<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 26, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission File No. 0-21597
MAZEL STORES, INC.
-------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1830097
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31000 Aurora Road
Solon, Ohio 44139
----------------------------------------
(Address of principal executive offices)
(Zip Code)
216-248-5200
------------------
(Registrant's telephone number, including area code)
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No * The Company's IPO was completed November 21, 1996.
----- -----
Indicate the number of shares outstanding of each of the issuer's
common stock, as of the latest practical date.
Common Shares, no par value, outstanding as of December 31, 1996:
9,170,100.
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<PAGE> 2
MAZEL STORES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Combined Financial Statements (unaudited)
Combined Balance Sheets -
October 26, 1996 and January 31, 1996 4
Combined Statements of Operations -for the quarter and
three quarters ended October 26, 1996 and October 31, 1995 5
Combined Statements of Cash Flows - for the
three quarters ended October 26, 1996 and October 31, 1995 6
Notes to Combined Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operation
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
4.2 Asset Based Loan and Security Agreement between Mazel
Stores, Inc. and Odd-Job Acquisition Corp., as
borrowers and The Provident Bank, as lender, dated
December 4, 1996
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The Registrant's Combined Financial Statements follow this page.
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<PAGE> 4
Mazel Company L.P.
Odd-Job Holdings, Inc.
Combined Balance Sheet
(Dollars in thousands)
<TABLE>
<CAPTION>
October 26, January 31,
1996 1996
----------- ----------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,209 $ 1,470
Accounts receivable-- trade, less allowance for
doubtful accounts of $195 10,048 10,067
Notes and other receivables 445 352
Inventories 44,408 29,212
Prepaid expenses 1,186 440
Deferred income tax benefit 314 314
-------- --------
Total current assets 57,610 41,855
Equipment, furniture and leasehold improvements, net 4,746 3,097
Other assets 1,167 1,037
Notes receivable-related parties 1,350 1,350
Goodwill, net 9,640 9,000
Deferred income tax benefit 1,695 1,695
-------- --------
$ 76,208 $ 58,034
======== ========
Liabilities, Stockholder's Equity
And Partners' Capital
Current liabilities
Long-term debt, current portion $ 1,354 $ 1,361
Accounts payable 13,662 11,732
Accrued expenses 3,708 2,376
Other current liabilities 442 193
-------- --------
Total current liabilities 19,166 15,662
Revolving line of credit 21,533 13,496
Long-term debt, net of current portion 11,004 12,525
Other liabilities 2,200 2,037
Deferred income taxes 44 44
-------- --------
Total liabilities 53,947 43,764
Stockholder's equity and partners' capital
Mazel Company L.P.
Partners' capital 21,008 12,974
Odd Job Holdings
Common stock ($1 par value; 1,000 shares issued
and outstanding) 1 1
Additional paid-in capital 1,389 1,499
Retained earnings (deficit) (137) (204)
-------- --------
Total stockholder's equity and partners' capital 22,261 14,270
-------- --------
Commitments and contingencies
$ 76,208 $ 58,034
======== ========
</TABLE>
See accompanying notes to combined financial statements.
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<PAGE> 5
Mazel Company L.P.
Odd-Job Holdings, Inc
Combined Statement of Operations
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
---------------------------- -----------------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 44,387 $ 24,160 $ 129,552 $ 65,856
Cost of sales 29,669 17,540 88,183 46,791
----------- ----------- ----------- -----------
Gross profit 14,718 6,620 41,369 19,065
Selling, general & administrative expense 11,562 4,521 32,384 13,684
Special charges 0 1,571 0 1,571
----------- ----------- ----------- -----------
Operating profit 3,156 528 8,985 3,810
Other income (expense)
Interest expense, net (775) (308) (2,059) (852)
Other 8 (501) 30 (470)
----------- ----------- ----------- -----------
Income (loss) before income taxes 2,389 (281) 6,956 2,488
Income taxes (benefit) (27) (2) 7 36
----------- ----------- ----------- -----------
Net income (loss) $ 2,416 ($ 279) $ 6,949 $ 2,452
=========== =========== =========== ===========
Pro forma data:
- -------------------------------
Income (loss) before income taxes 2,389 (281) 6,956 2,488
Provision for income taxes 979 (115) 2,852 1,020
----------- ----------- ----------- -----------
Net income (loss) 1,410 (166) 4,104 1,468
=========== =========== =========== ===========
Net income per share $ 0.23 ($ 0.03) $ 0.66 $ 0.24
=========== =========== =========== ===========
Shares outstanding 6,210,000 5,891,781 6,210,000 5,891,781
=========== =========== =========== ===========
Pro forma as adjusted data:
- -------------------------------
Income (loss) before income taxes 2,389 (281) 6,956 2,488
Supplemental pro forma adjustments:
Income of Odd Job retail operation (61) 759
Loss on discontinued Ohio retail operation 1,748 2,210
Management compensation adjustments 412 351 1,236 1,053
Special charge-litigation expense 500 500
Reduction in interest expense,net 738 384 2,213 1,237
Provision for income taxes (1,451) (1,083) (4,266) (3,381)
----------- ----------- ----------- -----------
Pro forma as adjusted net income 2,088 1,558 6,139 4,866
Pro forma as adjusted net income per share $ 0.23 $ 0.17 $ 0.67 $ 0.53
=========== =========== =========== ===========
Shares outstanding 9,170,100 9,170,100 9,170,100 9,170,100
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
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<PAGE> 6
Mazel Company L.P.
Odd-Job Holdings, Inc.
Combined Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Quarters Ended
----------------------------
October 26, October 31,
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 6,949 $ 2,452
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation and amortization 738 393
Loss on sale of retail operations 1,571
Noncash charges on sale of retail
operations (1,571)
Changes in operating assets and liabilities
Accounts receivable, trade 19 (1,145)
Notes and other receivables (93) (1,435)
Inventories (15,196) (1,197)
Prepaid expenses (746) 157
Other assets (993) 108
Accounts payable 1,930 (370)
Accrued expenses and other liabilities 1,737 (110)
-------- --------
Total adjustments (12,604) (3,599)
-------- --------
Net cash (used in)
operating activities (5,655) (1,147)
-------- --------
Cash flows from investing activities
Capital expenditures, net (2,165) 77
-------- --------
Net cash provided by (used in)
investing activities (2,165) 77
-------- --------
Cash flows from financing activities
Proceeds from term loan (999)
Repayment of debt (1,521) (22)
Net borrowings under credit facility 8,037 3,978
Repayment of subordinated notes payable (500)
Equity contributions 4,000
Partners' withdrawals (2,957) (1,425)
-------- --------
Net cash provided by
financing activities 7,559 1,032
-------- --------
Net decrease in cash and cash
equivalents (261) (38)
Cash and cash equivalents at beginning of period 1,470 143
-------- --------
Cash and cash equivalents at end of period $ 1,209 $ 105
======== ========
Supplemental disclosure
Interest paid $ 1,974 $ 786
======== ========
</TABLE>
See accompanying notes to combined financial statements.
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<PAGE> 7
MAZEL STORES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Quarter and Three Quarters Ended
October 26, 1996 & October 31, 1995
(1) Basis of Presentation
Combined financial statements for the quarter and three quarters ended
October 26, 1996 and October 31, 1995 are derived from the unaudited financial
statements of Mazel Company L.P. and Odd Job Holdings, Inc., which were
previously under common control and combined as of the date of the Offering (see
note 2). The statements should be read in conjunction with the financial
statements and notes thereto and the pro forma information included in the Mazel
Stores, Inc. (the "Company") Prospectus dated November 21, 1996 issued as a
result of the Company's initial public offering, (the "Offering").
In the opinion of management, the accompanying unaudited condensed
combined financial statements contain all adjustments which are normal and
recurring in nature, necessary to present fairly the financial position of the
Company at October 26, 1996 and the results of operations for the quarter and
three quarters ended October 26, 1996 and October 31, 1995. Operating results
for the three quarters ended October 26, 1996 are not necessarily indicative of
the results that may be expected for the year ending January 25, 1997.
The statement of combined operations data consists of: (i) Mazel
Company L.P.'s wholesale operations, the Peddlers Mart operations and the Ohio
Stores retail operations for the quarter and three quarters ended October 31,
1995; and (ii) Mazel Company L.P.'s wholesale operations and Odd Job Holdings'
operations which includes Peddlers Mart for the quarter and three quarters ended
October 26, 1996.
(2) Initial Public Offering
On November 21, 1996 the Company completed its initial public offering
of 2,574,000 shares of Common Stock, no par value at $16 per share, generating
net proceeds of approximately $37.4 million, after deducting underwriting fees
and offering expenses. The net proceeds were used to repay approximately $29.6
million of indebtedness to a senior institutional lender and approximately $4.0
million of Partners' notes, and to fund approximately $2.9 million in tax loans
to certain executives and approximately $900,000 in compensation buyouts to
certain executives. On December 13, 1996, the underwriters exercised their
over-allotment option to purchase an additional 386,100 common shares,
generating an additional $5.7 million of cash proceeds to the Company.
(3) Earnings Per Share
Earnings per share have been computed based on the weighted average
shares outstanding during each period presented. Pro forma as adjusted earnings
per share
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include shares issued pursuant to the Company's Offering as if such shares were
outstanding at the beginning of all periods presented.
(4) Pro Forma Disclosures
Prior to the Offering, Mazel Company L.P., the predecessor company,
maintained the tax status of a limited partnership and therefore, was not
subject to federal or state income taxes. The unaudited pro forma income data
assumes a provision for federal and state income taxes at an effective rate of
41%.
Pro forma as adjusted data gives effect to the Company's Offering as of
the beginning of all periods presented, and includes the combination of: (i)
the Mazel wholesale operation; (ii) the Odd Job retail operation; and (iii) the
Peddlers Mart retail store, as if the combination had occurred at the beginning
of all periods presented. Pro forma as adjusted data excludes certain
nonrecurring charges, and gives effect to the use of proceeds of the Offering,
as well as certain adjustments made as a result of the Offering relating
principally to compensation expense.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATION
GENERAL
Mazel Stores, Inc. consists of two complementary operations: (i) a
major regional closeout retail business; and (ii) one of the nation, largest
closeout wholesale businesses.
Mazel was founded as a wholesaler of closeout merchandise in 1975. In
1981, the Company initiated its Just Closeouts retail operations in Ohio, which
were subsequently sold in October 1995. In 1992, Mazel Company L.P. (a
predecessor to the Company), a general partner of which was an affiliate of ZS
Fund, acquired substantially all of the assets of Mazel's wholesale and retail
businesses. In December 1995, Odd-Job Holdings, wholly-owned by an affiliate of
ZS Fund, acquired Odd Job, which operated a chain of 12 retail stores in the New
York metropolitan area, and acquired Peddlers Mart, which operated one store. In
connection with a restructuring that occurred immediately prior to the Offering
in November 1996, the Company acquired all of the assets of Mazel Company L.P.
and the stock of Odd-Job Holdings. The Company (including its predecessors) has
opened or acquired ten (10) stores in fiscal 1996; it plans to open nine stores
in fiscal 1997, 12 stores in fiscal 1998 and 15 stores in fiscal 1999.
The Combined Financial Statements of Mazel Company L.P. and Odd-Job
Holdings, Inc. represent the historical assets, liabilities and results of
operations of the Company.
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<PAGE> 9
In the fourth quarter of fiscal 1996, the Company will take a one-time,
pre-tax charge of approximately $4.4 million representing compensation and other
charges arising in connection with the Offering. Included as part of the charge
are the effects of the issuance, in connection with the Offering, of a total of
203,521 shares of Common Stock to certain employees of the Company in return for
ongoing reductions in their salaries and potential bonuses. The Company also
expects to realize a one-time $1.6 million tax benefit in fiscal 1996 arising
from cumulative differences between the net book and tax basis of Mazel Company
L.P.'s assets and liabilities.
The Company believes that it generally requires approximately $600,000
to open a new store of 17,000 square feet, including the cost of leasehold
improvements, store equipment and fixtures and inventory (net of associated
accounts payable) and pre-opening costs. The Company anticipates that new stores
generally become profitable (excluding the store's share of interest carrying
charges or corporate overhead) within the first six to nine months of operation,
with stores opened in the third and fourth quarters achieving profitability more
quickly than stores opened in the first and second quarters.
On a continuous basis, the Company remodels and refurbishes stores at a
modest cost. Because the first full year of operations includes unusually strong
sales in the opening quarter associated with grand opening promotions, second
year net sales may be lower than first year net sales, but generally increase
thereafter. Store opening expenses are charged to operations as incurred. The
timing of store openings and the number of stores in the maturation process will
have an effect on quarter-to-quarter comparisons. Comparable store net sales
means a comparison of net sales from all stores open at the beginning of both
fiscal periods compared.
Wholesale net sales reflect both warehouse and drop shipment sales.
Drop shipment sales generally have lower gross margins than sales requiring
distribution from the Company's warehouses; however, they also have lower
associated selling, general and administrative costs.
The Company's wholesale operations have grown from $59.2 million in
fiscal 1991 to $77.3 million in fiscal 1995, a compound annual growth rate of
6.9%. The Company anticipates that net sales of the retail operations should
grow more quickly than those of its wholesale operations because of an emphasis
on opening and acquiring new stores and anticipated increases in comparable
store sales. As the Company's retail operations grow, the wholesale operations
will sell a larger percentage of its products to the Company's retail stores.
Because the gross margin on sales from the wholesale to retail operations are
below the margin on sales to third parties, to the extent that sales to the
retail operations becomes a higher percentage of wholesale's net sales,
wholesale's margin will be negatively affected. The wholesale operations gross
margin on sales to the Company's retail operations of inventory remaining on the
retail operations books at the end of a reporting period is eliminated
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<PAGE> 10
in the combined statements. Consequently, the wholesale operations gross margins
will be slightly affected on a quarter-to-quarter basis based on the level of
any changes to retail inventory.
In the past year, the Company has made a substantial investment in
executive personnel and infrastructure to accommodate the Company's anticipated
growth, particularly with respect to its retail operations. The Company has
hired three senior executives and six buyers, and is in the process of expanding
its Solon, Ohio and Englewood, New Jersey warehouse and distribution facilities
by an aggregate of 208,000 square feet. The Company believes that this level of
investment in senior management and distribution facilities will be sufficient
to support its growth until the Company's retail operations expands to
approximately 60 stores.
RESULTS OF OPERATIONS
The results of operations set forth below describe: (i) the Company's
retail operations; and (ii) its wholesale operations. Retail operations include
the results of the Odd Job and Peddlers Mart operations both prior and
subsequent to their acquisitions by the Company. Wholesale operations include
the results of Mazel Company L.P. for each of the periods. The Ohio stores, sold
in October 1995, are treated as a discontinued operation.
Statement of Operations Data
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------------------- -------------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales
Retail $ 19,785 $ 13,249 $ 54,824 $ 41,462
Wholesale 24,602 20,858 74,728 52,970
--------- --------- --------- ---------
44,387 34,107 129,552 94,432
Gross profit
Retail 7,768 4,970 21,439 15,717
Wholesale 6,950 5,619 19,930 15,112
--------- --------- --------- ---------
14,718 10,589 41,369 30,829
SG&A expense
Retail 7,258 5,209 19,851 15,132
Wholesale 3,022 2,553 8,713 7,478
--------- --------- --------- ---------
10,280 7,762 28,564 22,610
Operating profit before
Corporate expenses
Retail 510 (239) 1,588 585
Wholesale 3,928 3,066 11,217 7,634
--------- --------- --------- ---------
4,438 2,827 12,805 8,219
Discontinued operation (1,748) (2,210)
Corporate expenses (1,282) (1,233) (3,820) (2,299)
--------- --------- --------- ---------
Operating profit $ 3,156 ($ 154) $ 8,985 $ 3,710
========= ========= ========= =========
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
RETAIL SEGMENT PERCENTAGE OF NET SALES
----------------------------------------------------
Quarter Ended Three Quarters Ended
------------------------- ------------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.7 62.5 60.9 62.1
----- ----- ----- -----
Gross margin 39.3 37.5 39.1 37.9
SG & A expense 36.7 39.3 36.2 36.5
----- ----- ----- -----
Operating profit
before corporate expenses 2.6% (1.8%) 2.9% 1.4%
===== ===== ===== =====
</TABLE>
Quarter Ended October 26, 1996, versus Quarter Ended October 31, 1995
Net sales increased $6.5 million, or 49.3%, to $19.8 million in the
quarter ended October 26, 1996, from $13.2 million for the quarter ended October
31, 1995. Comparable store net sales increased approximately 22.1%, contributing
$2.9 million of the increase in net sales. Comparable store net sales increased
primarily due to expanded weekend hours and seven-day-a-week operation following
the Odd Job Acquisition, as well as an expanded product mix and enhanced
merchandising techniques. The remaining $3.6 million increase is attributable to
the addition of six new stores including two stores opened during the quarter
ended October 26, 1996.
Gross profit increased $2.8 million, or 56.3%, to $7.8 million in the
quarter ended October 26, 1996, from $5.0 million in the quarter ended October
31, 1995. Gross margin increased to 39.3% in the quarter ended October 26, 1996,
from 37.5% in the quarter ended October 31, 1995. This increase was due to
increased purchasing opportunities resulting from the ability to buy for both
the retail and wholesale operations, as well as the efforts of the Company's
eight new senior buyers in acquiring higher margin products.
Selling, general and administrative expenses increased $2.0 million, or
39.3%, to $7.3 million in the quarter ended October 26, 1996, from $5.2 million
in the quarter ended October
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31, 1995. Selling, general and administrative expenses, as a percentage of net
sales, decreased to 36.7% in the fiscal 1996 period from 39.3% in the
comparable 1995 period. This $2.0 million increase primarily resulted from $1.2
million of increased store level expenses. Approximately $500,000 of the
increase resulted primarily from an increase in administrative costs,
principally attributable to the addition of buying and advertising personnel
and costs associated with store management trainees. In addition, warehouse and
store delivery costs increased $375,000 due to costs associated with increased
inventory levels, new store opening support costs, and costs associated with
setup of the expanded warehouse square footage.
Operating profit increased to $510,000 for the quarter ended October 26,
1996, from a loss of $239,000 for the quarter ended October 31, 1995. As a
percentage of net sales, operating margin increased to 2.6% from (1.8)%. This
increase was primarily due to the factors described above.
Three Quarters Ended October 26, 1996, versus Three Quarters Ended October 31,
1995
Net sales increased $13.3 million, or 32.2%, to $54.8 million in the
three quarters ended October 26, 1996, from $41.5 million for the three quarters
ended October 31, 1995. Comparable store net sales increased approximately
16.7%, contributing $6.9 million of the increase in net sales. Comparable store
net sales increased primarily due to expanded weekend hours and seven-day-a-week
operation following the Odd Job Acquisition, as well as an expanded product mix
and enhanced merchandising techniques. The remaining $6.4 million increase is
attributable to two stores acquired March 1, 1996 and four additional stores
opened in the second and third quarter of fiscal 1996. Net sales in the first
three quarters of fiscal 1995 were marginally negatively affected by the
relocation of one of the Company's Manhattan stores during August of that year.
Gross profit increased $5.7 million, or 36.4%, to $21.4 million in the
three quarters ended October 26, 1996, from $15.7 million in the three quarters
ended October 31, 1995. Gross margin increased to 39.1% in the three quarters
ended October 26, 1996, from 37.9% in the three quarters ended October 31, 1995.
This increase was due to increased purchasing opportunities resulting from the
ability to buy for both the retail and wholesale operations, as well as the
efforts of the Company's eight new senior buyers in acquiring higher margin
products.
Selling, general and administrative expenses increased $4.7 million, or
31.2%, to $19.8 million in the three quarters ended October 26, 1996, from $15.1
million in the three quarters ended October 31, 1995. Selling, general and
administrative expenses, as a percentage of net sales, decreased to 36.2% in the
fiscal 1996 period from 36.5% in the comparable 1995 period. This $4.7 million
increase primarily resulted from $2.3 million of increased store level expenses.
Approximately $1.4 million of the
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increase resulted primarily from an increase in administrative cost, principally
attributable to costs associated with the new buying and advertising personnel
and costs associated with store management trainees. In addition, warehouse and
store delivery costs increased $1.0 million due to costs associated with
increased inventory levels, new store opening support costs, and costs
associated with setup of the expanded warehouse square footage.
Operating profit increased to $1.6 million for the three quarters ended
October 26, 1996, from $585,000 for the three quarters ended October 31, 1995.
As a percentage of net sales, operating profit increased to 2.9% from 1.4%. This
increase was primarily due to the factors described above.
<TABLE>
<CAPTION>
WHOLESALE SEGMENT PERCENTAGE OF NET SALES
--------------------------------------------------
Quarter Ended Three Quarters Ended
----------------------- ------------------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 71.7 73.1 73.3 71.5
----- ----- ----- -----
Gross margin 28.3 26.9 26.7 28.5
SG & A expense 12.3 12.2 11.7 14.1
----- ----- ----- -----
Operating profit
before corporate expenses 16.0 % 14.7 % 15.0 % 14.4 %
===== ===== ===== =====
</TABLE>
Quarter Ended October 26, 1996 versus Quarter Ended October 31, 1995
Net sales increased $3.7 million, or 18.0%, to $24.6 million during the
third quarter of fiscal 1996, from $20.9 million in the third quarter of fiscal
1995. Fiscal 1996 net sales were positively affected by higher levels of sales
to existing customers, including one key customer. The Company also benefited
from the addition of new customers.
Gross profit increased $1.3 million, or 23.7%, to $6.9 million during
the third quarter of fiscal 1996, from $5.6 million in the third quarter of
fiscal 1995. Gross margin increased to 28.3% in the third quarter of fiscal
1996, from 26.9% in the third quarter of fiscal 1995. The increase in gross
profit was driven by the large increase in sales volume, while the gross margin
increase resulted from the change in merchandise mix, a decrease in the
percentage of drop ship sales, and increased gross margins on stock sales during
the quarter.
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<PAGE> 14
Selling, general and administrative expenses increased $469,000, or
18.4%, to $3.0 million in the third quarter of fiscal 1996, from $2.6 million in
the comparable 1995 period. The increase in selling, general and administrative
expenses was principally due to increases in variable expenses (such as sales
commission and travel). As a percentage of net sales, selling, general and
administrative expenses remained relatively constant at 12.3% in the third
quarter of 1996, from 12.2% in the third quarter of 1995.
Wholesale operating profit increased to $3.9 million in the quarter
ended October 26, 1996, from $3.1 million in the third quarter of 1995. As a
percentage of net sales, operating margin increased to 16.0% in the 1996 period
from 14.7% in the comparable 1995 period due to the factors described above.
Three Quarters Ended October 26, 1996, versus Three Quarters Ended October 31,
1995
Net sales increased $21.8 million, or 41.1%, to $74.7 million in the
first three quarters of fiscal 1996, from $53.0 million in the first three
quarters of fiscal 1995. Fiscal 1996 net sales were positively affected by a
higher levels of sales to existing customers, including one key customer whose
secondary distribution center had been damaged early in the second quarter of
1996. The Company also benefited from the addition of new customers.
Gross profit increased $4.8 million, or 31.9%, to $19.9 million in the
first three quarters of fiscal 1996, from $15.1 million in the first three
quarters of fiscal 1995. Gross margin decreased to 26.7% in the first three
quarters of fiscal 1996, from 28.5% in the first three quarters of fiscal
1995. The increase in gross profit was driven by the large increase in sales
volume, while the gross margin decline resulted from a change in merchandise
mix, and a reduced gross margin on stock sales in the first three quarters of
fiscal 1996.
Selling, general and administrative expenses increased $1.2 million, or
16.5%, to $8.7 million in the first three quarters of fiscal 1996, from $7.5
million in the comparable 1995 period. The increase in selling, general and
administrative expenses was principally due to increases in variable expense
(such as sales commission and travel). As a percentage of net sales, selling,
general and administrative expenses decreased to 11.7% in the first three
quarters of 1996, from 14.1% in the first three quarters of 1995, as the Company
benefited from higher leverage of its fixed overhead.
Wholesale operating profit increased to $11.2 million in the first three
quarters of 1996, from $7.6 million in the first three quarters of 1995. As a
percentage of net sales, operating margin increased to 15.0% in the 1996 period
from 14.4% in the comparable 1995 period.
CORPORATE EXPENSES
Quarter Ended October 26, 1996 versus Quarter Ended October 31, 1995
Corporate expenses increased $49,000, or 4.0%, to $1.3 million during
the third quarter 1996 from $1.2 million for the third quarter 1995. Corporate
expense in 1996 includes additional costs associated with the hiring of two key
executives and higher levels of corporate insurance
14 of 18
<PAGE> 15
expense. Corporate expense in 1995 includes a $500,000 special charge for legal
fees.
Three Quarters Ended October 26, 1996 versus Three Quarters Ended October 31,
1995.
Corporate expense increased $1.5 million or 66.2% to $3.8 million during
the three quarters ended October 26, 1996 from $2.3 million for the three
quarters ended October 31, 1995. The increase is primarily due to the addition
of two key executives, expenses associated with the opening of a Columbus, Ohio
office and increases in other expenses, including insurance expense. Corporate
expense increased as a percentage of total sales to 3.0% in 1996 from 2.4% in
1995 due to the reasons mentioned above.
DISCONTINUED OPERATION
Discontinued operation charges relate to the operations of and $1.6
million loss on the October 1995 sale of the Just Closeouts Ohio retail
operation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchases of
inventory, expenditures related to new store openings and the working capital
requirements for new and existing stores. The Company takes advantage of
closeout and other special situation purchasing opportunities which frequently
result in large volume purchases, and, as a consequence, its cash requirements
are not constant or predictable during the year and can be affected by the
timing and size of its purchases. The Company maintains a high level of
committed credit, so that it can take immediate advantage of special situation
purchasing opportunities. Having such credit availability provides the Company
with a competitive advantage measured against many of its competitors.
For the three quarters ended October 26, 1996, on an actual basis, cash
used by combined operating activities increased to $5.7 million, from $1.1
million in the comparable period in 1995, primarily because of increased
inventory levels at both the retail and wholesale operations, partially offset
by increases in net income and trade accounts payable. Cash used in investing
activities increased to $2.2 million in the three quarters ended October 26,
1996, as compared with cash provided by investing activities of $77,000 in the
comparable 1995 period, due to increased capital expenditures relating to new
stores and increased warehouse capacity. Capital expenditures in 1995 were
offset by the proceeds of the sale of fixtures and equipment used in the Ohio
retail operation which was sold in October 1995. Cash provided by financing
activities increased to $7.6 million in the first three quarters of fiscal 1996
from $1.0 million in the comparable 1995 period, reflecting a $4.0 million
equity contribution and increased bank borrowings, partially offset by increased
partners' withdrawals in anticipation of the Offering..
Capital expenditures for each of fiscal 1996 and 1997 are budgeted at
approximately $4.0 million, primarily for new stores, the management information
systems upgrade and the warehouse and distribution facilities' expansion.
Historically, the Company's growth has been financed through cash flow
from operations, borrowings under its bank credit facility and the extension of
trade credit. At October 26, 1996, the
15 of 18
<PAGE> 16
outstanding balance of the Company's $38.5 million credit facility ("Credit
Facility") was approximately $32.8 million. Borrowings under the Credit Facility
bore interest at variable rates with a weighted average borrowing rate at
October 26, 1996 of 8.63% per annum and were secured by a lien on substantially
all of the Company's assets. As of November 21, 1996 the net proceeds of the
Offering have been used to repay outstanding indebtedness of $29.6 million under
the Credit Facility and $7.8 million of Partners' note, tax loans to certain
executives and compensation buyouts.
On December 4, 1996, the Company entered into a new $40 million credit
facility. Loans under the new facility are secured by liens only on the
Company's receivables and warehouse inventories. The facility has a maturity
date of April 30, 1999. Borrowings under the new facility will bear interest, at
the Company's option, at either LIBOR plus 2% or prime less 0.5%. The credit
facility contains restrictive covenants which require minimum net worth levels,
maintenance of certain financial ratios and limitations on capital expenditures
and investments.
The Company currently anticipates opening new stores in each of the next
few years. In addition to new store openings, the Company may increase the
number of stores it operates through acquisitions. Management believes that from
time to time acquisition opportunities will arise. Possible acquisitions will
vary in size and the Company will consider larger acquisitions that could be
material to the Company. In order to finance any such possible acquisitions, the
Company may use cash flow from operations, may borrow additional amounts under
its revolving credit facility, may seek to obtain additional debt or equity
financing or may use its equity securities as consideration. The availability
and attractiveness of any outside sources of financing will depend on a number
of factors, some of which will relate to the financial condition and performance
of the Company, and some of which will be beyond the Company's control, such as
prevailing interest rates and general economic conditions.
Management believes that the proceeds of its initial public offering,
together with cash flow from operations and borrowings under its new loan
facility, will be adequate to fund the operations and internal expansion plans
of the Company for at least the next twelve months.
INFLATION
During the three quarters ended October 26, 1996, lease expense and
salaries and wages have increased modestly. The increases have not had a
significant effect on the Company's results of operations because the impact of
rising costs has been offset by price increases. As a result, inflation has not
had nor is it expected to have a significant impact on the Company's operations.
SEASONALITY AND QUARTERLY FLUCTUATION
Historically, the Company's retail stores have experienced their highest
net sales and operating income levels during the fourth quarter, which includes
the holiday selling season. The Company's wholesale operations have historically
experienced slightly higher sales and operating income levels in the second half
of the year.
The Company's quarterly results of operations may also fluctuate from
quarter to quarter as a result of the amount and timing of sales contributed by
new stores, the level of advertising and pre-opening expenses associated with
the opening of new stores, the integration of new stores into the
16 of 18
<PAGE> 17
operations of the Company and the timing of large opportunistic purchases and
sales in the Company's wholesale operations as well as other factors.
17 of 18
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
--------
4.2 Asset Based Loan and Security Agreement between Mazel
Stores, Inc. and Odd-Job Acquisition Corp.,as borrowers, and
The Provident Bank, as lender, dated December 4, 1996
27 Financial Data Schedule (EDGAR filing only)
B. Reports on Form 8-K
-------------------
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAZEL STORES, INC.
(Registrant)
January 6, 1997 /s/ Reuven Dessler
- --------------- ------------------------------------
Date Reuven Dessler
Chief Executive Officer
January 6, 1997 /s/ Sue Atkinson
- --------------- ------------------------------------
Date Sue Atkinson
Senior Vice President
Chief Financial Officer and
Treasurer
Page 18 of 18
<PAGE> 1
Exhibit 4.2
ASSET BASED LOAN AND SECURITY
AGREEMENT
BETWEEN
MAZEL STORES, INC.
AND
ODD-JOB ACQUISITION CORP.
AS BORROWERS
AND
THE PROVIDENT BANK
AS LENDER
DECEMBER 4, 1996
<PAGE> 2
ASSET BASED LOAN AND SECURITY AGREEMENT
---------------------------------------
THIS AGREEMENT, dated as of December 4, 1996, by and between MAZEL
STORES, INC. ("Stores") an Ohio corporation, and ODD-JOB ACQUISITION CORP.
("Odd-Job"), a Delaware corporation, jointly and severally ("Borrower"), whose
mailing address is 31000 Aurora Road, Solon, Ohio 44139, and THE PROVIDENT BANK
("Bank"), an Ohio banking corporation, whose mailing address is 1111 Superior
Avenue, Cleveland, Ohio 44114-2522.
SECTION 1. DEFINITIONS. As used herein, the following terms, when
initial capital letters are used, shall have the respective meanings set forth
below. In addition, all terms defined in the Uniform Commercial Code as adopted
in Ohio (hereinafter the "Uniform Commercial Code") shall have the meanings
given therein unless otherwise defined herein.
1.1 ACCOUNTS shall mean all of Borrower's accounts (as that
term is defined in the Uniform Commercial Code), accounts receivable, chattel
paper, contract rights, documents and instruments; all other obligations or
indebtedness owed to Borrower from whatever source arising; all guarantees of
any of the foregoing and all security therefor; all of the right, title and
interest of Borrower in and with respect to the goods, services or other
property which gave rise to or which secure any of the foregoing and all
insurance policies and proceeds relating thereto; all of the foregoing whether
now owned by Borrower or hereafter acquired or in existence.
1.2 ADVANCE shall mean an advance made by Bank to Borrower
(including without limitation, any advance made to reimburse the Bank for
drawings under any Letter of Credit), pursuant to the provisions, terms and
conditions of Section 2 of this Agreement.
1.3 AFFILIATE shall mean (i) Reuven Dessler, Brady Churches,
any individual who is a member of the senior management of Borrower or an inside
director of Borrower, and any member of the immediate family of such persons
(collectively, the "Affiliated Individuals"); (ii) any Person that is a
shareholder in Borrower holding more than five percent (5%) of the issued shares
of Borrower (collectively, the "Affiliated Entities"); and (iii) any Person who
directly or indirectly controls, is controlled by or is under common control or
ownership with Borrower, any Affiliate Entities or any Affiliated Individuals.
For the purposes of this definition, the term "control" shall mean the ownership
of twenty percent (20%) or more of the beneficial interest in the entity being
referred to, and the term "immediate family" shall mean spouses, ancestors,
lineal descendants, and brothers and sisters of the person in questions
including those adopted.
1.4 AVAILABLE DRAW shall have the meaning set forth in Section
2.3(a) hereof.
1.5 CASH COLLATERAL ACCOUNT shall mean that deposit account
maintained by Borrower at Bank, without liability by Bank to pay interest
thereon, into which all collections on the Collateral shall be deposited and
over which Bank shall have the sole power of withdrawal until all Obligations
are paid, performed, satisfied, enforced, and observed in full, and any
outstanding Letters of Credit issued by Bank on behalf of Borrower have been
cancelled or expired.
1.6 COLLATERAL shall mean (a) all of the Borrower's Equipment,
General Intangibles, Inventory, Accounts and all other items of personal
property, including all motor
<PAGE> 3
vehicles, now owned or hereafter acquired by the Borrower or in which the
Borrower has granted or may in the future grant a security interest to the Bank
hereunder or in any supplement hereto or otherwise; (b) all proceeds and
products of any of the foregoing in whatever form, including cash, negotiable
instruments and other evidences of indebtedness, chattel paper, security
agreements or other documents and all rights of Borrower in, to and under all
leases and rental agreements relating to the foregoing; (c) all of the
Borrower's right, title and interest in and to all goods or other property
represented by or securing any of the Accounts, including all goods that may be
reclaimed or repossessed from or returned by Debtors; (d) all of the Borrower's
rights as an unpaid seller, including stoppage in transit, detinue and
reclamation; (e) all additional amounts due to the Borrower from any Debtor,
irrespective of whether such additional amounts have been specifically assigned
to the Bank; (f) all guaranties, or other agreements or property securing or
relating to any of the items referred to in (a) above, or acquired for the
purpose of securing and enforcing any of such items; (g) all instruments,
documents, securities, cash, property, deposit accounts (including but not
limited to deposits made to Borrower's Cash Collateral Account), and the
proceeds of any of the foregoing, owned by the Borrower or in which it has an
interest, which are now or may hereafter be in the possession or control of the
Bank or in transit by mail or carrier to or from the Bank, or in possession of
any third party acting on behalf of Bank, without regard to whether Bank
received same in pledge, for safekeeping, as agent for collection or
transmission or otherwise or whether Bank had conditionally released the same;
(h) all the capital stock of the subsidiaries of Borrower; (i) all partnership
interest of partnerships in which Borrower has an interest; (j) all of
Borrower's right, title and interest in and to all real estate leases, whether
as lessor or lessee; (k) all ledger sheets, files, records, documents,
blueprints, drawings and instruments (including, without limitation, computer
programs, tapes and related electronic data processing software) evidencing an
interest in or relating to the foregoing; and (l) all proceeds and products of
the collateral described above, including, without limitation, all claims
against third parties for damage to or loss or destruction of any of the
foregoing, including insurance proceeds, and accounts, contract rights, chattel
paper and general intangibles arising out of any sale, lease or other
disposition of any of the foregoing; provided, however, that the term
"Collateral" shall not include, any leases, agreements, chattel paper, contract
rights or General Intangibles which are now held or hereafter acquired by the
Borrower to the extent that such leases, agreements, chattel paper, contract
rights or General Intangibles are not assignable or capable of being encumbered
(A) as a matter of law or (B) under the terms of any agreement applicable
thereto (but solely to the extent that any such restriction is enforceable under
applicable law) without the consent of the other party thereto where such
consent has not been obtained. Attached hereto as Schedule 4.12 is a list of all
material leases, agreements, chattel paper, contract rights or General
Intangibles held by Borrower as of the date hereof which by their respective
terms are non-assignable.
1.7 CURRENT ASSETS and CURRENT LIABILITIES shall mean, at any
time, all assets or liabilities, respectively, that should, in accordance with
Generally Accepted Accounting Principles ("GAAP"), be classified as current
assets or current liabilities, respectively, on a balance sheet of Borrower.
1.8 DEBTOR shall mean the account debtor with respect to any
of the Borrower's Accounts and/or the prospective purchaser with respect to any
contract right, and/or any party who enters into or proposes to enter into any
contract or other arrangement with the
2
<PAGE> 4
Borrower pursuant to which the Borrower is to deliver any personal property or
perform any service.
1.9 DEFAULT RATE shall mean that rate of interest which is two
and one-half percent (2 1/2) above the then applicable rate under the Notes, or
if there is no then applicable rate, the default rate shall be a rate of
interest equal to the Prime Rate plus two and one-half percent (2-1/2%).
1.10 DIVIDENDS shall mean (i) any payment made, liability
incurred, or other consideration or property given, for the repurchase or
redemption of any equity interest of Borrower, or (ii) a distribution (of cash
or property) in respect of any equity interest of Borrower or (iii) any payment
to any shareholder in respect of any Indebtedness of Borrower to such Person.
1.11 ELIGIBLE ACCOUNTS shall mean such Accounts which are and
at all times shall continue to be acceptable to the Bank in all respects. As of
the Closing of the Loans, the following criteria shall be in effect as to the
Eligible Accounts, which shall be Accounts which:
(a) are not subject to any claim for credit,
allowance, or adjustment by the account
Debtor or any set off or counter claim;
provided, however, that the portion of
any Account which is not subject to such
claim for credit, allowance, adjustment,
setoff or counterclaim, shall be deemed
an Eligible Account;
(b) arose in the ordinary course of
Borrower's business from the performance
(fully completed) of services or bona
fide sale of Inventory which have been
shipped to the Debtor (excluding any
portion of an Account which is
attributable to finance charges,
advertising charges or the like), and not
more than ninety (90) days have elapsed
since the due date in respect of such
Account (but in no circumstances more
than one hundred twenty (120) days from
the invoice date), less any unused credit
owed such Debtor by Borrower;
(c) no notice of any bankruptcy or insolvency
proceeding (pending or threatened) in
respect of a Debtor, any discontinuation
of such Debtor's business, or any other
information reasonably calling into
question the ability of such Debtor to
perform its obligations has been received
by Borrower or Bank;
(d) is not subject to an assignment, pledge,
claim, mortgage, lien, or security
interest of any type except that granted
to or in favor of Bank;
3
<PAGE> 5
(e) the Debtor has not rejected, returned,
revoked acceptance of, or refused to
accept any of the Inventory which are the
subject of the Account; provided,
however, that the portion of any Account
which is not subject to such rejection,
return, revocation or refusal, shall be
deemed an Eligible Account;
(f) Borrower has not received any Instrument,
promissory note or chattel paper with
respect to or in payment of the Account;
(g) is not an Account which arises out of
contracts with or orders from the United
States or any of its departments,
agencies or instrumentalities, UNLESS
Bank's security interest in such Account
is perfected according to the Federal
Assignment of Claims Act in a manner
satisfactory to Bank;
(h) is not an Account due from any Affiliate,
partner or employee of Borrower or an
"intercompany" or "interdivisional"
receivable;
(i) is not an Account which arises out of
contracts with or orders from a Debtor
which is not a resident of the United
States (unless such Account is secured by
a letter of credit acceptable to the
Bank) provided, however, that the Bank
will consider, on a case by case basis,
Accounts of Debtors which are residents
of Canada and may determine, in its
discretion, whether such Accounts shall
constitute Eligible Accounts;
(j) is not an Account owed to Borrower by a
Debtor which has failed to pay more than
twenty-five percent (25%) of its
currently outstanding Accounts in
accordance with the requirements set
forth in (b) above or such Account does
not otherwise comply with the
requirements set forth in (b) of this
Section 1.12;
(k) does not arise from the shipment or
conditional sale of Inventory on
consignment;
(l) is not an Account owed to Borrower by
Debtor which is a creditor of Borrower
for goods sold or services rendered by
such Debtor to Borrower, but only to the
extent of the value of such goods or
services at any time outstanding and
unpaid;
4
<PAGE> 6
(m) a Debtor's Account balance (together with any
Accounts owing by an Affiliate of such Debtor) in
the aggregate does not exceed thirty percent (30%)
of the aggregate total of Borrower's Eligible
Accounts; provided, however, that only the portion
in excess of such limitation shall be deemed
ineligible, and further provided that this
subsection (m) shall not limited or exclude any
amount of the Account owed by MacFrugal Pic-N-Save,
dba West Coast Liquidators;
(n) is not subject to a reduction for a discrepancy
pursuant to Section 7.5 hereof, provided, however,
that only the amount of the discrepancy shall be
deemed ineligible;
(o) Borrower has not exercised or attempted to exercise
any seller's remedies with regard to any Account,
including, without limitation, stoppage in transit
or right of reclamation;
(p) is not an Account for which unapplied funds have
been received by Borrower or Bank; and
(q) is not an Account owed from a Debtor located in New
Jersey or Minnesota which exceeds, in the aggregate,
$2,000,000.00 (it being agreed that only the amount
in excess thereof shall be excluded), provided that
(I) any single Account of $1,000,000.00 or more
shall be excluded if such Account is in default and
(II) if the Bank requests that the Borrower qualify
to do business in either such state or file any
necessary reports, any account from a Debtor located
in such state shall be excluded unless the Borrower
becomes qualified or files the requested report
within thirty (30) days after the Bank's request.
1.12 ELIGIBLE INVENTORY shall mean such of Borrower's
Inventory in which Bank shall have a perfected first priority security interest.
Eligible Inventory will not include Inventory:
(a) located outside the United States;
(b) in the possession of an Affiliate, bailee or a third
party, unless such Inventory is subject to a
perfected first priority security interest in favor
of Bank to secure the Loans and then only to the
extent not subject to any lien or claim, setoff,
credit, or allowance for amounts due
5
<PAGE> 7
and unpaid to the Person in possession of such
Inventory;
(c) which is work in process;
(d) which is damaged, defective, unmerchantable or
spoiled;
(e) (i) held for twenty-four (24) or more months for any
period after December 1, 1997, as determined by the
monthly Inventory aging report prepared by Borrower
in the ordinary course; or (ii) which is obsolete;
(f) held by Borrower or a third party on consignment;
(g) which is Inventory from vendors or suppliers with
corresponding liens or purchase money security
interests against such Inventory, whether or not
such liens are Permitted Liens;
(h) which Bank, in its reasonable discretion, has
determined is unsatisfactory in any respect and has
given Borrower not less than thirty (30) days prior
written notice of the reason therefor;
(i) which is Inventory consisting of goods not held for
sale, including, without limitation, maintenance
items and supplies, packing materials and cartons;
(j) which is inventory owned by another Person and in
Borrower's possession; or
(k) which is fully prepaid, in transit Inventory not yet
received by Borrower unless title to such Inventory
has passed to Borrower, and so long as such
Inventory is adequately insured to the reasonable
satisfaction of the Bank and the Bank is loss payee
on such insurance, with a value not in excess of
$5,000,000.00.
1.13 EQUIPMENT shall mean all of Borrower's equipment (as that
term is defined in the Uniform Commercial Code), including, without limitation,
all furniture, fixtures, machinery and other equipment of any kind and all
substitutions and replacements thereof and accessories and parts therefor, all
whether now owned or hereafter acquired by Borrower.
1.14 EVENT OF DEFAULT shall mean any event described in
Section 10.1 hereof.
6
<PAGE> 8
1.15 INDEBTEDNESS shall mean:
(a) indebtedness created, issued or incurred by Borrower
for borrowed money (whether by loan or the issuance
and sale of debt securities) whether or not recourse
is limited to specific assets of Borrower;
(b) obligations of Borrower to pay the deferred purchase
or deferred acquisition price of property or
services, other than trade accounts payable arising
in the ordinary course of business so long as such
trade accounts payable are not for borrowed money
and are paid within sixty (60) days after the due
date (unless such trade account payable is being
contested in good faith pursuant to appropriate
proceedings and a sufficient reserve, as reasonably
determined by Bank, has been established in respect
thereof);
(c) indebtedness of others secured by a lien on the
property of Borrower, whether or not the
indebtedness so secured has been assumed by
Borrower;
(d) obligations of Borrower in respect of letters of
credit or similar instruments issued or accepted by
banks and other financial institutions for the
account of Borrower;
(e) capitalized lease obligations of Borrower; and
(f) indebtedness of others guaranteed by Borrower.
1.16 GENERAL INTANGIBLES shall mean all of Borrower's general
intangibles (as that term is defined in the Uniform Commercial Code), including,
without limitation, all goodwill, patents, formulas, blueprints, proprietary
manufacturing processes, trademarks, trade names, licenses, franchises,
beneficial interests in trusts, joint venture interests, partnership interests,
rights to tax refunds, pension plan overfundings, literary rights and other
contractual rights of Borrower, all whether now owned or hereafter acquired by
Borrower.
1.17 INTEREST COVERAGE RATIO shall mean that ratio of (a)
Borrower's net income (determined in accordance with GAAP), plus depreciation,
plus amortization, plus interest expense, plus taxes, plus any other noncash
charges, and minus capital expenditures and minus Dividends to (b) Borrower's
total interest expense.
1.18 INTEREST DETERMINATION DATE shall mean the third to last
Eurodollar Business Day (as defined in Section 1.20) of any then current
Interest Period with respect to any outstanding Advance, or in the case of funds
constituting a new Advance, that date which is two (2) Eurodollar Business Days
prior to the date such funds are actually advanced. If such date is
7
<PAGE> 9
not a Eurodollar Business Day, then the immediately preceding Eurodollar
Business Day shall be utilized.
1.19 INTEREST PERIOD means, with respect to any Libor Rate
Loan, the period commencing on the date such Loan is made, continued or
converted or on the last day of the immediately preceding Interest Period
applicable to such Libor Rate Loan, as the case may be, and ending on the same
day in the first, second or third calendar month thereafter, as the Borrower may
elect in advance in accordance with the requirements of this Agreement;
provided, however, that whenever the last day of any Interest Period would
otherwise occur on a day other than a Eurodollar Business Day, the last day of
such Interest Period shall occur on the next succeeding Eurodollar Business Day,
provided that if such extension of time would cause the last day of such
Interest Period for a Libor Rate Loan to occur in the next following calendar
month, the last day of such Interest Period shall occur on the next preceding
Eurodollar Business Day. If any Interest Period ends on a day during a month in
which there is no numerically corresponding day to the first day of the Interest
Period, then the Interest Period shall end on the last Eurodollar Business Day
of such calendar month. For all purposes herein, a "Eurodollar Business Day"
shall be any day on which major commercial banks in London, England are open for
the regular conduct of business. Interest shall accrue from and including the
first day of an Interest Period to but excluding the last day of such Interest
Period.
1.20 INVENTORY shall mean all of Borrower's inventory (as that
term is defined in the Uniform Commercial Code), including, without limitation,
all goods, merchandise and other personal property which are held for sale or
lease, or are furnished or to be furnished under any contract of service by
Borrower, or are raw materials, work-in-progress, supplies or materials used or
consumed in Borrower's business, and all products thereof, and all
substitutions, replacements, additions and accessories thereto, all whether now
owned or hereafter acquired by Borrower; and all of Borrower's right, title and
interest in and to any leases or rental agreements for such inventory.
1.21 LC FACILITY shall have the meaning set forth in Section
2.2 hereof.
1.22 LETTER OF CREDIT shall mean any one or more letters of
credit issued under the LC Facility.
1.23 LIABILITIES shall mean all indebtedness, obligations and
other liabilities of Borrower, whether matured or unmatured, liquidated or
unliquidated, direct or contingent or joint or several, that should, in
accordance with GAAP, be classified as liabilities on a balance sheet of
Borrower.
1.24 LIBOR RATE shall mean with respect to a Libor Rate Loan
the arithmetic mean of the offered rates for deposits in U.S. dollars having a
maturity coterminous with the Interest Period designated in the applicable Libor
Rate Loan request commencing on the second Eurodollar Business Day immediately
following the Interest Determination Date, as reported on the Bloomberg L.P.
Financial Markets System as of 11:00 A.M., London time, on such Interest
Determination Date. If Bank terminates its subscription to the Bloomberg L.P.
Financial Markets System, the Libor Rate shall be determined by Bank utilizing
any other reasonable system selected
8
<PAGE> 10
by Bank as a reference service to determine Libor rates. The Bank will use
reasonable efforts to confirm in writing any Libor Rate selected by the
Borrower; however, Bank shall have no liability to Borrower for failing to send
such confirmation.
1.25 LIBOR RATE LOAN means any Advance under Section 2 of this
Agreement that bears interest with reference to the Libor Rate.
1.26 LOAN DOCUMENTS shall mean this Agreement, the Notes, and
all other documents, agreements, instruments or certificates executed or
delivered by Borrower in connection herewith or relating hereto, and any
amendments or modifications thereto.
1.27 LOANS shall mean all Advances made pursuant to Section 2
of this Agreement.
1.28 MATERIAL AGREEMENTS shall mean those contracts,
agreements, documents or other arrangements set forth on Schedule 4.21.
1.29 MAXIMUM LOAN AMOUNT shall have the meaning set forth in
Section 2.1.
1.30 NET WORKING CAPITAL shall mean, at any time, the amount
by which Current Assets exceed Current Liabilities (determined by excluding the
full amount outstanding under the Revolving Loan).
1.31 NOTES shall mean one or more promissory notes evidencing
the Loans pursuant to Section 2 hereof.
1.32 OBLIGATIONS shall mean, without limitation, all Loans and
all other debts, obligations, or liabilities of every kind and description of
Borrower to Bank arising or existing in connection with or pursuant to the Loan
Documents, now due or to become due, direct or indirect, absolute or contingent,
presently existing or hereafter arising, joint or several, secured or unsecured,
whether for payment or performance, including, without limitation, all loans
(including any loan by renewal or extension), all overdrafts, all guarantees,
all bankers acceptances, all agreements, all letters of credit issued by Bank
for Borrower hereunder and the applications relating thereto, all indebtedness
of Borrower to Bank, and all undertakings to take or refrain from taking any
action. Obligations shall also include all interest and other charges chargeable
to the Borrower or due from the Borrower to the Bank from time to time under the
Loan Documents, including but not limited to, all costs and expenses referred to
in Section 8 and Section 11 of this Agreement.
1.33 PERMITTED INDEBTEDNESS shall mean only the following
Indebtedness:
(a) Trade payables and other current liabilities
occurred in the ordinary course of business;
(b) Any Indebtedness which is subordinated to the
satisfaction of Bank;
9
<PAGE> 11
(c) Payments under capitalized leases permitted by
Section 6.13 hereof and purchase money Indebtedness,
provided the aggregate annual payments under any
such leases, combined with the purchase money
Indebtedness, is less than $5,000,000.00, exclusive
of (I) any amount with respect to Borrower's
proposed AS400 computer lease and (II) up to
$2,500,000.00 with respect to the point of sale
inventory system, and further provided that any
amount of purchase money Indebtedness in excess of
$1,000,000.00 shall require the approval of the
Bank, which shall not be unreasonably withheld; and
(d) Such other Indebtedness as hereinafter approved by
Lender in writing.
1.34 PERMITTED LIENS shall mean the liens and interests in
favor of Bank granted in connection herewith and, to the extent reflected on
Borrower's books and records and not materially impairing the operations of
Borrower or any performance hereunder or contemplated hereby:
(a) liens arising by operation of law for taxes not yet
due and payable;
(b) inchoate statutory liens of mechanics, landlord's
materialmen, shippers and warehousemen for services
or materials for which payment is not yet due;
(c) liens incurred or deposits made in the ordinary
course of business in connection with workers'
compensation, unemployment insurance and other types
of social security;
(d) liens, if any, specifically permitted by Bank from
time to time in writing;
(e) the following if the validity or amount thereof is
being contested in good faith and by appropriate and
lawful proceedings promptly initiated and diligently
conducted of which Borrower has given notice to Bank
and for which appropriate reserves (in Bank's
reasonable judgment) have been established and so
long as levy and execution thereon have been and
continue to be stayed: claims and liens for taxes
due and payable and claims of mechanics,
materialmen, shippers, warehousemen, carriers and
landlords;
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(f) liens to secure purchase money Indebtedness which is
Permitted Indebtedness;
(g) liens securing statutory obligations, surety,
customs and appeal bonds and other obligations of
like nature, incurred in the ordinary course of
business;
(h) liens arising under or securing capitalized lease
obligations permitted hereunder;
(i) those liens and encumbrances shown on Schedule 1.35
hereto; and
(j) reservations, rights of way, zoning restrictions and
other similar encumbrances to title affecting real
property, provided that they do not as a practical
matter have any adverse effect on the ownership or
use of any of the property in question.
1.35 PERSON shall mean an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, and a
government or any department or agency thereof.
1.36 PLAN shall mean any pension plan, retirement plan, profit
sharing plan, defined benefit or contribution plan, bonus plan, other
compensatory or similar plan, other qualified or nonqualified plan, or "employee
pension benefit plan" as defined in Section 3(2) of ERISA (as defined in Section
4.18) and all rules and regulations promulgated thereunder.
1.37 PRIME RATE shall mean that annual percentage rate of
interest established by Bank from time to time as its prime rate (and disclosed
to Borrower), whether or not such rate is publicly announced and which provides
a base to which loan rates may be referenced. The Prime Rate is not necessarily
the lowest lending rate of the Bank.
1.38 PRIME RATE LOAN shall mean any Advance which bears
interest at a rate of interest utilizing the Bank's Prime Rate as the index
rate.
1.39 RETAIL INVENTORY shall mean that portion of Eligible
Inventory which is located at any retail location operated by Borrower. In
addition to the exclusions set forth in Section 1.13, the aggregate value of
Retail Inventory shall, for purposes of determining the amount which can be
borrowed under the Revolving Loan, be reduced by (a) any intercompany mark-up or
profit margin, and (b) a factor of two percent (2%) to reserve for damaged or
obsolete Retail Inventory.
1.40 REVOLVING LOAN shall mean any Advance pursuant to Section
2.1.
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1.41 REVOLVING LOAN NOTE shall mean the Revolving Loan
Promissory Note executed by Borrower to evidence the loan described in Section
2.1 hereof.
1.42 "TANGIBLE NET WORTH" shall mean, at any time, partner's
or shareholder's equity (in accordance with GAAP) less the sum of (i) any
surplus resulting from any write-up of assets, (ii) goodwill, including any
amounts, however designated on a balance sheet of Borrower, representing the
excess of the purchase price paid for assets or stock acquired over the value
assigned thereto on the books of the Borrower, (iii) patents, trademarks, trade
names and copyrights, (iv) any deferred expenses, (v) any other amount in
respect of an intangible that should be classified as an asset on the balance
sheet of Borrower in accordance with GAAP, (vi) any receivables or other amount
owed Borrower by any Affiliate, and (vii) any investment by Borrower in any
Affiliate.
SECTION 2. LOANS AND INTEREST.
2.1 REVOLVING CREDIT FACILITY.
(a) Subject to the terms and conditions of this
Agreement, and in reliance upon the representations
and warranties contained herein, the Bank will make
Advances in the form of loans to the Borrower in an
aggregate amount not to exceed the lesser of (i)
Forty Million Dollars ($40,000,000.00) minus the
lesser of (A) the aggregate face amount of the
Letters of Credit issued under the LC Facility or
(B) the Available Draw under such Letters of Credit
or (ii) the sum of (A) sixty percent (60%) of the
cost or market value, whichever is lower, of
Eligible Inventory which is not Retail Inventory,
(B) sixty percent (60%) of the cost or market value,
whichever is lower, of Retail Inventory, (C) eighty-
five percent (85%) of the outstanding amount of
Eligible Accounts, (D) sixty percent (60%) of the
lesser of (x) the aggregate face amount of the
Letters of Credit issued under the LC Facility or
(y) the Available Draw under the Letters of Credit
and (E) the amount of collected funds in the Cash
Collateral Account (the lesser of (i) or (ii) being
referred to hereinafter as the "Maximum Loan
Amount"). Bank reserves the right to modify the
advance rates stated herein upon ninety (90) days
prior notice to Borrower. Should the outstanding
amount of Loans at any time exceed the Maximum Loan
Amount, Borrower shall on demand immediately repay
such excess amount. Any such Loans in excess of the
Maximum Loan Amount will be made from time to time
in the sole and absolute discretion of the Bank, and
neither this Agreement nor any loans or other
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action by the Bank shall obligate the Bank to make
further loans to the Borrower.
(b) The Bank shall automatically reimburse itself for
amounts drawn under any Letter of Credit issued
pursuant to the LC Facility. The automatic
reimbursement described above shall constitute, and
be made in the form of, an Advance under the
Revolving Loan Note as a Prime Rate Loan.
(c) Advances under the Revolving Loan Note shall be made
pursuant to Borrower's written or telephonic request
therefor, given by Borrower to Bank, stating the
date of the requested borrowing, the amount of the
requested Advance, whether it will be a Prime Rate
Loan or Libor Rate Loan, the applicable Interest
Period, if any, and the total amount to be borrowed.
Bank shall only be obligated to make Advances in
increments of Ten Thousand Dollars ($10,000.00). For
all purposes relating to Advances hereunder, Stores
shall be the agent of Borrower, and Bank shall not
be obligated to accept direction from any other
Borrower with respect to any Advance until Bank
shall have received written notice to that effect.
In addition, all Advances to be made at the Libor
Rate shall equal or exceed Two Hundred Fifty
Thousand Dollars ($250,000.00). Each written request
for an Advance shall be signed by an authorized
representative of Borrower, and each telephonic
request for an Advance shall be made, and confirmed
in writing within twenty-four (24) hours
thereafter, by such an authorized representative.
Any written request with respect to a Libor Rate
Loan shall be received by Bank on or before the
applicable Interest Determination Date. Any
telephonic request for a Libor Rate Advance shall be
made on or before the applicable Interest
Determination Date. No written request for an
Advance shall become effective until actually
received by Bank.
(d) Borrower undertakes and agrees to pay to Bank on the
first day of each calendar month interest on the
amount outstanding under the Revolving Loan Note, at
an annual rate based upon a year of three hundred
sixty-five (365) days, with respect to each Advance
to be determined as follows:
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(i) A rate per annum, at the option of Borrower,
based on either (A) the Libor Rate plus two
hundred (200) basis points or (B) the Prime
Rate less one-half percent (1/2%).
(ii) The rate of interest on any Prime Rate Loan
will automatically and immediately increase
or decrease on the day of, and by an amount
equal to, each increase or decrease in the
Prime Rate with no notice to Borrower.
(iii) Any Libor Rate Loan elected by Borrower
under this Section 2.1 shall, as to each
such Advance, remain in effect until the
expiration of the applicable Interest
Period. Borrower may select a new Interest
Period for such Libor Rate Loan on the
applicable Interest Determination Date by
delivery of written notice to Bank on or
before such date. In the event that Borrower
shall fail to give timely notice on or
before the applicable Interest Determination
Date of its election to continue any Libor
Rate Loan as provided above or convert such
Loan to a Prime Rate Loan, or in the event
any such conversion or continuation shall be
prohibited by the terms of this Agreement,
such Advance (unless repaid) shall
automatically be deemed to be refinanced
with a Prime Rate Loan at the end of the
Interest Period then in effect with respect
to such Libor Rate Loan.
(iv) Notwithstanding any provision in this
Agreement to the contrary, if an Event of
Default shall have occurred, the unpaid
principal and, to the extent permitted by
law, accrued interest under the Revolving
Loan Note shall bear interest at the Default
Rate until the Event of Default shall have
been cured with the consent of Bank. Prior
to maturity, if any payment of principal or
interest is ten (10) or more days past due,
Borrower shall pay a late fee of an amount
equal to the lesser of five percent (5%) of
such payment or Two Hundred Fifty Dollars
($250.00).
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(e) The Revolving Loan shall mature on April 30, 1999.
On April 30, 1999, the Bank may, subject to the
Bank's then existing credit and lending policy
requirements, and provided no Event of Default has
occurred and is continuing hereunder, extend and
renew the term of the Revolving Loan for an
additional one (1) year period, in the Bank's sole
discretion. If the Bank does not extend and renew
the term of the Revolving Loan, then the Bank will
consider, in its discretion, extending the then
current maturity date of the Revolving Loan for a
period of one hundred eighty (180) days during which
Borrower may obtain replacement financing. If the
Bank does not notify the Borrower that it has
elected to renew and extend the Revolving Loan, then
Bank shall be deemed to have declined to so renew
and extend the Revolving Loan.
2.2 LETTER OF CREDIT FACILITY.
(a) Subject to the terms and conditions of this
Agreement and in reliance upon the representations
and warranties contained herein being true as of the
date of issuance of the letters of credit described
herein, the Bank will, provided no Event of Default
has occurred and is continuing, at the request of
Borrower, issue for the account of Borrower one or
more letters of credit (each a "Letter of Credit"
and collectively the "Letters of Credit") upon such
terms (including, without limitation, the execution
and delivery by Borrower of such applications, notes
and other instruments and payments of the fees
provided herein as Bank may require) and in such
form and substance as are satisfactory to Bank in
connection with the Borrower's business activities.
In no event shall the aggregate outstanding amount
under all Letters of Credit (that is, that portion
which has not already been drawn upon by the
beneficiary thereof (the "Available Draw")) exceed
Fifteen Million Dollars ($15,000,000.00) (the "LC
Facility"). Any portion of a Letter of Credit which
has been drawn against shall be immediately
reimbursed to the Bank by means of an Advance under
the Revolving Loan pursuant to Section 2.1 of this
Agreement, or if there is no availability, the
amount of such Letter of Credit draw shall be
immediately reimbursed by the Borrower. The LC
Facility shall be available to Borrower for a period
concurrent with that of the Revolving Loan. No
Letter
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of Credit will be issued which has a stated
expiration date occurring on or after the Maturity
Date.
(b) For purposes of determining the Maximum Loan Amount
permitted pursuant to Section 2.1, the issuance of a
Letter of Credit by Bank shall limit the
availability of Advances under the Revolving Loan as
set forth in Section 2.1. In connection with the
issuance and maintenance of each Letter of Credit,
Borrower shall pay to the Bank fees and commissions
as set forth in Section 8 hereof.
(c) Borrower shall be obligated to reimburse Bank for
any additional amounts, if any law, regulation or
guideline which becomes effective after the date
hereof or change after the date hereof in any law or
regulation or in the interpretation thereof or
issuance after the date hereof of any ruling,
decree, judgment or recommendation by any regulatory
body, court or any administrative or governmental
authority charged or claiming to be charged with the
administration thereof, shall either (i) impose
upon, modify, require, make or deem applicable to
the Bank or any of its affiliates any reserve
requirement based upon the deeming of Letters of
Credit to be deposits held by the Bank, special
deposit requirement, insurance assessment or similar
costs or requirement against or affecting letters of
credit issued or to be issued hereunder or (ii)
subject the Bank or any of its affiliates to any
tax, charge, fee, deduction, withholding or similar
costs of any kind whatsoever or (iii) impose any
condition upon or cause in any manner the addition
of any supplement to or increase of any kind to the
Bank's or an affiliate's capital or cost base for
issuing such Letters of Credit which results in an
increase in the capital requirement supporting such
Letters of Credit or (iv) impose upon, modify,
require, make or deem applicable to the Bank or any
of its affiliates any capital requirement, increased
capital requirement or similar requirement such as
the deeming of such Letters of Credit to be assets
held by the Bank or any of its affiliates for
capital calculation or other purposes, and the
result of any events referred to in (i), (ii), (iii)
or (iv) above shall be to increase the costs or
decrease the benefit in any way to the Bank or any
affiliate of issuing, maintaining or participating
in such Letters of Credit, then the Borrower shall,
on the tenth
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business day after receipt of written notice of such
increased costs or decreased benefits (which notice
shall set forth in reasonable detail the calculation
of such increased costs or decreased benefits) or
both to the Borrower by the Bank, pay to the Bank
all such additional amounts which, in the Bank's
sole good faith calculation as allocated to such
Letters of Credit:
(i) in the case of events referred to in (i) and
(ii) above, shall be sufficient to compensate
it for all such increased costs, decreased
benefits or both; or
(ii) in the case of events referred to in (iii) and
(iv) above, shall be an amount per annum,
payable quarterly, equal to the product
obtained by multiplying (i) the minimum
percentage (expressed as a decimal) capital
required by the appropriate regulatory bodies
to be maintained for letter of credit risks of
the type issued hereunder (taking into account
any risk allocation percentage or weighing
factor), times (ii) the amount of the Letters
of Credit; and
(iii) all as certified by the Bank in said written
notice to the Borrower, which certification
shall be conclusive absent manifest error.
The Bank agrees not to seek reimbursement
pursuant to this Section 2.3(c) unless the Bank
is seeking similar type reimbursement from its
other borrowers or customers for whom it has
issued letters of credit or has established a
letter of credit facility.
2.3 EVIDENCE OF LOANS. The Loans shall be evidenced by the
Revolving Loan Note any note delivered in substitution therefor (collectively,
the "Notes") in form satisfactory to Bank and shall bear interest as herein
provided. In case of any change after the date hereof in law or governmental
rules, regulations, guidelines or orders (or any interpretations thereof) or the
introduction of new laws, regulations or guidelines which become effective after
the date hereof, which require Bank to reserve for unfunded credit commitments,
Bank may charge Borrower an additional fee which will compensate Bank for such
requirements, unless the Borrower reduces the amount of the unfunded commitment
sufficient to obviate the need for such fee. Bank will only charge such fee to
Borrower if the Bank is generally charging its other customers a similar fee.
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The Bank shall make entries in its accounting system for the
amount of each Advance made under the Agreement and all interest and fees as
they accrue and shall credit such account for each payment of principal and
interest and other amounts. Such accounts shall constitute rebuttably correct
evidence of all amounts outstanding and all amounts advanced by the Bank
pursuant to this Agreement.
2.4 LOAN PAYMENTS. All payments of interest, principal and all
other amounts owing hereunder or under the Notes shall be made by the Borrower
to the Bank in immediately available funds at its principal office in
Cincinnati, Ohio or at such other place as the Bank may designate in writing, at
such times as shall be set forth herein or in the Notes or if not so set forth,
such amounts shall be payable on demand. Borrower hereby authorizes Bank, at
Bank's option, to charge any account or change or increase any Loan balance of
Borrower at Bank for the payment or repayment of any interest or principal of
the Loans or any fees, charges or other amounts due to Bank hereunder. Bank
shall be permitted to apply funds in the Cash Collateral Account to the
Obligations in such order of payment as it deems appropriate.
SECTION 3. GRANT OF SECURITY INTEREST. To secure the payment and
performance of all of the Obligations the Borrower hereby grants to the Bank a
continuing security interest in and assigns to the Bank all of Borrower's right
and interest in and to the Collateral. The foregoing interest granted by
Borrower to Bank shall be a first priority security interest and superior to all
other liens and encumbrances with respect to all Collateral owned by Borrower,
subject only to the Permitted Liens. Borrower acknowledges that the Loans
contemplated herein represent, in part, a refinancing of certain obligations of
Odd-Job to the Bank. Borrower agrees that all liens and security interests
previously granted to the Bank by Odd-Job shall continue and extend to secure
the Obligations, and agree that this extension shall in no manner affect or
impair such liens and security interests.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants to the Bank that:
4.1 ORGANIZATION AND AUTHORITY. (a) The Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its organization and has the power and authority to conduct its
business as now conducted and as proposed to be conducted while this Agreement
is in effect; (b) the execution and delivery of this Agreement, the Notes and
the other Loan Documents and the performance of the transactions contemplated
hereby and thereby are within the authority of the Borrower and have been duly
authorized by all proper and necessary corporate action; (c) except as set forth
on Schedule 4.1(c), the execution and delivery of this Agreement, the Notes and
the other Loan Documents and the performance of the transactions contemplated
hereby and thereby will not violate or contravene any provisions of law or the
charter or by-laws of the Borrower, or result in a breach or default in respect
of the terms of any agreement to which the Borrower is a party or by which it is
bound, which breach or default would result in the creation, imposition or
enforcement of any lien against any of the Collateral, or would have a material
adverse affect on the conduct of the Borrower's business as it is now being
conducted and proposed to be conducted while this Agreement is in effect, or
would otherwise materially impair the value of the security interest granted to
the Bank hereunder; and (d) the Borrower is duly qualified and is in good
standing and duly authorized to do business
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in every jurisdiction where the nature of its properties or the conduct of its
business requires such qualification and authorization, as shown on Schedule
4.1(d) attached hereto, and where the failure to qualify would have a material
adverse effect on Borrower.
4.2 BINDING EFFECT OF DOCUMENTS. This Agreement, the Notes and
the other Loan Documents are legal and binding obligations of the Borrower
enforceable in accordance with their terms, except as limited by bankruptcy,
insolvency, or other laws relating to the enforcement of creditor's rights and
general equitable principles.
4.3 GOVERNMENT CONSENT. The execution and delivery of this
Agreement, the Notes and the other Loan Documents and the performance of the
transactions contemplated hereby and thereby do not require any approval or
consent of any governmental agency or authority or of any other party except as
set forth on Schedule 4.3.
4.4 FINANCIAL STATEMENTS. Borrower has delivered to the Bank
copies of the financial statements of Mazel Company L.P. as of and for the year
or other period ending December 31, 1996 prepared by KPMG Peat Marwick. All of
these financial statements are true and correct, are in accordance with the
respective books of account and records of the Borrower and have been prepared
in accordance with generally accepted accounting principles, and fairly present
the financial condition of the Borrower and its assets and liabilities and the
results of its operations as at such date.
4.5 NO CHANGE IN FINANCIAL CONDITION. Since the ending date of
the financial statement described in Section 4.4, there has been no change in
the assets, liabilities, financial condition or operation of the Borrower, other
than changes in the ordinary course of business, the effect of which have not,
individually or in the aggregate, been materially adverse.
4.6 NO OTHER LIABILITIES. Except to the extent reflected in
the financial statements described in Section 4.4 or set forth in Schedule 4.6,
the Borrower, as of the date of this Agreement, does not know or have reasonable
grounds to know of any basis for the assertion against it of any material
liabilities or obligations of any nature, direct or indirect, accrued, absolute
or contingent, including, without limitation, liabilities for taxes then due or
to become due whether incurred in respect of or measured by the income of the
Borrower for any period prior to the date of this Agreement or arising out of
transactions entered into, or any state of facts existing prior thereto.
4.7 TAXES. The Borrower has filed all federal, state, local
and other tax returns and reports required to be filed by it, and such returns
and reports are true and correct to the best of its knowledge. The Borrower has
paid all taxes, assessments and other governmental charges lawfully levied or
imposed on or against it or its properties, other than those presently payable
without penalty or interest or being contested in good faith.
4.8 NO LITIGATION. Except as described in the attached
Schedule 4.8 and disclosed from time to time pursuant to Section 4.16 hereof,
there is no litigation or proceeding or governmental investigation pending or,
to the knowledge of the Borrower, threatened against
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or relating to the Borrower, its properties or business which involves a claim
or dispute which exceeds Five Hundred Thousand Dollars ($500,000.00).
4.9 COMPLIANCE WITH LAWS. The Borrower is not, to its
knowledge, in violation of or default under any statute, law, ordinance,
regulation, license, permit, order, writ, injunction or decree of any
government, governmental department, commission, board, bureau, agency,
instrumentality or court, which violation or default would have a material
adverse effect on the business, properties or condition, financial or otherwise,
of the Borrower.
4.10 NO DEFAULTS. The Borrower is not, to its knowledge, in
default under a material order, writ, judgment, injunction, decree, indenture,
agreement, lease or other instrument or contract, which default would have a
material adverse effect on the business, properties or condition, financial or
otherwise, of the Borrower, or in the performance of any covenants or conditions
respecting any of its indebtedness for borrowed money, and no holder of any
Indebtedness of the Borrower has given notice of any asserted default
thereunder, and no liquidation or dissolution of the Borrower and no
receivership, insolvency, bankruptcy, reorganization or other similar
proceedings relative to the Borrower or its properties is pending or, to the
knowledge of the Borrower, is threatened against Borrower.
4.11 LOCATION OF COLLATERAL. The Borrower maintains places of
business and owns Collateral only at those locations shown on Schedule 4.11
attached hereto (other than certain locations disclosed in writing to Bank or as
otherwise permitted by Section 5.9(g) hereof) and incorporated by reference
herein and maintains its chief executive office and its books of account and
records, including all records concerning Collateral at 31000 Aurora Road,
Solon, Ohio 44139 and 385 Nordhoff Place, Englewood, New Jersey. All of such
locations are locations where Borrower is a tenant leasing space or has a
contractual arrangement to store Inventory.
4.12 TITLE TO COLLATERAL. With respect to the Collateral,
other than as set forth on Schedule 4.12 attached hereto at the time the
Collateral becomes subject to the Bank's security interest, the Borrower is and
at all times will be the sole owner of and have good and marketable title to or
valid leasehold interests in the Collateral, free from all liens, encumbrances
and security interests in favor of any Person other than the Bank except for
Permitted Liens, and has full right and power to grant the Bank a security
interest therein. All information furnished to Bank concerning the Collateral is
and will be complete, accurate and correct in all material respects when
furnished.
4.13 RIGHTS OF BORROWER TO ACCOUNTS. As to each and every
Account (a) it is a bona fide existing obligation, valid and enforceable against
the Debtor (except as may be limited by bankruptcy or insolvency of the Debtor
or general equitable principles) for a sum certain for sales of goods shipped or
delivered, or goods leased, or services rendered in the ordinary course of
business; (b) all supporting documents, instruments, chattel paper and other
evidence of indebtedness, if any, delivered to the Bank are complete and correct
and valid and enforceable in accordance with their terms (except as may be
limited by bankruptcy or insolvency of the Debtor or general equitable
principles) and, to the best of Borrower's knowledge, all signatures and
endorsements that appear thereon are genuine, and all signatories and indorsers
have full capacity to contract; (c) the Debtor is liable for payment of the
amount expressed in such Account
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according to its terms (except as may be limited by bankruptcy or insolvency of
the Debtor or general equitable principles); (d) it will be subject to no
discount, allowance or special terms of payment except in the ordinary course of
business without the prior approval of the Bank; (e) it is not subject to any
prohibition or limitation upon assignment, except as set forth on Schedule 4.12
hereto; (f) the Borrower has full right and power to grant the Bank a security
interest therein and the security interest granted in such Accounts to the Bank
in Section 3 hereof, when perfected, will be a valid first security interest
which will inure to the benefit of the Bank without further action. The
warranties set out herein shall be deemed to have been made with respect to each
and every Account now owned or hereafter acquired by the Borrower.
4.14 RIGHTS OF BORROWER IN INVENTORY. The Eligible Inventory
is and will be saleable in the ordinary course of business and none of the
Inventory is or will be stored at a location (a) other than set forth on
Schedule 4.11 or any new location of which Bank has received prior written
notice after the date hereof or (b) with a bailee without the prior written
consent of Bank.
4.15 ACCURACY OF REPRESENTATION. No representation or warranty
by or with respect to the Borrower contained herein or in any certificate or
other document furnished by the Borrower pursuant hereto contains any untrue
statement of a material fact.
4.16 REPRESENTATIONS AS INDUCEMENT TO BANK. The foregoing
representations and warranties are made by the Borrower with the knowledge and
intention that the Bank will rely thereon, and shall survive the execution and
delivery of this Agreement and the making of all Loans hereunder. The receipt of
Borrower of each Advance shall constitute a representation and warranty by
Borrower that the representations and warranties of Borrower contained in this
Section 4 are true and correct in all material respects as of the date of such
Advance, except to the extent such representations and warranties expressly
relate to an earlier date. The Borrower shall supplement in writing, as
necessary, all representations and warranties made in accordance with this
Agreement, and shall deliver such supplemental disclosure to the Bank and shall
otherwise be entitled to supplement in writing and deliver to the Bank any
information, including without limitation, any exhibits or schedules hereto, so
that the representations and warranties subject to such supplemental disclosure
shall continue to be true and accurate; PROVIDED, HOWEVER, that the furnishing
of such supplemental disclosure shall not constitute a cure or waiver of any
Event of Default arising from the matters disclosed therein or otherwise then
existing, but shall constitute, from the date of delivery of such supplemental
disclosure, an amendment to the representations and warranties. Any reference in
this Agreement to the representations and warranties contained herein shall mean
such representations and warranties as the same may have been supplemented in
accordance with the provisions of this Section.
4.17 ENVIRONMENTAL PROTECTION. The Borrower (a) has no actual
knowledge of the permanent placement, burial or disposal of any Hazardous
Substances (as hereinafter defined) on any real property leased, owned or
occupied by the Borrower (the "Premises"), or any spills, releases, discharges,
leaks, or disposal of Hazardous Substances that have occurred or are presently
occurring on, under, or onto the Premises, or of any spills, releases,
discharges, leaks or disposal of Hazardous Substances that have occurred or are
occurring off the Premises as a result of the Borrower's improvement, operation,
or use of the Premises which would result in
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non-compliance with any of the Environmental Laws (as hereinafter defined); (b)
is and has been in compliance with all applicable Environmental Laws, except for
such non-compliance which would not have a material adverse effect on Borrower,
its financial condition, its operations, or properties; (c) knows of no pending
or threatened environmental civil, criminal or administrative proceedings
against the Borrower relating to Hazardous Substances; (d) knows of no facts or
circumstances that would give rise to any future civil, criminal or
administrative proceeding against the Borrower relating to Hazardous Substances;
and (e) will not permit any of its employees, agents, contractors,
subcontractors, or any other person occupying or present on the Premises to
generate, manufacture, store, dispose or release on, about or under the Premises
any Hazardous Substances which would result in the Premises not complying with
the Environmental Laws.
As used herein, "Hazardous Substances" shall mean and include
all hazardous and toxic substances, wastes, materials, compounds, pollutants and
contaminants (including, without limitation, asbestos, polychlorinated
biphenyls, and petroleum products) which are included under or regulated by the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, 42 U.S.C. 9601, et seq., the Toxic Substances Control Act, 15 U.S.C.
2601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. 6901, et
seq., the Water Quality Act of 1987, 33 U.S.C. 1251, et seq., and the Clean Air
Act, 42 U.S.C. 7401, et seq., and any other federal, state or local statute
ordinance, law, code, rule, regulation or order regulating or imposing liability
(including strict liability) or standards of conduct regarding Hazardous
Substances (hereinafter the "Environmental Laws"), but does not include such
substances as are permanently incorporated into a structure or any part thereof
in such a way as to preclude their subsequent release into the environment, or
the permanent or temporary storage or disposal of household hazardous substances
by tenants and which are thereby exempt from or do not give rise to any
violation of the aforementioned Environmental Laws.
Further, the Borrower hereby indemnifies the Bank and holds
the Bank harmless from and against any loss, damage, cost, expense or liability
(including strict liability) directly or indirectly arising out of or
attributable to the generation, storage, release, threatened release, discharge,
disposal or presence (whether prior to or during the term of the Loan) of
Hazardous Substances on, under or about the Premises (whether by the Borrower or
any employees, agents, contractor or subcontractors of the Borrower or any
predecessor in title or any third persons occupying or present on the Premises),
or the breach of any of the representations and warranties regarding the
Premises, including, without limitation: (a) those damages or expenses arising
under the Environmental Laws; (b) the costs of any required or necessary repair,
cleanup or detoxification of the Premises, including the soil and ground water
thereof, and the preparation and implementation of any closure, remedial or
other required plans; (c) damage to any natural resources; and (d) all
reasonable costs and expenses incurred by the Bank in connection with clauses
(a), (b) and (c) including, but not limited to reasonable attorneys' fees.
The indemnification provided for herein shall not apply to any
losses, liabilities, damages, injuries, expenses or costs which: (i) arise from
the gross negligence or willful misconduct of the Bank, or (ii) relate to
Hazardous Substances placed or disposed of on the Premises after the Bank
acquires Borrower's interest in the Premises through foreclosure or otherwise.
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4.18 EMPLOYEE BENEFIT PLANS. Other than as set forth on
Schedule 4.18 hereto, Borrower has no Plans, which are subject to regulation
under Title IV of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and no other Plans, which if violated, would have a material
adverse effect on Borrower, its financial condition, operations or property.
Borrower has not received any notice to the effect that it is not in full
compliance with any of the requirements of ERISA, and to Borrower's knowledge no
fact or situation, including but not limited to any "Reportable Event," or
"Prohibited Transaction," as such terms are defined in ERISA, exists which is or
is reasonably likely to be construed as a violation of ERISA in connection with
any Plan. Except as would not have a material adverse effect on Borrower,
Borrower (i) has complied with all applicable provisions of ERISA, including
minimum funding requirements, (ii) has made all filings required to be made by
Borrower or any of its Plans under ERISA, (iii) has not applied for any
extensions of time in which to make contributions to any Plan maintained by it
or to which it is required to contribute, (iv) has timely made all contributions
and paid all premiums required to be paid to the Pension Benefit Guaranty
Corporation, and (v) no matters are presently pending before the United States
Labor Department or the Internal Revenue Service concerning any Plan maintained
by Borrower to which it is required to contribute.
4.19 EMPLOYEE RELATIONS. Other than as set forth on Schedule
4.19, Borrower is not a party to any collective bargaining agreement, there are
no material grievances, disputes or controversies with any union or any other
organization of Borrower's employees, or threats of strikes, work stoppages or
any asserted pending demands for collective bargaining by any union or
organization.
4.20 INTELLECTUAL PROPERTY. Other than as set forth on
Schedule 4.20, Borrower does not own or utilize any patents, trademarks, trade
names, copyrights or similar intellectual property rights, whether by license or
otherwise.
4.21 MATERIAL AGREEMENTS. Except as disclosed on Schedule 4.21
hereto, as of the date hereof Borrower is not a party to nor is Borrower or any
of its property bound by (a) any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality which, if violated could have
a material adverse effect on Borrower, its financial condition, operations or
properties, (b) any debt instrument which, if violated, could have a material
adverse effect on Borrower, its financial condition, operations or properties,
(c) any security agreement, mortgage, deed of trust, pledge, assignment or other
document or arrangement where any lien upon any of Borrower's property exists in
favor of any person other than Bank which, if violated, could have a material
adverse effect on Borrower, its financial condition, operations or properties,
(d) any lease (capital, operating or otherwise), whether as lessee or lessor
thereunder, (e) any contract, commitment, agreement or other arrangement
involving the purchase or sale of any of its property by Borrower, or the
license of any right to or by Borrower, which, if terminated for any reason,
could result in a material adverse effect on Borrower, its financial conditions,
operations or properties, (f) any contract, commitment, agreement or other
arrangement with any Affiliate which, if violated, could have a material adverse
effect on Borrower, its financial condition, operations or properties, (g) any
management or employment contract or contract for personal services with any
Person, not otherwise an Affiliate, which is not otherwise terminable at will or
on less than ninety (90) days notice without liability which, if violated, could
have a material adverse effect on Borrower, its financial condition, operations
or properties, (h) any
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collective bargaining agreement which, if violated, could have a material
adverse effect on Borrower, its financial condition, operations or properties,
or (i) any other contract, agreement, understanding or arrangement which, if
violated, could have a material adverse effect on Borrower, its financial
condition, operations or properties.
4.22 SUBSIDIARIES AND PARTNERSHIP INTERESTS. Other than as set
forth on Schedule 4.22 hereto, Borrower has no wholly-owned subsidiaries, and
owns no interest in any corporation or partnership.
SECTION 5. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees
that until all of the Obligations have been paid in full, unless the Bank shall
otherwise consent in writing, it shall:
5.1 BOOKS AND RECORDS. Maintain complete and accurate books of
account and records pertaining to the Collateral and the operations of the
Borrower, and all such books of account and records shall be kept and maintained
at the location specified in Section 4.11 or any new location of which Bank has
received prior written notice after the date hereof as provided below. The
Borrower shall not move such books of account and records or change its chief
executive office without giving the Bank at least sixty (60) days prior written
notice. Prior to moving any of such books of account and records or changing the
location of its chief executive office, the Borrower shall execute and deliver
to the Bank financing statements satisfactory to the Bank. All such books of
account and records and all financial statements and reports furnished to the
Bank shall be maintained and prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods.
5.2 ACCESS TO INFORMATION. Upon reasonable prior notice and at
reasonable intervals, grant the Bank, or its representatives, full and complete
access to the Collateral and to all books of account, records, correspondence
and other papers relating to the Collateral during normal business hours and the
right to inspect, examine, verify and make abstracts from the copies of such
books of account, records, correspondence and other papers, and to investigate
such other records, activities and business of the Borrower as they may deem
necessary or appropriate at the time. Borrower acknowledges and agrees that Bank
shall have the absolute right, in addition to any other inspection or request
pursuant hereto, to conduct two (2) audits during any fiscal year of the
Borrower's facilities, its books and records and the Collateral, and such
additional audits as Bank deems necessary or appropriate after an Event of
Default occurs and is continuing.
5.3 EVIDENCE OF ACCOUNTS. From time to time as the Bank may
reasonably require, deliver to the Bank schedules of all outstanding Accounts.
Such schedules shall be in form satisfactory to the Bank and shall show the age
of such Accounts from date of invoice in intervals of not more than thirty (30)
days (current and past due amounts), and contain such other information and be
accompanied by such supporting documents as the Bank may from time to time
prescribe. The Borrower shall also deliver to the Bank such other schedules and
information as the Bank may reasonably request. The items to be provided under
this Section are to be prepared and delivered to the Bank from time to time
solely for its convenience in maintaining records of the Collateral and the
Borrower's failure to give any of such items to the Bank shall not affect,
terminate, modify or otherwise limit the Bank's security interest granted
herein.
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5.4 FINANCIAL INFORMATION. During the term of the Loans,
Borrower shall deliver the following to Bank:
(a) Deliver to the Bank within forty-five (45) days
after the close of each fiscal quarter of the
Borrower, a statement of condition and statement of
income and cash flows of Borrower for such period,
(it being agreed that a copy of Borrower's Form 10-Q
delivered to the Bank shall satisfy this
requirement) accompanied by a calculation of the
financial ratios in this Agreement, certified as
complete and correct by the president, chief
accounting or financial officer of Borrower, as well
as a compliance certificate signed by the president,
chief accounting or financial officer of Borrower
certifying that Borrower is in compliance with all
the terms and conditions of this Agreement and that
all representations and warranties of Borrower
hereunder (other than Section 4.21) are true and
accurate in all material respects and further
showing Borrower's compliance with all financial
covenants herein;
(b) within thirty (30) days after the end of each fiscal
quarter, an interim, unaudited balance sheet and
related profit and loss statement and a report or
schedule, as the case may be, of (i) wholesale
Inventory with aging (which report shall only be
required on and after January 1, 1998), (ii) joint
venture Inventory (as defined in Section 5.9(g)
hereof) and (iii) a statement in such form as Bank
may require of the current status and value of all
Accounts and Inventory, including a breakdown of
such Inventory and Accounts as are not Eligible
Inventory or Eligible Accounts, respectively;
(c) within forty five (45) days after the close of each
fiscal quarter of Borrower, a schedule of all retail
store locations opened by Borrower during such
fiscal quarter indicating the dates of opening of
such stores, and reporting on gross sales from all
retail store locations, the operating income from
each location (before allocation of corporate
expenses) and all direct and allocated expenses for
each location;
(d) deliver to the Bank not more than one hundred twenty
(120) days after the close of each fiscal year of
the Borrower, or within such further time as the
Bank may permit, audited financial statements for
Borrower
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including a balance sheet, a related income
statement and statement of cash flows, prepared in
accordance with generally accepted accounting
principles by independent certified public
accountants acceptable to the Bank, who shall give
their unqualified opinion with respect thereto (it
being agreed that a copy of Borrower's Form 10-K
delivered to the Bank shall satisfy this
requirement) and, if any, the auditor's letter to
management, provided that such financial statements
shall be accompanied by a certified schedule of the
Material Agreements as of the date of such financial
statements;
(e) within ten (10) days after the end of each fiscal
month, a month-end reconciliation of the borrowing
base reports together with an Accounts aging;
(f) no later than January 31 of each fiscal year of
Borrower, a plan of operations and budget for such
fiscal year, including a monthly breakdown of all
categories, together with projections of income
statements, balance sheets, cash flow budgets and
related expenditures, which shall be accompanied by
a description of the assumptions upon which such
projections are based.
5.5 OTHER INFORMATION. Furnish to the Bank such other
financial and business information and reports in form and substance
satisfactory to the Bank as and when the Bank may from time to time reasonably
request.
5.6 MAINTENANCE OF EXISTENCE AND LICENSES. While this
Agreement remains in effect and until the Obligations have been paid in full,
(a) maintain its existence in good standing; (b) make no change in the nature or
character of its business; (c) maintain and keep in full force and effect all
licenses and permits necessary to the proper conduct of its business where the
failure to do so would have a material adverse effect on Borrower, its financial
condition, operations or properties and (d) at the reasonable request of the
Bank, qualify as a foreign business and obtain all requisite licenses and
permits in each state (other than the state of its organization) where the
Borrower does business where the failure to do so would have a material adverse
effect on Borrower, its financial condition, operations or properties.
5.7 MAINTENANCE AND INSURANCE OF PROPERTIES. Maintain and keep
all of its properties, real and personal, in good working order, condition and
repair and insure and keep insured all such properties at all times in such
amounts and against loss of damage by fire, theft, and such other risks and
hazards as are customarily insured against by businesses in similar
circumstances, or as the Bank may reasonably specify from time to time, with
insurers and in amounts reasonably acceptable to the Bank. Bank acknowledges
that Borrower's existing
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insurance satisfies the requirement of this Section 5.7. If the Borrower fails
to do so, the Bank may obtain such insurance and charge the cost thereof to the
Borrower's account and add it to the Obligations. Bank shall be named as an
additional insured and loss payee on such insurance policies to the extent that
such policies insure the Collateral. All policies shall provide for at least ten
(10) days prior written notice of cancellation to the Bank. Borrower shall
deliver at least annually to Bank, or sooner if Bank shall request, certificates
of insurance evidencing the Borrower's compliance herewith. After the occurrence
and during the continuance of an Event of Default, any and all sums received by
Bank in payment of insurance losses, returns or unearned premiums or any other
proceeds of insurance may, at the option of Bank, be applied to the payment of
all or any part of the Obligations whether or not the same is then due and
payable, as the Bank may direct but, prior thereto, Borrower may receive and be
entitled to apply such proceeds in the ordinary course of business. After the
occurrence and during the continuance of an Event of Default, Borrower hereby
assigns to Bank any return or unearned premium which may be due upon
cancellation of any such policies for any reason and directs the insurers to pay
Bank any amount so due. Bank or Bank's designated agent is hereby constituted
and appointed Borrower's attorney-in-fact to (either in the name of Borrower or
in the name of Bank) make adjustments of all insurance losses, sign all
applications, receipts, releases and other papers necessary for the collection
of any such loss, and any return or unearned premium, execute proof of loss,
make settlements and endorse and collect all instruments payable to Borrower or
issued in connection therewith. Notwithstanding any action by Bank hereunder,
any and all risk of loss or damage to Borrower's Inventory, Equipment and other
assets, including any risk as to the extent of any and all deficiencies in the
effective insurance coverage thereof, is hereby expressly assumed by Borrower.
Bank agrees that it shall have no right to take any act pursuant to such power
of attorney until after the occurrence and during the continuance of an Event of
Default.
5.8 LIABILITY INSURANCE. At all times, maintain in full force
and effect such liability insurance with respect to its activities and business
interruption and other insurance as may be reasonably required by Bank, such
insurance to be provided by insurer(s) acceptable to Bank, and if requested by
Bank, such insurance shall name Bank as an additional insured. Copies of such
policies or certificates of insurance shall be provided to Bank promptly upon
issuance at the request of Bank. Bank acknowledges that Borrower's existing
insurance satisfies the requirement of this Section 5.8.
5.9 NOTICE OF CERTAIN EVENTS. Give prompt notice in writing to
the Bank of any of the following:
(a) Prior written notice of any proposed change in any
location where Borrower's Inventory is maintained
and any new locations where Borrower's Inventory is
to be maintained, and a notice confirming the
occurrence of any such change;
(b) The location of any new places of business and the
change in or close of any of its existing places of
business;
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(c) Thirty (30) days prior notice of any proposed change
in Borrower's name or any trade name of Borrower,
and a notice confirming the occurrence of any such
change;
(d) Any incident of any uninsured (determined in the
aggregate in any fiscal year) loss or damage to
Borrower's Equipment, Inventory or other physical
assets, the cost of replacement of which exceeds
Five Hundred Thousand Dollars ($500,000.00);
(e) Any event occurring after the execution hereof
which, if it had existed on the date of this
Agreement, would have required qualification of the
representations and warranties set forth herein and
any material adverse change in financial condition,
operations or properties of the Borrower or the
ability of the Borrower to perform its obligations
under this Agreement or the Loan Documents
including, but not limited to, a default or receipt
of a notice of default under any Material Agreement;
(f) Any Event of Default hereunder, or any fact or
circumstance or a combination thereof which with the
delivery of notice or the passage of time would
constitute an Event of Default hereunder; or
(g) Notwithstanding Section 5.9(a) above, Borrower will
provide five (5) business days prior written notice
of the location of any Inventory purchased jointly
with any other Persons ("joint venture Inventory"),
provided however, such notice is not required if
Borrower reasonably anticipates that such Inventory
will be held at such location for less than thirty
(30) days after the date Borrower pays for such
Inventory and the fair market value of such
Inventory does not exceed Seven Hundred Fifty
Thousand Dollars ($750,000.00).
5.10 PAYMENT OF TAXES. Pay all taxes, assessments or
governmental charges lawfully levied or imposed on or against it and its
properties prior to the date when such taxes, assessments or charges shall
become delinquent, unless the Borrower shall contest the validity thereof in
good faith with appropriate proceedings diligently pursued and shall post any
bond or other security required by applicable law or adequate book reserves in
accordance with GAAP have been established and are reasonably acceptable to
Bank.
5.11 DEALINGS IN INVENTORY. With respect to the Inventory,
sell or dispose of the Inventory only to buyers in the ordinary course of
business. Borrower will not sell Inventory
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on consignment in excess of $200,000.00, in the aggregate at any time. In the
event of any change in location of any of the Inventory, Borrower will, prior to
any such change, execute and deliver to the Bank such financing statements
satisfactory to the Bank as the Bank may request.
5.12 CLAIMS AGAINST BORROWER. Immediately upon learning
thereof, report to the Bank any claim or dispute asserted by any Debtor or other
obligor with respect to any non-retail inventory or transaction, and any other
matters materially affecting the value and enforceability or collectibility of
any of the Collateral and shall report to Bank, upon its request, any
reclamation, return (excluding any sales for value of Retail Inventory in the
ordinary course) or repossession of goods. In addition, the Borrower shall, at
its sole cost and expense (including reasonable attorney's fees), settle any and
all such claims and disputes and indemnify and protect the Bank against any
liability, loss or expense arising therefrom or out of any such reclamation,
return or repossession of goods, provided, however, if the Bank shall so elect,
it shall have the right upon and during the continuance of an Event of Default
to settle, compromise, adjust or litigate all claims or disputes directly with
the Debtor or other obligor upon such terms and conditions as it deems advisable
and charge all costs and expenses thereof (including attorneys' fees) to the
Borrower's account and add them to the Obligations.
5.13 DEFENSE OF COLLATERAL. Defend the Collateral against all
claims and demands of all persons at any time claiming the same or any interest
therein and pay all costs and expenses (including attorneys' fees) incurred in
connection with such defense.
5.14 FINANCING STATEMENTS. At the request of the Bank, execute
and deliver such financing statements, documents and instruments, and perform
all other acts as the Bank deems necessary or desirable, to carry out and
perform the intent and purpose of this Agreement, and pay, upon demand, all
expenses (including attorneys' fees) incurred by the Bank in connection
therewith. A photocopy of this Agreement shall be sufficient as a financing
statement and may be filed in any appropriate office in lieu thereof.
5.15 FINANCIAL COVENANTS. Maintain the following financial
covenants:
(a) Tangible Net Worth as follows:At all times equal to
or exceeding Thirty-Five Million Dollars
($35,000,000.00). Subject to the foregoing,
Borrower's Tangible Net Worth may be reduced from
that amount reported in the prior fiscal period
without such reduction constituting an Event of
Default hereunder, provided that such reduction is
in an amount not exceeding ten percent (10%), in the
aggregate, from the highest Tangible Net Worth of
Borrower reported in any prior fiscal period.
(b) A ratio of Liabilities to Tangible Net Worth as at
all times of not more than 3.0 to 1.0.
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(c) An Interest Coverage Ratio at all times not less
than 3.5 to 1.0.
(d) Net Working Capital at all times of not less than
Twenty-Five Million and No\Dollars ($25,000,000.00),
excluding any amount which may be available under
the Revolving Loan Note.
(e) A ratio of Current Assets to Current Liabilities at
all times of not less than 1.5:1.0.
5.16 MAINTENANCE OF BANK ACCOUNTS. Except as otherwise agreed
from time to time, concentrate all of its depository accounts with Bank,
including without limitation, all demand deposit, lock box, time deposit,
concentration and zero balance accounts except, however, certain accounts
necessary for the operation of its retail locations need not be maintained at
the Bank provided arrangements acceptable to the Bank have been established for
the immediate transfer of funds to accounts maintained at Bank. Borrower shall
also provide Bank with a power of attorney with respect to each such account,
which Bank may only utilize after the occurrence and continuation of an Event of
Default.
5.17 COMPLIANCE WITH LEASES. Borrower will comply in all
material respects with the provisions of all leases to which it is a party or
under which it occupies property, so as to prevent any loss or forfeiture
thereof or thereunder; PROVIDED, HOWEVER, that the Borrower may cancel,
surrender or modify any lease or leases or contest in good faith any provision
thereof if such action is reasonably deemed by the Borrower advantageous to its
business and if no forfeiture, other than reasonable settlement payments in
connection with such surrenders or cancellations, under any such lease results
therefrom.
5.18 ERISA. The Borrower shall, to the extent required by
applicable law, with respect to any Plan in effect now or in the future:
(a) at all times make timely payment of contributions
required to meet the minimum funding standards set
forth in Section 302 through 305 of ERISA with
respect to its plan,
(b) promptly, after the filing thereof, furnish to the
Bank copies of each annual report required to be
filed pursuant to Section 103 of ERISA in connection
with its plan for the plan year, including any
certified financial statements or actuarial
statements required pursuant to said Section 103,
(c) notify the Bank immediately of any fact, including,
but not limited to, any "Reportable Event," as that
term is defined in Section 4043 of ERISA, arising in
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connection with the plan which would constitute
grounds for termination thereof by the Pension
Benefit Guaranty Corporation or for the appointment
by the appropriate United States District Court of a
Trustee to administer the plan,
(d) notify the Bank of any "Prohibited Transaction" as
that term is defined in Section 406 of ERISA.
The Borrower will not:
(e) engage in any "Prohibited Transaction," or
(f) terminate any such plan in a manner which could
result in the imposition of a lien on the property
of the Borrower pursuant to Section 4068 of ERISA.
SECTION 6. NEGATIVE COVENANTS. The Borrower covenants and agrees that
until the Obligations have been paid in full, unless the Bank shall consent in
advance in writing, it shall not:
6.1 SALE OF ASSETS OR MERGER. Discontinue its business or
liquidate, sell, transfer, assign or otherwise dispose of a material part of its
assets or of the Collateral, by sale, merger, consolidation or otherwise,
provided, however, that it may (a) sell in the ordinary course of business and
for a full consideration in money or money's worth, any product, merchandise or
service produced, marketed or furnished by it and (b) sell any equipment owned
by Borrower which becomes obsolete. Notwithstanding the foregoing, Borrower
shall be permitted to transfer Inventory to either of OJBRO Corp., a New York
corporation, or OJLI Corp., a New York corporation, and any other parties
reasonably acceptable to Bank, at cost (plus reasonable commission).
6.2 LIENS AND ENCUMBRANCES. Except as set forth on Schedule
6.2, sell, assign, pledge, grant or suffer to exist a security interest, lien,
mortgage or other encumbrance on any of the Collateral to any person other than
the Bank, or permit any lien, encumbrance or security interest to attach to any
of the Collateral, except in favor of the Bank and except for Permitted Liens.
6.3 CONTINGENT LIABILITIES. Endorse, guarantee or become
surety for the obligations of any Person, firm or corporation, except that the
Borrower may endorse checks and negotiable instruments for collection or deposit
in the ordinary course of business.
6.4 LOANS. Except as set forth on Schedule 6.4, make any loans
or other advances of money, or grant extensions of credit which in the aggregate
exceed Five Thousand Dollars ($5,000.00) during any fiscal year (other than
normal extensions of trade credit in the ordinary course of business and
reasonable salary, travel or relocation advances, and other similar
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advances in the ordinary course of business) to any Person. Borrower also shall
not repay any existing loans made to it by its Affiliates.
6.5 DIVIDENDS. Make any Dividends (by way of redemption or
otherwise) to any of its shareholders.
6.6 DEALINGS WITH ACCOUNTS. Compromise or discount any Account
except for ordinary trade discounts or allowances for prompt payment, or other
discounts or credits in the ordinary course of business.
6.7 INVESTMENTS. Change its name or consolidate or merge with
any other entity or, except as permitted here or as shown on Schedule 6.7
hereto, acquire or purchase any equity interest in any other entity, including
shares of stock of other corporations, or acquire or purchase any assets or
assume any obligations, except that the Borrower is permitted to own notes and
other receivables acquired in the ordinary course of business. Notwithstanding
the foregoing, the Borrower shall be permitted to (i) invest its cash in highly
liquid, investment grade corporate and governmental obligations, (ii) to hold
its partnership interests in HIA Trading Associates and Central Processing
Associates and (iii) purchase or acquire assets of any other Person which is not
an Affiliate where the consideration paid (whether cash, assumption of liability
or otherwise) is (A) less than $2,000,000.00 for any single transaction or (B)
less than $5,000,000.00 in the aggregate with any other transactions in any
fiscal year of Borrower.
6.8 CHANGE IN MANAGEMENT OR BUSINESS. Change its management or
make any material change in any of its business objectives, purposes and
operations which might in any way adversely affect the repayment of the Loans,
as determined by the Bank. Reuven Dessler shall continue to hold the positions
of Chairman of the Board and Chief Executive Officer of Borrower and perform the
duties of that position, Jacob Koval shall continue to hold the position of
Executive Vice President of Borrower and perform the duties of that position,
Brady Churches shall continue to hold the position of President of Borrower and
perform the duties of that position, and Jerry Sommers shall continue to hold
the position of Executive Vice President of Borrower and perform the duties of
that position, provided, however, if (A) either (but not both) of Reuven Dessler
and Brady Churches OR (B) either (but not both) of Jacob Koval and Jerry Sommers
is terminated as a result of death, long-term disability or otherwise, Borrower
shall be in compliance with this Section 6.8 if within ninety (90) days
thereafter a replacement reasonably acceptable to Bank is appointed.
6.9 TRANSACTIONS WITH AFFILIATES. Except as set forth on
Schedule 6.9 hereto, enter into, or be a party to, any transaction with any of
Borrower's Affiliates after the date hereof, except in the ordinary course of
business, pursuant to the reasonable requirements of Borrower's business, and
upon fair and reasonable terms which are fully disclosed to Bank and are no less
favorable to Borrower than Borrower could obtain in a comparable arm's length
transaction with a person not an Affiliate of Borrower. Notwithstanding the
foregoing, transfers of Inventory at cost, among the Borrower and its
Affiliates, shall not be deemed a violation of this provision.
6.10 AMENDMENTS TO PARTNERSHIP AGREEMENT. Borrower will not
cause or permit any material amendment to the terms and provisions of any
partnership agreement of any
32
<PAGE> 34
partnership(s) in which any of Borrower has an interest if such amendment
adversely affects the business affairs or operations of Borrower or Borrower's
ability to perform the Obligations.
6.11 INDEBTEDNESS. Borrower shall not directly or indirectly
create, incur, assume, guaranty or be or remain liable with respect to any
Indebtedness, except for (a) any Indebtedness to Bank pursuant to this Agreement
or the other Loan Documents; (b) other Permitted Indebtedness; and (c) the
Indebtedness listed on Schedule 6.11 of this Agreement.
6.12 OTHER LETTERS OF CREDIT. Borrower will not request or
obtain any letters of credit from any financial institution or other provider of
letters of credit other than Bank.
6.13 CAPITAL EXPENDITURES. Borrower shall not expend funds or
accrue expense for any machinery, equipment, real or personal property or any
other type of property including leasehold improvements, whether through direct
purchases and capitalized lease obligations, in excess of (i) Five Million
Dollars ($5,000,000.00) in the aggregate in any fiscal year, (ii) a one time
expense of Two Million Five Hundred Thousand Dollars ($2,500,000.00) for a point
of sale inventory control system, and (iii) Three Hundred Thousand Dollars
($300,000.00) to fixture and equip each new retail location. The capital expense
limits contained herein are subject to the continued compliance by the Borrower
(prior to and after giving effect to the expenditure) with the covenants and
obligations herein. Borrower shall be permitted to carry-forward as an
additional capital expense allowance the amount of any unexpended portion of the
capital expense limitation which had been designated for scheduled capital
expenditures.
6.14 CHANGES IN CONTROL. So long as any of the Obligations
remain outstanding, there shall be no change in the voting control of Borrower.
SECTION 7. COLLECTION OF COLLATERAL AND NOTICE OF ASSIGNMENT.
7.1 RECEIPTS IN RESPECT OF COLLATERAL. All collections on the
Collateral shall be directed to Bank, which shall, on a daily basis, will apply
all of the collected balance of such receipts against the Obligations to the
extent of the outstanding balance under the Revolving Note, the amount, order
and method of such application to be in the sole discretion of Bank provided the
Bank shall not utilize such funds as a prepayment of the Term Loan prior to an
Event of Default. Any part of the collected balance of such receipts which the
Bank elects not to apply to Borrower's Obligations shall be paid over and
deposited by Bank to the Borrower's commercial account (which will, prior to an
Event of Default, be made available to Borrower).
7.2 NOTICE OF ASSIGNMENT. After the occurrence and during the
continuance of an Event of Default the Bank shall have the right at any time to
notify Debtors of its security interest in the Accounts and to require payments
to be made directly to the Bank. Upon request of the Bank after the occurrence
and during the continuance of an Event of Default Borrower will so notify the
Account Debtors and will indicate on all billings to the Account Debtors that
the Accounts are payable to the Bank. To facilitate direct collection, the
Borrower hereby appoints the Bank and any officer or employee of the Bank, as
the Bank may from time to time designate, as attorney-in-fact for the Borrower
to (a) receive, open and dispose of all mail addressed to the Borrower and take
therefrom any payments on or proceeds of Accounts; (b) take over the
33
<PAGE> 35
Borrower's post office boxes or make other arrangements, in which the Borrower
shall cooperate, to receive the Borrower's mail, including notifying the post
office authorities to change the address for delivery of mail addressed to the
Borrower to such address as the Bank shall designate; (c) endorse the name of
the Borrower in favor of the Bank upon any and all checks, drafts, money orders,
notes, acceptances or other evidences or payment or Collateral that may come
into the Bank's possession; (d) sign and endorse the name of the Borrower on any
invoice or bill of lading relating to any of the Accounts, on verifications of
Accounts sent to any Debtor, to drafts against Debtors, to assignments of
Accounts and to notices to Debtors; and (e) do all acts and things necessary to
carry out this Agreement, including signing the name of the Borrower on any
instruments required by law in connection with the transactions contemplated
hereby and on financing statements as permitted by the Uniform Commercial Code.
The Borrower hereby ratifies and approves all acts of such attorneys-in-fact,
and neither the Bank nor any other such attorney-in-fact shall be liable for any
acts of commission or omission, or for any error of judgment or mistake of fact
or law. This power, being coupled with an interest, is irrevocable so long as
any of the Obligations remain unsatisfied. Bank agrees that it shall no right to
take any act pursuant to such power of attorney until after the occurrence and
during the continuance of an Event of Default.
7.3 ENFORCEMENT OF ACCOUNTS. The Bank shall not, under any
circumstances, be liable for any error or omission or delay of any kind
occurring in the settlement, collection or payment of any Accounts or any
instruments received in payment thereof or for any damage resulting therefrom,
except for its gross negligence or willful misconduct. The Bank may, after the
occurrence and during the continuance of an Event of Default and without notice
to or consent from the Borrower, sue upon or otherwise collect, extend the time
of payment of, or compromise or settle for cash, credit or otherwise upon any
terms, any of the Accounts or any securities, instruments or insurance
applicable thereto and/or release the obligator thereon. The Bank is authorized
to accept the return of the goods represented by any of the Accounts, without
notice to or consent by the Borrower, or without discharging or any way
affecting the Obligations hereunder.
7.4 RETURNED OR REJECTED GOODS. After the occurrence and
during the continuance of an Event of Default or upon receipt of any returned or
rejected non-retail goods in an amount in excess of Five Hundred Thousand
Dollars ($500,000.00) the Borrower shall immediately issue and deliver a copy of
a credit memo to the Bank with respect thereto. Or, at the Bank's election, the
Borrower shall set aside such goods, mark them in the Bank's name and hold them
in trust for the Bank at the Borrower's expense, and, upon request, shall pay
the Bank the sales price thereof. If the Bank shall request the Borrower to pay
the sales price of such goods and the Borrower fails to forthwith pay the sales
price to the Bank, the Bank may take possession of such goods and sell or cause
the goods to be sold, at public or private sale, at such prices, to such
purchasers and upon such terms as the Bank deems advisable. The Borrower shall
remain liable to the Bank for any deficiency and shall pay the costs and
expenses of such sale, including reasonable attorneys' fees.
7.5 VERIFICATION OF ACCOUNTS. The Bank may confirm and verify
all Accounts in any reasonable manner at any time after prior notice to the
Borrower. Borrower agrees to cooperate with Bank in the confirmation and
verification of any Accounts, or reconciling any
34
<PAGE> 36
discrepancy between those amounts verified by the Bank and information provided
to the Bank by the Borrower.
7.6 LIMITATION OF BANK'S LIABILITY. The Bank shall not be
liable for or prejudiced by any loss, depreciation or other damage to Accounts
or other Collateral unless caused by the Bank's gross negligence or willful
misconduct, and the Bank shall have no duty to take any action to preserve or
collect any Account or other Collateral; except that the Bank shall use
reasonable care with respect to all Collateral in its possession. Bank shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral if the Collateral is accorded treatment substantially equal to that
which the Bank accords its own property, it being understood that the Bank shall
not have any responsibility or liability for (a) ascertaining or taking action
with respect to the collection or collectibility of any Accounts, (b) taking any
necessary steps to preserve rights against any parties claiming an interest in
the Collateral, or (c) the inspection of Inventory for defects therein.
SECTION 8. SERVICE CHARGES. In addition to the principal and interest on
the Loans and the reimbursement of expenses to Bank pursuant to this Agreement.
Borrower shall pay to Bank (i) an annual facility fee of one-quarter (1/4) of
one percent (1%) of the unused portion of the Revolving Loan (determined at the
end of each fiscal quarter based upon the average daily balance outstanding
{which for this purpose shall include amounts reserved for drawings under
outstanding Letters of Credit} under the Revolving Loan Note during the
preceding quarter) payable quarterly in arrears; and (ii) a negotiation
commission of (x) one percent (1%) of the stated amount of any Standby Letter of
Credit issued pursuant hereto or (y) one-quarter (1/4%) of one percent of the
stated amount of any Commercial Letter of Credit issued pursuant hereto, payable
upon issuance, plus an issuance fee of Sixty-Five Dollars ($65.00) for each such
Letter of Credit. All such fees shall be payable in full within ten (10) days of
a billing from Bank in respect thereof. Bank shall be permitted to alter the
Letter of Credit issuance fee stated herein at such time as the Bank is changing
its fees generally charged its customers, and shall give notice to Borrower
thereof.
SECTION 9. ONE GENERAL OBLIGATION: CROSS COLLATERAL. All loans and
advances by Bank to Borrower under this Agreement and under the other Loan
Documents constitute one loan, and all indebtedness and obligations of Borrower
to Bank under this and such other agreements, present and future, constitute one
general obligation secured by the Collateral and security held and to be held by
Bank hereunder and by virtue of all other Loan Documents between Borrower and
Bank now and hereafter existing. It is expressly understood and agreed that all
of the rights of Bank contained in this Agreement shall likewise apply insofar
as applicable to any modification of or supplement to this Agreement and to any
other Loan Document, present and future, between Bank and Borrower. In the event
that this Agreement is terminated, the Bank agrees to release its liens and
security interest in the Collateral and the Obligations shall no longer be
secured by the Collateral.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The following shall constitute Events
of Default under this Agreement, it being agreed that time is of the essence
hereof: (a) failure of the Borrower to
35
<PAGE> 37
pay when due any of the Obligations; (b) failure of the Borrower to observe or
perform any covenant contained in this Agreement or in any other Loan Document;
(c) discovery that any representation or warranty at any time made by the
Borrower to the Bank in this Agreement or in any Loan Document (including
documents and materials delivered to the Bank for the purpose of obtaining the
Loans) is, untrue or misleading in any material respect at the time made; and
(d) suspension by the Borrower of the operation of its present business, or the
insolvency of the Borrower, or the inability of the Borrower to meet its debts
as they mature, or its admission in writing to such effect, or its calling any
meeting of all or any of its creditors or committing any act of bankruptcy, or
the filing by or against the Borrower of any petition under any provision of the
Bankruptcy Act, as amended, or the entry of any judgment or filing of any lien
against the Borrower. Notwithstanding the foregoing, Bank shall provide Borrower
with (i) two (2) business days' notice and opportunity to cure any default
arising from the failure of Borrower to pay when due any of the monetary
Obligations owed to Bank, (ii) fifteen (15) calendar days' notice and
opportunity to cure any violation of the covenants contained in Section 5.15,
(iii) thirty (30) calendar days' notice and opportunity to cure any other act or
omission constituting an Event of Default under the Loan Documents OTHER THAN as
set forth in Section 10.1 (c) and (d) and Sections 6 and 7 of this Agreement for
which no notice is required and no opportunity to cure is available without the
written consent of Bank and (iv) sixty (60) days opportunity to cause the
dismissal of any involuntary proceeding commenced against Borrower under the
Bankruptcy Act in which the Bank is not a petitioner.
10.2 RIGHTS OF BANK UPON DEFAULT. Upon the occurrence and
during the continuance of an Event of Default described in Section 10.1, the
Bank at its option may: (a) declare the Obligations of the Borrower immediately
due and payable, without presentment, notice, protest or demand of any kind for
the payment of all or any part of the Obligations (all of which are expressly
waived by Borrower) and exercise all of its rights and remedies against the
Borrower and any Collateral provided herein or in any other agreement between
Borrower and Bank and (b) exercise all rights granted to a secured party under
the Ohio Uniform Commercial Code or otherwise. Upon the occurrence and during
the continuance of an Event of Default, Bank may take possession of the
Collateral, or any part thereof, and Borrower hereby grants Bank authority to
enter upon any premises on which the Collateral may be situated, and remove the
Collateral from such premises or use such premises, together with the materials,
supplies, books and records of Borrower, to maintain possession and/or the
condition of the Collateral and to prepare the Collateral for sale. Borrower
shall, upon demand by Bank, assemble the Collateral and make it available at a
place designated by Bank which is reasonably convenient to both parties. Unless
the Collateral is perishable or threatens to decline speedily in value or is of
a type customarily sold on a recognized market, Bank will give Borrower
reasonable notice of the time and place of any public sale thereof or of the
time after which any private sales or other intended disposition thereof is to
be made. The requirement of reasonable notice shall be met if such notice is
mailed, postage prepaid, to the address of the Borrower shown at the beginning
of this Agreement at least ten (10) days prior to the time of such sale or
disposition.
10.3 APPLICATION OF PROCEEDS. The Bank shall have the right to
apply the proceeds of any disposition of the Collateral to the payment of the
Obligations in such order of application as the Bank may, in its sole
discretion, elect.
36
<PAGE> 38
10.4 REMEDIES CUMULATIVE. The rights, options and remedies of
the Bank shall be cumulative and no failure or delay by the Bank in exercising
any right, option or remedy shall be deemed a waiver thereof or of any other
right, option or remedy, or waiver of any Event of Default hereunder, nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy hereunder. Bank shall not be deemed to have waived any of the Bank's
rights hereunder or under any other agreement, instrument or paper signed by
Borrower unless such waiver be in writing and signed by the Bank.
SECTION 11. MISCELLANEOUS.
11.1 GOVERNING LAW; JURISDICTION AND VENUE. The provisions of
this Agreement shall be governed by and interpreted in accordance with the laws
of the State of Ohio. The Bank and Borrower hereby designate all courts of
record sitting in Cleveland, Ohio, both state and federal, as forums where any
action, suit or proceeding in respect of or arising out of this Agreement or the
transactions contemplated by this Agreement may be prosecuted as to all parties,
their successors and assigns, and by the foregoing designation the Bank and
Borrower consent to the jurisdiction and venue of such courts.
11.2 WAIVER OF JURY TRIAL. AS A SPECIFICALLY BARGAINED
INDUCEMENT FOR THE BANK TO EXTEND CREDIT TO BORROWER, AND AFTER HAVING THE
OPPORTUNITY TO CONSULT COUNSEL, BORROWER HEREBY EXPRESSLY WAIVES THE RIGHT TO
TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO THIS AGREEMENT OR ARISING
IN ANY WAY FROM THE OBLIGATIONS.
11.3 OTHER WAIVERS. The Borrower waives notice of nonpayment,
demand, notice of demand, presentment, protest and notice of protest with
respect to the Obligations, or notice of acceptance hereof, notice of Loans
made, credit extended, Collateral received or delivered, or any other action
taken in reliance hereon, and all other demands and notices of any description,
except such as are expressly provided for herein.
11.4 COLLECTION COSTS. All costs and expenses incurred by the
Bank to obtain, enforce or preserve the security interests granted by this
Agreement and to collect the Obligations, including, without limitation,
stationery and postage, telephone and telegraph, secretarial and clerical
expenses, the fees or salaries of any collection agents utilized, all costs to
maintain and preserve the Collateral and all reasonable attorneys' fees and
legal expenses incurred in obtaining or enforcing payment of any of the
Obligations or foreclosing the Bank's security interest in any of the
Collateral, whether through judicial proceedings or otherwise, or in enforcing
or protecting its rights and interests under this Agreement or under any other
instrument or document delivered pursuant hereto, or in protecting the rights of
any holder or holders with respect thereto, or in defending or prosecuting any
actions or proceedings arising out of or relating to the Bank's transactions
with the Borrower, shall be paid by the Borrower to the Bank, upon demand, or,
at the Bank's election, charged to the Borrower's account and added to the
Obligations, and the Bank may take judgment against the Borrower for all such
costs, expense and fees in addition to all other amounts due from the Borrower
hereunder.
37
<PAGE> 39
11.5 EXPENSES. The Borrower shall reimburse the Bank for all
out-of-pocket costs and expenses incurred by the Bank in connection with the
preparation of this Agreement and the making of the Loans hereunder, including
the reasonable fees and expenses of the Bank's counsel (which Bank agrees shall
not exceed Sixty Thousand ($60,000.00) excluding expenses and disbursements),
and for all Uniform Commercial Code searches, filing, recording and other costs
connected with the perfection of the Bank's security interest in the Collateral.
11.6 NOTICES. All notices, requests, directions, demands,
waivers and other communications provided for herein shall be in writing and
shall be deemed to have been given or made when delivered personally or sent by
registered or certified mail, postage prepaid and return receipt requested,
addressed to the Borrower or the Bank, as the case may be, at their respective
addresses set forth at the beginning of this Agreement. Notices of changes of
address shall be given in the same manner.
11.7 SEVERABILITY. Any provision of this Agreement which is
prohibited and unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
11.8 ENTIRE AGREEMENT, MODIFICATION, BENEFIT. This Agreement
shall constitute the entire agreement of the parties and no provision of this
Agreement, including the provisions of this Section, may be modified, deleted or
amended in any manner except by agreement in writing executed by the parties.
All terms of this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties hereto and their respective successors and
assigns, provided, however, that the Borrower shall not assign or transfer its
rights hereunder.
11.9 CONSTRUCTION. All references in this Agreement to the
single number and neuter gender shall be deemed to mean and include the plural
number and all genders, and vice versa, unless the context shall otherwise
require.
11.10 HEADINGS. The underlined headings contained herein are
for convenience only and shall not affect the interpretation of this Agreement.
11.11 COUNTERPARTS. This Agreement may be executed in more
than one counterpart, each of which shall be deemed an original.
11.12 NONLIABILITY OF BANK. The relationship between the
Borrower and the Bank shall be solely that of borrower and lender. The Bank
shall not have any fiduciary responsibilities to the Borrower. The Bank
undertakes no responsibility to the Borrower to review or inform the Borrower of
any matter in connection with any phase of the Borrower's business or
operations.
38
<PAGE> 40
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers.
BANK:
THE PROVIDENT BANK
By: /s/ John R. Mirlisena, Jr.
------------------------------------
John R. Mirlisena, Jr.
Senior Vice President
MAZEL STORES, INC.
a Delaware corporation
By: /s/ Sue Atkinson
-------------------------------
Name: Sue Atkinson
-------------------------------
Its: Chief Financial Officer
and Treasurer
-------------------------------
ODD-JOB ACQUISITION CORP.,
a Delaware corporation
By: /s/ Sue Atkinson
-------------------------------
Name: Sue Atkinson
-------------------------------
Its: Chief Financial Officer
and Treasurer
-------------------------------
39
<PAGE> 41
TABLE OF CONTENTS
-----------------
ASSET BASED LOAN AND SECURITY AGREEMENT BETWEEN
MAZEL STORES, INC. AND ODD-JOB ACQUISITION CORP.
AND THE PROVIDENT BANK
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. DEFINITIONS................................................................................. 1
-----------
SECTION 2. LOANS AND INTEREST.......................................................................... 12
------------------
2.1 REVOLVING CREDIT FACILITY................................................................... 12
-------------------------
2.2 LETTER OF CREDIT FACILITY................................................................... 15
-------------------------
2.3 EVIDENCE OF LOANS........................................................................... 17
-----------------
2.4 LOAN PAYMENTS............................................................................... 17
-------------
SECTION 3. GRANT OF SECURITY INTEREST.................................................................. 18
--------------------------
SECTION 4. REPRESENTATIONS AND WARRANTIES.............................................................. 18
------------------------------
4.1 ORGANIZATION AND AUTHORITY.................................................................. 18
--------------------------
4.2 BINDING EFFECT OF DOCUMENTS................................................................. 18
---------------------------
4.3 GOVERNMENT CONSENT.......................................................................... 18
------------------
4.4 FINANCIAL STATEMENTS........................................................................ 18
--------------------
4.5 NO CHANGE IN FINANCIAL CONDITION............................................................ 19
--------------------------------
4.6 NO OTHER LIABILITIES........................................................................ 19
--------------------
4.7 TAXES....................................................................................... 19
-----
4.8 NO LITIGATION............................................................................... 19
-------------
4.9 COMPLIANCE WITH LAWS........................................................................ 19
--------------------
4.10 NO DEFAULTS................................................................................. 19
-----------
4.11 LOCATION OF COLLATERAL...................................................................... 20
----------------------
4.12 TITLE TO COLLATERAL......................................................................... 20
-------------------
4.13 RIGHTS OF BORROWER TO ACCOUNTS.............................................................. 20
------------------------------
4.14 RIGHTS OF BORROWER IN INVENTORY............................................................. 20
-------------------------------
4.15 ACCURACY OF REPRESENTATION.................................................................. 20
--------------------------
4.16 REPRESENTATIONS AS INDUCEMENT TO BANK....................................................... 21
-------------------------------------
4.17 ENVIRONMENTAL PROTECTION.................................................................... 21
------------------------
4.18 EMPLOYEE BENEFIT PLANS...................................................................... 22
----------------------
4.19 EMPLOYEE RELATIONS.......................................................................... 22
------------------
4.20 INTELLECTUAL PROPERTY....................................................................... 23
---------------------
4.21 MATERIAL AGREEMENTS......................................................................... 23
-------------------
4.22 SUBSIDIARIES AND PARTNERSHIP INTERESTS...................................................... 23
--------------------------------------
SECTION 5. AFFIRMATIVE COVENANTS....................................................................... 23
---------------------
5.1 BOOKS AND RECORDS........................................................................... 23
-----------------
</TABLE>
-i-
<PAGE> 42
<TABLE>
<CAPTION>
<S> <C> <C>
5.2 ACCESS TO INFORMATION....................................................................... 24
---------------------
5.3 EVIDENCE OF ACCOUNTS........................................................................ 24
--------------------
5.4 FINANCIAL INFORMATION....................................................................... 24
---------------------
5.5 OTHER INFORMATION........................................................................... 26
-----------------
5.6 MAINTENANCE OF EXISTENCE AND LICENSES....................................................... 26
-------------------------------------
5.7 MAINTENANCE AND INSURANCE OF PROPERTIES..................................................... 26
---------------------------------------
5.8 LIABILITY INSURANCE......................................................................... 27
-------------------
5.9 NOTICE OF CERTAIN EVENTS.................................................................... 27
------------------------
5.10 PAYMENT OF TAXES............................................................................ 28
----------------
5.11 DEALINGS IN INVENTORY....................................................................... 28
---------------------
5.12 CLAIMS AGAINST BORROWER..................................................................... 28
-----------------------
5.13 DEFENSE OF COLLATERAL....................................................................... 28
---------------------
5.14 FINANCING STATEMENTS........................................................................ 28
--------------------
5.15 FINANCIAL COVENANTS......................................................................... 29
-------------------
5.16 MAINTENANCE OF BANK ACCOUNTS................................................................ 29
----------------------------
5.17 COMPLIANCE WITH LEASES...................................................................... 29
----------------------
5.18 ERISA....................................................................................... 30
-----
SECTION 6. NEGATIVE COVENANTS.......................................................................... 30
------------------
6.1 SALE OF ASSETS OR MERGER.................................................................... 30
------------------------
6.2 LIENS AND ENCUMBRANCES...................................................................... 31
----------------------
6.3 CONTINGENT LIABILITIES...................................................................... 31
----------------------
6.4 LOANS....................................................................................... 31
-----
6.5 DIVIDENDS................................................................................... 31
---------
6.6 DEALINGS WITH ACCOUNTS...................................................................... 31
----------------------
6.7 INVESTMENTS................................................................................. 31
-----------
6.8 CHANGE IN MANAGEMENT OR BUSINESS............................................................ 31
--------------------------------
6.9 TRANSACTIONS WITH AFFILIATES................................................................ 32
----------------------------
6.10 AMENDMENTS TO PARTNERSHIP AGREEMENT......................................................... 32
-----------------------------------
6.11 INDEBTEDNESS................................................................................ 32
------------
6.12 OTHER LETTERS OF CREDIT..................................................................... 32
-----------------------
6.13 CAPITAL EXPENDITURES........................................................................ 32
--------------------
6.14 CHANGES IN CONTROL.......................................................................... 32
------------------
SECTION 7. COLLECTION OF COLLATERAL AND NOTICE OF ASSIGNMENT.
7.1 RECEIPTS IN RESPECT OF COLLATERAL........................................................... 32
---------------------------------
7.2 NOTICE OF ASSIGNMENT........................................................................ 33
--------------------
7.3 ENFORCEMENT OF ACCOUNTS..................................................................... 33
-----------------------
7.4 RETURNED OR REJECTED GOODS.................................................................. 33
--------------------------
7.5 VERIFICATION OF ACCOUNTS.................................................................... 34
------------------------
7.6 LIMITATION OF BANK'S LIABILITY.............................................................. 34
------------------------------
SECTION 8. SERVICE CHARGES............................................................................. 34
---------------
</TABLE>
-ii-
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 9. ONE GENERAL OBLIGATION: CROSS COLLATERAL................................................... 34
-----------------------------------------
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.............................................................. 35
------------------------------
10.1 EVENTS OF DEFAULT........................................................................... 35
-----------------
10.2 RIGHTS OF BANK UPON DEFAULT................................................................. 35
---------------------------
10.3 APPLICATION OF PROCEEDS..................................................................... 36
-----------------------
10.4 REMEDIES CUMULATIVE......................................................................... 36
-------------------
SECTION 11. MISCELLANEOUS............................................................................... 36
-------------
11.1 GOVERNING LAW; JURISDICTION AND VENUE....................................................... 36
-------------------------------------
11.2 WAIVER OF JURY TRIAL........................................................................ 36
--------------------
11.3 OTHER WAIVERS............................................................................... 36
-------------
11.4 COLLECTION COSTS............................................................................ 36
----------------
11.5 EXPENSES.................................................................................... 37
--------
11.6 NOTICES..................................................................................... 37
-------
11.7 SEVERABILITY................................................................................ 37
------------
11.8 ENTIRE AGREEMENT, MODIFICATION, BENEFIT..................................................... 37
---------------------------------------
11.9 CONSTRUCTION................................................................................ 37
------------
11.10 HEADINGS.................................................................................... 37
--------
11.11 COUNTERPARTS................................................................................ 37
------------
11.12 NONLIABILITY OF BANK........................................................................ 37
--------------------
</TABLE>
- iii -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> FEB-1-1996
<PERIOD-END> OCT-26-1996
<CASH> 1,209
<SECURITIES> 0
<RECEIVABLES> 10,493
<ALLOWANCES> 195
<INVENTORY> 44,408
<CURRENT-ASSETS> 57,610
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,208
<CURRENT-LIABILITIES> 19,166
<BONDS> 0
<COMMON> 1
0
0
<OTHER-SE> 22,260
<TOTAL-LIABILITY-AND-EQUITY> 76,208
<SALES> 129,552
<TOTAL-REVENUES> 129,552
<CGS> 88,183
<TOTAL-COSTS> 88,183
<OTHER-EXPENSES> 32,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,059
<INCOME-PRETAX> 6,956
<INCOME-TAX> 2,852
<INCOME-CONTINUING> 4,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,104
<EPS-PRIMARY> .66
<EPS-DILUTED> 0
</TABLE>
