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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-11893
GUESS ?, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 95-3679695
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
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1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(213) 765-3100
(Address, including zip code, and 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 $0.01 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. / /
As of the close of business on March 22, 2000, the aggregate market value of
the voting and non-voting common equity stock held by non-affiliates of the
registrant was $214,459,553.
As of the close of business on March 22, 2000, the registrant had 43,398,885
shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III herein.
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TABLE OF CONTENTS
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ITEM DESCRIPTION PAGE
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PART I
1 Business.................................................... 1
2 Properties.................................................. 12
3 Legal Proceedings........................................... 13
4 Submission of Matters to a Vote of Security Holders......... 14
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
6 Selected Financial Data..................................... 15
7 Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 16
7A Quantitative and Qualitative Disclosures About Market
Risks..................................................... 22
8 Financial Statements and Supplementary Data................. 23
9 Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 23
PART III
10 Directors and Executive Officers of the Registrant.......... 23
11 Executive Compensation...................................... 23
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 23
13 Certain Relationships and Related Transactions.............. 23
PART IV
14 Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K....................................... 23
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PART I
ITEM 1. BUSINESS
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-K.
Forward-looking statements may also be in the Company's other reports filed
under the Securities Exchange Act of 1934, in its press releases and in other
documents. In addition, from time to time, the Company, through its management,
may make oral forward-looking statements.
Forward-looking statements are only expectations, and involve known and
unknown risks and uncertainties, which may cause actual results in future
periods and other future events to differ materially from what is currently
anticipated. Certain statements in this Form 10-K, including those relating to
the Company's expected results, the accuracy of data relating to, and
anticipated levels of, its future inventory and gross margins, its anticipated
cash requirements and sources, the relocation of its distribution center, its
cost containment efforts, its plans regarding store openings and closings and
its business seasonality, are forward-looking statements. Such statements
involve risks and uncertainties, which may cause results to differ materially
from those set forth in these statements. Factors which may cause actual results
in future periods to differ from its current expectations include, among other
things, the continued availability of sufficient working capital, the
availability of adequate sources of capital, the successful integration of new
stores into existing operations, the continued desirability and customer
acceptance of existing and future product lines, possible cancellations of
wholesale orders, the success of competitive products, the success of the
Company's programs to strengthen its inventory cost accounting controls and
procedures and the success of technology being used in the Company's new
distribution center. In addition to these factors, the economic and other
factors identified in this Form 10-K, including but not limited to the risk
factors discussed herein and in the Company's previously filed public documents
could affect the forward-looking statements contained in herein and therein.
Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will" or the negative thereof and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of which they are made. The Company undertakes
no obligation to update publicly or revise any forward-looking statements.
For additional information regarding forward-looking statements, refer to
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained herein.
GENERAL
Unless the context indicates otherwise, when we refer to "we," "us" or the
"Company" in this Form 10-K, we are referring to Guess?, Inc. ("GUESS?") and its
subsidiaries on a consolidated basis.
We design, market, distribute and license one of the world's leading
lifestyle collections of casual apparel and accessories for men, women and
children that reflect the American lifestyle and European fashion sensibilities.
Our apparel is marketed under numerous trademarks including GUESS, GUESS?, GUESS
U.S.A., GUESS Jeans, GUESS? and Triangle Design, Question Mark and Triangle
Design, GUESS Kids, and GUESS Collection. The lines include full collections of
denim and cotton clothing, including jeans, pants, overalls, skirts, dresses,
shorts, blouses, shirts, jackets and knitwear. We also selectively grant
licenses to manufacture and distribute a broad range of products that complement
our apparel lines, including eyewear, watches, footwear, infant apparel and
other fashion accessories.
Our products are sold through three distribution channels: in our own
stores, to a network of wholesale accounts and through the Internet. GUESS?
branded products, some of which are produced under license, are also sold
internationally through a series of licensees and distributors. Our core
customer is a style-conscious consumer between the ages of 15 and 25. These
consumers are part of a highly desirable demographic group that we believe is
growing rapidly and has significant disposable
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income. We also appeal to customers outside this group through specialty product
lines that include GUESS Collection, a more sophisticated fashion line targeted
to women, and GUESS Kids, targeted to boys and girls ages 6 through 12.
We were founded in 1981 by Maurice Marciano, Paul Marciano and Armand
Marciano and we currently operate as a Delaware corporation.
BUSINESS SEGMENTS
Our business consists of three reportable business segments: retail
operations, wholesale operations and licensing operations. Financial information
about each segment for the fiscal years ended December 31, 1997, 1998 and 1999
are included under Note 11 to the Consolidated Financial Statements contained
herein.
In 1999, 50.0% of our net revenue came from retail operations, 43.4% from
wholesale operations and 6.6% from licensing operations. Our total net revenue
in 1999 was $599.7 million and net earnings were $51.9 million.
BUSINESS STRENGTHS
We believe we possess a foundation of business strengths necessary for the
execution of our business strategies. These business strengths include:
BRAND EQUITY. We believe that our name has become one of the most familiar
in fashion and is one of our most valuable assets. We believe the enduring
strength of the GUESS? brand name and image is due mainly to our consistent
emphasis on innovative and distinctive product designs that stand for
exceptional styling and quality. Our industry is highly competitive and subject
to rapidly changing consumer preferences and tastes. The success of our brand
depends on our ability to anticipate the fashion preferences of our customers.
We have a team of designers who, under the direction of Maurice Marciano, seek
to identify global fashion trends and interpret them for the style-conscious
consumer while retaining the distinctive GUESS? image. Through our award-winning
advertising, under the creative leadership and vision of Paul Marciano, we have
achieved worldwide recognition of the GUESS? brand name. By retaining control
over advertising and marketing activities from our headquarters in Los Angeles,
we maintain the integrity, consistency and direction of the GUESS? brand image
worldwide, while realizing substantial cost savings when compared to the use of
outside advertising agencies.
We have developed the "GUESS? signature image" and "GUESS? lifestyle
concept," through the use of our strong and distinctive images, merchandising
display themes, logos, and trademarks which are registered in over 170
countries.
ADVERTISING AND MARKETING. All worldwide advertising, marketing activities
and promotional materials are controlled from our headquarters in Los Angeles.
GUESS Jeans, GUESS U.S.A. and Guess ?, Inc. images have been showcased in dozens
of major publications, and outdoor and broadcast media throughout the United
States and worldwide. Our advertising campaigns promote the GUESS? image with
our award winning advertising and a consistent emphasis on innovative and
distinctive designs.
We communicate this message through the use of our signature black and white
print advertisements, as well as color print advertisements, designed by our
in-house advertising department. Led by Paul Marciano, this team has won
numerous awards and contributed to making the GUESS? brand one of the most
recognizable fashion brands. We have maintained a high degree of consistency in
our advertisements, by using similar themes and images. We require our licensees
and distributors to invest a percentage of their net sales of licensed products
and net purchases of GUESS? products, respectively, in Company-approved
advertising, promotion and marketing.
RETAIL DISTRIBUTION. At December 31, 1999, we operated 92 full-price retail
and 54 factory outlet stores in the United States and a retail store in
Florence, Italy that is an integral part of our European design activities. Our
60% owned subsidiary, GUESS? Canada Corporation ("GUESS Canada"), operates
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13 retail stores in Canada. Our retail network creates an upscale and inviting
shopping environment and enhances our image. Distribution through our retail
stores allows us to influence the merchandising and presentation of our
products, increase consumer awareness and build brand equity. Our retail stores
carry a full assortment of men's and women's merchandise, including most of the
GUESS? licensed products. Our factory outlet stores are primarily located in
outlet malls, generally operating outside the shopping radius of our wholesale
customers and our own retail stores. They appeal to value-conscious customers
with a product line that is approximately 70% unique to that venue.
LICENSEE STORES. Our licensees and distributors also operate 229
international GUESS? stores. These stores carry apparel and accessories that are
similar to those sold in the United States, including some that are tailored for
local fashion sensibilities. We work closely with international licensees and
distributors to ensure that their store designs and merchandise programs protect
the reputation of the GUESS? trademarks. Our international licenses and
distribution agreements also allow for the sale of GUESS? brand goods in better
department stores and upscale specialty retail stores.
WHOLESALE DISTRIBUTION. We have both domestic and international wholesale
distribution channels. Domestic wholesale customers consist primarily of better
department stores and select specialty retailers and upscale boutiques, which
have the image and merchandising expertise that we require for the effective
presentation of our products. Leading domestic wholesale customers include
Federated Department Stores, Inc., The May Department Stores Company,
Dillard's, Inc. and Dayton Hudson Corporation. During 1999, our products were
sold directly to consumers from approximately 2,800 retail store locations in
the United States. These locations include approximately 1,200 shop-in-shops, an
exclusive selling area within a department store that offers a wide array of our
products and incorporates GUESS? signage and fixture designs. These
shop-in-shops allow us to reinforce our GUESS? brand image with our customers.
Many department stores have more than one shop-in-shop, with each one featuring
women's, men's or girls' apparel. Through our foreign subsidiaries and our
network of international distributors, our products are also found in major
cities throughout Asia, Europe, South America and the Middle East.
LICENSING OPERATIONS. The desirability of the GUESS? brand name among
consumers has allowed us to selectively expand our product offerings and global
markets through trademark licensing arrangements, with minimal capital
investment or on-going operating expenses. We carefully select our trademark
licensees and approve in advance all product design, advertising and packaging
materials of all licensed products in order to maintain a consistent GUESS?
image. We currently have 28 licenses that include watches, eyewear, shoes,
handbags, leather apparel, jewelry and related accessories. We have granted
licenses for the manufacture and sale of GUESS? branded products in markets
which include Europe, Asia, South America, Australia and Africa.
BUSINESS GROWTH STRATEGIES
We regularly evaluate and implement initiatives that we believe will build
brand equity, grow our business and enhance profitability. Our key growth
strategies are as follows:
LEVERAGING THE GUESS? BRAND. We believe the GUESS? brand is an integral
part of our business, a significant strategic asset and a primary source of
sustainable competitive advantage. It communicates a distinctive image that is
fun, fashionable and sexy. Brand loyalty, name awareness, perceived quality,
strong brand images, public relations, publicity, promotional events and
trademarks all contribute to brand equity. Our design teams visit the world's
premier fashion locations in order to identify important style trends and to
discover new fabrics. We will continue this practice while promoting our
innovative designs through stylish advertising campaigns that advance the GUESS?
image. Our marketing programs are designed to convey a uniform style image for
the brand, aimed at increasing the desire of the target group to join our GUESS?
customer group.
RETAIL STORE STRATEGY AND EXPANSION PLANS. We plan that our retail division
will be our primary growth initiative over the next three to five years. We plan
to achieve this growth by adding a significant number of
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new stores, increasing the average size of our new stores and further increasing
the sales productivity of all stores. During 1999, we opened 19 new stores in
the United States and improved our operating base by closing 5 under performing
stores. In 1999, we also increased our ownership in our Canadian licensee, GUESS
Canada, which operates 13 retail stores in Canada, to 60%. We have an option to
acquire the remaining 40% of our Canadian subsidiary commencing December 31,
2001.
We currently plan to more than double our retail square footage in the
United States and Canada during the next three years. We plan to open 25 new
retail stores and 10 new factory outlet stores in the United States in 2000. We
also plan to open 10 GUESS Kids stores in the United States, which will carry
girls', boys' and Baby GUESS apparel. We also expect that our Canadian licensee,
GUESS Canada, will open 15 new retail stores in Canada in 2000. It has been our
experience that our retail locations build brand awareness and contribute to the
growth of our wholesale operations.
In 1999, our retail stores open a minimum of one year realized comparable
store sales gains averaging 28% over 1998 and our factory outlet stores realized
net gains averaging 24%. We believe this growth reflects the re-emergence of the
GUESS? brand nationally, and among other things, the effect of several ongoing
initiatives, including:
- being a leader in new product development,
- producing a more fashion-focused product mix,
- improvements in merchandising and visual presentation,
- the remodeling of select stores to promote a consistent brand message and
- the development of a motivated team of sales professionals so that our
customers have a favorable shopping experience.
The look and feel of GUESS? retail and factory outlet stores play an
important role in building our brand equity. To enhance the quality of our
presentation, we remodeled 14 stores during 1999 and plan to remodel an
additional 25 stores during 2000.
EXPAND SHOP-IN-SHOP PROGRAMS. We are continuing to selectively expand our
use of "shop-in-shops," which are exclusive selling areas within wholesale
customers' department stores that use GUESS? signage and fixture designs. The
GUESS? "shop-in-shop" concept is designed to enhance the presence and brand
awareness of GUESS? products in department stores. The strategic product
presentation, theme-based fixtures, displays, strong and distinctive images and
point-of-sale materials in these premium department store locations are designed
to reinforce and capitalize on the "GUESS? lifestyle" concept. These shops also
facilitate consumer shopping by featuring a comprehensive presentation of our
merchandise. In our wholesale business in 1998 and 1999, we focused on the
department stores with the greatest sales potential while increasing our
shop-in-shop presence in those stores. At the end of 1999, we had approximately
1,200 GUESS? shop-in-shops in the United States. We expect to continue to grow
our domestic wholesale operations in 2000, and plan to add or remodel up to 500
additional shop-in-shops this year. We also plan to selectively increase our
presence in department stores, specialty retail chains and upscale boutiques.
REPOSITION LICENSEE PORTFOLIO. A primary objective as a company is to
maintain the quality and reputation of the GUESS? brand. In order to maintain
quality and control of the GUESS? brand, we will continue to strategically
reposition our licensing portfolio by bringing in-house apparel licenses, where
appropriate. To maintain brand integrity and image, we aggressively monitor the
performance of our licensees. If we determine that licensees are performing
inadequately, we sometimes discontinue the existing relationship and seek out a
stronger replacement licensee or if appropriate, produce the product line
in-house. Over the past few years, we have converted our women's knits and
girls' product lines from licenses to our own products, and we recently
reacquired our boys' line. Our girls' and boys' apparel lines will both be
prominently featured in our new GUESS Kids stores and a planned series of girls'
and boys' shop-in-shops. We terminated our licensee for Baby GUESS in 1999 and
have a new licensee producing the Baby GUESS line in 2000.
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IMPROVED PRODUCT SOURCING. We have refocused our product sourcing
strategies to increase efficiencies, reduce costs and improve quality. We
currently purchase approximately 75% of our finished products from international
vendors. This is a significant change from several years ago when we purchased
the majority of our goods from domestic sources. We have increased our
utilization of lower-cost, offshore "packaged purchases." in which we supply the
product design and fabric selection, and the vendor manufacturers and delivers
the finished product. We have strategically aligned ourselves with sourcing
vendors worldwide, who will take full responsibility for delivering a quality,
finished product in a timely manner. We have substantially reduced our average
cost per unit at the same time as we have lowered the price of many of our
items. We also retain a close relationship with a number of domestic vendors
located primarily in Los Angeles as it is important to react to last minute
trends, as well as respond to rush reorders. By continuing to use packaged
programs, we believe we can continue to achieve improved product gross margins,
reduce carry costs of raw materials and improve deliveries and quality.
RELOCATE DISTRIBUTION CENTER. We have opened a new, automated distribution
center in Louisville, Kentucky, to replace our distribution center in Los
Angeles. Our new, 500,000 square-foot facility is near United Parcel Service's
national transit hub and, when fully operational in the second quarter of fiscal
year 2000, is expected to reduce our shipping time to the majority of our stores
and wholesale accounts that are east. We expect the new distribution center, in
addition to enabling us to get our products to market more rapidly, will allow
us to reduce distribution operating costs per unit, reduce our shipping costs
and provide better service to our customers.
E-COMMERCE. We are pursuing both business-to-consumer and
business-to-business initiatives. Our web site, www.guess.com, a virtual
storefront that promotes the GUESS? brand, became fully operational in
April 1999. Designed as a customer center, the site showcases GUESS? products in
an easy-to-navigate format, allowing customers to see and purchase our
collections of casual apparel and accessories. This virtual store is designed to
develop an additional retail distribution channel, improve customer service
levels and create a fun and entertaining alternative-shopping environment. The
site also provides fashion information, provides a mechanism for customer
feedback, promotes customer loyalty and enhances our brand identity through
interactive content. This site generates net revenue consistent with an average
GUESS? retail store.
During 2000, we intend to introduce a business-to-business concept that will
facilitate our interaction with wholesale customers, licensees and suppliers.
The site, which will utilize Commerce One's MarketSite with PeopleSoft's
eProcurement software, is designed to permit the purchase of both indirect items
such as office and maintenance supplies and direct items such as trims, fabric,
and finished goods. Our site has the potential to become an electronic
marketplace that will facilitate various levels of interaction between buyers
and sellers in the textile and apparel industries, and to reduce our operating
costs, increase our sourcing efficiencies and improve customer service.
GUESS? PRODUCTS
We derive net revenue from three primary sources:
- the sale of GUESS? men's, women's, girls' and boys' apparel,
- the sale of our licensees' products through our network of retail and
factory outlet stores primarily in the United States and
- the sale of GUESS? men's, women's, girls' and boys' apparel worldwide to
wholesale customers and distributors and net royalties from worldwide
licensing activities.
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The following table sets forth our net revenue from our channels of
distribution.
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YEAR ENDED DECEMBER 31,
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1997 1998 1999
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(DOLLARS IN THOUSANDS)
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Net Revenue:
Retail operations...................... $215,873 41.9% $222,624 47.2% $299,384 50.0%
Wholesale operations................... 250,040 48.5 212,504 45.0 260,628 43.4
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Net revenue from product sales....... 465,913 90.4 435,128 92.2 560,012 93.4
Net royalties.......................... 49,459 9.6 36,803 7.8 39,638 6.6
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Total net revenue.................. $515,372 100% $471,931 100% $599,650 100%
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PRODUCTS. Our product line is organized into four primary categories:
men's, women's, girls' and boys' apparel. In 1999, we reacquired our boys'
apparel line from a former licensee and now produce the line in-house. The
product assortment was refocused with a more narrow and deep buying strategy
using fewer stock keeping units ("SKUs") to be able to give our customers more
depth of the styles they want. New fashioned-oriented product is offered
monthly. To take advantage of the contemporary trends, we complement our core
basic styles with more fashion-oriented items. Within our basic denim
assortment, we have added new denim fabrics and washes. In addition, we have
also been successful in adding "immediates" to our merchandise assortment. These
are fashion forward styles that compliment our current product that continue to
keep GUESS? as the fashion leader and trend setter in the industry.
Our line of women's apparel also includes the GUESS Collection product line,
a better collection of women's skirts, dresses, tops, jackets, blazers and
blouses incorporating a sophisticated, high fashion combination of colors and
styles. These products are currently sold exclusively through our retail stores
and the Internet and our primarily designed to appeal to the contemporary
segment of the apparel market.
LICENSED PRODUCTS. The high level of desirability of the GUESS? brand name
among consumers has allowed us to selectively expand our product offerings and
distribution channels worldwide through trademark licensing arrangements. We
currently have 28 trademark licenses. Worldwide sales of licensed products (as
reported to us by our licensees) were approximately $525 million in 1999. Our
net royalties from these sales, including fees from new licensees, were
$39.6 million in 1999. Approximately 40% of our net royalties were derived from
our top 3 licensed product lines in 1999.
DESIGN
Under the direction of Maurice Marciano, GUESS? apparel is designed by an
in-house staff of five design teams (men's, women's, girls', boys' and GUESS
Collection) located in Los Angeles, California. GUESS? design teams travel
throughout the world in order to monitor fashion trends and discover new
fabrics. Fabric shows in Europe, Asia and the United States provide additional
opportunities to discover and sample new fabrics. These fabrics, together with
the trends observed by our designers, serve as the primary source of inspiration
for our lines and collections. We also maintain a fashion library consisting of
antique and contemporary garments as an additional source of creative concepts.
In addition, design teams regularly meet with members of the sales,
merchandising and retail operations to further refine our products in order to
meet the particular needs of our markets.
DOMESTIC RETAIL OPERATIONS
At December 31, 1999, our domestic retail operations consisted of 92
full-price retail and 54 factory outlet stores in the United States that we
owned and operated directly, which sell GUESS?-label products. Since the
beginning of 1996 through December 31, 1999, we have opened a total of 39 retail
stores and 17 factory outlet stores and have closed or consolidated 9 retail and
10 factory outlet stores in the United
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States. The percentage of net revenue generated by the retail network has
increased from 47.2% to 50.0% of our net revenue from product sales from the
beginning of 1996 through December 31, 1999.
RETAIL STORES. Our 92 domestic retail stores occupy 494,000 square feet and
range in size from approximately 3,000 to 10,000 square feet. Our retail stores
carry a full assortment of men's and women's GUESS? merchandise, including most
of our licensed products. In 1999, our retail division introduced its own
fragrance line. During 1999, we opened 9 retail stores, remodeled another 10
retail stores and closed one retail store as a result of a store consolidation.
We plan to open 25 new retail stores in the United States during 2000. During
2000, we also plan to launch our first 10 GUESS Kids stores to sell our girls'
line and our boys' line as well as infant's clothing, which will be supplied by
one of our licensees.
In 1999, our domestic retail stores achieved a 28% comparable store increase
in net revenue. Every domestic retail store increased its sales over those in
1998. Our domestic retail stores open at the beginning of 1998 increased sales
per square foot from $346 in 1998 to $434 in 1999.
FACTORY OUTLET STORES. Our 54 domestic factory outlet stores occupy
approximately 300,000 square feet and range in size from approximately 3,500 to
8,900 square feet. They are primarily located in outlet malls generally
operating outside the shopping radius of our wholesale customers and our retail
stores. These stores sell selected styles of GUESS? apparel and licensed
products at a discount to value-conscious customers. We also use the factory
outlet stores to assist us to distribute excess inventory effectively, thereby
protecting the GUESS? image. Approximately 70% of the products sold in our
factory outlet stores are unique to those stores. During 1999, we opened 10 new
factory stores and closed 4 under-performing stores. We plan to open another 10
factory outlet stores in 2000. In 1999, our domestic factory outlet stores
achieved a 24% comparable store sales increase in net revenue. Our domestic
factory outlet stores open at the beginning of 1998 increased sales per square
foot from $258 in 1998 to $335 in 1999.
DOMESTIC WHOLESALE CUSTOMERS
Our domestic wholesale customers consist primarily of better department
stores and select upscale specialty stores, which have the image and
merchandising expertise that we require for the effective presentation of our
products. Leading wholesale customers include Federated Department
Stores, Inc., The May Department Stores Company and Dillard's, Inc., among
others. During 1999, we sold our products directly to approximately 2,800 retail
doors in the United States.
A key element of our merchandising strategy is the shop-in-shop
merchandising format, an exclusive selling area within a department store that
presents a full array of GUESS? products using GUESS? signage and fixture
designs. At December 31, 1999, there were approximately 1,200 shop-in-shops
(excluding shop-in-shops installed by licensees and distributors) that feature
GUESS? products (other than the GUESS Collection). We added or remodeled
approximately 135 shop-in-shops in 1999 and intend to add or remodel up to 500
shop-in-shops by the end of 2000.
We have sales representatives in our showrooms in New York, Los Angeles,
Dallas, Chicago, Milan and Florence, Italy and Hong Kong. They coordinate with
customers to determine the inventory level and product mix that should be
carried in each store to maximize retail sell-through and enhance the customers'
profit margins. The inventory level and product mix are then used as the basis
for developing sales projections and product needs for each wholesale customer
and for scheduling production. Additionally, we use merchandise coordinators,
who work with the store to ensure that our products are appropriately displayed.
A few of our domestic wholesale customers, including some under common
ownership, have accounted for significant portions of our net revenue. During
1999, Bloomingdale's, Macy's and other affiliated stores owned by Federated
Department Stores, Inc. together accounted for approximately 12.4% of our net
revenue.
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INTERNATIONAL BUSINESS
We derive net revenue and earnings outside the United States from two
principal sources:
- sales of GUESS? brand apparel directly to 5 foreign distributors who
distribute it to better department stores, upscale specialty retail stores
and GUESS? licensed retail stores operated by our international
distributors, and
- royalties from licensees who manufacture and distribute GUESS? brand
products outside the United States. We sell products through distributors
and licensees throughout Asia, South America, Europe, South Africa,
Australia and the Middle East.
At December 31, 1999, 229 GUESS? retail and outlet stores were owned and
operated internationally by licensees and distributors, including 13 retail
stores in Canada that our 60% owned subsidiary operates. We have an option to
acquire the remaining 40% of our Canadian subsidiary commencing December 31,
2001. Our retail store license agreements generally provide detailed guidelines
for store fixtures and merchandising programs. The appearance, merchandising and
service standards of these stores are closely monitored to ensure that our image
is maintained. We have been advised by our distributors and licensees that they
plan to open approximately 45 new stores, including 15 stores in Canada, in
2000. We also own and operate a flagship GUESS? retail store located in
Florence, Italy.
LICENSE AGREEMENTS AND TERMS
Our trademark license agreements customarily provide for a three- to
five-year initial term with a possible option to renew prior to expiration for
an additional multi-year period. In addition to licensing trademarks for
products which complement our apparel products, we have granted trademark
licenses for the manufacture and sale of GUESS? branded products similar to
ours, including men's and women's denim and knitwear, in markets such as the
Philippines, Canada, Mexico, Chile, South Africa, South Korea, Europe and Japan.
Licenses granted to certain licensees that have produced high-quality products
and otherwise have demonstrated solid operating performance, such as GUESS?
Watches and GUESS? Eyewear, have been renewed and in some cases expanded to
include new products or markets. In other cases, products that were formerly
licensed, such as our women's knits, girls' and boys' lines, are now being
produced in-house. The typical license agreement requires that the licensee pay
us the greater of a royalty based on a percentage of the licensee's net sales of
licensed products or a guaranteed annual minimum royalty that typically
increases over the term of the license agreement. Generally, licensees are
required to spend a percentage of the net sales of licensed products for
advertising and promotion of the licensed products. In addition, certain
licensees are required to contribute toward the protection of our trademarks
within the territories granted to such licensees, thereby assisting us in our
efforts to prevent counterfeiting and other trademark infringement in those
territories.
To protect the GUESS? trademark and brand, our Licensing Department meets
regularly with licensees to ensure consistency with our overall merchandising
and design strategies and to ensure uniformity and quality control. The
Licensing Department approves in advance all GUESS? brand products, advertising,
promotional and packaging materials.
ADVERTISING AND MARKETING
Our advertising, public relations and marketing strategy is to promote a
consistent high impact image which endures regardless of changing consumer
trends. Since our inception, Paul Marciano has had principal responsibility for
the GUESS? brand image and creative vision. All worldwide advertising and
promotional material is controlled through our Advertising Department based in
Los Angeles. GUESS Jeans, GUESS U.S.A. and Guess ?, Inc. images have been
showcased in dozens of major publications and outdoor and broadcast media
throughout the United States and the world.
8
<PAGE>
Our advertising strategy promotes the GUESS? image and products, with an
emphasis on image. Our signature black and white print advertisements, as well
as color print advertisements, have garnered prestigious awards, including Clio,
Belding and Mobius awards for creativity and excellence. These awards, which we
have received on numerous occasions, are generally awarded based on the judgment
of prominent members of the advertising industry. We have maintained a high
degree of consistency in our advertisements, using similar themes and images. We
require our licensees and distributors to invest a percentage of their net sales
of licensed products and net purchases of GUESS? products in approved
advertising, promotion and marketing. We launched a new marketing campaign in
1999, which included Internet advertising sponsors and television commercials,
strong and consistent images used in all media forms, fresh merchandising
presentation themes and enhanced point-of-sale materials.
Our in-house advertising department is responsible for media placement of
all advertising worldwide, which includes approval of all advertising campaigns
from our licensees and distributors. We use a variety of media which emphasizes
print and outdoor advertising. We have focused advertisement placement in
national and international contemporary fashion/beauty and lifestyle magazines
including Vanity Fair, Harpers Bazaar, Elle, W and Details. By retaining control
over our advertising programs, we are able to maintain the integrity of the
GUESS? brand image while realizing substantial cost savings when compared to the
use of outside agencies.
We further strengthen communications with customers through our Web site
(www.guess.com). This global medium enables us to provide timely information in
an entertaining fashion to consumers about our history, GUESS? products and
store locations and allows us to receive and respond directly to customer
feedback.
SOURCING AND PRODUCT DEVELOPMENT
We source products through numerous suppliers, many of whom have established
relationships with us. We seek to achieve the most efficient means for timely
delivery of our high quality products. Our fabric specialists work with fabric
mills in the United States, Europe and Asia to develop woven and knitted fabrics
that enhance the products' comfort, design and appearance. For a substantial
portion of our apparel products, production planning takes place generally four
to five months prior to the corresponding selling season. Delivery of certain
basic products is accomplished through our Quick Response EDI (Electronic Data
Interchange) replenishment system which ensures shipment of such products
generally within 48 hours of receipt of customer orders.
We do not own any production equipment other than cutting machinery. To
remain competitive, in recent years we have increasingly been sourcing our
finished products globally. During 1999, we sourced approximately 80% of our
finished products from third-party suppliers located outside the United States.
Most of these finished products are acquired as package purchases where we
supply the design and fabric selection and the vendor supplies the finished
product. Although we have long-term relationships with many of our vendors, we
do not have long-term written agreements with them. The production and sourcing
staff in Los Angeles oversee aspects of apparel manufacturing, quality control
and production, as well as research and develop new sources of supply.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Our products use a variety of raw materials, principally consisting of woven
denim, woven cotton and knitted fabrics and yarns. Historically, we have had to
make commitments for a significant portion of our fabric well in advance of
sales. By increasing the use of packaged purchases, we have been able to reduce
our raw materials inventory.
9
<PAGE>
QUALITY CONTROL
Our quality control program is designed to ensure that products meet our
high quality standards. We monitor the quality of our fabrics prior to the
production of garments and inspect prototypes of each product before production
runs commence. We also perform random in-line quality control checks during and
after production before the garments leave the contractor. Final random
inspections occur when the garments are received in our distribution centers. We
believe that our policy of inspecting our products at our distribution centers
and at the vendors' facilities is important in maintaining the quality and
reputation of our products.
DISTRIBUTION CENTER
We utilize distribution centers at strategically located sites. During 1999,
distribution of our products in the United States was centralized in our Los
Angeles, California facility, which we lease from a related party and operate.
In January 2000, we opened a new, automated distribution center in Louisville,
Kentucky, to replace the distribution center in Los Angeles. We expect the new
facility, which we lease, to be fully operational in the second quarter of
fiscal year 2000. We also hold a ten percent ownership interest in a licensee
which operates a distribution center in Florence, Italy and services Europe.
Additionally, we utilize a contract warehouse in Hong Kong which services the
Pacific Rim.
At our distribution centers in the United States, we use fully integrated
and automated distribution systems. The bar code scanning of merchandise,
picking tickets and distribution cartons, together with radio frequency
communications, provide timely, controlled, accurate and instantaneous updates
to the distribution information systems.
COMPETITION
The apparel industry is highly competitive and fragmented, and is subject to
rapidly changing consumer demands and preferences. We believe that our success
depends in large part upon our ability to anticipate, gauge and respond to
changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the GUESS? image. We compete with numerous
apparel manufacturers and distributors and several well-known designers which
have recently entered or re-entered the designer denim market. Our retail and
factory outlet stores face competition from other retailers, including some of
our major wholesale customers. Our licensed apparel and accessories also compete
with a substantial number of designer and non-designer lines and various other
well-known brands. Many of our competitors have greater financial resources than
we do. Although the level and nature of competition differ among our product
categories, we believe that we compete on the basis of our brand image, quality
of design, workmanship and product assortment.
TRADEMARKS
We own numerous trademarks, including GUESS, GUESS?, GUESS U.S.A., GUESS
Jeans, GUESS? and Triangle Design, Question Mark and Triangle Design, GUESS
Kids, and GUESS Collection. At December 31, 1999, we had more than 2,100 U.S.
and international registered trademarks or trademark applications pending with
the trademark offices of the United States and in over 170 countries around the
world. From time to time, we adopt new trademarks in connection with the
marketing of new product lines. We consider our trademarks to have significant
value in the marketing of our products and act aggressively to register and
protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We
have a staff devoted to the monitoring and aggressive protection of our
trademarks worldwide.
10
<PAGE>
WHOLESALE BACKLOG
We maintain a model stock program in our basic denim products which allows
us generally to replenish a customer's inventory within 48 hours. We typically
receive orders for our fashion apparel 90 to 120 days prior to the time the
products are delivered to stores. At February 29, 2000, we had unfilled
wholesale orders, consisting primarily of orders for fashion apparel, of
approximately $167.7 million, compared to $93.9 million for such orders at
February 28, 1999. We expect to fill substantially all of these orders in 2000.
The backlog of wholesale orders at any given time is affected by various
factors, including seasonality and the scheduling of manufacturing and shipment
of products. Accordingly, a comparison of backlogs of wholesale orders from
period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
EMPLOYEES
We believe that our employees ("associates") are one of our most valuable
resources. At December 31, 1999, there were approximately 3,600 associates.
Associates include approximately 1,100 in wholesale operations and 2,500 in
retail operations.
We are not a party to any labor agreements and none of our associates is
represented by a labor union. We consider our relationship with our associates
to be good. In addition, we were among the first in the apparel industry to
implement a program to monitor the compliance of subcontractors with Federal
minimum wage and overtime pay requirements.
ENVIRONMENTAL MATTERS
We are subject to federal, state and local laws, regulations and ordinances
that govern activities or operations that may have adverse environmental effects
(such as emissions to air, discharges to water, and the generation, handling,
storage and disposal of solid and hazardous wastes). We are also subject to
laws, regulations and ordinances that impose liability for the costs of clean up
or other remediation of contaminated property, including damages from spills,
disposals or other releases of hazardous substances or wastes, in certain
circumstances without regard to fault. Certain of our operations routinely
involve the handling of chemicals and wastes, some of which are or may become
regulated as hazardous substances. We have not incurred, and do not expect to
incur, any significant expenditures or liabilities for environmental matters. As
a result, we believe that our environmental obligations will not have a material
adverse effect on our financial condition or results of operations.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 11 to the Notes to the Consolidated Financial Statements for a
discussion regarding our domestic and foreign operations.
11
<PAGE>
ITEM 2. PROPERTIES
Certain information concerning our principal facilities, all of which are
leased at December 31, 1999, is set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
AREA IN
LOCATION USE SQUARE FEET
- ------------------------- ------------------------------------------------------ -----------
<S> <C> <C>
1444 South Alameda Street Principal executive and administrative offices, design 565,000
Los Angeles, California facilities, sales offices, distribution and warehouse
facilities, production control, and sourcing
1610 Freeport Drive Distribution and warehousing facility 500,000
Louisville, Kentucky
1385 Broadway Administrative offices, public relations, and 30,000
New York, New York showrooms
Kowloon, Hong Kong Distribution and licensing coordination control 3,000
Florence, Italy Administrative office and retail store 4,100
</TABLE>
Our corporate, wholesale and retail headquarters and our production,
distribution and warehousing facilities are located in Los Angeles, California
and consist of seven adjacent buildings totaling approximately 565,000 square
feet. All of these properties are leased by us, and certain of these facilities
are leased from limited partnerships in which the sole partners are trusts
controlled by and for the benefit of Maurice Marciano, Paul Marciano and Armand
Marciano and their families (the "Principal Stockholders") pursuant to leases
that expire in July 2008. The total lease payments to these limited partnerships
are $225,000 per month with aggregate minimum lease commitments to these
partnerships at December 31, 1999 totaling approximately $23.4 million. See
"Item 13. Certain Relationships and Related Transactions."
During 1999, distribution of our products in the United States was
centralized in our Los Angeles, California facility. We have opened a new,
automated distribution center in Louisville, Kentucky, which is leased by us, to
replace the distribution center in Los Angeles. We also hold a ten-percent
ownership interest in a licensee, which leases and operates a distribution
center in Florence, Italy and services Europe. Additionally, we lease a contract
warehouse in Hong Kong which services the Pacific Rim.
We lease our showrooms, advertising, licensing, sales and merchandising
offices, remote distribution and warehousing facility and retail and factory
outlet store locations under non-cancelable operating lease agreements expiring
on various dates through May 2012. These facilities are located principally in
the United States, with aggregate minimum lease commitments, at December 31,
1999, totaling approximately $212.1 million.
The current terms of our store leases, excluding renewal options, expire as
follows:
<TABLE>
<CAPTION>
YEARS LEASE TERMS EXPIRE NUMBER OF STORES
- ------------------------ ----------------
<S> <C>
2000-2002................................................... 29
2003-2005................................................... 61
2006-2008................................................... 44
2009-2011................................................... 11
Thereafter.................................................. 2
</TABLE>
We believe our existing facilities are well maintained, in good operating
condition and are adequate to support our present level of operations. See Notes
7 and 8 of the Notes to Consolidated Financial Statements for further
information regarding current lease obligations.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On August 7, 1996, a class action complaint naming the Company and certain
of its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et al. v.
Guess ?, Inc. et al. The plaintiffs asserted claims for violation of state wage
and hour laws, wrongful discharge, and breach of contract arising out of the
Company's relationship with its independent contractors and actions taken by
them with respect to their employees. The plaintiffs also alleged that the
Company breached its agreement with the United States Department of Labor
regarding the monitoring of its independent contractors. The Court has held two
hearings on certifying the alleged class. The parties have agreed to settle the
case. On March 1, 2000, the Court gave final approval to the parties'
settlement. If no class member appeals within 60 days thereafter, the case will
be finally resolved.
On July 7, 1998, the Union of Needletrades Industrial and Textile Employees
("UNITE") filed with the National Labor Relations Board ("NLRB") charges against
the Company alleging that the Company violated the National Labor Relations Act
by failing to uphold certain obligations under a prior settlement agreement with
the NLRB, by denying pro-union employees access to the Company's facilities, by
conferring new benefits to employees, by making false accusations against UNITE,
by conducting video surveillance of UNITE's offices, and by assisting and
organizing an anti-union demonstration. These allegations were dismissed by the
NLRB. UNITE appealed, and, on October 15, 1999, the NLRB dismissed the appeal.
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and
Armand Marciano, as individuals, were named as defendants in a class action
entitled John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano and
Armand Marciano filed in the Los Angeles Superior Court. The complaint, as
amended, purported to state claims under Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 for alleged misrepresentations in connection with the
Company's initial public offering (the "IPO") in August 1996. Mr. Robinson
purported to represent a class of all purchasers of the Company's stock in the
IPO and sought unspecified damages. On January 10, 2000, the complaint was
dismissed in its entirety. However, Robinson has the right to appeal the
dismissal.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals (the "Marcianos"), as well as the Company, were named as defendants
in a stockholder's derivative complaint entitled John N. Robinson v. Maurice
Marciano, Paul Marciano and Armand Marciano and Guess ?, Inc. filed in the Los
Angeles Superior Court. The complaint (the "Derivative Complaint") purports to
state a claim for intentional breach of fiduciary duty, negligent breach of
fiduciary duty, constructive fraud and abuse of control in connection with the
Marcianos' management of the Company since its IPO. On July 26, 1999, the Court
entered an Order that allows the case to proceed past the pleadings stage. While
it is too soon to predict the outcome of the case with any certainty, the
defendants believe they have meritorious defenses to each of the claims asserted
and intend to vigorously defend themselves.
On May 21, 1999, the Company filed a demand for arbitration against Pour le
Bebe, Inc. and Pour la Maison, Inc. (collectively, "PLB") seeking damages and
injunctive relief in connection with four written license agreements between the
parties. The Company alleged that PLB defaulted under the license agreements,
that the license agreements properly were terminated and that PLB breached the
license agreements. On July 19, 1999, PLB filed a counterdemand for arbitration
against the Company. PLB sought damages and injunctive relief against the
Company alleging breach of contract, violation of the California Franchise
Relations Act, interference with prospective economic advantage, unlawful
business practices, statutory unfair competition and fraud. The arbitration was
conducted before the American Arbitration Association pursuant to arbitration
clauses in the license agreements.
On March 3, 2000, the Arbitrators issued an interim award in favor of the
Company and rejected each of PLB's counterclaims. The amount of the interim
award was in excess of $6 million. As the prevailing party, the Company is
entitled to, and has applied for, an award of its attorneys' fees, costs, and
expenses.
13
<PAGE>
Because of the uncertainty of the ultimate realization of the award, no
recognition has been given to it in the accompanying consolidated financial
statements.
On June 9, 1999, the Company commenced a lawsuit in the Los Angeles County
Superior Court against Mr. Kyle Kirkland, Kirkland Messina LLC, and CKM
Securities (collectively "Kirkland") for tortious interference, unfair
competition, fraud and related claims. This action arises out of alleged
misrepresentations and omissions of material fact made by Kirkland in connection
with the operations and financial performance of PLB. Currently, there are
proceedings in the California Court of Appeal to determine if the action will
proceed in court or by way of arbitration. No trial or hearing date has been
set.
The Company cannot predict the outcome of these matters. The Company
believes the outcome of one or more of the above cases could have a material
adverse effect on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote during the fourth quarter of fiscal year
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 8, 1996, the Company's Common Stock has been listed on the New
York Stock Exchange under the symbol 'GES.' The following table sets forth, for
the periods indicated, the high and low sales prices of the Company's Common
Stock, as reported on the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
Year ending December 31, 1998
First Quarter 1998.......................................... $ 8 $ 5 3/16
Second Quarter 1998......................................... 7 3/16 4
Third Quarter 1998.......................................... 5 3 3/4
Fourth Quarter 1998......................................... 7 1/8 3 5/8
Year ending December 31, 1999
First Quarter 1999.......................................... 8 1/2 5 1/16
Second Quarter 1999......................................... 14 6 1/8
Third Quarter 1999.......................................... 16 1/16 10 9/16
Fourth Quarter 1999......................................... 21 7/8 11 1/2
</TABLE>
On March 22, 2000, the closing sales price per share of the Company's Common
Stock, as reported on the New York Stock Exchange Composite Tape, was 27 5/16.
On March 22, 2000, there were 180 holders of record of the Company's Common
Stock.
DIVIDEND POLICY
We intend to use our cash flow from operations in 2000 principally to
finance the expansion and remodel of our retail stores, shop-in-shop programs
and operations. Any future determination as to the payment of dividends will be
at the discretion of the Company's Board of Directors and will depend upon our
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors. The agreement governing our
revolving credit facility and the indenture pursuant to which the Company's
Senior Subordinated Notes, due 2003, were issued restrict the payment of
dividends by the Company.
Since our IPO on August 8, 1996, we have not declared any dividends on our
Common Stock.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. The following selected financial data should be read in conjunction
with the Company's Consolidated Financial Statements and the related Notes
contained herein and with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of earnings data:
Net revenue...................................... $486,733 $551,162 $515,372 $471,931 $599,650
Earnings from operations......................... 82,928 98,095 70,646 57,046 93,776
Earnings before interest and income taxes........ 82,771 97,106 68,605 56,183 96,485
Net earnings..................................... 63,919 66,741 37,511 25,111 51,900
Supplemental statements of earnings data: (1)
Earnings before income taxes and change in
accounting principle (2)....................... 66,814 82,567 54,887 43,291 87,100
Income taxes..................................... 26,726 33,241 21,337 18,180 35,200
Net earnings..................................... 40,088 49,326 37,511 25,111 51,900
Earnings per share(3):
Basic............................................ 0.96 1.18 0.87 0.59 1.21
Diluted.......................................... 0.96 1.18 0.87 0.59 1.20
Weighted number of shares outstanding--basic (3)... 41,675 41,906 42,898 42,904 43,005
Weighted number of shares outstanding--diluted
(3).............................................. 41,675 41,908 42,902 42,919 43,366
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital........................... $ 57,572 $ 76,821 $106,670 $101,310 $ 97,944
Total assets.............................. 202,635 239,306 287,814 263,772 369,036
Notes payable and long-term debt.......... 123,335 127,316 141,517 99,000 83,363
Net stockholder's equity.................. 10,997 34,928 75,330 100,409 167,355
</TABLE>
(1) Reflects pro forma adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than an S corporation.
Prior to the Company's IPO in August 1996, the Company had elected to be
taxed as an S corporation for Federal income tax purposes. In certain
states, the Company was taxed as an S corporation; in other states, the
Company was taxed as a C corporation. Effective January 1, 1991, the
Company elected to be treated as an S corporation for California tax
purposes. As a result of the Company's IPO, all S corporation elections
were terminated.
(2) Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures are capitalized and amortized over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes that this new method will more
closely match the long-term benefit that the product display fixtures
provide with the expected future revenue from such fixtures. The cumulative
effect of the change in accounting principle, recorded in the first quarter
of 1997, is calculated based upon the retroactive effect of applying the
new accounting method to prior year fixture acquisitions. The cumulative
effect of the change in accounting principle of $4.0 million ($0.09 per
share) (after reduction for income tax expense of $2.7 million) is included
in earnings for the year ended December 31, 1997. Excluding the cumulative
effect of the change in accounting principle, the
15
<PAGE>
effect of the change during 1997 was to increase net earnings by
approximately $6.2 million or $0.14 per share.
(3) The weighted number of shares outstanding at December 31, 1996 reflects
(i) 32,681,819 shares of Common Stock outstanding prior to the IPO price
and the assumed issuance of 8,730,000 shares of Common Stock at the IPO
price ($18.00 per share) to generate sufficient cash to pay a distribution
of retained earnings to its then existing stockholders as part of the
termination of its S corporation status in an amount equal to retained
earnings as of the IPO date and (ii) an average of 42,682,000 shares
outstanding subsequent to the IPO, representing the actual shares
outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
We derive our net revenue from the sale of GUESS? men's, women's, boys and
girls' apparel and our licensees' products through our network of retail and
factory outlet stores primarily in the United States, from the sale of GUESS
men's, women's, boys' and girls' apparel worldwide to wholesale customers and
distributors, from net royalties from worldwide licensing activities, from the
sale of GUESS? apparel through the retail and wholesale channels of our 60%
owned Canadian subsidiary, GUESS? Canada Corporation ("GUESS Canada"), and from
the sale of GUESS? men's, women's, boys' and girls' apparel and our licensee
products through our on-line store at www.guess.com.
RESULTS OF OPERATIONS
The following table sets forth actual operating results for the 1997 and
1998 and 1999 periods as a percentage of net revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Product sales............................................... 90.4% 92.2% 93.4%
Net royalties............................................... 9.6 7.8 6.6
----- ----- -----
Total net revenue......................................... 100.0 100.0 100.0
Cost of sales............................................... 56.0 57.7 55.3
----- ----- -----
Gross profit................................................ 44.0 42.3 44.7
Selling, general and administrative expenses................ 30.3 30.2 28.5
Severance costs related to distribution facility............ -- -- 0.5
----- ----- -----
Earnings from operations.................................. 13.7 12.1 15.7
Other income/(expense):
Gain on disposition of property and equipment............. -- -- 0.6
Interest, net............................................. 2.7 2.7 1.6
Other (expense), net...................................... 0.4 0.2 0.2
----- ----- -----
3.1 2.9 1.2
Earnings before income taxes and cumulative effect of change
in accounting principle................................... 10.6 9.2 14.5
Income taxes................................................ 4.1 3.9 5.9
----- ----- -----
Earnings before cumulative effect of change in accounting
principle................................................. 6.5 5.3 8.6
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707........... 0.8 -- --
----- ----- -----
Net earnings................................................ 7.3% 5.3% 8.6%
===== ===== =====
</TABLE>
16
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
NET REVENUE. Net revenue decreased $43.5 million or 8.4% to $471.9 million
for the year ended December 31, 1998 from $515.4 million for the year ended
December 31, 1997. Net revenue from retail operations increased $6.7 million or
3.1% to $222.6 million for the year ended December 31, 1998 from $215.9 million
for the year ended December 31, 1997, as a result of the volume generated by our
new store openings, partially offset by a $10.7 million decrease or 5.6%
decrease in comparable store net revenue. The decrease in comparable store net
revenue was primarily due to product assortment changes in the our outlet stores
and softening Pacific Rim tourism, which significantly impacted West Coast
business during the first half of 1998. During the second half of 1998, our
full-priced stores experienced positive comparable store net revenue, primarily
due to our improved merchandising and store operational initiatives implemented
by a new retail management team. Net revenue from wholesale operations decreased
$37.5 million or 15.0% to $212.5 million for the year ended December 31, 1998
from $250.0 million for the year ended December 31, 1997. Domestic and
international wholesale operations net revenue for the year ended December 31,
1998 decreased by $18.2 million and $19.3 million, respectively. Our domestic
wholesale operations net revenue declined primarily as a result of increased
competition in branded basic denim apparel. International wholesale operations
net revenue decreased due primarily to the sale of the GUESS? Italia wholesale
operations in June 1997, which had contributed $13.5 million during the first
five months of 1997, as well as soft performance in the Asian and South American
markets. Net royalties decreased $12.7 million or 25.6% to $36.8 million for the
year ended December 31, 1998, from $49.5 million for the year ended
December 31, 1997. The decline in net royalties was primarily the result of us
terminating our various under-performing licenses, discontinuing certain
licenses which we brought back in-house, continuing economic turmoil and
currency devaluation in the Asian markets and the financial difficulty of one of
our domestic licensees. Net revenue from our international operations comprised
8.0% and 11.5% of our net product revenue during 1998 and 1997, respectively.
GROSS PROFIT. Gross profit decreased 11.9% to $199.9 million for the year
ended December 31, 1998 from $227.0 million for the year ended December 31,
1997. The decline in gross profit resulted from lower net royalties, as well as
decreased net revenue from product sales. Gross profit from product sales
decreased 8.1% to $163.0 million for the year ended December 31, 1998 from
$177.5 million for the year ended December 31, 1997. Gross margin (gross profit
as a percentage of total net revenue) decreased to 42.3% for the year ended
December 31, 1998 as compared to 44.0% for the year ended December 31, 1997.
Gross margin from product sales decreased to 37.5% for the year ended
December 31, 1998 compared to 38.1% for the year ended December 31, 1997. The
decrease for gross margin from product sales was primarily the result of our
fixed store occupancy costs being spread over a lower comparable store revenue
base, partially offset by a favorable mix in retail net revenue, which generally
carries a higher gross margin rate, and lower wholesale markdowns and
allowances.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses decreased 8.6% to $142.8 million, or 30.3% of
net revenue for the year ended December 31, 1998, from $156.3 million, or 30.3%
of net revenue, for the year ended December 31, 1997. The decrease in SG&A
expenses was primarily due to our cost reduction initiatives implemented in the
fourth quarter of 1997.
EARNINGS FROM OPERATIONS. Earnings from operations decreased 19.3% to
$57.0 million for the year ended December 31, 1998, from $70.6 million for the
year ended December 31, 1997. The decrease was primarily due to lower revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 6.0% to
$12.9 million for the year ended December 31, 1998 from $13.7 million for the
year ended December 31, 1997. This decrease resulted primarily from a lower
outstanding average debt, partially offset by a slightly higher average
effective interest rate. For the year ended December 31, 1998, the average debt
balance was $135.5 million, with an average effective interest rate of 9.0%. For
the year ended December 31, 1997, the average debt balance was $148.4 million,
with an average effective interest rate of 8.8%.
17
<PAGE>
OTHER EXPENSES. Other non-operating expenses were $0.9 for the year ended
December 1998 as compared to $2.0 million for the year ended December 31, 1997.
The decrease was primarily due to a $1.4 million write-down to the lower cost or
market of an equity investment during 1997.
INCOME TAXES. The income tax provision for the year ended December 31, 1998
was $18.2 million, or a 42.0% effective tax rate. The income tax provision for
the year ended December 31, 1997 was $21.3 million, or a 38.9% effective tax
rate. The effective tax rate for 1998 was adversely impacted primarily by
Federal and state income taxes related to a dividend declared to us by one of
our foreign subsidiaries.
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE. Net earnings before cumulative effect of a change in accounting
principle decreased by 25.2% to $25.1 million, or 5.3% of net revenue, for the
year ended December 31, 1998 from $33.5 million, or 6.5% of net revenue, for the
year ended December 31, 1997.
NET EARNINGS. Net earnings decreased to $25.1 million for the year ended
December 31, 1998, from $37.5 million for the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUE. Net revenue increased $127.7 million or 27.1% to
$599.7 million for the year ended December 31, 1999 from $471.9 million for the
year ended December 31, 1998. Net revenue from retail operations increased
$76.7 million or 34.5% to $299.4 million for the year ended December 31, 1999
from $222.6 million for the year ended December 31, 1998, from a 26.8% increase
in comparable store net revenue and from the volume generated by our new store
openings. The strong increase in comparable store net revenue was primarily
attributable to our improved merchandising and our fashioned-focused product
mix. The retail segment is benefiting from our improved customer service levels
resulting from our enhanced personnel training and incentive programs that have
been offered to our associates.
Net revenue from wholesale operations increased $48.1 million or 22.6% to
$260.6 million for the year ended December 31, 1999 from $212.5 million for the
year ended December 31, 1998. Domestic and international wholesale operations
net revenue increased, for the year ended December 31, 1999, by $40.6 million to
$228.7 million and by $7.4 million to $31.9 million, respectively. Our domestic
wholesale net revenue increased primarily as a result of the increased demand
for fashion products in both of our women's and men's lines. International
wholesale operations net revenue increased due primarily to increased sales from
the European market, partially offset by soft performance in the Asian and South
American markets. GUESS Canada contributed $12.1 million in international net
revenues during the second half for the year ended December 31, 1999. Net
royalties increased $2.8 million or 7.7%, to $39.6 million for the year ended
December 31, 1999 from $36.8 million for the year ended December 31, 1998. The
increase in net royalties was primarily due to settlements and adjustments
related to us terminating licensees, partially offset by us discontinuing
certain licenses that were brought back in-house, continuing economic turmoil
and currency devaluation in Asian markets. Net revenue from international
operations comprised 6.7% and 5.6% of net product revenue during 1999 and 1998,
respectively.
GROSS PROFIT. Gross profit increased 34.1% to $268.0 million for the year
ended December 31, 1999 from $199.9 million for the year ended December 31,
1998. The increase in gross profit resulted from higher net revenue from product
sales. Gross profit from product sales increased 40.1% to $228.4 million for the
year ended December 31, 1999 from $163.0 million for the year ended
December 31, 1998. Gross margin (gross profit as a percentage of total net
revenue) increased to 44.7% for the year ended December 31, 1999 as compared to
42.3% for the year ended December 31, 1998. Gross margin from product sales
increased to 40.8% for the year ended December 31, 1999 compared to 37.5% for
the year ended December 31, 1998.
The increase in our gross margin from product sales was primarily the result
of fixed store occupancy costs being spread over a larger comparable store
revenue base, a favorable mix in retail net revenue,
18
<PAGE>
which generally carries a higher gross margin rate, lower off-price sales and a
decrease in wholesale markdowns and allowances as a percentage of wholesale net
revenues.
Furthermore, during the fourth quarter of 1999, we enhanced our ability to
estimate reserves through improved processes and more current and accurate data.
As a result, we revised our estimate of certain reserves. This resulted in a
reduction of cost of sales of $2.3 million and increase of gross margin of
$2.3 million or 2.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $171.0 million for the year ended
December 31, 1999 decreased to 28.5% of net revenue, from 30.3% of net revenue
or $142.8 million, in the year ended December 31, 1998. The decrease in SG&A
expenses as a percentage of net revenue was due to our ability to leverage
certain expenses against a higher revenue base, as well as the success of our
ongoing cost containment programs.
GAIN ON DISPOSITION OF PROPERTY AND EQUIPMENT. We realized a non-recurring
pre-tax gain of $3.8 million on the disposition of property and equipment.
SEVERANCE COSTS RELATED TO DISTRIBUTION FACILITY. In accordance with the
requirements of EITF 94-3, "Liability for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)", we recorded a $3.2 million charge for future severance costs
related to the relocation of our distribution operations from Los Angeles,
California to Louisville, Kentucky. We anticipate the payment of these severance
costs to occur in the second quarter of fiscal year 2000.
EARNINGS FROM OPERATIONS. Earnings from operations increased 64.4% to
$93.8 million for the year ended December 31, 1999 from $57.0 million for the
year ended December 31, 1998. The increase was primarily due to higher revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 27.1% to
$9.4 million for the year ended December 31, 1999 from $12.9 million for the
year ended December 31, 1998. This decrease resulted primarily from a lower
outstanding average debt. For the year ended December 31, 1999, the average debt
balance was $93.1 million, with an average effective interest rate of 9.5%. For
the year ended December 31, 1998, the average debt balance was $135.5 million,
with an average effective interest rate of 9.0%.
INCOME TAXES. The income tax provision for the year ended December 31, 1999
was $35.2 million, or a 40.4% effective tax rate. The income tax provision for
the year ended December 31, 1998 was $18.2 million, or a 42.0% effective tax
rate. The effective tax for 1998 was adversely impacted by Federal and state
income taxes related to a dividend declared to us by one of our foreign
subsidiaries.
NET EARNINGS. Net earnings increased to $51.9 million for the year ended
December 31, 1999, from $25.1 million for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, we relied primarily on internally generated funds and trade
credit to finance our operations and expansion. At December 31, 1999, we had
working capital of $97.9 million compared to $101.3 million at December 31,
1998. The $3.4 million decrease in working capital is due primarily to a
$15.2 million increase in short-term investments, a $17.1 million increase in
inventories, a $3.2 million increase in prepaid expenses offset by a
$40.8 million increase in accounts payable and accrued expenses. With the
acquisition of the additional interest in GUESS Canada, our current portion of
notes payable and long-term debt increase $7.5 million
On December 3, 1999, we entered into a $125,000,000 Credit Agreement
("Credit Facility") with Chase Manhattan Bank that replaced our $100.0 million
revolving credit facility entered into in March 1997. The Credit Facility
provides us with a $125.0 million revolving credit facility including a
19
<PAGE>
$50.0 million sub-limit for letters of credit. The Credit Facility expires on
October 31, 2000. At December 31, 1999, we had no outstanding borrowings under
the Credit Facility, $15.2 million in outstanding commercial letters of credit
and $32.0 million in standby letters of credit. At December 31, 1999, we had
$77.8 million available for future borrowings under the Credit Facility. The
Credit Facility contains restrictive covenants requiring among other things, the
maintenance of certain financial ratios. We were in compliance with all such
covenants as of December 31, 1999.
Capital expenditures, net of lease incentives granted, totaled
$63.5 million for 1999 and $13.7 million for 1998. The increase in capital
expenditures was due primarily to our increase in store openings, costs
associated with our new distribution facility in Louisville, Kentucky, the
launching of our on-line store in April 1999, and the retail expansion of GUESS
Canada. We estimate that our capital expenditures for 2000 will be approximately
$80.0 million, primarily for retail store expansion and remodeling and
shop-in-shop expansion and enhancements.
We anticipate we will be able to satisfy our ongoing cash requirements
through 2000, including retail expansion plans and interest payments on our
senior subordinated notes due 2003 (such interest payments paid by us during
1999 amounted to $9.2 million), primarily with cash flow from operations,
supplemented by borrowings under our Credit Facility.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-K.
Forward-looking statements may also be in our other reports filed under the
Securities Exchange Act of 1934, in our press releases and in other documents.
In addition, from time to time, we, through our management, may make oral
forward-looking statements.
Forward-looking statements are only expectations, and involve known and
unknown risks and uncertainties, which may cause actual results in future
periods and other future events to differ materially from what is currently
anticipated. Certain statements in this Form 10-K, including those relating to
our expected results, the accuracy of data relating to, and anticipated levels
of, our future inventory and gross margins, our anticipated cash requirements
and sources, the relocation of our distribution center, our cost containment
efforts, our plans regarding store openings and closings and our business
seasonality, are forward-looking statements. Such statements involve risks and
uncertainties, which may cause results to differ materially from those set forth
in these statements. In addition to the factors discussed below, the economic
and other factors identified elsewhere in this Form 10-K, as well as the risk
factors discussed in our previously filed public documents, could affect the
forward-looking statements contained herein and therein.
Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will" or the negative thereof and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of which they are made. We undertake no
obligation to update publicly or revise any forward-looking statements.
Important factors that could cause actual results in future periods to
differ materially from our forward-looking statements, as well as affect our
ability to achieve our financial and other goals, include, but are not limited
to, the following:
- The continued availability of sufficient working capital, which could have
a material adverse effect on our financial condition and results of
operations.
- Our successful integration of new stores into existing operations, which
could have a material adverse effect on our financial condition and
results of operations.
20
<PAGE>
- The continued desirability and customer acceptance of our existing and
future products, which could have a material adverse effect on our
financial condition and results of operations.
- Possible cancellation of wholesale orders, which could have a material
adverse effect on our financial condition and results of operations.
- The success of our competitive products, which could have a material
adverse effect on our financial condition and results of operations.
- The success of our programs to strengthen our inventory cost accounting
controls and procedures, which could have a material adverse effect on our
financial condition and results of operations.
- The success of technology to be used in our new distribution center, which
could have a material adverse effect on our financial condition and
results of operation.
- The availability of adequate sources of capital, which could have a
material adverse effect on our financial condition and results of
operations.
- Our inability to identify and respond appropriately to changing consumer
demands and fashion trends, which could have a material adverse effect on
consumer acceptance of GUESS? products.
- A decision by the controlling owner of a group of department stores or any
other significant customer to decrease the amount purchased from us or to
cease carrying GUESS? products, which could have a material adverse effect
on our financial condition and results of operations.
- Our inability to control the quality, focus, image, financial stability or
distribution of our licensed products, which could impact consumer
receptivity to our products generally and, therefore, could have a
material adverse effect on our financial condition and results of
operations.
- Our failure to continue to enhance operating control systems, which could
have a material adverse effect on our financial condition and results of
operations.
- Factors beyond our control, such as which could have a material adverse
effect on our ability to expand our network of retail stores. Our general
failure to maintain and control our existing distribution and licensing
arrangements or to procure additional distribution and licensing
relationships could have a material adverse effect on our growth strategy,
which could have a material adverse effect on our financial condition and
results of operations.
- The extended loss of the services of one or more of our principal
executive officers, which could have a material adverse effect on our
financial condition and results of operations.
- Political instability resulting in the disruption of trade with the
countries in which our contractors, suppliers or customers are located,
the imposition of additional regulations relating to imports, the
imposition of additional duties, taxes and other charges on imports,
significant fluctuations in the value of the dollar against foreign
currencies or restrictions on the transfer of funds, which could have a
material adverse effect on our financial condition and results of
operations. Also, a substantial increase in customs duties, which could
have an adverse effect on our financial condition or results of
operations. These factors may be exacerbated by our increasing use of
packaged purchase sourcing from non-United States vendors.
- The inability of a manufacturer to ship our products in a timely manner or
to meet our quality standards, which could have a material adverse effect
on our ability to deliver products to our customers in a timely manner.
- No assurance can be given that others will not assert rights in, or
ownership of, trademarks and other proprietary rights of GUESS?. In
addition, the laws of certain foreign countries do not protect proprietary
rights to the same extent as do the laws of the United States.
21
<PAGE>
SEASONALITY
Our business is impacted by general seasonal trends characteristic of the
apparel and retail industries. Our retail operations are generally stronger in
the third and fourth quarters, while our wholesale operations generally
experience stronger performance in the first and third quarters. As the timing
of the shipment of products may vary from year to year, the result for any
particular quarter may not be indicative of results for the full year. We have
not had significant overhead and other costs generally associated with large
seasonal variations.
INFLATION
We do not believe the relatively moderate rates of inflation experienced in
the United States over the last three years have had a significant effect on our
net revenue or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which our products are
manufactured, we do not believe they have had a material adverse effect on our
net revenue or profitability.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It is effective for fiscal years
beginning after June 15, 2000. We believe the adoption of SFAS 133 will not have
a material impact on our financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We receive United States dollars for substantially all of our product sales
and our licensing revenues. Inventory purchases from offshore contract
manufacturers are primarily denominated in United States dollars; however,
purchase prices for the products may be impacted by fluctuations in the exchange
rate between the United States dollar and the local currencies of the contract
manufacturers, which may have the effect of increasing our cost of goods in the
future. In addition, royalties received from our international licensees are
subject to foreign currency translation fluctuations as a result of the net
sales of the licensee being denominated in local currency and royalties being
paid to us in United States dollars. During the last three fiscal years,
exchange rate fluctuations have not had a material impact on our inventory
costs.
We may enter into derivative financial instruments, including forward
exchange contracts, to manage foreign exchange risk on foreign currency
transactions. These financial instruments can be used to protect us from the
risk that the eventual net cash inflows from the foreign currency transactions
will be adversely affected by changes in exchange rates. Unrealized gains and
losses on outstanding foreign currency exchange contracts, used to hedge future
revenues and purchases, are not recorded in the financial statements but are
included in the measurement of the related hedged transaction when realized.
<TABLE>
<CAPTION>
FORWARD EXCHANGE U.S. DOLLAR FAIR VALUE IN U.S. $
CONTRACTS EQUIVALENT MATURITY DATE AT DECEMBER 31, 1999
- ----------------------- ----------- ----------------------- --------------------
<S> <C> <C> <C>
Canadian dollars $500,000 January 10 to 31, 2000 346,740
Canadian dollars 500,000 January 10 to 31, 2000 346,740
Canadian dollars 500,000 January 14, 2000 346,740
to February 15, 2000
</TABLE>
Based upon the rates at December 31, 1999, the cost to buy the equivalent
U.S. dollars discussed above was approximately $2.2 million Canadian currency.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference to
the Consolidated Financial Statements and Supplementary Data listed in Item 14
of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item can be found under the caption
"Directors and Executive Officers" of the Company's Proxy Statement (the "Proxy
Statement") dated March 31, 2000, for the 2000 Annual Meeting of Stockholders to
be held on May 15, 2000. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information in the Proxy Statement set forth under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership and Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) Documents Filed with Report
(1) Consolidated Financial Statements
The financial statements listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule is
filed as part of this report.
(2) Consolidated Financial Statement Schedule
The financial statement schedule listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this report.
(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits is filed as
part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the last fiscal year ended
December 31, 1999.
23
<PAGE>
GUESS ?, INC.
FORM 10-K
ITEMS 8, AND 14(A) AND 14(D)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C> <C>
1 Consolidated Financial Statements
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1999... F-3
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1998 and 1999............................ F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended
December 31, 1997, 1998 and 1999............................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999............................ F-6
Notes to Consolidated Financial Statements.................. F-7
2 Consolidated Financial Statement Schedule Valuation and
Qualifying Accounts......................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Guess ?, Inc.:
We have audited the accompanying consolidated financial statements of Guess
?, Inc. and Subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule, as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guess ?,
Inc. and Subsidiaries at December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 13, the Company changed its method of accounting for
its product display fixtures in 1997.
KPMG LLP
Los Angeles, California
February 10, 2000, except
for note 15, which is as of
March 3, 2000
F-2
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
ASSETS
1998 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 5,853 $ 6,139
Investments (note 2).................................... 11,900 27,059
Receivables:
Trade receivables, less reserves aggregating $7,837 and
$8,863 at December 31, 1998 and 1999, respectively.... 19,685 26,829
Royalties, less allowance for doubtful accounts of
$3,667 and $1,258 at December 31, 1998 and 1999,
respectively.......................................... 10,780 8,528
Other................................................... 3,673 4,316
--------- ---------
34,138 39,673
Inventories (note 3)...................................... 89,499 106,624
Prepaid expenses.......................................... 5,640 8,861
Prepaid income taxes...................................... 2,566 3,004
Deferred tax assets (note 6).............................. 6,496 9,619
--------- ---------
Total current assets.................................. 156,092 200,979
Property and equipment, at cost, net of accumulated
depreciation and amortization
(note 4).................................................. 86,453 125,688
Investments (note 2)........................................ 1,118 21,771
Deferred tax assets (note 6)................................ 4,110 --
Other assets, at cost, net of accumulated amortization of
$2,293 and $3,589 at December 31, 1998 and 1999,
respectively (note 14).................................... 15,999 20,598
--------- ---------
$ 263,772 $ 369,036
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and long-term debt
(note 5)................................................ $ -- $ 7,475
Accounts payable.......................................... 32,802 61,736
Accrued expenses.......................................... 21,980 33,824
--------- ---------
Total current liabilities............................. 54,782 103,035
Notes payable and long-term debt, excluding current
installments (note 5)..................................... 99,000 83,363
Deferred tax liabilities (note 6)........................... -- 4,562
Other liabilities........................................... 9,581 9,674
--------- ---------
163,363 200,634
Minority interest (note 7).................................. -- 1,047
Commitments and contingencies (notes 5 and 8)
Stockholders' equity (note 12):
Preferred stock, $0.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding................ -- --
Common stock, $0.01 par value. Authorized 150,000,000
shares; issued 62,937,327 and 63,335,743 shares at 1998
and 1999, outstanding 42,906,535 and 43,304,951 shares,
respectively............................................ 137 141
Paid-in capital........................................... 158,589 163,300
Retained earnings......................................... 92,543 144,443
Accumulated other comprehensive income (loss)............. (84) 10,247
Treasury stock, 20,030,792 shares repurchased............. (150,776) (150,776)
--------- ---------
Net stockholders' equity................................ 100,409 167,355
--------- ---------
$ 263,772 $ 369,036
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenue (note 11)
Product sales............................................. $465,913 $435,128 $560,012
Net royalties............................................. 49,459 36,803 39,638
-------- -------- --------
515,372 471,931 599,650
Cost of sales............................................... 288,408 272,079 331,660
-------- -------- --------
Gross profit................................................ 226,964 199,852 267,990
Selling, general and administrative expenses................ 156,318 142,806 171,014
Severance costs related to distribution facility (notes 10
and 14)................................................... -- -- 3,200
-------- -------- --------
Earnings from operations.................................. 70,646 57,046 93,776
Other income/(expense):
Gain on disposition of property and equipment
(note 10)............................................... -- -- 3,849
Interest, net............................................. (13,718) (12,892) (9,385)
Other, net................................................ (2,041) (863) (1,140)
-------- -------- --------
(15,759) (13,755) (6,676)
Earnings before income taxes and cumulative effect of
change in accounting principle.......................... 54,887 43,291 87,100
Income taxes (note 6)....................................... 21,337 18,180 35,200
-------- -------- --------
Earnings before cumulative effect of change in accounting
principle............................................... 33,550 25,111 51,900
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707
(note 13)................................................. 3,961 -- --
-------- -------- --------
Net earnings.............................................. $ 37,511 $ 25,111 $ 51,900
======== ======== ========
BASIC EARNINGS PER SHARE:
Earnings before cumulative effect of change in accounting
principle................................................. $ 0.78 $ 0.59 $ 1.21
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707
(note 13)................................................. 0.09 -- --
-------- -------- --------
Net earnings.............................................. $ 0.87 $ 0.59 $ 1.21
======== ======== ========
DILUTED EARNINGS PER SHARE:
Earnings before cumulative effect of change in accounting
principle................................................. $ 0.78 $ 0.59 $ 1.20
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707
(note 13)................................................. 0.09 -- --
-------- -------- --------
Net earnings.............................................. $ 0.87 $ 0.59 $ 1.20
======== ======== ========
Weighted number of shares outstanding--basic................ 42,898 42,904 43,005
======== ======== ========
Weighted number of shares outstanding--diluted.............. 42,902 42,919 43,366
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
------------- -------- -------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996.................... $ 135 $155,591 $ 29,921 $ 57 $(150,776) $ 34,928
Comprehensive income:
Net earnings............ $37,511 -- -- 37,511 -- -- 37,511
Foreign currency
translation
adjustment............ (109) -- -- -- (109) -- (109)
-------
Total comprehensive
income................ $37,402
=======
Issuance of common
stock................. 2 2,998 -- -- -- 3,000
-------- -------- -------- --------- --------- --------
Balance at December 31,
1997.................... 137 158,589 67,432 (52) (150,776) 75,330
Comprehensive income:
Net earnings............ $25,111 -- -- 25,111 -- -- 25,111
Foreign currency
translation
adjustment............ (32) -- -- -- (32) -- (32)
-------
Total comprehensive
income................ $25,079
-------- -------- -------- --------- --------- --------
=======
Balance at December 31,
1998.................... 137 158,589 92,543 (84) (150,776) 100,409
Comprehensive income:
Net earnings............ $51,900 -- -- 51,900 -- -- 51,900
Foreign currency
translation
adjustment............ (114) -- -- -- (114) -- (114)
Unrealized gain on
investment, net of tax
effect of $7,632...... 10,445 -- -- -- 10,445 -- 10,445
-------
Total comprehensive
income................ $62,231
=======
Issuance of common stock
under stock option
plan.................... 4 4,711 -- -- -- 4,715
-------- -------- -------- --------- --------- --------
Balance at December 31,
1999.................... $ 141 $163,300 $144,443 $ 10,247 $(150,776) $167,355
======== ======== ======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 37,511 $ 25,111 $ 51,900
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment............................................. 20,071 22,571 25,589
Amortization of other assets............................ 369 931 1,296
Deferred income taxes................................... 1,783 (834) (2,150)
Amortization of deferred royalty income................. (2,623) -- --
Cumulative effect of change in accounting principle..... (3,961) -- --
Loss (gain) on disposition of property and equipment.... 120 1,483 (5,037)
Minority interest....................................... -- -- 1,047
Foreign currency translation adjustment................. 91 (89) (80)
Equity method losses.................................... 603 87 (98)
(Increase) decrease in:
Receivables........................................... 8,988 3,637 558
Inventories........................................... (12,591) 2,582 (9,155)
Prepaid expenses and other current assets............. (4,972) 3,553 (9,340)
Prepaid income taxes.................................. (14,511) 12,141 (2,849)
Other assets.......................................... 8,105 (324) 5,820
Increase (decrease) in:
Accounts payable...................................... (964) (5,520) 19,393
Accrued expenses...................................... (993) (241) 10,662
Income taxes payable.................................. (6,784) 112 (252)
--------- --------- --------
Net cash provided by operating activities........... 30,242 65,200 87,304
Cash flows from investing activities:
Net (purchases of) proceeds from the sale of short-term
investments............................................. 4,401 (11,900) (10,600)
Purchase of property and equipment........................ (48,836) (13,738) (63,501)
Proceeds from the disposition of property and equipment... 1,445 14 7,106
Lease incentives granted.................................. 2,561 432 1,544
Acquisition of interest in Strandel Inc................... (2,027)
--- ---
Acquisition of license.................................... (2,975) (741) (1,443)
Purchase of investment securities available for sale...... -- -- (8,979)
Proceeds of investment securities available for sales..... -- -- 4,868
Increase of long-term investments......................... (1,435) 842 (2,357)
--------- --------- --------
Net cash used by investing activities............... (44,839) (25,091) (75,389)
Cash flows from financing activities:
Repayment of senior subordinated notes.................... -- (6,000) (19,400)
Proceeds from notes payable and long-term debt............ 63,935 102,300 5,529
Repayment of notes payable and long-term debt............. (149,734) (138,817) (1,258)
Proceeds from issuance of common stock.................... -- -- 3,534
--------- --------- --------
Net cash provided (used) by financing activities.... 14,201 (42,517) (11,595)
Effect of exchange rates on cash............................ (200) 57 (34)
Net increase (decrease) in cash............................. (596) (2,351) 286
Cash at beginning of year................................... 8,800 8,204 5,853
--------- --------- --------
Cash at end of year......................................... $ 8,204 $ 5,853 $ 6,139
========= ========= ========
Supplemental disclosures
Cash paid during the year for:
Interest.............................................. $ 15,185 $ 15,095 $ 10,358
Income taxes.......................................... $ 39,558 $ 3,704 $ 37,236
========= ========= ========
</TABLE>
On January 2, 1997, in connection with acquisition of a license, the Company
issued 216,216 shares of Common Stock aggregating $3.0 million.
See accompanying notes to consolidated financial statements
F-6
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Guess ?, Inc. (the "Company" or "GUESS?") designs, markets, distributes and
licenses leading lifestyle collections of casual apparel and accessories for
men, women and children that reflect the American lifestyle and European
fashions sensibilities. The Company designs are sold in GUESS? owned stores to a
network of wholesale accounts that include primarily better department stores,
selected specialty retailers and upscale boutiques and through the Internet.
GUESS? branded products, some of which are produced under license, are also sold
internationally through a series of licensees and distributors.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Guess ?, Inc.
and its wholly-owned foreign subsidiary, Guess Europe, B.V., a Netherlands
corporation ("GEBV"), and its majority-owned subsidiary GUESS? Canada
Corporation (formerly named Strandel Inc.), a Canadian corporation. GEBV holds
two wholly-owned subsidiaries: Ranche, Limited, a Hong Kong corporation
("Ranche"), and Guess Italia, S.r.l., an Italian corporation ("GUESS Italia").
The Company holds a 60% interest in GUESS Canada and the results of GUESS Canada
are included in the consolidated Financial Statements. Accordingly, all
references herein to "Guess ?, Inc." include the consolidated results of the
Company and its subsidiaries. All intercompany accounts and transactions are
eliminated during the consolidation process.
INVESTMENT SECURITIES
The Company accounts for its investment securities in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). SFAS 115 requires investments to be classified
into one of three categories based on management's intent: held-to-maturity
securities, available-for-sale securities and trading securities.
Held-to-maturity securities are recorded at amortized cost. Available-for-sale
securities are recorded at fair value with unrealized gains and losses reported
as a separate component of stockholders' equity. Trading securities are recorded
at market value with unrealized gains and losses reported in operations. The
Company accounts for its short-term investment securities as available-for-sale.
EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the
weighted-average number of shares of common stock, par value $0.01 per share
(the "Common Stock"), outstanding for the period. Diluted earnings per share
represents net earnings divided by the weighted-average number of shares
outstanding, inclusive of the dilutive impact of Common Stock equivalents.
The reconciliation of basic to diluted weighted average shares is as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net earnings..................................... $37,511 $25,111 $51,900
======= ======= =======
Weighted average shares used in basic
computations................................... 42,898 42,904 43,005
Dilutive stock options........................... 4 15 361
------- ------- -------
Weighted average shares used in diluted
computation.................................... 42,902 42,919 43,366
======= ======= =======
</TABLE>
F-7
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Options to purchase 1,421,000, 1,036,000 and 467,000 shares of Common Stock
at prices ranging from $10.50 to $18.00, $5.50 to $11.00 and $10.88 to $16.38
were outstanding during 1997, 1998 and 1999, respectively, but were not included
in the computation of diluted earnings per share because the options exercise
prices were greater than the average market price of the shares of Common Stock.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of accounts receivable. The Company maintains cash
with various major financial institutions and performs evaluations of the
relative credit standing of these financial institutions in order to limit the
amount of credit exposure with any institution. The Company extends credit to
corporate customers based upon an evaluation of the customer's financial
condition and credit history and generally requires no collateral. The Company's
customers are principally located throughout North America, and their ability to
pay amounts due to the Company may be dependent on the prevailing economic
conditions of their geographic region. However, such credit risk is considered
limited due to the Company's large customer base. Management performs regular
evaluations concerning the ability of its customers to satisfy their obligations
and records a provision for doubtful accounts based on these evaluations. The
Company's credit losses for the periods presented are insignificant and have not
exceeded management's estimates. A few of the Company's domestic wholesale
customers, including some under common ownership, have accounted for significant
portions of its net revenue. During 1999, Bloomingdale's, Macy's and other
affiliated stores owned by Federated Department Stores, Inc. together accounted
for approximately 12.4% of the Company's net revenue.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out and
weighted average) or market.
REVENUE RECOGNITION
The Company recognizes retail operations revenue at the point of sale, and
wholesale operations revenue from the sale of merchandise upon shipment. Royalty
income is based upon a percentage, as defined in the underlying agreement, of
the licensees' net revenue. The Company accrues for estimated sales returns and
allowances in the period in which the related revenue is recognized.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment are provided using
the straight-line and declining balance methods over the following useful lives:
<TABLE>
<S> <C>
Building and building improvements.......................... 10 to 31 years
Land improvements........................................... 5 years
Machinery and equipment..................................... 3 to 5 years
Corporate aircraft.......................................... 10 years
Corporate vehicles.......................................... 3 years
Shop fixtures............................................... 5 years
</TABLE>
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the term of the lease. Construction in progress is not
depreciated until the related asset is completed.
F-8
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 10 to 15 years.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation", balance
sheet accounts of the Company's foreign operations are translated from foreign
currencies into U.S. dollars at year-end or historical rates, while income and
expenses are translated at the weighted-average exchange rates for the year. The
related translation adjustments are reflected as a foreign currency translation
adjustment in the consolidated balance sheet.
HEDGING ACTIVITIES
At December 31, 1999, the Company had forward exchange contracts to purchase
$1.5 million U.S. currency for approximately $2.2 million Canadian currency.
Based on rates at December 31, 1999, the cost to buy the equivalent U.S. dollars
was approximately $2.2 million Canadian currency.
Unrealized gains and losses on outstanding foreign currency exchange
contracts, used to hedge future revenues and purchases, are not recorded in the
financial statements but are included in the measurement of the related hedged
transaction when realized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
COMPREHENSIVE INCOME
The Company reports comprehensive income under SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income consists of net earnings, unrealized
gains on investments and foreign currency translation adjustments and is
presented in the consolidated statements of stockholders' equity and
comprehensive income (loss).
BUSINESS SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), effective in 1998. SFAS 131
establishes new standards for reporting information about business segments and
related disclosures about products and services, geographic areas and major
customers. The business segments of the Company are wholesale, retail and
licensing operations. Information regarding these segments is summarized in
Note 11.
F-9
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
principally include cash, short and long-term investments, trade receivables,
accounts payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments.
The fair value of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
borrowing rate. At December 31, 1998 and 1999, the carrying value of all
financial instruments was not materially different from fair value.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
LONG-LIVED ASSETS
The Company reports long-lived assets, including intangibles, at amortized
cost. Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If this assessment indicates
that the intangibles will not be recoverable, as determined by a non-discounted
cash flow generated by the asset, the carrying value of the Company's long-lived
assets would be reduced to its estimated fair market value based on the
discounted cash flows.
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. Advertising
expenses charged to operations for the years ended December 31, 1997, 1998 and
1999 were $22.5 million, $18.0 million, and $24.5 million, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform with the 1999 presentation.
(2) INVESTMENTS
Short-term investments consist mostly of overnight interest bearing deposit
accounts aggregating $11.9 million at December 31, 1998 and $27.1 million at
December 31, 1999.
Long-term investments consist of certain marketable equity securities
aggregating $1.1 million and $21.8 million at December 31, 1998 and 1999,
respectively. Unrealized gains related to marketable equity securities at
December 31, 1999 amounted to $11.2 million, net of deferred taxes of
$7.6 million and are included as a component of stockholders' equity. '
F-10
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(3) INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................ $ 9,400 $ 8,514
Work in process.......................................... 7,922 6,740
Finished goods--retail................................... 36,712 45,750
Finished goods--wholesale................................ 35,465 45,620
------- --------
$89,499 $106,624
======= ========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land and land improvements.............................. $ 5,729 $ 5,734
Building and building improvements...................... 8,462 8,462
Leasehold improvements.................................. 59,218 67,821
Machinery and equipment................................. 71,975 86,790
Corporate aircraft...................................... 5,973 6,601
Shop fixtures........................................... 28,895 31,347
Construction in progress................................ 1,321 23,842
-------- --------
181,573 230,597
Less accumulated depreciation and amortization.......... 95,120 104,909
-------- --------
$ 86,453 $125,688
======== ========
</TABLE>
Construction in progress at December 31, 1998 and 1999 represents the costs
associated with the construction of buildings and improvements used in the
Company's operations and other capitalizable expenses in progress.
F-11
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(5) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
9 1/2% Senior Subordinated Notes due 2003................... $99,000 $79,562
Revolving bank loan bearing interest at 1.75% above the
Canadian prime rate plus an amount equal to 0.5% per month
of the average outstanding balance, payable on demand, but
commencing January 1, 2001 by way of 24 equal consecutive
minimum payments.......................................... -- 2,770
Advances under a demand line of credit of $15,926 with
advances thereon bearing interest at the Canadian prime
rate plus 1%.............................................. -- 6,818
Other obligations, maturing in varying amounts through
2004...................................................... -- 1,688
------- -------
99,000 90,838
Less current installments................................... -- 7,475
------- -------
Long-term debt, excluding current installments.............. $99,000 $83,363
======= =======
</TABLE>
In December 1999, the Company entered into a credit agreement with a bank
permitting borrowings up to $125 million (the "Credit Facility"). The Credit
Facility replaced the Company's $100 million revolving credit facility entered
into in March 1997. The Credit Facility provides for a $125 million revolving
credit facility including a $50 million sub-limit for letters of credit. The
Credit Facility expires on October 31, 2000. At December 31, 1999, the Company
had no outstanding borrowings under the Credit Facility, $15.2 million in
outstanding commercial letters of credit and $32.0 million in standby letters of
credit. The Credit Facility contains various restrictive covenants requiring,
among other things, the maintenance of certain financial ratios. The Company was
in compliance with all such covenants as of December 31, 1999. In addition, the
arrangements governing the Company's Credit Facility and the indenture pursuant
to which the Company's Senior Subordinated Notes due 2003 were issued restrict
the payments of dividends by the Company.
The Senior Subordinated Notes are redeemable at the option of the Company,
in whole or in part, at any time at various redemption prices. The Company
repurchased $6.0 million and $19.4 million in 1998 and 1999, respectively, of
its Senior Subordinated Notes.
F-12
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(6) INCOME TAXES
Income taxes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current........................................ $17,487 $14,477 $32,508
Deferred....................................... 2,995 793 (2,464)
State:
Current........................................ 3,973 2,459 5,202
Deferred....................................... (1,212) 41 314
Foreign:
Current........................................ 801 410 (360)
------- ------- -------
$24,044 $18,180 $35,200
======= ======= =======
</TABLE>
Actual income taxes differ from expected income taxes obtained by applying
the statutory Federal income tax rate to earnings before income taxes as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense.................. $21,544 $15,152 $30,485
State taxes, net of Federal benefit.............. 2,928 1,625 3,586
Foreign (benefit)................................ (157) (14) (273)
U.S. tax and foreign withholding tax on Foreign
distributions.................................. -- 739 --
Other............................................ (271) 678 1,402
------- ------- -------
$24,044 $18,180 $35,200
======= ======= =======
</TABLE>
Total income taxes were allocated as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operations....................................... $24,044 $18,180 $35,200
Stockholders' equity............................. -- -- 6,451
------- ------- -------
Total income taxes............................... $24,044 $18,180 $41,651
======= ======= =======
</TABLE>
The income tax expense for the year ended December 31, 1997 includes taxes
of $2.7 million related to a one-time change in accounting (see Note 13). The
Company's consolidated statement of earnings has presented the change in
accounting net of this income tax expense.
F-13
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of current and non-current deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1999 are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Retail store closure reserves........................... $ 467 $ 269
Deferred lease incentives............................... 1,648 1,718
Rent expense............................................ 2,158 2,161
Uniform capitalization adjustment....................... 1,987 2,194
State income taxes...................................... 870 1,471
Bad debt and other reserves............................. 1,810 2,904
Severance reserve....................................... -- 1,378
Other................................................... 2,066 2,602
------- -------
Total deferred assets................................. 11,005 14,697
Deferred tax liabilities.............................. 400 9,640
------- -------
Net deferred tax assets............................... $10,606 $ 5,057
======= =======
</TABLE>
Included above at December 31, 1998 and 1999 are $6.5 million and
$9.6 million for current deferred tax assets, respectively, and $4.1 million
non-current deferred tax assets and $4.5 million non-current deferred tax
liabilities.
Prepaid income taxes of $2.6 million and $3.4 million at December 31, 1998
and 1999, respectively, arise from the overpayment of estimated income taxes.
Based on the historical earnings of the Company, management believes it is
more likely than not that the results of operations will generate sufficient
taxable earnings to realize net deferred tax assets.
(7) RELATED PARTY TRANSACTIONS
The Company is engaged in various transactions with entities affiliated with
trusts for the respective benefit of Maurice, Paul and Armand Marciano (the
"Marciano Trusts"). The Company believes that the arrangements involving each of
the companies in which the Marciano Trusts have an investment, and related party
transactions discussed below were entered into on terms no less favorable to the
Company than could have been obtained from an unaffiliated third party.
LICENSE AGREEMENTS AND LICENSEE TRANSACTIONS
On September 28, 1990, the Company entered into a license agreement with
Charles David of California ("Charles David"). Charles David is controlled by
the father-in-law of Maurice Marciano. The Marciano Trusts and Nathalie Marciano
(the spouse of Maurice Marciano) together own 50% of Charles David, and the
remaining 50% is owned by the father-in-law of Maurice Marciano. The license
agreement grants Charles David the rights to manufacture worldwide and
distribute worldwide (except Japan and certain European countries) for men,
women and some children, leather and rubber footwear which bear the GUESS?
trademark. The license also includes related shoe care products and accessories.
F-14
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
Gross royalties earned by the Company under such license agreement for the
fiscal years ended December 31, 1997, 1998 and 1999 were $1.2 million,
$1.4 million and $1.9 million, respectively. Additionally, the Company purchased
$6.1 million, $6.1 million and $8.4 million of products from Charles David for
resale in the Company's retail stores during the same periods.
In May 1997, the Company sold substantially all of the assets and
liabilities of GUESS Italia to Maco Apparel, S.p.a. ("Maco"). The effect of the
net asset disposal was immaterial to the Company's results of operations. In
connection with this sale, the Company also purchased a 10% ownership interest
in Maco and entered into an approximate 10-year license agreement with Maco
granting it the right to manufacture and distribute certain men's and women's
jeanswear apparel, which bear the GUESS? trademark, in certain parts of Europe.
In addition to royalty fees, the Company will also receive $14.1 million over a
four-year period in consideration of the grant of the license rights for men's
and women's jeanswear apparel. During 1998 and 1999, the Company recorded
$2.8 million and $2.8 million, respectively, in revenue in connection with the
grant of such license rights. Additionally, the Company also recorded
$2.3 million and $3.2 million in royalty fees related to product sales in 1998
and 1999, respectively. Effective as of March 1, 1998, the Company also entered
into an approximate nine-year license agreement with Maco granting it the right
to manufacture and distribute kid's jeanswear, which bear the GUESS? trademark,
in certain parts of Europe.
On August 4, 1999, the Company completed its purchase of an additional 40%
of GUESS Canada, whereby the Company's ownership has been increased to 60%. As
part of the transaction, the Company paid $2.2 million and will provide
long-term financing of up to $13.4 million to GUESS Canada to expand its
Canadian retail operations. The Company has an option to acquire the remaining
40% of GUESS Canada that becomes exercisable commencing December 31, 2001. The
acquisition was accounted for as a purchase and the results of GUESS Canada are
included in the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired amounting to $1.1 million is allocated to goodwill and is being
amortized over 15 years. The operating results of GUESS Canada are immaterial to
the Company's consolidated financial statements.
AGENCY AGREEMENT
In February 1996, the Company entered into a buying agency agreement with
Newtimes Guess?, Ltd. ("Newtimes"). The Company owns 50% of Newtimes. Pursuant
to such agreement, the Company pays Newtimes a commission based on the cost of
finished garments purchased for the Company. Commissions earned by Newtimes from
the Company during the fiscal years ended December 31, 1997 and 1998 were $1.7,
and $1.0 million, respectively. Additionally, with respect to Newtimes, the
Company recorded $0.1 million in equity losses during the fiscal year ended
December 31, 1997. During 1998, Newtimes was dissolved after the Company
terminated its buying agency agreement with them, as well as severed its equity
interest. Accordingly, the Company has discontinued recording equity income
during 1998.
LEASES
The Company leases manufacturing, warehouse and administrative facilities
from partnerships affiliated with the Marciano Trusts and certain of its
affiliates. There are two leases in effect at December 31, 1999, both of which
expire in July 2008. The total lease payments to these limited partnerships are
currently $225,000 per month. Additionally, the Company is also on a month to
month lease for another
F-15
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
storage facility. Aggregate lease payments under leases in effect for the fiscal
years ended December 31, 1997, 1998 and 1999 were $2.6 million, $2.7 million,
and $2.7 million, respectively.
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its showrooms and retail store locations under operating
lease agreements expiring on various dates through 2016. Some of these leases
require the Company to make periodic payments for property taxes and common area
operating expenses. Certain leases include rent abatements and scheduled rent
escalations, for which the effects are being amortized and recorded over the
lease term. The Company also leases some of its equipment under operating lease
agreements expiring at various dates through 2003.
Future minimum rental payments under non-cancelable operating leases at
December 31, 1999 are as follows:
Year ending December 31, (in thousands):
<TABLE>
<CAPTION>
NON
RELATED RELATED
PARTIES PARTIES TOTAL
-------- -------- --------
<S> <C> <C> <C>
2000........................................... $ 30,251 $ 2,727 $ 32,978
2001........................................... 30,380 2,727 33,107
2002........................................... 28,975 2,727 31,702
2003........................................... 27,552 2,727 30,279
2004........................................... 23,727 2,727 26,454
Thereafter..................................... 71,245 9,771 81,016
-------- ------- --------
$212,130 $23,405 $235,536
======== ======= ========
</TABLE>
Rental expense for all operating leases during the years ended December 31,
1997, 1998, and 1999 aggregated $30.8 million, $32.6 million, and
$41.2 million, respectively.
INCENTIVE BONUSES
Certain officers and key employees of the Company are entitled to incentive
bonuses, primarily based on the Company's profits.
LITIGATION
On August 7, 1996, a class action complaint naming the Company and certain
of its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et al. v.
Guess ?, Inc. et al. The plaintiffs asserted claims for violation of state wage
and hour laws, wrongful discharge, and breach of contract arising out of the
Company's relationship with its independent contractors and actions taken by
them with respect to their employees. The plaintiffs also
F-16
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
alleged that the Company breached its agreement with the United States
Department of Labor regarding the monitoring of its independent contractors. The
Court has held two hearings on certifying the alleged class. The parties have
agreed to settle the case. On March 1, 2000, the Court gave final approval to
the parties' settlement. If no class member appeals within 60 days thereafter,
the case will be finally resolved.
On July 7, 1998, the Union of Needletrades Industrial and Textile Employees
("UNITE") filed with the National Labor Relations Board ("NLRB") charges against
the Company alleging that the Company violated the National Labor Relations Act
by failing to uphold certain obligations under a prior settlement agreement with
the NLRB, by denying pro-union employees access to the Company's facilities, by
conferring new benefits to employees, by making false accusations against UNITE,
by conducting video surveillance of UNITE's offices, and by assisting and
organizing an anti-union demonstration. These allegations were dismissed by the
NLRB. UNITE appealed, and, on October 15, 1999, the NLRB dismissed the appeal.
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and
Armand Marciano, as individuals, were named as defendants in a class action
entitled John N. Robinson v. Guess ?, Inc., Maurice as amended, purported to
state claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
for alleged misrepresentations in connection with the Company's initial public
offering (the "IPO") in August 1996. Mr. Robinson purported to represent a class
of all purchasers of the Company's stock in the IPO and sought unspecified
damages. On January 10, 2000, the complaint was dismissed in its entirety.
However, Robinson has the right to appeal the dismissal.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals (the "Marcianos"), as well as the Company, were named as defendants
in a shareholders' derivative complaint entitled John N. Robinson v. Maurice
Marciano, Paul Marciano and Armand Marciano and Guess ?, Inc., filed in the Los
Angeles Superior Court. The complaint (the "Derivative Complaint") purports to
state a claim for intentional breach of fiduciary duty, negligent breach of
fiduciary duty, constructive fraud and abuse of control in connection with the
Marcianos' management of the Company since its IPO. On July 26, 1999, the Court
entered an Order that allows the case to proceed past the pleadings stage. While
it is too soon to predict the outcome of the case with any certainty, the
defendants believe they have meritorious defenses to each of the claims asserted
and intend to vigorously defend themselves.
On May 21, 1999, the Company filed a demand for arbitration against Pour le
Bebe, Inc. and Pour la Maison, Inc. (collectively, "PLB") seeking damages and
injunctive relief in connection with four written license agreements between the
parties. The Company alleged that PLB defaulted under the license agreements,
that the license agreements properly were terminated and that PLB breached the
license agreements. On July 19, 1999, PLB filed a counterdemand for arbitration
against the Company. PLB sought damages and injunctive relief against the
Company alleging breach of contract, violation of the California Franchise
Relations Act, interference with prospective economic advantage, unlawful
business practices, statutory unfair competition and fraud. The arbitration was
conducted before the American Arbitration Association pursuant to arbitration
clauses in the license agreements. (See Note 15.)
On June 9, 1999, the Company commenced a lawsuit in the Los Angeles County
Superior Court against Mr. Kyle Kirkland, Kirkland Messina LLC, and CKM
Securities (collectively "Kirkland") for tortious interference, unfair
competition, fraud and related claims. This action arises out of alleged
misrepresentations and omissions of material fact made by Kirkland in connection
with the operations and
F-17
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
financial performance of PLB. Currently, there are proceedings in the California
Court of Appeal to determine if the action will proceed in court or by way of
arbitration. No trial or hearing date has been set.
The Company cannot predict the outcome of these matters. The Company
believes the outcome of one or more of the above cases could have a material
adverse effect on the Company's financial condition and results of operations.
(9) SAVINGS PLAN
The Company established the Guess ?, Inc. Savings Plan (the "Savings Plan")
under Section 401(k) of the Internal Revenue Code. Under the Savings Plan,
employees ("associates") may contribute up to 15% of their compensation per year
subject to the elective limits as defined by IRS guidelines and the Company may
make matching contributions in amounts not to exceed 1.5% of the associates'
annual compensation. The Company's contributions to the Savings Plan for each of
the three years ended December 31, 1997, 1998 and 1999 aggregated $0.3 million.
(10) QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 1998 and 1999 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue.......................................... $110,768 $98,068 $130,138 $132,957
Gross profit......................................... 46,452 44,235 54,782 54,383
Net earnings......................................... 7,951 3,440 9,639 4,081
Basic and diluted earnings per share................. $ 0.19 $ 0.08 $ 0.22 $ 0.10
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue......................................... $129,052 $119,557 $155,547 $195,494
Gross profit........................................ 54,028 55,035 65,261 93,666
Net earnings........................................ 11,486 7,017 14,235 19,162
Earnings per share:
Basic............................................. $ 0.27 $ 0.16 $ 0.33 $ 0.45
Diluted........................................... $ 0.27 $ 0.16 $ 0.33 $ 0.44
</TABLE>
During the second quarter of 1999, in accordance with the requirements of
EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring"), the Company recorded a $3.2 million charge for future severance
costs related to the relocation of distribution operations to Louisville. In the
third quarter of 1999, the Company realized a non-recurring pretax gain of
$3.8 million on the disposition of property and equipment. During the fourth
quarter of 1999, the Company enhanced its ability to estimate reserves through
improved processes and more current and accurate data. As a result, the Company
revised its estimate of certain reserves. This resulted in a reduction of cost
of sales of $2.3 million.
F-18
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(11) SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about Segments
of and Enterprise and Related Information", the Company's reportable business
segments and respective accounting policies, policies of the segments are the
same as those described in Note 1. Management evaluates segment performance
based primarily on revenue and earnings from operations. Interest income and
expense is evaluated on a consolidated basis and not allocated to the Company's
business segments.
Segment information is summarized as follows for the years ended
December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
Retail operations......................................... $215,873 $222,624 $299,384
Wholesale operations...................................... 250,040 212,504 260,628
Licensing operations...................................... 49,459 36,803 39,638
-------- -------- --------
$515,372 $471,931 $599,650
======== ======== ========
Earnings from operations:
Retail operations......................................... $ 5,008 $ 12,034 $ 37,072
Wholesale operations...................................... 16,179 8,209 25,101
Licensing operations...................................... 49,459 36,803 31,603
-------- -------- --------
$ 70,646 $ 57,046 $ 93,776
======== ======== ========
Capital expenditures:
Retail operations......................................... $ 5,602 $ 28,030
Wholesale operations...................................... 8,136 35,471
Licensing operations...................................... -- --
-------- --------
$ 13,738 $ 63,501
======== ========
Total assets:
Retail operations......................................... $ 93,140 $114,152
Wholesale operations...................................... 159,069 245,162
Licensing operations...................................... 11,563 9,722
-------- --------
$263,772 $369,036
======== ========
</TABLE>
F-19
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(11) SEGMENT INFORMATION (CONTINUED)
The table below presents information related to geographic areas in which
the Company operated in during 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States....................................... $455,969 $434,207 $548,179
Asia................................................ 22,277 13,859 13,279
Europe.............................................. 19,812 10,600 13,464
Canada.............................................. 1,649 1,644 12,073
South America....................................... 7,965 5,066 3,973
Mexico.............................................. 2,774 2,406 3,337
Other............................................... 4,926 4,149 5,345
-------- -------- --------
$515,372 $471,931 $599,650
======== ======== ========
</TABLE>
(12) STOCK OPTION PLAN
On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Non-Employee Directors' Stock Option Plan pursuant to which the Board of
Directors may grant stock options to non-employee directors. This plan
authorizes grants of options to purchase up to 500,000 authorized but unissued
shares of Common Stock. At December 31, 1997, 1998 and 1999, there were 28,886,
70,451 and 109,082 options issued under this plan, respectively. Stock options
are granted with an exercise price equal to the stock's fair market value at the
date of grant. Stock options have ten-year terms and vest and become fully
exercisable in increments of one-fourth of the shares granted on each
anniversary from the date of grant.
On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Equity Incentive Plan (the "Plan") pursuant to which the Board of Directors may
grant stock options to officers, key associates and consultants. The Plan
authorizes grants of options to purchase up to 4,500,000 authorized but unissued
shares of Common Stock. Stock options are granted with an exercise price equal
to the stock's fair market value at the date of grant. Stock options have
ten-year terms (five years in the case of an incentive stock option granted to a
ten-percent stockholder) and vest and become fully exercisable after varying
time periods from the date of grant based on length of service or specified
performance goals.
At December 31, 1997, 1998 and 1999, there were 3,208,645, 2,841,825 and
2,763,397 additional shares available for grant under the Plan, respectively.
The per share weighted-average fair value of stock options granted during 1997,
1998 and 1999 was $9.75, $4.24, and $12.46, respectively, on the dates of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1997, 1998 and 1999 expected dividend yields of 0.0%, 0.0% and
0.0%, respectively; 1997, 1998 and 1999 risk-free interest rates of 6.50%, 4.87%
and 6.51%, respectively; 1997, 1998 and 1999 volatility factors of 30%, 63% and
65%, respectively; and 1997, 1998 and 1999 expected lives of four years.
F-20
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
(12) STOCK OPTION PLAN (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation based on the fair value at the grant date for its stock options
under SFAS No. 123 ("SFAS 123"), the Company's pro forma net earnings and net
earnings per share for the years ended December 31, 1997, 1998 and 1999 would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net earnings........................... $35,222 $24,574 $51,300
Pro forma earnings per share--basic.............. $ 0.82 $ 0.57 $ 1.19
Pro forma earnings per share--diluted............ $ 0.82 $ 0.57 $ 1.18
</TABLE>
Pro forma net earnings reflect only options granted since the inception of
the Plan on July 30, 1996. The full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period of four years.
Stock option activity during the period indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARE EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at December 31, 1996...................... 1,287,105 $17.74
Granted......................................... 1,406,105 10.78
Forfeited....................................... (1,365,855) (16.88)
---------- ------
Balance at December 31, 1997...................... 1,291,355 $11.05
Granted......................................... 1,035,600 4.24
Forfeited....................................... (668,780) (10.92)
---------- ------
Balance at December 31, 1998...................... 1,658,175 $ 6.86
Granted......................................... 343,650 12.46
Exercised....................................... (373,090) (8.56)
Forfeited....................................... (265,222) (7.68)
---------- ------
Balance at December 31, 1999...................... 1,363,513 $ 7.64
========== ======
</TABLE>
At December 31, 1997, 1998 and 1999, the weighted-average exercise price was
$11.05, $6.86 and $7.64, respectively, and the weighted-average remaining
contractual lives of outstanding options were 8.85, 9.0 and 8.53 years,
respectively.
F-21
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(12) STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICE DECEMBER 31, 1999 CONTRACTUAL LIFE PRICE DECEMBER 31, 1999 PRICE
- --------------------- ----------------- ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$ 3.94 to $ 5.50 750,463 8.81 years $ 4.17 126,644 $ 4.26
$ 7.03 to $ 9.38 105,100 8.56 years 8.33 34,350 8.09
$10.50 to $13.13 391,350 7.60 years 11.16 177,290 10.93
$16.38 to $21.06 116,600 9.90 years 17.51 -- --
--------- ------ ------
1,363,513.... 8.54 years $ 7.64 338,284 $ 8.14
========= =======
</TABLE>
At December 31, 1998 and 1999, the number of options exercisable for each
year was 315,875 and 338,284, respectively. The weighted-average exercise price
of those options was $10.84 and $8.14, respectively.
(13) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PRODUCT DISPLAY FIXTURES
Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures are capitalized and amortized over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes that this new method will more
closely match the long-term benefit that the product display fixtures provide
with the expected future revenue from such fixtures. The cumulative effect of
the change in accounting principle, recorded in the first quarter of 1997, is
calculated based upon the retroactive effect of applying the new accounting
method to prior year fixture acquisitions. The cumulative effect of the change
in accounting principle of $4.0 million (after reduction for income tax expense
of $2.7 million) is included in earnings for the year ended December 31, 1997.
Excluding the cumulative effect of the change in accounting principle, the
effect of the change during 1997 was to increase net earnings by approximately
$6.2 million, or $0.14 per share.
(14) SEVERANCE COSTS RELATED TO DISTRIBUTION FACILITY
In accordance with the requirements of EITF 94-3, "Liability for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", the Company recorded a
$3.2 million charge for future severance costs related to the relocation of its
distribution operations from Los Angeles, California to Louisville, Kentucky.
The Company anticipates the payment of these severance costs to occur in the
second quarter of fiscal 2000.
(15) SUBSEQUENT EVENT
On March 3, 2000, the Arbitrators issued an interim award in favor of the
Company and rejected each of PLB's counterclaims (see Note 8). The amount of the
interim award was in excess of $6 million. As the prevailing party, the Company
is entitled to, and has applied for, an award of its attorneys' fees, costs and
expenses. Because of the uncertainty of the ultimate realization of the award,
no recognition has been given to it in the accompanying consolidated financial
statements.
F-22
<PAGE>
SCHEDULE II
GUESS ?, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1997
Allowance for obsolescence........................ $ 3,257 $ 3,764 $ (3,456) $ 3,565
Accounts receivable............................... 9,720 12,746 (11,270) 11,196
Royalties......................................... -- -- -- --
As of December 31, 1998
Allowance for obsolescence........................ 3,565 3,512 (3,217) 3,860
Accounts receivable............................... 11,196 8,542 (11,901) 7,837
Royalties......................................... -- 3,667 -- 3,667
As of December 31, 1999
Allowance for obsolescence........................ 3,860 583 (2,079) 2,364
Accounts receivable............................... 7,837 1,398 (372) 8,863
Royalties......................................... 3,667 1,657 (4,066) 1,258
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 29, 2000.
<TABLE>
<S> <C> <C>
GUESS ?, INC.
By: /s/ MAURICE MARCIANO
-----------------------------------------
Maurice Marciano
CO-CHAIRMAN OF THE BOARD,
CO-CHIEF EXECUTIVE OFFICER AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Co-Chairman of the Board,
/s/ MAURICE MARCIANO Co-Chief Executive
------------------------------------------- Officer and Director March 29, 2000
Maurice Marciano (Principal Executive
Officer)
President, Co-Chairman of
/s/ PAUL MARCIANO the Board, Co-Chief
------------------------------------------- Executive Officer and March 29, 2000
Paul Marciano Director
/s/ ARMAND MARCIANO Senior Executive Vice
------------------------------------------- President, Assistant March 29, 2000
Armand Marciano Secretary and Director
Executive Vice President
/s/ BRIAN FLEMING and Chief Financial
------------------------------------------- Officer (Principal March 29, 2000
Brian Fleming Financial Officer and
Chief Accounting Officer)
/s/ ROBERT DAVIS
------------------------------------------- Director March 29, 2000
Robert Davis
/s/ ALICE KANE
------------------------------------------- Director March 29, 2000
Alice Kane
/s/ HOWARD SOCOL
------------------------------------------- Director March 29, 2000
Howard Socol
/s/ BRYAN ISAACS
------------------------------------------- Director March 29, 2000
Bryan Isaacs
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (1)
4.3 Specimen stock certificate. (1)
10.1 Amended and Restated Stockholders' Agreement. (2)
10.20 Amended and Restated Revolving Credit Agreement, dated as of
March 28, 1997. (2)
10.22 1996 Equity Incentive Plan. (1)
10.23 1996 Non-Employee Directors' Stock Option Plan. (1)
10.24 Annual Incentive Plan. (1)
10.25 Employment Agreement between the Registrant and Maurice
Marciano. (2)
10.26 Employment Agreement between the Registrant and Paul
Marciano. (2)
10.27 Employment Agreement between the Registrant and Armand
Marciano. (2)
10.28 Registration Rights Agreement among the Registrant and
certain stockholders of the Registrant. (2)
10.29 Indemnification Agreement among the Registrant and certain
stockholders of the Registrant. (2)
10.30 Indemnification Agreements between the Registrant and
certain executives and directors. (2)
10.31 First Amendment to Amended and Restated Shareholders'
Agreement. (3)
10.32 First Amendment and Waiver to Amended and Restated Revolving
Credit Agreement by and between the Registrant and
BankBoston, NA, F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
hereto. (4)
10.33 Amended and Restated 1996 Non-Employee Directors' Stock
Option Plan, as amended through March 3, 1997. (5)
10.34 Second Amendment and Consent to the Amended and Restated
Revolving Credit Agreement by and between Guess ?, Inc. And
BankBoston, N.A.,F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
Hereto. (6)
10.35 Third Amendment and Consent to the Amended and Restated
Revolving Credit Agreement by and between Guess ?, Inc. And
BankBoston, N.A., F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
Hereto. (6)
10.36 Amendment No. 1 to The Guess ?, Inc. Amended and Restated
1996 Non- Employee Directors' Stock Option Plan. (7)
10.37 Employment Agreement dated July 6, 1998 between Guess
?, Inc. and Brian L. Fleming. (7)
10.38 Fourth Amendment and Consent to the Amended and Restated
Revolving Credit Agreement by and between Guess ?, Inc. And
BankBoston, N.A., F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
Hereto. (8)
*10.39 Credit Agreement by and between Guess?, Inc. and Sanwa Bank
of California, and the Chase Manhattan Bank.
*10.40 Lease Agreement between Guess?, Inc. and Robert Pattillo
Properties, Inc.
*10.41 Subscription Agreement between Freemark Entertainment
Corporation and Guess?, Inc.
18.0 Letter regarding change in accounting principles. (5)
*21.1 List of Subsidiaries.
*23.0 Independent Accountants' Consent.
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith
<PAGE>
(b) Financial Statement Schedule:
Schedule II--Description Valuation and Qualifying Accounts
- ------------------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996, as
amended.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1997.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1998.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1998.
<PAGE>
EXECUTION COPY
$125,000,000
CREDIT AGREEMENT
among
GUESS?, INC.,
as Borrower,
The Several Lenders
from Time to Time Parties Hereto,
SANWA BANK CALIFORNIA, as Co-Agent,
and
THE CHASE MANHATTAN BANK,
as Administrative Agent
Dated as of December 3, 1999
CHASE SECURITIES INC., as Lead Arranger and Book Manager
<PAGE>
TABLE OF CONTENTS
SECTION 1. DEFINITIONS .......................................1
1.1 Defined Terms .......................................1
1.2 Other Definitional Provisions ......................17
SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT
COMMITMENTS ......................................18
2.1 Revolving Credit Commitments .......................18
2.2 Procedure for Revolving Loan Borrowing..............18
2.3 Swingline Commitment................................19
2.4 Procedure for Swingline Borrowing; Refunding
of Swingline Loans..................................19
2.5 Commitment Fees, etc........ .......................20
2.6 Termination or Reduction of Revolving
Credit Commitments..................................20
2.7 Optional Prepayments................................21
2.8 Mandatory Revolving Credit Commitment Reductions....21
2.9 Conversion and Continuation Options.................21
2.10 Limitations and Eurodollar Tranches.................22
2.11 Interest Rates and Payment Dates....................22
2.12 Computation of Interest and Fees....................22
2.13 Inability to Determine Interest Rate................23
2.14 Pro Rata Treatment and Payments.....................23
2.15 Requirements of Law.................................24
2.16 Taxes...............................................25
2.17 Indemnity...........................................27
2.18 Change of Lending Office............................27
2.19 Replacement of Lenders..............................28
SECTION 3. LETTERS OF CREDIT ................................28
3.1 L/C Commitment.......................................28
3.2 Procedure for Issuance of Letter of Credit...........28
3.3 Fees and Other Charges...............................29
3.4 L/C Participations...................................29
3.5 Reimbursement Obligation of the Borrower.............30
3.6 Obligations Absolute.................................30
3.7 Letter of Credit Payments............................30
3.8 Applications.........................................31
SECTION 4. REPRESENTATIONS AND WARRANTIES ...................31
4.1 Financial Condition..................................31
4.2 No Change............................................31
4.3 Corporate Existence; Compliance with Law.............31
4.4 Corporate Power; Authorization; Enforceable
Obligations..........................................31
4.5 No Legal Bar.........................................32
4.6 Litigation...........................................32
4.7 No Default...........................................32
4.8 Ownership of Property; Liens.........................32
<PAGE>
Page
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4.9 Intellectual Property...............................32
4.10 Taxes..............................................32
4.11 Federal Regulations................................33
4.12 Labor Matters......................................33
4.13 ERISA..............................................33
4.14 Investment Company Act; Other Regulations..........33
4.15 Subsidiaries.......................................33
4.16 Use of Proceeds....................................34
4.17 Environmental Matters..............................34
4.18 Accuracy of Information, etc.......................34
4.19 Collateral.........................................35
4.20 Solvency...........................................35
4.21 Senior Indebtedness................................35
4.22 Year 2000 Matters..................................35
SECTION 5 CONDITIONS PRECEDENT...............................36
5.1 Conditions to Initial Extension of Credit...........36
5.2 Conditions to Each Extension of Credit..............37
SECTION 6. AFFIRMATIVE COVENANTS.............................37
6.1 Financial Statements................................37
6.2 Certificates; Other Information.....................38
6.3 Payment of Obligations..............................39
6.4 Maintenance of Existence; Compliance................39
6.5 Maintenance of Property; Insurance..................39
6.6 Inspection of Property; Books and Records;
Discussions.........................................39
6.7 Notices.............................................39
6.8 Environmental Laws..................................40
6.9 Additional Collateral, etc..........................40
SECTION 7. NEGATIVE COVENANTS................................41
7.1 Financial Condition Covenants.......................41
7.2 Indebtedness........................................41
7.3 Liens...............................................43
7.4 Fundamental Changes.................................44
7.5 Disposition of Property.............................45
7.6 Restricted Payments.................................46
7.7 Capital Expenditures................................46
7.8 Investments.........................................47
7.9 Payments and Modifications of Certain Debt
Instruments.........................................48
7.10 Transactions with Affiliates........................48
7.11 Sales and Leasebacks................................48
7.12 Changes in Fiscal Periods...........................49
7.13 Negative Pledge Clauses.............................49
7.14 Clauses Restricting Subsidiary Distributions........49
7.15 Lines of Business...................................49
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<PAGE>
SECTION 8. EVENTS OF DEFAULT .................................49
SECTION 9. THE AGENTS ........................................52
9.l Appointment...........................................52
9.2 Delegation of Duties..................................53
9.3 Exculpatory Provisions................................53
9.4 Reliance by Administrative Agent......................53
9.5 Notice of Default.....................................53
9.6 Non-Reliance on Agents and Other Lenders..............54
9.7 Indemnification.......................................54
9.8 Agent in Its Individual Capacity......................54
9.9 Successor Administrative Agent........................55
9.10 Co-Agent.............................................55
SECTION 10. MISCELLANEOUS ....................................55
10.1 Amendments and Waivers................................55
10.2 Notices...............................................56
10.3 No Waiver; Cumulative Remedies........................57
10.4 Survival of Representations and Warranties............57
10.5 Payment of Expenses and Taxes.........................57
10.6 Successors and Assigns; Participations an
Assignments...........................................58
10.7 Adjustments; Set-off..................................60
10.8 Counterparts..........................................60
10.9 Severability..........................................60
10.10 Integration..........................................60
10.11 GOVERNING LAW........................................61
10.12 Submission To Jurisdiction; Waivers..................61
10.13 Acknowledgements.....................................61
10.14 Releases of Guarantees and Liens.....................62
10.15 Confidentiality......................................62
10.16 WAIVERS OF JURY TRIAL................................62
- iii -
<PAGE>
ANNEX:
A Pricing Grid
SCHEDULES:
1.1 Revolving Credit Commitments
4.1 Material Guarantee Obligations; Material Dispositions
4.15 Subsidiaries
4.19 UCC Filing Jurisdictions
7.2(e) Existing Indebtedness
7.3(f) Existing Liens
EXHIBITS:
A Form of Guarantee and Collateral Agreement
B Form of Compliance Certificate
C Form of Closing Certificate
D Form of Assignment and Acceptance
E-1 Form of Legal Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
E-2 Form of Legal Opinion of Glenn A. Weinman
F Form of Exemption Certificate
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<PAGE>
CREDIT AGREEMENT, dated as of December 3, 1999 among GUESS ?, 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"), SANWA BANK CALIFORNIA, as co-agent (in such capacity, the
"Co-Agent"), and THE CHASE MANHATTAN BANK, as administrative agent.
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in the 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%) equal to the greatest of (a) the Prime Rate in effect on
such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal
Funds Effective Rate in effect an 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 Chase Manhattan Bank 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 Chase Manhattan Bank in connection with
extensions of credit to debtors): "Base CD Rate" shall mean the sum of (a) the
product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the
numerator of which is one and the denominator of which is one minus the C/D
Reserve Percentage and (b) the C/D Assessment Rate; and "Three-Month Secondary
CD Rate" shall mean, for any day, the secondary market rate for three-month
certificates of deposit reported as being in effect on such day (or, if such day
shall not be a Business Day, the next preceding Business Day) by the Board
through the public information telephone line of the Federal Reserve Bank of New
York (which rate will, under the current practices of the Board, be published in
Federal Reserve Statistical Release H.15(519) during the week following such
day), or, if such rate shall not be so reported on such day or such next
preceding Business Day, the average of the secondary market quotations for
three-month certificates of deposit of major money center banks in New York City
received at approximately 10:00 A.M., New York City time, on such day (or, if
such day shall not be a Business Day, on the next preceding Business Day) by The
Chase Manhattan Bank from three New York City negotiable certificate of deposit
dealers of recognized standing selected by it. Any change in the ABR due to a
change in the Prime Rate, the Three-Month Secondary CD 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, the Three-Month Secondary CD Rate or the
Federal Funds Effective Rate, respectively.
"ABR Loans": Loans the rate of interest applicable to which is based
upon the ABR.
"Adjustment Date": as defined in the Pricing Grid.
"Administrative Agent": The Chase Manhattan Bank, together with its
affiliates, as the arranger of the Revolving Credit Commitments and as the
administrative agent for the Lenders under this Agreement and the other Loan
Documents, together with any of its successors.
"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 fuctions) of such Person or (b) direct or cause the direction
of the management and policies of such Person, whether by contract or otherwise.
<PAGE>
2
"Agents": the collective reference to the Co-Agent and the
Administrative Agent.
"Aggregate Exposure": with respect to any Lender at any time, amount
equal to the amount of such Lender's Revolving Credit Commitment then in effect
or, if the Revolving Credit Commitments have been terminated, the amount of such
Lender's Revolving Extentions 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, restated, supplemented
or otherwise modified from time to time.
"Apparel Business": collectively, (a) the businesses of the
manufacture, wholesale sale and/or retail sale of clothing garments and other
wearing apparel or allied or complementary products for men, women or children,
including accessories, fragrances, eyewear, watches, home products, cosmetics
and footwear, or of any component materials thereof, (b) the business of
granting licenses of the trademarks, tradenames and other similar property to
other Persons for the manufacture and/or sale of such products of any nature by
such Persons and (c) activities related or ancillary to, or extensions of, the
businesses and activities described clauses (a) and (b) above.
"Applicable Documentary L/C Fee Rate": 0.200%; provided, that on and
after the date that is 90 days after the Closing Date, the Applicable
Documentary L/C Fee Rate will be determined pursuant to the Pricing Grid.
"Applicable Margin": a per annum rate equal to (a) 1.25%, in the case
of Eurodollar Loans, and (b) 0.25%, in the case of ABR Loans; provided, that on
and after the date that is 90 days after the Closing Date, the Applicable Margin
will be determined pursuant to the Pricing Grid.
"Application": an application, in such form as the Issuing Lender may
specify from time to time in accordance with its customary practice and the
terms of this Agreement, and which may be submitted electronically, requesting
the Issuing Lender to open a Letter of Credit.
"Asset Sale": any Disposition of property or series of related
Dispositions of property (excluding any issuance or sale of Capital Stock of the
Borrower or any such Disposition permitted by clause (a), (b), (c), (d), (e),
(f), (g), (h), (i), (j), (k) or (l) of Section 7.5) that yields Net Cash
Proceeds to the Borrower or any of its Subsidiaries in excess of $2,500,000.
"Assignee": as defined in Section 10.6(c).
"Assignment and Acceptance": an Assignment and Acceptance,
substantially in the form of Exhibit D.
"Assignor": as defined in Section 10.6(c).
"Attributable Debt": in respect of a sale and leaseback transaction
entered into by the Borrower or any of its Subsidiaries, at the time of
determination, the present value of the obligation of the lessee for net rental
payments during the remaining term of the lease included in such sale and
leaseback transaction including any period for which such lease has been
extended or may, at the sole option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
<PAGE>
3
"Available Revolving Credit Commitment": as to any Lender at any time,
an amount equal to the excess, if any, of (a) such Lender's Revolving Credit
Commitment then in effect over (b) such Lender's Revolving Extensions of Credit
then outstanding; provided, that in calculating any Lender's Revolving
Extensions of Credit for the purpose of determining such Lender's Available
Revolving Credit Commitment pursuant to Section 2.5(a), the aggregate principal
amount of Swinging Loans then outstanding shall be deemed to be zero.
"Basket Amount": an amount equal to $75,000,000 on the Closing Date,
permanently reduced thereafter by the amount of (a) any expenditures made to
repurchase common stock of the Borrower pursuant to Section 7.6(b), (b) the
Consideration expended in connection with any Permitted Acquisition pursuant to
Section 7.8(f), and (c) any expenditures made to redeem the Senior Subordinated
Notes pursuant to Section 7.9(a)(i).
"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 Date": any Business Day specified by the Borrower as a date
on which the Borrower requests the Lender 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 interbank
eurodollar market.
"Capital Expenditures": for any period, with respect to any Person,
the aggregate of all expenditures by such Person and its Subsidiaries for the
acquisition or leasing (pursuant to a capital lease) of fixed or capital assets
or additions to equipment (including replacements, capitalized repairs and
improvements during such period) that should be capitalized under GAAP on a
consolidated balance sheet of such Person and its Subsidiaries; provided,
however, that Capital Expenditures shall not include (a) property purchased
simultaneously with the trade-in of existing property owned by such Person or
its Subsidiaries to the extent of the trade-in credit with respect to the
property being traded in at such time, (b) expenditures of proceeds of any
Recovery Event, (c) expenditures to replace property Disposed of in accordance
with this Agreement to the extent of the sales price of such property and to the
extent replaced within 365 days of receipt of such sales price, (d) property
subject to Capital Lease Obligations or (e) capitalized fees and expenses.
"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.
<PAGE>
4
"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)
certificates of deposit, time deposits, eurodollar time deposits or overnight
bank deposits having maturities of one year 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 $250,000,000; (c) commercial paper of an issuer rated at least A-1 by
Standard & Poor's Ratings Services ("S&P") or P-1 by Moody's Investors Service,
Inc. ("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 one year 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 90 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 or
an equivalent rating by a nationally recognized rating agency, if such
securities are not rated by either S&P or 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; (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; (h) demand deposit accounts
maintained in the ordinary course of business; and (i) in the case of any
Foreign Subsidiary, (i) direct obligations of the sovereign nation (or any
agency thereof) in which such Foreign Subsidiary is organized or is conducting
business or obligations guaranteed by such sovereign nation (or any agency
thereof), (ii) investments of the type and maturity described in clauses (a)
through (g) above of foreign obligors, which investments or obligors (or the
direct or indirect parents of such obligors) have ratings described in such
clauses or equivalent ratings from comparable foreign rating agencies or (iii)
investments of the type and maturity described in clauses (a) through (g) above
of foreign obligors (or the direct or indirect parents of such obligors) that
are not rated as provided in such clauses or in clause (ii) above but which are,
in the reasonable judgment of the Borrower or the relevant Subsidiary,
comparable in investment quality to such investment and obligors (or the direct
or indirect parents of such obligors).
"C/D Assessment Rate": applied to any ABR Loan, the annual
assessment rate in effect on such day that is payable by a member of the Bank
Insurance Fund maintained by the Federal Deposit Insurance Corporation (the
"FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. ss: 327.4 (or any successor provision) to the FDIC (or any successor) for
the FDIC's (or such successor's) insuring time deposits at offices of such
institution in the United States.
<PAGE>
5
"C/D Reserve Percentage": for any day as applied to any ABR Loan, that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board, for determining the maximum reserve requirement for a
Depositary Institution (as defined in Regulation D of the Board as in effect
from time to time) in respect of new non-personal time deposits in Dollars
having a maturity of 30 days or more.
"Closing Date": the date on which the conditions precedent set forth
in Section 5.1 shall have been satisfied, which date is December 3, 1999.
"Co-Agent": as defined in the preamble hereto.
"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.
"Commitment Fee Rate": 0.375% per annum; provided that on and after
the date that is 90 days after the Closing Date, the Commitment Fee Rate will be
determined pursuant to the Pricing Grid.
"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.
"Confidential Information Memorandum": the Confidential Information
Memorandum dated September 1999 and furnished to the Lenders.
"Consideraton": in connection with any "acquisition, the consideration
paid by the Borrower or any of its Subsidiaries in connection therewith
(including the principal amount of any Indebtedness assumed in connection
therewith).
"Consolidated EBITDAR": for any period, Consolidated Net Income for
such period plus, without duplication and to the extent reflected as a charge in
this 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) Consolidated Operating Lease
Expense, (f) 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), and (g) any other
non-cash charges, and minus, to the extent included in the statement of such
Consolidated Net Income for such period, the surn 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 (other than income accrued in the
ordinary course of business), all as determined on a consolidated basis. For the
purposes of calculating Consolidated EBITDAR for any period of four consecutive
fiscal quarters (each, a "Reference Period") pursuant to any determination of
the Consolidated Leverage Ratio, (i) if at any time during such Reference Period
the Borrower or any Subsidiary shall have made any Material Disposition, the
Consolidated EBITDAR for such Reference Period shall be reduced by an amount
equal to the Consolidated EBITDAR (if positive) attributable to the property
that is the subject of such Material Disposition for such Reference Period or
increased by an amount equal to the Consolidated EBITDAR (if negative)
attributable thereto for such Performance Period and (ii) if during such
Reference Period the Borrower or any Subsidiary shall have made a Material
Acquisition, Consolidated EBITDAR for such Reference Period shall be calculated
after giving pro forma effect thereto as if such Material Acquisition occurred
on the first day of such Reference Period. As used in this definition, "Material
Acquisition" means 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) involves the payment of consideration by the
Borrower and its Subsidiaries in excess of $2,500,000; and "Material
Disposition" means any Disposition of property or series of related Dispositions
of property that yields gross proceeds to the Borrower or any of its
Subsidiaries in excess of $2,500,000.
<PAGE>
6
"Consolidated Fixed Charge Coverage Ratio": for any period, the ratio
of (a) Consolidated EBITDAR for such period minus Capital Expenditures for such
period to (b) Consolidated Fixed Charges for such period.
"Consolidated Fixed Charges": for any period, the sum (without
duplication) of (a) Consolidated Interest Expense for such period, (b)
Consolidated Operating Lease Expense for such period and (c) scheduled payments
made during such period on account of principal of Indebtedness of the Borrower
or any of its Subsidiaries.
"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 less all interest income and payments received under Hedge
Agreements in respect of interest rates allocable to such period in accordance
with GAAP).
"Consolidated Leverage Ratio": as at the last day of any period, the
ratio of (a) the sum of (i) Consolidated Total Debt on such day and (ii) 800% of
Consolidated Operating Lease Expense for such period to (b) Consolidated EBITDAR
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) except
as otherwise expressly provided herein, 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 (other than Strandel,
Inc. and its Subsidiaries) 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>
7
"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 net stockholders' equity at such date.
"Consolidated Operating Lease Expense": for any period, the aggregate
amount of fixed and contingent rentals payable by the Borrower and its
Subsidiaries for such period with respect to leases of real and personal
property (other than Capital Lease Obligations), determined on a consolidated
basis in accordance with GAAP.
"Consolidated Total Debt": at any date, the aggregate principal amount
of all Indebtedness (other than contingent obligations in respect of
Indebtedness of the type described in clause (f) of the definition thereof) of
the Borrower and its Subsidiaries at such date, determined on a consolidated
basis in accordance with GAAP.
"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 a majority of the then Continuing Directors or such other director
receives the vote of the Permitted Investors in his or her election by the
shareholders of the Borrower.
"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.
"Disposition": with respect to any property, any sale, lease, sale and
leaseback, assignment (other than for security), conveyance, transfer or other
disposition thereof. The terms "Dispose" and "Disposed of " shall have
correlative meanings.
"Documentary Letter of Credit": any Letter of Credit that is issued in
support of trade obligations of the Borrower or any of its Subsidiaries incurred
in the ordinary course of business and that includes, as a condition to drawing
thereunder, the presentation to the Issuing Lender of negotiable bills of
lading, invoices and related documents sufficient to create a valid and
perfected security interest in the goods covered thereby.
"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.
"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 at may at any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
<PAGE>
8
"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 Base Rate": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, the rate per annum determined on the
basis of the rate for deposits in Dollars 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 Business
Days prior to the beginning of such Interest Period. 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 Base Rate" shall be determined by reference to
such other comparable publicly available service for displaying eurodollar rates
as may be selected by the Administrative Agent with the consent of the Borrower
(which consent shall not be unreasonably withheld or delayed) or, in the absence
of such availability (or Borrower consent), by reference to the rate at which
the Administrative Agent is offered Dollar deposits at or about 11:00 A.M., New
York City time, two Business Days prior to the beginning of such Interest Period
in the interbank eurodollar market where its eurodollar and foreign currency and
exchange operations are then being conducted for delivery on the first day of
such Interest Period for the number of days comprised therein.
"Eurodollar Loans": Loans the rate of interest applicable to which is
based upon the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, a rate per annum determined for such day
in accordance with the following formula (rounded upward to the nearest 1/100th
of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"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.
"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 of the
quotations for the day of such transactions received by The Chase Manhattan Bank
from three federal funds brokers of recognized standing selected by it.
"Foreign Subsidiary": any Subsidiary of the Borrower that is not a
Domestic Subsidiary.
<PAGE>
9
"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 Borrower's audited
financial statements referred to in Section 4.1 with respect to the period
ending December 31, 1998. 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 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, insrumentality, 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 (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 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.
<PAGE>
10
"Hedge Agreements": all interest rate swaps, caps or collar agreements
or similar arrangements dealing with 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 property or services (other than
current trade payables incurred in the ordinary course of such Person's business
and contingent payments, earn-outs, incentive arrangements and similar
obligations arising in connection with Permitted Acquisitions), (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 acceptances, letters of credit, sure bonds or similar arrangements, (g)
the liquidation value of all preferred Capital Stock of such Person that is
redeemable at the option of the holder thereof on or prior to the Revolving
Termination Date (other than in connection with asset sales or changes of
control),(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 any Lien on
property (including amounts and contract rights) owned by such Person, whether
or not such Person has assumed or become liable for the payment of such
obligation, provided that the amount of such obligations deemed Indebtedness
under this clause (i) shall equal the lesser of the outstanding principal amount
of such obligations and the value of the property of such Person securing such
obligations, and (j) for the purposes of Sections 7.2 and 8(e) only, all
obligations of such Person in respect of Hedge Agreements. The Indebtedness of
any Person shall include the Indebtedness of any other entity (including any
partnership in which such Person is a general partner) to the extent such Person
is liable therefor as a result of such Person's ownership interest in or other
relationship with such entity, except to the extent the terms of such
Indebtedness expressly provide that such Person is not liable therefor.
"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 Revolving Loan that is an ABR Loan and any
Swingline Loan), the date of any repayment or prepayment made in respect
thereof.
<PAGE>
11
"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;
(ii) the Borrower may not select an Interest Period that
would extend beyond the Revolving Termination Date;
(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; and
(iv) the Borrower shall select Interest Periods so as not to
require a payment or prepayment of any Eurodollar Loan during an
Interest Period for such Loan.
"Investments": as defined in Section 7.8.
"Issuing Lender": The Chase Manhattan Bank, in its capacity as Issuer
of any Letter of Credit, together with any other Lender designated by the
Administrative Agent (with such Lender's consent) to serve as an Issuing Lender
hereunder. Each reference herein to "the Issuing Lender" shall, as the context
requires, refer to each Issuing Lender or relevant Issuing Lender.
"L/C Commitment": $50,000,000.
"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 Lenders other
than the Issuing Lender.
"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).
<PAGE>
12
"Loan": any loan made by any Lander pursuant to this Agreement.
"Loan Documents": this Agreement and the Security Documents.
"Loan Parties": the Borrower and each Subsidiary of the Borrower that
is a party to a Loan Document.
"Material Adverse Effect": a material adverse effect on (a) the
business, operations or condition (financial or otherwise) 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.
"Materials of Environmental Concern": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes, defined or regulated as such
in or under any Environmental Law, including asbestos, polychlorinated biphenyls
and urea-formaldehyde insulation.
"Material Subsidiary": any Subsidiary of the Borrower whose (a)
assets, (b) revenues or (c) earnings before interest, taxes, depreciation and
amortization (excluding intercompany receivables and revenues that would be
eliminated upon consolidation in accordance with GAAP), at the time of
determination (determined, in the case of clauses (b) and (c), in respect of the
most recent period of four consecutive fiscal quarters of the Borrower for which
the relevant financial information is available), in any such case exceed
$2,500,000.
"Multiemployer Plan': a Plan that is a multiemployer plan as defined
in Section 4001(a)(3)of ERISA.
"Net Cash Proceeds": (a) in connection with any Asset Sale or any
Recovery 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 if, as and when received) of such Asset Sale
or Recovery 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 or Recovery 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 (after taking into account any available tax credits or
deductions resulting directly from such Asset Sale or Recovery Event) and (b) in
connection with any incurrence of Indebtedness, the cash proceeds received from
such 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 definedin Section 2.16(a).
"Non-U.S. Lender: as defined In Section 2.16(d).
<PAGE>
13
"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 or the Borrower to the Administrative Agent or to any Lender (or, in
the cast 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, 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
an account of principal, interest, reimbursement obligations, fees, indemnities,
costs, expenses (including all 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 by the Borrower or any Wholly
Owned Subsidiary Guarantor of all of the Capital Stock of, or all or
substandatly all of the assets of, or of a business, unit or division of, any
Person; provided that (a) the Borrower shall be in compliance, on a pro forma
basis after giving effect to such acquisition, with the covenants contained in
Section 7.1, in each case recomputed as at the last day of the most recently
ended fiscal quarter of the Borrower for which the relevant information is
available as if such acquisition, had occurred on the first day of each relevant
period for testing such compliance (as demonstrated in a certificate of a
Reponsible Officer delivered to the Administrative Agent not less than three
Business Days prior to such acquisition), (b) no Default or Event of Default
shall have occurred and be continuing, or would occur after giving affect to
such acquisition, (c) substantially all of the assets being acquired (or, in the
case of acquisitions of Capital Stock, substantially all of the assets of the
Person being acquired and its Subsidiaries) shall be located within the United
States, (d) in the case of acquisitions of Capital Stock, the Person being
acquired and each of its Subsidiaries shall be organized in a jurisdiction
within the United States, (e) the businesses acquired as a result thereof shall
be Apparel Businesses, and (f) any such acquisition should have been approved by
the Board of Directors or comparable governing body of the relevant Person.
"Permitted Investors": the collective reference to Maurice Marciano,
Paul Marciano and Armand Marciano, the members of their families, their
respective estates, spouses, heirs, ancestors, lineal descendants, spouses of
lineal descendants, legatees and legal representatives of any of the foregoing
and any trust of which one or more of the foregoing are the beneficiaries.
"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>
14
"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 "employee" as defined in Section 3(5) of
ERISA.
"Pricing Grid: the pricing grid attached hereto as Annex A.
"Projections": as defined in Section 6.2(c).
"Properties": as defined in Section 4.17(a).
"Recovery Event": any settlement of or payment in respect of any
property or casualty insurance claim or any condemnation proceeding relating to
any asset of the Borrower or any of its Subsidiaries.
"Refunded Swingline Loans": as defined in Section 2.4.
"Refunding Date": as defined in Section 2.4.
"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 obligation of the Borrower to
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under
Letters of Credit.
"Reinvestment Deferred Amount: with respect to any Reinvestment Event,
the aggregate Net Cash Proceeds received by the Borrower or any of its
Subsidiaries in connection therewith that are not applied to reduce the
Revolving Credit Commitments pursuant to Section 2.8(b) as a result of the
delivery of a Reinvestment Notice.
"Reinvestment Event": any Asset Sale or Recovery Event in respect of
which the Borrower has delivered a Reinvestment Notice.
"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 or
Recovery Event to acquire assets useful in its business.
"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 business of the Borrower or any of its Subsidiaries,
"Reinvestment Prepayment Date": with respect to any Reinvestment
Event, the earlier of (a) the date occurring 365 days after such Reinvestment
Event and (b) the date on which the Borrower shall have determined not to
acquire assets useful in the business of the Borrower or any of its Subsidiaries
with all or any portion of the relevant Reinvestment Deferred Amount.
<PAGE>
15
"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(b) of
ERISA, other than those events as to which the thirty day notice period is
waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg.
ss. 4043.
"Required Lenders": at any time, the holders of more than 50% of the
Total Revolving Credit Commitments then in effect or, if the Revolving Credit
Commitments have been terminated, tho Total Revolving Extentions of Credit then
outstanding.
"Requirement of Law": as to any Person, the Certificate of
Incorporation and the By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or deterrnination of an
arbitrator or a court or other Govenmental 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, chief
financial officer, treasurer, assistant treasurer or secretary of the Borrower,
but in any event, with respect to financial matters, the chief financial
officer, treasurer or assistant treasurer of the Borrower.
"Restricted Payments": as defined in Section 7.6.
"Revolving Credit Commitment": as to any Lender, the obligation of
such Lender, if any, to make Revolving Loans and participate in Swingline Loans
and Letters of credit in an aggregate principal and/or face amount not to exceed
the amount set forth under the heading "Revolving Credit Commitment" opposite
such Lender's name on Schedule 1.1 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. The original amount of the Total Revolving
Credit Commitments is $125,000,000.
"Revolving Credit Commitment Period": the period from and including
the Closing Date to the Revolving Termination Date.
"Revolving Extensions of Credit": as to any Leder at any time, an
amount equal to the sum of (a) the aggregate principal amount of all Revolving
Loans hold by such Lender then outstanding, (b) such Lender's Revolving
Percentage of the L/C Obligations then outstanding and (c) such Lender's
Revolving Percentage of the aggregate principal amount of Swingline Loans then
outstanding.
"Revolving Loans": as defined in Section 2.1(a).
"Revolving Percentage": as to any Lender at any time, the percentage
which such Lender's Revolving Credit Commitment then constitutes of the Total
Revolving Credit Commitments (or, at any time after the Revolving Credit
Commitments shall have expired or terminated, the percentage which the aggregate
principal amount of such Lenders Revolving Loans then outstanding constitutes of
the aggregate principal amount of the Revolving Loans then outstanding).
"Revolving Termination Date": October 31, 2002.
"SEC": the Securities and Exchange Commission, any successor thereto
and any analogous Governmental Authority.
<PAGE>
16
"Security Documents": the collective reference to the Guarantee and
Collateral Agreement and any other security documents hereafter delivered to the
Administrative Agent granting a Lien on any property of any Person to secure the
obligations and liabilities of any Loan Party under any Loan Document.
"Senior Subordinated Note Indenture": the Indenture dated as of August
23, 1993, between the Borrower and First Trust National Association, as trustee,
together with all instruments and supplemented or otherwise modified from time
to time in accordance with Section 7.9, and any successor Indenture entered into
in connection with a replacement, refinancing or extension of the Senior
Subordinated Notes (so long as the aggregate outstanding principal amount of
Senior Subordinated Notes then outstanding is not increased as a result thereof,
as the same may be amended, supplemented or otherwise modified from time to time
in accordance with Section 7.9, provided (i) that the terms of any such
successor Indenture shall not be materially less favorable to the interests of
the Lenders than those contained in the Indenture as in effect on the Closing
Date and (ii) the maturity of the Indebtedness issued under any such successor
Indenture shall be no earlier than August 15, 2003.
"Senior Subordinated Notes": the senior subordinated notes of the
Borrower issued pursuant to the Senior Subordinated Note Indenture.
"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 probable 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. The amount of any claim shall be
computed as the amount which, in the light of the facts and circumstances at the
applicable time, represents the amount that can reasonably be expected to become
an actual or matured liability.
"Specified Change Control": a "Change in Control" (or any comparable
concept) as defined in the Senior Subordinated Note Indenture during any period
when the Senior Subordinated Note Indenture is in effect.
"Standby L/C Fee Payment Date": the last day of each March, June,
September and December and the last day of the Revolving Credit Commitment
Period.
"Standby Letter of Credit": any Letter of Credit other than a
Documentary Letter of Credit.
<PAGE>
17
"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 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 other than any
Foreign Subsidiary.
"Surviving Letters of Credit"" as defined in Section 5.1(b)
"Swingline Commitment": the obligation of the Swingline Lender to make
Swingline Loans pursuant to Section 2.3 in an aggregate principal amount at any
one time outstanding not to exceed $10,000,000.
"Swingline Lender": The Chase Manhattan Bank, in its capacity as the
lender of Swingline Loans.
"Swingline Loans": as defined in Section 2.3.
"Swingline Participation Amount": as defined in Section 2.4.
"Total Revolving Credit Commitments": at any time, the aggregate
amount of the Revolving Credit Commitments then in effect.
"Total Revolving Extensions of Credit": at any time, the aggregate
amount of the Revolving Extensions of Credit of the 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.
"United States": the United States of America.
"Wholly Owned Subsidiary": as to any Person, any other Person all of
the Capital Stock of which (other than directors' qualifying shares required by
law) is owned by such Person directly and/or through other Wholly Owned
Subsidiaries.
"Wholly Owned Subsidiary Guarantor": any Subsidiary Guarantor that is
a Wholly Owned Subsidiary of the Borrower.
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
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18
not defined, shall have the respective meanings given to them under
GAAP, (ii) the words "include", "includes" and "including" shall be deemed to be
followed by the phrase "without limitation", (iii) the word "incur" shall be
construed to mean incur, create, issue, assume, become liable in respect of or
suffer to exist (and the words "incurred" and "incurrence" shall have
correlative meanings), and (iv) the words "asset" and "property" shall be
construed to have the same meaning and effect and to refer to any and all
tangible and intangible assets and properties, including cash, Capital Sock,
securities, revenues, accounts, leasehold interests and contract rights.
(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. The captions and
headings of the various Sections and Subsections of this Agreement are provided
for convenience only and shall not affect or modify the meaning thereof.
SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS
2.1 Revolving Credit Commitments. (a) Subject to the terms and
conditions hereof, each Lender severally agrees to make revolving credit loans
("Revolving Loans") to the Borrower from time to time during the Revolving
Credit Commitment Period in an aggregate principal amount at any one time
outstanding which, when added to such Lender's Revolving Percentage of sum of
(i) the L/C Obligations then outstanding and (ii) the aggregate principal amount
of the Swingline Loans then outstanding, does not exceed the amount of such
Lender's Revolving Credit Commitment. During the Revolving Credit Commitment
Period the Borrower may use the Revolving Credit Commitments by borrowing,
prepaying The Revolving Loans in whole or in part, and reborrowing, all in
accordance with the terms and conditions hereof. The Revolving 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 2.9.
(b) The Borrower shall repay all outstanding Revolving Loans on the
Revolving Termination Date.
2.2 Procedure for Revolving Loan Borrowing. The Borrower may borrow
under the Revolving Credit Commitments during the Revolving Credit 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 2:00 p.m., New York City time, three Business
Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or
(b) prior to 12:00 Noon, New York City time, on the requested Borrowing Date, in
the case of ABR Loans), specifying (i) the amount and Type of Revolving Loans to
be borrowed, (ii) the requested Borrowing Date and (iii) in the case of
Eurodollar Loans, the respective amounts of each such Type of Loan and the
respective lengths of the initial Interest Period therefor. Any Revolving Loans
made on the Closing Date shall initially be ABR Loans. Each such borrowing shall
be in an amount equal to (x) in the case of ABR Loans, $2,5000,000 or a whole
multiple of $1,000,000 in excess thereof (or, if the then aggregate Available
Revolving Credit Commitments are less than $2,500,000, 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: provided, that the Swingline Lender may request,
on behalf of the Borrower, borrowings under the Revolving Credit Commitments
that are ABR Loans in other amounts pursuant to Section 2.4. Upon receipt of any
such notice from the Borrower, the
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19
Administrative Agent shall promptly notify each Lender thereof. Each 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 then 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
Lenders and in like funds as received by the Administrative Agent.
2.3 Swingline Commitment. (a) Subject to the terms and conditions
hereof, the Swingline Lender agrees to make a portion of the credit otherwise
available to the Borrower under the Revolving Credit Commitments from time to
time during the Revolving Credit Commitment Period by making swing line loans
("Swingline Loans") to the Borrower; provided that (i) the aggregate principal
amount of Swingline Loans outstanding at any time shall not exceed the Swingline
Commitment then in effect (notwithstanding that the Swingline Loans outstanding
at any time, when aggregated with the Swingline Lender's other outstanding
Revolving Loans hereunder, may exceed the Swingline Commitment then in effect)
and (ii) the Borrower shall not request, and the Swingline Lender shall not
make, any Swingline Loan if, after giving effect to the making of such Swingline
Loan, the aggregate amount of the Available Revolving Credit Commitments would
be less than zero. During the Revolving Credit Commitment Period, the Borrower
may use the Swingline Commitment by borrowing, repaying and reborrowing, all in
accordance with the terms and conditions hereof. Swingline Loans shall be ABR
Loans only.
(b) The Borrower shall repay all outstanding Swingline Loans on the
Revolving Termination Date.
2.4 Procedure for Swingline Borrowing: Refunding of Swingline Loans.
(a) Whenever the Borrower desires that the Swingline Lender make Swingline Loans
it shall give the Swingline Lender irrevocable telephonic notice confirmed
promptly in writing (which telephonic notice must be received by the Swingline
Lender not later than 3:00 P.M., New York City time, on the proposed Borrowing
Date), specifying (i) the amount to be borrowed and (ii) the requested Borrowing
Date (which shall be a Business Day during the Revolving Credit Commitment
Period). Each borrowing under the Swingline Commitment shall be in amount equal
to $500,000 or a whole multiple of $100,000 in excess thereof. Not later than
4:00 P.M., New York City time, on the Borrowing Date specified in a notice in
respect of Swingline Loans, the Swingline Lender shall make available to the
Administrative Agent at the Funding Office an amount in immediately available
funds equal to the amount of the Swingline Loan to be made by the Swingline
Lender. The Administrative Agent shall make the proceeds of such Swingline Loan
available to the Borrower on such Borrowing Date by depositing such proceeds in
the account of the Borrower with the Administrative Agent on such Borrowing Date
in immediately available funds.
(b) The Swingline Lender, at any time and from time to time in its sole
and absolute discretion may, on behalf of the Borrower (which hereby irrevocably
directs the Swingline Lender to act on its behalf), on one Business Day's notice
given by the Swingline Lender no later than 12:00 Noon, New York City time,
request each Lender to make, and each Lender hereby agrees to make, a Revolving
Loan, in an amount equal to such Lender's Revolving Percentage of the aggregate
amount of the Swingline Loans (the "Refunded Swingline Loans") outstanding on
the date of such notice, to repay the Swingline Lender. Each Lender shall make
the amount of such Revolving Loan available to the Administrative Agent at the
Funding Office in immediately available funds, not later than 10:00 A.M., New
York City time, one Business Day after the date of such notice. The proceeds of
such Revolving Loans shall be immediately made available by the Administrative
Agent to the Swingline Lender for application by the Swingline Lender to the
repayment of the Refunded Swingline Loans. The Borrower
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20
unconditionally agrees to pay to the Swingline Lender on demand any amount that
is not so received from the Lenders.
(c) If prior to the time a Revolving Loan would have otherwise been
made pursuant to Section 2.4(b), one of the events described in Section 8(f)
shall have occurred and be continuing with respect to the Borrower or if for any
other reason, as determined by the Swingline Lender in its sole discretion,
Revolving Loans may not be made as contemplated by Section 2.4(b), each Lender
shall on the date such Revolving Loan was to have been made pursuant to the
notice referred to in Section 2.4(b) (the "Refunding Date"), purchase for cash
an undivided participating interest in the then outstanding Swingline Loans by
paying to the Swingline Lender an amount (the "Swingline Participation Amount")
equal to (i) such Lender's Revolving Percentage times (ii) the sum of the
aggregate principal amount of Swingline Loans then outstanding that were to have
been repaid with such Revolving Loans.
(d) Whenever, at any time after the Swingline Lender has received from
any Lender such Lender's Swingline Participation Amount, the Swingline Lender
receives any payment on account of the Swingline Loans, the Swingline Lender
will distribute to such Lender its Swingline Participation Amount (appropriately
adjusted, in the case of interest payments, to reflect the period of time during
which such Lender's participating interest was outstanding and funded and, in
the case of principal and interest payments, to reflect such Lender's pro rata
portion of such payment if such payment is not sufficient to pay the principal
of and interest on all Swingline Loans then due); provided however, that in the
event that such payment received by the Swingline Lender is required to be
returned, such Lender will return to the Swingline Lender any portion thereof
previously distributed to it by the Swingline Lender.
(e) Each Lender's obligation to make the Loans referred to in Section
2.4(b) and to purchase participating interests pursuant to Section 2.4(c) shall
be absolute and unconditional and shall not be affected by any circumstance,
including (i) any setoff, counterclaim, recoupment, defense or other right that
such Lender or the Borrower may have against the Swingline Lender, the Borrower
or any other Person for any reason whatsoever; (ii) the occurrence or
continuance of a default or an Event of Default or the failure to satisfy any of
the other conditions specified in Section 5; (iii) any adverse change in the
condition (financial or otherwise) of the Borrower; (iv) any breach of this
Agreement or any other Loan Document by the Borrower, any other Loan Party o any
other Lender; or (v) any other circumstance, happening or event whatsoever,
whether or not similar to any of the foregoing.
2.5 Commitment Fees etc. (a) The Borrower agrees to pay to
Administrative Agent for the account of each Lender a commitment fee for the
period from and including the Closing Date to the last day of the Revolving
Credit Commitment Period, computed at the Commitment Fee Rate on the average
daily amount of the Available Revolving Credit Commitment of such Lender during
the period for which payment is made, payable quarterly in arrears on the last
day of each March, June, September and December and on the Revolving Termination
Date, commencing on the first of such dates to occur after the date hereof.
(b) The Borrower agrees to pay to the Administrative Agent and the
Issuing Lender the fees in the amounts and on the dates previously agreed to in
writing by the Borrower, the Administrative Agent and the Issuing Lender.
2.6 Termination or Reduction of Revolving Credit Commitments. The
Borrower shall have the right, upon not less than three Business Days' notice to
the Administrative Agent, to terminate the Revolving Credit Commitments or, form
time to , to reduce the amount of the Revolving Credit Commitments; provided
that no such termination or reduction of Revolving Credit Commitments shall be
permitted if, after giving effect thereto and to any prepayments of the
Revolving Loans and Swingline
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21
Loans made on the effective date thereof, the Total Revolving Extensions of
Credit would exceed the Total Revolving Credit Commitments. Any such reduction
shall be in an amount equal to $5,000,000, or a whole multiple of $1,000,000 in
excess thereof, and shall reduce permanently the Revolving Credit Commitments
then in effect.
2.7 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 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 2.17. 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
Revolving Loans that are ABR Loans and Swingline Loans) accrued interest to such
date on the amount prepaid. Partial prepayments of Revolving Loans shall be in
an aggregate principal amount of $2,500,000 or a whole multiple of $1,000,000 in
excess thereof. Partial prepayments of Swingline Loans shall be in an aggregate
principal amount of $100,000 or a whole multiple thereof.
2.8 Mandatory Revolving Credit Commitment Reductions. (a) If any
Indebtedness shall be incurred by the Borrower or any of its Subsidiaries
(excluding any Indebtedness incurred in accordance with Section 7.2), an amount
equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of
such incurrence toward the reduction of the Revolving Credit Commitments.
(b) If on any date the Borrower or any of its Subsidiaries shall
receive Net Cash Proceeds from any Asset Sale or Recovery Event then, unless a
Reinvestment Notice shall be delivered in respect thereof, such Net Cash
Proceeds shall be applied within five Business Days after such date toward the
reduction of the Revolving Credit Commitments; provided, that, notwithstanding
the foregoing, (i) the aggregate Net Cash Proceeds of Asset Sales that may be
excluded from the foregoing requirement pursuant to a Reinvestment Notice shall
not exceed $5,000,000 in any fiscal year of the Borrower and (ii) 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 reduction of the Revolving Credit Commitments.
(c) Any reduction of the Revolving Credit Commitments pursuant to this
Section 2.8 shall be accompanied by prepayment of the Revolving Loans and/or
Swingline Loans to the extent, if any, that the Total Revolving Extensions of
Credit exceed the amount of the Total Revolving Credit Commitments as so
reduced, provided that if the aggregate principal amount of Revolving Loans and
Swingline Loans then outstanding is less than the amount of such excess (because
L/C 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 an amount in cash in a cash collateral account established with the
Administrative Agent for the benefit of the Lenders on terms and conditions
reasonably satisfactory to the Administrative Agent. Amounts in such cash
collateral account shall be refunded to the Borrower at any time that such
amounts exceed such excess. The application of any prepayment pursuant to
Section 2.8 shall be made, first, to ABR Loans and, second, to Eurodollar Loans.
Each prepayment of the Loans under Section 2.8 (except in the case of ABR Loans)
shall be accompanied by accrued interest to the date of such prepayment on the
amount prepaid.
2.9 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
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22
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 may be converted into a Eurodollar Loan when any event of Default has
occurred and is continuing and the Administrative Agent or the Required Lenders
have determined in its or their sole discretion not to permit such conversions.
(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 may be continued as such when any Event of Default has
occurred and is continuing and the Administrative Agent has or the Required
Lenders 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.
2.10 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 $5,000,000 or a whole
multiple of $1,000,000 in excess thereof and (b) no more than five Eurodollar
Tranches shall be outstanding at any one time.
2.11 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 day plus the
Applicable Margin.
(b) Each ABR Loan shall bear interest at a rate per annum equal to the
ABR plus the Applicable Margin.
(c) (i) If all or a portion of the principal amount of any Loan or
Reimbursement Obligation shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise), such overdue amount shall bear interest
at a rate per annum equal to (x) in the case of the Loans, the rate that would
otherwise be applicable thereto pursuant to the foregoing provisions of this
Section plus 2% or (y) in the case of Reimbursement Obligations, the rate
applicable to ABR Loans plus 2%, and (ii) if all or a portion of any interest
payable on any Loan or Reimbursement Obligation or any commitment fee or other
amount payable hereunder shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise), such overdue amount shall bear interest
at a rate per annum equal to the rate then applicable to ABR Loans plus 2%, in
each case, with respect to clauses (i) and (ii) above, from the date of such
non-payment until such amount is paid in full (as well after as before
judgment).
(d) Interest shall be payable in arrears on each Interest Payment Date,
provided that interest accruing pursuant to paragraph (c) of this Section shall
be payable from time to time on demand.
2.12 Computation of Interest and Fees. 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
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23
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 or the Eurocurrency Reserve Requirements shall become
effective as of the opening of business on the day on which such change becomes
effective. The Administrative Agent shall as soon as practicable notify the
Borrower and the Lenders of the effective date and the amount of each such
change in interest rate. 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.
2.13 Inability to Determine Interest Rate. If prior to the first day
of any Interest Period:
(a) the Administrative Agent shall have 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
Required Lenders 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 Lenders as soon as practicable thereafter. If such notice is
given (x) any Eurodollar Loans requested to be made on the first day of such
Interest Period shall be made as ABR Loans, (y) any Loans 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 shall be
converted, on the last day of the then-current Interest Period, to ABR Loans.
Until such notice has been withdrawn by the Administrative Agent, no further
Eurodollar Loans shall be made or continued as such, nor shall the Borrower have
the right to convert Loans to Eurodollar Loans. The Administrative Agent shall
withdraw such notice when the circumstances giving rise to such notice cease to
exist.
2.14 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 Revolving Credit Commitments of the
Lenders shall be made pro rata according to the respective Revolving Percentages
of the Lenders.
(b) Each payment (including each prepayment) by the Borrower on account
of principal of and interest on the Revolving Loans shall be made pro rata
according to the respective outstanding principal amounts of the Revolving Loans
then held by the Lenders.
(c) 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 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
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24
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.
(d) 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, on demand, from the Borrower.
(e) 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, form 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.
2.15 Requirements of Law. (a) If the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof or compliance
by any Lender with any request or directive (whether or not having the force of
law) from any central bank or other Governmental Authority made subsequent to
the date hereof:
(i) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar 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 that is not otherwise included in the determination of the
Eurodollar Rate hereunder; or
(ii) 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 deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit, 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
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25
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 the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder or under or in respect of any Letter of
Credit 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 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 such reduction;
provided that the Borrower shall not be required to compensate a Lender pursuant
to this paragraph for any amounts incurred more than six 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 six-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. 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.
(d) Each Lender shall be entitled to be compensated for amounts
pursuant to this Section 2.15 only to the extent such Lender makes the same
demands for compensation from all of its other customers facing the same or
similar circumstances.
2.16 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, nor or hereafter imposed,
levied, collected, withheld or assessed by any Governmental Authority, excluding
(a) net income taxes and franchise taxes (imposed on a net income basis or in
lieu of net income taxes) imposed by the United States or the jurisdiction under
the laws of which the Administrative Agent or any Lender is organized or doing
business or in which its principal office is located or in which the applicable
lending office of such Lender is located, and (b) any branch profits tax imposed
by the United States or any similar tax imposed by any other jurisdiction in
which the Lender is located. 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 sum payable shall be increased
as may be necessary so that after making all of the required deductions
(including deductions applicable to additional sums payable under this Section
2.16) such Administrative Agent or Lender receives an amount equal to the sum it
would have received had no such deductions been made, 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 pursuant to paragraph (a) of this
Section or make any indemnification payment related thereto pursuant to
paragraph (c) of this Section (i) that are attributable to such Lender's failure
to comply with the requirements of paragraph (d) 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
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26
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 or, if not reasonably
available, other evidence reasonably satisfactory to the Administrative Agent.
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 U.S. 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 ("IRS") Form W-8BEN or Form
W-8ECI, 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 F and a Form W-8BEN, or any subsequent versions thereof or successors
thereto, properly completed and duly executed by such Non-U.S. Lender claiming
complete exemption from, 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
reasonable request of the Borrower or the obsolescence or invalidity or 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.
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2.17 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 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 the absence of manifest error. This covenant shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder. Notwithstanding the foregoing provisions of this Section 2.17
or of Section 2.8(c), so long as no Event of Default then exists, if at any time
the mandatory prepayment of Loans pursuant to Section 2.8(c) would result in the
Borrower incurring costs under this Section 2.17 as a result of Eurodollar Loans
being prepaid other than on the last day of an Interest Period applicable
thereto (the "Affected Eurodollar Loans"), then the Borrower may in its sole
discretion initially deposit a portion (up to 100%) of the amounts that
otherwise would have been paid in respect of the Affected Eurodollar Loans with
the Administrative Agent (which deposit, after giving effect to interest to be
earned on such deposit prior to the last day of the relevant Interest Periods,
must be equal in amount to the amount of Affected Eurodollar Loans not
immediately prepaid) to be held as security for the obligations of the Borrower
hereunder pursuant to a cash collateral agreement to be entered into in form and
substance reasonably satisfactory to the Administrative Agent, with such cash
collateral to be directly applied upon the first occurrence (or occurrences)
thereafter of the last day of an Interest Period applicable to the relevant
Eurodollar Loans (or such earlier date or dates as shall be requested by the
Borrower) to repay an aggregate principal amount of such Loans equal to the
Affected Eurodollar Loans not initially repaid pursuant to this sentence.
Notwithstanding anything to the contrary contained in the immediately preceding
sentence, all amounts deposited as cash collateral pursuant to the immediately
preceding sentence shall be held for the sole benefit of the Lenders whose Loans
would otherwise have been immediately repaid with the amounts deposited and upon
the occurrence of an Event of Default, any amounts held as cash collateral
pursuant to this Section 2.17, shall, if so directed by the Administrative Agent
or the Required Lenders, be immediately applied to the relevant Loans.
2.18 Change of Lending Office. Each Lender agrees that, upon the
occurrence of any event giving rise to the operation of Section 2.15 or 2.16(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
designate another lending office or assign its rights and obligations hereunder
to another of its offices, branches or affiliates, for any Loans affected by
such event with the object of avoiding the consequences of such event; provided,
that such designation or assignment 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 2.15 or 2.16(a).
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28
2.19 Replacement of Lenders. The Borrower shall be permitted to replace
any Lender that (a) requests reimbursement for amounts owing pursuant to Section
2.15 or 2.16(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 2.18 so
as to eliminate the continued need for payment of amounts owing pursuant to
Section 2.15 or 2.16(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 2.17 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 2.15 or 2.16(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.
SECTION 3. LETTERS OF CREDIT
3.1 L/C Commitment. (a) Subject to the terms and conditions hereof, the
Issuing Lender, in reliance on the agreement of the other 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 Revolving Credit
Commitment Period in such form as may be approved from time to time by the
Issuing Lender (which approval shall not be unreasonably withheld); provided
that the Issuing Lender shall have no obligation to issue any Letter of Credit
if, after giving effect to such issuance, (i) the L/C Obligations would exceed
the L/C Commitment or (ii) the aggregate amount of the Available Revolving
Credit Commitments would be less than zero. 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 (in the case of Standby Letters of
Credit) or 180 days after its date of issuance (in the case of Documentary
Letters of Credit) and (y) the date that is five Business Days prior to the
Revolving Termination Date, provided that any Standby 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.
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 (or
such other location as may be designated by the Issuing Lender) an Application
therefor, completed to the satisfaction of the Issuing Lender, and such other
certificates, documents and other papers and information as the Issuing Lender
may reasonably 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
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29
may be agreed to by the Issuing Lender and the Borrower. The Issuing Lender
shall make available 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 notice of the issuance of each Letter of Credit (including
the amount thereof). The Administrative Agent shall furnish to the Lenders
notice of the issuance of Letters of Credit (including the amounts thereof) on a
quarterly basis.
3.3 Fees and Other Charges. (a) The Borrower will pay fees in respect
of the Letters of Credit as follows: (i) in the case of Standby Letters of
Credit, a fee, calculated at a per annum rate equal to the Applicable Margin
then in effect with respect to Eurodollar Loans (or, in the case of any Standby
Letter of Credit supporting documentary Surviving Letters of Credit, 0.80% per
annum), on the undrawn face amount thereof, payable quarterly in arrears on each
Standby L/C Fee Payment Date after the issuance date and (ii) in the case of
Documentary Letters of Credit, a drawing fee, calculated at an absolute rate
equal to the Applicable Documentary L/C Fee Rate, on the amount drawn in respect
of such Letter of Credit, payable upon drawing. Each such fee shall be shared
ratably among the Lenders. In addition, the Borrower shall pay to the Issuing
Lender for its own account a fronting fee in an amount separately agreed to by
the Borrower and the Issuing Lender.
(b) In addition to the foregoing fees, the Borrower shall pay or
reimburse the Issuing Lender for such normal and customary administrative 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.
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 Revolving 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 amount equal to such L/C Participant's Revolving
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, time (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. 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.
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30
(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. 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 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 the applicable drawing,
Section 2.11(b) and (ii) thereafter, Section 2.11(c).
3.6 Obligations Absolute. 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
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 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. 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.
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31
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.
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, the Borrower hereby represents and warrants to the Administrative Agent
and each Lender that:
4.1 Financial Condition. The audited consolidated balance sheets of the
Borrower as at December 31, 1996, December 31, 1997 and December 31, 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 KPMG LLP, present fairly the consolidated financial condition of the
Borrower 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 as at September 25, 1999,
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 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 and the absence
of footnotes). 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). Except as set forth
on Schedule 4.1, as of the date hereof, the Borrower and its Subsidiaries do not
have any material Guarantee Obligations, contingent liabilities and liabilities
for taxes, or any material 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.
Except as set forth on Schedule 4.1, during the period from December 31, 1998 to
and including the date hereof there has been no Disposition by the Borrower of
any material part of its business or property.
4.2 No Change. Since December 31, 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
(or other appropriate) 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, except to the extent failure to
possess such power, authority or legal right could not reasonably be expected to
result in a Material Adverse Effect, (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, except to the extent failure to be so qualified and
in good standing could not reasonably be expected to result in a Material
Adverse Effect, 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 (or other appropriate) 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. Each Loan
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Party has taken all necessary corporate (or other appropriate) 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. 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 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, 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
borrowings hereunder and the use of the proceeds thereof will not violate any
Requirement of Law or any material 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 material Contractual Obligation
(other than the Liens created by the Security Documents).
4.6 Litigation. 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 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 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 or property
right or license in, all its other property, except when failure to hold such
title, interest, right or license could not reasonably be expected to result in
a Material Adverse Effect, and none of such property is subject to any Lien
except as permitted by Section 7.3.
4.9 Intellectual Property. 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. No claim which 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. The use of Intellectual
Property by the Borrower and its Subsidiaries does not to the Borrower's
knowledge infringe on the rights of any Person in any material respect.
4,10 Taxes. Each of the Borrower and each of its Subsidiaries has filed
or caused to be filed all material Federal, state and other 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 written 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
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33
Governmental Authority (other than any taxes the amount or validity of which 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 material tax
Lien (other than any Lien that is permitted pursuant to Section 7.3 hereof) 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.
4.11 Federal Regulations. No part of the proceeds of any Loans will be
used for "buying" or "carrying" 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; (b) hours worked by and payment made
to employees of the Borrower and its Subsidiaries have not been in violation of
the Fair Labor Standards Act or any other applicable Requirement of Law dealing
with such matters; and (c) all 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 Plan, and each 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 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.
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, 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.
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34
4.16 Use of Proceeds. The proceeds of the Revolving Loans and the
Swingline Loans, and the Letters of Credit, shall be used for general corporate
purposes, including redemptions of the Senior Subordinated Notes, repurchases of
the Borrower's common stock and Permitted Acquisitions, in each case to the
extent permitted hereby.
4.17 Environmental Matters. Except as, in the aggregate, could not
reasonably be expected to have a material Adverse Effect:
(a) 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 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
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) 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 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
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
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 have in the last five years been in compliance, with all
applicable Environmental Laws, and there is no contamination at, under or about
the Properties or violation of any 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 (other than the Borrower or its Subsidiaries)
under Environmental Laws.
4.18 Accuracy of Information, etc. No statement or information
contained in this Agreement, any other Loan Document, the Confidential
Information memorandum or any other
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35
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 (other than projections and pro forma financial information),
contained as of the date such statement, information, document or certificate
was so furnished (or, in the case of the Confidential Information Memorandum, as
of the date of this Agreement), any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements contained
herein or therein not misleading. The 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 related 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 form the projected results set forth therein by a
material amount. 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 Collateral. 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. When financing statements in appropriate form are
filed in the offices specified on Schedule 4.19, 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 Liens permitted by Section 7.3).
4.20 Solvency. The Loan Parties, taken as a whole, 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 Senior Indebtedness. The Obligations constitute "Senior
Indebtedness" (or the comparable concept) of the Borrower under and as defined
in the Senior Subordinated Note Indenture.
4.22 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 (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, have been completed. The costs
to the Borrower and its Subsidiaries 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. The computer systems of the Borrower and its Subsidiaries are
and, with ordinary course upgrading and maintenance, will continue for the term
of this Agreement to be, sufficient for the conduct of their business as
currently conducted.
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36
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 1.1 and (ii) the Guarantee and Collateral Agreement, executed and
delivered by the Borrower and each Subsidiary Guarantor.
(b) Existing Credit Agreement. The commitments under the Borrower's
existing credit agreement and all Liens granted in connection therewith shall
have been terminated, and all amounts owing thereunder shall have been paid in
full, it being understood that certain letters of credit ("Surviving Letters of
Credit") outstanding under such credit agreement on the Closing Date shall
continue to remain outstanding.
(c) Approvals. Any governmental and third party approvals necessary in
connection with the transactions contemplated hereby shall have been obtained
and be in full force and effect.
(d) Lien Searches. The Administrative Agent shall have received the
results of a recent lien search in each of the jurisdictions where assets of the
Loan Parties are located, and such search shall reveal no liens on any of the
assets of the Borrower or its Subsidiaries except for liens permitted by Section
7.3 or discharged on or prior to the Closing Date pursuant to documentation
satisfactory to the Administrative Agent.
(e) 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 with appropriate supporting documentation (including the reasonable
fees and expenses of legal counsel), on or before the Closing Date.
(f) 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.
(g) Legal Opinions. The Administrative Agent shall have received the
following executed legal opinions:
(i) the legal opinion of Skadden, Arps, Slate, Meagher & Flom
LLP, special New York counsel to the Borrower and the Subsidiary Guarantors,
substantially in the form of Exhibit E-1; and
(ii) the legal opinion of Glenn A. Weinman, general counsel of
the Borrower and its Subsidiaries, substantially in the form of Exhibit E-2.
Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Administrative Agent may
reasonably require.
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37
(h) Filings, etc. The Uniform Commercial Code financing statements
referred to in Section 4.19 shall have been executed and be in proper form for
filing. In addition, the Administrative Agent shall have received satisfactory
executed landlord lien waivers in respect of leased warehouses significant to
the businesses of the Borrower and the Subsidiary Guarantors (determined by the
Borrower based on criteria acceptable to the Administrative Agent).
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 in all material respects on and as of such date as if made on
and as of such date (except for those representations and warranties which
expressly related to a specific 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 issuance of a Letter of Credit 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.
SECTION 6. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Revolving Credit
Commitments remain in effect, any Letter of Credit 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 and
unaudited consolidating balance sheet of the Borrower and its consolidated
Subsidiaries as at the end of such year and the related audited consolidated and
unaudited consolidating 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, in the case of audited financial statements, without a "going
concern" or like qualification or exception, or qualification arising out of the
scope of the audit, by KPMG LLP or other independent certified public
accountants of nationally recognized standing; and
(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 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 the absence of
footnotes).
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
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38
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 (f), to the relevant Lender):
(a) concurrently with the delivery of any financial statements pursuant
to Section 6.1, (i) a certificate of a Responsible Officer stating that, to the
best of each such Responsible Officer's knowledge, each Loan Party during such
period has observed or performed all of its covenants and other agreements, and
satisfied every condition, contained in this Agreement and the other Loan
Documents to which it is a party to be observed, performed or satisfied by it,
and that such Responsible Officer has obtained no knowledge of any Default or
Event of Default except as specified in such certificate and (ii) in the case of
quarterly or annual financial statements, (x) a Compliance Certificate
containing all information and calculations necessary for determining compliance
by the Borrower and its Subsidiaries with the provisions of this Agreement
referred to therein as of the last day of the fiscal quarter or fiscal year of
the Borrower, as the case may be, and (y) to the extent not previously disclosed
to the Administrative Agent, a listing of any county or state within the United
States where any Loan Party keeps inventory;
(b) as soon as available, and in any event no later than 45 days after
the end of each fiscal year of the Borrower, a detailed consolidated budget for
the following fiscal year (including (i) a projected consolidated balance sheet
of the Borrower and its Subsidiaries as of the end of the following fiscal year,
the related consolidated statements of projected cash flow, projected changes in
financial position and projected income and a description of the underlying
assumptions applicable thereto and (ii) the amount of Loans and Letters of
Credit projected to be outstanding hereunder on a month-by-month basis), and, as
soon as available, significant revisions, if any, of such budget and projections
with respect to such fiscal year (collectively, the "Projections"), which
Projections shall in each case be accompanied by a certificate of a Responsible
Officer stating that such Projections are based on reasonable estimates,
information and assumptions and that such Responsible Officer has no reason to
believe that such Projections are incorrect or misleading in any material
respect;
(c) within 45 days after the end of each fiscal quarter of the Borrower
(or 90 days in the case of the last fiscal quarter of the fiscal year of the
Borrower), a narrative discussion and analysis of the financial condition and
result of operations of the Borrower and its Subsidiaries for such fiscal
quarter and for the period from the beginning of the then current fiscal year to
the end of such fiscal quarter, as compared to the comparable periods of the
previous year (which may consist of a Form 10-Q or 10-K, as the case may be,
filed with the SEC);
(d) no later than 10 Business Days prior to the effectiveness thereof,
copies of substantially final drafts of any proposed amendment, supplement,
waiver or other modification with respect to the Senior Subordinated Note
Indenture;
(e) within five days after the same are sent, copies of all financial
statements and reports that the Borrower sends to the holders of any class of
its debt securities or public equity securities and, within five days after the
same are filed, copies of all financial statements and reports that the Borrower
may make to, or file with, the SEC, excluding Form 4 and other filings relating
to shareholdings of directors or officers of the Borrower; and
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39
(f) 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, in all material respects, 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 to visit and inspect any
of its properties and examine and make abstracts from any of its books and
records at any reasonable time (upon reasonable notice) and as often as may
reasonably be desired (providing that, so long as no Default or Event of Default
has occurred and is continuing, such visits (other than by the Administrative
Agent) shall not occur more than once annually) and 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, in the case of the Administrative Agent, with its independent certified
public accountants.
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,
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 $2,500,000 or more and not covered
by insurance or in which injunctive or similar relief imposing a cost to the
Borrower of $2,500,000 or more is sought;
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40
(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 form, 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 for6th 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 with, and take all reasonable
efforts to ensure compliance by all tenants and subtenants, if any, with , all
applicable Environmental Laws, and obtain and comply with and maintain, and take
all reasonable efforts to ensu5re that all tenants and subtenants obtain and
comply with and maintain, any and all licenses, approvals, notifications,
registrations or permits required by applicable Environmental Laws, except when
failure to do so could not reasonably be expected to result in a Material
Adverse Effect.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply with all lawful orders and directives of
all Governmental Authorities regarding Environmental Laws, except when failure
to do so could not reasonably be expected to result in a Material Adverse
Effect.
6.9 Additional Collateral, etc. (a) With respect to any property
acquired after the Closing Date by the Borrower or any of its Subsidiaries
(other than property acquired by any Foreign Subsidiary) of the type
contemplated by the Guarantee and Collateral Agreement to constitute Collateral
and as to which the Administrative Agent, for the benefit of the Lenders, does
not have a perfected Lien, promptly take all actions necessary or advisable to
grant to the Administrative Agent, for the benefit of the Lenders, a perfected
first priority security interest in such property (subject to Liens permitted by
Section 7.3), including the filing of Uniform Commercial Code financing
statements in such jurisdictions as may be required by the Guarantee and
Collateral Agreement or by law or as may be requested by the Administrative
Agent.
(b) With respect to any new Subsidiary (other than a Foreign
Subsidiary) created or acquired after the Closing Date by the Borrower or any of
its Subsidiaries, promptly cause such new Subsidiary (i) to become a party to
the Guarantee and Collateral Agreement, (ii) to take such actions necessary or
advisable to grant to the Administrative Agent for the benefit of the Lenders a
perfected first priority security interest in the Collateral (subject to Liens
permitted by Section 7.3) described in the Guarantee and Collateral Agreement
with respect to such new Subsidiary, including the filing of Uniform Commercial
Code financing statements in such jurisdictions as may be required by the
Guarantee and Collateral Agreement or by law or as may be requested by the
Administrative Agent and (iii) to deliver to the Administrative Agent a
certificate of such Subsidiary, substantially in the form of Exhibit C, with
appropriate insertions and attachments.
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41
SECTION 7. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Revolving Credit
Commitments remain in effect, any Letter of Credit remains outstanding or any
Loan or other amount is owing to any Lender or the Administrative Agent
hereunder, the Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly:
7.1 Financial Condition Covenants.
(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage
Ratio as at the last day of any period of four consecutive fiscal quarters of
the Borrower to be greater than 3.50 to 1.0.
(b) Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated
Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters
of the Borrower ending during any period set forth below to be less than the
ratio set forth below opposite such fiscal quarter:
Consolidated Fixed Charge
Fiscal Quarter Coverage Ratio
Closing Date to and including the last day of 1.25 to 1.0
the second fiscal quarter of fiscal year 2000
The first day of the third fiscal quarter of 1.50 to 1.0
fiscal year 2000 to and including the last day
of the third fiscal quarter of fiscal year 2000
The first day of the fourth fiscal quarter of 1.75 to 1.0
fiscal year 2000 to and including the last day
of the third fiscal quarter of fiscal year 2001
The first day of the fourth fiscal quarter of 2.00 to 1.0
fiscal year 2001 and thereafter
(c) Consolidated Net Worth. Permit Consolidated Net Worth at any time
to be less than $100,000,000.
(d) Consolidated Net Income. Permit Consolidated Net Income for any
period of four consecutive fiscal quarters of the Borrower to be less than
$1.00.
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;
(b) Indebtedness of the Borrower to any Subsidiary and of any
Subsidiary Guarantor to the Borrower or any other Subsidiary;
(c) (i) Guarantee Obligations incurred in the ordinary course of
business by the Borrower or any of its Subsidiaries of obligations of any
Subsidiary Guarantor and (ii) Guarantee Obligations, in an aggregate principal
amount not to exceed $2,000,000, incurred by the Borrower in connection with
obligations of Strandel, Inc. under Indebtedness permitted by Section 7.2(i);
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42
(d) Indebtedness of the Borrower in respect of the Senior Subordinated
Notes in an aggregate principal amount not to exceed $93,000,000;
(e) other Indebtedness outstanding on the date hereof and listed on
Schedule 7.2(e) and any refinancings, refundings, renewals or extensions thereof
(without increasing the principal amount thereof or shortening the maturity
thereof);
(f) Indebtedness (including, without limitation, Capital Lease
Obligations) secured by Liens permitted by Section 7.3(g) in an aggregate
principal amount not to exceed $10,000,000 (including, if applicable, any
Attributable Debt incurred pursuant to this paragraph (f) at any one time
outstanding;
(g) Hedge Agreements in respect of Indebtedness otherwise permitted
hereby, so long as such agreements are not entered into for speculative
purposes;
(h) the Surviving Letters of Credit;
(i) Indebtedness of Strandel, Inc. and its Subsidiaries under a
working capital facility in an aggregate principal amount not to exceed
$22,000,000 at any one time outstanding;
(j) Indebtedness of any Subsidiary that is not a Subsidiary Guarantor
to any other Subsidiary that is not a Subsidiary Guarantor;
(k) Indebtedness of Strandel, Inc. and its Subsidiaries to the
Borrower in an aggregate principal amount not to exceed $13,500,000 at any one
time outstanding;
(l) Indebtedness of the Borrower and its Subsidiaries in respect of
tenders for performance, performance bonds, bid bonds, appeal bonds, surety
bonds and similar obligations, in each case provided in the ordinary course of
business;
(m) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided that such
Indebtedness is extinguished within five Business Days of its incurrence;
(n) Indebtedness in respect of taxes, assessments, governmental
charges or levies, claims or customs authorities and claims for labor, worker's
compensation, materials and supplies to the extent that payment therefor shall
not at the time be required to be made in accordance with the provisions of
Section 6.3;
(o) Indebtedness in respect of judgments or awards to the extent an
Event of Default has not resulted therefrom;
(p) Guarantee Obligations incurred in the ordinary course of business
by any Foreign Subsidiary with respect to obligations of any other Foreign
Subsidiary;
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43
(q) Indebtedness of a Subsidiary acquired after the date hereof and
Indebtedness of a Person merged or consolidated with or into the Borrower or a
Subsidiary of the Borrower after the date hereof in an aggregate principal
amount not to exceed $10,000,000 at any one time outstanding, provided that (i)
such Indebtedness existed at the time of such acquisition, merger or
consolidation and was not created in anticipation of such event, (ii) such
acquisition, merger or consolidation is a Permitted Acquisition and (iii)
immediately after giving effect to such acquisition, merger or consolidation, no
default or Event of Default shall have occurred and be continuing; and
(r) additional Indebtedness of the Borrower or any of its Subsidiaries
in an aggregate principal amount (for the Borrower and all Subsidiaries, without
duplication) not to exceed $10,000,000 at any one time outstanding.
7.3 Liens. Create, incur, assume or suffer to exist any Lien upon any
of its property (including without limitation any trademark, trade name or other
intellectual property, or any fixed assets), whether or now owned or hereafter
acquired except for:
(a) Liens for taxes 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, merchanics', materialmen's,
repairmen's, landlord's or other like Liens arising in the ordinary course of
business that are not overdue for a period of more than 60 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 to secure the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety, customer 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, title defects 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 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),
and renewals, extensions or replacements thereof, securing Indebtedness
permitted by Section 7.2(e), provided that no such Lien is spread to cover any
additional property after the Closing Date and that the amount of the
indebtedness secured thereby is not increased;
(g) Liens securing Indebtedness of the Borrower or any Subsidiary
incurred pursuant to Section 7.2(f) to finance the acquisition of fixed or
capital assets or to refinance such Indebtedness, provided that (i) such Liens
shall be created substantially simultaneously with the acquisition of such fixed
or capital assets or such refinancing, (ii) such Liens do not at any time
encumber any property other than the property financed by such Indebtedness and
(iii) the amount of Indebtedness secured thereby is not increased;
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44
(h) Liens created pursuant to the Security Documents;
(i) judgment Liens pursuant to judgments not constituting an Event of
Default pursuant to Section 8(h); and
(j) any interest or title of a lessor, sublessor, licensee or licensor
under any lease, sublease or license entered into by the Borrower or any other
Subsidiary in the ordinary course of its business and covering only the assets
so leased, subleased or subject to such license;
(k) Liens in favor of customs and revenue authorities to secure
payment of customs duties in connection with the importation of goods;
(l) Liens arising from precautionary UCC financing statement filings
regarding operating leases;
(m) rights reserved to or vested in any governmental agency by law or
regulation to control or regulate, or obligations or duties under law or
regulation to any governmental agency with respect to, the use of any real
property or with respect to any right, power, franchise, grant, license or
permit;
(n) present or future zoning laws or regulations or other laws or
regulations restricting the occupancy, use or enjoyment of real property;
(o) Liens on the property or assets of a Person which becomes a
Subsidiary as a result of an acquisition after the date hereof or which merges
or consolidates with or into the Borrower or a Subsidiary of the Borrower after
the date hereof, securing Indebtedness permitted by Section 7.2(q), provided
that (i) such Liens existed at the time of the acquisition, merger or
consolidation and were not created in anticipation of such event, (ii) any such
Lien does not by its terms cover any property or assets after the time such
Person becomes a Subsidiary or the occurrence of such merger or consolidation
which were not covered immediately prior to the time such Person becomes a
Subsidiary or the occurrence of such merger or consolidation;
(p) Liens on the property or assets of Strandel, Inc. and its
Subsidiaries existing on the date hereof listed on Schedule 7.3(f), and
renewals, extensions or replacements thereof which do not spread such Lien to
cover any additional property after the Closing Date and which do not increase
the amount of Indebtedness secured thereby; and
(q) Liens not otherwise permitted by this Section so long as neither
(i) the aggregate outstanding principal amount of the obligations secured
thereby nor (ii) the aggregate fair market value (determined as of the date such
Lien is incurred) of the assets subject thereto exceeds (as to the Borrower and
all Subsidiaries), when added to the aggregate outstanding amount of
Attributable Debt (other than Attributable Debt secured by Liens permitted under
Section 7.3(g)), $10,000,000 at any one time.
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:
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45
(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 Subsidiary Guarantor, provided that
the Subsidiary Guarantor shall be the continuing or surviving corporation
(which, in the case of any such merger or consolidation involving a Wholly Owned
Subsidiary Guarantor shall be a Wholly Owned Subsidiary Guarantor);
(b) any Subsidiary of the Borrower any Dispose of any or all of its
assets (upon voluntary liquidation or otherwise) to the Borrower or any
Subsidiary Guarantor (which, in the case of a Disposition by a Wholly Owned
Subsidiary Guarantor, shall be a Wholly Owned Subsidiary Guarantor);
(c) any Foreign Subsidiary may be merged or consolidated with or into
another Foreign Subsidiary;
(d) any Foreign Subsidiary may Dispose of any or all of its assets
(upon voluntary liquidation or otherwise) to another Foreign Subsidiary;
(e) any Person may be merged or consolidated with to into the
Borrower, if the Borrower is the surviving or continuing corporation, pursuant
to a Permitted Acquisition; and
(f) any Person may be merged or consolidated with or into any
Subsidiary of the Borrower, pursuant to a Permitted Acquisition.
7.5 Disposition or 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:
(a) the Disposition of obsolete or worn out property, or property no
longer useful in the conduct of the borrower's or its Subsidiaries' business
(and not material in amount), in each case in the ordinary course of business;
(b) the sale of the inventory in the ordinary course of business;
(c) Dispositions permitted by Section 7.4;
(d) the sale or issuance of any Subsidiary's Capital Stock to the
Borrower or any Wholly Owned Subsidiary Guarantor;
(e) the Disposition of any aircraft or art held by the Borrower or its
Subsidiaries;
(f) the Disposition of manufacturing equipment in connection with the
relocation to foreign countries of certain operations of the Borrower and its
Domestic Subsidiaries, so long as the aggregate Net Cash Proceeds received in
connection therewith does not exceed $2,500,000;
(g) the Disposition of warehouse space and related real property of
the Borrower and its Subsidiaries in the ordinary course of business;
(h) the Disposition or issuance of any Foreign Subsidiary's Capital
Stock to any other Foreign Subsidiary;
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46
(i) licenses of Intellectual Property in the ordinary course of
business of the Borrower or any of its Subsidiaries;
(j) the lease or sublease by the Borrower or any of its Subsidiaries
of any real property in the ordinary course of business;
(k) transfers of property or assets subject to a Recovery Event to or
at the direction of a governmental agency or authority or insurer, as
applicable;
(l) the Disposition of accounts receivable arising in connection with
the compromise or collection thereof; and
(m) the Disposition of other property having a fair market value not
to exceed $10,000,000 in the aggregate for any fiscal year of the Borrower.
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 to the Borrower or any
Subsidiary Guarantor (which, in the case of Restricted Payments made by a Wholly
Owned Subsidiary Guarantor, shall be a Wholly Owned Subsidiary Guarantor);
(b) the Borrower may repurchase its common stock so long as (i) after
giving effect thereto, the Basket Amount shall not be less than zero and (ii)
the aggregate amount expended in connection therewith shall not exceed
$10,000,000 in any fiscal year of the Borrower or $25,000,000 during the term of
this Agreement;
(c) the Borrower may purchase the Borrower's common stock or common
stock options from present or former officers or employees of the Borrower or
any Subsidiary upon the death, disability or termination of employment of such
officer or employee, provided, that the aggregate amount of payments under this
paragraph (c) after the date hereof shall not exceed $5,000,000; and
(d) any Foreign Subsidiary may make Restricted Payments to any other
Foreign Subsidiary.
7.7 Capital Expenditures. Make any Capital Expenditure during any
fiscal year ending on or after December 31, 2000, except Capital expenditures of
the Borrower and its Subsidiaries in the ordinary course of business not
exceeding $80,000,000 in the 2000 fiscal year and $85,000,000 in any fiscal year
thereafter; provided, that (i) any such amount referred to above, if not so
expended in the fiscal year for which it is permitted and if no Default or Event
of Default has occurred and is continuing at the end of such fiscal year, may be
carried over for expenditure in the next succeeding fiscal year and (ii) Capital
Expenditures made pursuant to this Section 7.7 during any fiscal year shall be
deemed made, first, in respect of amounts permitted for such fiscal year as
provided above and, second, in respect of amounts carried over form the prior
fiscal year pursuant to subclause (i) above.
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47
7.8 Investments. Make any advance, loan, extension of credit (by way
of guaranty or otherwise) or capital contribution to, or purchase of 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;
(b) investments in Cash Equivalents;
(c) Guarantee Obligations permitted by Section 7.2;
(d) loans and advances to employees 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) intercompany investments by the Borrower or any of its
Subsidiaries in the Borrower or any Person that, prior to such investment, is a
Subsidiary Guarantor (or, in the case of any such Investment by a Wholly Owned
Subsidiary Guarantor, in the Borrower or any Person that, prior to such
investment, is a Wholly Owned Subsidiary Guarantor);
(f) Permitted Acquisitions so long as, after giving effect thereto,
the Basket Amount shall not be less than zero;
(g) the acquisition by the Borrower of the remaining common stock of
Strandel, Inc. not already owned by it for a purchase price which shall not
exceed that calculated in accordance with the Unanimous Shareholders Agreement
among the Borrower, Freemark Entertainment Corporation and Strandel, Inc. dated
July 31, 1999, as in effect on the Closing Date, provided that (i) the Borrower
shall be in compliance, on a pro forma basis after giving effect to such
acquisition, with the covenants contained in Section 7.1, in each case
recomputed as at the last day of the most recently ended fiscal quarter of the
Borrower for which the relevant information is available as if such acquisition
had occurred on the first day of each relevant period for testing such
compliance (as demonstrated in a certificate of a Responsible Officer delivered
to the Administrative Agent not less than three Business Days prior to such
acquisition) and (ii) no Default or Event of Default shall have occurred and be
continuing, or would occur after giving effect to such acquisition;
(h) Investments in equity securities regularly traded over recognized
national exchanges in an aggregate amount not to exceed $10,000,000 (net of any
return of capital in respect thereof);
(i) Investments received in connection with Dispositions permitted
hereunder;
(j) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers and in settlement of delinquent
obligations of, and other disputes with, customers and suppliers arising in the
ordinary course of business;
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48
(k) Investments consisting of loans to vendors of the Borrower and its
Subsidiaries not to exceed $1,000,000 in aggregate principal amount at any one
time outstanding;
(l) deposits to secure payments in the ordinary course of business;
(m) redemption of the Senior Subordinated Notes to the extent
permitted under Section 7.9;
(n) repurchases by the Borrower of its common stock or options to the
extent permitted under Section 7.6;
(o) intercompany Investments by a Foreign Subsidiary in any other
Foreign Subsidiary;
(p) Investments in Foreign Subsidiaries or joint ventures not to
exceed $5,000,000 in any fiscal year (net of any return of capital in respect
thereof);
(q) Investments permitted pursuant to Section 7.2(k); and
(r) 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 $5,000,000 during the term of this
Agreement.
7.9 Payments and Modifications of Certain Debt Instruments. (a) Make
or offer to make any payment, prepayment, repurchase or redemption of or
otherwise defease or segregate funds with respect to the principal amount of the
Senior Subordinated Notes, other than (i) redemption of the Senior Subordinated
Notes so long as, after giving effect thereto, the Basket Amount shall not be
less than zero and (ii) in addition, redemption's of $18,000,000 aggregate
principal amount of the Senior Subordinated Notes, provided that, in each case,
no Default or Event of Default shall have occurred and be continuing or would
occur after giving effect thereto, (b) amend, modify, waive or otherwise change,
or consent or agree to any amendment, modification, waiver or other change to,
any of the terms of the Senior Subordinated Notes (other than any such
amendment, modification, waiver or other change that (i) would not be materially
adverse to the interests of the Lenders and (ii) does not involve the payment of
a consent fee), or (c) designate any Indebtedness (other than obligations of the
Loan Parties pursuant to the Loan Documents) as "Designated Senior Indebtedness"
(or any comparable concept) for the purposes of the Senior Subordinated Note
Indenture.
7.10 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 transactions with the Borrower or any Subsidiary
transactions described in the notes to the Borrower's financial statements for
the period ended December 31, 1998 and continuations, renewals or extensions
thereof, and payment of compensation, fees, expenses and indemnities to
directors and officers of the Borrower and its Subsidiaries) unless such
transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary
course of business of the Borrower or such Subsidiary as the case may be, and
(c) 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.
7.11 Sales and Leasebacks. Enter into any arrangement with any Person
providing for the leasing by the Borrower or any Subsidiary of real or personal
property that has been or is to be sold or transferred by the Borrower or such
Subsidiary to such Person or to any other Person to whom funds have been or are
to be advanced by such Person on the security of such property or rental
obligations of the Borrower or such Subsidiary unless, after giving effect
thereto, the aggregate outstanding amount of Attributable Debt (other than
Attributable Debt secured by Liens permitted under Section 7.3(g)), when added
to the aggregate amount utilized pursuant to Section 7.3(q), does not exceed
$10,000,000.
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49
7.12 Changes in Fiscal Periods. Permit the fiscal year of the Borrower
to end on a day other than December 31 or change the Borrower's method of
determining fiscal quarters, provided that the Borrower may change its fiscal
year to end on or about the last day of January and the Borrower may change its
method of determining fiscal quarters consistent with methods customarily used
in the retail apparel business.
7.13 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 the Subsidiary Guarantors 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, the other Loan Documents and the Senior
Subordinated Note Indenture, (b) any agreements governing any purchase money
Liens or Capital Lease Obligations (or refinancings thereof) otherwise permitted
hereby (in which case, any prohibition or limitation, shall only be effective
against the assets financed thereby) and (c) Hedge Agreements with any Lender or
any Affiliate of any Lender (so long as the relevant restrictions are not
materially more restrictive than the comparable restrictions contained in the
Loan Documents).
7.14 Clauses Restricting Subsidiary Distributions. Enter into or
suffer to exist or become effective any consensual encumbrances 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 the Senior Subordinated Note Indenture, (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, (iii) customary
restrictions regarding assignments of leases and licenses, (iv) provisions in
Indebtedness of Foreign Subsidiaries permitted hereunder (so long as such
provisions are applicable only to the relevant Foreign Subsidiaries) and (v) any
restrictions contained in Hedge Agreements with any Lender or any Affiliate of
any Lender that are not materially more restrictive than the comparable
restrictions contained in the Loan Documents.
7.15 Lines of Business. Enter into any business, either directly or
through any Subsidiary, except for the Apparel Businesses.
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
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50
(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 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 Section 5.5
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 after notice to the
Borrower from the Administrative Agent or the Required Lenders; 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 (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 (in the case of this
clause (iii) only) is to cause 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 $2,500,000; 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, trustee, custodian, conservator
or other similar official for it or for all or any substantial party 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 Material 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
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51
(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 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
proceedings shall commence 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,
in the reasonable opinion of the Required Lenders, 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 in the reasonable opinion
of the Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or
(vi) any other event or condition shall occur or exist with respect to a Plan;
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 reasonably be
expected to have a Material Adverse Effect; or
(h) one or more judgements 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 $2,500,000 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) the occurrence of one or more of the events or circumstances
described in Section 4.12 that, in the aggregate, could reasonably be expected
to have a Material Adverse Effect; or
(j) the occurrence of one or more of the events or circumstances
described in Section 4.17 that, in the aggregate, could reasonably be expected
to have a Material Adverse Effect; or
(k) 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 (other than in connection with a transaction expressly permitted
hereunder); or
(l) 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 or any Affiliate of any Loan Party shall so assert; or
(m) (i) any "person" or "group" (as such terms are used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), excluding the Permitted Investor, 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 35% 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, or (iii) a Specified Change of
Control shall occur; or
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(n) the Senior Subordinated Notes shall cease, for any reason, to be
validly subordinated to the Obligations, as provided in the Senior Subordinated
Note Indenture, or any Loan Party or any Affiliate of any Loan Party shall so
assert;
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 Revolving Credit Commitments shall immediately terminate and
the Loans hereunder (with accrued interest thereon) and all other amounts owning
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) 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 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 Revolving Credit Commitments to be terminated forthwith, whereupon
the Revolving Credit Commitments shall immediately terminate; and (ii) 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) 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 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.
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 the unused portion thereof after all such Letters of Credit shall
have expired or been fully drawn upon, 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
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.
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 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.
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9.2 Delegation of Duties. The Administrative Agent may execute any of
the 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 the 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 evidencing Loans
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 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 or
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 of
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, of 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.
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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 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 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 Revolving Credit 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 Revolving Credit 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 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 and with respect to any Letter of Credit
issued 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.
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9.9 Successor Administrative Agent. The Administrative Agent may
resign as Administrative Agent upon 30 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) the
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 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 30 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 Co-Agent. The Co-Agent shall not have any duties or
responsibilities hereunder in its capacity as such.
SECTION 10. MISCELLANEOUS
10.1 Amendments and Waivers. Neither this Agreement, any other Loan
Documents, 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, 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
Revolving Credit Commitment, in each case without the written consent of each
Lender directly affected thereby; (ii) eliminate or reduce the voting rights of
any Lender under this Section 10.1 with respect to any matter covered by this
section 10.1 without the written consent of such Lender, (iii) reduce any
percentage specified in the definition of Required 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 all or substantially all of the Subsidiary
Guarantors from their obligations under the Guarantee and Collateral Agreement,
in each case without the written consent of all Lenders; (v) amend, modify or
waive any provision of Section 9 without the written consent of the
Administrative Agent; (v) amend, modify or waive any provision of Section 2.3 or
2.4 without the written consent of the Swingline Lender; or (v) amend, modify or
waive any provision of Section 3 without the written consent of the Issuing
Lender. 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.
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56
For the avoidance of doubt, this Agreement may be amended (or amended
and restated) with the written consent of the Required Lenders, the
Administrative Agent and the Borrower (a) to add one or more additional credit
facilities to this Agreement (it being understood that a Lender shall not be
required to provide any such additional credit facilities without such Lender's
consent) and to permit the extensions of credit from time to time outstanding
thereunder and the accrued interest and fees in respect thereof to share ratably
in the benefits of this Agreement and the other Loan Documents with the
Revolving Extensions of Credit and the accrued interest and fees in respect
thereof and (b) to include appropriately the Lenders holding such credit
facilities in any determination of the Required Lenders.
10.2 Notices. All notices, requests and demands to or upon the
respective parties thereto 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:
The Borrower: Guess?, Inc.
1444 South Alameda Street
Los Angeles, California 90021
Attention: Maurice Marciano, Chairman
or Brian Fleming, Chief
Financial Officer
Telecopy: 213-744-7817
Telephone: 213-765-3100
The Administrative Agent: The Chase Manhattan Bank
c/o The Loan and Agency Services Group
One Chase Manhattan Plaza, 8th Floor
New York, New York 10081
Attention: Jesus Sang
Telecopy: 212-552-5650
Telephone: 212-552-7916
with a copy to: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10018
Attention: Paul Phalen
Telecopy: 212-827-4497
Telephone: 212-827-4421
provided that any notice, request or demand to the or upon the Administrative
Agent or the Lenders shall not be effective until received.
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 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 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 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 fees and disbursements of counsel to the
Administrative Agent (including any local or special counsel) and not more than
one additional form of counsel to the Lenders, (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 payment, stamp, excise and other taxes, if any, that may be payable
or determined to be payable in connection with the execution and delivery of, or
consummation or administration or 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 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, 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
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 the 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 or breach of any Loan Document by an
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 10 days after written demand therefor, accompanied by appropriate invoices
and supporting documentation. Statements payable by the Borrower pursuant to
this Section 10.5 shall be submitted to Brian Fleming (Telephone No.
213-765-3100) (Telecopy No. 213-744-7817), at the address of the Borrower set
forth in Section 10.2, or to such other Person or address as may be hereafter
designated by the Borrower in a written notice to the Administrative Agent. The
agreement in this Section 10.5 shall survive repayment of the Loans and all
other amounts payable hereunder.
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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 Revolving Credit 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 Lenders' 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 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 of Sections 2.15, 2.16 and 2.17
with respect to its participation in the Revolving Credit Commitments and the
Loans outstanding from time to time as if it was a Lender; provided that, in the
case of Section 2.16, 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.
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(c) Any Lender (an "Assignor") may, in accordance with applicable law,
at any time and from time to time assign to any Lender, any affiliate of any
Lender 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, any affiliate of
any Lender) shall be in an aggregate principal amount of less than $10,000,000
(other than in the case of an assignment of all of a Lender's interests under
this Agreement), unless otherwise agreed by the Borrower and the Administrative
Agent. 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 party hereto and, to the extent provided in
such Assignment and Acceptance, have the rights and obligations of a Lender
hereunder with a Revolving Credit 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 o 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 revolving Credit 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 such 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 the old
notes will be returned to the Borrower marked "canceled" and one or more new
notes shall be issued to the designated Assignee.
(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) promptly accept
such Assignment and Acceptance and (ii) record the information contained therein
in the Register on the effective date determined pursuant thereto.
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(f) For avoidance of doubt, the parties to this Agreement acknowledge
that the provisions of this Section 10.6 concerning assignments relate only to
absolute assignments and that such provisions do not prohibit assignments
creating security interests, including any pledge or assignments 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 a note to any Lender requiring a note to facilitate
transactions of the type described in paragraph (f) above.
10.7 Adjustments; Set-off. (a) Except to the extent that the Agreement
expressly provides for payments to be allocated to a particular Lender, 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) and the
occurrence and continuance of an Event of Default, 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. 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 of any other jurisdiction.
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 such matter hereof not expressly set forth or referred to
herein or in the other Loan Documents.
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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 of 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 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>
62
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 (without
requirement of notice to or consent of any Lender except as expressly required
by Section 10.1) to take any action required by the Borrower having the effect
of 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 or (ii) under the
circumstances described in paragraph (b) below.
(b) At such time as the Loans, the Reimbursement of 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 Revolving
Credit Commitments have been terminated and no Letters of Credit shall be
outstanding (or any outstanding Letters of Credit have been collateralized in a
manner acceptable to the Administrative Agent), 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; provided that nothing herein shall
prevent the Administrative Agent or any Lender from disclosing any such
information (a) to the Administrative Agent or any Lender from disclosing any
such information (a) to the Administrative Agent, any other Lender, any
affiliate of any Lender that agrees to comply with the provisions of this
Section, (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 solely in connection with the transactions contemplated hereunder,
(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 to any Requirement of Law, (f) if 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 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.
<PAGE>
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.
GUESS ?, INC.
By:_________________________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as Administrative Agent, as Issuing Lender and as a
Lender
By:_________________________________________________
Name:
Title:
SANWA BANK CALIFORNIA,
as Co-Agent and as a Lender
By:_________________________________________________
Name:
Title:
<PAGE>
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.
GUESS ?, INC.
By:_________________________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as Administrative Agent, as Issuing Lender and as a
Lender
By:_________________________________________________
Name:
Title:
SANWA BANK CALIFORNIA,
as Co-Agent and as a Lender
By:_________________________________________________
Name:
Title:
<PAGE>
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.
GUESS ?, INC.
By:_________________________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as Administrative Agent, as Issuing Lender and as a
Lender
By:_________________________________________________
Name:
Title:
SANWA BANK CALIFORNIA,
as Co-Agent and as a Lender
By: /s/ Nicole Earnier
--------------------------------------------------
Name: Nicole Earnier
Title: Vice President
<PAGE>
GMAC COMMERCIAL CREDIT LLC
By:_________________________________________________
Name:
Title:
ISRAEL DISCOUNT BANK OF NEW YORK
By:_________________________________________________
Name:
Title:
MERCANTILE BANK NATIONAL ASSOCIATION
By:_________________________________________________
Name: Stephen M. Reese
Title: Vice President
BANK LEUMI USA
By:_________________________________________________
Name:
Title:
<PAGE>
GMAC COMMERCIAL CREDIT LLC
By:_________________________________________________
Name:
Title:
ISRAEL DISCOUNT BANK OF NEW YORK
By:_________________________________________________
Name:
Title:
MERCANTILE BANK NATIONAL ASSOCIATION
By:_________________________________________________
Name:
Title:
BANK LEUMI USA
By:_________________________________________________
Name: Richard Silverstein
Title: SVP
By:_________________________________________________
Name: Phyllis Rosenfeld
Title: Vice President
<PAGE>
GMAC COMMERCIAL CREDIT LLC
By:_________________________________________________
Name:
Title:
ISRAEL DISCOUNT BANK OF NEW YORK
By:_________________________________________________
Name: Howard Weinberg
Title: First Vie President
MERCANTILE BANK NATIONAL ASSOCIATION
By:_________________________________________________
Name:
Title:
BANK LEUMI USA
By:_________________________________________________
Name:
Title:
<PAGE>
GMAC COMMERCIAL CREDIT LLC
By:_________________________________________________
Name:
Title:
ISRAEL DISCOUNT BANK OF NEW YORK
By:_________________________________________________
Name: Howard W
Title:
MERCANTILE BANK NATIONAL ASSOCIATION
By:_________________________________________________
Name:
Title:
BANK LEUMI USA
By:_________________________________________________
Name:
Title:
<PAGE>
GMAC COMMERCIAL CREDIT LLC
By:_________________________________________________
Name:
Title:
ISRAEL DISCOUNT BANK OF NEW YORK ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/R. David Kamgruera By: /s/ Howard Welchberg
------------------------------ -----------------------------------------
Name: R. David Kamruera Name: Howard Welchberg
Title: Vice President Title: First Vice President
MERCANTILE BANK NATIONAL ASSOCIATION
By:_________________________________________
Name:
Title:
BANK LEUMI USA
By:_________________________________________
Name:
Title:
<PAGE>
STANDARD INDUSTRIAL LEASE AGREEMENT
THIS LEASE, made this 14th day of May, 1999, by and between ROBERT PATTILLO
PROPERTIES, INC., a Georgia corporation, hereinafter referred to as "Landlord";
and GUESS?, INC., a Delaware corporation, hereinafter referred to as "Tenant":
W I T N E S S E T H:
Premises
1. For and in consideration of the rents, covenants, agreements, and
stipulations hereinafter set forth, to be paid, kept and performed by Tenant,
Landlord hereby leases and rents to Tenant, and Tenant hereby leases and takes
upon the terms and conditions hereinafter set forth, an approximately 371, 440
square foot building shell (the "Existing Shell") to be expanded by
approximately 135,000 square feet pursuant to the terms hereof (the Existing
Shell as so expanded is hereinafter referred to as the "Building"), and that
certain real property on which the Existing Shell is located, which real
property is located in Jefferson County, Kentucky and is more particularly
described by the legal description attached hereto as Exhibit "A" (collectively,
the "Premises"). Landlord shall acquire the approximately seven (7) acres of
real property described as the "Expansion Land" on the drawing attached hereto
as Exhibit "A-1". Landlord covenants that such Expansion Land shall be
sufficiently large to accommodate the expansion of the Existing Shell in
accordance with the terms of this Lease. Upon such acquisition, the Expansion
Land shall be included within the Premises for all purposes of this Lease.
Landlord and Tenant agree to enter into an amendment to this Lease to
incorporate a legal description of such Expansion Land to be acquired by
Landlord. This Lease is subject to all encumbrances, easements, covenants and
restrictions set forth on Exhibit "A-2" attached hereto. Landlord represents
that the real property upon which the Premises is to be located is zoned so as
to permit office, warehouse and distribution center uses.
Landlord covenants to file a subdivision map or take such other necessary
actions as promptly as reasonably practicable in order to render the land upon
which the Existing Shell is located, together with the Expansion Land, a legal
lot for purposes of applicable law.
Term
2. To have and to hold for a term to commence on the Commencement Date (as
defined in Paragraph 4 of the Rider attached hereto as Exhibit "C") and to end
at midnight on the last day of the one hundred twentieth (120th) full calendar
month after the Commencement Date. For purposes of this Lease, the term "Lease
Year" shall mean the period beginning on the Commencement Date and ending on the
date twelve (12) months from and after the Commencement Date, and each 12-month
period thereafter, except that the final Lease Year shall expire on the
expiration date of the Lease term. [See paragraph 1 of Exhibit "C".]
Rental
3. (a) Tenant shall pay to Landlord monthly rental of $113,949.00 during
Lease Years one (1) through five (5) and monthly rental of $128,720.16 during
the Lease Years six (6) through ten (10). Upon completion of Landlord's Work (as
defined in Exhibit "C"), Landlord shall cause its architects to measure the
square footage of the Building (as defined in Exhibit "C") (measured from the
exterior faces of all exterior walls). If the square footage as so measured is
not 506,440 square feet, the amount of monthly rental provided for herein shall
be adjusted based upon such measured square footage as follows: During Lease
Years one (1) through five (5) the monthly rental shall be one-twelfth (1/12)
times such measured square footage times $2.70, and during Lease Years six (6)
through (10), the monthly rental shall be one-twelfth (1/12) times such measured
square footage times $3.05. Landlord and Tenant shall enter into an amendment to
this Lease memorializing the square footage of the Building and the resulting
installments of monthly rental. All monthly rental shall be due on the first day
of each month, in advance, without offset or demand, commencing on the
Commencement Date. All payments of rental shall be sent to Robert Pattillo
Properties, Inc., P.O. Box 101923, Atlanta, Georgia 30393-1923, or such other
address provided to Tenant by Landlord. Tenant has paid to Landlord $113,949.00
(the "Prepaid Rent"), representing the first month's rent due hereunder.
Landlord shall pay to Tenant interest on the Prepaid Rent, which shall accrue at
the rate of eleven percent (11%) per annum beginning on the date hereof and
ending on the Commencement Date. Such accrued interest shall be due and payable
by Landlord to Tenant on the Commencement Date. If Landlord fails to pay Tenant
such interest within ten (10) days after written demand, Tenant shall be
entitled to offset against rent and other sums which become due from Tenant
pursuant to the terms hereof an amount equal to such due and payable interest.
In the event Tenant fails to pay rental or any other payment called for under
this Lease within ten (10) days of the due date, Tenant shall pay a late charge
equal to two percent (2%) of the unpaid amount. Landlord and Tenant agree that
such late charge is intended to compensate Landlord for additional
administrative charges and other damages incurred by Landlord on account of such
late payment and not as a penalty. Landlord and Tenant agree that the actual
damages to be suffered by Landlord in such event shall be difficult, if not
impossible to ascertain, and that such late charge is a reasonable estimate of
such charges and damages.
<PAGE>
(b) Tenant has deposited $113,949.00 (the "Security Deposit") with Landlord
to secure Tenant's performance of its obligations hereunder. Landlord shall pay
to Tenant interest on the portion of the Security Deposit (as restored by Tenant
pursuant to the terms hereof) that is not applied against amounts owed by Tenant
to Landlord pursuant to the terms hereof, which interest shall accrue at the
rate of eleven percent (11%) per annum beginning on the date hereof and
continuing until such time as Tenant shall have been returned the portion of the
Security Deposit (as restored by Tenant pursuant to the terms hereof) that is
not applied against amounts owed by Tenant to Landlord pursuant to the terms
hereof. Any interest which has accrued pursuant to the preceding sentence shall
be due and payable annually on each anniversary of the Commencement Date. If
Landlord fails to pay any such interest within ten (10) days after written
demand, Tenant shall be entitled to offset against rent and other sums which
become due from Tenant pursuant to the terms hereof an amount equal to such due
and payable interest. If Tenant defaults hereunder, then Landlord may, without
prejudice to Landlord's other remedies, apply part or all of the Security
Deposit to cure Tenant's default. If Landlord so uses part or all of the
Security Deposit, Tenant shall, within ten (10) days after written demand, pay
Landlord the amount necessary to restore the Security Deposit to its original
amount. Except as provided herein, Landlord shall not be required to pay any
interest on said Security Deposit and Landlord may commingle the Security
Deposit with other funds. If Landlord sells the Premises, the Security Deposit
shall be transferred to the purchaser and Landlord shall be relieved of any
further liability in relation to the Security Deposit. Upon the termination of
this Lease, Landlord may use the Security Deposit to cure any defaults of Tenant
or to reimburse Landlord for expenses of repairing, restoring or cleaning the
Premises. In the event all or any portion of the Security Deposit remains after
paying for such items, the remaining amount shall be returned to Tenant.
Notwithstanding the foregoing, Landlord reserves the right to return at any time
after the date hereof the portion of the Security Deposit (as restored by Tenant
pursuant to the terms hereof) that has not been applied against amounts owed by
Tenant to Landlord pursuant to the terms hereof and be relieved of any further
obligation to pay interest thereon.
<PAGE>
Utility Bills
4. Tenant shall place utility bills of all types in its name. Tenant shall
pay all such bills, along with all charges and assessments pertaining to
utilities serving the Premises, including, but not limited to, water and sewer,
natural gas, electricity, fire protection (including sprinkler testing charges),
sanitary charges, drainage service fees or similar charges which are included in
any water or other utility bill. If Tenant does not pay such charges when due,
Landlord may do so. The amount paid by Landlord shall be paid by Tenant to
Landlord, as additional rental, within thirty (30) days of demand therefor by
Landlord.
Mortgagee's Rights
5. Landlord represents, warrants and covenants to Tenant that the land on
which the Existing Shell is located is not encumbered by any mortgage or deed of
trust and that the Premises (including the Building and the Expansion Land) will
not be encumbered by any mortgage, deed to secure debt or deed of trust on the
Commencement Date. Tenant's rights as to the Premises shall be subject and
subordinate to any mortgage, deed of trust or deed to secure debt which may be
placed upon the Premises by Landlord after the Commencement Date. This
subordination is intended to be self-operative, but only if the mortgagee and
trustee under trust deeds or mortgages and the ground lessor under any ground
lease (herein collectively referred to as "Lender") shall execute and deliver to
Tenant a non-disturbance agreement which shall be by its terms binding upon its
successors and assigns including any purchaser or transferee at a foreclosure
sale or sale of transfer in lieu of foreclosure and shall provide, among other
things, that Lender consent to the Lease and that, in the event of foreclosure
of said mortgage or trust deed, as the case may be, or in the event Lender comes
into possession or acquires title to the Premises as a result of the enforcement
or foreclosure of the mortgage, trust deed, trust deed note or ground lease or
as a result of any other means, Lender agrees to recognize Tenant and further
agrees that Tenant shall not be disturbed in its possession of the Premises for
any reason other than one which would entitle the Landlord to terminate the
Lease under its terms. Said agreement shall further provide that Tenant and
Lender shall be bound each to the other under all of the terms, covenants and
conditions of the Lease for the balance of the term thereof remaining and any
extension or renewal thereof which may be effected in accordance with any option
therefor in the Lease, with the same force and effect as if they were the
original Landlord and Tenant, respectively, under the Lease, subject to
commercially reasonable exceptions of the type customarily contained in such
documents. Without limiting the generality of the foregoing, in no event shall
any said Lender or purchaser at a foreclosure sale or grantee under a deed in
lieu of foreclosure be bound by the expansion option set forth in paragraph 5 of
the Rider. Landlord shall apply any rental payments received from Tenant during
any month pursuant to the terms hereof to the payment of any installments of
indebtedness which shall be due and payable from Landlord to any such Lender
during such month; provided, however, Landlord shall not be obligated to pay to
any such Lender the excess of (a) any rental received hereunder during any month
over (b) the amounts which shall be due and payable by Landlord to any such
Lender during such month. If Landlord fails to pay any such rental payment to
any such Lender as contemplated by the preceding sentence, without obligating
Landlord to obtain any notice and cure rights from any Lender for the benefit of
Tenant, Tenant shall be entitled to pay directly to such Lender any due but
unpaid amount which Landlord owes such Lender. Tenant shall be entitled to
offset against rent and any other sum which shall next become due and payable
from Tenant to Landlord under this Lease any amounts paid by Tenant to any such
Lender pursuant to the preceding sentence. Should the Lender or any purchaser or
transferee at a foreclosure sale or sale or transfer in lieu of foreclosure of
any other person who may come into possession of or acquire title to the
Premises as a result of the enforcement or foreclosure of such mortgage, trust
deed, trust deed note or ground lease fail or refuse to recognize and assume
this Lease and recognize the rights of Tenant hereunder and agree not to disturb
Tenant as aforesaid, this Lease (except for the terms of paragraph 5 of Exhibit
"C", which shall be subordinate to any such mortgage, trust deed, trust deed
note or ground lease) shall be deemed prior and superior to the lien of any such
trust deed or mortgage or ground lease. In addition, Tenant shall not be
obligated to attorn to the purchaser or transferee upon any foreclosure sale or
sale or transfer in lieu of foreclosure unless and until such purchaser or
transferee acknowledges in writing the foregoing privity of contract between it,
as Landlord, and Tenant. If requested, Tenant shall execute a subordination,
nondisturbance and attornment agreement which meets the requirements set forth
in this paragraph.
<PAGE>
Repairs by Tenant
6. Tenant, at its sole cost, shall keep and maintain the Premises (except
portions of the Premises to be repaired by Landlord under terms of Paragraph 7
below), including without limitation, all paving, lawn maintenance and
landscaping, in good order and repair. Tenant also agrees to keep in good
repair, and replace if necessary, all systems pertaining to water, fire
protection, drainage, sewer, electrical, heating, ventilation, air conditioning
and lighting. Tenant agrees to return such systems to Landlord upon the
expiration or earlier termination of the term of this Lease in a condition
comparable to that existing at the Commencement Date, reasonable wear and tear
and damage not otherwise required to be repaired by Tenant under this Lease
excepted. Tenant shall keep the Premises free from all liens, charges or
encumbrances whatsoever (or shall cause the same to be bonded over or otherwise
removed within 30 days after Tenant has received written notice of filing).
Tenant shall have no authority, express or implied, to create any lien, charge
or encumbrance upon the interest of the Landlord in the Premises. Tenant shall,
at its sole cost, maintain a regularly scheduled preventive maintenance and
service contract with a maintenance contractor reasonably acceptable to Landlord
for the repair, maintenance and servicing of all heating and air-conditioning
systems and equipment within the Premises. If Landlord fails to disapprove any
such contractor within two (2) business days after receipt of written request
from Tenant, Landlord shall irrevocably be deemed to have approved such
contractor for the repair and maintenance work specified in such request from
Tenant. Tenant shall have the right to contract with third-party contractors
reasonably acceptable to Landlord to perform any maintenance or repair work
required to be performed by Tenant hereunder; provided, however, any such
contractor shall not be subject to approval by Landlord in the event of an
emergency or if such contractor is to perform repairs or maintenance (or any
series of related repairs or maintenance) which costs less than $5,000.00. If
Landlord fails to disapprove any contractor within two (2) business days after
written request from Tenant, Landlord shall irrevocably be deemed to have
approved such contractor for the repair and maintenance work specified in such
request from Tenant. Upon request by Tenant and at Tenant's sole cost, Landlord
will arrange for any repair which is Tenant's responsibility pursuant to the
terms of this Lease to be performed by Landlord's employees, agents or
contractors. Tenant shall pay, as additional rent, the cost of such repair
within thirty (30) days of receipt of a bill therefor from Landlord.
Repairs by Landlord
7. Except for damage caused by Tenant, its agent, employees, contractors
and invitees which arises from a risk not generally insurable by the insurance
carried (and issued by insurance companies of recognized standing and financial
strength) or required to be carried by Landlord pursuant to the terms of this
Lease or otherwise, Landlord, at its sole cost, shall keep in good repair the
roof (including gutters and downspouts), foundation and exterior walls,
exclusive of painting, glass and exterior doors. Landlord shall repair any
damage to the Premises which is caused by Landlord, its agents, representatives,
employees or contractors and which would otherwise be the responsibility of
Tenant hereunder if such damage arises from a risk not generally insurable by
any insurance which is carried (and issued by insurance companies of recognized
standing and financial strength) by Tenant pursuant to the terms of this Lease
or otherwise or required to be carried by Tenant pursuant to the terms hereof.
Tenant shall promptly notify Landlord of the need for any repairs which are
Landlord's responsibility hereunder, unless Landlord otherwise has knowledge of
the need therefor. Landlord shall be under no duty to make any repairs hereunder
unless Landlord receives notice of the need for such repairs, unless Landlord
otherwise has knowledge of the need therefor.
<PAGE>
Modifications and Alternations to the Premises
8. Tenant shall make no modifications, alterations or improvements to the
Premises, cut any openings or penetrations in the roof or install any satellite
or communications antennas or other structures without the prior written consent
of Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed; provided, however, Tenant shall have the right to make non-structural,
interior modifications, alterations or improvements to the Premises without
Landlord's consent. All modifications or alterations shall be completed in a
good, workmanlike and lien-free manner in accordance with all applicable codes
and regulations. Tenant shall have the right to contract with third-party
contractors reasonably acceptable to Landlord to perform any modifications,
alterations or improvement work which Tenant is otherwise permitted to perform
pursuant to the terms hereof; provided, however, any such contractor shall not
be subject to approval by Landlord in the event of an emergency or if such
contractor is to perform any modifications, alterations or improvements (or any
series of related modifications, alterations or improvements) which costs less
than $5,000.00. If Landlord fails to disapprove any such contractor within two
(2) business days after written request from Tenant, Landlord shall irrevocably
be deemed to have approved such contractor for the work specified in such
request from Tenant. Upon request by Tenant and at Tenant's sole cost, Landlord
will arrange for any modification, alteration or improvement consented to by
Landlord be performed by Landlord's employees, agents or contractors. Tenant
shall pay, as additional rent, the cost of such modification, alteration or
improvement within ten (10) days of receipt of a bill therefor from Landlord.
Return of Premises
9. Tenant agrees to return the Premises to Landlord at the expiration or
prior termination of this Lease broom clean and in a condition and repair
comparable to that existing at the time the Premises was delivered to Tenant,
reasonable wear and tear, damage by storm, fire, lightning, earthquake or other
casualty excepted. Upon Landlord's request, Tenant agrees to remove any
modifications, alterations or improvements made by Tenant without Landlord's
consent (if Landlord's consent was required hereunder) or which are not
typically found in industrial distribution facilities in the vicinity of the
Premises. Within ten (10) days of written request by Tenant, which request shall
include plans and specifications for the modifications, alterations or
improvements at issue. Landlord shall inform Tenant whether the proposed
modifications, alterations or improvements will be required to be removed at the
expiration or earlier termination of the Lease, and Landlord shall be bound by
such decision. Tenant shall remove its personal property from the Premises at
the expiration or prior termination of this Lease. Tenant shall repair any
damage caused by such removal. Notwithstanding the foregoing, at Landlord's
option, Tenant shall remove, upon the expiration or earlier termination of this
Lease, the items which are part of Tenant's initial build-out and which are
listed on Exhibit "D" hereto; provided, however, Tenant shall not be obligated
to remove any of the "Group Removal Items" (as defined on Exhibit "D") unless
Landlord requires Tenant to remove all items within the Group Removal Items. If
Tenant fails to remove any item which it is required to remove pursuant to the
terms hereof within five (5) days of the expiration or earlier termination of
this Lease, Landlord may remove such items and Tenant shall reimburse Landlord
on demand for all costs with such removal.
<PAGE>
Destruction of or Damage to Premises
10. If the Premises are totally destroyed by storm, fire, lightning,
earthquake or other casualty, this Lease shall terminate as of the date of such
destruction and rental shall be abated as of such date. If the Premises are
damaged, but not wholly destroyed by any of such casualties, rental shall abate
in such proportion as use of Premises has been destroyed, and Landlord shall
restore (i) the Building as modified by the Landlord's Work and as expanded (if
at all) onto the Adjacent Land and (ii) any portion of the Tenant's Work for
which Landlord pays Tenant pursuant to the terms of paragraph 3 of Exhibit "C"
to substantially the same condition as existed before such casualty as speedily
as practicable; provided, however, that if the damage shall be so extensive that
the same cannot be reasonably repaired and restored within nine (9) months from
the date of the casualty, then Tenant may terminate this Lease by giving written
notice to Landlord within thirty (30) days from the date that either party
notifies the other that such party has determined that the repair and
restoration work cannot reasonably be completed within such nine (9) month
period. In the event of such termination, rental shall be abated as of the date
of such casualty. In no event shall Landlord be responsible for repairing or
restoring the Tenant's Work, any personal property of Tenant or any alterations
or improvements made by Tenant (other than portions of Tenant's Work for which
Landlord has paid Tenant pursuant to the terms of Exhibit "C"). Tenant's right
of rental abatement provided above shall expire on the earlier to occur of (i)
the date on which Tenant reopens for business in the damaged portion of the
Premises; or (ii) the date on which the work required to be performed by
Landlord pursuant to this paragraph 10 is substantially complete. Subject to all
of the terms and conditions of this Lease (but subject to the rent abatement
provided for in this paragraph 10), so long as Tenant, its agents,
representatives, employees, contractors and invitees do not interfere with
Landlord's performance of the work required to be performed by Landlord pursuant
to the terms of this paragraph. Tenant shall have the right to enter the
Premises prior to the date of substantial completion of such work to be
performed by Landlord for the purpose of performing any work which is Tenant's
responsibility pursuant to the terms of this paragraph.
Indemnity
11. Except for damage caused by Landlord's negligence or that of Landlord's
agents, representatives, employees or contractors, or the failure of Landlord to
discharge its obligations under this Lease and subject to the provisions of
paragraph 27(c) below, Tenant agrees to indemnify, defend and save harmless
Landlord against all claims, losses, liabilities, costs and expenses (including
attorney's fees and costs of litigation) suffered by Landlord by reason of the
use or occupancy of the Premises by Tenant. Unless caused by Landlord's
negligence or that of Landlord's agents, representatives, employees or
contractors or the failure of Landlord to discharge its obligations under this
Lease, Landlord shall not be liable to Tenant's employees, agents, contractors
or invitees for any injury to a person or damage to property on or about the
Premises, or any damage caused by the improvements becoming out of repair, the
failure or cessation of any utility or by any leakage of gas, oil, water or
steam or electricity emanating from the Premises. Subject to the provisions of
paragraph 27(c) below, Landlord agrees to indemnify, defend and save harmless
Tenant against all claims, losses, liabilities, costs and expenses (including
attorney's fees and costs of litigation) suffered by Tenant by reason of the
negligent or willful acts or omissions of Landlord, its agents, representatives,
employees and contractors or the failure of Landlord to discharge its
obligations under this Lease.
Governmental Orders
12. Reference is made herein to paragraphs 2(b) and 3(b) of the Rider,
which provide for the allocation of responsibility with respect to compliance
with laws for the initial construction. Thereafter, subject to the terms of
paragraph 15, Tenant agrees, at its own expense, to promptly comply with all
requirements of any applicable law, ordinance, statute or regulation applicable
to the Premises or Tenant's operations in the Premises other than applicable
laws, ordinances, statutes or regulations which apply to the structural aspects
of the Premises for any reason other than Tenant's specific use or manner of use
of the Premises.
Condemnation
13. If the entire Premises or such portion thereof as will make the
Premises unusable (in Tenant's reasonable opinion) for the purpose herein leased
shall be condemned by any legally constituted authority for any public use or
purpose, or sold under threat of condemnation, then this Lease shall terminate
as of the date of such condemnation or sale and rental shall be accounted for
between Landlord and Tenant as of such date. In the event of a condemnation
which does not result in the termination of this Lease, rental shall be abated
in a fair and equitable manner and Landlord, shall restore to the extent
practicable (i) the Building as modified by the Landlord's Work and as expanded
(if at all) onto the Adjacent Land and (ii) any portion of the Tenant's Work for
which Landlord pays Tenant pursuant to the terms of paragraph 3 of Exhibit "C".
All condemnation awards or sales proceeds in lieu thereof shall belong to
Landlord; provided, however, Tenant shall be entitled to file a separate claim
for its loss, provided the filing of such claim does not affect or diminish
Landlord's claim as to such awards or proceeds. Notwithstanding the foregoing,
Tenant shall be entitled to any condemnation award, whether made to Landlord or
Tenant, which is made for the taking of furniture, fixtures, improvements or
property placed on the Premises by Tenant at Tenant's expense; provided,
however, Tenant shall not be entitled to (and expressly assigns to Landlord all
Tenant's right, title and interest in and to) any condemnation award based upon
the present or future estate or interest of Tenant in the unexpired Lease term.
Assignment
14. Tenant may not assign this Lease or any interest thereunder or sublet
the Premises in whole or in part or allow all or a portion of the Premises to be
used by a third party without the prior written consent of Landlord, which
consent shall not be unreasonably withheld, conditioned or delayed. If Tenant is
a corporation, partnership, limited liability company or other entity other than
a corporation the shares of which are publicly traded on a national stock
exchange, the transfer of more than thirty-five percent (35%) of the ownership
interests of Tenant, whether in one transaction or a series of related
transactions, shall constitute an assignment for purposes of this Lease. Any
assignee (and if Landlord so elects, any subtenant) shall become liable directly
to Landlord for all obligations of Tenant hereunder. No such assignment or
sublease nor any subsequent amendment of the Lease shall release Tenant or any
guarantor of Tenant's obligations hereunder. If such subtenant or assignee pays
rental in excess of the rental due hereunder or if Tenant receives any other
consideration on account of any such assignment or sublease, Tenant shall pay
Landlord, as additional rent, one-half of such excess rental or other
consideration upon the receipt thereof; provided, however, this sentence shall
not apply to any Permitted Transfer (as defined in paragraph 8 of the Rider).
Hazardous Substances
15. Landlord represents and warrants that upon delivery to Tenant, the
Building and the Premises shall be free of Hazardous Materials at levels which
violate any applicable laws, ordinances or regulations. Landlord shall
indemnify, defend and hold Tenant harmless from and against any and all claims,
judgments, damages, penalties, fines, costs (including without limitation,
consultants' fees, experts' fees, attorney's fees and court costs and all costs
of repair of any portion of the Premises or its contents), liabilities or losses
(other than consequential damages such as lost profits or loss of business)
resulting from any breach of the foregoing representation or warranty or from
the presence upon the Premises of any Hazardous Materials which were not
introduced by Tenant, its agents, representatives, employees, contractors or
invitees. In the event that Landlord breaches the representation and warranty
set forth in the first sentence of this paragraph 15 and Tenant is deprived of
the use of all or a portion of the Premises, Tenant's obligation to pay base
rental pursuant to the terms hereof shall abate in proportion to the affected
portion of the Premises until such time as Tenant is no longer deprived of the
use of the Premises.
<PAGE>
Tenant covenants that, without first obtaining Landlord's written consent,
that neither Tenant, nor any of its agents, employees, contractors or invitees
shall cause any Hazardous Materials to be stored, handled, treated, released or
brought upon or disposed of on the Premises other than Hazardous Materials of
the type commonly utilized by the operators of businesses in first class
industrial or warehouse facilities. Tenant shall comply with any and all
applicable laws, ordinances, rules, regulations and requirements respecting the
storage, handling, treatment, release, disposal, presence or use of permitted
Hazardous Materials in, on or about the Premises. "Hazardous Materials" for
purposes of this Lease shall be interpreted broadly to mean any material or
substance that is defined, regulated or classified under federal, state, or
local laws as: (a) a "hazardous substance" pursuant to section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
ss.9601(14), section 311 of the Federal Water Pollution Control Act, 33 U.S.C.
ss.1321, as now or hereafter amended (or any state or local counterpart of the
foregoing statutes); (b) a "hazardous waste" pursuant to section 1004 or section
3001 of the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss.6903, 6921,
as now or hereafter amended; (c) a toxic pollutant under section 307(a)(1) of
the Federal Water Pollution Control Act, 33 U.S.C.ss.1317(a)(1) (or any state or
local counterpart of the foregoing states); (d) a "hazardous air pollutant"
under section 112 of the Clean Air Act, 42 U.S.C. ss.7412, as now or hereafter
amended (or any state or local counterpart of the foregoing statutes); (e) a
"hazardous material" under the Hazardous Materials Transportation Uniform Safety
Act of 1990, 49 U.S.C. App. ss.1802(4), as now or hereafter amended (or any
state or local counterpart of the foregoing statutes); (f) determined to present
the unreasonable risk of injury to health or the environmental under the Toxic
Substances Control Act, as amended, 15 U.S.C. ss.2601 et seq. (or any state or
local counterpart of the foregoing statutes); (g) toxic or hazardous pursuant to
regulations promulgated now or hereafter under the aforementioned laws or any
state or local counterpart to any of the aforementioned laws; or (h) presenting
a risk to human health or the environment under other applicable federal, state
or local laws, ordinances, or regulations, as now or as may be passed or
promulgated in the future. Tenant shall indemnify, defend and hold Landlord
harmless from and against any and all claims, judgments, damages, penalties,
fines, costs (including without limitation, consultants' fees, experts' fees,
attorney's fees and court costs), liabilities or losses (other than
consequential damages such as lost profits, diminution in the market value of
the Premises, and lost opportunities to lease or sell the Premises) resulting
from any breach of any promise, covenant or agreement set forth in this
paragraph. Without limiting the generality of the foregoing indemnity, in the
event Landlord has reason to believe that the covenant set forth in this
paragraph has been violated by Tenant, Landlord shall be entitled to take such
actions as Landlord deems necessary in order to assess, contain, delineate
and/or remediate any contamination by such Hazardous Materials. If it shall be
determined that Tenant violated any of the covenants or agreements set forth in
this paragraph, any such sums expended by Landlord shall be reimbursed by
Tenant, as additional rent, within thirty (30) days of demand therefor by
Landlord. Upon the expiration or earlier termination of this Lease, Landlord may
cause to be performed environmental studies of the Premises to determine whether
any Hazardous Materials have been stored, handled, treated, released, brought
upon or disposed of on the Premises during the term of this Lease in violation
of the terms hereof. If any such study reveals any breach of any Tenant's
representations, warranties or covenants under this paragraph 15, Tenant shall
pay all costs of such studies. The obligations of this Paragraph 15 shall
survive the expiration or earlier termination of this Lease.
Removal of Fixtures
16. Provided Tenant is not then in default hereunder beyond any applicable
notice and cure period, Tenant may remove all fixtures and equipment which
Tenant has placed in the Premises, provided Tenant repairs all damages to the
Premises caused by such removal, but in on event shall Tenant remove heating,
ventilating, air conditioning, plumbing, electrical and lighting systems and
fixtures or dock levelers. In the event this Lease is terminated for any reason,
any property remaining in or upon the Premises, at the option of the Landlord,
may either be deemed to become property of Landlord or Landlord may dispose of
such property as Landlord deems proper with no obligation to Tenant.
<PAGE>
Default; Remedies
17. In the event (i) any payment of rental or other sum due hereunder is
not paid as and when due and Tenant fails to cure such failure within ten (10)
days after notice of such delinquency by Landlord to Tenant; (ii) Tenant shall
fail to comply with any term, provision, condition, or covenant of this Lease,
other than an obligation requiring the payment of rent or other sums hereunder
and shall not cure such failure within thirty (30) days after written notice to
the Tenant of such failure to comply (or if such failure cannot by its nature be
cured within such thirty (30) day period. Tenant shall have reasonable time not
to exceed ninety (90) days to cure such failure, so long as Tenant promptly
commences such cure within such thirty (30) day period and thereafter diligently
prosecutes such cure to completion); or (iii) Tenant or any guarantor shall file
a petition under any applicable federal or state bankruptcy or insolvency law or
have any involuntary position filed thereunder against it and the same shall not
be dismissed or otherwise terminated within ninety (90) days of such filing,
then Landlord shall have the option to do nay one or more of the following:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. Upon such termination, Landlord may recover
from Tenant and Tenant agrees to pay to Landlord, as compensation for all loss,
damage and expense which Landlord may suffer by reason of such termination, the
following: (i) the worth at the time of award of the unpaid rent which had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that the Tenant
proves could have been reasonably avoided; (iii) subject to clause (ii), the
worth at the time of ward of the amount by which the unpaid rent for the balance
of the term after the time of award exceeds the amount of such rental loss that
the Tenant proves could be reasonably avoided; and (iv) any other amount
necessary to compensate the Landlord for all the detriment proximately caused by
the Tenant's failure to perform his obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom. For purposes
hereof, the "worth at the time of award" of the amounts referred to in clauses
(i) and (ii) above is computed by allowing interest at a rate equal to the rate
announced by the Wall Street Journal (or if the Wall Street Journal shall cease
publication of the "prime rate", such other publication of comparable quality
which shall be reasonably acceptable to Landlord) from time to time as the
"prime rate" plus 2% per annum. The worth at the time of award of the amount
referred to in paragraph (iii) is computed by discounting such amount by six
percent (6%).
(b) Without terminating this Lease, terminate Tenant's right of
possession, whereupon rental shall continue to accrue and be owed by Tenant
hereunder. Thereafter, at Landlord's option, Landlord may enter upon and relet
all or a portion of the Premises (or relet the Premises together with any
additional space) for a term longer or shorter than the remaining term hereunder
and otherwise on terms satisfactory to Landlord. Tenant shall be liable to
Landlord for the deficiency, if any, between Tenant's rent hereunder and all net
sums received by Landlord on account of such reletting (after deducting all
costs incurred by Landlord in connection with any such reletting, including
without limitation, tenant improvement costs, brokerage commissions and
attorney's fees).
(c) Pursue a dispossessory action against Tenant, in which event
Tenant shall remain liable for all amounts computed pursuant to paragraph 17(a)
above.
(d) Perform any unperformed obligation of Tenant. Any sums expensed by
Landlord shall be repaid by Tenant, as additional rent, within thirty (30) days
of demand therefor by Landlord.
<PAGE>
Landlord agrees to use reasonable efforts to relet the Premises and to
otherwise mitigate any damages arising out of a default on the part of Tenant;
provided, however, that (i) Landlord shall have no obligation to treat
preferentially the Premises compared to other premises Landlord has available
for leasing in properties owned or managed by Landlord; (ii) Landlord shall not
be obligated to expend any efforts or any monies beyond those Landlord would
expend in the ordinary course of leasing properties similar to the Premises; and
(iii) in evaluating a prospective reletting of the Premises, the term, rental,
use and the reputation, experience and financial standing of prospective tenants
are factors which Landlord may properly consider.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
other remedies herein provided or any other remedies provided by law. If either
party institutes a lawsuit to enforce any of the provisions of this Lease, the
prevailing parties' reasonable attorney's fees and court costs shall be paid by
the non-prevailing party.
Entry by Landlord
18. Landlord may post a sign stating that the Premises are "For Lease" or
"For Sale" six (6) months prior to the termination of this Lease. Landlord may
enter the Premises at reasonable hours during the term of this Lease, upon
reasonable advance notice to Tenant, to exhibit same to prospective purchasers
or tenants and to make repairs required of Landlord under the terms hereof, or
to make repairs to Landlord's adjoining property, if any.
Estoppel Certificates
19. Tenant agrees to furnish within twenty (20) days of receipt of request
from Landlord or Landlord's mortgagee a written statement certifying as to the
then-current status of the Lease; provided, however, if Tenant fails to respond
to such request within such twenty (20) day period, Landlord shall deliver to
Tenant a second written request for such estoppel certificate, and Tenant shall
provide such estoppel certificate to Landlord within ten (10) days of receipt of
such second request. Such estoppel certificate shall be in substantially the
form attached hereto as Exhibit "B" hereto. The notice and cure provisions of
paragraph 17 shall not apply to Tenant's obligations under this paragraph 19.
No Estate in Land
20. This Lease shall create the relationship of landlord and tenant between
Landlord and Tenant.
Holding Over
21. If Tenant remains in possession of the Premises after expiration of the term
hereof, with Landlord's acquiescence and without any express written agreement
of parties, Tenant shall be a month-to-month tenant upon all the same terms and
conditions as contained in this Lease, except that the rental rate shall become
one and one-half times the amount in effect at the end of the term of this
Lease, and there shall be no renewal of this Lease by operation of law. Such
month-to-month tenancy be terminable upon thirty (30) days notice by either
party to the other. Tenant waives any right that it may have to additional
notice pursuant to applicable law. If Tenant remains in possession of the
Premises after the expiration of the term hereof without Landlord's
acquiescence, Tenant shall be a tenant as sufferance subject to immediate
eviction. In such event, in addition to paying Landlord any damages resulting
from such holdover, Tenant shall pay rental at the rate of two times the amount
in effect at the end of the term of the Lease. Notwithstanding the foregoing, if
Tenant vacates the Premises but fails to remove all of its property therefrom,
Tenant shall not be deemed to be holding over pursuant to the terms hereof,
provided, however, Landlord shall have the right to remove all such property and
to store the same at Tenant's expense and risk.
<PAGE>
Miscellaneous
22. All rights, powers and privileges conferred hereunder upon parties
hereto shall be cumulative but not restrictive to those given by law. No failure
of Landlord to exercise any power given Landlord hereunder, or to insist upon
strict compliance by Tenant with its obligations hereunder, and no custom or
practice of the parties at variance with the terms hereof shall constitute a
waiver of Landlord's right to demand exact compliance with the terms hereof.
Time is of the essence of this Lease. Subject to the terms of paragraph 14
above, this Lease shall be binding upon and shall inure to the benefit of the
respective successors and assigns of Landlord and Tenant. Tenant shall pay and
be liable for all rental, sales and use taxes, and other similar taxes, if any,
levied or imposed by any city, state, county or other governmental authority.
Such payments shall be paid concurrently with the payment of rental or other sum
due hereunder upon which the tax is based. This Lease contains the entire
agreement to the parties hereto as to the Premises, and no representations,
inducements, promises or agreements, oral or otherwise, between the parties, not
embodied herein, shall be of any force or effect. If any term, covenant or
condition of this Lease or the application thereof to any person, entity or
circumstance shall, to any extent, be invalid or unenforceable, the remainder of
this Lease, or the application of such term, covenant or condition to persons,
entities or circumstances other than those which or to which used may be held
invalid or unenforceable, shall not be affected thereby, and each term, covenant
or condition of this Lease shall be valid and enforceable to the fullest extent
permitted by law. The circulation of one or more drafts of this Lease shall not
constitute a reservation of the Premises or an offer to lease the Premises to
Tenant. Neither party shall be bound hereunder until such time as both parties
have signed this Lease.
Notices
23. Any notice given pursuant to this Lease shall be in writing and
sent by certified mail, return receipt requested, by hand delivery, by facsimile
transmission or by reputable overnight courier to:
(a) Landlord: Robert Pattillo Properties, Inc. 2987 Clairmont Road, Suite
550, Atlanta, Georgia; Facsimile Number: 404-235-3541, or at such other address
or to such other facsimile number as Landlord may designate in writing to
Tenant.
(b) Tenant: Guess?, Inc., 1444 South Alameda Street, Los Angeles,
California 90021; Facsimile number: 213-765-0911, or at such other address or to
such other facsimile number as Tenant may designate in writing to Landlord.
Any notice sent in the manner set forth above shall be deemed sufficiently given
for all purposes hereunder on the day said notice is deposited in the mail if
sent by certified mail, upon receipt if sent by hand delivery or reputable
overnight courier, or if sent by facsimile, on the date such notice is
transmitted, provided a copy of such notice is sent within two (2) business days
by regular mail to the recipient's address set forth above.
Brokerage
24. CB Richard Ellis/Nicklies ("Tenant's Broker") has represented Tenant in
connection with this Lease. Landlord shall pay Tenant's Broker a commission
pursuant to the terms of a separate agreement. Tenant covenants and agrees to
indemnify and hold the other harmless from any and all loss, liability, damage,
claim, judgment, cost and expense (including without limitation attorney's fees
and litigation costs) that may be incurred or suffered by the other because of
any claim for any fee, commission or similar compensation with respect to this
Lease, made by any broker, agent or finder other than Tenant's Broker claiming
by, through or under Tenant, whether or not such claim is meritorious. Landlord
covenants and agrees to indemnify and hold the other harmless from any and all
loss, liability, damage, claim, judgment, cost and expense (including without
limitation attorney's fees and litigation costs) that may be incurred or
suffered by the other because of any claim for any fee, commission or similar
compensation with respect to the Lease, made by Tenant's Broker or any broker,
agent or finder claiming by, through or under Landlord, whether or not such
claim is meritorious.
<PAGE>
Signs
25. Subject to any applicable laws, ordinances, codes, regulations or any
of the matters set forth on Exhibit "A-2" hereto, Tenant may erect a building
sign on or about the Premises. Prior to the expiration of the term of this
Lease, Tenant shall remove any such sign and repair any damage to the building
occasioned by the removal of such sign.
Use of Premises
26. The Premises shall be used for any legal purpose, including, but not
limited, to use for general offices, general merchandising and distribution of
apparel and accessories. The Premises shall not be used for any illegal
purposes, nor in any manner to create any nuisance or trespass, vitiate
Landlord's insurance or violate any restrictive covenants encumbering the
Premises as of the Commencement Date.
Insurance
27. (a) Tenant will carry, at Tenant's expense, all-risk insurance coverage
on or self insure all equipment, inventory, fixtures, furniture, appliances and
other personal property on the Premises. Tenant shall procure, maintain and keep
in full force and effect at all times during the term of this Lease commercial
general liability insurance with respect to the Premises and the conduct and
operation of Tenant's business therein, naming Landlord and its mortgagees as
additional insured parties, with limits of not less than $2,000,000.00 for death
or bodily injury to one or more persons in a single occurrence and not less
than $2,000,000 for property damage. Such general liability insurance policy
shall contain broad form contractual liability coverage covering Tenant's
indemnities in favor of Landlord provided hereunder.
(b) Landlord will carry, at Tenant's expense, all risk insurance
coverage on the Premises in an amount equal to 100% of the replacement cost
thereof with commercially reasonable deductibles. Such insurance shall include
coverage for damage due to earthquake or flood. Landlord shall procure, maintain
and keep in full force and effect at all times during the term of this Lease
commercial general liability insurance with respect to the Premises, naming
Tenant as an additional insured party, with limits of not less than
$2,000,000.00 for death or bodily injury to one or more persons in a single
occurrence and not less than $2,000,000 for property damage. Such general
liability insurance policy shall contain broad form contractual liability
coverage covering Landlord's indemnities in favor of Tenant provided hereunder.
Tenant shall pay to Landlord, as additional rent, the amount of Landlord's
premium as to coverages required by this subparagraph 27(b) within thirty (30)
days after Landlord bills Tenant for the annual premium for such insurance.
Tenant's obligation as to the payment of such insurance premiums shall be
apportioned on a per diem basis for the years in which the Lease term commences
and terminates.
<PAGE>
(c) To the fullest extent permitted by law, Landlord and Tenant and
their respective insurance carries waive all right of recovery against the other
and its officers, employees and agents and agrees to release the other and its
officers, employees and agents from liability for loss or damage arising from
risks generally insurable by insurance carried (and issued by insurance
companies of recognized standing and financial strength) or required to be
carried by the waiving party pursuant to the terms hereof.
(d) All insurance required to be carried by Tenant shall be effected
under enforceable policies issued by insurers licensed to do business in the
Commonwealth of Kentucky. At least fifteen (15) days prior to the expiration
date of any policy procured by Tenant, the certificates for such insurance shall
be delivered by Tenant to Landlord. Certificates for all insurance required to
be carried by Tenant pursuant to the terms hereof shall be delivered to Landlord
prior to the commencement of the term of this Lease. All such policies shall
contain an agreement by the insurers that such policies shall not be canceled or
materially modified without at least thirty (30) days prior written notice to
the Landlord and to the holder of any mortgage to whom loss hereunder may be
payable. If Tenant provides any insurance required by this Lease in the form of
a blanket policy, Tenant shall furnish proof that such blanket policy complies
in all respects with the provisions of this Lease and that the coverage
thereunder is at least equal to the coverage which would be provided under a
separate policy covering only the Premises. Landlord agrees to provide Tenant
certificates evidencing the insurance required to be maintained by Landlord
pursuant to the terms hereof as promptly as reasonably practicable.
Ad Valorem Taxes
28. Tenant shall pay, as addition rent, all ad valorem real estate taxes
and assessments assessed or levied against the Premises for full taxable years
within the Lease term and shall pay a per diem apportionment thereof for the
years in which the Lease commences and terminates. Tenant shall remit such
amounts to Landlord within thirty (30) days of notice from Landlord of such
amount; provided, however, Tenant shall be allowed to take the maximum benefit
of any law allowing real estate taxes or assessments to be paid in installments.
As promptly as reasonably practicable, Landlord shall cause the Premises to be
comprised of one or more tax parcels which are separately assessed for tax
purposes. Until such time as the Premises is comprised of one or more tax
parcels which are separately assessed for tax purposes, ad valorem taxes and
assessments as to parcels covering other property in addition to the Premises
shall be equitably allocated to the Premises.
Exhibits
<PAGE>
29. The following exhibits attached hereto constitute a portion of this
Lease:
Exhibit A Legal Description
Exhibit A-1 Description of Expansion Property
Exhibit A-2 List of Title Matters
Exhibit B Estoppel Certificate
Exhibit C Rider
Exhibit C-1 General Specifications
Exhibit C-2 Tenant's Work General Specifications
Exhibit D Items to be Removed
Exhibit E Example of Renewal and Expansion Provisions
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals,
effective the day and year first above written.
LANDLORD:
ROBERT PATTILLO PROPERTIES, INC.,
a Georgia Corporation
_________________________ By:______________________________
Witness Title:________________________
(Corp. Seal)
TENANT:
GUESS?, INC., a Delaware corporation
_________________________ By:______________________________
Witness Title:________________________
(Corp. Seal)
<PAGE>
EXHIBIT "A"
Proposed Lot 214 Revised
Riverport Phase 3
Being Lot 214, Revised as shown on the Minor Subdivision Plat approved by the
Louisville and Jefferson County Planning Commission on July 22, 1998, as
Docket No. 191-98, and attached to Deed dated July 28, 1998, of record in Deed
Book 7078, Page 695, in the Office of the Clerk of Jefferson County, Kentucky.
-7-
<PAGE>
EXHIBIT "A-1"
-8-
<PAGE>
EXHIBIT "A-2"
[List of Title Matters]
1. State, County and School District Taxes due and payable in 1999 and
thereafter, a lien not yet due and payable.
2. Conditions, stipulations, restrictions, building lines and easements,
together with incidental rights, as provided for on the recorded plat of
Riverport Phase 3 of record in Plat and Subdivision Book 43, Page 93, in
the Office of the Clerk of Jefferson County, Kentucky.
3. Declaration of Restrictions for Riverport Complex of record in Deed Book
6561, Page 89, and as amended by Fourth Amendment to Declaration of
Restrictions of record in Deed Book 7079, Page 548, aforesaid records.
4. Public Utility, Sewer, Drainage and Access Easement, 100 feet in width,
granted and shown on the Minor Subdivision Plat attached to the Deed of
record in Deed Book 7078, Page 695, aforesaid records.
5. 30' Sanitary Sewer and Drainage Easement centered on southern property line
as shown on Minor Subdivision Plat attached to the Deed of record in Deed
Book 7078, Page 695, aforesaid records.
-9-
<PAGE>
EXHIBIT "B"
ESTOPPEL CERTIFICATE
Date: __________
TO: [Insert Name of Recipient]
LEASE AGREEMENT dated May __, 1999 ("Lease") by and between ROBERT PATTILLO
PROPERTIES, a Georgia corporation ("Landlord") and GUESS ?, INC., a Delaware
corporation ("Tenant") for the premises more fully described on Exhibit A
attached hereto.
The undersigned, as Tenant, under the above referenced Lease, hereby
certifies to the best of its actual knowledge as of the date hereof the
following:
(1) The undersigned has entered into occupancy of the premises described in
said Lease;
(2) The Lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way, except as follows:
________________________________________________________________________________
________________________________________________________________________________
(3) The commencement date of the Lease is _______________, 19___;
(4) The expiration date of the Lease is ______________, provided, however,
Tenant has additional options to extend the term of the Lease as provided
therein;
(5) Current annual Base Rent is $__________; ($__________ monthly;
(6) All conditions of the Lease to be performed by Landlord and necessary
to the enforceability of the Lease have been satisfied;
(7) There are no defaults by either Landlord or Tenant thereunder;
(8) No rents have been paid in advance of one (1) month except
_______________; and
(9) There are no existing defenses or offsets which the undersigned has
against the Landlord.
(1) There have been no assignments of the Lease, in whole or in part, or
subleases of all or part of the Premises except as follows _____________________
_______________________________________________________________________________.
Executed the day and date above written.
TENANT: GUESS ?, INC., a Delaware corporation
By:_________________________
Name:_______________________
Title:______________________
-10-
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EXHIBIT "C"
RIDER TO STANDARD INDUSTRIAL LEASE AGREEMENT DATED MAY ___, 1999, BY AND
BETWEEN ROBERT PATTILLO PROPERTIES, INC., A GEORGIA CORPORATION, HEREINAFTER
COLLECTIVELY REFERRED TO AS "LANDLORD"; AND GUESS ?, INC., A DELAWARE
CORPORATION, HEREINAFTER REFERRED TO AS "TENANT";
This Rider is attached to and made part of the referenced Standard
Industrial Lease Agreement. In the event of an inconsistency between the terms
of this Rider and the terms of the Standard Industrial Lease Agreement, the
terms of this Rider shall control.
1. Renewal Options. Tenant shall have the right to renew the term of the Lease
for two (2) additional periods of five (5) years each or if Tenant shall have
previously exercised a renewal option in connection with the exercise of an
expansion option pursuant to paragraph 5 below, either of such periods of five
(5) years less the Stub Term as to the Expansion in question, as defined in
subparagraph 5(c) below (individually, a "Renewal Term" and collectively, the
"Renewal Terms") by giving Landlord prior written notice six (6) months prior to
the expiration of the then existing term that Tenant has exercised such renewal
right, subject to the following conditions:
(a) There shall not be a default or breach beyond any applicable notice and
cure period under any of the terms or provisions of the Lease at the time
such notice is given or at the time of the commencement of the Renewal
Term.
(b) Tenant shall occupy the Premises during the Renewal Term under the same
terms and conditions as specified in the Lease, except Tenant shall lease
the Premises in their then "as-is" condition, the rental for any Renewal
Term shall be then Market Rate (as defined in Paragraph 1(d) below), but
not less than the rental for the original Premises or Expansion, if
different and as applicable, in effect immediately prior to the
commencement of such Renewal Term.
(c) As used herein, the term "CPI Ceiling" shall be an amount determined by
multiplying the monthly rental for the first month of the term of this
Lease by a fraction, the numerator of which shall be the Index most
recently published prior to the commencement of the Renewal Term in
question (whether such Renewal Term be a 5-year or shorter period of time),
and the denominator of which shall be the Index most recently published
prior to the commencement date of the term of this Lease. In no event shall
the CPI Ceiling be less than the monthly rental for the first month of the
term. As used herein, the term "Index" shall mean the United States, Bureau
of Labor Statistics Consumer Price Index for All Items - All Wage Earners
and Clerical Workers (base year 1982-84=100) applicable to the SMSA
including Louisville, Kentucky ("CPI"). If the Index has changed so that
the base year differs from that used in this Section, the Index shall be
converted in accordance with the conversion factor published by the United
States Department of Labor, Bureau of Labor Statistics, to the 1982-84
base. If the Index is discontinued or revised during the Lease term, such
other governmental index or computation with which it is replaced shall be
used in order to obtain substantially the same result as would be obtained
if the Index had not been discontinued or revised.
(d) As used herein, the term "Market Rate" shall be initially determined by
Landlord as (i) the amount of initial base annual rental per square foot
then being charged in comparable warehouse/distribution facilities located
in the Louisville, Kentucky market (the "Comparable Buildings") (ii)
together with the annual escalation rate, if any, for space comparable to
the Premises and taking into consideration all other relevant factors
establishing similarity or dissimilarity between the comparable lease and
the leasing of the Premises to Tenant for the Renewal Term, including,
without limitation, escalations (including type, base year and stop),
concessions, length of lease term, size and location of the Premises,
building standard work letter and/or tenant improvement allowances, quality
and quantity of any existing tenant improvements, quality and
creditworthiness of Tenant, amenities offered, location of building, and
other generally applicable concessions, allowances, terms and conditions of
tenancy. The reference to the foregoing factors is illustrative only and
the presence or absence of such factors shall be taken into account in
determining Market Rate. Notwithstanding the foregoing, as to any portion
of any Renewal Term falling between the tenth (10th) and fifteen (15th)
anniversaries of the Commencement Date, the Market Rate shall not exceed
the CPI Ceiling with respect to such period of time; provided, however,
this limitation to the amount of the CPI Ceiling shall not apply to any
portion of the Expansion Term as any Expansion (i.e., the rental payable
during the Expansion Term as to any Expansion shall be the Market Rate
computed without reference to the CPI Ceiling). The determination of the
Market Rate shall not take into account any permanent leasehold
improvements installed by Tenant the cost of which shall not have been
reimbursed by Landlord ("Tenant Owned Improvements") pursuant to the terms
of paragraph 3(c)(iv) below. If the Market Rate shall be determined by
arbitration pursuant to subparagraph (e) below, then the arbitrators shall
be expressly directed to make such determination as if such Tenant Owned
Improvements did not exist.
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(e) Within thirty (30) days after Landlord receives the notice of Tenant's
exercise of the renewal option, Landlord shall notify Tenant of the
proposed Market Rate; provided, however, in no event shall Landlord be
obligated to notify Tenant of the proposed Market Rate prior to the ninth
(9th) month before the expiration of the then existing term. Consequently,
as to any renewal of the term effected in connection with Expansion so as
to meet the requirements set forth in paragraph 5(c) below that ten years
remain in the term as of the Expansion Rent Commencement Date, Landlord
shall not be required to notify Tenant as to the Market Rate as to the Stub
Term as to the Premises existing prior to such Expansion until nine (9)
months prior to the commencement of such Stub Term. In the event that
Landlord and Tenant are not able to agree as to the Market Rate within
sixty (60) days from Landlord's receipt of notice of Tenant's exercise of
the Renewal Option, the Market Rate shall be determined as follows:
(i) Each of the Landlord and Tenant shall within ten (10) days of the
expiration of the aforementioned sixty (60) day period, select an
independent appraiser who is a member of MAI experienced in
appraising real property similar to the land in question.
(ii) In the event that either Landlord or Tenant fails to appoint such
an appraiser within such ten (10) day period, the party which has
appointed such an appraiser shall notify the party which has not
appointed an appraiser. If the party which failed to appoint an
appraiser continues to fail to appoint an appraiser within five
(5) days after such notice, then the appraiser appointed by the
party making an appointment shall determine the Market Rate which
shall be binding on parties hereto.
(iii)In the event that Landlord and Tenant each appoint a qualified
appraiser within such ten (10) day period, then the two
appraisers so appointed shall meet in good faith in an attempt to
agree on the Market Rate within thirty (30) days of such
appointment.
(iv) In the event that the appraiser appointed by Landlord and the
appraiser appointed by Tenant cannot agree on the Market Rate
within thirty (30) days of the last appointment of such two
appraisers, the two appraisers shall agree on the identity of a
similarly qualified independent appraiser who is a member of MAI,
or if the two appraisers have not agreed on the identity of such
third appraiser within forty-five (45) days of such last
appointment, then a third similarly qualified, independent
appraiser who is a member of MAI shall be appointed by the
American Arbitration Association in accordance with the
Commercial Arbitration Rules of the American Arbitration
Association, and the decision of such third appraiser shall be
binding. Such third appraiser shall make its decision in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association. Each party shall pay the fees and
expenses of the appraiser that such party appoints, and the
parties shall split the fees and expenses of the third appraiser,
if any.
(v) Notwithstanding any provision to the contrary, if Tenant
disapproves of the amount of the Market Rate, in its sole
discretion, Tenant shall be entitled to rescind the exercise of
its renewal option by notice given to Landlord within ten (10)
days of the date on which Tenant receives notice of the
determination of the Market Rate, but only if Tenant reimburses
Landlord for all out of pocket expenses incurred by Landlord in
connection with such renewal process (including without
limitation, the cost of Landlord's appraiser which would
otherwise be Landlord's cost). If Tenant fails to provide such
written notice within such ten (10) day period, Tenant shall be
deemed conclusively to have waived such right of rescission.
(f) In the event that Tenant effects two Expansions pursuant to the terms
of paragraph 5 below, then the Renewal Terms as to the original
Premises and the two Expansions may not be coterminous. In such event,
the Renewal Terms shall be effected in connection with the Expansion
as required by the terms of paragraph 5(c) below and Tenant shall be
required to exercise any renewal options as to any remaining Renewal
Terms such that the term of this Lease shall at all times be
coterminous as to the entire Premises including the Expansions. If
Tenant fails to do so, then the renewal and the computation of rental
with respect thereto may be effected by Landlord by written notice to
Tenant. In such event, the amount of rental shall be computed
independently as to each Renewal Term as to the original Premises and
each Expansion. The example set forth on Exhibit "E" illustrates the
application of this provision.
(g) The failure by Tenant to exercise any renewal option shall result in
the termination of all further options.
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(h) In the event Tenant fails to timely notify Landlord in the manner
herein specified, Tenant shall be conclusively deemed to have waived
its right to enter into any Renewal Term.
(i) The renewal options described in this paragraph 1 shall be assignable
to an assignee of Tenant's right, title and interest in and to this
Lease if such assignee is a permitted assignee pursuant to the terms
of this Lease.
2. Landlord's Work. (a) Landlord shall expeditiously perform the following work
(collectively, the "Landlord's Work") in accordance with the Landlord's Final
Plans (as hereinafter defined) after the date on which both parties have
executed this Lease:
(i) Landlord shall expand the Existing Shell (as defined in Paragraph
1 of the Lease) by approximately 135,000 square feet; and
(ii) Landlord shall improve and modify the Building (as defined in
Paragraph 1 of the Lease) in accordance with the specifications
attached hereto as Exhibit C-1.
(b) Landlord warrants to Tenant that all building systems in the Existing
Shell shall be in good working order as of the date of delivery to Tenant,
subject to any damage arising out of any negligent or willful act of
Tenant, its agents, representatives, employees or contractors. Landlord
further warrants to Tenant that as of the date of delivery to Tenant, the
Building, as improved by the Landlord's Work (but specifically excluding
the Tenant's Work), shall (subject to paragraph 15 of the Lease) comply
with all laws, ordinances, codes and regulations including any provision of
the Americans with Disabilities Act ("ADA") which apply to any structure
which is a "commercial facility," Landlord not being responsible for
compliance with ADA requirements applicable any portion of the Premises
which by virtue of Tenant's use constitutes a "public accommodation."
Landlord also warrants the Building, as improved by the Landlord's Work,
against any defects for a period of one (1) year from and after the date of
delivery to Tenant. Landlord shall assign to Tenant any assignable
warranties on building systems within the Premises. If any such warranties
are not assignable, Landlord shall cooperate with Tenant to permit Tenant
to benefit from any warranties held by Landlord on any building systems
within the Premises.
(c) The Landlord's Final Plans shall be prepared as follows:
(i) Landlord shall deliver to Tenant no later than May 7, 1999,
proposed final plans and specifications (the "Proposed Landlord's
Final Plans") for the Landlord's Work. The Plans and
Specifications shall be consistent with the pre-architectural
specifications (the "General Specifications") of Landlord's Work
attached hereto as Exhibit "C-1". Within five (5) business days
after receipt of the Proposed Landlord's Final Plans Tenant
shall, in writing, inform Landlord of required revisions or
corrections thereto. Tenant's revisions and corrections to the
Proposed Landlord's Final Plans shall be limited to any aspect
thereof which is materially inconsistent with the General
Specifications. Any other requested change shall constitute a
Change Order (as defined below). In the event Tenant shall not
inform Landlord of such desired revisions or corrections within
such five (5) business day period, the Proposed Landlord's Final
Plans shall be deemed approved and accepted for the purposes
hereof.
(ii) In the event Tenant shall inform Landlord of required revisions
or corrections to the Proposed Landlord's Final Plans, Landlord
shall revise the Proposed Landlord's Final Plans and shall submit
the revised Proposed Landlord's Final Plans to Tenant for
Tenant's approval within three (3) business days of the receipt
of Tenant's comments. Tenant shall have three (3) business days
after the receipt of such revised Proposed Landlord's Final Plans
to review, approve or comment on the required provisions or
corrections thereto. Tenant's revisions and corrections to any
revision to the Proposed Landlord's Final Plans shall be limited
to any aspect thereof which is materially inconsistent with the
revision(s) requested by Tenant pursuant to the terms hereof. Any
other requested change shall constitute a Change Order (as
defined below). In the event Tenant shall not inform Landlord of
such desired revisions or corrections to the revised Proposed
Landlord's Final Plans within said three (3) business day period,
the revised Proposed Landlord's Final Plans shall be deemed
approved or accepted for the purposes hereof. This process shall
continue until the Proposed Landlord's Final Plans are finally
approved by Landlord and Tenant.
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(iii) The Proposed Landlord's Final Plans, as finally approved by
Landlord and Tenant, shall collectively be referred to as the
"Landlord's Final Plans."
(iv) Tenant shall not be entitled to make any Change Order without
Landlord's approval, which approval shall not be unreasonably
withheld or delayed. For purposes hereof, "Change Order" shall
mean any alteration, substitution, addition or change to or in
the Landlord's Final Plans requested by Tenant or any requested
change to the Proposed Landlord's Final Plans which is deemed to
be a Change Order pursuant to this subparagraph (c). If at any
time after the Landlord's Final Plans are approved by Landlord,
Tenant desires to make a Change Order, Tenant shall submit to
Landlord a written description of such desired Change Order. Any
such Change Order shall be subject to Landlord's prior
reasonable approval. Landlord shall respond to Tenant as
promptly as practicable with an estimate of the cost of such
Change Order (the "Change Order Effect Notice"). Within three
(3) days after receipt of such Change Order Effect Notice,
Tenant shall respond to such Change Order Effect Notice, by
either withdrawing such Change Order or authorizing such Change
Order. Notwithstanding the preceding sentence, if Landlord
notifies Tenant that such Change Order affects the critical path
of construction, Tenant shall respond to such Change Order
Effect Notice within 24 hours of receipt of such critical path
notification, by either withdrawing such Change Order or
authorizing such Change Order pursuant to subparagraph (iv)
hereof. No Change Order shall be approved by Landlord until
approved in writing by Jim Topple (the "Landlord
Representative"). No Change Order shall be approved by Tenant
until approved in writing by Tenant's Vice President of Finance
(the "Tenant Representative"). Any Change Order approved in
writing by the Landlord Representative and Tenant Representative
shall be binding. A failure by Tenant to so respond to any such
Change Order Effect Notice within three (3) days after receipt
of such Change Order Effect Notice shall be deemed a withdrawal
of such Change Order. Once the cost and the schedule change, if
any, for such Change Order has been approved by Tenant, all
references herein to the "Landlord's Final Plans" shall be to
the Landlord's Final Plans, as changed and modified pursuant to
such Change Order. Tenant shall pay Landlord, as additional
rent, within thirty (30) days of demand the cost of such Change
Order as disclosed in the Change Order Effect Notice.
(v) The target date for the Substantial Completion Date is October 1,
1999; provided, however, Landlord shall not be liable for failure
to meet such target date.
3. Tenant's Work. (a) Tenant, at its sole cost and expense, shall complete
Tenant's build out of the Premises (collectively, the "Tenant's Work") in
accordance with the Tenant's Final Plans (as hereinafter defined).
(b) Subject to paragraph 15 of the Lease, Tenant warrants to Landlord
Tenant shall complete Tenant's Work in accordance with all laws, ordinances,
codes and regulations, including without limitation the Americans with
Disabilities Act (the "ADA"). Tenant shall also be responsible for causing the
Premises to comply with any provision of the ADA which applies to "public
accommodations", if Tenant desires to operate all or any portion of the Premises
so as to render the Premises or any portion thereof a "public accommodation."
Unless caused by the negligent or intentional acts or omissions of Landlord or
its agents, representatives, employees or contractors or the failure of Landlord
to discharge its obligations under this Lease, Tenant agrees to indemnify,
defend and hold Landlord and Landlord's agents harmless from and against any and
all loss, liability, cost and expense (including without limitation, attorney's
fees and court costs) incurred by Landlord or its agents relating in any way to
the performance of Tenant's Work, including without limitation, the imposition
of any lien against the Premises or the Building in connection therewith. In no
event shall Landlord be deemed to have consented to the imposition of any lien
against any interest of Landlord on the Building or the Premises.
(c) The Tenant's Final Plans shall be prepared as follows:
(i) Tenant shall prepare proposed final plans and specifications (the
"Proposed Tenant's Final Plans") for the Tenant's Work. The
Plans and Specifications shall be consistent with the
pre-architectural specifications (the "Tenant's Work General
Specifications") of Tenant's Work attached hereto as Exhibit
"C-2". Within five (5) business days after receipt of the
Proposed Tenant's Final Plans Landlord shall, in writing, inform
Tenant of required revisions or corrections thereto. Landlord's
revisions and corrections to the Proposed Tenant's Final Plans
shall be limited to any aspect thereof which is materially
inconsistent with the Tenant's Work General Specifications. In
the event Landlord shall not inform Tenant of such desired
revisions or corrections within such five (5) business day
period, the Proposed Tenant's Final Plans shall be deemed
approved and accepted for the purposes hereof.
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(ii) In the event Landlord shall inform Tenant of required revisions
or corrections to the Proposed Tenant's Final Plans, Tenant
shall revise the Proposed Tenant's Final Plans and shall submit
the revised Proposed Tenant's Final Plans to Tenant for Tenant's
approval within three (3) business days of the receipt of
Tenant's comments. Landlord shall have three (3) business days
after the receipt of such revised Proposed Tenant's Final Plans
to review, approve or comment on the required provisions or
corrections thereto. Landlord's revisions and corrections to any
revision to the Proposed Tenant's Final Plans shall be limited
to any aspect thereof which is materially inconsistent with the
revision(s) requested by Tenant pursuant to the terms hereof. In
the event Landlord shall not inform Tenant of such desired
revisions or corrections to the revised Proposed Tenant's Final
Plans within said three (3) business day period, the revised
Proposed Tenant's Final Plans shall be deemed approved or
accepted for the purposes hereof. This process shall continue
until the Proposed Tenant's Final Plans are finally approved by
Landlord and Tenant.
(iii) The Proposed Tenant's Final Plans, as finally approved by
Landlord and Tenant, shall collectively be referred to as the
"Tenant's Final Plans." Without the prior written consent of
Landlord, Tenant shall not make any changes to the Tenant's
Final Plans. Subject to all of the terms and conditions of this
Lease (other than the obligation to pay rent) and so long as
Tenant its agents, representatives, employees, contractors and
invitees do not interfere with Landlord's performance of the
Landlord's Work, Tenant shall have the right to enter the
Premises prior to the Commencement Date for the purpose of
performing the Tenant's Work. Tenant's Work shall be performed
by contractors reasonably approved by Landlord (such approved
contractors are hereinafter referred to as "Tenant's
Contractors"). If Landlord fails to disapprove any such proposed
contractor within two (2) business days of demand from Tenant,
such contract shall be deemed approved for purposes of
completing the Tenant's Work.
(iv) Landlord shall not be entitled to any construction management fee
or any other similar fee in connection with Tenant's Work. By
sending Tenant written notice designating which elements of
Tenant's Work Landlord is electing to purchase, Landlord will
have the option from time to time to pay the Tenant for the cost
of some or all of the Tenant's Work, whereupon the amount of
monthly rental due hereunder shall increase by the amount
computed by multiplying the amount paid by Landlord by eleven
percent (11%) and dividing such product by twelve (12). If
Landlord exercises the option described in the preceding
sentence, Landlord and Tenant shall enter into an amendment to
this Lease to memorialize any such payments made by Landlord and
the resulting return due Landlord.
4. Commencement Date. The term of this lease shall commence on the date (the
"Commencement Date") which is ninety (90) days from and after the date (the
"Substantial Completion Date") on which Landlord obtains a temporary certificate
of occupancy for the Building, as improved by the Landlord's Work (but excluding
any work performed by Tenant). The parties shall execute a written statement
setting forth the Commencement Date and the date of expiration of this Lease
promptly after the same shall have been ascertained, but the enforceability of
this Lease shall not be affected if either party fails to execute such
statement.
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5. Expansion as to Adjacent Land.
(a) Landlord has an option (the "Purchase Option") to purchase
approximately twenty-five (25) acres of real property described as "Lot 215
Revised" on the site plan attached hereto as Exhibit "A-1" (the "Adjacent
Land") which includes the Expansion Land (as defined in Paragraph 1 of the
Lease). As part of its acquisition of the Expansion Land, Landlord
anticipates that the Purchase Option shall be modified so as to apply to
the Adjacent Land less and except the Expansion Land (hereinafter
referred to as the "Option Land"). Landlord agrees to perform its
obligations under the Purchase Option so as to keep its option rights
thereunder in full force and effect. Landlord shall invoice Tenant for the
cost of keeping the Purchase Option in full force and effect, and Tenant
shall pay such amounts to Landlord, as additional rent hereunder, within
thirty (30) days of receipt of any such invoice. At the request of Tenant,
Landlord shall use good faith efforts to cause the term of the Purchase
Option to be extended so as to be exercisable during the entire original
ten (10) year term of the Lease. Tenant, within thirty (30) days after
being invoiced therefor by Landlord, shall pay all amounts required to be
paid by Landlord in order initially to so extend the term of the Purchase
Option and thereafter to keep the Purchase Option in full force and effect;
provided, however, Landlord shall notify Tenant of the terms of any such
extension of the Purchase Option in advance of its commitment to so extend
the Purchase Option, and Tenant may withdraw its request that the Purchase
Option be so extended by giving written notice to Landlord within ten (10)
days of the receipt of Landlord's notice, in which event Tenant shall not
be required to pay to Landlord any costs or other amounts incurred by
Landlord in seeking the extension of the Purchase Option or to maintain the
Purchase Option beyond the original term thereof. At any time during the
term of this lease, Tenant may notify Landlord that it no longer requires
Landlord to maintain the Purchase Option in full force and effect, and in
such event, effective one hundred eighty (180) days after Landlord's
receipt of such notice (or sooner if Landlord causes the Purchase Option to
terminate), (i) Tenant's rights under this paragraph 5 shall irrevocably
cease and be of no further force and effect, and (ii) Tenant shall no
longer be required to pay to Landlord the cost of keeping the Purchase
Option in full force and effect, nor shall Tenant thereafter have any
rights to the Option Land.
(b) Provided that there does not exist a default by Tenant with all
applicable notice and cure periods having expired without such default
having been cured, Tenant shall have the option, at any time during the
original 10-year term (but no more than two (2) times) by written notice to
Landlord ("Tenant's Election Notice"), to cause Landlord to exercise its
option to purchase the Option Land or a portion thereof sufficient to
effect the expansion of the Building as hereinafter described and expand
the Building thereon (such expansion is hereinafter referred to as the
"Expansion"), at Landlord's sole cost and expense, by a minimum of one
hundred fifty-seven thousand five hundred (157,500) square feet and a
maximum of three hundred fifteen thousand (315,000) square feet in the
aggregate, which Expansion shall be located on the north side of the
Building on Lot 215, as set forth on the Site Plan. In any such event,
Landlord shall provide a shell building in quality and design comparable to
the Existing Shell, except that Landlord shall install no office pod or
vehicle parking areas. The design and build out of the Expansion shall be
constructed in the same manner as the design and build out of the Existing
Shell pursuant to Exhibit "C-1". An amendment documenting the Expansion
shall include provisions similar to paragraph 2 of this Rider. Tenant's
right to exercise the Expansion two times is subject to the following: (i)
Landlord shall have the reasonable right to approve the size of any
Expansion if it is other than 157,500 square feet or 315,000 square feet;
and (ii) if the first Expansion is 315,000 square feet, there shall be no
second Expansion.
(c) Tenant's exercise of the expansion option shall not be effective unless
Tenant contemporaneously therewith shall exercise an option as to a portion
of a Renewal Term, an entire Renewal Term or a combination of Renewal Terms
or portions thereof remaining unexercised pursuant to paragraph 1 of this
Rider so there remains exactly ten (10) years in the Lease term effective
as of Expansion Rent Commencement Date as to the original Premises and any
prior Expansion, as well as the current Expansion. If Tenant exercises only
a portion of a Renewal Term in order to meet the requirement that ten (10)
years remains in the term, the remainder of such Renewal Term may be
exercised independently pursuant to the terms of Paragraph 1 above.
Tenant's obligation to pay monthly rental as to the Expansion shall
commence on the date on which temporary or permanent certificate of
occupancy has been issued as to such Expansion (the "Expansion Rent
Commencement Date"). The time period commencing on the Expansion Rent
Commencement Date and ending on the last day of the term hereof, including
the renewal options exercised in connection with the exercise of such
expansion option, is hereinafter referred to as the "Expansion Term". The
Expansion Term shall consist of two components: the "Remaining Term" which
shall consist of the remainder of the term hereof prior to the exercise of
such expansion and renewal options, and the "Stub Term" which shall consist
of that portion of the Expansion Term remaining after the Remaining Term.
For example, if Tenant's obligation to pay Expansion Rent occurred when
there were 7 years remaining in the original term, then such original term
would be extended by 3 years so that the term remaining as of such date was
10 years, the Remaining Term would be 7 years and the Stub Term would be 3
years. In such event, as provided in paragraph 1 above, the first Renewal
Term remaining to be exercised pursuant to paragraph 1 would be reduced to
2 years (5 years less Stub Term of 3 years). If Tenant exercises its
expansion right two (2) times, then the Remaining Term and Stub Term shall
be determined separately as to each Expansion.
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(d) The Expansion shall be governed by all of the terms and conditions of
this Lease except that amount of monthly rental as to the Expansion
("Expansion Rent") for the Expansion Term shall be the Market Rate as
determined pursuant to this subparagraph (d). Within thirty (30) days of
the receipt of Tenant's Election Notice, Landlord shall notify Tenant of
Landlord's good faith determination ("Landlord's Determination") of the
Market Rate. Within thirty (30) days of the receipt of Landlord's
Determination, Tenant shall provide Landlord written notice of the approval
of Landlord's Determination. If Tenant disapproves such Landlord's
Determination and wishes to withdraw Tenant's exercise of the expansion
option, Tenant's written response shall so provide, and in such event,
Tenant's exercise of this expansion option shall be rescinded and of no
effect. However, the provisions of this Paragraph 5 of this Rider shall
remain in full force and effect and Tenant shall thereafter again have the
right pursuant to the provisions of said Paragraph 5 to exercise the
expansion option. If Tenant provides such notice of disapproval of
Landlord's Determination and does not withdraw the exercise of such
expansion option, then Landlord and Tenant shall determine the Market Rate
pursuant to the procedure described in paragraphs 1(d) and (e) of this
Rider. In such event, the Market Rate as to the Stub Term shall not be
determined at the time of the exercise of the expansion option, but instead
shall be determined within the time period specified in paragraph
5(c)(ii)(B) below. If Tenant provides notice of approval of Landlord's
Determination, then Landlord and Tenant shall execute an amendment to this
Lease effecting such Expansion. If Tenant fails to respond to Landlord's
notice of Landlord's Determination within such thirty (30) day period, then
Tenant shall be conclusively deemed to have disapproved Landlord's
Determination and withdrawn the exercise of its expansion option.
(e) Monthly rental due during the Expansion Term shall be as follows:
(i) Monthly rental payable as to the Expansion during the Expansion
Term shall be the Expansion Rent as provided in subparagraph (d)
above. If there are two Expansions, monthly rental shall be computed
separately as to each Expansion.
(ii) Monthly rental payable as to original Premises or the first
Expansion in the event of a second Expansion shall be as follows:
(A) Monthly rental as to the Remaining Term shall be the amount
of monthly rental which shall otherwise be payable hereunder as
to the Premises or first Expansion, as applicable, absent any
such expansion and renewal.
(B) Monthly rental as to the Stub Term shall be the Market Rate
as determined pursuant to paragraph 1 hereof except that (i) such
process shall be initiated by notice from Landlord given to
Tenant no later than 6 months nor sooner than 9 months prior to
the commencement of the Stub Term and (ii) Tenant shall not have
the right to vitiate the exercise of the renewal option
regardless of whether Tenant approves the Market Rate, as so
determined.
(f) Landlord's obligations under this paragraph 5 shall be contingent upon
(i) Landlord's ability to finance the Expansion on terms and conditions
which are then commercially reasonable (which terms shall include a loan to
value ratio of not less than 75%, a debt service ratio of not more than
1.25 based on loan which fully amortizes over a term of not greater than 25
years); (ii) the receipt of such approval and entitlements as may be
necessary for the development of the Expansion; (iii) Tenant having net
worth of not less than $100,000,000 and the ratio of Tenant's total debt to
the aggregate balance of Tenant's total debt plus equity not exceeding
seventy five percent (75%). The satisfaction of the financial conditions
set forth in subparagraph 5(f) shall be evidenced by audited financial
statements or Form 10-Q or other periodic filings with the SEC.
(g) This expansion option shall terminate on first to occur of (i) the
foreclosure of any mortgage encumbering the Premises or the conveyance of
the Premises in lieu of foreclosure; (ii) the expiration of the original
ten (10) year term of this Lease; (iii) the consummation by Guess ? Inc.,
the named tenant, of a sublease or assignment other than a Permitted
Transfer as defined in paragraph 8 of this Rider.
6. Declaration. Tenant shall pay to Landlord, as additional rental under this
Lease, within thirty (30) days after receipt of an invoice from Landlord, any
sums which relate to the Premises and which, by virtue of Tenant's acts or
omissions, shall be due and payable from Landlord pursuant to the terms of that
certain Declaration of Restrictions for Riverport Complex of record in Deed
Book 6561, Page 89, as amended.
7. Contingencies. The Lease is in full force and effect as of the date hereof,
but Tenant shall have the right to terminate the Lease as follows:
(a) On or before June 15, 1999 Landlord shall notify Tenant whether
Landlord has acquired the Expansion Land. If Landlord shall have failed to
acquire the Expansion Land on or before June 15, 1999, Tenant and Landlord
shall each have the right to terminate this Lease by notice to the other
party given on or before June 18, 1999, in which event this Lease shall be
of no further force or effect and neither party hereto shall have any
further liability to the other party. If Tenant fails to terminate this
Lease pursuant to this paragraph on or before June 18, 1999, Tenant shall
be deemed to have waived its right to terminate this Lease pursuant to this
subparagraph.
-17-
<PAGE>
(b) Landlord shall deliver to Tenant a copy of any recorded covenants,
conditions and restrictions affecting the Expansion Land on or before May
10, 1999. Tenant shall have the right to terminate this Lease by notice to
Landlord given on or before May 18, 1999, if Tenant fails to approve any
matter which adversely affects title to the Expansion Land, in which event
this Lease shall be of no further force or effect and neither party hereto
shall have any further liability to the other party. If Tenant fails to
terminate this Lease pursuant to this paragraph on or before May 18, 1999,
Tenant shall be deemed to have waived its right to terminate this Lease
pursuant to this subparagraph.
(c) If the Riverport Board shall not have approved Landlord's request for
an extension of its Purchase Option through June 30, 2003 (as defined
below) on or before May 15, 1999, Tenant shall have the right to terminate
this Lease by notice to Landlord given on or before May 18, 1999, in which
event this Lease shall be of no further force or effect and neither party
hereto shall have any further liability to the other party. If Tenant fails
to terminate this Lease pursuant to this paragraph on or before May 18,
1999, Tenant shall be deemed to have waived its right to terminate this
Lease pursuant to this subparagraph.
(d) If Tenant determines that the Existing Shell, including the structure,
all systems therein, and all appurtenances thereto are not suitable for
Tenant's proposed use, Tenant shall notify Landlord on or before May 18,
1999, of the defects that render the foregoing unsuitable for Tenant's
proposed use. If Tenant fails to provide such notice to Landlord on or
before May 18, 1999, Tenant shall be deemed to have waived its right to
terminate this Lease pursuant to this subparagraph. If Tenant gives such
notice and Landlord fails to agree to cure such defects or agrees to cure
such defects but fails to complete such cure within thirty (30) days of
such notice from Tenant, this Lease shall terminate and be of no further
force and effect and neither party hereto shall have any further liability
to the other party.
(e) Tenant fails to obtain approval from the appropriate local governmental
authorities for economic assistance under the Kentucky Jobs Development
Act, Tenant fails to obtain such approval on or before May 15, 1999, Tenant
shall be entitled to terminate this Lease by notice given to Landlord on or
before May 18, 1999, in which event this Lease shall be of no further force
or effect and neither party hereto shall have any further liability to the
other party. If Tenant fails to terminate this Lease pursuant to this
paragraph on or before May 18, 1999, Tenant shall be deemed to have waived
its right to terminate this lease pursuant to this subparagraph.
8. Assignment. Notwithstanding anything to the contrary contained in this Lease,
Tenant shall have the right, without the consent of the Landlord, to assign this
Lease or sublet the Premises to a corporation or other entity which:
(a) is Tenant's parent corporation, so long as such assignee or sublessee
remains Tenant's parent corporation; or
(b) is a wholly-owned subsidiary of Tenant, so long as such assignee or
sublessee remains a wholly-owned subsidiary of Tenant; or
(c) is a corporation of which Tenant or Tenant's parent corporation owns
or the shareholders of Tenant or Tenant's parent corporation own in excess
of fifty percent (50%) of the outstanding capital stock, so long as Tenant
or Tenant's parent corporation continues to own or the shareholders of
Tenant or Tenant's parent corporation continues to own in excess of fifty
percent (50%) of the outstanding capital stock of such assignee or
sublessee; or
(d) as a result of a consolidation, merger or other reorganization with
Tenant and/or Tenant's parent corporation, shall own all or substantially
all of the capital stock or assets of Tenant or Tenant's parent
corporation, but only if such assignee or sublessee has a tangible net
worth of not less than $75,000,000.00 immediately before such assignment or
subletting and such consolidation, merger or other reorganization does not
involve any distribution of cash or other assets which would result in such
assignee or sublessee having a net worth less than $75,000,000.00 after
such assignment or subletting; or (e) Acquires or is acquiring all or
substantially all of the outstanding capital stock of Tenant or all or
substantially all of the assets of Tenant, but only if such assignee or
sublessee has a tangible net worth of not less than $75,000,000.00
immediately before such assignment or subletting and such acquisition does
not
-18-
<PAGE>
not involve any distribution of cash or other assets which would result in
such assignee or sublessee having a net worth less than $75,000,000.00
after such assignment or subletting; or
(f) as a result of a change of the domicile of Tenant or the
reincorporation of Tenant in another jurisdiction shall own all or
substantially all of the assets of Tenant, but only if such assignee or
sublessee has a tangible net worth of not less than $75,000,000.00
immediately before such assignment or subletting and such change of
domicile does not involve any distribution of cash or other assets which
would result in such assignee or sublessee having a net worth less than
$75,000,000.00 after such assignment or subletting.
Any assignment or subletting pursuant to a-f above, inclusive, shall be
subject to the following conditions: (a) Tenant shall remain fully liable during
the unexpired term of this Lease, unless Tenant shall cease to exist as a result
of any transaction described in subparagraphs (d) or (f) above; (b) any such
assignment or subletting shall be subject to all of the terms of this Lease; and
(c) such assignee (other than a person or entity that acquires all or
substantially all of the capital stock of Tenant) shall assume all obligations
of "Tenant" under this Lease from and after the date of such assignment. Tenant
shall notify Landlord within thirty (30) days of any such assignment or
subletting, and Tenant shall deliver to Landlord within thirty (30) days of any
such assignment a fully executed, recordable form agreement from any such
assignee to Landlord whereby such assignee (other than a person or entity that
acquires all or substantially all of the capital stock of Tenant) agrees to
assume all obligations of Tenant under this Lease from and after the date of
such assignment.
FAMILY TRANSFERS
The transfer of shares of stock of Tenant among the immediate members of
the family of a shareholder, to a living trust for estate planning purposes or
by will or intestacy, or to existing shareholders of Tenant or to Tenant shall
not be deemed an assignment of this Lease or the subletting of the Premises.
PUBLIC OFFERING/TRADING
In no event shall a sale, issuance or transfer of the stock of Tenant to
the public or public trading of the stock of Tenant constitute an assignment of
this Lease or a subletting of the Premises.
HYPOTHECATION
An hypothecation of shares of stock of Tenant shall not be deemed an
assignment of this Lease or a subletting of the Premises unless and until either
the person to whom said shares have been so hypothecated obtain the right to
vote said shares for directors of Tenant prior to any foreclosure of any
security interest in said shares or acquires all right, title and interest of
the hypothecator in said shares.
Any assignment or subletting which is permitted without Landlord's consent
pursuant to this paragraph 8 is referred to herein as a "Permitted Transfer."
-19-
<PAGE>
EXHIBIT "D"
Guess?
Distribution Center
Preliminary Pre-Architectural Specifications
Dated: April 7, 1999
Items to be removed at end of lease by Guess? (at the discretion of RPP):
1. All conveyors (product, trash, etc.)
2. Personnel catwalks
3. Personnel lockers (at peak a total of 560 lockers)
4. All racking
5. Air compressor lines (terminate at the source and remove)
6. Electrical lines for equipment (terminate at the source and remove
conduit)
7. Specialized computer room features (including: raised flooring,
special fire protection system)
8. Cafeteria (4,000 square feet without patio)
9. Training room (1,000 square feet)
10. Exercise room (1,000 square feet)
11. Employee entrance area (9,600 square feet)
12. Service room area (8,400 square feet)
Items 7 through 12 (inclusive of items 7 and 12) are referred to in this
Lease as the "Group Removal Items."
-22-
<PAGE>
EXHIBIT "E"
Assume that during the second Lease Year Tenant elects to expand the
Building by 157,500 square feet by exercising its first Expansion right pursuant
to paragraph 5 of this Rider and that the Expansion Rent Commencement Date for
such Expansion is the first day of the third Lease Year. Assume further that
during the eighth Lease Year Tenant elects to expand the Building by an
additional 157,500 square feet by exercising its second Expansion right pursuant
to paragraph 5 of this Rider and that the Expansion Rent Commencement Date for
such Expansion is the first day of the ninth Lease Year. Given these
assumptions, the following would apply:
(A) As to the first Expansion:
(1) Tenant would be required to renew the Lease pursuant to this paragraph
1 of the Rider in order to extend the term by two years. After such renewal, the
term would expire at the end of the twelfth Lease Year.
(2) The Remaining Term would begin on the first day of the third Lease Year
and end on the last day of the initial term. The Stub Term would be the two
year period of time which is the subject of the renewal option described in item
(1) above (i.e., Lease Years 11-12). This would result in the next Renewal Term
consisting of Lease Years 13-15, inclusive.
(3) The rent would be the Market Rate during the Remaining Term and the
Stub Term.
(4) As a consequence of the second Expansion, Tenant would be required to
exercise two Renewal Terms -- as to Lease Years 13-15 remaining after the
renewal referred to Paragraph (A)(1) above and as to the Lease Years 16-18 -- so
as to meet the requirement of paragraph 5(c) of this Rider that the term of this
Lease be extended for ten years as of the Expansion Rent Commencement Date as to
the second Expansion. In such event, the rent for Lease Years 13-15 for the
first Expansion shall the lesser of the CPI Ceiling or the Market Rate, as
determined as of the beginning of such three year period (subject always to the
provisions of paragraph 1(b) of this Rider, which provide that rent shall never
be less than the rent applicable immediately prior to any adjustment in the
rent). The rent for Lease Years 16-18 for the first Expansion shall be the
Market Rate, as determined as of the first day of such three year period. If
Tenant exercises its option to renew as to the last remaining Renewal Term as to
Lease Years 19-20 (i.e., renew after the expiration of the Expansion Term for
the second Expansion), the rent as to the first Expansion shall be the Market
Rate, as determined as of the first day of such two year period.
(B) As to the second Expansion:
(1) Tenant would be required to renew the Lease pursuant to this paragraph
1 of the Rider in order to extend the term by an additional six years so that
it would expire at the end of Lease Year 18. Thus, the ten year period after the
Expansion Rent Commencement Date which Tenant is required to have pursuant to
the terms of paragraph 5 of this Rider shall be comprised of the two years
remaining in the initial ten year term, the two years of the Stub Term for the
first Expansion, three years until the end of the first five year renewal term
and the first three years of the second five year renewal term.
(2) The Remaining Term would begin on the first day of the ninth Lease Year
and would end on the last day of the Stub Term for the first Expansion. The Stub
Term for the second Expansion would be Lease Years 13-18.
(3) The rent would be the Market Rate during the Remaining Term and the
Stub Term. If Tenant exercises its option to renew as to the last remaining
Renewal Term as to Lease Years 19-20 (i.e., renew after the expiration of the
Expansion Term for the second Expansion), the rent as to the second Expansion
shall be the Market Rate, as determined as of the first day of such two year
period.
(C) As to the Building (exclusive of the Expansions):
(1) Rent increases pursuant to paragraph 3 of the Lease at the end of the
fifth Lease Year. The term will be renewed as to Lease Years 11-12 as to the
First Expansion and Lease Years 13-18 as to the Second Expansion. During Lease
Years 11-15, the rent shall the lesser of the CPI Ceiling or the Market Rate, as
determined as of the beginning of Lease Year 11 (subject always to the
provisions of paragraph 1(b) of this Rider, which provide that rent shall never
be less than the rent applicable immediately prior to any adjustment in the
rent). During Lease Years 16-18, if Tenant exercises it option to renew as to
the last remaining Renewal Term as to Lease Years 19-20 (i.e., renew after the
expiration of the Expansion Term for the second Expansion), the rent as to the
first Expansion shall be the Market Rate, as determined as of the first day of
such two year period. The rent is the Market Rate, as determined as of the
beginning of Lease Year 16.
-23-
<PAGE>
The following chart further clarifies Exhibit "E":
Rent Applicable to Exhibit "E"
<TABLE>
<CAPTION>
Lease Year 1-2 3-5 6-8 8-10 11-12 13-15 16-18 18-20
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original $2.70/ $2.70 $3.05 $3.05 lesser of lesser of Market Market
Premises sft. /sft. /sft. /sft. Market Market Rate Rate
Rate or Rate or
CPI CPI
Ceiling Ceiling
First N/A Market Market Market Market lesser of Market Market
Expansion Rate Rate Rate Rate Market Rate Rate
Rate or
CPI
Ceiling
Second N/A N/A N/A Market Market Market Market Market
Expansion Rate Rate Rate Rate Rate
</TABLE>
-24-
<PAGE>
________________________________________
SUBSCRIPTION AGREEMENT
________________________________________
BY AND AMONG
STRANDEL INC.
GUESS?, INC.
AND
FREEMARK ENTERTAINMENT CORPORATION
July 31, 1999
<PAGE>
SUBSCRIPTION AGREEMENT
----------------------
MEMORANDUM OF AGREEMENT made at Montreal on the 31st day of July, 1999
BY AND AMONG: STRANDEL INC., a corporation incorporated under
the laws of Canada, with its registered office
at 7077 Park Avenue, Suite 5031, Montreal,
Quebec, H3N 1X7,
the "Corporation");
AND: GUESS?, INC., a corporation incorporated under
the laws of Delaware, with its registered office
at 1444 South Alameda Street, Los Angeles,
California, 90021, U.S.A.,
(the "Purchaser");
AND: FREEMARK ENTERTAINMENT CORPORATION, a
corporation incorporated under the laws of
Canada, with its registered office at 7077
Park Avenue, Suite 503, Montreal, Quebec, H3N
1X7,
("Freemark").
WHEREAS the Purchaser desires to subscribe for thirty thousand (30,000)
Class A Common Shares from the treasury of the Corporation, in consideration of
an aggregate amount of three million dollars ($3,000,000) (the "Equity
Investment"), which would increase its equity position in the Corporation to
60%, at such price and on such terms as hereinafter set forth (the
"Subscription"); and
WHEREAS the Equity Investment will be used by the Corporation for purposes
of working capital and to become current with trade creditors;
THIS AGREEMENT WITNESSETH THAT, in consideration of the mutual covenants
herein contained, it is agreed by and between the Parties as follows:
ARTICLE I
INTERPRETATION
1.1 Definitions. Where used herein or in any amendments hereto or in any
communication required or permitted to be given hereunder, the following terms
shall have the following meanings, respectively, unless the context otherwise
requires:
(a) "Agreement" shall mean this Subscription Agreement and all instruments
supplemental hereto or in amendment of confirmation hereof; "herein",
"hereof", "hereto", "hereunder" and similar expressions mean and refer to
this Agreement and not to any particular Article, Section, Subsection or
other subdivision; "Article", "Section", "Subsection" or other subdivision
of this Agreement means and refers to the specified Article, Section,
Subsection or other subdivision of this Agreement.
<PAGE>
-2-
(b) "Closing" shall mean the delivery to the Purchaser of the share
certificates for the Subscribed Shares and the payment to the Corporation
of the Subscription Price for the Subscribed Shares at the place of closing
on the Closing Date.
(c) "Closing Date" shall have the meaning ascribed thereto at Section 8.1.
(d) "Financial Statements" shall mean the Corporation's audited financial
statements as at March 31, 1999 and the combined audited financial
statements as at January 30, 1999 of 176995 Canada Inc., 3032116 Canada
Inc., 2996197 Canada Inc., 3032507 Canada Inc., 3098605 Canada Inc.,
3133320 Canada Inc., 3133338 Canada Inc., 3138925 Canada Inc. and Spinardi
Inc., copies of which financial statements are annexed hereto as Schedule
1.1(d).
(e) "Indemnified Party" shall have the meaning ascribed thereto at Section 7.3.
(f) "Indemnifying Party" shall have the meaning ascribed thereto at Section
7.3.
(g) "Intellectual Property Rights" shall mean (i) all domestic and foreign
patents, trade marks, trade names, service marks, copyrights, trade
secrets, inventions, know-how, technology, software, licenses, and other
intellectual property, and (ii) all registrations and applications for
registration of intellectual property; and "Intellectual Property Right"
shall mean any one of them.
(h) "Laws" shall mean:
(i) all constitutions, treaties, laws, statutes, codes, ordinances,
orders, decrees, rule, regulations, and municipal by-laws; and
(ii) all judgments, orders, writs, injunctions, decisions, rulings,
decrees, and awards of any governmental authority or body,
in each case binding on or affecting the Party or Person referred to in the
context in which such word is used; and "Law" shall mean any one of them.
(i) "License" and "Licenses" shall have the respective meanings ascribed
thereto at Section 3.1(z).
(j) "Lien" and "Liens" shall mean any pledge, hypothec, charge, claim,
restriction on transfer, mortgage, security interest or encumbrance of any
sort.
(k) "Losses" shall have the meaning ascribed thereto at Section 7.1.
(l) "Parties" shall mean the Purchaser, Freemark and Strandel; and "Party"
shall mean any one of them.
(m) "Person" shall mean an individual, corporation, company, cooperative,
partnership, limited liability company, trust, unincorporated association,
entity with juridicial personality or governmental authority or body, and
pronouns which refer to a Person shall have a similarly extended meaning.
<PAGE>
-3-
(n) "Reorganization" shall mean the transfer by the Purchaser and Freemark of
all of the issued and outstanding shares of the capital of 3535762 Canada
Inc. to the Corporation according to the terms disclosed in Schedule 1.1(n)
annexed hereto.
(o) "Subscribed Shares" shall mean 30,000 Class A Common Shares from the
treasury of the Corporation representing, after giving effect to said share
subscription, 40% of the issued and outstanding shares of the share capital
of the Corporation, delivered to the Purchaser.
(p) "Subscription Price" shall have the meaning ascribed thereto at Section
2.1.
(q) "Subsidiaries" shall mean 3535762 Canada Inc., 3106021 Canada Inc.,
Spinardi Inc., 176995 Canada Inc., 3562786 Canada Inc., 3138925 Canada
Inc., 3032507 Canada Inc., 3032116 Canada Inc., 2996197 Canada Inc.,
3098605 Canada Inc., 3133320 Canada Inc. and 3133338 Canada Inc.
(r) "Tax" and "Taxes" shall have the respective meanings ascribed thereto at
Section 3.1(w).
1.2 Schedules. The following is a list of the Schedules attached hereto and
incorporated herein by reference:
Schedule 1.1(d) - Financial Statements
Schedule 1.1(n) - Reorganization
Schedule 3.1(d) - No Conflict
Schedule 3.1(e) - Corporate Chart
Schedule 3.1(f) - Subsidiary
Schedule 3.1(g) - No Options
Schedule 3.1(j) - Liabilities
Schedule 3.1(l) - No Changes; No Unusual Transactions
Schedule 3.1(m) - Permitted Liens
Schedule 3.1(o) - Condition and Sufficiency of Assets; Inventory
Schedule 3.1(p) - Place of Business
Schedule 3.1(q) - Intellectual Property Rights
Schedule 3.1(r) - Contracts
Schedule 3.1(t) - Insurance
Schedule 3.1(u) - Bank Accounts
Schedule 3.1(v) - Outstanding Litigation
Schedule 3.1(w) - Tax Matters
Schedule 3.1(z) - Licenses
Schedule 3.1(bb) - Benefit Plans
Schedule 3.1(cc) - Environmental Matters
Schedule 4.1(c) - Form of Unanimous Shareholders Agreement
Schedule 4.1(d) - Form of Employment Agreements
Schedule 4.1(f) - Form of Loan Agreement
SChedule 4.1(g) - Form of Opinion of Counsel for the Corporation
<PAGE>
-4-
ARTICLE II
SUBSCRIPTIONS
2.1 Subscription. Upon and subject to the terms and conditions hereof, the
Purchaser hereby subscribes for the Subscribed Shares for an aggregate
subscription price equal to three million dollars ($3,000,000) (the
"Subscription Price") all of which shall be allocated to the Subscribed Shares.
2.2 Acceptance. The Corporation hereby accepts the subscription of the
Purchaser for the Subscribed Shares indicated in Section 2.1, subject to the
terms and conditions contained herein.
2.3 Payment of the Subscription Price. Purchaser hereby acknowledges receipt of
the Subscribed Shares and the Corporation hereby acknowledges receipt of the
Subscription Price, by way of certified cheque or bank draft. It is understood
that the entire Subscription Price shall be added to the stated capital account
of the Class A Common Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Corporation and Freemark. Each of the
Corporation and Freemark, on a solidary (joint and several) basis, each waiving
the benefits of division and discussion, represents and warrants to the
Purchaser as follows and acknowledges that the Purchaser is relying upon such
representations and warranties in connection with the subscription by the
Purchaser of the Subscribed Shares and that the Purchaser would not have entered
into this Agreement without such representations and warranties:
(a) Due Incorporation. Each of the Corporation, the Subsidiaries and Freemark:
(i) is duly incorporated, validly existing and in good standing under the
Laws of its jurisdiction of incorporation; and
(ii) has all necessary corporate power and authority to own, lease and
operate its properties and to conduct its business as and in the
places where such properties are now owned, leased or operated or such
business is now conducted.
(b) Due Authorization. Each of the Corporation and Freemark has the necessary
corporate power and authority to execute this Agreement and to perform its
obligations hereunder. The execution of this Agreement by each of the
Corporation and Freemark and the performance by each of the Corporation and
Freemark of its obligations hereunder has been duly authorized by all
necessary action on their part. Such execution and performance by the
Corporation and Freemark does not require any action or consent of, any
registration with, or notification to, any Person, or any action or consent
under any Laws to which each of the Corporation and Freemark is subject,
except for any such disclosure as each of the Corporation and Freemark
shall determine to be necessary or appropriate to comply with securities
laws, stock exchange rules and/or covenants in loan agreements.
<PAGE>
-5-
(c) Enforceability. This Agreement constitutes a legal, valid and binding
obligation of the Corporation and of Freemark enforceable against them in
accordance with its terms, except to the extent that enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally and by general
principles of equity.
(d) No Conflict. The execution of this Agreement, the consummation of the
transactions contemplated herein, the performance by each of the
Corporation and Freemark of its obligations hereunder and the compliance by
each of the Corporation and Freemark with this Agreement do not:
(i) violate, contravene or breach, or constitute a default under, the
constating instruments or by-laws of the Corporation or of Freemark;
(ii) violate, contravene or breach, or constitute a default under any
contract, agreement, indenture, instrument, or commitment to which the
Corporation or the Subsidiaries may be a party, or their properties
may be subject, or by which either of them is bound or affected,
except for those agreements listed in Schedule 3.1(d);
(iii)result in, or give any Person the right to seek, or to cause (a) the
termination, cancellation, modification, amendment, variation or
renegotiation of any contract, agreement, indenture, instrument or
commitment to which the Corporation or the Subsidiaries or any of
their properties may be a party or subject or by which either of them
is bound or affected, or (b) the acceleration or forfeiture of any
term of payment, or (c) the loss in whole or in part of any benefit
which would otherwise accrue to the Corporation or the
Subsidiaries, except for these agreements listed in Schedule 3.1(d);
(iv) result in, or require the creation of any lien, hypothec, pledge,
charge, prior claim, security interest, adverse claim or other
encumbrance or right of others of any nature, whatsoever or howsoever
arising (individually, a "Lien" and collectively, "Liens"), upon any
of the Subscribed Shares or any of the Subscribed Shares or any
property of the Corporation of the Subsidiaries; or
(v) violate, contravene or breach any Laws.
(e) Authorized and Issued Capital. The authorized capital of the Corporation
consists of an unlimited number of Class A Common Shares, Class B Common
shares, Class A Preferred shares, Class B Preferred Shares, Class C
Preferred shares and Class D Preferred shares, of which thirty thousand
(30,000) Class A Common Shares (and no more) have been (without giving
effect to the Subscription) validly subscribed and issued and are
outstanding as fully paid and non-assessable, free and clear of all Liens.
Immediately following the issuance pursuant hereto of the Subscribed
Shares, the Subscribed Shares represent 40% of all of the issued and
outstanding shares in the capital of the Corporation.
All of the issued outstanding shares in the capital of each of the
Subsidiaries have been validly subscribed and issued, and are outstanding
as fully paid non-assessable, free and clear of all Liens and are
beneficially owned by the Corporation or any of the Subsidiaries, as the
case may be, as the corporate chart sets out in Schedule 3.1(e).
<PAGE>
-6-
(f) No Subsidiary. Except as disclosed in Schedule 3.1(f) annexed hereto, the
Corporation does not own, directly or indirectly, any shares in the capital
of any Person and has never had any property interest in any Person.
(g) No Options. Except as disclosed in Schedule 3.1(g). There is no:
(i) outstanding security of the Corporation or any of the Subsidiaries
convertible or exchangeable or exercisable into any share or shares in
the capital of the Corporation or any Subsidiary;
(ii) outstanding subscription, option, warrant, call, commitment or
agreement obligating the Corporation or the Subsidiaries, presently or
in the future, to issue any share or shares of its capital or any
security or securities of any class or kind which in any way relate to
the authorized or issued capital of the Corporation or any Subsidiary;
(iii)agreement (other than this Agreement) which grants to any Person the
right to purchase or otherwise acquire any share or shares issued and
outstanding in the capital of the Corporation or any Subsidiary; or
(iv) voting trust or voting agreement or pooling agreement or proxy with
respect to any shares of the capital of the Corporation or any
Subsidiary.
(h) Books and Records. The minute books of the Corporation and the Subsidiaries
are complete and accurate and contain copies of all by-laws and resolutions
passed by the shareholders and directors (and any committees) since the
respective dates of their incorporation; all of which by-laws and
resolutions have been duly passed.
The share certificate books, registers of shareholders, registers of
transfers and registers of directors of the Corporation and the
Subsidiaries are complete and accurate.
The financial books and records of the Corporation and the Subsidiaries
have been maintained in accordance with sound business practices and
fairly, accurately and completely present and disclose in accordance with
generally accepted accounting principles consistently applied (i) the
financial position of the Corporation and the Subsidiaries, and (ii) all
material transactions of the Corporation and the Subsidiaries.
(i) Financial Statements. The Financial Statements fairly, accurately and
completely present and disclose in all material respects in accordance with
GAAP (i) the financial position of the Corporation and of the Subsidiaries,
(ii) the results of operations of the Corporation and the Subsidiaries, and
(iii) the changes in the financial position of the Corporation and the
Subsidiaries, all as at the dates and for the periods therein specified
(except that in the case of unaudited statements, such statements are
subject to audit and year-end adjustments, and do not have any notes).
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(j) Liabilities. Each of the Corporation and the Subsidiaries has no
liabilities or obligations of any nature whatsoever, whether direct,
indirect, absolute, contingent or otherwise, except for those liabilities
or obligations (i) reflected in or reserved against in their Financial
Statements, (ii) incurred after their respective year ends in the usual and
ordinary course of business consistent with past practice, or (iii) set
forth in Schedule 3.1(j) annexed hereto.
(k) Accounts Receivable. All accounts receivable of the Corporation and the
Subsidiaries are bona fide, result from the ordinary course of business,
have been properly recorded in the ordinary course of business.
(l) No Changes; No Unusual Transactions. Except as disclosed in Schedule 3.1(l)
since the last audited balance sheet date, the Corporation and each of the
Subsidiaries has conducted its business in the ordinary course and there
has not been any material change in either the business, operations,
properties, or condition of the Corporation and the Subsidiaries taken as a
whole, nor any event, condition on contingency that could reasonably be
expected to result in any such material change.
(m) Title to Property. The Corporation and each of the Subsidiaries is the sole
and unconditional owner of, and has a good and valid title to all of its
assets reflected on the Financial Statements, or which have been acquired
on or after January 30, 1999 (other than such assets consumed or disposed
of on or after January 30, 1999 in the ordinary course of business and in a
manner consistent with past practice), in each case free and clear of all
Liens, except for the Permitted Liens described in Schedule 3.1(m).
(n) Immovable. The Corporation and the Subsidiaries do not own any immovable
property.
(o) Condition and Sufficiency of Assets; Inventory. Except as disclosed in
Schedule 3.1(o)annexed hereto, all of the tangible assets of the
Corporation and the Subsidiaries are (i) in good operating condition and
repair, ordinary wear and tear excepted, (ii) not in need of maintenance or
repairs (except ordinary or routine maintenance or repairs that are not
material in nature or costs, individually or collectively), and (iii)
adequate and sufficient for the continuing conduct of the business of the
Corporation and the Subsidiaries as now conducted.
All inventory of each of the Corporation and the Subsidiaries is of a
quality and quantity usable and salable in the ordinary course of business.
(p) Location; Place of Business. Other than inventory in transit and vehicles
used in the transportation of such inventory, each of the Corporation and
the Subsidiaries does not hold, directly or indirectly, any of its moveable
or personal property anywhere other than in the locations set forth in
Schedule 3.1(p) annexed hereto.
(q) Intellectual Property Rights. Other than the license agreement entered into
with the Purchaser or licenses related to the use of software in the
ordinary course of business, the only Intellectual Property Rights used by
the Corporation and the Subsidiaries are related to the use of the name
Strandel. The operations of the business do not infringe the Intellectual
Property Rights of any Person. No proceeding for infringement of the
Intellectual Property Rights of any Person is pending or threatened against
the Corporation or the Subsidiaries in connection with the business of any
of its affiliates (as defined under the Canada Business Corporations
Act).
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(r) Contracts; Leases. Schedule 3.1(r) annexed hereto contains a description of
all written or oral contracts, agreements, indentures, instruments,
commitments and all the leases to which the Corporation or any of the
Subsidiaries is a party or by which it is bound other than (i) involving
receipts or expenditures of the Corporation of less than $100,000 per annum
or (ii) verbal contracts of employment which are terminable on notice
required by law, or (iii) purchase orders issued or received in the
ordinary course of business.
Except as disclosed in Schedule 3.1(d), all leases to which the Company or
any Subsidiary is a party are in good standing and in full force and effect
without amendment thereto, and each of the Corporation and the
Subsidiaries, as the case may be, is entitled to all benefits under such
leases.
(s) Guarantees. Neither the Corporation nor any Subsidiary is party to or bound
either absolutely or on a contingent basis by any comfort letter,
understanding or agreement of guarantee, indemnification, assumption or
endorsement or any like commitment with respect to the liabilities or
obligations of any Person (whether accrued, absolute or otherwise
contingent), except in the ordinary course of business.
(t) Insurance. Schedule 3.1(t) is a true and complete list of all insurance
policies currently maintained by or for each of the Corporation and the
Subsidiaries. The coverage under each such policy is in full force and
effect and each of the Corporation and the Subsidiaries, as the case may
be, is in good standing under such policies.
The Corporation and the Subsidiaries have not received notice of, and
each of Freemark and the Corporation has no knowledge of any fact,
condition or circumstance which might reasonably form the basis of any
claim against the Corporation or any of the Subsidiaries which (i) is not
fully covered by insurance (subject to deductibles) maintained by or for
the Corporation or any of the Subsidiaries, or (ii) could reasonably be
expected to result in any increase in insurance premiums payable by the
Corporation or any of the Subsidiaries.
(u) Bank Accounts. Schedule 3.1(u) annexed hereto sets forth the name of each
Person with whom each of the Corporation and the Subsidiaries maintains an
account or safety deposit box and the names of all Persons authorized to
draw thereon or to have access thereto.
(v) Litigation. Except as disclosed in Schedule 3.1(v) annexed hereto, there
are (i) no actions, claims, investigations, arbitrations, or other
proceedings pending or, to the knowledge of Freemark or the Corporation,
threatened against, any of the Corporation's or any Subsidiary's
properties, which if adversely determined would have a material adverse
effect on the Corporation or the Subsidiaries; and (ii) no outstanding
judgments, orders, decrees, writs, injunctions, decisions, rulings or
awards against, with respect to, or in any manner affecting the Corporation
or any of the Subsidiaries or their respective properties.
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(w) Tax Matters. For the purposes of this Agreement, the term "Tax" or,
collectively, "Taxes" shall mean (i) any and all federal, state,
provincial, municipal, local and foreign taxes, assessments and other
governmental charges, duties, impositions and liabilities including Canada
Pension Plan and Provincial Pension Plan contributions and unemployment
insurance contributions and employment insurance contributions including
taxes based upon or measured by gross receipts, income, profits, sales,
capital use and occupation, goods and services, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts and (ii) any liability for
the payment of any amounts of the type described in clause (i) of this
Section 3.1(w) as a result of any express or implied obligation to
indemnify any other person or as a result of any obligations under any
agreements or arrangements with any other person with respect to such
amounts and including any liability for taxes of a predecessor entity.
(i) Tax Returns and Audits
1. The Corporation and the Subsidiaries have correctly computed all
Taxes prepared and duly and timely filed all federal, provincial,
local and foreign returns, estimates, information statements and
reports ("Tax Returns"), required to be filed by them, have
timely paid all Taxes which are due and payable and have made
adequate provision in the Financial Statements for the payment of
all Taxes that are or may become payable for any taxation year
ending on or prior to March 31, 1999. The Corporation and the
Subsidiaries have made adequate and timely installments of Taxes
required to be made.
2. With respect to any periods for which Tax Returns the Corporation
and the Subsidiaries have not yet been required to be filed or
for which Taxes are not yet due and payable, they have only
incurred liabilities for Taxes in the ordinary course of its
business and in a manner consistent with prior periods.
3. All Tax Returns of the Corporation and the Subsidiaries have been
assessed through and including each of the dates set forth in
Schedule 3.1(w), and there are no outstanding waivers, except as
set forth in Schedule 3.1(w), of any limitation periods or
agreements providing for an extension of time for the filing of
any Tax Return or the payment of any Tax by the Corporation and
the Subsidiaries or any outstanding objections to any assessment
or reassessment of Taxes. Any deficiencies proposed as a result
of such assessments or reassessments of the Tax Returns through
and including the dates set forth in Schedule 3.1(w) have been
paid and settled with the exception of the GST/PST Taxes
assessments as set forth in Schedule 3.1(j).
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4. There are no contingent Tax liabilities or any grounds that could
prompt an assessment or reasssessment, including, but without
limitation, aggressive treatment of income, expenses, deductions,
credits or other amounts in the filing of earlier or current Tax
Returns, nor have the Corporation and the Subsidiaries received
any indication from any taxation authorities that an assessment
or reassessment of Tax is proposed.
5. The Corporation and the Subsidiaries have withheld form each
payment made to any of their past and present shareholders,
directors, officers, employees and agents the amount of all Taxes
and other deductions required to be withheld and have paid such
amounts when due, in the form required under the appropriate
legislation, or made adequate provision for the payment of such
amounts to the proper receiving authorities.
6. The Corporation and the Subsidiaries have collected from each
receipt from any of the past and present customers (or other
persons paying amounts to the Corporation) the amount of all
Taxes (including goods and services tax and provincial sales
taxes) required to be collected and have remitted such Taxes when
due, in the form required under the appropriate legislation or
made adequate provision for the payment of such amount to the
proper receiving authorities.
7. The Corporation and the Subsidiaries are not subject to any
assessments, levies, penalties or interest with respect to Taxes
which will result in any liability on their part in respect of
any period ending on or prior to the date hereof, in excess of
the amount to be provided for in the Financial Statement.
8. The Corporation and the Subsidiaries have not been and are not
currently required to file any returns, reports, elections,
designations or other filings with any taxation authority located
in any jurisdiction outside Canada or outside the province of
Quebec.
9. Except as disclosed in Schedule 3.1(w), the Ccorporation and the
Subsidiaries have not filed or been party to any election
pursuant to Section 83 or 85 of the Income Tax Act (Canada) (the
"ITA") or the corresponding provisions of any provincial statute.
10. The Corporation and the Subsidiaries have not at any time
benefited from a forgiveness of debt, except pursuant to the
transaction with Pantorama Industries Inc. referred to in
Schedule 3.1(l), or entered into any transaction or arrangement
(including conversion of debt into shares of its share capital)
which could have resulted in the application of Section 80 and
following of the ITA or the relevant provisions of any provincial
statute.
11. Since its data of incorporation, the Corporation and each of the
Subsidiaries has been a "Canadian controlled private corporation"
within the meaning of the ITA and the relevant provincial
legislation.
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12. Except as disclosed in Schedule 3.1(w), the Corporation and the
Subsidiaries are not, nor have they been at any time, associated
(within the meaning of the ITA and the relevant provincial
legislation) with any other corporation.
13. The Corporation and the Subsidiaries have made available to
Purchaser or its legal counsel, copies of all available foreign,
federal, state, provincial and local income and all state and
local sales and use Tax Returns for the Corporation and the
Subsidiary filed for all periods since its inception.
14. There are no Liens on the assets of the Corporation or any
Subsidiaries relating to or attributable to Taxes other than
Liens for Taxes not yet due and payable.
15. As of the Closing, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions
of this Agreement, covering any employee or former employee of
the Corporation that, individually or collectively, could give
rise to the payment of any amount that would not be deductible by
the Corporation or the Subsidiaries as an expense under
applicable Law other than reimbursements of a reasonable amount
of travel, entertainment expenses and other nondeductible
expenses that are commonly paid by similarly situated businesses
in reasonable amounts.
16. The Corporation and the Subsidiaries tax basis in their assets
(and the undepreciated capital cost of such assets) for purposes
of determining their future amortization, depreciation and other
Federal and provincial income tax deductions is accurately
reflected on the Corporation's Tax Returns and records.
17. The Corporation and the Subsidiaries have not acquired property
or services from, or disposed of property, or provided services
to a person with whom they do not deal at arm's length (within
the meaning of the ITA and the relevant provincial legislation)
for an amount that is other than the fair market value of such
property or services, or have been deemed to have done so for
purposes of the ITA and the relevant provincial legislation.
(x) Reorganization. All the steps and transactions contemplated by the
Reorganization have been fully implemented and have been effected in
compliance with all Laws and have not caused or resulted, nor shall they as
at the Closing Date cause or resulted, in any (i) adverse financial or Tax
consequences to the Corporation or any of its Subsidiaries, (ii) current or
deferred liability to the Corporation or any of its Subsidiaries or (iii)
any liability for Taxes, interest or penalties under any Tax Laws for the
Corporation. All of the assets of the Corporation are sufficient for the
continuing conduct of the business as currently conducted and as conducted
in the past. The assets of Corporation include all of the assets and rights
necessary for the conduct of the business on a going forward basis. The
Corporation shall be responsible for the costs and expenses incurred in
connection with the preparation of the documents for the implementation of
the Reorganization.
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(y) Paid-up Capital. The paid-up capital for tax purposes of each of the
Subscribed Shares is no less than its stated capital for corporate
purposes.
(z) Licenses, Permits. To the knowledge of the Corporation and Freemark, each
of the Corporation and the Subsidiaries has, and is in full compliance with
and entitled to all of the benefits under, all permits, licenses,
certificates of compliance, consents, approvals and authorizations of, or
registrations with, any governmental, judicial or public authority or
regulatory body (collectively, the "Licenses", and individually a
"License") necessary or required to conduct its business as presently
conducted, and each License has been validly issued and is in full force
and effect. Other than as set forth in Schedule 3.1(z) annexed hereto,
there are no Licenses required to conduct the business of the Corporation
or any of the Subsidiaries as presently conducted.
(aa) Employee Matters. Each of the Corporation and the Subsidiaries has complied
in all material respects, with all applicable Laws relating to employment
matters, including, without limitation, any provisions thereof relating to
wages and hours.
(bb) Benefit Plans. Except as set forth in Schedule 3.1(bb) annexed hereto,
neither the Corporation nor any of the Subsidiaries is a party to any
pension, retirement, bonus, profit sharing, compensation, incentive, stock
purchase, stock option, stock appreciation, severance, change-of-control,
savings, thrift, insurance, medical, hospitalization, disability, death or
other similar program, or practice providing directors, officers,
shareholders or employee benefits (the "Benefit Plans").
(cc) Environmental Matters. Except as set forth at Schedule 3.1(cc) annexed
hereto, the Corporation and the Subsidiaries have at all times conducted,
held and used, and are continuing to conduct, hold and use, their affairs,
business and properties in accordance with all applicable Laws relating in
whole or in part to the environment or its protection.
Except as disclosed at Schedule 3.1(cc) annexed hereto, at no time have nay
contaminants been released, emitted, discharged, deposited, issued,
sprayed, injected, abandoned, buried, spilled, incinerated, disposed,
leaked, poured, emptied, dumped, or placed on, in under or adjacent to any
immovable or real property owned or used by the Corporation or any of the
Subsidiaries.
(dd) Compliance with Laws. Except as may be specifically provided in this
Section 3.1, each of the Corporation and the Subsidiaries has complied and
continues to comply with all Laws in all material respects.
(ee) Full Disclosure. The Corporation and Freemark have made or caused to be
made due inquiry with respect to (i) each covenant, agreement, obligation,
representation and warranty contained in this Agreement, (ii) the Schedules
annexed hereto, and (iii) any certificates or other documents referred to
herein or furnished to the Purchaser pursuant hereto or in connection
herewith, and none of the aforesaid covenants, agreements, obligations,
representations, warranties, Schedules, certificates or documents contains
any untrue statement of a material fact or omits to state a material fact
necessary to make such representation, warranty, Schedule, certificate or
other document not misleading.
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(ff) Resident. The Corporation is not a non-resident of Canada within the
meaning of the ITA).
3.2 Representations and Warranties of the Purchaser. The Purchaser represents
and warrants to the Corporation and Freemark as follows and acknowledges that
the Corporation and Freemark are relying upon such representations and
warranties in connection with the sale by the Corporation of the Subscribed
Shares and that the Corporation and Freemark would not have entered into this
Agreement without such representations and warranties:
(a) Due Incorporation. The Purchaser is duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation and
has the necessary corporate power to own or lease its properties and to
carry on its business as such business is presently conducted.
(b) Due Authorization. The Purchase has the necessary corporate power and
authority to execute this Agreement and to perform its obligations
hereunder. The execution of this Agreement by the Purchaser and the
performance by the Purchaser of its obligations hereunder have been duly
authorized by all necessary corporate action on its part. Such execution
and performance by the Purchaser does not require any action or consent of,
any registration with, or notification to, any Person, or any action or
consent under any Laws to which the Purchaser is subject, except for any
such disclosure as the Purchaser shall determine to be necessary or
appropriate to comply with securities laws, stock exchange rules and/or
covenants in loan agreements.
(c) Enforceability. This Agreement constitutes a legal, valid and binding
obligation of the Purchaser, enforceable against it in accordance with its
terms, except to the extent that enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and by general principles of equity.
(d) No Conflict. The execution of this Agreement, the consummation of the
transactions contemplated herein, the performance by the Purchaser of its
obligations hereunder and the compliance by the Purchaser with this
Agreement do not violate, contravene or breach, or constitute a default
under, the constating instruments or by-laws of the Purchaser or any Law
applicable to the Purchaser.
(e) Resident. The Purchaser is a non-resident of Canada within the meaning of
the ITA.
ARTICLE IV
COVENANTS OF THE CORPORATION
4.1 Closing. The Corporation hereby acknowledges having taken the following
actions on the date hereof at the place of Closing:
(a) delivered to the Purchaser and/or its nominee share certificates in its
name representing the Subscribed Shares;
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(b) delivered to the Purchaser copies of resolutions of the shareholders and
directors of the Corporation (in form and substance reasonably satisfactory
to the Purchaser's legal counsel) (i) authorizing and approving the issue
of the Subscribed Shares by the Corporation to the Purchaser and/or its
nominee and their registration in the name of the Purchaser and/or its
nominee and (ii) appointing such new directors, officers and auditors of
the Corporation as may be nominated by the Purchaser;
(c) executed a Unanimous Shareholders Agreement with the Purchaser and Freemark
substantially in the form of Schedule 4.1(c) annexed hereto;
(d) executed employment agreements with Michael Routtenberg, Lawrence
Routtenberg, Mark Routtenberg and Ginette Godbout in the forms of Schedule
4.1(d) hereto;
(e) executed a loan agreement between the Purchaser and the Corporation in the
form of Schedule 4.1(f) hereto;
(f) delivered to the Purchaser a favourable opinion of Goodman Phillips &
Vineberg substantially in the form of Schedule 4.1(f) annexed hereto.
(g) delivered all such documentation to evidence the completion of the
Reorganization as shall be reasonably requested by Purchaser.
ARTICLE V
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
5.1 Survival of Representations and Warranties of the Corporation and Freemark.
The representations and warranties of each of the Corporation and Freemark
contained in this Agreement, in the Schedules annexed hereto or in any
certificate of other document delivered or given pursuant to this Agreement
shall survive the completion of the transactions contemplated by this Agreement,
and notwithstanding such completion or any investigation made by or on behalf of
the Purchaser or any knowledge by the Purchaser of any incorrectness in, or
breach of, such representations or warranties, shall continue in full force and
effect for the benefit of the Purchaser for a period of three (3) years from the
Closing Date; (i) except for any representation and warranty relating to Tax
matters which shall survive until ninety (90) days after the last date on which
the relevant tax authority is entitled to assess or reassess the Corporation or
the Purchaser with respect to such Tax matters, (ii) except for any
representation and warranty in respect of which a claim based on fraud is made,
and (iii) except for the representations and warranties contained in sections
3.1(a), (b), (c), (e), (g) and (p), which in each such case shall be unlimited
as to duration.
5.2 Survival of Representations and Warranties of Purchaser. The representations
and warranties of the Purchaser contained in this Agreement or in any
certificate or other document delivered or given pursuant to this Agreement
shall survive the completion of the transactions contemplated by this Agreement,
and notwithstanding such completion or any investigation made by or on behalf of
the Corporation or any knowledge by the Corporation of any incorrectness in, or
breach of, such representations or warranties, shall continue in full force and
effect for the benefit of, such representations or warranties, shall continue in
full force and effect for the benefit of the Corporation for a period of three
(3) years from the Closing Date; except for any representation and warranty in
respect of which a claim based on fraud is made and except for the
representations and warranties contained in sections 3.2(a), (b) and (c), which
in each such case shall be unlimited as to duration.
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ARTICLE VI
CONDITIONS OF CLOSING
6.1 Conditions for the Benefit of the Purchaser. The subscription of the
Subscribed Shares in accordance with the terms of this Amendment is subject to
the following conditions, each of which is hereby declared to be the exclusive
benefit of the Purchaser. The Corporation and Freemark hereby acknowledge that
each condition has been performed or complied with in all respects at or prior
to the date hereof.
(a) Truth of Representations and Warranties of the Corporation and Freemark.
The representations and warranties of the Corporation and Freemark
contained in this Agreement or in any Schedule annexed hereto or in any
certificate or other document delivered or given pursuant to this Agreement
(considered individually and collectively) shall have been accurate as of
the date of this Agreement, and shall be true and correct as of the date
hereof.
(b) Performance of Covenants by the Corporation and Freemark. All of the
covenants, obligations and agreements that each of the Corporation and
Freemark is required to perform or to comply with pursuant to this
Agreement at or prior to the date hereof (considered individually and
collectively) shall have been performed or complied with in all material
respects at or prior to the date hereof.
(c) Third Party Approvals. There shall have been obtained all approvals,
consents and assurances, in form and substance reasonably satisfactory to
the Purchaser's legal counsel, necessary in order to permit the
transactions contemplated herein to be completed without affecting or
resulting in the termination, cancellation, modification, amendment,
variation or renegotiation of this Agreement including, without limitation,
all consents required (with the exception of the items disclosed in
Schedule 3.1(d)) in order to consummate the transactions contemplated
herein which, if not obtained, could have a material adverse effect on the
ability of the Corporation and its Subsidiaries to carry on their affairs.
(d) Litigation. There shall be no actions, claims, investigations, arbitrations
or other proceedings (whether or not on behalf of the Corporation or any of
the Subsidiaries) pending or threatened to restrain, enjoin or invalidate
any transaction contemplated by this Agreement.
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification by the Corporation and Freemark. The Corporation and
Freemark, on a solidary basis, without right of contribution each waiving the
benefits of division and discussion, shall indemnify and hold the Purchaser and
each of its officers, directors, employees, agents, representatives and
affiliates (the "Purchaser Indemnified Parties") harmless from and against any
and all claims, demands, actions, causes of action, judgments, damages, losses
(which shall include any diminution in value of the Subscribed Shares),
liabilities, costs or expenses (including, without limitation, interest,
penalties and reasonable attorneys' and experts' fees and disbursements),
including Tax liabilities, suffered or incurred in connection with the
transactions contemplated herein, (collectively, the "Losses") which may be made
against the Purchaser Indemnified Parties or any of the Corporation and the
Subsidiaries, or which any of them may suffer or incur as a result of, arising
out of or relating to:
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(a) any violation, contravention or breach of any covenant, agreement or
obligation of the Corporation or Freemark under or pursuant to this
Agreement; or
(b) any incorrectness in, or breach of, any representation or warranty made by
the Corporation or Freemark in Section 3.1, the Schedules annexed hereto or
in any certificate or other document delivered or given pursuant to this
Agreement; or
(c) any liabilities or obligations of the Corporation, the Subsidiaries or of
Freemark of any nature whatsoever arising after the Closing Date in respect
of any fact, condition or circumstance existing or occurring on or prior to
the Closing Date (including, without limitation, any liabilities or
obligations of the Corporation or any Subsidiary for Taxes due, together
with any penalties or interest, in connection with any period ending on or
prior to the Closing Date), save and except for any liabilities or
obligations arising after the Closing Date in respect of any fact,
condition or circumstance existing on or prior to the Closing Date which
has been disclosed in writing to the Purchaser prior to the Closing
(including, without limitation, by way of disclosure in this Agreement or
any of the Schedules hereto).
In connection with the foregoing, Freemark hereby waives its right to claim from
the Corporation any amount paid to the Purchaser pursuant to this Article 7.
7.2 Indemnification by Purchaser. The Purchaser shall indemnify and hold the
Corporation harmless from and against any Losses which may be made against the
Corporation or which the Corporation may suffer or incur as a result of, arising
out of or relating to:
(a) any violation, contravention or breach of any covenant, agreement, or
obligation of the Purchaser under or pursuant to this Agreement; or
(b) any incorrectness in, breach of, any representation or warranty made by the
Purchaser in Section 3.2, the Schedules annexed hereto or in any
certificate or other document delivered or given pursuant to this
Agreement.
7.3 Obligation to Reimburse. The Party providing indemnification, hereunder (the
"Indemnifying Party") shall reimbuse, on demand, to the Party being indemnified
hereunder (the "Indemnified Party") the amount of any Losses suffered or
incurred by the Indemnified Party, the whole as of the date that the Indemnified
Party incurs any such Losses, together with interest thereon from the aforesaid
date until payment in full at the rate per annum equal to 8%.
7.4 Notification. Promptly upon obtaining knowledge thereof, the Indemnified
Party shall notify the Indemnifying Party of any cause which the Indemnified
Party has determined has given or could give rise to indemnification under this
Article VII. The omission so to notify the Indemnifying Party shall not relieve
the Indemnifying Party from any duty to indemnify and hold harmless which
otherwise might exist with respect to such cause unless (and only to that
extent) the omission to notify materially prejudices the ability of the
Indemnifying Party to exercise its right to defend provided in this Article VII.
7.5 Defense of Third Party Claim. If any legal proceeding shall be instituted or
any claim or demand shall be asserted by a third party against the Indemnified
Party (each a "Third Party Claim"), then the Indemnifying Party shall have the
right, after receipt of the Indemnified Party's notice under Section 7.4 and
upon giving notice to the Indemnified Party within 30 calendar days of such
receipt, to defend the Third Party Claim at its own cost and expense with
counsel of its own selection, provided that:
<PAGE>
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(a) the Indemnified Party shall at all times have the right to fully
participate in the defense at its own expense; and
(b) the Third Party Claim seeks only monetary damages and does not seek any
injunctive or other relief against the Indemnified Party.
Amounts payable by the Indemnifying Party pursuant to a Third Party claim
shall be paid in accordance with the terms of the settlement or, the judgment,
as applicable, but in any event prior to the expiry of any delay for a judgment
to become executory.
7.6 No Compromise. The Indemnifying Party shall not be permitted to compromise
and settle or to cause a compromise and settlement of any Third Party Claim,
without the prior written consent of the Indemnified Party, unless:
(a) the terms of the compromise and settlement require only the payment of
money and do not require the Indemnified Party, the Corporation or any of
the Subsidiaries to admit any of the Subsidiaries to admit any wrongdoing
or take or refrain from taking any action; and
(b) the Indemnified Party receives, as part of the compromise and settlement, a
legally binding and enforceable unconditional satisfaction or release,
which is in form and substance satisfactory to the Indemnified Party,
acting reasonably, from any and all obligations or liabilities it may have
with respect to the Third Party Claim.
7.7 Failure to Defend. If the Indemnifying Party fails within 30 calendar days
from receipt of the notice of a Third Party Claim to give notice of its
intention to defend the Third Party Claim in accordance with Section 7.5 or
fails to promptly assume such defense at any time after such notice has been
given, then the Indemnifying Party shall be deemed to have waived its right to
defend the Third Party Claim and the Indemnified Party shall have the right (but
not the obligation) to undertake or to cause the Corporation, Freemark or any of
the Subsidiaries to undertake the defense of the Third Party Claim and
compromise and settle the Third Party Claim on behalf, for the account and at
the risk and expense of the Indemnifying Party.
<PAGE>
-18-
7.8 Expiration of Indemnification. The obligation of indemnification set out in
Sections 7.1 and 7.2 shall survive the Closing Date for the period prescribed by
law. The obligation of indemnification arising from any material incorrectness
in, or material breach of, any representation for warranty made by the
Corporation, Freemark or the Purchaser, as the case may be, in each case shall
be subject to the limitations regarding survival of representations and
warranties set forth in Section 5.1 or 5.2, as the case may be; provided,
however, that the obligation of indemnification shall not expire if a claim for
indemnity is made on or before the expiration dates set forth in Sections 5.1
and 5.2.
ARTICLE VIII
CLOSING
8.1 Date, Time and Place of Closing. The Closing shall take place at the offices
of Stikeman, Elliott, 1155 Rene-Levesque Blvd. West, 40th Floor, Montreal,
Quebec on July 31, 1999 (the "Closing Date") at the hour of 10:00 a.m. (Montreal
time) or at such other place, on such other date and/or at such other time as
may be agreed between the parties.
ARTICLE IX
MISCELLANEOUS
9.1 Announcements. Any press release, public announcement or publicity with
respect to the transaction contemplated in this Agreement shall be made only
with the prior written consent of the Parties unless such release, announcement
or publicity is required by Law or the rules of any relevant securities
exchange, in which case the Party required to make such release, announcement of
publicity shall use it best efforts to obtain approval of the other Party to the
form, nature and extent of such disclosure, which approval shall not
unreasonably withheld.
9.2 Further Assurances. Each Party upon the request of the other, whether at or
after the Closing Date, shall do, execute, acknowledge and deliver or cause to
be done, executed, acknowledged or delivered all such further acts, deeds,
documents, assignments, transfers, conveyances, powers of attorney and
assurances as may be reasonably necessary or desirable to effect complete
consummation of the transactions contemplated by this Agreement.
9.3 Successors in Interest. This Agreement and the provisions hereof shall enure
to the benefit of and be binding upon the Parties and their respective
successors and assigns. Neither the Corporation nor Freemark may assign this
Agreement or any of its rights and obligations hereunder without the prior
written consent of the Purchaser. Notwithstanding the foregoing, the Purchaser
may assign or transfer this Agreement and all of the Purchaser's rights and
obligations hereunder to an affiliate (as defined under the Canada Business
Corporations Act).
<PAGE>
-19-
9.4 Notices. Any notice, consent, authorization, direction or other
communication required or permitted to be given hereunder shall be in writing
and shall be delivered either by personal delivery or by telex, telecopier or
similar telecommunications device and addressed as follows:
(a) in the case of the Corporation, to it at:
7077 Park Avenue, Suite 503
Montreal, Quebec
H3N 1X7
Attention: Mark Routtenberg
Telecopier: (514) 270-8028
and
Attention: Brian L. Fleming
Telecopier: (213) 744-7817
and
Attention: Glenn A. Weinman
Telecopier: (213) 765-0911
(b) in the case of the Purchaser, to it at:
Guess?, Inc.
1444 South Almeda Street
Los Angeles, CA
USA 90021
Attention: Brian L. Fleming
Telecopier: (213) 744-7817
and
Attention: Glen A. Weinman
Telecopier: (213) 765-0911
<PAGE>
-20-
With a copy to:
STIKEMAN, ELLIOTT
1155 Rene-Levesque Blvd. West
40th Floor
Montreal, Quebec H3B 3V2
Attention: William B. Rosenberg
Telecopier: (514) 397-3222
(c) in the case of Freemark, to it at:
7077 Park Avenue, Suite 503
Montreal, Quebec
H3N 1X7
Attention: Mark Routtenberg
Telecopier: (514) 270-8028
With a copy to:
GOODMAN, PHILLIPS & VINEBERG
1501, avenue McGill College
26th Floor
Montreal, Quebec
H3A 3N9
Attention: Sidney Horn
Telecopier: (514) 841-6499
Any notice, consent, authorization, direction or other communication
delivered as aforesaid shall be deemed to have been effectively delivered and
received, if sent by telex, telecopier or similar telecommunications device on
the calendar day next following receipt of such transmission or, if delivered,
to have been delivered and received on the date of such delivery provided,
however, that if such date is not a business day then it shall be deemed to have
been delivered and received on the business day next following such deemed to
have been delivered and received on the business day next following such
delivery. Either Party may change its address for service by notice delivered as
aforesaid.
9.5 Counterparts. This Agreement may be executed in one or more counterparts,
each of which when so executed shall be deemed an original, and such
counterparts together shall constitute one and the same instrument.
9.6 Severability. Any term of provision of this Agreement that is held by a
court of competent jurisdiction or other authority to be invalid, void or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction. If the final judgment of a court of competent
jurisdiction or other authority declares that any term or provision hereof is
invalid, void or unenforceable, the parties agree that the court making such
determination shall have the power to reduce the scope, duration, area or
applicability of the term of provision, to delete specific words or phrases, or
to replace any invalid, void or unenforceable term of provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term of provision.
<PAGE>
-21-
9.7 Governing Law. This Agreement shall be governed by and interpreted and
construed in accordance with the laws of the Province of Quebec and the laws of
Canada applicable therein.
9.8 Entire Agreement. This Agreement, including the Schedules and the Unanimous
Shareholders' Agreement executed concurrently herewith, constitute the entire
agreement between the Parties pertaining to the subject matter hereof, and
supersedes all prior agreements, understandings, negotiations and discussions of
the Parties.
9.9 Inconsistency. This Agreement shall override the Schedules annexed hereto to
the extent of any inconsistency.
9.10 Gender. Any reference in this Agreement to any gender shall include both
genders and the neuter, and words herein importing the singular number only
shall include the plural and vice-versa.
9.11 Currency. All of the dollar amounts mentioned in this Agreement or in the
Schedules annexed hereto shall be in Canadian Funds.
9.12 Headings. The headings in this Agreement are inserted for convenience of
reference only and shall not affect the interpretation hereof.
9.13 Amendment. No amendment shall be binding unless expressly provided in any
instrument duly executed by the Parties.
9.14 Waiver. No waiver, whether by conduct or otherwise, of any of the
provisions of this Agreement shall be deemed to constitute a waiver of any other
provisions (whether or not similar) nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided in an instrument duly
executed by the Parties to be bound thereby.
<PAGE>
-22-
IN WITNESS WHEREOF, the Parties have executed this Agreement on the date and at
the place first above mentioned.
STRANDEL INC.
Per: /s/ Mark Routtenberg
---------------------------------------
Mark Routtenberg
GUESS ?, INC.
Per: ---------------------------------------
Maurice Marciano
FREEMARK ENTERTAINMENT CORPORATION
Per: /s/ Mark Routtenberg
---------------------------------------
Mark Routtenberg
<PAGE>
-22-
IN WITNESS WHEREOF, the Parties have executed this Agreement on the date and at
the place first above mentioned.
STRANDEL INC.
Per: /s/ Maurice Marciano
---------------------------------------
Mark Routtenberg
GUESS ?, INC.
Per: --------------------------------------
Maurice Marciano
FREEMARK ENTERTAINMENT CORPORATION
Per: ---------------------------------------
Mark Routtenberg
<PAGE>
EXHIBIT 21.1 LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
LIST OF SUBIDIARIES
INVESTMENT IN LOCATION OWNED BY PERCENT OF OWNERSHIP
- --------------- -------- ------------------ --------------------
<S> <C> <C> <C>
GUESS? Retail, Inc. United States Guess ?, Inc. 100%
GUESS? Licensing, Inc. United States Guess ?, Inc. 100%
GUESS? Europe, BV Netherlands Guess ?, Inc. 100%
Ranche Ltd. Hong Kong GUESS? Europe, BV 100%
Guess.com, Inc. United States Guess ?, Inc. 100%
Baby GUESS? Inc. United States Guess ?, Inc. 100%
Guess Italia,S.r.l. Italy GUESS? Europe, BV 100%
GUESS? Canada Corporation United States Guess ?, Inc. 60%
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Guess?, Inc.:
We consent to incorporation by reference in the registration statement
(Nos. 333-10069) on Form S-8 of Guess?, Inc. of our report dated February 9,
2000, except for note 15, which is as of March 3, 2000, relating to the
consolidated balance sheets of Guess?, Inc. and subsidiaries as of December 31,
1998, and 1999, and the related consolidated statements of earnings,
stockholders' equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 1999, and the related
financial statement schedule, which report appears in the December 31, 1999
annual report on Form 10-K of Guess?, Inc.
KPMG LLP
Los Angeles, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,139
<SECURITIES> 27,059
<RECEIVABLES> 35,592
<ALLOWANCES> 8,863
<INVENTORY> 106,624
<CURRENT-ASSETS> 200,979
<PP&E> 230,597
<DEPRECIATION> 104,909
<TOTAL-ASSETS> 369,036
<CURRENT-LIABILITIES> 103,035
<BONDS> 83,363
0
0
<COMMON> 141
<OTHER-SE> 167,214
<TOTAL-LIABILITY-AND-EQUITY> 369,036
<SALES> 560,012
<TOTAL-REVENUES> 599,650<F1>
<CGS> 331,660
<TOTAL-COSTS> 503,165
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,385
<INCOME-PRETAX> 87,100
<INCOME-TAX> 35,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,900
<EPS-BASIC> $1.21<F3>
<EPS-DILUTED> $1.20<F3>
<FN>
<F1>INCLUDES NET ROYALTIES OF $3.96 MILLION.
<F3>
</FN>
</TABLE>
