EXHIBIT 1.2
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
Between
U. S. BANK NATIONAL ASSOCIATION
and
GARGOYLES, INC.
Dated as of May 28, 1999
CONTENTS
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SECTION 1. DEFINITIONS 1
1.1 Terms Defined 1
1.2 Accounting Terms 8
1.3 Rules of Construction 8
1.4 Incorporation of Recitals and Exhibits 9
SECTION 2. REVOLVING LOAN 9
2.1 Loan Commitment 9
2.2 Use of Proceeds 9
2.3 Revolving Note 9
2.4 Revolving Loan Interest Rates 10
2.5 Repayment 10
2.6 Revolving Loan Unused Portion Fee 10
2.7 Borrowing Base 10
2.8 Letters of Credit 11
SECTION 3. TERM LOAN I 12
3.1 Loan Commitment 12
3.2 Use of Proceeds 12
3.3 Term Note I 12
3.4 Term Loan I Interest Rates 12
3.5 Repayment 13
SECTION 4. TERM LOAN II 13
4.1 Loan Commitment 13
4.2 Use of Proceeds 13
4.3 Term Note II 14
4.4 Term Loan II Interest Rates 14
4.5 Repayment 14
SECTION 5. TERM LOAN III 14
5.1 Loan Commitment 14
5.2 Use of Proceeds 14
5.3 Term Note III 14
5.4 Term Loan III Interest Rates 15
5.5 Repayment 15
SECTION 6. GENERAL PROVISIONS APPLICABLE TO THE LOANS 15
6.1 Manner of Payment 15
6.2 Statements 15
6.3 Book Entry Loan Account 16
6.4 Bank Control Account 16
6.5 Computations of Interest 16
6.6 Default Interest 16
6.7 Maximum Interest Rate 16
6.8 Late Charge 17
6.9 Prepayments 17
6.10 Fundings 17
6.13 Extensions, Renewals, and Modifications 18
6.14 Renewal of Existing Notes 18
6.15 Collateral 18
SECTION 7. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS 18
7.1 Conditions Precedent for Initial Funding 18
7.2 Conditions Precedent to Each Subsequent Funding 20
SECTION 8. AFFIRMATIVE COVENANTS 21
8.1 Financial Data 21
8.2 Licenses and Permits 22
8.3 Maintenance of Properties 22
8.4 Payment of Charges 22
8.5 Insurance 23
8.6 Maintenance of Records 24
8.7 Inspection 24
8.8 Hazardous Substances 24
8.9 Corporate Existence 25
8.10 Notice of Disputes and Other Matters 25
8.11 Exchange of Note 26
8.12 Maintenance of Liens 26
8.13 Other Agreements 26
8.14 After-Acquired Collateral 26
8.15 Further Assurances 27
8.16 Maintenance of Bank Accounts 27
SECTION 9. NEGATIVE COVENANTS 27
9.1 Dividends and Distributions 27
9.2 Transactions With Affiliates 27
9.3 Other Indebtedness 27
9.4 Leases and Leasebacks 28
9.5 Liens 28
9.6 Advances and Loans 29
9.7 Investments 29
9.8 Acquisitions 29
9.9 Consolidation, Merger, and Sale of Assets 30
9.10 Type of Business 30
9.11 Change of Chief Executive Office or Name 30
9.12 Change in Documents 30
9.13 Control 30
9.14 Pension Plan 31
9.15 Working Capital 31
9.16 Debt Service Coverage Ratio 31
9.17 Capital Expenditures 32
9.18 Sungold Enterprises, Ltd. Payments 32
SECTION 10. REPRESENTATIONS AND WARRANTIES 32
10.1 Corporate Status 32
10.2 Power and Authority 33
10.3 No Violation of Agreements 33
10.4 Recording and Enforceability 33
10.5 Litigation 34
10.6 Good Title to Properties 34
10.7 Licenses and Permits 34
10.8 No Burdensome Agreements 34
10.9 Properties in Good Condition 35
10.10 Financial Statements 35
10.11 Outstanding Indebtedness 35
10.12 Taxes 35
10.13 License Fees 36
10.14 Trademarks, Patents, Etc. 36
10.15 Governmental Approvals 36
10.16 Disclosure 36
10.17 Regulations U and X 36
10.18 Names 37
10.19 Condition of Property 37
10.20 Pension Plans 37
10.21 Year 2000 37
SECTION 11. EVENTS OF DEFAULT; REMEDIES 38
11.1 Events of Default 38
11.2 Acceleration; Remedies 40
SECTION 12. MISCELLANEOUS 40
12.1 Notices 40
12.2 Payment of Expenses 41
12.3 Setoff 42
12.4 Waiver of Setoff 42
12.5 Fees and Commissions 42
12.6 No Waiver 42
12.7 Entire Agreement and Amendments 43
12.8 Benefit of Agreement 43
12.9 Release of Claims 43
12.10 Severability 44
12.11 Descriptive Headings 44
12.12 Governing Law 44
12.13 Consent to Jurisdiction, Service, and Venue 44
12.14 Arbitration 44
12.15 Counterparts 45
12.16 Statutory Notice 45
EXHIBITS
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Exhibit A Revolving Note, Section 2.3
Exhibit B Term Note I, Section 3.3
Exhibit C Term Note II, Section 4.3
Exhibit D Term Note III, Section 5.3
Exhibit E Opinion of Counsel 7.1(c)
Exhibit F (F-1 through F-3) Board Resolution and Incumbency Certificates,
Section 7.1(e)(iii)
Exhibit G Existing Liens, Section 9.5
Exhibit H Schedule of Trademarks, Trade Names, Service Marks, Patents and
Applications,Section 10.14
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT is made and entered into
as of the 28th day of May, 1999, by and between U. S. BANK NATIONAL
ASSOCIATION, a national banking association ("U. S. Bank"), and GARGOYLES,
INC., a Washington corporation ("Borrower"). Words and phrases with initial
capitalized letters have the meanings assigned in Section 1 of this Agreement.
RECITALS:
A. U. S. Bank is a national banking association doing business in
Seattle, Washington. Borrower is a corporation formed and existing under the
laws of the state of Washington and is engaged in the business of designing,
manufacturing, and marketing premium sunglasses and related products.
B. On April 7, 1997, U. S. Bank and Borrower entered into that certain
First Amended and Restated Credit Agreement (together with all amendments,
supplements, exhibits, and modifications thereto, the "Existing Credit
Agreement"), whereby U. S. Bank agreed to provide the credit facilities
described therein to Borrower.
C. Borrower has requested U. S. Bank to modify the credit facilities
provided for in the Existing Credit Agreement. U. S. Bank is ready, able, and
willing to grant Borrower's requests on the terms and conditions of this
Agreement.
D. In order to modify the credit facilities provided by U. S. Bank to
Borrower, the parties desire to amend and restate the Existing Credit Agreement
in its entirety.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth herein, the parties agree as follows:
SECTION 1. DEFINITIONS
1.1 Terms Defined
------------------
As used herein, the following terms have the meanings set forth below:
"Affiliate" means a Person that now or hereafter, directly or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with Borrower. A Person shall be deemed to control a
corporation or partnership if such Person possesses, directly or indirectly,
the power to direct or cause the direction of the management of such
corporation or partnership, whether through the ownership of voting securities,
by contract, or otherwise.
"Agreement" means this Second Amended and Restated Credit Agreement and
includes all modifications of this Agreement.
"Applicable Law" means all applicable provisions and requirements of all
(a) constitutions, statutes, ordinances, rules, regulations, standards, orders,
and directives of any Governmental Bodies, (b) Governmental Approvals, and
(c) orders, decisions, decrees, judgments, injunctions, and writs of all courts
and arbitrators, whether such Applicable Laws presently exist, or are modified,
promulgated, or implemented after the date hereof.
"Borrower" means Gargoyles, Inc., a Washington corporation, and its
successors.
"Borrowing Base" has the meaning set forth in Section 2.7 hereof.
"Borrowing Notice" has the meaning set forth in Section 6.10(a) hereof.
"Business Day" means any day except a Saturday, Sunday, or other day on
which national banks in the state of Washington are authorized or required by
law to close.
"Capital Expenditures" means the aggregate amount of capital expenditures
of Borrower as determined in accordance with generally accepted accounting
principles, including leases that are or should be capitalized pursuant to
generally accepted accounting principles.
"Cash Flow" means Borrower's net income (after tax expense) for the
relevant period, subject to the following adjustments:
(a) There shall be added to net income: (i) charges against income
consisting of depreciation of real and personal property, amortization, write-
off of goodwill, and other intangibles, (ii) increases in deferred tax
accounts, (iii) charges against income for noncash stock compensation, and
(iv) interest expense;
(b) There shall be deducted from net income: (i) revenues derived
from sources other than continuing operations, such as net gains from sales of
capital assets, restoration to contingency reserves, collection of proceeds of
life insurance policies, write-up of assets, or gains from the sale,
acquisition, or retirement of securities, (ii) cash paid by Borrower during the
relevant period for Capital Expenditures, which cash does not constitute
proceeds of loans made to Borrower for the specific purpose of financing
Capital Expenditures, (iii) dividends and distributions paid to Borrower's
shareholders, and (iv) decreases in deferred tax accounts.
"Claims" has the meaning set forth in Section 12.14 hereof.
"Collateral" means all the property, real or personal, tangible or
intangible, now owned or hereafter acquired, in which U. S. Bank has been or is
to be granted a security interest by Borrower or any other Person, to secure
the Indebtedness of Borrower to U. S. Bank.
"Commitment Period" has the meaning set forth in Section 2.1 hereof.
"Debt Service" means, for the relevant period, the aggregate amount of
Borrower's interest expense and principal reduction payments required on all
Indebtedness of Borrower for borrowed money, including, without limitation,
payments required during the relevant period on leases that would be required
to be capitalized under generally accepted accounting principles.
"Debt Service Coverage Ratio" means the ratio of Cash Flow to Debt
Service.
"Default" means any condition or event that constitutes an Event of
Default or with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
"Eligible Accounts Receivable" means the accounts receivable of Borrower
and the Subsidiaries excluding the following: (a) accounts receivable that
have been outstanding in excess of 90 days from the date of invoice, (b) all
accounts receivable from any single customer of Borrower or any of the
Subsidiaries if 25 percent or more of such customer's accounts owed to Borrower
or any of the Subsidiaries are ineligible for any reason, (c) accounts
receivable due from officers, employees, or Affiliates of Borrower,
(d) accounts receivable that are partially or wholly subject to the right of
setoff, (e) accounts receivable resulting from COD sales, finance charges, and
consignments, (f) accounts receivable due from Persons not residents of the
United States, except as otherwise approved in writing by U. S. Bank,
(g) accounts receivable due from the federal government, (h) accounts
receivable that constitute any retainage, (i) accounts receivable that
constitute dated ▇▇▇▇▇▇▇▇ other than approved by U. S. Bank in writing,
(j) accounts receivable in which any Person other than U. S. Bank has a
security interest, (k) all accounts receivable from any single customer of
Borrower or any of the Subsidiaries in excess of 10 percent of the aggregate
amount of Eligible Accounts Receivable, except (i) as otherwise approved in
writing by U. S. Bank, and (ii) the limitation set forth in this clause (k)
does not apply to accounts receivable from Sunglass Hut International, and (l)
all accounts receivable from Sunglass Hut International in excess of the lesser
of (i) $3,500,000, or (ii) an amount equal to 35 percent of the aggregate
amount of Eligible Accounts Receivable; provided that such percentage may be
reduced to not less than 10 percent by U. S. Bank, upon not less than 60 days
prior written notice from U. S. Bank to Borrower. Notwithstanding the
foregoing, "Eligible Accounts Receivable" shall not include any accounts
receivable unless and until U. S. Bank holds a first, valid, binding, and
perfected security interest in any such accounts receivable.
"Eligible Foreign Accounts Receivable" means the accounts receivable of
Borrower and the Subsidiaries due from Persons not residents of the United
States, excluding the following: (a) accounts receivable that have been
outstanding in excess of 90 days from the date of invoice, (b) all accounts
receivable from any single customer of Borrower or any of the Subsidiaries if
10 percent or more of such customer's accounts owed to Borrower or any of the
Subsidiaries are ineligible for any reason, (c) accounts receivable due from
officers, employees, or Affiliates of Borrower, (d) accounts receivable that
are partially or wholly subject to the right of setoff, (e) accounts receivable
resulting from COD sales, finance charges, and consignments, (f) accounts
receivable that constitute any retainage, (g) accounts receivable that
constitute dated ▇▇▇▇▇▇▇▇ other than approved by U. S. Bank in writing,
(h) accounts receivable in which any Person other than U. S. Bank has a
security interest, and (i) all accounts receivable from any single customer of
Borrower or any of the Subsidiaries in excess of 10 percent of the aggregate
amount of Eligible Accounts Receivable. Notwithstanding the foregoing,
"Eligible Foreign Accounts Receivable" shall not include any accounts
receivable unless and until U. S. Bank holds a first, valid, binding, and
perfected security interest in any such accounts receivable. There shall be no
duplication between Eligible Foreign Accounts Receivable and Eligible Accounts
Receivable.
"Eligible Inventory" means inventory of Borrower and the Subsidiaries,
including raw materials and finished goods, valued at the lower of cost or
market. "Eligible Inventory" shall exclude inventory that is obsolete,
consigned inventory, inventory that is not in salable condition, work in
process, and inventory in which any Person other than U. S. Bank has a security
interest. Notwithstanding the foregoing, "Eligible Inventory" shall not
include any inventory unless and until U. S. Bank holds a first, valid,
binding, and perfected security interest in that inventory.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Equity Documents" means the Stock Purchase Agreement and Registration
Rights Agreement of even date herewith entered into between Borrower and
U. S. Bank, as well as the Certificate of Designation of Rights and Preferences
of Series A Preferred Stock of Borrower of even date herewith and issued to
U. S. Bank.
"Event of Default" has the meaning set forth Section 11.1 hereof.
"Excess Cash Flow" means Borrower's net income (before tax expense) for
the relevant period, subject to the following adjustments:
(a) There shall be added to net income charges against income
consisting of depreciation of real and personal property, amortization, write-
off of goodwill, and other intangibles;
(b) There shall be deducted from net income: (i) to the extent
included in determining net income, all noncash revenue and income items under
generally accepted accounting principles, (ii) cash paid by Borrower for
Capital Expenditures, which cash does not constitute proceeds of loans made to
Borrower for the specific purpose of financing Capital Expenditures,
(iii) without duplication of other charges against income, cash paid by
Borrower to Sungold Enterprises, Ltd. as permitted by this Agreement, (iv) cash
principal reduction payments made by Borrower on Term Loan I and Excess Cash
Flow payments made on Term Loan II during the relevant period pursuant to
Section 4.5(b), (v) cash dividends and distributions paid to Borrower's
shareholders, and (vi) cash paid by Borrower during the relevant period for
income taxes.
"Existing Credit Agreement" has the meaning set forth in Recital B hereof.
"Funding" means any disbursement of the proceeds of the Revolving Loan,
the Term Loans, or the issuance or renewal of any Letter of Credit.
"Governmental Approval" means any authorization, consent, approval,
certificate of compliance, license, permit, or exemption from, contract with,
registration or filing with, or report or notice to, any Governmental Body
required or permitted by Applicable Law.
"Governmental Body" means the government of the United States, any state
or any foreign country, or any governmental or regulatory official, body,
department, bureau, subdivision, agency, commission, court, arbitrator, or
authority, or any instrumentality thereof, whether federal, state, or local.
"Guarantor" means H.S.C., Inc., a Washington corporation, Sungold Eyewear,
Inc., a Washington corporation, and Private Eyes Sunglass Corporation, together
with any Subsidiary that executes a guaranty of the Loans after the date of
this Agreement.
"Guaranties" means the guaranties executed by Guarantors in connection
with the Existing Credit Agreement, together with all amendments thereto.
"Hazardous Materials" means oil or petrochemical products, PCBs, asbestos,
urea formaldehyde, flammable explosives, radioactive materials, hazardous
wastes, toxic substances, or related materials, including, but not limited to,
substances defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," or "toxic substances" under any
Hazardous Materials Laws.
"Hazardous Materials Claims" means (a) enforcement, cleanup, removal, or
other regulatory actions instituted, completed, or threatened by any
Governmental Body pursuant to any applicable Hazardous Materials Laws and
(b) claims made or threatened by any third party against Borrower or any
Guarantor or its property relating to damage, contribution, cost recovery,
compensation, loss, or injury resulting from Hazardous Materials.
"Hazardous Materials Laws" means all Applicable Laws pertaining to
Hazardous Materials.
"Indebtedness" means all items that in accordance with generally accepted
accounting principles would be included in determining total liabilities as
shown on the liabilities side of the balance sheet as of the date that
"Indebtedness" is to be determined, and in any event, includes liabilities
secured by any mortgage, deed of trust, pledge, lien, or security interest on
property owned or acquired, whether or not such a liability has been assumed,
and the guaranties, endorsements (other than for collection in the ordinary
course of business), and other contingent obligations with regard to the
obligations of other Persons.
"Letters of Credit" has the meaning set forth in Section 2.8 hereof and
includes all renewals, replacements, and amendments to the Letters of Credit.
"Loan Documents" means this Agreement, the Notes, the Security Agreements, the
Pledge Agreement, and the Guaranties, together with all other agreements,
instruments, and documents arising out of or relating to this Agreement or the
Loans, and includes all renewals, replacements, and amendments thereof.
"Loans" means the Revolving Loan and the Term Loans, as well as all
renewals, replacements, and amendments thereof.
"Notes" means the Revolving Note and Term Note I, Term Note II, and Term
Note III, as well as all renewals, replacements, and amendments thereof.
"Participant" means any financial institution to which U. S. Bank sells a
participation in any of the Loans.
"Permitted Liens" has the meaning set forth in Section 9.5 hereof.
"Person" means any individual, partnership, joint venture, firm,
corporation, association, limited liability company, limited liability
partnership, trust, or other enterprise or any Governmental Body.
"Plan" means an employee pension benefit plan that is covered by ERISA or
subject to the minimum funding standards under Section 412 of the Internal
Revenue Code of 1986, as amended, and is either (a) maintained by Borrower or
any Affiliate for employees of Borrower or any Affiliate or (b) maintained
pursuant to a collective bargaining agreement or any other arrangement under
which more than one employer makes contributions and to which Borrower or any
Affiliate is then making or accruing an obligation to make contributions or has
within the preceding five plan years made contributions.
"Pledge Agreement" means the Pledge Agreement executed by Borrower in
connection with the Existing Credit Agreement, together with all amendments to
the foregoing.
"Reference Rate" means that rate of interest announced by U. S. Bank from
time to time as its reference rate. The Reference Rate is not the lowest rate
of interest charged by U. S. Bank to any classification of U. S. Bank
customers. For purposes of this Agreement, each time the Reference Rate
changes, a contemporaneous change shall occur in the interest rate charged to
Borrower on any Loans then bearing interest at a rate indexed to the Reference
Rate, effective upon the announcement or publication of any such change in
rate. U. S. Bank shall not be obligated to notify Borrower of any change in
the Reference Rate; however, the Reference Rate is available upon inquiry of
U. S. Bank.
"Revolving Loan" has the meaning set forth in Section 2.1 hereof and
includes all renewals, replacements, and amendments of the Revolving Loan.
"Revolving Note" has the meaning set forth in Section 2.3 hereof and
includes all renewals, replacements, and amendments of the Revolving Note.
"Security Agreements" means all security agreements executed by Borrower and
Guarantors in connection with the Existing Credit Agreement, together with all
amendments to any of the foregoing.
"Subsidiaries" means the Persons 100 percent of the equity interest of
which is owned by Borrower.
"Term Loan I" has the meaning set forth in Section 3.1 hereof and includes
all renewals, replacements, and amendments of Term Loan I.
"Term Loan II" has the meaning set forth in Section 4.1 hereof and
includes all renewals, replacements, and amendments of Term Loan II.
"Term Loan III" has the meaning set forth in Section 5.1 hereof and
includes all renewals, replacements, and amendments of Term Loan III.
"Term Loans" means Term Loan I, and Term Loan II, and Term Loan III.
"Term Note I" has the meaning set forth in Section 3.3 hereof and includes
all renewals, replacements, and amendments of Term Note I.
"Term Note II" has the meaning set forth in Section 4.3 hereof and
includes all renewals, replacements, and amendments of Term Note II.
"Term Note III" has the meaning set forth in Section 5.3 hereof and
includes all renewals, replacements, and amendments of Term Note III.
"U. S. Bank" means U. S. Bank National Association, a national banking
association, and its successors and assigns.
"Working Capital" means Borrower's (a) current assets, less (b) Borrower's
current liabilities, including all amounts outstanding under the Revolving
Loan, but excluding all amounts outstanding under the Term Loans.
1.2 Accounting Terms
---------------------
(a) Unless otherwise specified herein, all accounting terms used
herein shall be interpreted, all accounting determinations hereunder shall be
made, and all financial statements required to be delivered hereunder shall be
prepared in accordance with generally accepted accounting principles
consistently applied.
(b) All financial reporting required by this Agreement, and all
financial covenants set forth in this Agreement shall be measured, on a
consolidated basis in order to include the assets, liabilities, and results of
operations of the Subsidiaries.
1.3 Rules of Construction
--------------------------
Unless the context otherwise requires, the following rules of construction
apply to the Loan Documents:
(a) Words in the singular include the plural and in the plural
include the singular.
(b) Provisions of the Loan Documents apply to successive events and
transactions.
(c) In the event of any inconsistency between the provisions of this
Agreement and the provisions of any of the other Loan Documents, the provisions
of this Agreement govern.
1.4 Incorporation of Recitals and Exhibits
-------------------------------------------
The foregoing recitals are incorporated into this Agreement by reference.
All references to "Exhibits" contained herein are references to exhibits
attached hereto, the terms and conditions of which are made a part hereof for
all purposes.
SECTION 2. REVOLVING LOAN
2.1 Loan Commitment
--------------------
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will make Fundings to
Borrower from time to time during the period ending January 31, 2000
("Commitment Period"), but such Fundings (together with any outstanding Letters
of Credit) shall not exceed, in the aggregate principal amount at any one time
outstanding, $9,000,000 (the "Revolving Loan"). Borrower may borrow, repay,
and reborrow hereunder either the full amount of the Revolving Loan or any
lesser sum. The Commitment Period shall be extended for two 1-year periods,
provided that (a) there exist no Events of Default as of the date of any
extension, (b) U. S. Bank and Lender agree on financial covenants for each
extension period at least 30 days prior to the expiration of the Commitment
Period or the extended Commitment Period (as the case may be), and (c) the
terms of such an extension are confirmed by an amendment to this Agreement in a
form acceptable to U. S. Bank and Borrower.
2.2 Use of Proceeds
--------------------
The initial Funding under the Revolving Loan shall be used to renew and
refinance the "Revolving Loan" under the Existing Credit Agreement.
Thereafter, the proceeds of the Revolving Loan shall be used by Borrower for
operating cash for Borrower and the Subsidiaries.
2.3 Revolving Note
-------------------
The Revolving Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit A (the "Revolving Note").
2.4 Revolving Loan Interest Rates
----------------------------------
The Revolving Loan shall bear interest at the Reference Rate plus .75
percent per annum.
2.5 Repayment
--------------
(a) Commencing on the first day of the first month following the
initial Funding under the Revolving Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on the Revolving Loan.
(b) Borrower shall pay U. S. Bank all outstanding principal, accrued
interest, and other charges with respect to the Revolving Loan on the last day
of the Commitment Period.
2.6 Revolving Loan Unused Portion Fee
--------------------------------------
Borrower agrees to pay U. S. Bank a fee for the Revolving Loan in an
amount equal to .25 percent per annum of the average unused portion of the
Revolving Loan. Such fee shall accrue from and include the date of this
Agreement throughout the term of the Revolving Loan and shall be payable
quarterly in arrears on the last day of March, June, September, and December,
and on any day that the Revolving Loan is paid in full and U. S. Bank's
commitment to make further Fundings under the Revolving Loan has expired or
terminated. Computations of such fee shall be based on a 360-day year for the
actual number of days elapsed.
2.7 Borrowing Base
-------------------
(a) The outstanding balance of principal and interest on the
Revolving Loan (including outstanding Letters of Credit) shall at no time
exceed an amount equal to:
(i) 80 percent of Eligible Accounts Receivable, plus
(ii) 65 percent of Eligible Foreign Accounts Receivable;
provided that the maximum advance based upon Eligible Foreign Accounts
Receivable is limited to $500,000, plus
(iii) 65 percent of Eligible Inventory; provided that the
maximum advance based upon Eligible Inventory is limited to
$8,000,000,("Borrowing Base").
(b) Borrower shall execute and submit to U. S. Bank a Borrowing Base
report in a form acceptable to U. S. Bank calculating the Borrowing Base (i) on
Tuesday of each week, dated as of Friday of the previous week, (ii) concur-
rently with each request for a Funding under the Revolving Loan or request for
the issuance of a Letter of Credit, and (iii) promptly upon U. S. Bank's
request.
(c) If at any time the aggregate principal amount of the Revolving
Loan (including outstanding Letters of Credit) exceeds the Borrowing Base,
Borrower shall repay such outstanding portion of the Revolving Loan in an
amount equal to such excess within one Business Day. Borrower's failure to do
so shall constitute an Event of Default.
2.8 Letters of Credit
----------------------
(a) Subject to and upon the terms and conditions set forth herein
and in reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") for the benefit of
Borrower in forms acceptable to U. S. Bank from time to time during the
Commitment Period. The expiration date of any Letter of Credit shall not
extend beyond the Commitment Period. The maximum aggregate amount of
outstanding Letters of Credit shall not exceed, at any one time, $750,000. The
maximum aggregate amount of outstanding Letters of Credit plus the aggregate
outstanding amount of principal and interest on the Revolving Loan shall not
exceed, at any one time, $9,000,000.
(b) Prior to issuing any Letter of Credit, Borrower shall execute
and deliver to U. S. Bank a letter of credit application in U. S. Bank's then
customary form, and such other documents as U. S. Bank customarily requests in
connection with the issuance of letters of credit at that time.
(c) Borrower shall pay to U. S. Bank a fee for the issuance of each
Letter of Credit in an amount equal to U. S. Bank's standard fee at the time of
issuance, plus U. S. Bank's customary fees and handling charges. Such fees may
be paid to U. S. Bank by U. S. Bank's making a Funding under the Revolving
Loan.
(d) Any draws on Letters of Credit issued by U. S. Bank pursuant to
the terms of this Agreement shall be paid by Borrower immediately upon receipt
of notice from U. S. Bank of such draw. So long as Borrower meets the
conditions to Fundings under the Loans, draws on Letters of Credit may be paid
from Fundings under the Revolving Loan. In the event Borrower fails to make
such immediate repayment, U. S. Bank shall be authorized to consider any such
draws as Fundings under the Revolving Loan. In the event Borrower is in
Default under the terms of this Agreement on the date of any such draw, such
draw will nevertheless constitute a Funding on the Revolving Loan and shall not
constitute a waiver of any of U. S. Bank's rights hereunder or under any of the
other Loan Documents. In the event that any Letters of Credit are outstanding
upon the expiration of the Commitment Period for the Revolving Loan, Borrower
shall, upon U. S. Bank's request, deposit with U. S. Bank in a special demand
deposit account set up by Borrower, an amount of cash necessary to cover all
outstanding Letters of Credit. Borrower hereby grants U. S. Bank a security
interest in any such demand deposit account and gives U. S. Bank the authority
to debit such account upon a draw on outstanding Letters of Credit in an amount
equal to the amount paid by U. S. Bank to the beneficiaries of such Letters of
Credit. In the event Borrower does not establish such an account, or in the
event the amount of funds in such account are insufficient to satisfy the
obligations of U. S. Bank under all outstanding Letters of Credit, then all
payments made by U. S. Bank under such Letters of Credit shall automatically
constitute Fundings under the Revolving Loan, notwithstanding the fact that the
Commitment Period for the Revolving Loan has expired. U. S. Bank shall
maintain possession of the Revolving Note until all Letters of Credit have
either expired, been canceled, or been paid by U. S. Bank and U. S. Bank has
been reimbursed in full.
SECTION 3. TERM LOAN I
3.1 Loan Commitment
--------------------
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will lend to Borrower
$9,500,000 on a term loan basis ("Term Loan I").
3.2 Use of Proceeds
--------------------
The proceeds of Term Loan I, together with the proceeds of the other Term
Loans shall be used to renew and refinance "Term Loan I," "Term Loan II," and
the "Equipment Loans" that are outstanding under the Existing Credit Agreement
as of the date of this Agreement.
3.3 Term Note I
----------------
Term Loan I shall be evidenced by a promissory note in the form attached
hereto as Exhibit B ("Term Note I").
3.4 Term Loan I Interest Rates
-------------------------------
Term Loan I shall bear interest at the Reference Rate plus .75 percent per
annum.
3.5 Repayment
--------------
(a) Commencing on the first day of the first month following the initial
Funding under Term Loan I and on the first day of each month thereafter,
Borrower shall pay U. S. Bank an amount equal to all accrued interest on the
Term Loan.
(b) Commencing on July 1, 1999, and continuing on the first day of each
month thereafter, Borrower shall make principal reduction payments to
U. S. Bank to apply against Term Loan I in the following amounts:
Year of Payment Amount of Monthly Payment
--------------- -------------------------
1999 (commencing 7/1/99) $16,666.67
2000 $75,000.00
2001 $125,000.00
2002 $166,666.67
2003 $166,666.67
2004 $166,666.67
2005 (until maturity date) $166,666.67
(c) On June 1, 2005, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan I.
SECTION 4. TERM LOAN II
4.1 Loan Commitment
--------------------
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will lend to Borrower
$7,000,000 on a term loan basis ("Term Loan II").
4.2 Use of Proceeds
--------------------
The proceeds of Term Loan II, together with the proceeds of the other Term
Loans shall be used to renew and refinance "Term Loan I," "Term Loan II," and
the "Equipment Loans" that are outstanding under the Existing Credit Agreement
as of the date of this Agreement.
4.3 Term Note II
-----------------
Term Loan II shall be evidenced by a promissory note in the form attached
hereto as Exhibit C ("Term Note II").
4.4 Term Loan II Interest Rates
--------------------------------
Term Loan II shall bear interest at the Reference Rate plus .75 percent
per annum.
4.5 Repayment
--------------
(a) Commencing on the first day of the first month following the
initial Funding under the Term Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on the Term Loan.
(b) On or before March 31 of each year, commencing March 31, 2000,
and continuing until Term Loan II is paid in full, Borrower shall make
principal reduction payments to U. S. Bank to apply against Term Loan II in an
amount equal to 50 percent of Excess Cash Flow of for the previous fiscal year
of Borrower.
(c) On June 1, 2005, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan II.
SECTION 5. TERM LOAN III
5.1 Loan Commitment
--------------------
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will lend to Borrower
$3,000,000 on a term loan basis ("Term Loan III").
5.2 Use of Proceeds
--------------------
The proceeds of Term Loan III, together with the proceeds of the other
Term Loans shall be used to renew and refinance "Term Loan I," "Term Loan II,"
and the "Equipment Loans" that are outstanding under the Existing Credit
Agreement as of the date of this Agreement.
5.3 Term Note III
------------------
Term Loan III shall be evidenced by a promissory note in the form attached
hereto as Exhibit D ("Term Note III").
5.4 Term Loan III Interest Rates
---------------------------------
Term Loan III shall bear interest at the Reference Rate plus .75 percent
per annum.
5.5 Repayment
--------------
(a) Commencing on the first day of the first month following the
initial Funding under the Term Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on the Term Loan.
(b) On June 1, 2005, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan III.
SECTION 6. GENERAL PROVISIONS APPLICABLE TO THE LOANS
6.1 Manner of Payment
----------------------
All sums payable to U. S. Bank pursuant to this Agreement shall be paid
directly to U. S. Bank in immediately available United States funds. Whenever
any payment to be made hereunder or on any of the Notes becomes due and payable
on a day that is not a Business Day, such payment may be made on the next
succeeding Business Day and such extension of time shall in such case be
included in computing interest on such payment.
6.2 Statements
---------------
U. S. Bank shall send Borrower statements of all amounts due hereunder.
The statements shall be considered correct and conclusively binding, absent
manifest error, on Borrower unless Borrower notifies U. S. Bank to the contrary
within 30 days of receipt of any statement that Borrower claims to be
incorrect. Borrower agrees that accounting entries made by U. S. Bank with
respect to Borrower's loan accounts shall constitute evidence of all Fundings
made under and payments made on any of the Loans. Without limiting the methods
by which U. S. Bank may otherwise be entitled by Applicable Law to make demand
for payment of the Loans upon Borrower, Borrower agrees that any statement,
invoice, or payment notice from U. S. Bank to Borrower with respect to any
principal or interest obligation of Borrower to U. S. Bank shall be deemed to
be a demand for payment in accordance with the terms of such statement,
invoice, or payment notice. Under no circumstances shall a demand by
U. S. Bank for partial payment of principal or interest or both be construed as
a waiver by U. S. Bank of its right thereafter to demand and receive payment
(in part or in full) of any remaining principal or interest obligation.
6.3 Book Entry Loan Account
----------------------------
U. S. Bank shall establish a book entry loan account for each of the Loans
in which U. S. Bank will make debit entries of all Fundings pursuant to the
terms of this Agreement. U. S. Bank will also record in the applicable loan
account, in accordance with customary banking practices, all interest and other
charges, expenses, and other items properly chargeable to Borrower, if any,
together with all payments made by Borrower on account of the Indebtedness
evidenced by Borrower's respective loan accounts and all other sums credited to
the respective loan accounts. The debit balance of Borrower's respective loan
accounts shall reflect the amount of Borrower's Indebtedness to U. S. Bank from
time to time by reason of advances, charges, payments, or credits.
6.4 Bank Control Account
-------------------------
So long as any amounts remain outstanding under any of the Loans, there
shall be established for Borrower and the Subsidiaries one or more bank control
accounts at U. S. Bank into which all funds obtained by Borrower and the
Subsidiaries from the collection of accounts receivable, from the sale of
inventory or services, or otherwise during the terms of the Loans shall be
deposited. U. S. Bank and Borrower hereby agree that U. S. Bank may charge the
bank control accounts in order to make any payments under the Loans that
Borrower is required to make pursuant to the terms of this Agreement.
6.5 Computations of Interest
-----------------------------
All computations of interest shall be based on a 360-day year for the
actual number of days elapsed.
6.6 Default Interest
---------------------
Upon the occurrence and during the continuance of any Event of Default,
U. S. Bank may, at its option, raise the interest rate charged on the Loans to
a rate of up to the Reference Rate applicable to each Loan plus 4 percent per
annum from the date of the occurrence of the Event of Default until the Event
of Default is cured or waived by U. S. Bank or, absent cure or waiver, until
the Loans are repaid in full.
6.7 Maximum Interest Rate
--------------------------
Notwithstanding any provision contained herein or in the Notes, the total
liability of Borrower for payment of interest pursuant hereto, including late
charges, shall not exceed the maximum amount of interest permitted by
Applicable Law to be charged, collected, or received from Borrower; and if any
payments by Borrower include interest in excess of that maximum amount,
U. S. Bank shall apply the excess first to reduce the unpaid balance of the
Loans, then to reduce the balance of any other Indebtedness of Borrower to
U. S. Bank. If there is no such Indebtedness, the excess shall be returned to
Borrower.
6.8 Late Charge
----------------
If any payment of principal or interest required under any of the Loans is
15 days or more past due, Borrower will be charged a late charge of 5 percent
of the delinquent payment or $5, whichever is greater, for each such late
payment. The 15-day period provided for herein shall not be construed as a
waiver of any Default or Event of Default resulting from any late payment under
any of the Loans.
6.9 Prepayments
----------------
Borrower may make prepayments of all or any portion of the Loans at any
time without premium or penalty. All prepayments shall be applied to the Loans
being prepaid in the inverse order of maturity.
6.10 Fundings
-------------
(a) Borrower shall give U. S. Bank notice (either in writing or
orally) for each Funding under the Revolving Loan between 8 a.m. and noon,
Seattle time on or before the day of the requested Funding. Each such notice
("Borrowing Notice") shall be given by the CEO, CFO or controller of Borrower,
each of whom is authorized to request Fundings and direct disposition of any
such Fundings until written notice by Borrower of the revocation of such
authority is received by U. S. Bank. Each Borrowing Notice shall be effective
upon receipt, except that notices received by U. S. Bank after noon, Seattle
time, on a Business Day shall be deemed to be received on the immediately
succeeding Business Day.
(b) Borrower acknowledges that U. S. Bank cannot effectively
determine whether a particular request for a Funding is valid, authorized, or
authentic. It is nevertheless important to Borrower that it has the privilege
of making requests for Fundings in accordance with Section 6.10(a) hereof.
Therefore, to induce U. S. Bank to lend funds in response to such requests and
in consideration for U. S. Bank's agreement to receive and consider such
requests, Borrower assumes all risk of the validity, authenticity, and
authorization of such requests, whether or not the individual making such
requests has authority to request Fundings and whether or not the aggregate sum
owing exceeds the maximum principal amount referred to above. U. S. Bank shall
not be responsible under principles of contracts, tort, or otherwise for the
amount of an unauthorized or invalid Funding; rather, Borrower agrees to repay
any sums with interest as provided herein.
6.13 Extensions, Renewals, and Modifications
--------------------------------------------
Any extensions, renewals, and modifications of the Loans shall be governed
by the terms and conditions of this Agreement and the other Loan Documents
unless otherwise agreed to in writing by U. S. Bank and Borrower.
6.14 Renewal of Existing Notes
------------------------------
The "Revolving Note," "Term Note I," Term Note II," and the "Equipment
Note," under the Existing Credit Agreement and all previous renewals thereof
shall be marked "Renewed" and retained by U. S. Bank until all Loans hereunder
are repaid in full.
Collateral
----------
All Security Agreements, the Pledge Agreement, financing statements,
filings with the United States Patent and Trademark Office, and other
instruments, documents, and agreements whereby Borrower or any Guarantor has
granted U. S. Bank a security interest in connection with the Existing Credit
Agreement shall remain in full force and effect and shall secure repayment of
the Loans and all obligations of Borrower and Guarantors under this Agreement,
the Notes, the Guaranties and all other Loan Documents.
SECTION 7. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS
7.1 Conditions Precedent for Initial Funding
---------------------------------------------
U. S. Bank shall not be required to make the any Funding under any of the
Loans unless or until the following conditions have been fulfilled to the
satisfaction of U. S. Bank:
(a) U. S. Bank shall have received this Agreement and the Notes,
duly executed and delivered by Borrower.
(b) U. S. Bank shall have received, duly executed and delivered by
Borrower and Guarantors, such financing statements and other documents deemed
necessary by U. S. Bank to perfect the security interests granted to U. S. Bank
by Borrower or Guarantors.
(c) U. S. Bank shall have received updated schedules of
registrations of and applications for patents, trademarks and other
intellectual property to the Security Agreements previously executed by
Borrower and Guarantors, together with such other agreements, instruments and
documents as U. S. Bank deems necessary to perfect its interest in the assets
described in such schedules.
(d) U. S. Bank shall have received such evidence deemed necessary by
U. S. Bank that U. S. Bank's security interests in the Collateral constitute
first priority and exclusive security interests, except as otherwise provided
herein.
(e) U. S. Bank shall have received from counsel for Borrower
acceptable to U. S. Bank, an opinion addressed to U. S. Bank and dated as of
the date of this Agreement, in the form attached hereto as Exhibit E.
(f) Each of Guarantors shall have executed the reaffirmation of
their respective Guaranties and Security Agreements attached to this Agreement.
(g) The transactions contemplated by the Equity Documents shall have
been consummated in accordance with the terms and conditions thereof.
(h) No Default or Event of Default hereunder shall exist, and after
having given effect to the requested Funding, no Default or Event of Default
shall exist.
(i) All representations and warranties of Borrower contained herein
or otherwise made in writing in connection herewith shall be true and correct
in all material respects with the same effect as though such representations
and warranties had been made on and as of the date of the initial Funding.
(j) All corporate proceedings of Borrower and each Guarantor shall
be satisfactory in form and substance to U. S. Bank, and U. S. Bank shall have
received all information and copies of all documents, including records of all
corporate proceedings, that U. S. Bank has requested in connection therewith,
such documents where appropriate to be certified by proper corporate
authorities or Governmental Bodies. Borrower shall provide U. S. Bank with the
following documents prior to or upon the execution of this Agreement:
(i) Copies of the articles or certificates of incorporation
(as the case may be) of Borrower and each Guarantor, together with all
amendments thereto, certified by Borrower to be true and complete;
(ii) A certificate of authority or good standing (as the case
may be) for Borrower and each Guarantor in its respective state of
incorporation and in the state of its respective principal place of business,
dated within 30 days of the date of the execution of this Agreement; and
(iii) A certified resolution of the directors and incumbency
certificate of Borrower and each Guarantor in the form attached hereto as
Exhibit F-1, F-2, and F-3.
(k) Borrower shall have paid U. S. Bank all accrued interest on all
outstanding credit facilities under the Existing Credit Agreement through the
date of this Agreement.
7.2 Conditions Precedent to Each Subsequent Funding
----------------------------------------------------
The obligation of U. S. Bank to make any Funding subsequent to the initial
Funding hereunder is subject to the fulfillment, to the satisfaction of
U. S. Bank, of the following:
(a) The conditions set forth in Section 7.1 shall have been
previously satisfied, and U. S. Bank shall have received evidence satisfactory
to U. S. Bank of satisfaction thereof.
(b) U. S. Bank shall have received a Borrowing Notice for each
requested Funding.
(c) There shall have been executed and delivered to U. S. Bank such
further instruments, agreements, and documents as may be reasonably necessary
or proper in the opinion of U. S. Bank to confirm the obligations of Borrower
to U. S. Bank hereunder, the grant of security therefor, and the proper use of
the proceeds of all Fundings.
(d) The representations and warranties of Borrower in Section 10
hereof shall be true on the date of each Funding with the same force and effect
as if made on and as of that date.
(e) No Default or Event of Default shall exist, and, after having
given effect to the requested Funding, no Default or Event of Default would
exist.
(f) To the extent not previously delivered, all other documents,
agreements, and instruments from or with respect to Borrower or any other
Person that may be called for hereunder shall be duly executed and delivered to
U. S. Bank, including, but not limited to, all documents, agreements, and
instruments deemed necessary by U. S. Bank to perfect its security interest in
Collateral acquired after the date of this Agreement. For the purposes of this
Agreement, the waiver of delivery of any document, agreement, or instrument
from or with respect to Borrower or any other Person does not constitute a
continuing waiver with respect to the obligation to fulfill the conditions
precedent to each Funding hereunder.
SECTION 8. AFFIRMATIVE COVENANTS
Borrower hereby covenants and agrees that so long as this Agreement is in
effect, and until the Loans, together with interest thereon, and all other
obligations incurred hereunder are paid or satisfied in full, Borrower shall:
8.1 Financial Data
-------------------
Keep its books of account in accordance with generally accepted accounting
principles, consistently applied, and furnish to U. S. Bank:
(a) As soon as practicable and in any event within 25 days after the
close of each month, the following unaudited financial statements of Borrower
for each such month and on a year to date basis, all in reasonable detail, in
comparative form to historical and budgeted financial statements, and certified
by Borrower to be true and correct: balance sheet, statement of income, and
statement of cash flows. There shall be included in such financial statements
prepared as of the end of each month a calculation of the financial covenants
provided for in Section 9 hereof.
(b) As soon as practicable and in any event within 90 days after the
close of each fiscal year of Borrower, the following financial statements of
Borrower, setting forth the corresponding figures for the previous fiscal year
in comparative form where appropriate, all in reasonable detail and audited
(without any qualification or exception deemed material by U. S. Bank) by
Borrower's current independent certified public accountant or such other
independent certified public accountants selected by Borrower and satisfactory
to U. S. Bank: balance sheet, statement of income, and statement of cash
flows. Borrower shall provide U. S. Bank with a copy of its independent
certified public accountants' management letter or other similar report or
correspondence to Borrower.
(c) The financial statements of Guarantors as required by the
Guaranties.
(d) As soon as practicable and in any event within 45 days after the
close of each fiscal quarter of Borrower, certificates signed by Borrower,
stating that during such period no Default or Event of Default existed or, if
any such Default or Event of Default existed, specifying the nature thereof,
the period of existence thereof, and what action Borrower proposes to take or
has taken with respect thereto, and that during such period Borrower was in
compliance with all the financial covenants set forth in Section 9 hereof; and
promptly upon the occurrence of any Default or Event of Default, a certificate
signed by Borrower, specifying the nature thereof, the period of existence
thereof, and what action Borrower proposes to take or has taken with respect
thereto.
(e) As soon as practicable and in any event within 25 days after the
close of each month, accounts receivable and accounts payable agings, as well
as a report of inventory by type and location for each such month in forms and
in such detail as is acceptable to U. S. Bank.
(f) Copies of all reports relative to the operations of Borrower and
its Affiliates filed with any Governmental Body, including, without limitation,
copies of Borrower's 10Q and 10K reports filed with the United States
Securities and Exchange Commission.
(g) As soon as practicable and in any event within 30 days of the
end of each fiscal year, a statement projecting all Capital Expenditures to be
made or committed to during the following fiscal year of Borrower.
(h) As soon as practicable and in any event within 30 days of the
end of each fiscal year, a five-year projection of the financial operations of
Borrower in a form and in such detail as is acceptable to U. S. Bank.
(i) With reasonable promptness, such other information regarding the
business, operations, and financial condition of Borrower and Guarantors as
U. S. Bank may from time to time reasonably request.
8.2 Licenses and Permits
-------------------------
Maintain all Governmental Approvals and all related or other material
agreements necessary for Borrower and the Guarantors to operate their
businesses, as they now exists or as they may be modified or expanded.
Borrower and the Guarantors will at all times comply with all Applicable Laws
relating to the operations, facilities, or activities of Borrower and the
Guarantors.
8.3 Maintenance of Properties
------------------------------
Keep Borrower's and Guarantors' properties in good repair and in good
working order and condition, in a manner consistent with past practices and
comparable to industry standards; from time to time make all appropriate and
proper repairs, renewals, replacements, additions, and improvements thereto;
and keep all equipment that may now or in the future be subject to compliance
with any Applicable Laws in full compliance with such Applicable Laws.
8.4 Payment of Charges
-----------------------
Duly pay and discharge all material (a) taxes, assessments, levies, and
any other charges of Governmental Bodies imposed on or against Borrower,
Guarantors, or their property or assets, or upon any property leased by
Borrower or Guarantors, prior to the date on which penalties attached thereto,
unless and to the extent only that such taxes, assessments, levies, and any
other charges of Governmental Bodies, after written notice thereof having been
given to U. S. Bank, are being contested in good faith and by appropriate
proceedings, (b) claims allowed by Applicable Laws, whether for labor,
materials, rentals, or anything else, that could, if unpaid, become a lien or
charge upon Borrower's or Guarantors' property or assets or the outstanding
capital stock of Borrower or adversely affect the facilities or operations of
Borrower or Guarantors (unless and to the extent only that the validity thereof
is being contested in good faith and by appropriate proceedings after written
notice thereof has been given to U. S. Bank); (c) trade bills in accordance
with the terms thereof or generally prevailing industry standards; and
(d) other Indebtedness heretofore or hereafter incurred or assumed by Borrower
or Guarantors, unless such Indebtedness be renewed or extended. In the event
any charge is being contested by Borrower as allowed above, Borrower shall
establish adequate reserves against possible liability therefor.
8.5 Insurance
--------------
(a) Maintain insurance upon Borrower's and Guarantors' properties
and business insuring against such risks as U. S. Bank shall reasonably
determine from time to time. Borrower shall cause each insurance policy issued
in connection therewith to provide and shall cause the insurer issuing such
policy to certify to U. S. Bank that (i) if such insurance is proposed to be
canceled or materially changed for any reason whatsoever, such insurer will
promptly notify U. S. Bank, and such cancellation or change shall not be
effective as to U. S. Bank for 30 days after receipt by U. S. Bank of such
notice, unless the effect of the change is to extend or increase coverage under
the policy; (ii) U. S. Bank will have the right at its election to remedy any
default in the payment of premiums within 30 days of notice from the insurer of
the default; and (iii) loss payments from casualty/property loss insurance in
excess of $50,000 in each instance will be payable jointly to Borrower or
Guarantor (as the case may be) and U. S. Bank as secured party or otherwise as
its interest may appear.
(b) From time to time upon request by U. S. Bank, promptly furnish
or cause to be furnished to U. S. Bank evidence, in form and substance
satisfactory to U. S. Bank, of the maintenance of all insurance, indemnities,
or bonds required by this Section 8.5 or by any license, lease, or other
agreement to be maintained, including, but not limited to, such originals or
copies as U. S. Bank may request of policies, certificates of insurance,
riders, assignments, and endorsements relating to the insurance and proof of
premium payments.
8.6 Maintenance of Records
---------------------------
Keep at all times books of account and other records in which full, true,
and correct entries will be made of all dealings or transactions in relation to
the business and affairs of Borrower and Guarantors.
8.7 Inspection
---------------
Allow any representative of U. S. Bank to visit and inspect any of the
properties of Borrower and Guarantors, to examine the books of account and
other records and files of Borrower and Guarantors, to make copies thereof, and
to discuss the affairs, business, finances, and accounts of Borrower and
Guarantors with their officers, employees, and accountants, all at such
reasonable times and as often as U. S. Bank may desire. This right of
inspection shall specifically include U. S. Bank's collateral and financial
examinations.
8.8 Hazardous Substances
-------------------------
(a) Borrower hereby covenants and agrees that so long as any
Indebtedness of Borrower to U. S. Bank is outstanding:
(i) Neither Borrower nor Guarantors will permit its property
or any portion thereof to be a site for the storage, use, generation,
manufacture, disposal or transportation of Hazardous Materials in violation of
Hazardous Materials Laws;
(ii) Neither Borrower nor Guarantors will permit any Hazardous
Materials to be disposed of off its property other than in properly licensed
disposal sites;
(iii) Borrower and Guarantors, at their cost and expense, will
keep and maintain their property and each portion thereof in compliance with
and shall not cause or permit its property or any portion thereof to be in
violation of any Hazardous Materials Laws; and
(iv) Borrower will immediately advise U. S. Bank in writing of
any Hazardous Material Claim.
(b) Borrower agrees to indemnify U. S. Bank and hold U. S. Bank
harmless from and against any and all claims, demands, damages, losses, liens,
liabilities, penalties, fines, lawsuits, and other proceedings and costs and
expenses (including attorneys' fees), arising directly or indirectly from or
out of or in any way connected with (i) the accuracy of the representations
contained in Section 10.19 hereof; (ii) any activities on its property during
Borrower's or any Guarantor's ownership, possession, or control of its property
that directly or indirectly results in its property or any other property
becoming contaminated with Hazardous Materials; (iii) the discovery of
Hazardous Materials on its property; (iv) the cleanup of Hazardous Materials
from its property; and (v) the discovery of Hazardous Materials or the cleanup
of Hazardous Materials from adjacent or other property that has become
contaminated as a result of any activity on Borrower's property. As between
Borrower and U. S. Bank, Borrower acknowledges that it will be solely
responsible for all costs and expenses relating to the cleanup of Hazardous
Materials from its property or from any other properties that become
contaminated with Hazardous Materials as a result of activities on or the
contamination of its property.
(c) Borrower's obligations under this Section 8.8 are unconditional
and shall not be limited by any nonrecourse or other limitations of liability
provided for in the Loan Documents. The representations, warranties, and
covenants of Borrower set forth in this Section 8.8 and Section 10.19 hereof
(including, but not limited to, the indemnity provided for in Section 8.8(b)
hereof) shall survive the closing and repayment of the Loans to U. S. Bank;
and, to the extent permitted by Applicable Laws and Hazardous Materials Laws,
shall survive the transfer of its property by foreclosure proceedings (whether
judicial or nonjudicial), deed in lieu of foreclosure, or otherwise. Borrower
acknowledges and agrees that its covenants and obligations hereunder are
separate and distinct from its obligations under the Loans and the Loan
Documents.
8.9 Corporate Existence
------------------------
Maintain and preserve the corporate existence of Borrower and Guarantors.
8.10 Notice of Disputes and Other Matters
-----------------------------------------
Promptly give written notice to U. S. Bank of:
(a) Any citation, order to show cause, or other legal process or
order that could have a material adverse effect on Borrower or any Guarantor,
directing Borrower to become a party to or to appear at any proceeding or
hearing by or before any Governmental Body that has granted to Borrower or any
Guarantor any Governmental Approval, and include with such notice a copy of any
such citation, order to show cause, or other legal process or order;
(b) Any (i) refusal, denial, threatened denial, or failure by any
Governmental Body to grant, issue, renew, or extend any material Governmental
Approval; (ii) proposed or actual revocation, termination, or modification
(whether favorable or adverse) of any Governmental Approval by any Governmental
Body; (iii) dispute or other action with regard to any Governmental Approval by
any Governmental Body; (iv) notice from any Governmental Body of the imposition
of any material fines or penalties or forfeitures; or (v) threats or notice
with respect to any of the foregoing or with respect to any proceeding or
hearing that might result in any of the foregoing;
(c) Any dispute concerning or any threatened nonrenewal or
modification of any material lease for real or personal property to which
Borrower or any Guarantor is a party; or
(d) Any actions, proceedings, or claims of which Borrower may have
notice that may be commenced or asserted against Borrower or any Guarantor in
which the amount involved is $200,000 or more and is not fully covered by
insurance or which, if not solely a claim for monetary damages, could, if
adversely determined, have a material adverse effect on Borrower or any
Guarantor.
8.11 Exchange of Note
---------------------
Upon receipt of a written notice of loss, theft, destruction, or
mutilation of a Note, and upon surrendering such Note for cancellation if
mutilated, execute and deliver a new Note or a Note of like tenor in lieu of
such lost, stolen, destroyed, or mutilated Note. Any Note issued pursuant to
this Section 8.11 shall be dated so that neither gain nor loss of interest
shall result therefrom.
8.12 Maintenance of Liens
-------------------------
At all times maintain the liens and security interests provided under or
pursuant to this Agreement as valid and perfected first liens and security
interests on the property and assets intended to be covered thereby. Except as
contemplated under Section 9.5 hereof, Borrower shall take all action requested
by U. S. Bank necessary to assure that U. S. Bank has valid and exclusive liens
and security interests in all Collateral.
8.13 Other Agreements
---------------------
Comply with all covenants and agreements set forth in or required pursuant
to any of the other Loan Documents.
8.14 After-Acquired Collateral
------------------------------
Without the need for any request by U. S. Bank, execute and deliver to
U. S. Bank appropriate instruments in order to effectuate the proper granting
and perfection of a first-priority security interest in or assignment of all
property to U. S. Bank, whether personal, real, or mixed, hereafter acquired by
Borrower or any Guarantor, concurrently with the acquisition thereof.
8.15 Further Assurances
-----------------------
Within ten days of request by U. S. Bank, duly execute and deliver or
cause to be duly executed and delivered to U. S. Bank such further instruments,
agreements, and documents and do or cause to be done such further acts as may
be necessary or proper in the opinion of U. S. Bank to carry out more
effectively the provisions and purpose of this Agreement and the other Loan
Documents.
8.16 Maintenance of Bank Accounts
---------------------------------
As security for repayment of the Loans, maintain its principal depository
accounts with U. S. Bank and effectuate the transfer of such accounts within a
reasonable period of time after execution of this Agreement. Borrower hereby
grants to U. S. Bank a security interest in all such accounts in order to
secure the obligations of Borrower hereunder.
SECTION 9. NEGATIVE COVENANTS
Borrower covenants and agrees that until all the Loans, together with
interest thereon, and all other obligations incurred hereunder are paid or
satisfied in full, Borrower shall not and shall not permit any Guarantor,
without the prior written consent of U. S. Bank:
9.1 Dividends and Distributions
--------------------------------
Except as provided in the Equity Documents, declare or pay any cash
distributions or dividends or return any capital to any of Borrower's
shareholders; authorize or make any distribution, payment, or delivery of
property or cash to any of Borrower's shareholders; redeem, retire, purchase,
or otherwise acquire, directly or indirectly, for consideration, any shares or
other interests of Borrower now or hereafter outstanding; or set aside any
funds for any of the foregoing purposes.
9.2 Transactions With Affiliates
---------------------------------
Except as provided in Section 9.6 hereof, enter into any transaction,
other than an arm's-length transaction, in which an Affiliate of Borrower shall
have any interest; or make any payment or agree to make any payment to any such
Affiliate; or transfer or agree to transfer ownership or possession of any of
its business or assets, tangible or intangible, real, personal, or mixed, to
any Affiliate.
9.3 Other Indebtedness
-----------------------
Create, incur, assume, or suffer to exist, contingently or otherwise, any
Indebtedness except (a) Indebtedness represented by the Notes; (b) accounts and
other current payables arising from the ordinary course of business; and
(c) additional Indebtedness outstanding or committed to at any time (including,
but not limited to, indebtedness evidenced by notes, bonds, debentures, leases,
purchase agreements, and other contractual obligations) not in excess of an
aggregate amount at any one time outstanding of 250,000. Notwithstanding
clause (c) above, Borrower may not guarantee or become contingently liable for
the obligation of any Person other than Guarantors. In computing the
additional indebtedness permitted by clause (c) hereof, all capital lease
payments due from Borrower within 12 months shall be included if the amounts of
such rental payments are not otherwise included as Indebtedness in accordance
with generally accepted accounting principles. Except as set forth in
Section 9.5 hereof, none of the additional indebtedness permitted by this
Section 9.3 shall be secured by the Collateral.
9.4 Leases and Leasebacks
--------------------------
Except for arrangements entered into prior to the date hereof, enter into
any new agreement to rent or lease any material real or personal property or
enter into any arrangement with any bank, insurance company, or other lender or
investor providing for the leasing of any real or personal property or
equipment (a) that at the time has been or is sold or transferred by Borrower
to such lender or investor or (b) that has been or is being acquired from
another Person by such lender or investor or on which one or more buildings
have been or are to be constructed by such lender or investor, for the purpose
of leasing such property to Borrower. Borrower may, however, enter into such
leases in the ordinary course of business provided that there is compliance
with Section 9.3(c) hereof.
9.5 Liens
----------
Contract, create, incur, assume, or suffer to exist any mortgage, pledge,
lien, or other charge or encumbrance of any kind (including, but not limited
to, the charge upon property purchased under conditional sales or other title
retention agreements) upon or grant any interest in any of the property of
Borrower or any Guarantor or assets whether now owned or hereafter acquired,
except (a) liens granted pursuant to this Agreement; (b) liens in connection
with worker's compensation, unemployment insurance, or other social security
obligations; (c) good faith deposits in connection with bids, tenders,
contracts, or leases or deposits to secure public statutory obligations;
(d) mechanic's, carrier's, repairmen's, or other like liens in the ordinary
course of business with respect to obligations that are not overdue or that are
being contested in good faith and for which appropriate reserves have been
established or for which deposits to obtain the release of such liens have been
made; (e) liens for taxes, assessments, levies, or charges of Governmental
Bodies imposed upon Borrower, any Guarantor, or its property, operations,
income, products, or profits that are not at the time due or payable or for
which, if the validity thereof is being contested in good faith by legal or
administrative proceedings, appropriate reserves have been established;
(f) encumbrances consisting of zoning regulations, easements, rights-of-way,
survey exceptions, and other similar restrictions on the use of real property
or minor irregularities in title thereto that do not materially impair the use
of such property in the operation of the business of Borrower or any Guarantor;
(g) liens arising out of judgments or awards with regard to which Borrower or
any Guarantor shall be prosecuting an appeal in good faith and for which a stay
of execution has been issued and appropriate reserves established; and (h) the
currently existing liens listed on Exhibit G hereto. The liens described in
clauses (a) through (h) hereof are called the "Permitted Liens."
9.6 Advances and Loans
-----------------------
Subsequent to the date of this Agreement, lend money, make credit
available (other than in the ordinary course of business to customers), or lend
property or the use thereof to any Person; purchase or repurchase the stock or
Indebtedness or all or a substantial part of the assets or properties of any
Person; guarantee, assume, endorse, or otherwise become responsible for
(directly or indirectly or by any instrument having the effect of assuring any
Person's payment, performance, or capability) the Indebtedness, performance,
obligations, stock, or dividends of any Person; or agree to or allow any
Guarantor to do any of the foregoing; but Borrower and Guarantors may endorse
negotiable instruments for deposit or collection in the ordinary course of
business. Notwithstanding the foregoing, Borrower may make short-term advances
and loans to Guarantors.
9.7 Investments
----------------
Invest in (by capital contribution or otherwise), acquire, purchase, or
make any commitment to purchase the obligations, stock, or equity of any
Person, except (a) direct obligations of the government of the United States of
America or any agency or instrumentality thereof, (b) interest-bearing
certificates of deposit or repurchase agreements issued by any commercial
banking institution satisfactory to U. S. Bank, and (c) stock or obligations
issued in settlement of claims of Borrower against others by reason of
bankruptcy or a composition or readjustment of debt or reorganization of any
debtor of Borrower or any Guarantor.
9.8 Acquisitions
-----------------
Either directly or through an Affiliate, acquire, purchase, or make any
commitment to acquire or purchase an interest in the stock or other equity
interest of any Person or all or a substantial portion of the assets of any
Person.
9.9 Consolidation, Merger, and Sale of Assets
----------------------------------------------
Wind up, liquidate, or dissolve Borrower's affairs or enter into any
transaction of merger or consolidation with any Person; convey, sell, lease, or
otherwise dispose of (or agree to do any of the foregoing at any time) any of
its material licenses, contracts, or permits, sell all or a substantial part of
its property or assets or sell any part of its property or assets necessary or
desirable for the conduct of its business as now generally conducted or as
proposed to be conducted; sell any of its notes receivable, installment or
conditional sales agreements, or accounts receivable: purchase, lease, or
otherwise acquire all or a substantial part of the property or assets of any
other Person, or allow any Guarantor to do any of the foregoing.
9.10 Type of Business
---------------------
Enter into any business which is substantially different from or not
connected with the business in which Borrower is presently engaged or make any
substantial change in the nature of its business or operations.
9.11 Change of Chief Executive Office or Name
---------------------------------------------
Change (a) the chief executive office of Borrower or any Guarantor,
(b) Borrower's or any Guarantor's name, or (c) the location of any of the
Collateral, except in the ordinary course of business; or adopt or use any
trade name without (x) prior written notice to U. S. Bank, and (y) the
execution, delivery, and filing (and payment of filing fees and taxes) of all
such documents as may be necessary or advisable in the opinion of U. S. Bank to
continue to perfect and protect the liens and security interests in the
Collateral.
9.12 Change in Documents
------------------------
Amend, supplement, terminate, or otherwise modify in any way Borrower's or
any Guarantor's articles of incorporation, contracts, or other documents
delivered to U. S. Bank hereunder or executed in connection herewith.
9.13 Control
------------
Except as contemplated in the Equity Documents or in connection with any
employment agreement, enter into any agreement with any Person that confers
upon such Person the right or authority to control or direct a major portion of
the business or assets of Borrower or any Guarantor.
9.14 Pension Plan
-----------------
Terminate or partially terminate any Plan now existing or hereafter
established for Borrower or its Affiliates or withdraw from participation
therein under circumstances that result or could result in liability to the
Pension Benefit Guaranty Corporation, to the fund by which the Plan is funded,
or to the employees (or their beneficiaries) for whom the Plan is or shall be
maintained; or permit any other event or circumstance to occur that results or
could result in liability to the Pension Benefit Guaranty Corporation or a
violation of ERISA.
9.15 Working Capital
--------------------
Permit Working Capital to be less than the following as of the last day of
the applicable month:
Month Minimum Working Capital
--------------- -----------------------
June 1999 $2,200,000
July 1999 $2,500,000
August 1999 $2,900,000
September 1999 $2,800,000
October 1999 $2,600,000
November 1999 $2,000,000
December 1999 $1,300,000
9.16 Debt Service Coverage Ratio
--------------------------------
Permit the Debt Service Coverage Ratio to be less than the following,
calculated on a year to date basis as of the last day of each month:
Month Debt Service Coverage
---------------- ---------------------
June 1999 2.0:1.0
July 1999 2.1:1.0
August 1999 2.2:1.0
September 1999 2.0:1.0
October 1999 1.8:1.0
November 1999 1.4:1.0
December 1999 1.2:1.0
9.17 Capital Expenditures
-------------------------
Permit Capital Expenditures to exceed $225,000 during any fiscal year of
Borrower.
9.18 Sungold Enterprises, Ltd. Payments
---------------------------------------
Permit (a) payments to Sungold Enterprises, Ltd. to exceed $750,000 in the
aggregate during Borrower's fiscal year ending December 31, 1999, or the amount
in the aggregate due and owing by Borrower under the terms of Section 2 of that
certain Royalty Agreement dated April 10, 1997, between Borrower and Sungold
Enterprises, Ltd. during Borrower's fiscal year ending December 31, 2000, or
(b) any payments to Sungold Enterprises, Ltd. after December 31, 2000.
SECTION 10. REPRESENTATIONS AND WARRANTIES
In order to induce U. S. Bank to enter into this Agreement and to make the
Loans as herein provided, Borrower hereby makes the following representations,
covenants, and warranties, all of which shall survive the execution and
delivery of this Agreement and shall not be affected or waived by any
inspection or examination made by or on behalf of U. S. Bank:
10.1 Corporate Status
---------------------
Borrower and each Guarantor is a corporation organized and validly
existing under the laws of the state of Washington. Borrower and each
Guarantor has the power and authority to own its property and assets and to
transact the business in which it is engaged or presently proposes to engage.
Borrower and each Guarantor is qualified to do business in all states except
where the failure to be qualified could not have a material adverse effect on
Borrower.
10.2 Power and Authority
------------------------
Borrower and each Guarantor has the power to execute, deliver, and carry
out the terms and provisions of this Agreement and each of the Loan Documents
and has taken all necessary action to authorize the execution, delivery, and
performance of this Agreement and the other Loan Documents, the borrowings
hereunder, and the making and delivery of the Notes and all Loan Documents
delivered hereunder. This Agreement constitutes and the Notes and other Loan
Documents and instruments issued or to be issued hereunder, when executed and
delivered pursuant hereto, constitute or will constitute the authorized, valid,
and legally binding obligations of Borrower and each Guarantor (as the case may
be) enforceable in accordance with their respective terms.
10.3 No Violation of Agreements
-------------------------------
Neither Borrower nor any Guarantor is in default under any material
provision of any agreement to which it is a party or in violation of any
Applicable Laws. The execution and delivery of this Agreement, the Notes, the
other Loan Documents, and the instruments incidental hereto; the consummation
of the transactions herein or therein contemplated; and compliance with the
terms and provisions hereof or thereof (a) will not violate any material
Applicable Law and (b) will not conflict or be inconsistent with; result in any
breach of any of the material terms, covenants, conditions, or provisions of;
constitute a default under; or result in the creation or imposition of (or the
obligation to impose) any lien, charge, or encumbrance upon any of the property
or assets of Borrower or any Guarantor pursuant to the terms of any material
Governmental Approval, mortgage, deed of trust, lease, agreement, or other
instrument to which Borrower is a party, by which Borrower or any Guarantor may
be bound, or to which Borrower or any Guarantor may be subject, and (c) will
not violate any of the provisions of the articles of incorporation of Borrower.
No Governmental Approval is necessary (x) for the execution of this Agreement,
the making of the Notes, or the assumption and performance of this Agreement or
the Notes by Borrower or (y) for the consummation by Borrower and Guarantors of
the transactions contemplated by this Agreement, including, but not limited to,
the grant of the security interests to U. S. Bank.
10.4 Recording and Enforceability
---------------------------------
Neither the articles of incorporation, bylaws, or other applicable
corporate documents of Borrower or any Guarantor, nor other agreements require
recording, filing, registration, notice, or other similar action in order to
insure the legality, validity, binding effect, or enforceability against all
Persons of this Agreement, the Notes, or other Loan Documents executed or to be
executed hereunder, other than filings or recordings that may be required under
the Uniform Commercial Code or in connection with the perfection of the
security interests of U. S. Bank in patents, trademarks, and similar types of
Collateral.
10.5 Litigation
---------------
There are no actions, suits, or proceedings pending or threatened against
or affecting Borrower or any Guarantor before any Governmental Body that could
have a material adverse effect on Borrower or any Guarantor or the Collateral.
Neither Borrower nor any Guarantor is in default under any material provision
of any Applicable Law or Governmental Approval of any Governmental Body which
could have a material adverse effect on Borrower or any Guarantor or on the
Collateral.
10.6 Good Title to Properties
-----------------------------
Borrower and each Guarantor has good and marketable title to, or a valid
leasehold interest in, its property and assets, subject to no liens, mortgages,
pledges, encumbrances, or charges of any kind, except those permitted under the
provisions of Section 9.5 hereof.
10.7 Licenses and Permits
-------------------------
All Governmental Approvals with respect to the business of Borrower and
Guarantors were to Borrower's knowledge duly and validly issued by the
respective Governmental Bodies, are in full force and effect, and are to
Borrower's knowledge valid and enforceable in accordance with their terms.
With regard to such Governmental Approvals, no fact or circumstance exists that
constitutes or, with the passage of time or the giving of notice or both, would
constitute a material default under any thereof, or permit the grantor thereof
to cancel or terminate the rights thereunder, except upon the expiration of the
full term thereof. Borrower and Guarantors presently holds all material
Governmental Approvals as are necessary or advisable in connection with the
conduct of its business as now conducted and as presently proposed to be
conducted.
10.8 No Burdensome Agreements
-----------------------------
Neither Borrower nor any Guarantor is a party to any agreement or
instrument or subject to any restrictions that now have or, as far as can be
foreseen, could have a material adverse effect on Borrower or any Guarantor.
10.9 Properties in Good Condition
---------------------------------
All the material properties of Borrower and Guarantors are, and all
material properties to be added in connection with any contemplated expansion
will be in good repair and good working order and condition in a manner
consistent with past practices of Borrower and Guarantors, and comparable to
industry standards and are and will be in compliance with all Applicable Laws.
10.10 Financial Statements
------------------------------
The (a) audited financial statements of Borrower dated as of December 31,
1998, and all schedules and notes included in such financial statements and
(b) unaudited financial statements of Borrower that have heretofore been
delivered to U. S. Bank are true and correct in all material respects and
present fairly (i) the financial position of Borrower as of the date of said
statements and (ii) the results of operations of Borrower for the periods
covered thereby; and there are not any significant liabilities that should have
been reflected in the financial statements or the notes thereto under generally
accepted accounting principles, contingent or otherwise, including liabilities
for taxes or any unusual forward or long-term commitments, that are not
disclosed or reserved against in the statements referred to above or in the
notes thereto or that are not disclosed herein. All such financial statements
have been prepared in accordance with generally accepted accounting principles
consistently applied. There has been no material adverse change (including,
but not limited to, any such change occasioned by accident, act of God, war,
fire, flood, explosion, strike or other labor dispute, or orders or action by
any Governmental Body or public utility) in the operations, business, property,
assets, or condition (financial or otherwise) of Borrower since March 31, 1999.
10.11 Outstanding Indebtedness
----------------------------------
Other than current trade payables, Borrower has no Indebtedness,
including, but not limited to, Indebtedness to Affiliates, that is not listed
on Borrower's unaudited financial statements dated March 31, 1999.
10.12 Taxes
---------------
Borrower and Guarantors have duly filed all tax returns and reports
required by Applicable Law to be filed; and all taxes, assessments, levies,
fees, and other charges of Governmental Bodies upon Borrower and Guarantors or
upon their assets that are due and payable have been paid (except as otherwise
permitted in this Agreement).
10.13 License Fees
----------------------
Borrower and Guarantors have paid all fees and charges that have become
due for any Governmental Approval for their business or has made adequate
provisions for any such fees and charges that have accrued.
10.14 Trademarks, Patents, Etc.
-----------------------------------
Attached hereto as Exhibit H is a schedule of all trademarks, trade names,
service marks, patents, and applications therefor currently held by Borrower
and Guarantors or in which they has an interest, e.g., a license. Borrower and
Guarantors possess all necessary trademarks, trade names, service marks,
copyrights, patents, patent rights, and licenses to conduct their businesses as
now and as proposed to be conducted, without conflict with the rights or
claimed rights of others.
10.15 Governmental Approvals
--------------------------------
Borrower holds all material Governmental Approvals necessary for the
operation of Borrower's and Guarantors' business.
10.16 Disclosure
--------------------
To the best of Borrower's knowledge, the exhibits hereto, the financial
information and statements referred to in Section 10.10 hereof, any
certificate, statement, report or other document furnished to U. S. Bank by
Borrower or any other Person in connection herewith or in connection with any
transaction contemplated hereby, and this Agreement, do not contain any untrue
statements of material fact or omit to state any material fact necessary in
order to make the statements contained therein or herein not misleading.
10.17 Regulations U and X
-----------------------------
Borrower does not own and no part of the proceeds hereof will be used to
purchase or carry any margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System) or to extend credit to others
for the purpose of purchasing or carrying any margin stock. Borrower is not
engaged principally or as one of its important activities in the business of
extending credit for the purpose of purchasing or carrying any margin stock.
If requested by U. S. Bank, Borrower will furnish to U. S. Bank a statement in
conformity with the requirements of Federal Reserve Form U-1 referred to in
said Regulation. No part of the proceeds of the Loans will be used for any
purpose that violates or is inconsistent with the provisions of Regulation X of
said Board of Governors.
10.18 Names
---------------
Neither Borrower, any Guarantors, nor any of its predecessors operate or
do business or during the past five years have operated or done business under
a fictitious, trade, or assumed name other than the following: Eyeking,
Gargoyles Performance Eyewear, and Hobie Polarized Sunglasses.
10.19 Condition of Property
-------------------------------
Except as otherwise disclosed to U. S. Bank, Borrower hereby represents
and warrants to U. S. Bank that as of the date hereof and continuing hereafter,
Borrower's and Guarantors' property (both owned and leased) and each portion
thereof (a) are not and to the best knowledge of Borrower after reasonable
investigation have not been a site for the use, generation, manufacture,
storage, disposal, or transportation of any Hazardous Material; (b) are
presently in compliance with all Hazardous Materials Laws; and (c) are not
being used and to the best knowledge of Borrower after due investigation have
not been used in any manner that has resulted in or will result in Hazardous
Materials being spilled or disposed of on any adjacent or other property.
10.20 Pension Plans
-----------------------
No "reportable event" as defined in Section 4043(b) of Title IV of ERISA
has occurred and is continuing with respect to any plan maintained for
employees of Borrower or any Affiliate. In addition, each of the plans
maintained for the employees of Borrower and its Affiliates are in compliance
with the requirements of ERISA, including the minimum funding requirements.
10.21 Year 2000
-------------------
Borrower has reviewed and assessed its business operations and computer
systems and applications to address the "year 2000 problem" (that is, that
computer applications and equipment used by Borrower, directly or indirectly
through third parties, may be unable to properly perform date-sensitive
functions before, during, and after January 1, 2000). Borrower reasonably
believes that the year 2000 problem will not result in a material adverse
change in Borrower's business condition (financial or otherwise), operations,
properties, or prospects or ability to repay U. S. Bank. Borrower agrees that
this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any Funding under this Agreement or
delivers any information to U. S. Bank. Borrower will promptly deliver to
U. S. Bank such information relating to this representation as U. S. Bank
requests from time to time.
SECTION 11. EVENTS OF DEFAULT; REMEDIES
11.1 Events of Default
----------------------
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason for the Event of Default, whether it shall relate
to one or more of the parties hereto, and whether it shall be voluntary or
involuntary or be pursuant to or affected by operation of Applicable Law):
(a) If Borrower fails to pay the principal of or any installment of
interest on any of the Notes, when and as the same becomes due and payable,
whether at scheduled maturity, by acceleration, or otherwise; or
(b) If any Indebtedness of Borrower or any Guarantor for money
borrowed or credit extended becomes or is declared due and payable (after any
applicable grace period) prior to the stated maturity thereof or is not paid as
and when it becomes due and payable, or if any event occurs which constitutes
an event of default under any instrument, agreement, or evidence of
Indebtedness relating to any such obligation of Borrower; or
(c) If Borrower or any Guarantor fails to pay or perform (after any
applicable grace period) any obligation or Indebtedness to others in excess of
$100,000 (other than as set forth in Section 11.1(b) hereof), whether now or
hereafter incurred; provided, that past-due trade credit shall not constitute
an Event of Default until after December 31, 1999; or
(d) If any representation or warranty (i) made by Borrower in this
Agreement or (ii) made by Borrower, Guarantor, or any other Person in any
document, certificate, or statement furnished pursuant to this Agreement or in
connection herewith, is false or misleading in any material respect; or
(e) If Borrower fails to observe or perform any term, covenant, or
agreement to be performed or observed pursuant to Sections 8 and 9 hereof; or
(f) If Borrower fails to observe or perform (not otherwise specified
in this Section 11) any term, covenant, or agreement to be performed or
observed pursuant to the provisions of this Agreement, the other Loan
Documents, or any other agreement incidental hereto and such default is not
cured within 30 days; or
(g) If Borrower fails to perform any of its obligations under any of
the Loan Documents not otherwise specified in this Section 11.1, or if the
validity of any of such documents has been disaffirmed by or on behalf of any
of the parties thereto other than U. S. Bank and such default is not cured
within 30 days; or
(h) If custody or control of any substantial part of the property of
Borrower or any Guarantor is assumed by any Governmental Body or if any
Governmental Body takes any final action, the effect of which would be to have
a material adverse effect on Borrower; or
(i) If Borrower or any Guarantor suspends or discontinues its
business, or if Borrower or Guarantor makes an assignment for the benefit of
creditors or a composition with creditors, is unable or admits in writing its
inability to pay its debts as they mature, files a petition in bankruptcy,
becomes insolvent (howsoever such insolvency may be evidenced), is adjudicated
insolvent or bankrupt, petitions or applies to any tribunal for the appointment
of any receiver, liquidator, or trustee of or for it or any substantial part of
its property or assets, commences any proceeding relating to it under any
Applicable Law of any jurisdiction whether now or hereafter in effect relating
to bankruptcy, reorganization, arrangement, readjustment of debt, receivership,
dissolution, or liquidation; or if there is commenced against Borrower or any
Guarantor any such proceeding that remains undismissed for a period of 60 days
or more, or an order, judgment, or decree approving the petition in any such
proceeding is entered; or if Borrower or any Guarantor by any act or failure to
act indicates its consent to, approval of, or acquiescence in, any such
proceeding or any appointment of any receiver, liquidator, or trustee of or for
it or for any substantial part of its property or assets, suffers any such
appointment to continue undischarged or unstayed for a period of 60 days or
more, or takes any corporate action for the purpose of effecting any of the
foregoing; or if any court of competent jurisdiction assumes jurisdiction with
respect to any such proceeding, or if a receiver or a trustee or other officer
or representative of a court or of creditors, or if any Governmental Body,
under color of legal authority, takes and holds possession of any substantial
part of the property or assets of Borrower or any Guarantor; or
(j) If there is any refusal or failure by any Governmental Body to
issue, renew, or extend any lease or Governmental Approval with respect to the
operation of the business of Borrower or any Guarantor, or any denial,
forfeiture or revocation by any Governmental Body of any Governmental Approval
that could have a material adverse effect on Borrower; or
(k) If any of the events described in Section 8.10 hereof occur or
are threatened and, in U. S. Bank's reasonable judgment, such event jeopardizes
or could reasonably be expected to jeopardize repayment of any of the Notes; or
(l) If Borrower breaches or fails to pay or perform (after any
applicable grace period) any obligation under any of the Equity Documents; or
(m) If any material adverse change in the business or financial
condition of Borrower or any Guarantor occurs, or if any event that materially
increases U. S. Bank's risk or materially impairs the Collateral occurs.
11.2 Acceleration; Remedies
---------------------------
Upon the occurrence of any Event of Default or at any time thereafter, if
any Event of Default is then continuing, U. S. Bank may, by written notice to
Borrower, declare the entire unpaid principal balance or any portion of the
principal balance of all or any of the Notes and interest accrued thereon to be
immediately due and payable by the maker thereof; and such principal and
interest shall thereupon become and be immediately due and payable, without
presentation, demand, protest, notice of protest, or other notice of dishonor
of any kind, all of which are hereby expressly waived by Borrower.
Notwithstanding the foregoing, upon the occurrence of any event specified in
Section 11.1(i), the obligation of U. S. Bank to make Fundings shall
automatically terminate and the unpaid principal amount of all outstanding
Loans (together with interest thereon) and Letters of Credit shall
automatically become due and payable without further act of U. S. Bank.
U. S. Bank may proceed to protect and enforce its rights hereunder or realize
on any or all security granted pursuant hereto in any manner or order it deems
expedient without regard to any equitable principles of marshaling or
otherwise. All rights and remedies given by this Agreement, the Notes, and the
other Loan Documents are cumulative and not exclusive of any thereof or of any
other rights or remedies available to U. S. Bank; no course of dealing between
Borrower and U. S. Bank or any delay or omission in exercising any right or
remedy shall operate as a waiver of any right or remedy; and every right and
remedy may be exercised from time to time and as often as deemed appropriate by
U. S. Bank.
SECTION 12. MISCELLANEOUS
12.1 Notices
------------
All notices, requests, consents, demands, approvals, and other
communications hereunder shall be deemed to have been duly given, made, or
served if made in writing and delivered personally, sent via facsimile, or
mailed by first-class registered or certified mail, return receipt requested
postage prepaid, to the respective parties to this Agreement as follows:
(a) If to Borrower:
Gargoyles, Inc.
▇▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
(b) If to U. S. Bank:
U. S. Bank National Association
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
The designation of the persons to be so notified or the address of such persons
for the purposes of such notice may be changed from time to time by similar
notice in writing, except that any communication with respect to a change of
address shall be deemed to be given or made when received by the party to whom
such communication was sent.
12.2 Payment of Expenses
------------------------
Whether or not the transactions hereby contemplated are consummated,
Borrower shall pay on demand all costs and expenses of U. S. Bank incurred in
connection with the preparation, negotiation, execution, and delivery of the
Loan Documents, as well as any amendments, modifications, consents, or waivers
relating thereto, including, without limitation, reasonable attorneys' fees,
appraisal fees, title insurance fees, and recording fees. In addition, if
there shall occur any Default or Event of Default, U. S. Bank shall be entitled
to recover any costs and expenses incurred in connection with the preservation
of rights under, and enforcement of, the Loan Documents, whether or not any
lawsuit or arbitration proceeding is commenced, in all such cases, including,
without limitation, reasonable attorneys' fees and costs (including the
allocated fees of internal counsel). Costs and expenses as referred to above,
shall include, without limitation, a reasonable hourly rate for collection
personnel, whether employed in-house or otherwise, overhead costs as reasonably
allocated to the collection effort, and all other expenses actually incurred.
Reasonable attorneys' fees shall include, without limitation, attorneys' fees
and costs incurred in connection with any bankruptcy case or other insolvency
proceeding commenced by or against Borrower or any Person granting a security
interest in any item of Collateral, including all fees incurred in connection
with (a) moving from relief from the automatic stay, to convert or dismiss the
case or proceeding, or to appoint a trustee or examiner, or (b) proposing or
opposing confirmation of a plan of reorganization or liquidation, in any case
without regard to the identity of the prevailing party.
12.3 Setoff
-----------
Borrower hereby pledges and gives to U. S. Bank, and any Participant, a
lien and security interest in and for the amount of all past, present, and
future Indebtedness of Borrower to U. S. Bank the balance of any deposit
account maintained by Borrower at U. S. Bank or any Participant. In the case
of Borrower's Default hereunder, Borrower hereby authorizes U. S. Bank or any
such Participant at U. S. Bank's sole option, at any time and from time to
time, to apply to the payment of all or any portion of the Loans or other
Indebtedness of Borrower to U. S. Bank, any deposit balance or balances now or
hereafter in the possession of U. S. Bank or such Participant that belong to or
are owed to Borrower.
12.4 Waiver of Setoff
---------------------
In the event that U. S. Bank sells all or any portion of the Loans to any
Participant, Borrower hereby waives the right to interpose any setoff,
counterclaim, or cross-claim (other than compulsory counterclaims or cross-
claims) in connection with any litigation or dispute under this Agreement,
regardless of the nature of such setoff, counterclaim, or cross-claim.
12.5 Fees and Commissions
-------------------------
Borrower agrees to indemnify U. S. Bank and hold it harmless with regard
to any commissions, fees, judgments, or expenses of any nature and kind that
U. S. Bank may become liable to pay by reason of any claims by or on behalf of
brokers, finders, or agents in connection with any act or failure to act by
Borrower or any litigation or similar proceeding arising from such claims.
Borrower states that it is aware of no valid basis for any such claims.
12.6 No Waiver
--------------
No failure or delay on the part of U. S. Bank or the holder of any of the
Notes in exercising any right, power, or privilege hereunder and no course of
dealing between Borrower and U. S. Bank or the holder of any of the Notes shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power, or privilege hereunder preclude any other or further exercise
thereof or the exercise of any right, power, or privilege. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies that U. S. Bank or any subsequent holder of any of the Notes
would otherwise have. No notice to or demand on Borrower in any case shall
entitle Borrower to any other or further notice or demand in similar or other
circumstances or shall constitute a waiver of the right of U. S. Bank to any
other or further action in any circumstances without notice or demand.
12.7 Entire Agreement and Amendments
------------------------------------
(a) This Agreement and the exhibits to this Agreement represent the
entire agreement between the parties hereto with respect to the Loans and the
transactions contemplated hereunder and, except as expressly provided herein,
shall not be affected by reference to any other documents. This Agreement, or
any provision hereof, may not be changed, waived, discharged, or terminated
orally, but only by an instrument in writing, signed by the party against whom
enforcement of the change, waiver, discharge, or termination is sought.
(b) Upon execution of this Agreement and the exhibits to this
Agreement, and the satisfaction of the conditions precedent to the initial
Funding under this Agreement, the Existing Credit Agreement shall be deemed
amended and superseded in their entirety by this Agreement and the exhibits to
this Agreement.
12.8 Benefit of Agreement
-------------------------
This Agreement is binding upon and inures to the benefit of Borrower and
U. S. Bank and their successors and assigns and all subsequent holders of any
of the Notes or any portion thereof. Borrower expressly acknowledges that
U. S. Bank is not prohibited or restricted from assigning rights or
participations hereunder or any portion thereof to another Person. Borrower,
however, is precluded from assigning any of its respective rights or delegating
any of its obligations hereunder or under any of the other agreements between
Borrower and U. S. Bank without the prior written consent of U. S. Bank.
12.9 Release of Claims
----------------------
IN CONSIDERATION FOR U. S. BANK'S AGREEMENT TO ENTER INTO THIS AGREEMENT
AND THE EQUITY DOCUMENTS, BORROWER, H.S.C., INC., SUNGOLD EYEWEAR, INC., AND
PRIVATE EYES SUNGLASS CORPORATION EACH HEREBY RELEASES AND FOREVER DISCHARGES
U. S. BANK, ITS PREDECESSORS AND SUCCESSORS-IN-INTEREST, AND THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES AND AGENTS FROM ANY AND ALL
CLAIMS, DEMANDS, DAMAGES, LIABILITIES, CHARGES, ACTIONS, LOSSES, CAUSES OF
ACTION, COSTS, EXPENSES, COMPENSATION, AND SUITS OF ANY KIND, PAST, PRESENT OR
FUTURE, ARISING FROM OR ALLEGED TO ARISE FROM THEIR BUSINESS RELATIONSHIP,
INCLUDING THE RELATIONSHIP PROVIDED FOR IN THE EXISTING CREDIT AGREEMENT
THROUGH THE DATE OF THIS AGREEMENT, WHETHER KNOWN OR UNKNOWN. THIS RELEASE IS
INTENDED TO BE COMPLETE AND COMPREHENSIVE WITH RESPECT TO ALL SUCH CLAIMS.
THIS RELEASE OF CLAIMS HAS BEEN COMPLETELY READ AND FULLY UNDERSTOOD AND
VOLUNTARILY ACCEPTED FOR THE PURPOSE OF MAKING A FULL AND FINAL COMPROMISE AND
SETTLEMENT WITH RESPECT TO ALL CLAIMS, DISPUTED OR OTHERWISE.
12.10 Severability
----------------------
If any provision of this Agreement or any of the Loan Documents is held
invalid under any Applicable Laws, such invalidity shall not affect any other
provision of this Agreement that can be given an effect without the invalid
provision, and, to this end, the provisions hereof are severable.
12.11 Descriptive Headings
---------------------------
The descriptive headings of the several sections of this Agreement are
inserted for convenience only and do not affect the meaning or construction of
any of the provisions hereof.
12.12 Governing Law
--------------------
This Agreement and the rights and obligations of the parties hereunder and
under the other Loan Documents shall be construed in accordance with and shall
be governed by the laws of the state of Washington without regard to the choice
of law rules thereof.
12.13 Consent to Jurisdiction, Service, and Venue
--------------------------------------------------
For the purpose of enforcing payment of any of the Notes, performance of
the obligations under any of the Notes, any arbitration award under the other
Loan Documents, or otherwise in connection herewith, Borrower hereby consents
to the jurisdiction and venue of the courts of the state of Washington or of
any federal court located in such state, including, but not limited to, the
Superior Court of Washington for King County and the United States District
Court for the Western District of Washington. Borrower hereby waives the right
to contest the jurisdiction and venue of courts located in King County,
Washington, on the ground of inconvenience or otherwise and waives any right to
bring any action or proceeding against U. S. Bank in any court outside King
County, Washington. The provisions of this section do not limit or otherwise
affect the right of U. S. Bank to institute and conduct action in any other
appropriate manner, jurisdiction, or court.
12.14 Arbitration
---------------------
(a) Either Borrower or U. S. Bank may require that all disputes,
claims, counterclaims, and defenses, including those based on or arising from
any alleged tort ("Claims") relating in any way to the Loans be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitations that would be applicable if they were
litigated.
(b) This provision is void if the Loans, at the time of the proposed
submission to arbitration, are secured by real property located outside of
Oregon or Washington or if the effect of the arbitration procedure (as opposed
to any Claims of Borrower) would be to materially impair U. S. Bank's ability
to realize on any Collateral pursuant to an arbitration ruling favorable to
U. S. Bank.
(c) If arbitration occurs and each party's Claim is less than
$100,000, one neutral arbitrator will decide all issues; if either party's
Claim is more than $100,000, three neutral arbitrators will decide all issues.
All arbitrators will be active Washington State Bar members in good standing.
All arbitration hearings will be held in Seattle, Washington. In addition to
all other powers, the arbitrator or arbitrators shall have the exclusive right
to determine all issues of arbitrability and shall have the authority to issue
subpoenas. Judgment on any arbitration award may be entered in any court with
jurisdiction.
(d) If either party institutes any judicial proceeding relating to
the Loans, that action shall not be a waiver of the right to submit any Claim
to arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim
and delivery, and replevin.
(e) This arbitration clause cannot be modified or waived by either
party except in writing, which writing must refer to this arbitration clause
and be signed by Borrower and U. S. Bank.
12.15 Counterparts
----------------------
This Agreement and each of the Loan Documents may be executed in one or
more counterparts, each of which shall constitute an original agreement, but
all of which together shall constitute one and the same instrument.
12.16 Statutory Notice
--------------------------
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, Borrower and U. S. Bank have caused this Agreement to
be duly executed by the respective, duly authorized signatories as of the date
first above written.
GARGOYLES, INC.
--------------------------------
By: ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
Chief Executive Officer
Chief Financial Officer
U. S. BANK NATIONAL ASSOCIATION
--------------------------------
By: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Vice President
Affirmation of Guaranty and Security Agreements
-----------------------------------------------
Each of the undersigned Guarantors hereby (i) reaffirms its Guaranty and
its Security Agreement, (ii) agrees that its Guaranty guarantees the repayment
of the Loans and all other obligations of Borrower under this Agreement and the
other Loan Documents, (iii) agrees that its respective Security Agreement and
related collateral documents secures the payment and performance of the Secured
Obligations described in such Security Agreement, which Secured Obligations
shall include, without limitation, all obligations of such Guarantor under its
Guaranty, as well as all obligations of Borrower under this Agreement and the
other Loan Documents, (iv) acknowledges that its obligations pursuant to its
Guaranty and Security Agreement are enforceable without defense, offset, or
counterclaim, and (v) agrees to the release of claims set forth in Section 12.9
of this Agreement.
H.S.C., Inc., a Washington corporation
--------------------------------------
By: ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
President
Chief Financial Officer
SUNGOLD EYEWEAR, INC., a Washington
corporation
--------------------------------------
By: ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
Chief Executive Officer
Chief Financial Officer
PRIVATE EYES SUNGLASS CORPORATION,
a Washington corporation
--------------------------------------
By: ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
President
Chief Financial Officer