SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: March 31, 1998
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 Numbers 333-23893; 333-23893-01; 333-23893-02; 333-23893-03
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CFP HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 95-4413619
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
CFP GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 95-4616486
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
CUSTOM FOOD PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
California 2013 95-3760291
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
QF ACQUISITION CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 22-3174301
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Identification Number)
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1117 West Olympic Blvd.
Montebello, CA 90640
(Address, Including Zip Code of Registrant's Principal Executive Offices)
213-727-0900
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
shorter period that the registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
[ x ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy of information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[ x ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock,
as of the latest practicable date. There is no public trading market for shares of the
registrants Common Stock.
Class Outstanding at May 23, 1998
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Voting Common Stock - Class A, $.01 par value 14,705
Non-voting common Stock - Class A, $.01 par value 11,241
Non-voting common Stock - Class B, $.01 par value 3,059
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CFP GROUP, INC.
CFP HOLDINGS, INC.
CUSTOM FOOD PRODUCTS, INC.
QF ACQUISITION CORP.
Form 10K for the Fiscal Year Ended March 31, 1998
TABLE OF CONTENTS
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Page No.
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PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 16
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 36
SIGNATURES 38
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Special Note Regarding Forward Looking Informaton
CFP Group, Inc., (the "Company"), or its representatives, may make
forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of Operations, press releases and filings with the Securities and Exchange
Commission (the "Commission"), regarding estimated future operating results,
planned capital expenditures (including the amount and nature thereof) and the
Company's financing plans, if any, related thereto, increases in customers and
the Company's financial position and other plans and objectives for future
operations. Certain of the matters discussed may involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are set forth among the factors set forth in the
"Factors Affecting Future Performance" section in Item 1 of this report, as well
as factors contained in the Company's other securities filings.
All subsequent oral and written forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
Part I
Item 1. Business
History
CFP Group, Inc. became the parent of CFP Holdings, Inc. on December 31,
1996 after the recapitalization of CFP Holdings in a series of transactions
whereby each person owning capital stock (or options to acquire capital
stock of CFP Holdings) exchanged their equity interests for equivalent
interests of capital stock (or options to acquire capital stock) of CFP
Group. CFP Holdings was formed in 1993 by First Atlantic, a private
investment firm specializing in acquiring and building middle market
companies, and commenced operations on April 1, 1993 after acquiring all of
the outstanding stock of Center of the Plate Foods, Inc., and all
significant operating assets of Best Western Foods, Inc.. Best Western was
a leading supplier of uncooked beef to the Arby's restaurant chain while
Center of the Plate constituted what is today Custom Foods' value-added
operations. Under First Atlantic's sponsorship, Custom Foods has focused on
building its core value-added product line by expanding its manufacturing
facilities, enhancing its product development capabilities and developing a
growth strategy aimed at diversifying its customer base.
On December 31, 1996 CFP Holdings acquired Quality Foods. Founded in
the 1940's as William Cohen and Son Company, Inc., Quality Foods has a
50-year history of supplying the foodservice industry. Quality Foods is one
of the leading manufacturers of sandwich steak products in the United
States.
General
The Company is a leading developer, manufacturer and marketer of
value-added meat and poultry products sold to the foodservice industry and
manufacturers of packaged foods. The Company provides a wide range of
pre-cooked and uncooked products, including beef and chicken sandwich
steaks; beef, pork and poultry meat rolls used in further processing;
charbroiled
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products and crumble toppings; barbecue-flavored meats; and meatballs.
The Company principally manufactures higher margin specialty products that
provide superior quality and performance for the end-user and that are
typically custom-formulated to meet specific customer requirements. In the
foodservice industry, the Company supplies some of the country's leading
restaurant chains and outlets, including Subway, Great Steak & Potato
Company, International House of Pancakes, Inc., Domino's Pizza, Inc.,
Wal-Mart Stores, Inc., Nathan's Famous Inc., Blimpie International, Inc.
and Arby's. The Company also serves many of the country's leading packaged
foods manufacturers, including Chef America, H. J. Heinz Company, Inc.,
Foodbrands America, Inc., Schwan's Sales Enterprises Inc., Kraft Foods Inc.
and McLane Company, Inc. The Company believes that its proprietary recipes
and manufacturing processes, national presence and long-standing customer
relationships pose barriers to entry for other manufacturers seeking to
provide competitive products. The Company is comprised of two operating
subsidiaries, Quality Foods, which was acquired on December 31, 1996, and
Custom Foods.
Quality Foods is one of the country's leading manufacturers of
pre-cooked and uncooked, thinly- sliced beef used primarily in
Philadelphia-style steak sandwiches. It also supplies sliced chicken
products and pre-cooked and uncooked meatballs and hamburger patties.
Quality Foods serves the foodservice industry, with particular emphasis on
Quick Service Restaurants (QSRs), sandwich chains and family dining
establishments. For over ten years, Quality Foods has been the primary
supplier of pre-cooked beef to the Subway restaurant chain for its popular
steak and cheese sandwich. Quality Foods employs a proprietary forming and
freezing process that, the Company believes, produces a product with
excellent flavor and visual appearance, as well as superior yield when
cooked.
Quality Foods sells its products through an established network of
independent foodservice brokers and over 400 foodservice distributors
located in 42 states and six Canadian provinces. Quality Foods has recently
developed and introduced several complementary beef and chicken products
which, the Company believes, can be successfully marketed through these
established distribution channels.
In November 1996, Quality Foods completed an $11.0 million purchase,
renovation and retrofit of a 150,000 square foot production facility in
Philadelphia, and the substantial consolidation of three manufacturing and
administrative facilities into this location (collectively, the
"Philadelphia Consolidation") which has more than doubled Quality Foods'
production capacity and which the Company believes will enable it to meet
its currently anticipated manufacturing needs for at least the next five
years.
Custom Foods develops, manufactures and markets pre-cooked meat and
poultry products sold primarily to manufacturers of branded and private
label packaged foods, also referred to as "industrial" users, and is also a
major supplier of frozen, uncooked beef product to the Arby's restaurant
chain. Custom Foods' pre-cooked products include a variety of pork, beef,
chicken and turkey items, such as meat rolls used in further processing;
barbecue products; Mexican specialties; charbroiled patties and crumble
toppings. Custom Foods focuses on sales to manufacturers of frozen and
refrigerated convenience foods, including items in the fast-growing
hand-held foods segment. Custom Foods is the largest supplier of
custom-formulated meat and poultry fillings to Chef America for use in
substantially all of its microwaveable sandwich product lines. Chef America
has accounted for a majority of Custom Foods' sales of pre-cooked products
for each of the past three years. See "Factors Affecting Future Performance
- Importance of Key Customers." Due to capacity constraints and the growing
needs of its customers, Custom Foods has, over the past three years,
significantly broadened its operations with the opening and subsequent
expansion of a new facility in Kentucky. With capacity expansions
completed, Custom Foods recently created a direct sales and marketing
department. Custom Foods has developed over 400 proprietary product
formulations, many of which, the Company believes, can now be successfully
marketed through this sales group.
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Custom Foods and its predecessors have supplied beef products to Arby's
for over 20 years. Prior to fiscal 1995, Custom Foods supplied Arby's on a
national basis. However, in the first quarter of fiscal 1995, Custom Foods
entered into an 18-month contract to supply Arby's on a regional basis,
reducing the scope of its arrangement due to a new competitive bidding
process and a freight advantage enjoyed by certain other suppliers. Under
this contract, sales to Arby's declined from $61.0 million in fiscal 1994
to $26.2 million in fiscal 1995, resulting in an overall 28.9% decrease in
Custom Foods' net sales. Nevertheless, Custom Foods' income from operations
during this period increased 19.7%, reflecting significant growth in its
more profitable pre-cooked operations. In June 1996, following completion
of the expansion of its Kentucky facility, Custom Foods entered into a new
three-year contract to once again supply Arby's on a national basis.
Recent Developments
The Company has announced that it has signed a letter of intent to
acquire a privately held Midwestern value-added beef processing company for
a proposed purchase price of less than $15 million.
CFP has substantially completed its due diligence on the company and,
subject to the negotiation of a definitive purchase agreement and obtaining
appropriate financing, expects to consummate the acquisition in the third
calendar quarter.
Industry
Value-Added Meat and Poultry Processors
Value-added meat and poultry processors such as the Company purchase
raw cuts of beef, pork, chicken and turkey and process them into packaged
form for further processing or for distribution into the foodservice and
retail markets. Various steps including blending, forming, cooking, slicing
and mixing with vegetables and flavorings are employed to create consistent
products that fulfill specific preparation or processing needs of
customers. Industry trends have increased the demand for value-added meat
and poultry products like those provided by the Company, including the
desire for more uniform and consistent end-products, continuous focus on
reduced preparation and/or reduced manufacturing costs and increased food
safety concerns. The Company believes that it is well positioned among
value-added meat and poultry processors to capitalize on these trends as a
result of its national distribution, broad pre-cooked product capabilities,
multiple modern manufacturing facilities and a diversified focus on both
foodservice and industrial markets.
Foodservice
The foodservice industry is composed of establishments that serve food
outside the home and includes restaurants; the food operations of health
care providers, schools and other institutions, hotels, resorts and
corporations; and other non-traditional foodservice outlets. Growth in this
industry has been driven by the increase in away-from-home meal
preparation, which has accompanied the expanding number of both dual income
and single-parent households. Another trend within the foodservice industry
is the growth in the number of non-traditional foodservice outlets such as,
convenience stores, retail stores, supermarkets and food kiosks. These
non-traditional locations often lack extensive cooking, storage or
preparation facilities, resulting in a need for pre-cooked and prepared
foods similar to those provided by the Company. The expansion in the
foodservice industry has also been accompanied by the continued
consolidation and growth of broadline and specialty foodservice
distributors, many of which are long-standing customers of the Company.
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Industrial
The majority of the Company's existing and targeted industrial
customers are involved in the manufacture of branded and private label
packaged foods. The same trends which have contributed to the increase in
away-from-home meal preparation have also fueled the growth in easy to
prepare, microwaveable frozen and refrigerated convenience foods. Among the
fastest growing segments is the frozen and refrigerated hand-held foods
market. This growth has been driven by improved product quality and variety
and the increasing need for inexpensive, yet hearty, food items which
require minimal preparation. Despite rapid growth, many categories of
frozen and refrigerated hand-held foods have achieved minimal household
penetration. The Company believes it has been successful in establishing
and maintaining supply relationships with many of the leading manufacturers
in this market, including Chef America, and that it is well-suited to
service this customer base with a broad line of value-added products which
meet its customers needs.
Products
The Company manufactures and markets a wide variety of value-added
beef, pork and poultry products for both foodservice and industrial
customers. Products are provided in either "solid-muscle," or natural cut
form, and "restructured" form, whereby natural cuts are ground, blended or
emulsified to provide a generally more consistent and lower cost end
product. The Company manufactures both pre-cooked and uncooked products in
both portion-controlled and bulk form, depending upon the specific
preparation, storage or manufacturing needs of the end customer. Various
sauces, spices, marinades and vegetable mixtures are also used in certain
of the Company's products.
Customers and End Purchasers
The Company serves several hundred active customers including broad
line and specialty foodservice distributors, packaged foods manufacturers
and major national and regional restaurant chains. Subway distributors,
Arby's distributors and Chef America accounted for 20%, 26% and 15% of the
Company's net sales, respectively, in fiscal 1998. No other customer
accounted for as much as 5% of the Company's net sales during fiscal 1998.
The Company supplies its foodservice customers generally through
distributors which take title to the product and resell it. Among the
Company's customers are many of the country's largest broad line and
specialty food service distributors. For these and other large end
purchasers, the Company's products generally go through extensive
qualification procedures and its manufacturing capabilities are subjected
to thorough review by the end purchasers prior to the Company's approval as
a vendor. Large end purchasers typically select suppliers that can
consistently meet increased volume requirements on a national basis during
peak promotional periods. In its value-added operations, the Company
believes that its manufacturing flexibility, national presence and
long-standing customer relationships pose barriers to entry for other
manufacturers seeking to provide similar products to the Company's current
large foodservice end purchasers.
The Company's industrial customers comprise some of the leading
packaged foods manufacturers in the country. Given the highly customized
nature of the Company's products, relationships are generally maintained at
various levels within the Company. The Company believes that it has been
able to maintain and expand these relationships through its attention to
customer service, by providing products that consistently meet the changing
needs of its customers and by remaining cost competitive. The Company
believes that once its value-added products are approved as principal
ingredients in its customers' end products, there exist high barriers to
entry for other manufacturers as long as the Company's overall quality,
costs and product support remain competitive.
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Sales and Marketing
The Company divides its sales and marketing efforts between the
foodservice and industrial markets in order to better serve its target
markets. Sales are driven by both a direct sales force and an independent
broker network.
The Sales Force
In its foodservice sales operations, the Company employs 11 sales and
sales support personnel, located throughout the United States. These
individuals manage the broker network and develop and maintain the
Company's relationships with large end purchasers, including Subway and its
various franchisee groups, QSRs, sandwich chains and major distributors.
Sales personnel also interface with the Company's independent foodservice
distributor network, principally for the purposes of developing new
accounts for existing products as well as developing new products to market
through the existing channels.
Industrial sales are conducted by six in-house sales and sales support
personnel, located in California and Texas. Sales are generally made
without the use of foodservice brokers, and involve a high degree of
customer service and interaction with the product development,
manufacturing and purchasing personnel of the end purchaser.
Independent Broker Network
The Company maintains a network of independent foodservice brokers
covering most of the states as well as Canada, all of which are compensated
on a commission basis. The Company believes that its broker relationships
are a valuable asset providing significant new product and customer
opportunities. The brokers perform several significant functions for the
Company including identifying and developing new business opportunities and
providing customer service and support to the Company's distributors and
end purchasers.
Manufacturing and Processing
The Company purchases whole cuts of raw meat and poultry in either
fresh or frozen form and subjects them to various processing steps
including blending, forming, cooking and, in some cases, further processing
including shredding, cubing, slicing and the addition of sauces and
vegetables. The Company has developed highly specialized products for
customers which include proprietary recipes and manufacturing processes
that the Company believes would be difficult for a competitor to duplicate.
Custom Foods usually develops the recipes and manufacturing processes for
its customers, or receives general requirements and then develops a product
formulation and manufacturing process to produce a product that meets the
needs of its customers. These requirements can include specific fat and
nutritional content, taste, texture, and various performance
characteristics specific to the customer's manufacturing process.
The Company generally retains ownership of its proprietary
manufacturing processes and generally retains ownership of its product
recipes. Although the customer often specifies the ultimate "label"
requirements and product specifications, the actual manufacturing steps and
processes typically remain confidential and proprietary to the Company.
Raw Materials and Suppliers
The Company's principal raw materials consist of fresh and frozen cuts
of beef, pork and poultry, purchased from a variety of local, national and
foreign suppliers. The Company often makes forward volume commitments on
raw materials to lock in availability and pricing consistent with its
production expectations. The Company also purchases a variety of spices,
binders, sauces and other product additives used in the manufacturing
process.
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The Company typically utilizes a variety of meat and poultry cuts in
the manufacture of its restructured products. In its sandwich steak product
lines, however, the Company generally purchases beef lifter and loin tail
cuts to ensure product quality and consistency throughout the manufacturing
process. Lifter meat, and to a lesser extent loin tail, have historically
experienced significant price fluctuations during the course of the year
based on seasonal buying patterns of large users and product availability
relative to other cuts of beef, with prices typically lowest from June to
August and highest in the Spring and Fall. Historically, the Company has
purchased larger quantities during the low points in the seasonal cycle,
formed the product into an intermediate stage and frozen it for further
processing as production requirements dictate.
The Company believes that its beef, pork and poultry raw materials are
available from a number of sources at market prices and quantities
sufficient to meet its anticipated production needs. The Company does,
however, concentrate certain beef and pork purchases to ensure the highest
quality and consistency of product and to improve its overall costs. For
fiscal 1998 the Company purchased a significant amount of its meat and
poultry requirements from divisions of ConAgra, Inc.
Patents and Trademarks
The Company has no material patents or trademarks on which its business
depends.
Competition
The Company competes in highly competitive markets with a significant
number of companies of various sizes, including divisions or subsidiaries
of larger companies. The principle competitive factors in its markets are
product quality and consistency, price, customer service, and ability to
produce highly specialized products to meet specific customer requirements.
Many of the Company's competitors are larger and have greater financial
resources.
Government Regulatory Matters
The Company is subject to federal, state and local health laws and
regulations that establish standards for the manufacture, storage, labeling
and transport of foodstuffs. The USDA is the regulatory body that is
primarily responsible for monitoring the Company's operations. Beef, pork
and poultry inspection is mandatory, under the jurisdiction of the Food
Safety and Inspection Service (a division of the USDA), for meat that is
transported across state lines or is otherwise placed in interstate
commerce.
The Company operates USDA-approved facilities. The Company's programs
are designed to assure that its Company's products are manufactured under
conditions that meet or exceed all applicable government standards. Such
programs are monitored by federal inspectors and include: (i) inspection of
meat at various stages of processing, (ii) temperature monitoring for both
fresh and cooked meat, (iii) review and approval of labeling and (iv)
controlling and monitoring the use of additives.
The operations and the products of the Company are also subject to
state and local regulation through such measures as licensing of plants,
enforcement of health standards and inspection of the facilities.
Enforcement actions for violations of federal, state and local regulations
may include seizure and condemnation of violative products, cease and
desist orders, injunctions, monetary penalties and/or impoundment. The
Company believes that its facilities and practices are sufficient to
maintain compliance with applicable government regulations, although there
can be no assurances in this regard.
Employees
As of March 31, 1998, the Company had approximately 550 employees.
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Approximately 280 of the Company's employees are represented by the
Teamsters Union under contracts which expire in March 2000 and January
2001. The Company has not had a strike during the past ten years.
Factors Affecting Future Performance
Significant Leverage and Indebtedness Service
The Company incurred substantial indebtedness in connection with the
financing of the Quality Foods Acquisition and is highly leveraged. As of
March 31, 1998, the Company had total consolidated indebtedness (including
capitalized lease obligations) of approximately $143.5 million and a
stockholders' deficiency of $25.0 million. Outstanding debt at March 31,
1998 primarily relates to the 11.625% Senior Notes due 2004 (the "Senior
Notes") and borrowings under a term loan and revolving credit agreement
(the "Bank Credit Agreement"). Borrowings under the Bank Credit Agreement
were refinanced in May 1998 with a new $40 million loan and security
agreement (the "Loan and Security Agreement"). Subject to the restrictions
in the Loan and Security Agreement and the Senior Notes Indenture, the
Company and its subsidiaries may incur additional indebtedness from time to
time to finance capital expenditures and acquisitions and for other general
corporate purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The degree to which the Company is leveraged will have important
consequences to the holders of the Senior Notes, including: (i) limitations
on the Company's future ability to obtain additional financing for working
capital or other purposes; (ii) a substantial portion of the Company's cash
flow from operations will be dedicated to the payment of the principal of
and interest on its indebtedness, thereby reducing funds available for
operations; (iii) certain of the Company's borrowings, including the
borrowings under the Loan and Security Agreement, will be at variable rates
of interest which will cause the Company to be vulnerable to increases in
interest rates; (iv) making the Company more vulnerable to economic
downturns and limiting its ability to withstand competitive pressures; and
(v) the Senior Notes will mature after substantially all of the Company's
other indebtedness.
The Company's ability to make scheduled payments of principal on, or
interest on, or to refinance, its indebtedness will depend on its future
operating performance and cash flow, which are subject to prevailing
economic conditions, prevailing interest rate levels, and financial,
competitive, business and other factors, many of which are beyond its
control, as well as the availability of borrowings under the Loan and
Security Agreement or successor facilities. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
indebtedness, it will be required to refinance all or a portion of its
existing indebtedness, or to obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any
additional financing could be obtained. The inability to obtain additional
financing would have a material adverse effect on the Company.
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Importance of Key Customers
Certain customers are material to the business and operations of the
Company. Subway distributors, Arby's distributors and Chef America
accounted for 20%, 26%, and 15% of the Company's net sales, respectively,
in fiscal 1998. No other customer accounted for as much as 5% of the
Company's net sales during the fiscal year.
The Company's prospects will continue to depend upon the success of the
Subway and Chef America products that incorporate meats provided by the
Company, as well as Subway's and Chef America's retention of the Company as
a major supplier. Although the Company believes that it has excellent
relationships with these customers and that such relationships are mutually
beneficial, the Company does not have long-term contracts with either
Subway or Chef America, and the loss of either as a customer, or a
significant reduction in the Company's business with either of them, would
have a material adverse effect on the Company. Commencing with the last
quarter of fiscal year 1998 and continuing through the first quarter of
fiscal year 1999 sales to Chef America have declined. Total revenues at the
Company's Custom Foods division for the last quarter of fiscal year 1998
were essentially unchanged when compared to the three months ended March
31, 1997, as the decline in Chef America volume was offset by sales to
other customers. Based on discussions between Chef America and the Company,
the Company believes that Chef America is expanding the number of food
product suppliers they are using in order to support their growth. However,
as a result of the decreased volume to Chef America in the last quarter of
fiscal year 1998 and the first quarter of fiscal year 1999, operating
results for the Company's Custom Foods value-added division were and are
expected to be adversely affected.
While Arby's is one of the Company's three largest customers, sales to
Arby's distributors produce relatively low profit margins, compared to
other higher margin value-added products of the Company, and require a high
level of the Company's working capital relative to the profit margins
produced.
Competition
The Company operates in highly competitive markets with a significant
number of companies of varying sizes, including divisions or subsidiaries
of larger companies. The Company's sales to Arby's and its sales of
hamburger patties and meatball items to other customers, because of their
low value- added nature are the most price sensitive and competitive areas
in which the Company competes. A number of the Company's competitors have
multiple product lines, substantially greater financial and other resources
available to them and are, to varying degrees, vertically integrated. There
can be no assurance that the Company can continue to compete successfully
with such other companies. Competitive pressures or other factors could
cause the Company's products to lose market share or result in significant
price erosion, which would have a material adverse effect on the Company.
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General Risks of Food Industry
The food industry, and the markets within the food industry in which
the Company competes, are subject to various risks, including: adverse
changes in general economic conditions; evolving consumer preferences;
nutritional and health-related concerns; federal, state and local food
inspection and processing controls; consumer product liability claims;
risks of product tampering; and the availability and expense of liability
insurance. The meat and poultry industries have recently been subject to
increasing scrutiny due to the association of meat and poultry products
with recent outbreaks of illness, and on rare occasions even death, caused
by foodborne pathogens such as E. coli, salmonella and others which are
found in raw and improperly cooked meat. Consumer demand for meat and
poultry fluctuates as the result of such outbreaks of illness. Product
recalls are sometimes required in the meat and poultry industries to
withdraw contaminated or mislabeled products from the market.
Suppliers and Raw Materials
The Company purchases large quantities of commodity beef, pork and
poultry. Historically, market prices for products processed by the Company
have fluctuated in response to a number of factors, including changes in
the United States government farm support programs, changes in
international agricultural and trading policies, weather and other
conditions during the growing and harvesting seasons. The Company
historically has been able to pass through some increases in the prices of
beef, pork and poultry to end users. Failure to pass on significant price
increases to its customers for a prolonged period of time would have a
material adverse effect on the Company. Further, certain of the Company's
customers, including Subway and Chef America, have fixed price arrangements
for certain products in which the sale price is fixed for periods of up to
one year. Although the fixed price arrangements are for a targeted quantity
of products, there is no requirement to deliver the products until a
purchase order is issued establishing quantity and delivery time. Should
the prices of raw materials increase substantially for a prolonged period
of time, the Company could be required to deliver products to these
customers at lower gross margins than historically achieved.
Government Regulation
The operations of the Company are subject to extensive inspection and
regulation by the United States Department of Agriculture ("USDA") and by
other federal, state and local authorities, regarding the processing,
packaging, storage, transportation, distribution and labeling of products
that are manufactured, produced and processed by the Company. The Company's
processing facilities and products are subject to frequent inspection by
USDA and/or other federal, state and local authorities. On July 25, 1996,
the USDA issued strict new policies against contamination by foodborne
pathogens such as E. coli and salmonella, and established a new system of
regulation known as the Hazard Analysis Critical Control Points ("HACCP")
program. The HACCP program required all meat and poultry processing plants
to develop and
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implement sanitary operating procedures by January 27, 1997. Other HACCP
program requirements began going into effect on January 26, 1998. As the
USDA's HACCP requirements are relatively new, their impact on the meat and
poultry industries is not yet fully known. However, the Company believes
that it is currently in substantial compliance with all material
governmental laws and regulations (including the January 1997 and 1998
HACCP requirements), and that it maintains all material permits and
licenses relating to its operations. Nevertheless, there can be no
assurance that the Company will be able to maintain compliance with
existing laws or regulations or that it will be able to comply with any
future laws and regulations. Failure by the Company to comply with
applicable laws and regulations would subject it to civil remedies,
including withholding of necessary USDA inspections, fines, injunctions,
recalls or seizures, as well as potential criminal sanctions, any of which
would have a material adverse effect on the Company.
The business operations of the Company and the past and present
ownership and operation of real property by the Company are subject to
extensive and changing federal, state and local environmental laws and
regulations pertaining to the discharge of materials into the environment,
the handling and disposition of wastes (including solid and hazardous
wastes) or otherwise relating to protection of the environment. Compliance
with federal, state and local environmental laws and regulations is not
expected to have a material impact on the Company's capital expenditures,
earnings or competitive position. No assurance can be given, however, that
additional environmental issues relating to presently known matters or
identified sites or to other matters or sites will not require additional,
currently unanticipated investigation, assessment or expenditures.
Dependence on Key Management
The Company's executive officers and certain other key employees have
been primarily responsible for the development and expansion of the
Company's business, and the loss of the services of one or more of these
individuals could have an adverse effect on the Company. The Company's
future success will be dependent in part upon its continued ability to
recruit, motivate and retain qualified personnel. There can be no assurance
that the Company will be successful in this regard. The Company has
employment and non-competition agreements with certain key personnel.
Controlling Stockholder
Atlantic Equity Partners, L.P., a Delaware limited partnership ("AEP"),
of which First Atlantic is the investment manager, owns 49.3% and 97.2% of
the Company's fully-diluted common stock and voting common stock,
respectively. As controlling stockholder, AEP is able, subject to certain
contractual limitations, to determine the outcome of any corporate
transaction or other matter submitted to the stockholders of the Company
for approval, including mergers, consolidations or the sale of all or
substantially all of the assets of the Company, or any of its subsidiaries
(including the Company). In
12
<PAGE>
addition, AEP has the ability to elect a majority of the Company's Board of
Directors and the Boards of Directors of its subsidiaries.
Year 2000
The Company is in the process of selecting a new Enterprise Wide System
and currently expects to have a new system selected and implemented by July
1999. The company believes that implementation of the new system will
address its major "year 2000 issues", which arise in cases where the
computer systems or any equipment with computer chips use two-digit fields
that recognize dates using the assumption that the first two digits are
"19". On January 1, 2000, any clock or date recording mechanism including
date sensitive software that uses only two digits to represent the year may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations, causing
disruption of operations, including among other things a temporary
inability to process transactions, send invoices or engage in similar
activities.
The Company is currently engaged in a review of its computer systems
and applications, including packaged software used by the Company, that
will not be addressed by the new system. The Company expects to make any
modifications required to resolve year 2000 issues in a timely manner and
leave adequate time to assess and correct any significant issues that may
materialize. The Company is also expecting to initiate formal
communications with selected vendors and customers to determine the extent
to which the Company is vulnerable to those third parties' failure to
remediate their own year 2000 issues. The Company can give no guarantee
that the systems of other companies on which the Company's systems rely
will be converted on time or that failure to convert by another company or
a conversion that is incompatible with the Company's systems would not have
a material adverse effect on the Company. The Company is taking steps to
reduce the likelihood that such failures could affect the Company's systems
through any electronic communications.
The Company does not expect that the review and modifications described
above, excluding the cost of implementing the new system, will require
material expenditures. If the Company is unable to successfully implement
the new system sufficiently in advance of the year 2000, however,
additional expenditures could be required and such expenditures could be
substantial. If modification required to address the Company's year 2000
issues are not made, or are not timely, the year 2000 issues could have a
material impact on the operations and financial results and conditions of
the Company. See "Liquidity and Capital Resources".
13
<PAGE>
Item 2. Properties
<TABLE>
The following table sets forth the Company's principal facilities:
<CAPTION>
Owned/ Square
Location Purpose Leased Footage
- -------- ------- ------ -------
<S> <C> <C> <C>
Philadelphia, PA.....................Manufacturing and Owned 150,000
Administrative Offices
Montebello, CA.......................Manufacturing and Leased 32,000
Administrative Offices
Owingsville, KY......................Manufacturing Leased 38,000
Vernon, CA...........................Manufacturing Leased 20,000
</TABLE>
The Company also has a 45,000 square foot facility in Camden, NJ which
was closed as part of the Philadelphia Consolidation. The company's current
intention is to sell this facility.
Environmental Matters
The business operations of the Company and the operation of real
property by Custom Foods and Quality Foods are subject to extensive and
changing federal, state and local environmental laws and regulations
pertaining to the discharge of materials into the environment, the handling
and disposition of wastes (including solid and hazardous wastes) or
otherwise relating to protection of the environment. Compliance with
federal, state and local environmental laws and regulations is not expected
to have a material impact on the Company's capital expenditures, earnings
or competitive position. No assurance can be given, however, that
additional environmental issues relating to presently known matters or
identified sites or to other matters or sites will not require additional,
currently unanticipated investigation, assessment or expenditures.
Environmental assessment audits conducted prior to Quality Foods'
acquisition of the Philadelphia facility revealed the presence there of
petroleum hydrocarbon contamination from former underground storage tank
operations. The facility's former owner has conducted assessment and
remedial work at the site under the oversight of the Pennsylvania
Department of Environmental Protection. Soil and groundwater remediation is
substantially complete. Pursuant to an agreement among the facility's
former owner, Quality Foods, and the Commonwealth of Pennsylvania, subject
to certain exceptions, Quality Foods is not responsible to the Commonwealth
of Pennsylvania for identified environmental contamination that occurred on
the site prior to Quality Foods' acquisition of the facility.
Item 3. Legal proceedings
The Company is not involved in any legal matters within or outside of
the normal course of business which would have a material impact on the
operations or financial position of the Company.
The Company is likely to be subject to claims arising from time to time
in
14
<PAGE>
the ordinary course of its business. In certain of such actions, plaintiffs
may request punitive or other damages that may not be covered by insurance
and, accordingly, no assurance can be given with respect to the ultimate
outcome of any such possible futures claims or litigation or their effect
on the Company.
Item 4. Submission of matters to a vote of security holders
The Company did not submit any matters to a vote of security holders
during the year covered by this report.
Part II
Item 5. Market for registrant's common equity and related stockholder
matters
The Company's Common stock is not publicly traded. The Company is
substantially owned by Atlantic Equity Partners, LP (AEP). The Company is
controlled by AEP, which beneficially owns shares representing 97.2% of the
voting interest in CFPG, 49.3% on a fully diluted basis, and has the right
to designate all of the directors of the Company. Accordingly, AEP controls
the Company and has the power to elect all of its directors, appoint new
management and approve any action requiring the approval of the holders of
the Company's common stock.
In fiscal 1998 the Company sold 72 Non-voting Class B shares at $694.44
per share to an employee in a private placement pursuant to Section 4(2)
under the Securities Act.
Item 6. Selected financial data
<TABLE>
The following Selected Consolidated Financial Data of the Company
should be read in conjunction with the consolidated financial statements
and related notes of the Company and other financial data included
elsewhere in this filing. The balance sheet data presented below as of
September 30, 1993, 1994, 1995 and 1996 and March 31, 1997 & 1998 and the
statement of operations data presented below for the six months ended
September 30, 1993 and March 31, 1997 and for the years ended September 30,
1994, 1995 and 1996 and for the year ended March 31, 1998 are derived from
the audited consolidated financial statements of the Company.
<CAPTION>
Six Months Six Month
Ended Years Ended September 30, Ended Year Ended
September 30, -------------------------------- March 31, March 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Statement of Operations Data:
Net sales $ 44,285 $ 86,598 $ 61,543(1) $ 65,996 $ 60,529 $181,378
Cost of sales 40,352 76,485 49,868 53,818 52,276 152,484
-------- -------- -------- -------- -------- --------
Gross profit 3,933 10,113 11,675 12,178 8,253 28,894
Operating expenses 2,052 5,957 6,700 5,512 7,474 17,156
Other charges 4,996(2)
-------- -------- -------- -------- -------- --------
Income from operations 1,881 4,156 4,975 1,670 779 11,738
Interest expense 1,307 2,443 2,632 3,232 4,681 17,236
-------- -------- -------- -------- -------- --------
15
<PAGE>
Income (loss) before income
taxes and extraordinary
items ...................... 574 1,713 2,343 (1,562) (3,902) (5,498)
Provision (benefit) for income
taxes ...................... 265 851 1,189 (409) (541) 30
--------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item ......... 309 862 1,154 (1,153) (3,361) (5,528)
Extraordinary (loss) on early
extinguishment of debt ..... (4,489)
--------- --------- --------- --------- --------- ---------
Net income (loss) ............ $ 309 $ 862 $ 1,154 $ (1,153) $ (7,850) $ (5,528)
========= ========= ========= ========= ========= =========
Other Data:
EBITDA(3) .................... $ 2,582 $ 6,003 $ 6,685 $ 3,758 $ 3,026 $ 18,484
Net cash (used in) provided by
operating activities ....... (427) 4,375 4,382 135 3,477 661
Net cash used in investing
activities ................. (606) (666) (1,785) (1,811) (67,293) (3,754)
Net cash provided by (used in)
financing activities ....... 308 (3,499) (2,807) 2,168 65,462 2,298
Depreciation and amortization $ 701 $ 1,847 $ 1,710 $ 2,088 $ 2,236 $ 6,732
Interest expense ............. 1,307 2,443 2,632 3,232 4,681 17,236
Capital expenditures ......... 445 1,515 5,054 3,009 1,674 5,489
Ratio of earnings to fixed
charges(4) ................. 1.41x 1.64x 1.83x
Balance Sheet Data:
Working capital .............. $ 4,908 $ 4,309 $ 2,754 $ 3,153 $ 14,702 $ 15,507
Total assets ................. 27,660 27,709 30,148 32,203 132,822 133,079
Total debt, redeemable
preferred stock and
redeemable common stock .... 20,369 18,847 19,526 23,223 142,174 145,818
Total stockholders' equity
(deficiency) ............... 4,026 4,828 5,884 4,020 (19,383) (24,959)
<FN>
(1) Sales declined during the year ended September 30, 1995 as a result of
the decline in sales to the Arby's restaurant chain.
(2) Represents one-time costs associated with the termination of a Sales
Brokerage Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) EBITDA is the sum of income before income taxes and interest,
depreciation and amortization expense. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of
a company's operating performance or as a measure of liquidity.
(4) In calculating the ratio of earnings to fixed charges, earnings consist
of income before income taxes plus fixed charges. Fixed charges consist
of interest (which includes amortization of deferred financing costs)
and one-third of rental expense, deemed representative of that portion
of rental expense estimated to be attributable to interest. A ratio of
earnings to fixed charges is not presented for the year ended September
30, 1996, the six months ended March 31, 1997 or the year ended March
31, 1998, as earnings were not adequate to cover fixed charges.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company develops, manufactures and markets pre-cooked meat and
poultry products sold primarily to manufacturers of branded and private
label packaged foods and is a major supplier of frozen uncooked beef
products to the Arby's and Subway restaurant chains. In December 1996, the
Company acquired Quality Foods, (the "Acquisition") one of the country's
leading manufacturers of pre-cooked and uncooked thinly sliced beef used
primarily in Philadelphia style steak sandwiches. It also supplies sliced
chicken products
16
<PAGE>
and pre-cooked and uncooked meatballs and hamburger patties. As a result of
the Acquisition, management believes the Company is positioned as a leading
developer, manufacturer and marketer of value-added meat and poultry
products sold to the food service industry and manufacturers of packaged
foods.
The Company funded the Acquisition through the use of term loans,
bridge loans and borrowings available under existing credit facilities. In
1997, the Company issued $115 million of 11.625% Senior Notes due 2004
("Senior Notes") and used the proceeds to repay substantially all of the
debt related to the Acquisition. The Company is now highly leveraged and
the interest expense resulting from the Senior Notes and other outstanding
debt is expected to significantly effect the results from operations.
Additionally, amortization of intangible assets resulting from the
Acquisition is expected to approximate $3.1 million annually through
December 2016.
Results from Operations
In March 1997, the Company changed its fiscal year end from the
Saturday closest to September 30 to the Saturday closest to March 31.
Accordingly, the information set forth below sets forth unaudited operating
results for the six months ended March 31, 1996 and the twelve month period
ended March 31, 1997 in order to provide meaningful comparisons to the
audited results of operations for the six months ended March 31, 1997, and
the twelve months ended March 31, 1998. In the opinion of management, the
unaudited financial data set forth below reflect all adjustments
(consisting of normal recurring accruals) necessary to present fairly, in
all material respects, the results of operations for the unaudited periods.
The year ended September 30, 1996 is compared to the year ended September
30, 1995.
<TABLE>
Comparison of the referenced periods is effected by the timing of the
Quality Foods acquisition, which was completed in December 1996. As a
result, the twelve-month and six month periods ended March 31, 1997 include
results from operations for Quality Foods for only three months.
Additionally the twelve and six month periods ended March 31, 1997 include
only three months of amortization expense on goodwill acquired in the
Acquisition and two months of interest expense on the 11.625% Senior Notes
which were issued in January 1997. The year ended March 31, 1998 includes a
full twelve-months of Quality Foods' operations, and goodwill amortization
expense and interest expense on the 11.625% Senior Notes. The six month
period ended March 31, 1996 does not include Quality Foods' operations, any
goodwill amortization expense or interest expense on the 11.625% Senior
Notes. In the discussion that follows, where applicable, the Company has
quantified the impact of the Acquisition and related matters upon its
operating results.
<CAPTION>
Fiscal Year Ended Six Months Ended Year Ended
September 30, March 31, March 31,
----------------------- ------------------------ ------------------------
1995 1996 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------
(unaudited) (unaudited)
(in thousands except per pound data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................ $ 61,543 $ 65,996 $ 30,335 $ 60,529 $ 96,190 $ 181,378
Cost of sales ............................ 49,868 53,818 23,766 52,276 82,328 152,484
--------- --------- --------- --------- --------- ---------
Gross profit ............................. 11,675 12,178 6,569 8,253 13,862 28,894
Operating expenses ....................... 6,700 5,512 2,944 7,474 10,043 17,156
Other charges ............................ 4,996 4,996
--------- --------- --------- --------- --------- ---------
Income from operations ................... 4,975 1,670 (1,371) 779 3,819 11,738
Interest expense ......................... 2,632 3,232 1,512 4,681 6,401 17,236
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary items .................... 2,343 (1,562) (2,883) (3,902) (2,582) (5,498)
Provision (benefit) for income taxes ..... 1,189 (409) (662) (541) (288) 30
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item .. 1,154 (1,153) (2,221) (3,361) (2,294) (5,528)
17
<PAGE>
Extraordinary (loss) on early
extinguishment of debt ............... (4,489) (4,489)
--------- --------- --------- --------- --------- ---------
Net income (loss) ..................... $ 1,154 $ (1,153) $ (2,221) $ (7,850) $ (6,783) $ (5,528)
========= ========= ========= ========= ========= =========
Other Data:
Net sales:
Value-added ......................... $ 35,294 $ 36,391 $ 20,566 $ 41,486 $ 57,191 $ 134,846
Arby's .............................. 26,249 29,605 9,769 19,043 38,999 46,532
--------- --------- --------- --------- --------- ---------
Total ............................. $ 61,543 $ 65,996 $ 30,335 $ 60,529 $ 96,190 $ 181,378
========= ========= ========= ========= ========= =========
Pounds sold ........................... 43,371 50,417 22,673 41,300 69,042 106,722
Average net sales price per pound ... $ 1.42 $ 1.31 $ 1.34 $ 1.47 $ 1.39 $ 1.70
Average gross profit per pound ...... $ 0.27 $ 0.24 $ 0.29 $ 0.20 $ 0.20 $ 0.27
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended Year Ended
September 30, March 31, March 31,
------------------ ------------------ ------------------
1995 1996 1996 1997 1997 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................................... 81.0 81.5 78.3 86.4 85.6 84.1
----- ----- ----- ----- ----- -----
Gross profit ...................................... 19.0 18.5 21.7 13.6 14.4 15.9
Operating expenses ................................ 10.9 8.4 9.7 12.3 10.4 9.4
Other charges ..................................... 7.6 16.5
----- ----- ----- ----- ----- -----
Income from operations ............................ 8.1 2.5 (4.5) 1.3 4.0 6.5
Interest expense .................................. 4.3 4.9 5.0 7.7 6.7 9.5
----- ----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item .............................. 3.8 (2.4) (9.5) (6.4) (2.7) (3.0)
Provision (benefit) for income taxes .............. 1.9 (0.6) (2.2) (0.9) (0.3)
----- ----- ----- ----- ----- -----
Income (loss) before extraordinary
item .......................................... 1.9 (1.8) (7.3) (5.5) (2.4) (3.0)
Extraordinary (loss) on early
extinguishment of debt .......................... (7.4) (4.7)
----- ----- ----- ----- ----- -----
Net income (loss) ............................... 1.9% (1.8)% (7.3)% (12.9)% (7.1)% (3.0)%
===== ===== ===== ===== ===== =====
</TABLE>
Fiscal Year ended March 31, 1998 compared to the Twelve Months ended
March 31, 1997
Net Sales. Net sales increased by $85.2 million or 89% for the year
ended March 31, 1998 when compared to the twelve month period ended March
31, 1997. Approximately $68.1 million of this increase relates to the net
sales generated from Quality Foods which was acquired in December 1996 and
as such the twelve month period ended March 31, 1997 includes only three
months of Quality Foods operations. The remaining amount of the increase
relates to increased demand for Custom Foods' value added products.
Commencing with the last quarter of fiscal year 1998 and continuing through
the first quarter of fiscal year 1999 sales to one of the Company's largest
customers, Chef America, have declined. Total revenues at the Company's
Custom Foods division for the last quarter of fiscal year 1998 were
essentially unchanged when compared to the three months ended March 31,
1997, as the decline in Chef America volume was offset by sales to other
customers. However, as a result of the decreased volume to Chef America in
the last quarter of fiscal year 1998 and the first quarter of fiscal year
1999, operating results for the Company's Custom Foods value-added division
were and are expected to be adversely affected. However, as of March 31,
1998, the growth in other value-added business of the Company has offset
the impact of the decline in Chef America business.
18
<PAGE>
Gross Profit. Gross profit increased by $15 million from $13.9 million
for the twelve month period ended March 31, 1997 to $28.9 million for the
year ended March 31, 1998. During the same period, gross margin increased
from 14.4% to 15.9%. The dollar increase is predominately attributable to a
full year of gross profit on Quality Foods sales included in the year ended
March 31, 1998 with only three months included in the twelve months ended
March 31, 1997. The increase in gross margin also primarily relates to the
inclusion of a full year of sales of Quality Foods' products which tend to
be of a higher margin than Custom Foods' products. Notwithstanding the
decline in Chef America volume during the last quarter of fiscal year 1998,
gross profit and gross profit as a percent of sales for such quarter
increased when compared to the three months ended March 31, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $7.1 million to $17.2 million from
$10.0 million. Selling, general and administrative expenses as a percentage
of sales decreased from 10.4% to 9.5%. The increase in expenses is
principally attributable to the acquisition of Quality Foods, amortization
expense of approximately $2.3 million associated with intangible assets
originating from the Quality Foods' acquisition and increased overhead and
infrastructure additions to comply with internal and external reporting
requirements, to refocus sales and marketing efforts, and increased legal,
accounting and other professional services costs. The increase in gross
expenses was more than offset by the increase in sales.
Income from Operations. Income from operations increased by $7.9
million from $3.8 million to $11.7 million as a result of the items
discussed above.
Interest Expense. Interest expense increased by $10.8 million to $17.2
million in 1998 from $6.4 million. The increase is entirely attributable to
interest expense on the 11.625% Senior Notes which were issued in January
1997 and as such were outstanding for only two months during the twelve
months ended March 31, 1997.
Provision for Income Taxes. Provision (benefit) for income taxes
increased to $30,000 for the current year from ($288,000) for the prior
year. For the current year, the expected income tax benefit based on the
statutory rate was reduced to zero because the company provided a valuation
allowance related to its' net operating loss carryforwards. The provision
of $30,000 relates to estimated minimum state tax liabilities.
Extraordinary Loss. The extraordinary loss of $4.5 million for the
twelve months ended March 31, 1997 primarily represents the write-off of
deferred financing costs due to early payment of long-term debt, partially
offset by discounts gained due to early repayment of certain long-term
debt.
Net Loss. A net loss of $5.5 million was incurred for the current year
versus a net loss of $6.8 million for the prior year due to the net impact
of the
19
<PAGE>
foregoing items.
Six months ended March 31, 1997 compared to six months ended March 31, 1996.
Net Sales. Net sales increased to $60.5 million in the six months ended
March 31, 1997 from $30.3 million in the six months ended March 31, 1996.
Approximately $18.3 million of this $30.2 million increase was due to the
inclusion of Quality Foods' sales subsequent to the Acquisition. Net sales
to Arby's increased $9.3 million during this period as a result of
increases in sales to several Eastern U.S. markets pursuant to the new
three-year contract. Sales of Custom Food's value-added products increased
moderately over the prior period, principally as a result of increased
sales to new and existing customers. Total pounds sold by the Company
increased 82% while the average net sales price per pound increased 10%.
Pounds sold increased primarily due to the Quality Foods' results being
included for three months and the increased Arby's sales. The net sales
price per pound increased primarily from Quality Foods' sales which are at
higher per pound prices than the sales to Custom Foods' customers.
Gross Profit. Gross profit increased to $8.3 million for the six months
ended March 31, 1997 from $6.6 million for the six months ended March 31,
1996. All of the increase in gross profit was attributable to Quality
Foods. The gross margin decreased to 13.6% for the six months ended March
31, 1997 from 21.7% for the six months ended March 31, 1996. The decline of
the gross margin as a percent of sales was a result of increased costs for
raw materials of Custom Foods' value-added products which were not passed
on to customers, an increase in sales to Arby's that have a relatively
lower gross margin compared to sales to other customers, and lower margins
on sales by Quality Foods. In connection with the purchase accounting
adjustments made for the acquisition of Quality Foods, the Company
increased the carrying value of the Quality Foods work in process and
finished goods inventory by $1.5 million to reflect the fair value of the
inventory purchased. The subsequent sale of this higher valued inventory at
lower margins reduced the overall gross profit for the quarter ended March
31, 1997.
Operating Expenses. Operating expenses increased to $7.5 million for
the six months ended March 31, 1997, from $2.9 million for the six months
ended March 31, 1996, principally attributable to (i) the inclusion of
Quality Foods operating expenses from the December 31, 1996 acquisition
date forward of approximately $1.8 million; (ii) compensation expense of
$1.4 million recorded in connection with the Company's repurchase of common
stock from employees immediately subsequent to their exercise of stock
options; (iii) Acquisition and Senior Note Offering closing bonuses to CFP
Holdings and Quality Foods management of $500,000; and (iv) amortization of
goodwill related to the Acquisition of $782,000.
Other Charges. Other charges for the six months ended March 31, 1996
consisted of $5.0 million for termination of a Sales Brokerage Agreement in
20
<PAGE>
January 1996.
Income from Operations. Income from operations increased to $800,000
for the six months ended March 31, 1997 from a loss of $1.4 million for the
six months ended March 31, 1996, as a result of lower gross margins being
offset by the lack of other charges as discussed above.
Interest Expense. Interest expense increased to $4.7 million for the
six months ended March 31, 1997 compared to $1.5 million for the six months
ended March 31, 1996, primarily attributable to the Offering and the
indebtedness incurred to finance the Acquisition.
Provision for Income Taxes. The benefit for income taxes decreased from
$662,000 for the six months ended March 31, 1996 to $541,000 for the six
months ended March 31, 1997. The income tax benefit for the six months
ended March 31, 1996 was less than the statutory rate due primarily to
non-deductible expenses including officer's life insurance and goodwill
amortization. The income tax benefit for the six months ended March 31,
1997 was less than the statutory rate due primarily to the Company
providing a valuation allowance against the deferred tax asset.
Extraordinary Loss. The extraordinary loss of $4.5 million for the six
months ended March 31, 1997 primarily represents the write-off of deferred
financing costs due to early payment of long-term debt, partially offset by
discounts gained due to early repayment of certain long-term debt.
Net Loss. Net loss increased to $7.9 million for the six months ended
March 31, 1997 from $2.2 million for the six months ended March 31, 1996
due to the net impact of the foregoing items.
Fiscal year ended September 30, 1996 compared to fiscal year ended
September 30, 1995
Net Sales. Net sales increased to $66.0 million in fiscal 1996 from
$61.5 million in fiscal 1995, as a result of increases in sales to Arby's
and other customers. Sales to Arby's increased in fiscal 1996 as a result
of additional sales to several Eastern U.S. markets pursuant to the new
three-year contract. Sales of value-added products by Custom Food Products
increased slightly over the prior year, principally as a result of sales to
new and existing customers. Total pounds sold by the Company increased
16.2% while the average selling price declined 7.7%. The average selling
price declined primarily as a result of a reduction in beef prices from
1995 to 1996, which were passed through to Arby's under the cost-plus
pricing structure of the contract.
Gross Profit. Gross profit increased to $12.2 million in fiscal 1996
from $11.7 million in fiscal 1995. The gross margin declined slightly to
18.5% in fiscal 1996 from 19.0% in fiscal 1995 principally as a result of
increased sales to Arby's which are lower margin sales.
21
<PAGE>
Operating Expenses. Operating expenses decreased to $5.5 million in
fiscal 1996 from $6.7 million in fiscal 1995, a 17.7% decrease, principally
attributable to the net effect of the elimination of sales commissions as a
result of the termination of a Sales Brokerage Agreement.
Other Charges. Other charges in fiscal 1996 consisted of $5.0 million
for termination of a Sales Brokerage Agreement in January 1996.
Income from Operations. Income from operations decreased to $1.7
million in fiscal 1996 from $5.0 million in fiscal 1995, primarily due to
other charges noted above.
Interest Expense. Interest expense increased to $3.2 million in fiscal
1996 from $2.6 million in fiscal 1995, a 22.8% increase, primarily as a
result of increased capitalized lease obligations.
Provision (Benefit) for Income Taxes. Benefit for income taxes was
$400,000 for fiscal 1996, a decrease of $1.6 million from the $1.2 million
provision for income taxes for fiscal 1995, calculated using our effective
tax rates on income (loss) before income taxes. The effective tax rate
benefit of 26.2% for fiscal 1996 changed from the effective income tax rate
provision of 50.7% for fiscal 1995 principally as a result of the loss
before income taxes in fiscal 1996 as compared to the income before income
taxes in fiscal 1995. The effective tax rate of the income tax benefit in
fiscal 1996 differed from the statutory rate as a result of non-deductible
goodwill amortization, officers' life insurance and other non-deductible
expenses.
Net Income. A net loss of $1.2 million was incurred in fiscal 1996.
This was a decrease of $2.4 million from the $1.2 million net income in
fiscal 1995, due to the net impact of the foregoing items.
Liquidity and Capital Resources
The Company's total consolidated indebtedness was $143.5 million at
March 31, 1998, principally consisting of $115 million in Senior Notes and
$14 million in borrowings under the Bank Credit Agreement as well as
various notes payable to government agencies and capital leases. On May 5,
1998, the Company entered into a $40.0 million Loan and Security Agreement
(the "Loan and Security Agreement") with a financial institution providing
for revolving credit loans (the "Revolver") and term loan options. Maximum
borrowings under the Revolver cannot exceed $40.0 million, subject to a
borrowing base and other limitations, including amounts outstanding under
term loans, letters of credit, and other borrowing instruments under the
Loan and Security Agreement. All amounts outstanding under the Bank Credit
Agreement were repaid with new borrowings under the Loan and Security
Agreement consisting of a $10.0 million term loan and $4.1 million advanced
under the Revolver. In addition, deferred financing costs of approximately
$1 million were written off in connection with the repayment of the Bank
Credit Facility. All amounts outstanding under the Loan and Security
Agreement become due and payable in
22
<PAGE>
May 2002.
Loans under the Loan and Security Agreement are secured by
substantially all of the Company's assets, including a pledge of all the
stock of Quality Foods and Custom Foods, are guaranteed by the Company's
subsidiaries, which guarantees are secured by substantially all of the
assets of the Company's subsidiaries, and are further secured by a pledge
of all the stock of CFP Holdings, Inc.
The Loan and Security Agreement and the indenture contain numerous
restrictive covenants, which limit the discretion of the management of the
Company with respect to certain business matters. These covenants place
significant restrictions on, among other things, the ability of the Company
to incur additional indebtedness, to create liens or other encumbrances, to
pay dividends or make other restricted payments, to make investments, to
make capital expenditures, loans and guarantees and to sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate
with, another entity.
In addition to its debt service obligations, the Company requires
liquidity for working capital and capital expenditures. The Company
experiences seasonal increases in its working capital as a result of large
product promotions and planned inventory increases based upon seasonally
low raw material prices. In fiscal 1999, the Company expects its working
capital to be at its lowest level in the Winter and to peak between May and
September. Historically, the Company has experienced minimal bad debts with
respect to accounts receivable, as well as minimal inventory obsolescence
or shrinkage losses.
For the fiscal year ended March 31, 1998 the Company spent $5.5 million
on capital expenditures. The Company presently anticipates that its capital
expenditures for fiscal 1999 will be approximately $7.1 million, consisting
primarily of growth related projects.
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the Loan and Security Agreement. Based upon
the current and anticipated level of operations, the Company believes that
its working capital requirements, capital expenditures and debt service
requirements for the next twelve to eighteen months will be satisfied
through a combination of cash flow from operations and funds available
under the Agreement.
Year 2000
The Company is in the process of selecting a new Enterprise Wide System
and currently expects to have a new system selected and implemented by July
1999. The company believes that implementation of the new system will
address its major "year 2000 issues", which arise in cases where the
computer systems or any equipment with computer chips use two-digit fields
that recognize dates using the assumption that the first two digits are
"19". On January 1, 2000, any clock or date recording mechanism including
date sensitive software that uses only two digits to represent the year may
recognize a date
23
<PAGE>
using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations, causing disruption of operations,
including among other things a temporary inability to process transactions,
send invoices or engage in similar activities.
The Company is currently engaged in a review of its computer systems
and applications, including packaged software used by the Company, that
will not be addressed by the new system. The Company expects to make any
modifications required to resolve year 2000 issues in a timely manner and
leave adequate time to assess and correct any significant issues that may
materialize. The Company is also expecting to initiate formal
communications with selected vendors and customers to determine the extent
to which the Company is vulnerable to those third parties' failure to
remediate their own year 2000 issues. The Company can give no guarantee
that the systems of other companies on which the Company's systems rely
will be converted on time or that failure to convert by another company or
a conversion that is incompatible with the Company's systems would not have
a material adverse effect on the Company. The Company is taking steps to
reduce the likelihood that such failures could affect the Company's systems
through any electronic communications.
The Company does not expect that the review and modifications described
above, excluding the cost of implementing the new system, will require
material expenditures. If the Company is unable to successfully implement
the new system sufficiently in advance of the year 2000, however,
additional expenditures could be required and such expenditures could be
substantial. If modification required to address the Company's year 2000
issues are not made, or are not timely, the year 2000 issues could have a
material impact on the operations and financial results and conditions of
the Company.
Inflation
Management does not believe that inflation had any material impact upon
its business for the three years ended September 30, 1995 and 1996 and
March 31, 1998 and the six months ended March 31, 1997.
Item 7A. Quantitative and qualitative disclosures about market risk
Not applicable.
Item 8. Financial statements and supplementary data
See Item 14 Exhibits, financial statement schedules, and reports on
Form 8-K.
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure
None.
24
<PAGE>
Part III
Item 10. Directors and executive officers of the registrant
MANAGEMENT
Directors and Executive Officers of the Company
<TABLE>
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of stockholders of the Company and until their successors
are duly elected and qualified, and all executive officers hold office at
the pleasure of the Board of Directors.
<CAPTION>
Name Age Position(s)
---- ---- -----------
<S> <C> <C>
Executive Officers and Directors
Roberto Buaron.............. 51 Director, Chairman
William Del Chiaro.......... 45 Director, President and Chief Executive Officer
Robert Gioia................ 49 Director
Richard Griffith............ 65 Director, Vice Chairman
David Cohen................. 33 Director, Vice Chairman
Eric Ek..................... 42 Director, Vice President, Chief Financial Officer and
Secretary
James Long.................. 55 Director, Vice Chairman and Treasurer
Andrew Kohn................. 30 Director
</TABLE>
Roberto Buaron has been the Chairman and a director of the Company
since December 1996. He is the Chairman and Chief Executive Officer of
First Atlantic, which he founded in 1989. From 1987 to 1989, he was an
Executive Vice President with Overseas Partners, Inc., an investment
management firm. Mr. Buaron is currently a director of BPC Holding
Corporation.
William Del Chiaro joined the company in March 1998 as President and
CEO of Quality Foods. In May 1998 he became President and CEO of the
Company. He was previously Executive Vice President of Sara Lee
Corporation's Hillshire Farm & Kahn's divisions, a $1 billion manufacturer
of processed and packaged meats for the retail grocer, foodservice and
other markets. There he was responsible for a substantial portion of the
business's operations, capital expenditures, sales and marketing. Prior to
this position, Mr. Del Chiaro spent ten years as a senior executive of
Mars, Inc., where he held top-level marketing and sales positions in the
Uncle Ben's, Dove International, M&M/Mars, and foodservice divisions. His
experience also includes three years as Director of Marketing of Dr. Pepper
Company's food service division, as well as various positions of increasing
responsibility during a seven-year career at Proctor & Gamble Company.
Robert Gioia has been a Director of the Company since December 1996.
From December 1996 to May 1998 he served as the President and Chief
Executive Officer of the Company. Prior to that, he was the Chairman and
Chief Executive Officer of Quality Foods and of a corporation (of which he
is the sole stockholder) which was a partner of Quality Foods since July
1992. He has held management positions in the food processing industry for
over 22
25
<PAGE>
years. Prior to joining Quality Foods, Mr. Gioia was responsible for sales
and marketing of the foodservice division, both restaurant and
institutional, of the Red Wing Company, a national food manufacturer and
processor. In addition, Mr. Gioia held several positions, including Vice
President, with the Gioia Macaroni Company, a national pasta manufacturer
founded by the Gioia family in 1910.
Richard Griffith has been Vice Chairman of the Company since December
1996 and a Director of the Company since March 1993. He has been the
President and Chief Executive Officer of Custom Foods since March 1993 and
recently announced that he will be retiring from that position on June 30,
1998. Prior to the formation of the Company, Mr. Griffith served as
President and Chief Executive Officer of the Company's predecessors, Best
Western and Center of the Plate since November 1991. Mr. Griffith was the
founding Chairman of Arcop, Inc., the purchasing cooperative of the Arby's
restaurant chain.
David Cohen has been Vice Chairman of Quality Foods since September
1997 and a Director of the Company since December 1996. Prior to that he
served as President and Chief Operating Officer of Quality Foods since July
1992 and President of a corporation (of which he is the sole stockholder)
which was a partner of Quality Foods. Mr. Cohen joined Quality Foods in
1983 and has served in numerous positions, including National Sales
Manager, before becoming Chief Operating Officer.
Eric Ek has been the Vice President and Chief Financial Officer of the
Company since July 1993 and a director of CFP Holdings since December 1996.
Previously, Mr. Ek was a Managing Director at Takenaka & Company, a Pacific
Rim focused investment banking firm from 1990 to 1993. At Takenaka, Mr. Ek
was the Chief Financial Officer of a residential home builder and a Chief
Administrative Officer for a manufacturing firm. Prior to joining Takenaka,
Mr. Ek was employed by KPMG Peat Marwick and Ernst & Young from 1982 to
1990. Mr. Ek is a Certified Public Accountant.
James Long has been the Vice Chairman and Treasurer of CFP Holdings
since December 1996 and a director of the Company since March 1993. He has
been an Executive Vice President of First Atlantic since March 1991. From
January 1990 to February 1991, Mr. Long was an Executive Vice President at
Kleinwort Benson Equity Fund, a leveraged buyout fund. Mr. Long is
currently a director of BPC Holding Corporation.
Andrew Kohn has been a director of CFP Holdings since December 1996.
Mr. Kohn is a Vice President of First Atlantic, with which he has been
employed since 1994. Previously, Mr. Kohn was employed by Berkshire
Partners, a private equity investment firm, and Bear Stearns & Co.
Compensation of Directors
All directors are reimbursed for their usual and customary expenses
26
<PAGE>
incurred in attending all Board of Directors and committee meetings.
Directors of the Company receive no remuneration for serving as directors.
Item 11. Executive Compensation
<TABLE>
The following table sets forth a summary of the compensation earned by
the Company's Chief Executive Officer and its four other most highly
compensated executive officers (collectively, the "Named Executive
Officers") for services rendered in all capacities during the last fiscal
year.
<CAPTION>
Summary Compensation Table (1)
Annual Compensation Long-Term
Compensation
Fiscal Options LTIP All Other
Year Salary Bonus Granted Payouts Compensation
Name & Title (1) ($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Gioia 1998 325,314 25,000
Chief Executive Officer -----------------------------------------------------------------
1997 80,664 (2) 12,500 (3)
-----------------------------------------------------------------
1996 (4)
-----------------------------------------------------------------
Richard Griffith 1998 315,246 48,387 18,918 (6)
Vice Chairman -----------------------------------------------------------------
1997 300,000 196,200 (5) 7,015 (6)
-----------------------------------------------------------------
1996 299,803 150,000 6,078 (6)
-----------------------------------------------------------------
David Cohen 1998 166,792 25,000 16,800 (9)
Vice Chairman -----------------------------------------------------------------
1998 132,186 8,400 (12)
-----------------------------------------------------------------
1996 (4)
-----------------------------------------------------------------
Eric Ek 1998 198,950 23,556 8,506 (11)
Chief Financial Officer -----------------------------------------------------------------
1997 151,884 120,100(10) 7,015 (11)
-----------------------------------------------------------------
1996 125,500 48,945 4,736 (11)
-----------------------------------------------------------------
Steve Diener 1998 132,186 8,400 (12)
Vice President of Sales -----------------------------------------------------------------
& Marketing 1998 132,186 8,400 (12)
-----------------------------------------------------------------
1996 26,442 (13)
-----------------------------------------------------------------
<FN>
(1) For purposes of this table, the fiscal years referred to herein mean the
12-month periods ended March 31.
(2) Consists of compensation received for the last 3 months of the period from
the Company Mr. Gioia's base compensation under his employment agreement
with the Company is $325,000.
(3) Consists of bonus earned for the last 3 months of the period from the
Company.
(4) Became an employee of the Company in January 1997.
(5) Includes (i) $42,857 of bonus received in connection with the consummation
of the Quality Foods Acquisition and (ii) $ 107,143 of bonus received in
connection with the consummation of the Senior Notes Offering.
(6) For 1998: Consists of $18,918 of car allowance and value of personal use
of the Company's automobile. For 1997: Consists of $7,015 of value of
personal use of the Company's automobile. For 1996: Consists of $6,078 of
value of personal use of the Company's automobile.
(7) Consists of compensation received for the last 3 months of the period from
the Company. Mr. Cohen's base compensation under his employment agreement
with the Company is $240,000 through September 1997 and $125,000,
thereafter.
(8) Consists of bonus earned for the last 3 months of the period from the
Company.
(9) For 1998: Consists of $4,800 excess term life insurance and $12,000 car
allowance. For 1997: Consists of $3,000 car allowance.
(10) Includes (i) $28,571 of bonus received in connection with the consummation
of the Quality Foods Acquisition and (ii) $71,429 of bonus received in
connection with the consummation of the Senior Notes Offering.
(11) For 1998: Consists of $8,400 for car allowance and $106 excess term life
insurance. For 1997: Consists of $4,545 of disability insurance, $370
excess term life insurance and $2100 of car allowance. For 1996: Consists
of $4,366 of disability insurance and $370 excess term life insurance.
(12) For 1998: Consists of car allowance. For 1997: Consists of car allowance.
(13) Became an employee of the Company in January 1996.
</FN>
</TABLE>
27
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to any of the Named Executive Officers in
the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
The following table sets forth information with respect to each
exercise of stock options during the last fiscal year by each of the Named
Executive Officers and the number of options held at fiscal year end and
the aggregate value of in-the-money options held at fiscal year end.
<CAPTION>
Number of Value of
Securities Unexercised
Underlying Options In-The-Money
at FY-End Options at FY-End
Shares (#) ($)(1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert Gioia............... -- -- 0/0 0/0
Richard Griffith........... -- -- 1,149/0 465,345/0
David Cohen................ -- -- 0/0 0/0
Eric Ek.................... -- -- 444/0 179,820/0
Steve Diener............... -- -- 0/0 0/0
<FN>
- -----------
(1) Based on the fair market value of the Common Stock at March 31, 1998
($694.00 per share), as determined by the Company's Board of Directors.
</FN>
</TABLE>
Employment Contracts
The Company has entered into an employment agreement with Mr. Del
Chiaro (the "Del Chiaro Employment Agreement") that expires on March 17,
2001 or on an earlier date in accordance with the terms of the Del Chiaro
Employment Agreement. Base compensation under the Del Chiaro Employment
Agreement is $325,000 per year. Mr. Del Chiaro is also eligible to
participate in the Company's annual cash bonus plan which is based upon
Quality Foods' achievement of certain annual performance targets. The
Company may terminate Mr. Del Chiaro at any time for "cause" or after a
specified period upon a "disability" (as such terms are defined in the Del
Chiaro Employment Agreement). If the Company terminates Mr. Del Chiaro
"without cause" (as such term is defined in the Del Chiaro Employment
Agreement), Mr. Del Chiaro is entitled to receive, among other things, the
aggregate of his base salary payable for 18 months from the date of the
termination by the Company "without cause".
The Company has entered into an employment agreement with Mr. Gioia
(the "Gioia Employment Agreement") that expires on December 31, 2001 or on
an earlier date in accordance with the terms of the Gioia Employment
Agreement. Base compensation under the Gioia Employment Agreement is
$325,000 per year plus an annual adjustment beginning in January 1998 based
on the Consumer Price Index. Mr. Gioia is also eligible to participate in
the Company's annual cash bonus plan which is based upon the Company's
28
<PAGE>
achievement of certain annual performance targets, subject to the right to
receive a minimum annual cash bonus of $50,000. The Company may terminate
Mr. Gioia at any time for "cause" or after a specified period upon a
"disability" (as such terms are defined in the Gioia Employment Agreement).
If the Company terminates Mr. Gioia "without cause" (as such term is
defined in the Gioia Employment Agreement), Mr. Gioia is entitled to
receive, among other things, the aggregate of his base salary and the pro
rata portion of his minimum annual bonus payable through the later of
December 31, 2001 or 18 months from the date of termination by the Company
"without cause." In connection with the Gioia Employment Agreement, upon
the adoption of the 1998 Stock Option Plan Mr. Gioia will be granted
options to purchase up to that number of shares of Class B Nonvoting Common
Stock, $.01 par value, of CFP Group (the "Class B Nonvoting Common Stock")
equal to 1.25% of the total number of issued and outstanding shares of
common stock of CFP Group (determined on a fully-diluted basis).
The Company has entered into an employment agreement with Mr. Griffith
(the "Griffith Employment Agreement") that expires on December 31, 1999 or
on an earlier date in accordance with the terms of the Griffith Employment
Agreement. Base compensation under the Griffith Employment Agreement is
$300,000 per year plus an annual adjustment beginning in July 1997 based on
the Consumer Price Index. Mr. Griffith is also eligible to participate in
the Company's annual cash bonus plan which is based upon Custom Foods'
achievement of certain annual performance targets. The Company may
terminate Mr. Griffith at any time for "cause" or after a specified period
upon a "disability" (as such terms are defined in the Griffith Employment
Agreement). If the Company terminates Mr. Griffith "without cause" (as such
term is defined in the Griffith Employment Agreement), Mr. Griffith is
entitled to receive, among other things, the aggregate of his base salary
payable through the earlier of December 31, 1999 or 18 months from the date
of termination by the Company "without cause" and the pro rata portion of
his annual bonus for the fiscal year in which such termination occurred.
The Company has entered into an employment agreement with Mr. Cohen as
amended (the "Cohen Employment Agreement") that expires on December 31,
2001 or on an earlier date in accordance with the terms of the Cohen
Employment Agreement. Base compensation under the Cohen Employment
Agreement is $125,000 per year plus an annual adjustment beginning in
January 1998 based on the Consumer Price Index. Mr. Cohen is also eligible
to participate in the Company's annual cash bonus plan which is based upon
Quality Food's achievement of certain annual performance targets, subject
to the right to receive a minimum annual cash bonus of $50,000. The Company
may terminate Mr. Cohen at any time for "cause" or after a specified period
upon a "disability" (as such terms are defined in the Cohen Employment
Agreement). If the Company terminates Mr. Cohen "without cause" (as such
term is defined in the Cohen Employment Agreement), Mr. Cohen is entitled
to receive, among other things, the aggregate of his base salary and the
pro rata portion of his minimum annual bonus through the later of December
31, 2001 or 18 months from the date of termination by the Company "without
cause." In
29
<PAGE>
connection with the Cohen Employment Agreement, upon the adoption of the
1998 Stock Option Plan Mr. Cohen will be granted options to purchase up to
that number of shares of Class B Nonvoting Common Stock of CFP Group equal
to 1.07% of the total number of issued and outstanding shares of common
stock of CFP Group (determined on a fully-diluted basis).
The Company has entered into an employment agreement with Mr. Ek as
amended (the "Ek Employment Agreement") that expires on December 31, 1999
or on an earlier date in accordance with the terms of the Ek Employment
Agreement. Base compensation under the Ek Employment Agreement is $200,000
per year plus an annual adjustment beginning in July 1997 based on the
Consumer Price Index. Mr. Ek is also eligible to participate in the
Company's annual cash bonus plan which is based upon Custom Foods'
achievement of certain annual performance targets. The Company may
terminate Mr. Ek at any time for "cause" or after a specified period upon a
"disability" (as such terms are defined in the Ek Employment Agreement). If
the Company terminates Mr. Ek "without cause" (as such term is defined in
the Ek Employment Agreement), Mr. Ek is entitled to receive, among other
things, the aggregate of his base salary payable for 12 months from the
date of termination by the Company "without cause" and the pro rata portion
of his annual bonus for the fiscal year in which such termination occurred.
Put Rights of Messrs. Gioia, Cohen and Griffith
Under the terms of their respective employment agreements, each of
Messrs. Gioia, Cohen and Griffith have the right, in connection with the
termination of their employment under certain circumstances, to sell to CFP
Group, and CFP Group is obligated to purchase, the shares of Class A
Nonvoting Common Stock (in the case of Mr. Griffith) and Class B Nonvoting
Common Stock (in the case of Messrs. Gioia and Cohen) owned by them. The
price at which such shares may be purchased and sold is intended to be the
fair market value thereof as determined pursuant to a formula (in the case
of Mr. Griffith) and an appraisal (in the case of Messrs. Gioia and Cohen).
The right of such individuals to sell their shares to CFP Group is subject
to the terms and conditions of the then outstanding credit facilities of
CFP Group and its subsidiaries.
In addition, under the terms of the Griffith Employment Agreement, CFP
Group has the right, under certain circumstances, to require Mr. Griffith
to sell the shares of Class A Nonvoting Common Stock owned by him to CFP
Group. The price at which such shares may be purchased and sold is intended
to be the fair market value thereof as determined pursuant to a formula.
The right of CFP Group to purchase Mr. Griffith's shares is also subject to
the terms and conditions of the then outstanding credit facilities of CFP
Group and its subsidiaries.
Employee Stock Option Plan
30
<PAGE>
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "Option Plan"), which was
assumed by CFP Group in December, 1996, provides for the grant of both
incentive stock options ("ISOs") and non-qualifying stock options ("NSOs")
to directors and employees of, and independent consultants and contractors
to, the Company and its subsidiaries. A total of 11,586 shares of nonvoting
common stock has been authorized and reserved for issuance under the Option
Plan, subject to adjustment to reflect changes in capitalization resulting
from stock splits, stock dividends and similar events.
The Option Plan is administered by the Board of Directors or a Stock
Option Committee (the "Committee") appointed by the Board of Directors. The
Committee has the authority to interpret the Option Plan, to determine the
persons to whom options will be granted, to determine the basis upon which
the options will be granted, and to determine the exercise price, duration
and other terms of the options to be granted under the Option Plan,
provided, among other things, that (a) the exercise price of ISOs granted
under the Option Plan may not be less than the fair market value of the
stock subject to the option on the date of grant (110% of fair market value
if the employee is the beneficial owner of 10% or more of CFP Group's
voting securities), (b) the exercise price must be paid in cash, by
personal or certified check or by surrendering previously owned shares of
nonvoting common stock upon the exercise of the option, (c) the term of the
option may not exceed ten years (or five years in the case of an ISO
granted to an employee who is the beneficial owner of 10% or more of CFP
Group's voting securities), (d) no option is transferrable other than by
will or the laws of descent and distribution and (e) no option may be
granted to a member of the Committee.
Upon the termination of an optionee's employment (other than by death
or disability), such person's options may be exercised during the
three-month period following the date of such termination. In the event of
the death or disability of an optionee, the option may be exercised by such
person or his personal representative during the six month period following
the date the optionee ceases to be an employee of the Company by reason of
such death or disability. In the event of a Corporate Transaction (as such
term is defined in the Option Plan), each outstanding option under the
Option Plan which is not assumed or replaced with a comparable option from
the successor corporation will automatically terminate.
ISOs may not be granted under the plan to any individual if the effect
of such grant would be to permit that person to have the first opportunity
to exercise such options, in any calendar year, for the purchase of shares
having a fair market value (at the time of the grant of such options) in
excess of $100,000. ISOs granted under the Option Plan are intended to have
the federal income tax consequences of a qualified stock option. An
employee to whom an incentive stock option ("ISO") which qualifies under
Section 422 of the Code is granted will not recognize income at the time of
grant or exercise of such Option. However, upon the exercise of an ISO, any
excess in the fair market
31
<PAGE>
price of the Common Stock over the Option Price constitutes a tax
preference item which may have alternative minimum tax consequences for the
employee. If the employee sells such shares more than one year after the
date of transfer of such shares and more than two years after the date of
grant of such ISO, the employee will generally recognize a long-term
capital gain or loss equal to the difference, if any, between the sale
prices of such shares and the Option Price. In such case, CFP Group will
not be entitled to a federal income tax deduction in connection with the
grant or exercise of the ISO. If the employee does not hold such shares for
the required period, when the employee sells such shares, the employee will
recognize ordinary compensation income and possibly capital gain or loss
(long-term or short-term, depending on the holding period of the stock
sold) in such amounts as are prescribed by the Code and the regulations
thereunder, and CFP Group will generally be entitled to a Federal income
tax deduction in the amount of such ordinary compensation income recognized
by the employee.
An employee to whom a nonqualified stock option ("NSO") is granted will
not recognize income at the time of grant of such Option. When such
employee exercises such NSO, the employee will recognize ordinary
compensation income equal to the excess, if any, of the fair market value,
as of the date of Option exercise, of the shares the employee receives upon
such exercise over the Option Price paid. The tax basis of such shares to
such employee will be equal to the Option Price paid plus the amount, if
any, includible in the employee's gross income, and the employee's holding
period for such shares will commence on the date on which the employee
recognizes taxable income in respect of such shares. Gain or loss upon a
subsequent sale of any Common Stock received upon the exercise of a NSO
generally would be taxed as capital gain or loss (long-term or short-term,
depending upon the holding period of the stock sold). Certain additional
rules apply if the Option Price is paid in shares previously owned by the
participant. Subject to the applicable provisions of the Code and
regulations thereunder, CFP Group will generally be entitled to a Federal
income tax deduction in respect of a NSO in an amount equal to the ordinary
compensation income recognized by the employee. This deduction will, in
general, be allowed for the taxable year of CFP Group in which the
participant recognizes such ordinary income. The Board of Directors may
amend the Option Plan without stockholder approval in any respect other
than any amendment that requires stockholder approval by law or pursuant to
the rules of the Code regarding qualified stock options.
1998 Stock Option Plan
On June 17, 1998 the Company's Board of Directors adopted, subject to
shareholder approval, a new incentive stock option program (the "1998 Stock
Option Plan") which includes the existing management of the Company, as
well as key senior executives and management of Quality Foods and Custom
Foods.
32
<PAGE>
Item 12. Security ownership of certain beneficial owners and management
PRINCIPAL STOCKHOLDERS
<TABLE>
The following table sets forth certain information regarding the
ownership of the capital stock of the Company as of May 30, 1998 with
respect to (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of any class of its voting capital stock,
(ii) each of the Company's directors, (iii) the Named Executive Officers
and (iv) all directors and officers as a group. Except as otherwise
indicated, each of the stockholders has sole voting and investment power
with respect to the shares beneficially owned. Unless otherwise indicated,
the address for each stockholder is c/o CFP Group, Inc., 1117 West Olympic
Boulevard, P.O. Box 1027, Montebello, California 90640.
<CAPTION>
Shares of Voting Shares of Percentage of
Common Stock Percentage of Nonvoting All Classes of
(1) Voting Common Common Stock(1) Common Stock
Name and Address of Beneficial Owner Class A Stock Class A Class B (Fully-Diluted)
<S> <C> <C> <C> <C> <C>
Atlantic Equity Partners, L.P.(2) ............... 14,293 97.2% -- -- 49.3%
Roberto Buaron (3) .............................. 14,293 97.2 -- -- 49.3
Richard Griffith (4) ............................ -- -- 3,161 -- 10.9
Robert Gioia (5) ................................ -- -- -- 1,081 3.7
Eric Ek ......................................... -- -- 1,066 -- 3.7
David Cohen (6) ................................. -- -- -- 1,081 3.7
James Long (7) .................................. 173 1.2 -- -- *
Steve Diener .................................... -- -- 100 -- *
All officers and directors as a group
(8 persons) ..................................... 14,466 98.4 4,337 2,162 72.2
<FN>
- -----------
* Less than one percent.
(1) The authorized capital stock of CFP Group consists of 160,000 shares of
capital stock, including 150,000 shares of Common Stock, $.01 par value
(the "Common Stock") and 10,000 shares of Preferred Stock, $.01 par
value (the "Preferred Stock"). Of the 150,000 shares of Common Stock,
100,000 shares are designated Class A Voting Common Stock (the "Class A
Voting Stock"), 25,000 shares are designated Class A Nonvoting Stock
(the "Class A Nonvoting Stock"), and 25,000 shares are designated Class
B Nonvoting Common Stock (the "Class B Nonvoting Stock").
(2) Address is P.O. Box 847, One Capital Place, Fourth Floor, Grand Cayman,
Cayman Islands, British West Indies. Atlantic Equity Associates, L.P.
("AEA") is the sole general partner of AEP and as such exercises voting
and/or investment power over shares of capital stock owned by AEP,
including the shares of Common Stock held by AEP (the "AEP Shares").
Mr. Buaron is the sole stockholder of Buaron Capital Corporation
("BCC."). BCC is the managing general partner of AEA. Rodney Limited
("Rodney"), an indirect wholly owned subsidiary of Afros Finanziana
S.p.a ("Afros"), is also a general partner of AEA. As general partners
of AEA, BCC and Rodney share voting and/or investment power over, and
may be deemed to beneficially own, the AEP Shares. BCC and Rodney
disclaim any beneficial ownership of any shares of capital stock owned
by AEP, including the AEP Shares. Through their respective affiliations
with BCC, Rodney and AEA, Mr Buaron and Afros control the sole general
partner of AEP and therefore have the authority to control voting
and/or investment power over, and may be deemed to beneficially own,
the AEP Shares. Mr. Buaron and Afros disclaim any beneficial ownership
of any of the AEP Shares. Certain present and former employees of First
Atlantic, an affiliate of AEP, owning an additional 412 shares of Class
A Voting Stock, have granted AEP the right to vote the shares of Class
A Voting Stock beneficially owned by them.
(3) Address is c/o First Atlantic Capital, Ltd., 135 East 57th Street, New
York, New York 10022. Represents shares of Common Stock to be owned and
controlled by AEP. Mr. Buaron is the sole shareholder of BCC. BCC is
the managing general partner of AEA. AEA is the sole general partner of
AEP and as such, exercises voting and/or investment power over shares
of capital stock owned and controlled by AEP, including the AEP Shares.
Mr. Buaron, as the sole shareholder and Chief Executive Officer of BCC,
and Rodney, as a general partner of AEA,
33
<PAGE>
control the sole general partner of AEP and therefore share voting
and/or investment power over, and may be deemed to beneficially own,
the AEP Shares. Mr. Buaron disclaims any beneficial ownership of the
AEP Shares.
(4) Includes 70 shares of Class A Nonvoting Stock owned by Mr. Griffith's
Profit Sharing Trust and 150 shares of Class A Nonvoting Stock owned by
Mr. Griffith's wife.
(5) Represents 1,081 shares of Class B Nonvoting Stock owned by RDG Food
Corp., Inc. ("RDG"). Mr. Gioia, as the sole shareholder of RDG,
controls the voting and disposition of the shares owned by RDG and,
therefore, is deemed to beneficially own the Class B Nonvoting Stock
owned by RDG.
(6) Represents 1,081 shares of Class B Nonvoting Stock of Amjor Holdings,
Inc. ("AHI"). Mr. Cohen, as the sole stockholder of AHI, controls the
voting and disposition of the shares owned by AHI and, therefore, is
deemed to beneficially own the Class B Nonvoting Stock owned by AHI.
(7) Address is c/o First Atlantic Capital, Ltd., 135 East 57th Street, New
York, New York, 10022.
</FN>
</TABLE>
Item 13. Certain relationships and related transactions
CERTAIN TRANSACTIONS
Transactions with Certain Stockholders
During fiscal 1998 the Company repurchased 334 shares of Non-voting
Class B Stock from former employees of the Company.
Effective December 31, 1996, the Company entered into a new management
consulting agreement with First Atlantic which provides for the annual
payment of compensation in the amount of $600,000 plus out of pocket
expenses to First Atlantic in exchange for providing management consulting
services to the Company and its subsidiaries. Payments under this agreement
during fiscal 1998 were $666,000. Such agreement will continue until
December 31, 2003 unless extended pursuant to its terms.
In connection with the acquisition of Quality Foods, Robert Gioia and
David Cohen, and entities controlled by them, received cash consideration
for their interests in Quality Foods upon the closing of the Acquisition of
$6,232,945 and $5,131,366, respectively, and $344,230 and $290,000
respectively upon partial release of the purchase price escrowed at
closing, and are entitled to receive their respective pro rata shares, with
the other Sellers, of any amounts, if and when released, of the remaining
part of the purchase price escrowed at closing.
Stockholders' Agreement
CFP Group, AEP, NationsCredit Commercial Corporation, Richard Griffith,
Robert Gioia, David Cohen, Eric Ek and the other Stockholders named therein
entered into a Stockholders' Agreement (the "Stockholders' Agreement")
dated as of December 31, 1996, which contains certain restrictions with
respect to the transfer of CFP Group's capital stock, certain rights
granted by CFP Group with respect to such shares and certain voting and
other arrangements.
34
<PAGE>
The rights and obligations of each party to the Stockholders' Agreement
shall terminate as to such stockholder upon the earliest to occur of (I)
the transfer of all stock of CFP Group owned by such stockholder, (ii) the
twentieth anniversary of the date of the Stockholders' Agreement, (iii) a
sale of all or substantially all of the stock of CFP Group in a single
transaction or (d) the consummation of an initial public offering of the
common stock of CFP Group which results in net proceeds to CFP Group of at
least $100 million dollars.
The Corporation and the Stockholders shall use its and their best
efforts (including any action required to amend the Certificate of
Incorporation or By-laws of the Corporation) to cause the size of the Board
to consist of nine directors (or such other number as a Majority in
Interest of AEP Stockholders shall determine) and to provide that,
notwithstanding any vacancies, any corporate action taken by the Board of
the Corporation must be approved by at least five directors (or such larger
number as shall constitute a majority of the Board).
The Stockholders' Agreement provides that all of the parties to the
Stockholders' Agreement other than AEP (each such other party being
referred to herein as the "Selling Group") are prohibited from transferring
any stock to any person engaged in a business which competes in any manner
with the business conducted by CFP Group and its subsidiaries. In addition,
subject to certain exceptions, no Selling Group may transfer any stock
prior to the third anniversary of the date of the Stockholders' Agreement
and thereafter no Selling Group may transfer stock unless it first offers
such stock to CFP Group. Should CFP Group fail to accept all or any part of
the stock offered for sale, AEP will have the right to purchase all or any
part of the stock offered but not accepted for purchase by CFP Group.
Should AEP fail to accept all such stock offered for sale, then the Selling
Group may transfer the stock so offered to an Institutional Investor (as
such term is defined in the Stockholders' Agreement) or to such other
purchaser as shall be approved by AEP (and its transferees).
In the event that AEP receives an offer from an unaffiliated third
party to purchase that number of shares of stock of CFP Group which
constitutes, in the aggregate, more than 50% of the total number of shares
then outstanding, AEP shall not transfer any stock unless the terms of such
offer are extended to the other stockholders and the other stockholders are
given the opportunity to participate on a pro rata basis in such sale.
Pursuant to the Stockholders' Agreement, if at any time AEP shall
approve (i) a proposal from a person that is not an affiliate of AEP for
the transfer of all of the stock of CFP Group, (ii) the merger or
consolidation of CFP Group with or into another person that is not an
affiliate of AEP in which the stockholders will receive cash or securities
for their shares or (iii) the sale by CFP Group or its subsidiaries of all
or substantially all of their assets to a person that is not an affiliate
of AEP, then each stockholder shall be required to participate in such
transaction and to take all necessary action to cause CFP Group to
consummate such transaction.
In the event of a Termination of Relationship of a Management Investor
(as such terms are defined in the Stockholders' Agreement), CFP Group shall
35
<PAGE>
have the right to repurchase all or any part of the stock owned by such
Management Investor. The price at which such shares are to be purchased
shall be either the lesser of the price paid by such terminated Management
Investor or the fair value per share of the stock (as determined in
accordance with the provisions of the Stockholders' Agreement), depending
on whether the Management Investor was terminated for "cause" (as defined
in the Stockholders' Agreement) or for any reason other than "cause."
Indemnification of Officers and Directors
The Certificates of Incorporation of CFP Holdings, CFP Group, Custom
Foods and Quality Foods contain provisions eliminating the personal
liability of directors for monetary damages for breaches of their duty of
care, except in certain prescribed circumstances. The Bylaws of CFP
Holdings, CFP Group, Custom Foods and Quality Foods also provide that
directors and officers will be indemnified to the fullest extent authorized
by Delaware law or California law, as the case may be, as it now exists or
may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of CFP
Holdings, CFP Group, Custom Foods or Quality Foods (as the case may be).
The Bylaws of CFP Holdings, CFP Group and Custom Foods provide that the
right of directors and officers to indemnification is not exclusive of any
other right now possessed or hereinafter acquired under any statute,
agreement or otherwise.
Part IV
Item 14. Exhibits, financial statement schedules, and reports on Form 8-K
Set forth below are consolidated financial statements, financial
statement schedules and exhibits filed as part of this Annual Report on
Form 10-K.
1) Consolidated Financial Statements
Filed herewith.
2) Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts, is filed
herewith. All other schedules are not included because they are
not applicable.
3) Exhibits
The following Exhibits are filed as a part of, or incorporated by
reference into this report:
36
<PAGE>
FY 1998 10-K Exhibit Index
Exhibit #:
(10) Material contracts:
10.1 Loan and Security Agreement dated May 5, 1998
between Fleet Capital Corporation and CFP Holdings, Inc. (Filed
herewith).
10.2 Employment Agreement dated March 9, 1998
between CFP Holdings, Inc. and William G. DelChiaro. (Filed
herewith).
10.3 Amendment number 1 dated September 15, 1997 to
Employment Agreement between CFP Holdings, Inc. and David
Cohen. (Filed herewith).
(12) Statements re computation of ratios:
12.1 Computation of Earnings to Fixed Charges.(Filed
herewith).
(21) Subsidiaries of the registrant:
CFP Group, Inc., a Delaware Corporation
CFP Holdings, Inc., a Delaware Corporation
Custom Food Products, Inc., a California Corporation
QF Acquisition Corp., a Delaware Corporation
(27) Financial Data Schedule. (Filed herewith).
4) Reports on Form 8-K
None.
Signatures
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 26th day of June, 1998.
CFP GROUP, INC.
By:
/s/ Roberto Buaron
--------------------------------------
Roberto Buaron
Chairman of the Board
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed on the 26th day of June, 1998, by the following persons
in the capacities indicated:
Name Title
---- -----
/s/ Roberto Buaron
- ------------------------------------------ Chairman of the Board and Director
Roberto Buaron
/s/ William Del Chiaro
- ------------------------------------------ President, Chief Executive Officer
William Del Chiaro
/s/ Robert Gioia
- ------------------------------------------ Director
Robert Gioia
/s/ Eric Ek
- ------------------------------------------ Vice President, Chief Financial
Eric Ek Officer, Secretary and Director
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Richard Griffith
- ------------------------------------------ Director
Richard Griffith
/s/ James A. Long
- ------------------------------------------ Director
James A. Long
/s/ David Cohen
- ------------------------------------------ Director
David Cohen
/s/ Andrew Kohn
- ------------------------------------------ Director
Andrew Kohn
38
<PAGE>
<TABLE>
CFP Holdings, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended September 30, 1995, and 1996
Six Months Ended March 31, 1997 and year ended March 31, 1998
<CAPTION>
Balance
at Balance
beginning Charged to Charged to at end
Description of period Expenses Other Deductions of period
----------- --------- -------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Accounts Receivable: (In Thousands)
Allowance for doubtful accounts
Year ended September 30, 1995 9 129 - - 138
Year ended September 30, 1996 138 12 - (100) 50
Period ended March 31, 1997 50 22 50 (29) 93
Year ended March 31, 1998 93 119 (79) (18) 115
</TABLE>
39
<PAGE>
- --------------------------------------------------------------------------------
CFP Group, Inc.
Financial Statements for the Years Ended September 30, 1995
and 1996 and March 31, 1998 and the Six Months Ended March 31,
1997 and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
CFP Group, Inc.:
We have audited the accompanying consolidated balance sheets of CFP Group, Inc.
and subsidiaries (the "Company") as of March 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the years ended September 30, 1995 and 1996, the six months ended
March 31, 1997, and the year ended March 31, 1998. Our audits also included the
financial statement schedule listed at Item 14. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CFP Group, Inc. and subsidiaries as
of March 31, 1997 and 1998, and the results of their operations and their cash
flows for the years ended September 30, 1995 and 1996, the six months ended
March 31, 1997, and the year ended March 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
June 5, 1998
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31,
--------------------------
1997 1998
(In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,139 $ 1,344
Accounts receivable, net of allowance for doubtful accouts of $93,000 and
$115,000 at March 31, 1997 and 1998, respectively (Note 2) 10,719 12,007
Inventories (Notes 2 and 4) 11,340 15,718
Prepaid expenses and other current assets 2,526 890
-------- --------
Total current assets 26,724 29,959
PROPERTY AND EQUIPMENT, NET (Notes 2 and 5) 25,402 27,004
COSTS OF IN EXCESS OF NET ASSETS ACQUIRED,
NET (Notes 2 and 3) 72,021 68,608
INTANGIBLE AND OTHER ASSETS, NET (Notes 2 and 6) 8,675 7,508
-------- --------
TOTAL $132,822 $133,079
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31,
---------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 1997 1998
(In thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term obligations (Note 7) $ 1,991 $ 2,232
Accounts payable 4,964 6,816
Accrued expenses and other current liabilities 5,055 5,362
Income taxes payable 12 42
Total current liabilities 12,022 14,452
--------- ---------
LONG-TERM OBLIGATIONS (Note 7) 137,864 141,267
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
REDEEMABLE COMMON STOCK (Note 9) 2,319 2,319
--------- ---------
STOCKHOLDER'S DEFICIENCY (Note 10):
Preferred stock, $.01 par value; 6,472 shares authorized; none
issued and outstanding
Voting common stock - Class A, $.01 par value; 100,000 shares
authorized; 14,705 shares issued and outstanding 3,196 3,196
Nonvoting common stock - Class A, $.01 par value; 25,000 shares authorized;
11,241 (inclusive of 3,011 shares classified as redeemable common stock)
shares issued and outstanding 2,204 2,204
Nonvoting common stock - Class B, $.01 par value; 25,000 shares authorized;
3,321 and 3,059 shares (inclusive of 2,162 shares classified as redeemable
common stock) issued and outstanding at March 31, 1997
and March 31, 1998, respectively 805 623
Stockholders' notes receivable (337) (203)
Accumulated deficit (25,251) (30,779)
--------- ---------
Total stockholders' deficiency (19,383) (24,959)
--------- ---------
TOTAL $ 132,822 $ 133,079
========= =========
</TABLE>
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996, SIX MONTHS ENDED MARCH 31, 1997
AND YEAR ENDED MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six
Months Year
Years Ended September 30, Ended Ended
--------------------------- March 31, March 31,
1995 1996 1997 1998
<S> <C> <C> <C> <C>
SALES (Note 2) $ 61,543 $ 65,996 $ 60,529 $ 181,378
COST OF SALES 49,868 53,818 52,276 152,484
--------- --------- --------- ---------
GROSS PROFIT 11,675 12,178 8,253 28,894
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 8) 6,700 5,512 7,474 17,156
SALES BROKERAGE AGREEMENT
TERMINATION COSTS (Notes 8 and 10) 4,996
--------- --------- --------- ---------
INCOME FROM OPERATIONS 4,975 1,670 779 11,738
INTEREST EXPENSE (Note 7) 2,632 3,232 4,681 17,236
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND EXTRAORDINARY ITEM 2,343 (1,562) (3,902) (5,498)
PROVISION (BENEFIT) FOR INCOME
TAXES (Notes 2 and 11) 1,189 (409) (541) 30
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,154 (1,153) (3,361) (5,528)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (Note 7) (4,489)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 1,154 $ (1,153) $ (7,850) $ (5,528)
========= ========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1995 AND 1996, SIX MONTHS ENDED MARCH 31, 1997
AND YEAR ENDED MARCH 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Nonvoting - Nonvoting -
Voting Class A - Class A Class B
Common Stock Common Stock Common Stock Shareholder
------------------- ------------------- ------------------ Notes
Shares Amount Shares Amount Shares Amount Receivable
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 14,705 $ 3,196 2,725 $ 592
Net income
Redeemable preferred dividends
------ -------- --------- --------
BALANCE, SEPTEMBER 30, 1995 14,705 3,196 2,725 592
Net loss
Redeemable preferred dividends
Increase in carrying value of stock
warrant purchase obligations
------ -------- --------- --------
BALANCE, SEPTEMBER 30, 1996 14,705 3,196 2,725 592
Net loss
Redeemable preferred dividends
Increase in carrying value of stock
warrant purchase obligations
Exercise of stock warrants 4,538 1,723
Exercise of stock options 7,487 2,163
Issuance of common stock 1 1 3,321 $ 2,305 $ (343)
Repayment of stockholder notes 6
Repurchase of common stock (3,510) (1,456)
Distribution to stockholders
Shares reclassified to redeemable
common stock (3,011) (819) (2,162) (1,500)
------ -------- --------- -------- -------- -------- --------
BALANCE, MARCH 31, 1997 14,705 3,196 8,230 2,204 1,159 805 (337)
Issuance of common stock and
grant of note receivable 72 50 (35)
Repurchase of common stock and
cancellation of note receivable (334) (232) 169
Net loss
------ -------- --------- -------- -------- -------- --------
BALANCE, March 31, 1998 14,705 $ 3,196 8,230 $ 2,204 897 $ 623 $ (203)
====== ======== ========= ======== ======== ======== ========
Retained
Earnings
(Accumulated
Deficit) Total
(Dollars In Thousands)
BALANCE, SEPTEMBER 30, 1994 $ 1,040 $ 4,828
Net income 1,154 1,154
Redeemable preferred dividends (98) (98)
-------- --------
BALANCE, SEPTEMBER 30, 1995 2,096 5,884
Net loss (1,153) (1,153)
Redeemable preferred dividends (94) (94)
Increase in carrying value of stock
warrant purchase obligations (617) (617)
-------- --------
BALANCE, SEPTEMBER 30, 1996 232 4,020
Net loss (7,850) (7,850)
Redeemable preferred dividends (27) (27)
Increase in carrying value of stock
warrant purchase obligations (207) (207)
Exercise of stock warrants 1,723
Exercise of stock options 2,163
Issuance of common stock 1,963
Repayment of stockholder notes 6
Repurchase of common stock (1,456)
Distribution to stockholders (17,399) (17,399)
Shares reclassified to redeemable
common stock (2,319)
-------- --------
BALANCE, MARCH 31, 1997 (25,251) (19,383)
Issuance of common stock and
grant of note receivable 15
Repurchase of common stock and
cancellation of note receivable (63)
Net loss (5,528) (5,528)
-------- --------
BALANCE, March 31, 1998 $(30,779) $(24,959)
======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
-4-
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996, SIX MONTHS ENDED MARCH 31, 1997
AND YEAR ENDED MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six
Years Ended Months Year
September 30, Ended Ended
----------------------- March 31, March 31,
1995 1996 1997 1998
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,154 $ (1,153) $ (7,850) $ (5,528)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,710 2,088 2,236 6,732
Amortization of deferred financing costs and original
issue discount 602 630 389 1,283
Deferred income taxes (171) (10) (546)
Loss on sale of equipment 15
Extraordinary loss on early extinguishment of debt 4,489
Changes in assets and liabilities, net of the effects from
the acquisition of Quality Foods LP:
Accounts receivable (18) (658) (170) (1,288)
Inventories 430 (479) 1,802 (4,378)
Prepaid expenses and other current assets (362) 324 (963) 1,636
Income taxes receivable/payable 473 (399) 98 30
Accounts payable (57) 84 289 1,852
Accrued expenses and other current liabilities 621 (292) 3,703 307
-------- -------- -------- --------
Net cash provided by operating activities 4,382 135 3,477 661
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,821) (1,432) (1,674) (4,497)
Acquisition of Quality Foods L.P. (65,647)
Proceeds from sale of property and equipment 44 1,137
Other assets 36 (379) (16) (394)
-------- -------- -------- --------
Net cash used in investing activities (1,785) (1,811) (67,293) (3,754)
-------- -------- -------- --------
<FN>
See accompanying notes to consolidated financing statements.
</FN>
(Continued)
</TABLE>
-5-
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996, SIX MONTHS ENDED MARCH 31, 1997
AND YEAR ENDED MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six
Years Ended Months Year
September 30, Ended Ended
---------------------- March 31, March 31,
1995 1996 1997 1998
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving loan facility $ 8,300 $ 9,725 $ 14,821 $ 23,000
Repayment of revolving loan facilities (9,050) (9,975) (15,821) (18,500)
Proceeds from issuance of long-term debt 8,800 5,681 218,500
Repayment of long-term debt and capitalized lease
obligations (10,857) (3,120) (122,847) (1,847)
Deferred financing costs (11,455) (308)
Proceeds from sale of common stock 157 15
Purchase of redeemable preferred stock (143) (1,207)
Collection of shareholder notes receivable 6 1
Purchase of common stock (692) (63)
Distributions to shareholders (16,000)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (2,807) 2,168 65,462 2,298
========= ========= ========= =========
NET (DECREASE) INCREASE IN CASH (210) 492 1,646 (795)
CASH, BEGINNING OF PERIOD 211 1 493 2,139
--------- --------- --------- ---------
CASH, END OF PERIOD $ 1 $ 493 $ 2,139 $ 1,344
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest $ 1,831 $ 2,265 $ 2,099 $ 15,386
Income taxes 973 (93) 33
<FN>
See accompanying notes to consolidated financial statements.
</FN>
(Continued)
</TABLE>
-6-
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996, SIX MONTHS ENDED MARCH 31, 1997
AND YEAR ENDED MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six
Years Ended Months Year
September 30, Ended Ended
---------------------- March 31, March 31,
1995 1996 1997 1998
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITY:
Acquisition of property and equipment through
capital leases $ 3,233 $ 1,577 $ 1,019
Accrued dividends on redeemable preferred stock 98 94 $ 27
Issuance of common stock in exchange for equity
interest in Quality Foods L.P. 1,500
Issuance of employee notes in exchange for nonvoting
Class B common stock 343 35
Exercise price of stock options for which the cost to
exercise was deducted from the distribution to
stockholders 1,399
Issuance of nonvoting Class B common stock to
a financial institution for services rendered in
1997; and to an employee in 1998 305 50
</TABLE>
During the year ended September 30, 1996 and the six months ended March 31
1997, the carrying value of the stock warrant purchase obligations
increased by $617,000 and $207,000, respectively, with a corresponding
charge to retained earnings. During the six months ended March 31, 1997,
the stock warrant purchase obligations with a carrying value of $1,723,000
were redeemable for nonvoting Class A common stock.
On December 31, 1996, the Company acquired all of the equity interests in
Quality Foods L.P. and its two general partners, which are now operated as
QF Acquisition Corp. ("Quality Foods") for a purchase price of $65.6
million (see Note 3).
See accompanying notes to consolidated financial statements.
(Concluded)
-7-
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
CFP Group, Inc. (the "Company") was incorporated on November 26, 1996 as
New CFP Holdings, Inc. and subsequently changed its name to CFP Group, Inc.
The Company was formed to recapitalize CFP Holdings, Inc. On December 31,
1996, each person owning capital stock (or options to acquire capital
stock) of CFP Holdings, Inc. exchanged their equity interests for
equivalent interests of capital stock (or options to acquire capital stock)
of the Company. Accordingly, these consolidated financial statements
include the historical results of CFP Holdings, Inc. for all periods
presented. CFP Group, Inc. and CFP Holdings, Inc. are companies that have
no operations or assets separate from their investments in their respective
subsidiaries and rely on CFP Holdings, Inc.'s subsidiaries for their cash
flows.
CFP Group, Inc., through its wholly owned subsidiaries, develops,
manufactures and markets precooked and uncooked meat products sold
primarily to manufacturers of branded and private label packaged foods,
foodservice distributors, and restaurants.
On December 31, 1996, the Company acquired all of the equity interests in
Quality Foods. Quality Foods is a Pennsylvania-based manufacturer primarily
of pre-cooked and uncooked, thinly sliced beef used in "Philadelphia-style"
steak sandwiches. The financial statements include the operations of
Quality Foods from the date of acquisition (See Note 3).
On March 31, 1993, the Company acquired substantially all of the assets of
Best Western Foods, Inc. and all the outstanding stock of Center of the
Plate Foods, Inc. The acquisitions were accounted for as purchases. The
cost in excess of net assets acquired related to the purchase of the assets
of Best Western Foods, Inc. and a portion of the stock of Center of the
Plate Foods, Inc. was based on the fair values of the identifiable assets
acquired and liabilities assumed. However, because certain shares of the
stock of Center of the Plate Foods, Inc. were purchased from a stockholder
of the Company, a portion of the cost in excess of net assets acquired was
reduced to reflect the historical basis of the stockholder's continuing
interest in the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of CFP Group, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Fiscal Year-End - During March 1997, the Company changed its year-end from
the Saturday closest to September 30 to the Saturday closest to March 31.
All full years presented are 52 weeks; the six-month period ended March 31
consists of 26 weeks. For clarity of presentation, the Company describes
its prior year-ends as September 30 and its prior quarter-end and current
year-end as March 31. The Company's fiscal quarter-end is the Saturday
closest to the calendar quarter-end.
-8-
<PAGE>
Concentration of Credit Risk - Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. The
Company performs ongoing credit evaluations of its customers and maintains
an allowance for potential credit losses. The Company has one significant
customer that accounted for more than 10% of its sales. Sales to this
customer totaled 44%, 40%, 23%, and 15% of total sales for the years ended
September 30, 1995 and 1996, the six months ended March 31, 1997, and the
year ended March 31, 1998, respectively. Accounts receivable from this
customer totaled 11% and 7% of total accounts receivable at March 31, 1997
and 1998, respectively. In addition, pursuant to franchise supply
agreements with two different international franchising operations, the
Company sells products to authorized distributors who in turn sell these
products to two franchising operations. During the years ended September
30, 1995 and 1996, the six months ended March 31, 1997 and the year ended
March 31, 1998, approximately 43%, 45%, 46% and 46% of sales, respectively,
were to such distributors.
Inventories - Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
Property and Equipment - Property and equipment are stated at cost. The
Company uses the straight-line method of depreciation and amortization for
buildings and leasehold improvements and both the straight-line and the
double-declining method for all other property and equipment. Depreciation
is provided for over the estimated useful lives of the related assets,
ranging from 3 to 40 years. Leasehold improvements are amortized over the
shorter of their useful lives or the term of the lease.
Intangible and Long-Lived Assets - The Company reviews the recoverability
of intangible and long-lived assets whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. If the expected future cash flows from the use of such assets
(undiscounted and without interest charges) are less than the carrying
value, the Company's policy is to record a write-down that is determined
based on the difference between the carrying value of the asset and its
estimated fair value.
Cost in Excess of Net Assets Acquired - Cost in excess of net assets
acquired is amortized over periods of 20 to 40 years. Accumulated
amortization was $1,919,000 and $5,332,000 at March 31, 1997 and 1998,
respectively (see Note 3).
Covenants Not to Compete - Covenants not to compete are stated at cost and
are amortized on a straight-line basis over five years. Accumulated
amortization was $2,065,000 and $2,643,000 at March 31, 1997 and 1998,
respectively. At March 31, 1998, covenants not to compete are fully
amortized.
Income Taxes - Deferred income taxes are determined based on temporary
differences between the financial reporting and income tax bases of assets
and liabilities at the balance sheet date, multiplied by the applicable tax
rates. Future tax benefits are recognized to the extent that realization of
such benefits is more likely than not.
Fair Value of Financial Instruments - The carrying amounts of accounts
receivable and accounts payable approximate fair value because of their
short-term nature. The carrying amounts of substantially all of the
Company's outstanding long-term obligations approximate fair value because
their interest rates are based on variable reference rates or rates
currently available to the Company for debt with similar terms.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported
-9-
<PAGE>
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
New Accounting Pronouncements - In June of 1997, the FASB issued Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131"), which requires disclosure of certain
information about operating segments, geographic areas in which the Company
operates, major customers and products and services. The Company will
evaluate the effect that this new standard has on the Company's financial
statement presentation, and the required information will be reflected in
the financial statements for the year ended March 31, 1999.
3. BUSINESS ACQUISITIONS
On December 31, 1996, pursuant to a securities purchase agreement, the
Company acquired all of the equity interests in Quality Foods for a total
purchase price of $67.1 million, which was composed of cash payments to
sellers of $64.0 million less a purchase price adjustment refund received
from the sellers of $354,000, the issuance of 2,162 shares of nonvoting
common stock - Class B valued at $1.5 million plus acquisition costs of
$2.6 million less cash assumed of $600,000. Funds for the acquisition,
repayment of certain existing indebtedness, and working capital were
primarily provided by $76.0 million in term loans, a $20.0 million
revolving credit facility and $25.0 million of subordinated bridge loans.
This acquisition has been accounted for under the purchase method, and the
results of the operations of Quality Foods have been included in the
consolidated financial statements since the date of acquisition. The
purchase price has been allocated to the assets acquired and liabilities
assumed, based on fair values at the date of acquisition. This resulted in
an excess of cost over net assets acquired of $62.6 million, which is being
amortized on a straight-line basis over 20 years.
If the acquisition and the related equity and debt transactions had
occurred on October 1, 1995, the results on a pro forma basis for the
combined operations of the Company and Quality Foods for the year ended
September 30, 1996 and for the six months ended March 31, 1997 would have
been as follows:
September 30, March 31,
1996 1997
(In Thousands)
Net sales $ 156,645 $ 81,578
Loss before extraordinary item $ (3,297) $ (4,265)
The fair value of the assets acquired was $95.4 million, the cash paid was
$65.6 million, the fair value of common stock issued was $1.5 million and
liabilities assumed or paid upon the acquisition were $28.3 million.
-10-
<PAGE>
4. INVENTORIES
Inventories consisted of the following:
March 31,
---------------------------
1997 1998
(in thousands)
Raw materials $ 4,498 $ 5,655
Work-in-process 2,157 3,470
Finished goods 4,685 6,593
------- -------
Total $11,340 $15,718
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31,
--------------------------
1997 1998
(in thousands)
Land $ 376 $ 376
Building 17,232 19,171
Machinery and equipment 9,590 11,135
Office furniture and fixtures 492 759
Leasehold improvements 2,479 2,531
Construction in progress 185 80
-------- --------
30,354 34,052
Accumulated depreciation (4,952) (7,048)
-------- --------
Property and equipment, net $ 25,402 $ 27,004
======== ========
6. INTANGIBLES AND OTHER ASSETS
Intangible and other assets consisted of the following:
March 31,
--------------------------
1997 1998
(in thousands)
Covenants not to compete $ 2,643
Deferred financing costs 12,231 $ 12,539
Other assets 210 568
-------- --------
15,084 13,107
Accumulated amortization (6,409) (5,599)
-------- --------
Total $ 8,675 $ 7,508
======== ========
-11-
<PAGE>
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
March 31,
------------------------
1997 1998
(in thousands)
Senior notes payable, interest at 11.625%,
payable semiannually, principal due January
2004 $115,000 $115,000
Term note payable to a bank, interest at a
reference rate (8.5% at March 31, 1998) plus
2% or eurodollar rate (5.7% at March 31,
1998) plus 3%, payable semiannually,
principal payable quarterly at $1.0 million,
increasing to $2.2 million with the remaining
balance due in June 2002 10,000 9,000
Revolving loan payable to a bank, interest at
a reference rate (8.5% at March 31, 1998)
plus 1.25% or eurodollar rate (5.7% at March
31, 1998) plus 2.5%, payable quarterly,
expires June 2002 500 5,000
Debt assumed in connection with the
acquisition of Quality Foods: Revenue bond
payable to a government financing authority,
interest at a reference rate (5.65% at March
31, 1998) not to exceed 18%, payable monthly,
principal payable annually at $100,000,
increasing to $400,000 through December 2014 4,300 4,200
Notes payable to a government agency,
interest at 2%, payable with principal
monthly through April 2012, collateralized in
a second position on the Company's
Philadelphia facility 2,154 1,955
Note payable to a government agency, interest
at 0.5%, payable monthly beginning April 1999
through October 2005, principal and interest
payable in equal monthly installments from
November 2005 through April 2010,
collateralized in a shared third position on
the Company's Philadelphia facility 1,000 1,000
Notes payable to a government agency,
interest at 5.25%, payable monthly with
principal through February 2012,
collateralized in a shared third position on
the Company's Philadelphia facility 747 710
Capital lease obligations payable in varying
monthly installments through 2021,
collateralized by buildings and equipment
with a net book value of 6,042,000 and
$6,317,000 at March 31, 1997 and 1998,
respectively 6,154 6,634
-------- --------
Total 139,855 143,499
Current portion (1,991) (2,232)
-------- --------
Long-term debt $137,864 $141,267
======== ========
The senior notes payable are senior unsecured obligations that rank pari
passu in the right of payment with all other existing and future senior
debt of the Company. The senior notes payable provide limitations on the
sale or transfer of the Company's subsidiaries and also provide for the
holders of the notes to require the Company to purchase the notes upon a
change in control of the Company. The senior notes payable contain certain
financial covenants, including limitations on incurring additional debt,
payments to stockholders, capital stock transactions and transactions with
affiliates. At March 31, 1998, no amounts were available for dividend
payments. The Company may redeem the notes prior to maturity subject to
certain redemption premiums. The senior notes payable are obligations of
CFP Holdings and are, jointly and severally, unconditionally guaranteed in
full by CFP Group and each of CFP Holdings' subsidiaries.
-12-
<PAGE>
The Company has entered into a bank credit agreement for a revolving note
payable and a term loan payable ("Bank Debt"). Maximum borrowings under the
revolving loan payable are $20.0 million subject to a borrowing base.
Available borrowings at March 31, 1998 were $7.4 million. The revolving
loan payable also provides for standby letters of credit of up to $3.0
million and for the reduction of available borrowings equal to the amount
outstanding under the revenue bond payable. The Bank Debt is collateralized
by substantially all of the Company's assets and is guaranteed jointly and
severally, and unconditionally, in full by each of the Company's
subsidiaries. The bank credit agreement provides for the maintenance of
certain financial ratios and other financial covenants and also includes
limitations on capital expenditures, incurrence of additional debt, payment
of dividends, capital stock transactions and asset dispositions. At March
31, 1998, no amounts were available for dividend payments. The interest
rates for the revolving loan payable and term loan are reduced when the
Company achieves certain leverage ratios. On May 4, 1998, all amounts
outstanding under the bank credit agreement were repaid (see Note 14,
Subsequent Events).
The revenue bond payable provides for monthly escrow deposits in amounts
sufficient to fund annual sinking fund requirements. Mandatory sinking fund
redemptions are required each December 1 through final redemption in 2014.
The bonds are supported by an irrevocable letter of credit, which is backed
by a guarantee provided by a commercial lender. The letter of credit and
guarantee are collateralized by a first priority lien on the Company's
Philadelphia real property. The commercial lender also has a lien on
certain production equipment owned by the Company.
One of the notes payable to a government agency requires that the Company
maintain a letter of credit for $750,000.
In connection with a loan agreement and a capital lease, the Company issued
warrants, which contained antidilution provisions, to purchase 2,700 and
412 shares, respectively, of common stock at $0.01 per share. The stock
warrant purchase obligations were initially recorded at their estimated
fair value at the date of issuance. Adjustments to the carrying value of
the stock warrants purchase obligations to the estimated redemption price
were recognized during the period from the date of issuance to the earliest
put date of the warrants. During the year ended September 30, 1995, no
adjustment to the carrying value of the stock warrant purchase obligations
was required. During the year ended September 30, 1996, the Company had
increased the carrying value of the warrants from $899,000 to $1,516,000
with a corresponding charge to retained earnings of $617,000. During the
six months ended March 31, 1997, the carrying value of the warrants was
increased by $207,000 and the warrants were converted into 4,538 nonvoting
shares of Class A common stock.
As part of the acquisition of Quality Foods, the Company borrowed $76.0
million under term loans and $25.0 million under bridge notes. The bridge
notes, $66.0 million of the term notes, and certain other long-term
obligations were repaid upon the issuance of the senior notes payable
resulting in an extraordinary loss of $4.5 million. No income tax benefit
was allocated to the extraordinary loss, as the Company's income tax
benefit was fully allocated to the loss from operations.
-13-
<PAGE>
Minimum principal payments of long-term obligations as of March 31, 1998
are as follows:
Year Ending 1998
March 31, (In Thousands)
1999 $ 2,232
2000 2,729
2001 2,813
2002 2,880
2003 6,619
Thereafter 126,226
--------
Total $143,499
========
8. RELATED PARTY TRANSACTIONS
The Company had a sales brokerage agreement with a stockholder under which
the stockholder was paid a specified commission based on sales of certain
products to certain customers. The agreement was terminated in January 1996
for a fee of $4,996,000. Commission expense under this agreement was
$2,142,000 and $570,000 for the years ended September 30, 1995 and 1996,
respectively. Upon termination of the sales brokerage agreement, the
Company entered into a consulting agreement that provided for a one-year
contract with an option to extend for one additional year. The consulting
agreement provided for annual payments of $100,000 with an additional bonus
of $100,000 at the discretion of the Company. During 1996, the Company paid
$100,000 total. During December 1996, the Company purchased all 865
nonvoting Class A common shares owned by this stockholder for $692,000.
Effective December 31, 1996, the Company entered into a new management
consulting agreement with an affiliate of a stockholder under which the
Company is obligated to pay $600,000 per year plus expenses through
December 2003, at which time the agreement is automatically extended
annually, until terminated by the Company or the stockholder. Consulting
expense under this and a preceding agreement was $393,000, $400,000,
$292,000 and $666,000, including reimbursed expenses, for the years ended
September 30, 1995 and 1996, the six months ended March 31, 1997, and the
year ended March 31, 1998, respectively. The Company paid an investment
banking fee of $750,000 to the same affiliate of a stockholder upon
consummation of the acquisition of Quality Foods.
The Company and certain of its shareholders have entered into a shareholder
agreement that restricts the transfer or sale of the Company's stock. Among
other provisions, the shareholder agreement provides for the right of first
refusal upon sale of the stock in addition to providing for the election of
certain directors of the Company.
The Company has entered into employment agreements with certain of its
executive officers, which expire at various dates through December 2001.
Such agreements provided for minimum salary levels, adjusted annually for
cost-of-living changes, as well as for incentive bonuses, which are payable
if specified management goals are attained and for the issuance of stock
options. The aggregate commitment for future salaries and minimum bonuses
at March 31, 1998, was approximately $3.9 million through December 2001.
-14-
<PAGE>
9. REDEEMABLE COMMON STOCK
In December 1996, in connection with the execution of certain employment
agreements (see Note 8), three management shareholders were granted the
right to sell certain shares of common stock and shares to be issued upon
the exercise of certain stock options back to the Company. The management
shareholders have the right to sell these shares upon the occurrence of
certain employment related events, which include termination without cause,
termination for nonrenewal of employment agreement and involuntary
termination. With respect to 3,011 shares of Redeemable Nonvoting - Class A
common stock, the redemption price is determined by a formula specified in
the agreement. With respect to 2,162 shares of Redeemable Nonvoting - Class
B common stock, the redemption price is the fair value of shares or in
certain circumstances the higher of the price paid for the stock or the
fair value. The redemption amounts are payable in cash or, in certain
circumstances, subordinated notes payable. With respect to the 3,011
shares, in certain circumstances, the Company has the right to purchase the
stock from the management shareholder at a formula driven price as
determined in the agreement.
The redeemable common stock was initially recorded at its fair value at the
date the common stock was issued. Adjustments to the carrying value of the
redeemable common stock are recorded when the redemption value exceeds the
carrying value. As of March 31, 1998, no increase in the carrying value was
necessary.
10. STOCK OPTION PLAN
In connection with the recapitalization (see Note 1), the Company assumed
all obligations of CFP Holdings under the CFP Holdings Stock Option Plan.
Under the Plan, which is administered by the Board of Directors, 11,586
shares of nonvoting common stock were reserved for the issuance of
incentive stock options or nonqualified stock options to directors,
employees and consultants of the Company. The price, terms and conditions
of each issuance are determined based on the provisions of the plan. During
the year ended September 30, 1995, 11,239 options were granted at an
exercise price of $289 per share, of which 3,871 and 7,437 options were
exercisable as of September 30, 1995 and 1996, respectively. In December
1996, 7,487 options at $289 per share were exercised for nonvoting common
stock. Thereafter, the Company repurchased 2,645 shares of these newly
issued shares for $2.1 million less the exercise cost of $764,000 for net
cash paid of $1,352,000 that was recorded as compensation expense. At March
31, 1998, a total of 2,206 vested options at an exercise price of $289 per
share, expiring 2002, were outstanding.
The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." The estimated fair value of
options granted during 1995 pursuant to SFAS No. 123 was $664,000. Had
compensation cost for the Company's stock option plan been determined based
on their fair value at the date of grant consistent with the provisions of
SFAS No. 123, the Company's pro forma net income (loss) would have been
$1.0 million, $(1.3) million, $(8.0) million, and $(5.7) million for the
years ended September 30, 1995 and 1996 and for the six months ended March
31, 1997 and the year ended March 31, 1998, respectively. The fair value of
each option grant was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions: dividend yield and
volatility of zero, a risk free interest rate of 6.28% and expected option
lives of 3.7 years.
-15-
<PAGE>
On June 17, 1998 the Company's Board of Directors, subject to shareholder
approval, adopted a new incentive stock option program (the "1998 Stock
Option Plan") which includes the existing management of the Company, as
well as key senior executives and management of Quality Foods and Custom
Foods.
11. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Six
Years Ended Months Ended Year Ended
September 30, March 31 March 31
------------------- ------- -------
1995 1996 1997 1998
Current:
Federal $ 1,092 $ (401)
State 268 2 $ 5 $ 30
------- ------- ------- -------
1,360 (399) 5 30
------- ------- ------- -------
Deferred:
Federal (135) 39 (427)
State (36) (49) (119)
------- ------- ------- -------
(171) (10) (546)
------- ------- ------- -------
Total provision (benefit) $ 1,189 $ (409) $ (541) $ 30
======= ======= ======= =======
<TABLE>
The major elements contributing to the difference between the federal
statutory income tax rate and the effective income tax rate relating to
income (loss) before income taxes and extraordinary item are as follows:
<CAPTION>
Six
Years Ended Months Ended Year Ended
September 30, March 31, March 31,
---------------- --------- ---------
1995 1996 1997 1998
<S> <C> <C> <C> <C>
Statutory rate 35.0% (35.0)% (35.0)% (35.0)%
Officer's life insurance and other nondeductible
expenses 1.8 4.0 0.7 2.0
Goodwill amortization 4.3 6.4 1.2 1.8
State taxes, net 9.6 (1.6) 1.9 (2.0)
Valuation allowance 17.3 33.2
---- ----- ----- -----
Effective tax rate 50.7% (26.2)% (13.9)% 0.0%
==== ===== ===== =====
</TABLE>
-16-
<PAGE>
<TABLE>
Deferred income taxes consist of the following:
<CAPTION>
September 30, March 31,
------------------------- ------------------------
1995 1996 1997 1998
(In Thousands)
<S> <C> <C> <C> <C>
Deferred income tax assets:
Federal net operating loss carryforwards $ 2,894 $ 4,747
State taxes $ 53 $ 26 160
Accrued vacation 29 39 114 113
Expense accruals 12 21 38 485
State net operating loss carryforwards 43 627 849
AMT credit carryforward 189 126 126
Valuation allowances (3,149) (5,333)
------- ------- ------- -------
$ 94 $ 318 $ 650 $ 1,147
======= ======= ======= =======
Deferred income tax liabilities:
Depreciation and amortization $ 555 $ 681 $ 405 $ 1,135
Prepaid expenses 53 51 101 12
Other 41 131 144
------- ------- ------- -------
$ 649 $ 863 $ 650 $ 1,147
======= ======= ======= =======
</TABLE>
At March 31, 1998, the Company has federal net operating loss carryforwards
of approximately $13.5 million that are available ratably over the next six
fiscal years and that expire in 2012. At March 31, 1998, the Company has
various state operating loss carryforwards aggregating approximately $12.3
million that expire in 2002 through 2017.
During the six months ended March 31, 1997 and the year ended March 31,
1998, the Company established a valuation allowance equal to the net
deferred tax asset of $3.1 million and $5.3 million, respectively.
12. COMMITMENTS
The Company leases its facilities and certain equipment under both capital
and noncancelable operating leases that expire through November 2021. Rent
expense under operating leases totaled $618,000, $618,000, $444,000 and
$1,220,000 for the years ended September 30, 1995 and 1996, the six months
ended March 31, 1997 and the year ended March 31, 1998, respectively.
Certain of the leases require the payment of related property taxes,
insurance, maintenance and other costs.
-17-
<PAGE>
Minimum future lease payments under both capital and operating leases,
together with the present value of the net minimum lease payments under
capital leases as of March 31, 1998 are summarized as follows:
Capital Operating
Year Ending Leases Leases
March 31, (In Thousands)
1999 $ 1,290 $ 965
2000 1,252 874
2001 1,093 624
2002 1,131 530
2003 844 441
Thereafter 14,594 20
-------- -------
Total minimum lease payments 20,204 $ 3,454
Amount representing interest (13,570) =======
-------
Present value of net minimum lease payments $ 6,634
========
13. BENEFIT PLAN
One of the Company's subsidiaries has a defined contribution profit-sharing
salary reduction plan covering substantially all of its employees not
otherwise covered under a collective bargaining agreement. Company
contributions to the profit-sharing plan are determined by the board of
directors and are a percentage of each participant's compensation. Benefit
plan expense recorded by the Company was $29,000 and $98,000 for the six
months ended March 31, 1997 and year ended March 31, 1998, respectively.
14. SUBSEQUENT EVENTS
On May 5, 1998, the Company entered into a $40.0 million loan and security
agreement (the "Loan and Security Agreement") with a financial institution
providing for revolving credit loans (the "Revolver") and term loan
options. Maximum borrowings under the Revolver cannot exceed $40.0 million,
limited to a borrowing base and other limitations including amounts
outstanding under term loans, letters of credit and other borrowing
instruments under the Loan and Security Agreement. All amounts outstanding
under the existing Bank debt were repaid with new borrowings under the Loan
and Security Agreement consisting of a $10.0 million term loan and $4.1
million advanced under the Revolver. In addition, deferred financing costs
of approximately $1 million were written off in connection with the
repayment of the Bank debt. All amounts outstanding under the Loan and
Security Agreement become due and payable in May 2002.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods for the years
ended March 31, 1998 and the six months ended March 31, 1997 are presented
below (in thousands):
1998
-----------------------------------------------------
June 30 September 30 December 31 March 31
Net sales $ 44,755 $ 46,593 $ 47,335 $ 42,695
Gross profit 7,472 8,088 6,675 6,659
Income from operations 3,346 3,928 2,172 2,292
Loss before income taxes (804) (484) (2,160) (2,050)
Net loss (804) (484) (2,160) (2,080)
1997
-------------------------
December 31 March 31
Net sales $ 20,624 $ 39,905
Gross profit 2,561 5,692
Income (loss) from operations 1,025 (246)
Income (loss) before income taxes and
extraordinary item 202 (4,104)
Extraordinary item (4,489)
Net loss (50) (7,800)
-18-
<PAGE>
16. SUMMARIZED FINANCIAL INFORMATION
<TABLE>
The full financial statements of each of the other co-guarantors of the
senior notes payable (see Note 7) have not been provided because the
Company's management believes that the presentation of full financial
statements is not material to investors. Summarized financial information
of CFP Group, Inc. and CFP Holdings, Inc. as of March 31, 1998 and for the
year then ended and as of March 31, 1997, and for the six months ended
March 31, 1997 is as follows:
<CAPTION>
March 31, 1998
---------------------------------------------------------------------
CFP
Holdings CFP CFP Group,
Inc. Group, Inc.
Consolidated Inc. Eliminations Consolidated
(In Thousands)
<S> <C> <C> <C> <C>
Total current assets $ 29,963 $ (4) $ 29,959
Total noncurrent assets 103,120 103,120
Investment in subsidiary 6,047 $ (6,047)
--------- --------- --------- ---------
Total $ 133,083 $ 6,043 $ (6,047) $ 133,079
========= ========= ========= =========
Total current liabilities $ 14,452 $ 14,452
Total noncurrent liabilities 141,267 141,267
Intercompany (receivable) payable (28,683) $ 28,683
--------- ---------
Redeemable preferred stock 1,228 $ (1,228)
--------- ---------
Common stock subject to redemption 2,319 2,319
--------- ---------
Stockholder's equity (deficiency):
Voting common stock 3,196 3,196 (3,196) 3,196
Nonvoting common stock 5,146 2,827 (5,146) 2,827
Stockholders notes receivable (203) (203)
Accumulated deficit (3,523) (30,779) 3,523 (30,779)
--------- --------- --------- ---------
Total stockholder's equity
(deficiency) 4,819 (24,959) (4,819) (24,959)
--------- --------- --------- ---------
Total $ 133,083 $ 6,043 $ (6,047) $ 133,079
========= ========= ========= =========
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31, 1998
--------------------------------------------------------------
CFP
Holdings CFP CFP Group,
Inc. Group, Inc.
Consolidated Inc. Eliminations Consolidated
(In Thousands)
<S> <C> <C> <C> <C>
Sales $ 181,378 $ 181,378
Cost of sales 152,484 152,484
--------- ---------
Gross profit 28,894 28,894
Selling, general and administrative
expenses 17,156 17,156
--------- ---------
Income from operations 11,738 11,738
Equity in loss of subsidiary $ (5,528) $ 5,528
Interest expense 17,236 17,236
--------- --------- --------- ---------
Loss before income taxes and
extraordinary item (5,498) (5,528) 5,528 (5,498)
Provision for income taxes 30 30
--------- --------- --------- ---------
Loss before extraordinary item (5,528) (5,528) 5,528 (5,528)
Extraordinary loss on early extinguishment
of debt
--------- --------- --------- ---------
Net loss $ (5,528) $ (5,528) $ 5,528 $ (5,528)
========= ========= ========= =========
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------------------------------------
CFP
Holdings CFP CFP Group,
Inc. Group, Inc.
Consolidated Inc. Eliminations Consolidated
(In Thousands)
<S> <C> <C> <C> <C>
Total current assets $ 26,724 $ 26,724
Total noncurrent assets 106,098 106,098
Investment in subsidiary $ 1,828 $ (1,828)
--------- --------- --------- ---------
Total $ 132,822 $ 1,828 $ (1,828) $ 132,822
========= ========= ========= =========
Total current liabilities $ 12,022 $ 12,022
Total noncurrent liabilities 137,864 137,864
Intercompany (receivable) payable (18,892) $ 18,892
--------- ---------
Redeemable preferred stock 1,228 $ (1,228)
--------- ---------
Common stock subject to redemption 2,319 2,319
--------- ---------
Stockholder's equity (deficiency):
Voting common stock 3,196 3,196 (3,196) 3,196
Nonvoting common stock 6,655 3,009 (6,655) 3,009
Stockholders notes receivable (337) (337)
Accumulated deficit (9,251) (25,251) 9,251 (25,251)
--------- --------- --------- ---------
Total stockholder's equity
(deficiency) 600 (19,383) (600) (19,383)
--------- --------- --------- ---------
Total $ 132,822 $ 1,828 $ (1,828) $ 132,822
========= ========= ========= =========
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, 1997
-------------------------------------------------------------
CFP
Holdings CFP CFP Group,
Inc. Group, Inc.
Consolidated Inc. Eliminations Consolidated
(In Thousands)
<S> <C> <C> <C> <C>
Sales $ 60,529 $ 60,529
Cost of sales 52,276 52,276
-------- --------
Gross profit 8,253 8,253
Selling, general and administrative
expenses 7,474 7,474
-------- --------
Income from operations 779 779
Equity in loss of subsidiary $ (7,850) $ 7,850
Interest expense 4,681 4,681
-------- -------- -------- --------
Loss before income taxes and
extraordinary item (3,902) (7,850) 7,850 (3,902)
Provision for income taxes (541) (541)
-------- -------- -------- --------
Loss before extraordinary item (3,361) (7,850) 7,850 (3,361)
Extraordinary loss on early extinguishment
of debt (4,489) (4,489)
-------- -------- -------- --------
Net loss $ (7,850) $ (7,850) $ 7,850 $ (7,850)
======== ======== ======== ========
</TABLE>
* * * * * *
(13395)
-22-
FLEET CAPITAL CORPORATION
-with-
CFP HOLDINGS, INC.
CUSTOM FOOD PRODUCTS, INC.
QF ACQUISITION CORP.
--------------------------------------
LOAN AND SECURITY AGREEMENT
--------------------------------------
Dated: May 5, 1998
$40,000,000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION 1. GENERAL DEFINITIONS.............................................................................1
1.1. Defined Terms...................................................................................1
1.2. Accounting Terms...............................................................................18
1.3. Other Terms....................................................................................18
1.4. Certain Matters of Construction................................................................18
SECTION 2. CREDIT FACILITY................................................................................18
2.1. Revolving Credit Loans.........................................................................19
2.2. Term and Equipment Loans.......................................................................20
(A) Term Loan.............................................................................20
(B) Mandatory Prepayments.................................................................21
(C) Optional Prepayments..................................................................21
2.3. Manner of Borrowing Revolving Credit Loans.....................................................21
2.4. Eurodollar Loans...............................................................................22
2.5. All Loans to Constitute One Obligation.........................................................24
2.6. Loan Account...................................................................................25
2.7. Letters of Credit..............................................................................25
2.8. Issuance of Letters of Credit..................................................................25
2.9. Disbursements and Reimbursement Obligations....................................................26
SECTION 3. INTEREST, FEES, TERM AND REPAYMENT.............................................................27
3.1. Interest, Fees and Charges.....................................................................27
(A) Interest..............................................................................27
(B) Letter of Credit Fees.....................................................................28
(C) Default Rate Applicable to Interest and Fees..........................................29
(D) Unused Line Fee.......................................................................29
(E) Closing Fee...........................................................................29
(F) Examination and Inspection Fees.......................................................29
(G) No Impact of Usury Laws; Limitation on Interest.......................................30
3.2. Term of Agreement..............................................................................30
3.3. Termination....................................................................................30
3.4. Payments.......................................................................................32
3.5. Application of Payments and Collections........................................................32
3.6. Statements of Account..........................................................................33
3.7. Increased Costs................................................................................33
3.8. Basis For Determining Interest Rate Inadequate or Unfair.......................................34
3.9. Capital Adequacy...............................................................................34
SECTION 4. COLLATERAL: GENERAL TERMS.....................................................................35
4.1. Security Interest in Collateral................................................................35
4.2. Lien on Realty.................................................................................36
(i)
<PAGE>
4.3. Representations, Warranties and Covenants --Collateral.........................................36
4.4. Lien Perfection................................................................................37
4.5. Real Property Lien Documentation...............................................................37
4.6. Location of Collateral.........................................................................37
4.7. Insurance of Collateral........................................................................38
4.8. Protection of Collateral.......................................................................39
SECTION 5. PROVISIONS RELATING TO ACCOUNTS................................................................40
5.1. Representations, Warranties and Covenants......................................................40
5.2. Assignments, Records and Schedules of Accounts.................................................41
5.3. Administration of Accounts.....................................................................41
5.4. Collection of Accounts.........................................................................42
5.5. Notice Regarding Disputed Accounts.............................................................42
SECTION 6. PROVISIONS RELATING TO INVENTORY...............................................................42
6.1. Representations, Warranties and Covenants......................................................43
6.2. Inventory Reports..............................................................................43
6.3. Returns of Inventory...........................................................................43
SECTION 7. PROVISIONS RELATING TO EQUIPMENT...............................................................44
7.1. Representations, Warranties and Covenants......................................................44
7.2. Evidence of Ownership of Equipment.............................................................44
7.3. Records and Schedules of Equipment.............................................................44
SECTION 8. REPRESENTATIONS AND WARRANTIES.................................................................44
8.1. General Representations and Warranties.........................................................44
(A) Organization and Qualification........................................................44
(B) Corporate Names.......................................................................44
(C) Corporate Power and Authority.........................................................45
(D) Legally Enforceable Agreement.........................................................45
(E) Use of Proceeds.......................................................................45
(F) Margin Stock..........................................................................45
(G) Governmental Consents.................................................................45
(H) Patents, Trademarks, Copyrights and Licenses..........................................45
(I) Capital Structure.....................................................................46
(J) Solvent Financial Condition...........................................................46
(K) Restrictions..........................................................................46
(L) Litigation............................................................................46
(M) Title to Properties...................................................................46
(N) Financial Statements; Fiscal Year; Pro Forma Financial Statements.....................47
(O) Full Disclosure.......................................................................47
(P) Pension Plans.........................................................................48
(Q) Taxes.................................................................................48
(R) Labor Relations.......................................................................48
ii
<PAGE>
(S) Compliance With Laws..................................................................49
(T) Surety Obligations....................................................................49
(U) No Defaults...........................................................................49
(V) Brokers...............................................................................49
(W) Business Locations; Agent for Process.................................................49
(X) Trade Relations.......................................................................49
(Y) Leases................................................................................50
(Z) Investment Company Act................................................................50
(AA) OSHA and Environment Compliance.......................................................50
(BB) Senior Indebtedness...................................................................50
(CC) Indebtedness..........................................................................50
(DD) True Copies of Charter and Other Documents............................................50
(EE) Certain Transactions..................................................................50
8.2. Reaffirmation..................................................................................50
8.3. Survival of Representations and Warranties.....................................................51
SECTION 9. COVENANTS AND CONTINUING AGREEMENTS...........................................................51
9.1. Affirmative Covenants.........................................................................51
(A) Taxes and Liens.......................................................................51
(B) Tax Returns...........................................................................51
(C) Payment of Bank Charges...............................................................51
(D) Business and Existence................................................................52
(E) Maintain Properties...................................................................52
(F) Compliance with Laws..................................................................52
(G) ERISA Compliance......................................................................52
(H) ERISA Events..........................................................................52
(I) Business Records......................................................................53
(J) Visits and Inspections................................................................53
(K) Financial Statements..................................................................53
(L) Notices to Lender.....................................................................54
(M) Landlord Agreements...................................................................55
(N) Subordinations........................................................................55
(O) Compliance Certificate................................................................55
(Q) Environmental Matters.................................................................55
(R) Further Assurances....................................................................58
(S) Conduct of Business...................................................................58
(T) Notice of Amendments to Certain Documents.............................................58
(T) Payment of Indebtedness for Money Borrowed............................................58
(U) Performance of Certain Obligations....................................................59
9.2. Negative Covenants.............................................................................59
(A) Mergers; Consolidations; Acquisitions.................................................59
(B) Loans.................................................................................59
(C) Indebtedness For Money Borrowed.......................................................60
(D) Affiliate Transactions................................................................60
(E) Partnerships or Joint Ventures........................................................60
(F) Adverse Transactions..................................................................60
iii
<PAGE>
(G) Guaranties............................................................................61
(H) Limitation on Liens...................................................................61
(I) Subordinated Debt.....................................................................61
(J) Distributions.........................................................................62
(K) Subsidiaries..........................................................................62
(L) Capital Expenditures..................................................................62
(M) Business Locations....................................................................62
(N) Change of Business....................................................................63
(N) Disposition of Assets.................................................................63
(P) Name of Borrower......................................................................63
(Q) Use of Lender's Name..................................................................63
(R) Margin Securities.....................................................................63
(S) Restricted Investment.................................................................64
(T) Fiscal Year...........................................................................64
(U) Stock of Subsidiary, Etc..............................................................64
(V) Tax Consolidation.....................................................................64
(W) ERISA.................................................................................64
(X) Other Agreements......................................................................64
SECTION 10. CONDITIONS PRECEDENT...........................................................................64
10.1. Documentation..................................................................................64
10.2. Other Conditions...............................................................................66
10.3. Conditions to Each Loan........................................................................67
(A) Representations and Warranties........................................................67
(B) No Default............................................................................68
SECTION 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT..............................................68
11.1. Events of Default..............................................................................68
(A) Payment of Loans......................................................................68
(B) Payment of Obligations................................................................68
(C) Misrepresentations....................................................................68
(D) Breach of Covenants...................................................................68
(F) Cancellation of Other Agreements......................................................68
(F) Insolvency, Etc.......................................................................69
(G) Bankruptcy Etc........................................................................69
(H) Other Defaults........................................................................69
(I) Uninsured Losses; Unauthorized Dispositions...........................................69
(J) Adverse Changes.......................................................................69
(K) Solvency..............................................................................69
(L) Business Disruption; Condemnation.....................................................70
(M) Change of Ownership...................................................................70
(N) ERISA.................................................................................70
(O) Litigation............................................................................70
(P) Criminal Forfeiture...................................................................70
(Q) Judgments.............................................................................70
iv
<PAGE>
11.2. Acceleration of the Obligations................................................................70
11.3. Remedies.......................................................................................71
11.4. Remedies Cumulative; No Waiver.................................................................71
SECTION 12. MISCELLANEOUS..................................................................................72
12.1. Power of Attorney..............................................................................72
12.2. Indemnity......................................................................................72
12.3. Modification of Agreement; Sale of Interest....................................................73
12.4. Reimbursement of Expenses......................................................................73
12.5. Indulgences Not Waivers........................................................................74
12.6. Severability...................................................................................74
12.7. Successors and Assigns.........................................................................74
12.8. Cumulative Effect; Conflict of Terms...........................................................74
12.9. Execution in Counterparts......................................................................74
12.10. Notice.........................................................................................75
12.11. Demand Obligations.............................................................................76
12.12. Entire Agreement...............................................................................76
12.13. Interpretation.................................................................................76
12.14. GOVERNING LAW; CONSENT TO FORUM................................................................76
12.15. WAIVER OF TRIAL BY JURY AND OTHER WAIVERS BY BORROWER..........................................77
SECTION 13 BORROWING AGENCY PROVISIONS....................................................................78
</TABLE>
v
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made this 5th day of May, 1998, by
and among FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation and
CFP HOLDINGS, INC. ("Holdings"), a Delaware corporation, CUSTOM FOOD PRODUCTS,
INC. ("Custom"), a California corporation and QF ACQUISITION CORP. (d/b/a
Quality Foods) ("Quality"), a Delaware corporation.
SECTION 1. GENERAL DEFINITIONS
1.1. Defined Terms. When used herein, the following terms shall have
the following meanings (terms defined in the singular to have the same meaning
when used in the plural and vice versa):
Accountants - Deloitte & Touche, LLP and/or any other firm of
independent certified public accountants of recognized national standing or
otherwise acceptable to Lender.
Accounts - with respect to any Borrower, all of such Borrower's
accounts, contract rights, chattel paper, instruments and documents, whether now
owned or hereafter created or acquired by such Borrower or in which such
Borrower now has or hereafter acquires any interest.
Account Debtor - any Person who is or may become obligated under or on
account of an Account.
Additional Equipment Loans - any Equipment Loan made by Lender to a
Borrower pursuant to Section 2.2(B) of this Agreement that is secured by all
Collateral.
Adjusted Net Earnings From Operations - with respect to any fiscal
period, means the net income after provision for income taxes for such fiscal
period of Holdings on a Consolidated basis, all as reflected on the Consolidated
financial statement of Holdings supplied to Lender pursuant to Section 7.1(K)
hereof, but excluding: (i) any gain or loss arising from the sale of capital
assets; (ii) any gain arising from any write-up of assets; (iii) earnings and
losses of any Subsidiary accrued prior to the date it became a Subsidiary; (iv)
earnings and losses of any corporation, substantially all the assets of which
have been acquired in any manner by any Borrower, realized by such corporation
prior to the date of such acquisition; (v) earnings and losses of any business
entity (other than a Subsidiary) in which any Borrower has an ownership interest
except to the extent such earnings shall have actually been received by any
Borrower in the form of cash distributions; (vi) any portion of the earnings and
losses of any Subsidiary which is subject to any restriction as to the payment
of dividends to any Borrower, but only to the extent of earnings subject to such
restrictions; (vii) the earnings and losses of any Person to which any assets of
any Borrower shall have been sold, transferred or disposed of, or into which any
Borrower shall have merged, or been a party to any consolidation or other form
of reorganization, prior to the date of such transaction; (viii) any gain or
loss arising from the acquisition of any Securities of any Borrower; and (ix)
any
<PAGE>
gain or loss arising from extraordinary or non-recurring items (except if
realized in respect of a previously recorded extraordinary or non-recurring
loss).
Affiliate - a Person (other than a Subsidiary): (i) which directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, a Borrower; (ii) which beneficially owns or holds
10% or more of any class of the Voting Stock of a Borrower; or (iii) 10% or more
of the Voting Stock (or in the case of a Person which is not a corporation, 10%
or more of the equity interest) of which is beneficially owned or held by a
Borrower or a Subsidiary of a Borrower. For purposes hereof, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of Voting Stock, by contract or otherwise.
Aggregate Adjusted Availability - at any date, an amount equal to (i)
the Borrowing Base minus (ii) the sum of (a) the aggregate unpaid balance of
Revolving Credit Loans plus (b) an amount equal to the excess of the aggregate
face amount of all outstanding Standby Letters of Credit over $6,000,000 plus
(c) an amount equal to 35% of the aggregate face amount of all outstanding
Commercial Letters of Credit plus (d) all sums due and owing by Borrowers to
their respective trade creditors which remain outstanding beyond normal business
practices.
Agreement - this Loan and Security Agreement.
Applicable Margin - with respect to Base Rate Loans and Eurodollar Rate
Loans, the percentages which, when added to or subtracted from the Base Rate or
Eurodollar Rate, as the case may be, comprises the Contract Rate and are
referenced in and are subject to adjustment as provided under Section 3.1
hereof.
Applicable Percentage - with respect to PMSI Equipment Loans, 80% and
with respect to Additional Equipment Loans, 85%.
Average Monthly Loan Balance - the amount obtained by adding (i) the
unpaid balance of Revolving Credit Loans, the Term Loan and the Equipment Loans
owing by Borrowers to Lender and (ii) the aggregate outstanding face amount of
Letters of Credit as at the end of each day for each day during the month in
question and by dividing such sum by the number of days in such month.
Bank - Fleet National Bank.
Base Rate - a variable rate of interest equal to the higher from time
to time of (A) the rate of interest announced publicly by Bank in Boston,
Massachusetts as its prime rate and (B) a rate equal to 1/2 of 1% per annum
above the weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by federal funds brokers, as
determined for any day by Bank.
Base Rate Loans - any Loans bearing interest computed by reference to
the Base Rate.
Borrower - any of Holdings, Custom or Quality, as the context requires;
Borrowers means collectively, Holdings, Custom and Quality.
2
<PAGE>
Borrowing Agent - Holdings.
Borrowing Base - as at any date of determination thereof, an amount
equal to the lesser of:
(i) the Maximum Revolving Amount; and
(ii) the aggregate sum of the Borrowers' Individual Borrowing
Bases.
Borrowing Base Certificate - a certificate, substantially in the form
of Exhibit 5.2 hereto, provided by Borrowers to Lender, showing the calculation,
semi-monthly (or more frequently, if requested by Lender in accordance with
Section 5.2 hereof) of each Individual Borrowing Base.
Business Day - with respect to Eurodollar Loans, any day on which
commercial banks are open for domestic and international business including
dealings in Dollar deposits in London, England and New York, New York and with
respect to all other Loans, any day excluding Saturday, Sunday and any day which
is a legal holiday under the laws of the State of New York or is a day on which
banking institutions located in such state are closed.
Capital Expenditures - expenditures made and liabilities incurred for
capital assets in accordance with GAAP but shall specifically exclude, in any
event, (i) to the extent otherwise permitted by the terms of this Agreement,
expenditures made with the proceeds received from any casualty insurance
policies, which proceeds are used to replace or repair lost, destroyed or
damaged assets, (ii) to the extent otherwise permitted by the terms of this
Agreement, expenditures made with the net proceeds derived from any sale or
other disposition of assets, which net proceeds are used to replace such assets,
(iii) payments on operating leases of fixed assets and (iv) expenditures made in
connection with Permitted Acquisitions.
Capitalized Lease Obligation - any Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
Cash Collateral Account - as defined in Section 2.9(C).
Cash Flow - with respect to Holdings on a Consolidated Basis for any
fiscal period, an amount equal to Adjusted Net Earnings from Operations, plus
depreciation and amortization, plus or minus non-cash losses or gains
respectively from fixed asset sales, plus non cash charges related to: changes
in GAAP, plus expenses related to effecting the refinancing of which this
Agreement is a part less the sum of, without duplication (i) non-financed
Capital Expenditures (ii) amortization of Standby Letters of Credit and (iii)
all scheduled principal payments made on any long term debt or capital leases.
CFP - CFP Group, Inc., a Delaware corporation.
3
<PAGE>
Closing Date - the date on which all of the conditions precedent in
Section 10 are satisfied and the initial Loan or Letter of Credit issued is made
hereunder.
Closing Reserve - $5,000,000.
Code - the Uniform Commercial Code as adopted and in force in the State
of New York, as from time to time in effect.
Collateral - all of the Property described in Section 4 hereof, and all
other Property that now or hereafter secures the payment and performance of any
of the Obligations.
Commercial Letters of Credit - Letters of Credit issued for the account
of any Borrower which serve as security for the payment by a Borrower of
obligations incurred in connection with the purchase of Inventory or Equipment.
Consent Reserve - $3,664,390 provided, that such reserve shall be
reduced (i) $305,973 upon receipt by Lender of (a) a consent agreement
substantially in the form annexed hereto as Exhibit 1.1(A)(1) executed by
Quality and MELF and (b) an executed copy of the MELF Intercreditor Agreement
and (ii) $3,358,417 upon receipt by Lender of (a) a consent agreement
substantially in the form annexed hereto as Exhibits 1.1(B)(1) and 1.1(B)(2)
executed by PIDC, PIDA and Quality, (b) a first priority Mortgage in the
principal amount of $3,989,183 and a fourth priority Mortgage to secure all
Obligations (other than the PMSI Equipment Loans), each on the Real Property
located at 5501 Tabor Road, Philadelphia, Pennsylvania in form and substance
satisfactory to Lender, (c) the title insurance policies more fully described in
Section 10.2(H) hereof, (d) a current survey of the Real Property in form and
substance satisfactory to Lender and (e) the opinion of counsel of McCausland,
Keen & Buckman in form and substance satisfactory to Lender.
Consolidated - the consolidation in accordance with GAAP of the
accounts or other items as to which such term applies.
Contingent Reserves - such sums as Lender may, from time to time,
establish as a reserve in accordance with the provisions of Section 2.1(A) of
this Agreement including, without limitation, the Closing Reserve, the Consent
Reserve and the Term Loan Reserve.
Contract Rate - an interest rate per annum equal to the (i) sum of the
Base Rate plus the Applicable Margin with respect to Base Rate Loans and (ii)
sum of the Eurodollar Rate plus the Applicable Margin with respect to Eurodollar
Rate Loans.
Contract Year - the twelve month period beginning on the Closing Date
and on the anniversary of the Closing Date in any year.
Controlled Group - shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with any Borrower, are treated as a single
employer under Sections 414(b) or (c) of the IRC.
4
<PAGE>
Current Assets - at any date means the aggregate amount at which all of
the current assets of a Person would be properly classified as current assets on
a balance sheet at such date in accordance with GAAP except that amounts due
from Affiliates and investments in Affiliates shall be excluded therefrom.
Current Liabilities - at any date means the amount at which all of the
current liabilities of a Person would be properly classified as current
liabilities on a balance sheet at such date in accordance with GAAP (excluding
the Loans and current maturities of long-term Indebtedness), plus any insurance
claims accruals which are not so classified under GAAP.
Custom - Custom Food Products, Inc., a California corporation.
Default - an event or condition the occurrence of which would, with the
lapse of time or the giving of notice, or both, become an Event of Default.
Default Rate - as defined in Section 3.1(C) of this Agreement.
Distribution - in respect of any corporation means: (i) the payment of
any dividends or other distributions on capital stock of the corporation (except
distributions in any class of capital stock), (ii) the redemption or acquisition
of capital stock or Subordinated Debt unless made contemporaneously from the net
proceeds of (x) the sale of capital stock or (y) Subordinated Debt and (iii) any
payment on any Subordinated Repurchase Note.
Dollars - and the sign "$" shall mean lawful money of the United States
of America.
Dominion Account - a special account of Lender established by each
Borrower or any of its Subsidiaries pursuant to this Agreement at a bank
selected by each Borrower, but acceptable to Lender, in its commercially
reasonable discretion, and over which Lender shall have sole and exclusive
access and control for withdrawal purposes.
EBITDA - for any fiscal period, the sum of Adjusted Net Earnings from
Operations before Interest Expense, taxes, depreciation and amortization for
said period with respect to Holdings on a Consolidated basis as determined in
accordance with GAAP.
Eligible Account - an Account arising in the ordinary course of a
Borrower's business from the sale of goods or rendition of services which
Lender, in its commercially reasonable judgment, deems to be an Eligible
Account. Without limiting the generality of the foregoing, no Account shall be
an Eligible Account if: (i) it arises out of a sale made by a Borrower to a
Subsidiary or an Affiliate of any Borrower or to a Person controlled by an
Affiliate of any Borrower or any of its Subsidiaries; or (ii) it is unpaid more
than (a) seventy five (75) days after the invoice date with respect to Accounts
of Custom or (b) seventy five (75) days after the invoice date with respect to
Accounts of Quality provided, that such Accounts are reported to Lender in a
manner satisfactory in all respects to Lender; or (iii) fifty percent (50%) or
more of the Accounts from the Account Debtor are deemed not to be Eligible
Accounts hereunder because of the provisions of clause (ii) of this definition;
or (iv) the total unpaid Accounts of the Account Debtor exceeds twenty five
percent (25%) of the net amount of all Accounts, to the extent of such excess;
or (v) any covenant,
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representation or warranty contained in this Agreement with respect to such
Account has been breached in any material respect; or (vi) the Account Debtor
has disputed liability with respect to such Account, or has made any claim with
respect to any other Account due from such Account Debtor to any Borrower, or
the Account otherwise is subject to any right of setoff by the Account Debtor,
to the extent of any offset, dispute or claim; or (vii) the Account Debtor has
commenced a voluntary case under the federal bankruptcy laws, as now constituted
or hereafter amended, or made an assignment for the benefit of creditors, or a
decree or order for relief has been entered by a court having jurisdiction in
respect of the Account Debtor in an involuntary case under the federal
bankruptcy laws, as now constituted or hereafter amended, or any other petition
or other application for relief under the federal bankruptcy laws has been filed
against the Account Debtor, or if the Account Debtor has terminated its business
as a going concern, ceased to be Solvent, or consented to or suffered a
receiver, trustee, liquidator or custodian to be appointed for it or for all or
a significant portion of its assets or affairs; or (viii) it arises from a sale
to an Account Debtor outside the United States of America, Canada or such other
jurisdictions as to which Lender has consented in writing, unless the sale is on
letter of credit, guaranty or acceptance terms, in each case acceptable to
Lender in its commercially reasonable credit judgment; or (ix) it arises from a
sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return,
sale-on-approval, consignment or any other repurchase or return basis; or (x)
Lender concludes, upon the exercise of its commercially reasonable credit
judgment, that collection of such Account is insecure or that payment thereof is
doubtful or will be delayed seventy-five (75) days beyond the invoice date by
reason of the Account Debtor's financial condition; or (xi) the Account Debtor
is the United States of America or any department, agency or instrumentality
thereof, unless such Borrower assigns its right to payment of such Account to
Lender, in form and substance satisfactory to Lender, so as to comply with the
Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et seq.
and 41 U.S.C. Section 15); or (xii) the Account Debtor is located in either the
State of New Jersey, the State of Minnesota or the State of Indiana, unless such
Borrower has qualified as a foreign corporation in such state or filed a Notice
of Business Activities Report with the appropriate officials in such state for
the then current year; or (xiii) the Account is subject to a Lien other than a
Permitted Lien; or (xiv) the goods giving rise to such Account have not been
delivered to and accepted by the Account Debtor or the services giving rise to
such Account have not been performed by a Borrower and accepted by the Account
Debtor or the Account otherwise does not represent a final sale; or (xv) the
Account is evidenced by chattel paper or an instrument of any kind unless such
chattel paper or instrument shall have been pledged and delivered to Lender, or
has been reduced to judgment; or (xvi) any Borrower has made any agreement with
the Account Debtor for any deduction therefrom, except for discounts or
allowances which are reflected in the calculation of the face amount of each
invoice related to such Account; or (xvii) any Borrower has made an agreement
with the Account Debtor to extend the time of payment thereof (a) seventy-five
(75) days beyond the invoice date with respect to Accounts of Custom or (b)
sixty (60) days beyond the invoice date with respect to Accounts of Quality; or
(xviii) the Account arises from a retail sale of goods to a Person who is
purchasing same primarily for personal, family or household purposes.
Eligible Inventory - such Inventory of each Borrower (other than
packaging materials and supplies) which Lender, in the exercise of its
commercially reasonable credit judgment, deems to be Eligible Inventory. Without
limiting the generality of the foregoing, no Inventory shall be Eligible
Inventory unless, in Lender's commercially reasonable credit judgment, it (i) is
raw materials, work-in-process, Mold-State Inventory or finished goods, (ii)
with respect to Inventory other than Mold-
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State Inventory is in good, new and saleable condition, (iii) with respect to
Inventory other than Mold-State Inventory is not obsolete or unmerchantable,
(iv) in all material respects meets all standards imposed by any governmental
agency or authority, (v) conforms in all material respects to the warranties and
representations set forth in Section 6.1 hereof, (vi) is at all times subject to
Lender's duly perfected, first priority security interest and no other Lien
except a Permitted Lien and (vii) is situated at a location in compliance with
Section 4.6 hereof and is not in transit except for Eligible In Transit
Inventory.
Eligible In Transit Inventory - Eligible Inventory at any time having
an aggregate value not in excess of $2,500,000 and as to which any Borrower
shall have taken title but not possession but shall be entitled to receive
possession thereof upon payment of the purchase price attributable to the
specific goods.
Environmental Laws - all federal, state and local laws, rules,
regulations, ordinances, programs, permits, guidances, orders and consent
decrees relating to health, safety and environmental matters, as amended
including, but not limited to, the Resource Conservation and Recovery Act
("RCRA") ; the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"); the Toxic Substances Control Act, as amended; the Clean
Water Act; the River and Harbor Act; the Water Pollution Control Act; the Marine
Protection Research and Sanctuaries Act; the Deep-Water Act; the Superfund
Amendments and Reauthorization Act of 1986; the Federal Insecticide, Fungicide
and Rodenticide Act; the Mineral Lands and Leasing Act; the Surface Mining
Control and Reclamation Act; state and federal superlien and environmental
cleanup programs and laws; and U.S. Department of Transportation regulations.
Equipment - with respect to any Borrower, all of such Borrower's
machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles
and other tangible personal Property (other than Inventory) of every kind and
description used in the operations of such Borrower or owned by such Borrower or
in which such Borrower has an interest, whether now owned or hereafter acquired
by such Borrower and wherever located, and all parts, accessories and special
tools and all increases and accessions thereto and substitutions and
replacements therefor.
Equipment Loans - as defined in Section 2.2(B) of this Agreement.
Equipment Note - the secured promissory notes to be executed by
Borrowers on or about the Closing Date in favor of Lender to evidence the PMSI
Equipment Loans and the Additional Equipment Loans, which shall be in the form
of Exhibit 2.2(b) attached hereto.
Equity Event - the receipt of cash proceeds by Holdings or CFP
resulting from an initial public offering of the capital stock of Holdings or
CFP.
ERISA - the Employee Retirement Income Security Act of 1974, as
amended, and all rules and regulations from time to time promulgated thereunder.
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ERISA Affiliate - each trade or business (whether or not incorporated)
which, together with any Borrower, would be treated as a single employer under
Section 4001(a)(14) of ERISA or IRC Section 414(b), (c), (m), (n) or (o), as
applicable.
Eurodollar Loan - any Loan bearing interest computed by reference to
the Eurodollar Rate.
Eurodollar Rate - for any Eurodollar Loan, for the then current
Interest Period relating thereto, the rate per annum (such Eurodollar Rate to be
rounded, if necessary, to the next higher 1/16 of one (1%) percent) equal to the
quotient of (a) LIBOR, divided by (b) a number equal to 1.00 minus the aggregate
of the rates (expressed as a decimal) of reserve requirements current on the day
that is two Business Days prior to the beginning of the Interest Period
(including without limitation basic, supplemental, marginal and emergency
reserves) under any regulation promulgated by the Board of Governors of the
Federal Reserve System (or any other governmental authority having jurisdiction
over the Bank) as in effect from time to time, dealing with reserve requirements
prescribed for Eurocurrency funding including any reserve requirements with
respect to "Eurocurrency liabilities" under Regulation D of the Board of
Governors of the Federal Reserve System.
Event of Default - as defined in Section 11.1 of this Agreement.
Expiration Date - the last day of the Original Term or, if this
Agreement shall have been renewed pursuant to Section 3.2, the last day of the
Final Renewal Term.
Fiscal Year - shall mean a 52 week accounting period commencing on the
first day after the last Saturday in March in each year.
Fixed Charge Coverage - for Holdings on a Consolidated Basis, for any
period, the ratio of (x) EBITDA for such period to (y) the sum of (i) Interest
Expense actually paid in cash for such period plus (ii) non-financed Capital
Expenditures made during such period plus (iii) scheduled principal payments on
all Indebtedness for Money Borrowed (other than Current Liabilities) for such
period plus (iv) taxes accrued and/or paid during such period.
GAAP - generally accepted accounting principles in the United States of
America in effect from time to time.
General Intangibles - with respect to any Borrower, all of such
Borrower's general intangibles, whether now owned or hereafter created or
acquired by such Borrower, including, without limitation, all choses in action,
causes of action, corporate or other business records, deposit accounts,
inventions, designs, patents, patent applications, trademarks, trade names,
trade secrets, goodwill, copyrights, registrations, licenses, franchises,
customer lists, tax refund claims, computer programs, all claims under
guaranties, security interests or other security held by or granted to such
Borrower to secure payment of any of the Accounts by an Account Debtor, all
rights to indemnification and all other intangible property of every kind and
nature (other than Accounts).
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Guarantors - Any hereafter created Subsidiary or other Affiliate of any
Borrower or other Person who may hereafter guarantee payment or performance of
the whole or any part of the Obligations.
Guaranty Agreement - the continuing Guaranty which is to be executed by
each Guarantor in form and substance satisfactory to Lender.
Guarantor Security Agreement - the agreement which is to be entered
into by each Guarantor pursuant to which Lender is granted a security interest
in each Guarantor's property as Collateral for the Obligations.
Hazardous Discharge - as defined in Section 9.1(O) hereof.
Hazardous Substance - any flammable explosives, radon, radioactive
materials, asbestos, urea formaldehyde foam insulation, polychorinated
byphenyls, petroleum and petroleum products, methane, hazardous materials,
hazardous wastes, hazardous or toxic substances as defined in CERCLA, the
Hazardous Materials Transportation Act, as amended, RCRA or any other applicable
Environmental Law and in the regulations adopted pursuant thereto.
Hazardous Wastes - all hazardous waste materials regulated under
Environmental Laws now in force or hereafter enacted relating to hazardous waste
disposal.
Holdings - CFP Holdings, Inc., a Delaware corporation.
Indebtedness - as applied to a Person means, without duplication (i)
all items which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of such Person as
at the date as of which Indebtedness is to be determined, including, without
limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons
which such Person has guaranteed and (iii) in the case of Borrowers (without
duplication), the Obligations.
Indenture - Indenture dated as of January 28, 1997 among Holdings, as
Issuer, Custom, Quality and CFP, as guarantors, and United States Trust Company
of New York, as Trustee with respect to the Senior Guaranteed Notes.
Individual Borrowing Base - as at any date of determination thereof,
with respect to each Borrower an amount equal to:
(i) eighty-five percent (85%) of the net amount
of such Borrower's Eligible Accounts
outstanding at such date;
PLUS
(ii) sixty five percent (65%) of the value of
such Borrower's Eligible Inventory at such
date calculated on the basis of the lower of
cost or
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<PAGE>
market with the cost of raw materials
and finished goods calculated on a first-in,
first-out basis
MINUS
(iii) an amount equal to the sum of (A) the
difference between (x) the aggregate face amount of all
outstanding Standby Letters of Credit issued on behalf of such
Borrower and (y) $6,000,000, plus (B) thirty five percent
(35%) of the face amount of all Commercial Letters of Credit
issued on behalf of such Borrower plus (C) any amounts which
Lender may have paid pursuant to any of the Loan Documents for
the account of such Borrower such to the extent not treated as
Revolving Credit Loans hereunder plus (D) Contingent Reserves.
For purposes hereof, (a) the net amount of Eligible Accounts at such
time shall be (i) the face amount of such Eligible Accounts less (ii) to the
extent not otherwise deducted, any and all returns, discounts, credits,
allowances or excise taxes of any nature at any time issued, owing, claimed by
Account Debtors, granted, outstanding or payable in connection with such
Accounts at such time, and the net amount of any Eligible Account for which a
check or other payment instrument shall have been received but collected funds
shall not have been received by such Borrower shall be included notwithstanding
that the books of such Borrower shall show such Eligible Account as having been
paid.
Interest Expense - for any period, the interest expense of Borrowers on
a Consolidated basis during such period determined in accordance with GAAP
consistently applied, and shall in any event include, without limitation,
interest on Capitalized Lease Obligations and shall exclude (i) original issue
discount amortization to the extent it is required to be included in accordance
with GAAP, and (ii) amortization of deferred financing costs.
Interest Period - the period provided for any Eurodollar Loan pursuant
to Section 2.4.
Inventory - with respect to any Borrower, all of such Borrower's
inventory, whether now owned or hereafter acquired by such Borrower, including,
but not limited to, all goods intended for sale or lease by such Borrower, or
for display or demonstration; all work in process; all raw materials and other
materials and supplies of every nature and description used or which might be
used in connection with the manufacture, printing, packing, shipping,
advertising, selling, leasing or furnishing of such goods or otherwise used or
consumed in such Borrower's business; and all documents evidencing and General
Intangibles relating to any of the foregoing, whether now owned or hereafter
acquired by such Borrower.
Investment Property - all of each Borrower's now owned or hereafter
acquired securities (whether certificated or uncertificated), securities
entitlements, securities accounts, commodities accounts and commodities
contracts.
IRC - shall mean the Internal Revenue Code of 1986, as amended from
time to time, together with the regulations promulgated thereunder.
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<PAGE>
Issuing Bank - as defined in Section 2.7(D) hereof.
Lending Office - the lending office of Lender.
Letter of Credit - a Commercial Letter of Credit or a Standby Letter of
Credit.
LIBOR - for any Eurodollar Loan for the then current Interest Period,
the rate of interest equal to the average (rounded upwards, if necessary, to the
nearest 1/16 of 1%) of the rates per annum at which Dollar deposits in
immediately available funds are offered to the Bank in the London interbank
eurodollar market as at or about 11:00 a.m. (London time) two (2) Business Days
prior to the beginning of the applicable Interest Period, for delivery on the
first day of such Interest Period, and in an amount approximately equal to the
amount of such Eurodollar Loan for a period approximately equal to such Interest
Period.
Lien - any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including, but not limited
to, the security interest, security title or lien arising from a security
agreement, mortgage, deed of trust, deed to secure debt, encumbrance, pledge,
conditional sale or trust receipt or a lease (other than operating leases under
which such Person is the lessee), consignment or bailment for security purposes.
The term "Lien" shall include reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions, leases and other
title exceptions and encumbrances affecting Property. For the purpose of this
Agreement, each Borrower shall be deemed to be the owner of any Property which
it has acquired or holds subject to a conditional sale agreement or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person for security purposes.
Loan Account - the loan account established on the books of Lender
pursuant to Section 2.6 hereof with respect to each Borrower.
Loan Documents - this Agreement and the Other Agreements.
Loans - all loans and advances made by Lender pursuant to this
Agreement, including, without limitation, all Revolving Credit Loans, the Term
Loan, the Equipment Loans and the Letters of Credit.
Management Agreement - The Management Consulting Agreement dated as of
December 30, 1996, as amended through the date hereof, between First Atlantic
Capital, Ltd. and Holdings.
Material Adverse Effect - (a) with respect to any Person and relative
to any event or occurrence of whatever nature (including, without limitation,
any adverse determination in any litigation, arbitration or governmental
proceeding), a material adverse effect on (i) the financial condition,
operations, business, revenues, assets or Properties of such Person and its
Subsidiaries taken as a whole or (ii) the ability of such Person to timely and
fully perform any of its payment or other material Obligations under this
Agreement or any other Loan Document to which it is a party, and (b) with
respect to any material Collateral and relative to any condition, event or
occurrence of
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<PAGE>
whatever nature, a material adverse effect (in the context of such Person and
its Subsidiaries taken as a whole) on (i) the value thereof or (ii) any
Borrower's rights to or interest therein (for the benefit of the Lender).
Maximum Revolving Credit Amount - an amount at any time equal to (a)
Forty Million Dollars ($40,000,000) minus (b) the sum of (i) the aggregate face
amount of all Letters of Credit at such time and (ii) the outstanding principal
balance of the Term Loan and the Equipment Loans at such time.
MELF - the Commonwealth of Pennsylvania, acting through the Department
of Commerce Machinery and Equipment Loan Fund.
MELF Intercreditor Agreement - the Intercreditor Agreement to be
executed and delivered by Lender and MELF substantially in the form annexed
hereto as Exhibit 1.1(C), as such agreement may be amended, supplemented or
otherwise modified from time to time.
MELF Loans - the $500,000 loan made by MELF to Quality under and
pursuant to the terms of a loan agreement dated as of March 21, 1996 between
MELF and Quality.
Mold-State Inventory - Inventory of Quality consisting of raw uncooked
meat molded and frozen awaiting tempering and slicing.
Money Borrowed - as applied to Indebtedness, means (without
duplication), with respect to each Borrower, (i) Indebtedness for borrowed
money; (ii) Indebtedness, whether or not in any such case the same was for
borrowed money, (A) which is represented by notes payable or drafts accepted
that evidence extensions of credit (other than accounts payable), (B) which
constitutes obligations (other than accounts payable) evidenced by bonds,
debentures, notes or similar instruments, or (C) upon which interest charges are
customarily paid or that was issued or assumed as full or partial payment for
Property (in each case other than accounts payable); (iii) Indebtedness that
constitutes a Capitalized Lease Obligation; and (iv) Indebtedness under any
guaranty of obligations that would constitute Indebtedness for Money Borrowed
under clauses (i) through (iii) hereof.
Mortgage - each mortgage or deed of trust to be executed by any
Borrower on or about the Closing Date in favor of Lender and by which such
Borrower shall grant and convey to Lender, as security for the Obligations, a
Lien upon the Real Property of the applicable Borrower located at the locations
set forth on Exhibit 4.2 attached hereto.
Multiemployer Plan - a plan described in Sections 3(37) and Section
4001(a)(3) of ERISA which covers employees of any Borrower or any ERISA
Affiliate.
Net Proceeds - with respect to any sale of Equipment or Real Property
or any condemnation or insurance recovery (i) the aggregate cash proceeds
received by any Borrower in respect thereof, less (ii) the direct costs relating
thereto (including without limitation, legal, accounting and investment banking
fees, and sales commissions) and any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking into account
any available tax credits
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<PAGE>
or deductions any tax sharing arrangements), amounts required to be applied to
the repayment of indebtedness senior to, or on a parity with, Lender secured by
a lien on the asset or assets the subject thereof and any reserve for
indemnification or adjustment in respect of the sale price of such asset or
assets.
Notes - the Revolving Credit Note, the Term Note and the Equipment Note
and all amendments, modifications, substitutions and replacements thereof.
Obligations - all Loans and all other advances, debts, liabilities,
obligations, covenants and duties owing, arising, due or payable from any
Borrower to Lender of any kind or nature, present or future, including, without
limitation, liabilities with respect to Letters of Credit, whether or not
evidenced by any note, guaranty or other instrument, whether arising under this
Agreement or any of the Other Agreements or otherwise, whether direct or
indirect (including those acquired by assignment), absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter arising
and however acquired. The term includes, without limitation, all interest,
charges, expenses, fees, attorney's fees and any other sums chargeable to any
Borrower or any Guarantor under any of the Loan Documents.
Original Term - as defined in Section 3.2 of this Agreement.
OSHA - the Occupational Safety and Health Act, and all rules and
regulations from time to time promulgated thereunder.
Other Agreements - any and all agreements, instruments and documents
(other than this Agreement), heretofore, now or hereafter executed by any
Borrower or any Guarantor and delivered to Lender for its benefit in respect to
the transactions with Lender contemplated by this Agreement, including, without
limitation, the Notes, the Guaranty Agreements, the Guarantor Security Agreement
and the Pledge Agreements.
Overadvance - as defined in Section 2.1(B).
PBGC - the Pension Benefit Guaranty Corporation or any successor
agency.
Participating Lender - each Person who shall be granted the right by
Lender to participate in any of the Loans in accordance with Section 12.3 of
this Agreement and who shall have entered into a participation agreement in form
and substance satisfactory to Lender.
PEDFA - the Pennsylvania Economic Development Financing Authority, a
public instrumentality and body corporate and politic of the Commonwealth of
Pennsylvania.
PEDFA Obligations - the indebtedness evidenced by the Taxable
Development Revenue Bonds, 1995 Series D issued by PEDFA on December 27, 1995 in
the original aggregate principal sum of $4,400,000.
Permitted Acquisitions - as defined in Section 9.2(A) hereof.
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<PAGE>
Permitted Liens - any Lien of a kind specified in subparagraphs (i)
through (x) of Section 9.2(H) of this Agreement.
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of
Borrowers (other than PMSI Equipment Loans) incurred in any Fiscal Year which is
secured by a Purchase Money Lien and the principal amount of which, when
aggregated with the principal amount of all other Purchase Money Indebtedness
and Capitalized Lease Obligations of Borrowers incurred in such Fiscal Year,
does not exceed an amount equal to $5,000,000. For the purposes of this
definition, the principal amount of any Purchase Money Indebtedness consisting
of capitalized leases shall be computed as a Capitalized Lease Obligation only
to the extent that (a) the leased property does not constitute accessories,
attachments or additions to Equipment, (b) the leased property in identifiable
sufficiently to distinguish it from other Equipment and (c) any such capital
lease does not impair the then operational or liquidation value of all other
Equipment.
Permitted Purchase Money Lien - a Purchase Money Lien upon tangible
fixed assets provided that (a) such tangible fixed assets do not constitute
accessories, attachments or additions to other Collateral, (b) such tangible
fixed assets are identifiable sufficiently to distinguish them from the
Collateral and (c) any such Purchase Money Lien on tangible fixed assets do not
impair the then operational or liquidation value of the Collateral.
Permitted Refinancing - Refinancing Indebtedness if (a) the principal
amount of such Refinancing Indebtedness does not exceed the principal amount of
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of premiums and reasonable expenses incurred in connection
therewith); (b) such Refinancing Indebtedness has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (c) if such Indebtedness is subordinated, such Refinancing
Indebtedness is subordinated in right of payment to the Obligations on terms at
least as favorable to the Lender as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
Person - an individual, partnership, corporation, joint stock company,
trust or unincorporated organization, or a government or agency or political
subdivision thereof.
PIDA - Pennsylvania Industrial Development Authority.
PIDA Loan - the loans in the original aggregate principal amount of
$1,750,000 made by PIDA to PIDC on March 27, 1997, which loans are secured by
the PIDA Mortgage.
PIDA Mortgage - the mortgage on the Real Property located at 5501 Tabor
Road, Philadelphia, Pennsylvania 19120 dated as of March 27, 1997 issued by PIDC
to PIDA.
PIDC - Pennsylvania Industrial Development Corporation.
PIDC Loan - loans in the original aggregate principal amount of
$1,750,000 made by PIDC to Quality on May 25, 1995, which loans are secured by
the PIDC Mortgage.
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<PAGE>
PIDC Mortgage - the Open-End Mortgage and Security Agreement dated as
of May 25, 1995 made by Quality to PIDC.
Plan - any employee benefit plan within the meaning of Section 3(3) of
ERISA, maintained by any Borrower or any member of the Controlled Group or any
such employee benefit plan to which any Borrower or any member of the Controlled
Group is required to contribute on behalf of any of its employees.
Pledge Agreements - collectively, the Pledge Agreements dated the
Closing Date and executed and delivered to Lender by (i) Group with respect to
the stock of Holdings and (ii) Holdings with respect to the stock of Quality and
Custom.
PMSI Equipment Loans - any Equipment Loan made by Lender to Borrower
pursuant to Section 2.2(B) of this Agreement that is secured solely by the
Equipment being purchased with such Equipment Loan.
Prior Lenders - NationsBanc Capital Markets, Inc., NationsBank, N.A.,
NationsBank of Texas, N.A. and Fleet National Bank.
Pro Forma EBITDA - pro forma earnings before interest, taxes,
depreciation and amortization of the business or entity to be acquired
determined in accordance with GAAP. For purposes of this definition all expenses
which could reasonably be expected not to recur after the closing of each
applicable Acquisition shall be excluded from the calculation of Pro Forma
EBITDA.
Prohibited Transaction - shall mean any transaction described in
Section 406 of ERISA which is not exempt by reason of Section 408 or ERISA, and
any transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Sections 4975(c)(2) or (d) of the IRC, and which could result in any
excise tax, fine, penalty or other liability being imposed on any Borrower.
Projections - Borrowers' forecasted Consolidated (a) balance sheets,
(b) profit and loss statements, (c) cash flow statements, and (d) capitalization
statements, all prepared on a consistent basis with Borrowers' historical
financial statements, together with appropriate supporting details and a
statement of underlying assumptions.
Property - any interest in any kind of property or asset, whether real,
personal or mixed, or tangible or intangible.
Purchase Money Indebtedness - means (i) Indebtedness for the payment of
all or any part of the purchase price of any fixed assets, (ii) any Indebtedness
(other than the Obligations) incurred at the time of or within one hundred
eighty (180) days prior to or after the acquisition of any fixed assets for the
purpose of financing all or any part of the purchase price thereof, and (iii)
any renewals, replacements, refundings, modifications, extensions or
refinancings thereof, but not any increases in the principal amounts thereof
outstanding at the time except in the amount of any premiums and reasonable
expenses incurred in connection therewith. Purchase Money Indebtedness shall not
include any obligation or liability of any Borrower under any operating lease.
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Purchase Money Lien - a Lien upon fixed assets which secure Purchase
Money Indebtedness, but only if such Lien shall at all times be confined solely
to the fixed assets the purchase price of which was financed (including any
renewals, replacements, refundings, modifications, extensions or refinancings
thereof) through the incurrence of the Purchase Money and other fixed assets
provided by the same financing source.
Quality - QF Acquisition Corp. (d/b/a Quality Foods), a Delaware
corporation.
Refinancing Indebtedness - Indebtedness issued in exchange for, or the
proceeds of which are used for, extending, renewing, replacing, defeasing or
refunding outstanding Indebtedness of Borrowers.
Real Property - all of Quality's right, title and interest in and to
the real property listed on Exhibit 4.2 hereto and any and all other real
property or leasehold interests which any Borrower may hereafter acquire.
Renewal Terms - as defined in Section 3.2 of this Agreement.
Reportable Event - any of the events set forth in Section 4043 of ERISA
or the regulations promulgated thereunder.
Restricted Investment - any investment in cash or by delivery of
Property to any Person, whether by acquisition of stock, Indebtedness or other
obligation or Security, or by loan, advance or capital contribution, or
otherwise, or in any Property except the following: (i) investments in any
Borrower by Holdings or in one or more Subsidiaries of any Borrower; (ii)
Property to be used in the conduct of its business; (iii) Current Assets arising
from the sale of goods and services in the ordinary course of business of any
Borrower; (iv) investments in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the United States of
America, provided that such obligations mature within one year from the date of
acquisition thereof; (v) investments in certificates of deposit maturing within
one year from the date of acquisition issued by a bank or trust company
organized under the laws of the United States or any state thereof having
capital surplus and undivided profits aggregating at least $100,000,000 or
liquid investment on other deposit accounts with such institutions; (vi)
investments in commercial paper rated A-1/P-1 by a national credit rating agency
and maturing not more than two hundred seventy (270) days from the date of
creation thereof; (vii) investments incurred in connection with Permitted
Acquisitions or as permitted by Section 9.2(E) of this Agreement; (viii) loans
and advances permitted by Section 9.2(B) hereof; and (ix) other investments in
an aggregate amount at any time not exceeding $1,000,000.
Revolving Credit Loan - a Loan made by Lender as provided in Section
2.1 of this Agreement.
Revolving Credit Note - the secured promissory note to be executed by
Borrowers on or about the Closing Date in favor of Lender to evidence the
Revolving Credit Loans, which shall be in the form of Exhibit 2.1 attached
hereto.
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Security - shall have the same meaning as in Section 2(l) of the
Securities Act of 1933, as amended.
Senior Guaranteed Notes - Holdings' 11 5/8% senior guaranteed notes due
2004 in the original aggregate principal amount of $115,000,000 dated January
28, 1997 issued pursuant to, and governed by, the Indenture.
Solvent - as to any Person, such Person (i) owns Property whose fair
saleable value is greater than the amount required to pay the probable liability
of such Person on all of such Person's Indebtedness (including contingent
debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures
and (iii) has capital that is not unreasonably small to carry on its business
and transactions and all business and transactions in which it is about to
engage.
Standby Letters of Credit - Letters of Credit issued for the account of
any Borrower which serve as security for the performance or payment by any
Borrower of its obligations, except obligations incurred in connection with the
purchase of Inventory or Equipment and shall include, without limitation, the
Letter of Credit in the face amount of $1,610,000 issued on the Closing Date to
MationsBank of Texas, N.A.
Stockholders Agreement - the Stockholders Agreement dated December 30,
1996 between CFP and certain of its stockholders.
Subordinated Debt - Indebtedness of any Borrower that is expressly
subordinated to the Obligations on terms and conditions satisfactory to Lender
in all respects.
Subordinated Repurchase Notes - any notes issued by a Borrower to
repurchase equity held by management pursuant to the Stockholders Agreement
which notes shall be on terms and conditions satisfactory to Lender including,
without limitation, having a term not greater than three (3) years and shall
provide for the issuance of notes in payment of all interest accruing thereon.
Subsidiary - any corporation of which a Person owns, directly or
indirectly through one or more intermediaries, more than 50% of the Voting Stock
at the time of determination.
Term - the period comprising the Original Term and all Renewal Terms.
Term Loan - as defined in Section 2.2(A) of this Agreement.
Term Loan Reserve -$1,400,000 for each Fiscal Year (on a cumulative
basis) that EBITDA on any date below is less than the amount set forth opposite
the applicable date with respect to the four (4) fiscal quarters then ended:
Fiscal Quarter Ending Minimum EBITDA
--------------------- --------------
March 31, 1999 $16,500,000
June 30, 1999 $16,500,000
September 30, 1999 $16,500,000
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Fiscal Quarter Ending Minimum EBITDA
--------------------- --------------
December 31, 2000 $17,500,000
March 31, 2000 $17,500,000
June 30, 2000 $17,500,000
September 30, 2000 $17,500,000
December 31, 2000 $17,500,000
March 31, 2001 $18,000,000
June 30, 2001 $18,000,000
September 30, 2001 $18,000,000
December 31, 2001 $18,000,000
March 31, 2002 and at the end of $19,000,000
each fiscal quarter thereafter
Term Note - the secured promissory notes to be executed by Borrowers on
or about the Closing Date in favor of Lender to evidence the Term Loan, which
shall be in the form of Exhibit 2.2(a) attached hereto.
Termination Amount - Average Monthly Loan Balance determined for the
twelve month period ending on the date of termination or, if such period is
shorter than twelve months, for the period from the Closing Date through the
date of termination.
Voting Stock - Securities of any class or classes of a corporation the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
1.2. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP consistent with that applied
in preparation of the financial statements referred to in Section 9.1(K), and
all financial data pursuant to the Agreement shall be prepared in accordance
with such principles.
1.3. Other Terms. All other terms contained in this Agreement shall
have, when the context so indicates, the meanings provided for by the Code to
the extent the same are used or defined therein.
1.4. Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not affect the
interpretation of this Agreement. All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations. All references to any instruments or agreements, including, without
limitation, references to any of the Loan Documents shall include any and all
modifications or amendments thereto and any and all extensions or renewals
thereof.
SECTION 2. CREDIT FACILITY
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Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make a total credit facility of up to FORTY MILLION
DOLLARS ($40,000,000) available upon Borrowing Agent's request therefor, as
follows:
2.1. Revolving Credit Loans.
(A) Subject to all of the terms and conditions of this
Agreement, Lender agrees, to make Revolving Credit Loans to each Borrower from
time to time, as requested by Borrowing Agent on behalf of any Borrower in
accordance with the terms of Section 2.3 hereof, up to a maximum principal
amount at any time outstanding equal to the lesser of (a) such Borrower's
Individual Borrowing Base or (b) the lesser of (i) the Maximum Revolving Credit
Amount or (ii) the Borrowing Base at such time. It is expressly understood and
agreed that Lender may use the Borrowing Base as a maximum ceiling on Revolving
Credit Loans outstanding to Borrowers at any time and the Individual Borrowing
Base as a maximum ceiling on Revolving Credit Loans outstanding to the
applicable Borrower. If the unpaid balance of the Revolving Credit Loans should
exceed the Borrowing Base or the Maximum Revolving Credit Amount or any other
applicable limitation set forth in this Agreement including, without limitation,
a Borrower's Individual Borrowing Base, such Revolving Credit Loans shall
nevertheless constitute Obligations that are secured by the Collateral and
entitled to all the benefits thereof. In no event shall Borrowing Agent on
behalf of any Borrower be authorized to request a Loan at any time that there
exists an Event of Default. Notwithstanding the foregoing provisions of this
Section 2.1(A), Lender shall have the right to establish reserves in such
amounts, and with respect to such matters, as Lender shall deem necessary or
appropriate in the exercise of its commercially reasonable judgment, against the
amount of Revolving Credit Loans which any Borrower may otherwise request under
this Section 2.1(A), including, without limitation, with respect to (i) price
adjustments, damages, unearned discounts or other matters for which credit
memoranda are issued in the ordinary course of any Borrower's business; (ii)
other sums chargeable against any Borrower's Loan Account as Revolving Credit
Loans under any section of this Agreement; (iii) the Term Loan Reserve, if any,
(iv) the Consent Reserve, and (v) such other matters, events, conditions or
contingencies as to which Lender, in the exercise of its commercially reasonable
judgment determines reserves should be established from time to time hereunder,
including but not limited to the Closing Reserve (collectively, the "Contingent
Reserves").
(B) Insofar as Borrowers may request and Lender may be willing
in its sole and absolute discretion to make Revolving Credit Loans to any
Borrower at a time when the unpaid balance of Revolving Credit Loans exceeds, or
would exceed with the making of any such Revolving Credit Loan, either the
Borrowing Base or the Maximum Revolving Credit Amount or such Borrower's
Individual Borrowing Base (any such Loan or Loans being herein referred to
individually as an "Overadvance" and collectively as "Overadvances"), Lender
shall enter such Overadvances as debits in the applicable Loan Account. All
Overadvances shall be payable on demand, shall be secured by the Collateral and
shall bear interest as provided in this Agreement for Revolving Credit Loans
generally.
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(C) The Revolving Credit Loans shall be used solely for
Permitted Acquisitions, to repay Indebtedness on the Closing Date under the
Borrowers' existing credit facility, for general corporate purposes and for the
general working capital needs of Borrowers to the extent not inconsistent with
the provisions of this Agreement.
(D) Borrowers' obligation to repay the Revolving Credit Loans
shall be evidenced by the Revolving Credit Note.
(E) In no event shall the aggregate Revolving Credit Loans
with respect to Inventory of Borrowers exceed $20,000,000 outstanding at any
time or from time to time.
2.2. Term and Equipment Loans.
(A) Term Loan. Lender shall, subject to the terms and
conditions of this Agreement, make a Term Loan to Borrowers on the Closing Date
in the principal sum of $10,000,000 ("Term Loan"). The Term Loan shall be
advanced on the Closing Date and shall be, with respect to principal, due and
payable upon the last day of the Original Term of this Agreement (subject to
mandatory prepayments pursuant to Section 2.2(C) hereof or acceleration upon the
occurrence and during the continuation of an Event of Default under this
Agreement or termination of this Agreement). Notwithstanding anything herein to
the contrary, the entire unpaid principal balance of the Term Loan shall be
immediately due and payable upon the acceleration of the Obligations pursuant to
Section 11(g) of this Agreement. The Term Loan shall be evidenced by the Term
Note. Lender shall, subject to the terms and conditions of this Agreement, from
time to time, from and after the Closing Date through the last day of the
Original Term, make Loans to Borrowers to finance any Borrower's purchase of
Equipment for use in such Borrower's business (any such loan, an "Equipment
Loan"). All Equipment Loans shall be in such amounts as are requested by
Borrowing Agent on behalf of any Borrower, but in no event shall any Equipment
Loan (i) be in an amount less than Five Hundred Thousand Dollars ($500,000) or
(ii) exceed the Applicable Percentage of the cash purchase price set forth on
the invoice therefor (exclusive of fees, commissions, freight, taxes,
installation charges and other soft costs related to such Equipment) of the
Equipment then to be purchased. In no event shall the aggregate amount of all
(a) Equipment Loans made hereunder exceed $8,000,000 and (b) PMSI Equipment
Loans made hereunder exceed $5,000,000. In addition, Borrowers may not receive
more than $3,000,000 in Equipment Loans during any twelve (12) consecutive
months. Equipment Loans shall be advanced by Lender to Borrowers upon Borrowing
Agent's request for either an Additional Equipment Loan or a PMSI Equipment
Loan, as the case may be, on behalf of any Borrower together with such
information as Lender may reasonably require verifying that such Borrower has
made, or will make, during its then current Fiscal Year Capital Expenditures in
each case in amounts not less than the requested Equipment Loan. Borrowers, in
the aggregate, shall not be permitted to make more than four (4) requests, in
the aggregate, in any Fiscal Year but Borrowers shall be permitted to combine
two or more purchases of Equipment in order to satisfy the minimum size
requirement for an Equipment Loan and to avoid making more than the permitted
number of requests for Equipment Loans in any Fiscal Year. All Equipment Loans
shall amortize on a seven (7) year basis and shall be payable, with respect to
principal, in consecutive quarterly installments, commencing on the first
Business Day of the first fiscal quarter following the funding by Lender of the
applicable Equipment Loan and the final installment of each Equipment Loan shall
be in the amount of the balance thereof and
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shall be due on the last day of the Original Term, subject to acceleration upon
the occurrence of a Default or Event of Default under this Agreement or
termination of this Agreement. Each Equipment Loan shall otherwise be evidenced
by, and repayable in accordance with the terms and conditions set forth in the
Equipment Note. All Equipment Loans shall be secured by all Collateral except,
notwithstanding anything to the contrary herein or in any other Loan Document,
each PMSI Equipment Loan shall be secured solely by the Equipment being
purchased with such PMSI Equipment Loan.
(B) Mandatory Prepayments. In addition to any other repayments
of the Term Loan, Revolving Credit Loan or Equipment Loan required or permitted
under the Term Note, the Revolving Credit Note, the Equipment Note and under
this Agreement:
(i) If (1) any Borrower sells any of the tangible
fixed assets, (2) any of the Collateral (other than Inventory
and Accounts) or any of the Collateral is taken by
condemnation or (3) any Borrower or Lender receives any
insurance recovery arising out of the theft, destruction or
other loss of any Collateral (other than Inventory and
Accounts) at a time when no Event of Default has occurred
which is then continuing, then, to the extent the total Net
Proceeds from (1), (2), and (3) exceeds in the aggregate the
sum of $500,000 during any Fiscal Year, in each such event
Borrowers shall have the option to either (a) pay to Lender,
as and when received by such Borrower, a sum equal to the Net
Proceeds of such sale, condemnation or insurance recovery
shall be applied (1) to Borrowers' outstanding Obligations
with respect to the Revolving Credit Loans if such Collateral
or asset was purchased with the proceeds of Revolving Credit
Loans and (2) in all other cases, to the installments of
principal due under the Term Note, in the order of the
maturity thereof until payment thereof in full and then to the
Equipment Loans and Revolving Credit Loans in accordance with
Borrowers' outstanding Obligations or (b) repair, restore or
replace such Collateral as contemplated by Section 9.2(O)
hereof. If Net Proceeds would otherwise be applied to repay
Loans at a time when there are no Loans outstanding, Lender
shall be entitled to establish a Contingency Reserve in an
amount equal to 50% of the amount of Net Proceeds that would
otherwise be applied to repay Loans pursuant to this Section
2.2(B).
(C) Optional Prepayments. Borrowers may prepay the Term Loans
in whole or in part at any time without premium or penalty except as provided in
Section 3.3(B) hereof, to be applied in accordance with Borrowers' written
instructions. Equipment Loans, once repaid, may not be reborrowed.
2.3. Manner of Borrowing Revolving Credit Loans. Borrowings under the
credit facility established pursuant to Section 2.1 shall be as follows:
(A) A request for a Revolving Credit Loan shall be made, or
shall be deemed to be made, in the following manner: (i) Borrowing Agent on
behalf of any Borrower may give Lender notice of its intention to borrow, in
which notice Borrowing Agent on behalf of any Borrower shall specify the amount
of the proposed borrowing and the proposed borrowing date; (ii) the becoming due
of any amount required to be paid under this Agreement as interest shall be
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deemed irrevocably to be a request for a Revolving Credit Loan on the due date
in the amount required to pay such interest; and (iii) the becoming due of any
other Obligation shall be deemed irrevocably to be a request for a Revolving
Credit Loan on the due date in the amount then so due;
(B) Borrowers hereby irrevocably authorize Lender to disburse
the proceeds of each Revolving Credit Loan requested, or deemed to be requested,
pursuant to this Section 2.3 as follows: (i) the proceeds of each Revolving
Credit Loan requested under Section 2.3(A)(i) shall be disbursed by Lender in
lawful money of the United States of America in immediately available funds, in
the case of any borrowing on the Closing Date, in accordance with the terms of
the written disbursement letter from Borrowing Agent on behalf of any Borrower,
and in the case of each subsequent borrowing, by wire transfer to such bank
account as may be agreed upon by each Borrower and Lender from time to time, if
such borrowing request is received by 11:00 a.m. New York time on the same
Business Day and if received later than 11:00 a.m. New York time on the next
succeeding Business Day; and (ii) the proceeds of each Revolving Credit Loan
requested under Section 2.3(A)(ii) or (iii) shall be disbursed by Lender by way
of direct payment of the relevant Obligation.
(C) On the terms and subject to the conditions of this
Agreement, Revolving Credit Loans may be repaid without premium or penalty and
may be reborrowed.
2.4. Eurodollar Loans.
(A) Notwithstanding the provisions of Section 2.3, (a) in the
event any Borrower desires to obtain a Eurodollar Loan, Borrowing Agent shall
give Lender prior written irrevocable notice no later than 11:00 a.m. New York
time on the third (3rd) Business Day prior to the requested borrowing date
specifying (i) its election to obtain a Eurodollar Loan, (ii) the date of the
proposed borrowing (which shall be a Business Day) and (iii) the amount to be
borrowed, which amount shall be an integral multiple of $1,000,000. In no event
shall Borrowers be permitted to have outstanding at any one time Eurodollar
Loans with more than five (5) different Interest Periods. In addition, and
notwithstanding any other provision of this Agreement, Borrowers shall have no
right to request or obtain a Eurodollar Loan at any time that an Event of
Default exists.
(B) Provided that no Event of Default has occurred which is
then continuing, each interest period of a Eurodollar Loan shall commence on the
date such Eurodollar Loan is made and shall end on the date which is one (1)
month, two (2) months, three (3) months or six (6) months later, as may then be
requested by Borrowers ("Interest Period") provided that:
(i) any Interest Period which would
otherwise end on a day which is not a Business Day shall
end on the next preceding or succeeding Business Day as is
the Bank's custom in the market to which such Eurodollar
Loan relates; and
(ii) there remains a minimum of one
(1) month in the Original Term (or if this Agreement has
been renewed, in the then applicable Renewal Term);
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(iii) any Interest Period which
would otherwise end on a day which is not a Business Day
shall be the next preceding or succeeding Business Day as
is Lender's custom in the market to which such
Eurocurrency Loan relates;
(iv) all Interest Periods of the
same duration which commence on the same date shall end on
the same date; and
(v) each Interest Period which
commences before, and would otherwise end after the last
day of the Term shall end on the last day of the Term.
Notwithstanding the foregoing, Borrowers may obtain or convert
to Eurodollar Loans with Interest Periods of greater than one
(1) month but less than three (3) months in order to make
principal payments on the Term Loans, or as may otherwise be
agreeable to Lender.
(C) Provided that no Event of Default has occurred which is
then continuing, Borrower may, on any Business Day, convert any Base Rate Loan
into a Eurodollar Loan. If any Borrower desires to convert a Base Rate Loan,
Borrowing Agent on behalf of such Borrower shall give Lender not less than three
(3) Business Days' prior written notice (prior to 11:00 a.m. New York time on
such Business Day), specifying the date of such conversion and the amount to be
converted. Each conversion into or conversion of a Eurodollar Loan shall be an
integral multiple of $1,000,000. After giving effect to any conversion of Base
Rate Loans to Eurodollar Loans, Borrowers, in the aggregate, shall not be
permitted to have outstanding at any one time Eurodollar Loans with more than
five (5) different Interest Periods.
(D) Each Borrower shall have the right on three (3) Business
Days' prior irrevocable written notice by Borrowing Agent on behalf of such
Borrower to Lender to (i) subject to the provisions of Section 2.4(E) continue
any Eurodollar Loan into a subsequent Interest Period of the same or a different
permitted duration, in each case subject to the satisfaction of the following
conditions:
(i) in the case of a continuation of
less than all Loans, the Loans continued shall each be in
a minimum principal amount of $100,000 and in integral
multiples thereof;
(ii) accrued interest on a Loan (or
portion thereof) being continued shall be paid by
Borrowers at the time of continuation; and
(iii) no Loan (or portion thereof)
may be continued as a Eurodollar Loan if an Event of
Default has occurred which is then continuing or if, after
giving effect to such continuation, more than five (5)
separate Eurodollar Loans in the aggregate would be
outstanding hereunder.
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If Borrowing Agent on behalf of any Borrower shall fail to give timely
notice of such Borrower's election to continue any Eurodollar Loan or portion
thereof as provided above, or if such continuation shall not be permitted, such
Eurodollar Loan or portion thereof, unless such Loan shall be repaid, shall
automatically be converted into a Base Rate Loan at the end of the Interest
Period then in effect with respect to such Eurodollar Loan.
(E) Subject to the provisions of Section 3.3, Borrowers may
prepay any Loan in whole at any time or in part from time to time, without
premium or penalty provided that a Eurodollar Loan may only be prepaid on the
last Business Day of the then current Interest Period with respect thereto.
Borrowing Agent on behalf of any Borrower shall specify the date of prepayment
of Loans which are Eurodollar Loans and the amount of Loans to be prepaid. In
the event that any prepayment of a Eurodollar Loan is made on a date other than
the last Business Day of the then current Interest Period with respect thereto,
Borrowers shall indemnify Lender therefor in accordance with Section 2.4(F)
hereof.
(F) Each Borrower shall indemnify Lender and hold Lender
harmless from and against any and all losses or expenses that Lender may sustain
or incur as a consequence of any prepayment or any default by such Borrower in
the payment of the principal of or interest on any Eurodollar Loan or failure by
such Borrower to complete a borrowing of, a prepayment of or conversion of or to
a Eurodollar Loan after notice thereof has been given, including (but not
limited to) any interest payable by Lender to lenders of funds obtained by it in
order to make or maintain its Eurodollar Loans hereunder, and any other loss or
expense incurred by Lender by reason of the liquidation or reemployment of
deposits or other funds acquired by Lender to make, continue, convert into or
maintain, a Eurodollar Loan.
(G) Notwithstanding any other provision hereof, if any
applicable law, treaty, regulation or directive, or any change therein or in the
interpretation or application thereof, shall make it unlawful for Lender (for
purposes of this subsection (G), the term "Lender" shall include Lender and the
office or branch where Lender or any corporation or bank controlling Lender
makes or maintains any Eurodollar Loans) to make or maintain its Eurodollar
Loans, or if with respect to any Interest Period, Lender is unable to determine
the Eurodollar Rate relating thereto, or adverse or unusual conditions in or
changes in applicable law relating to the London Eurodollar interbank market
make it, in the reasonable good faith judgment of Lender, impracticable, to fund
therein any of the Eurodollar Loans or make the projected Eurodollar Rate
unreflective of the actual costs of funds therefor to Lender, the obligation of
Lender to make Eurodollar Loans hereunder shall forthwith be suspended during
the pendency of such circumstances and Borrowers shall, if any affected
Eurodollar Loans are then outstanding, promptly upon request from Lender,
convert such affected Eurodollar Loans into Base Rate Loans.
2.5. All Loans to Constitute One Obligation. All Loans and Letters of
Credit shall constitute one general obligation of each Borrower, and (except for
PMSI Equipment Loans which are secured by the Equipment financed thereby) shall
be secured by Lender's security interest in and Lien upon all of the Collateral,
and by all other security interests and Liens now or at any time or times
hereafter granted by each Borrower to Lender in respect thereof.
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2.6. Loan Account. Lender shall enter all Loans as debits to the Loan
Account and shall also record in Borrowers' Loan Account all payments made by
each Borrower on such Loans and all proceeds of Collateral which are finally
paid to Lender, and may record therein, in accordance with customary accounting
practice, all charges and expenses properly chargeable to Borrowers hereunder.
2.7. Letters of Credit. Subject to the terms and conditions hereof,
Lender shall issue, or cause the issuance by the Issuing Bank of, Letters of
Credit from time to time during the Term; provided, however, that Lender will
not be required to issue or cause to be issued any Letters of Credit to the
extent the sum of the outstanding Revolving Credit Loans plus the face amount of
outstanding Letters of Credit (with the requested Letter of Credit being deemed
to be outstanding) to exceed the Maximum Revolving Credit Amount (calculated
without duplication with respect to the requested Letter of Credit) or to cause
the outstanding amount of Revolving Credit Loans to exceed the Borrowing Base.
The maximum principal amount of outstanding Standby Letters of Credit shall not
exceed Seven Million Dollars ($7,000,000) in the aggregate at any time. The
maximum principal amount of Commercial Letters of Credit shall be determined by
Lender and Borrowers. All disbursements or payments by Lender related to Letters
of Credit shall be deemed to be Revolving Credit Loans and shall bear interest
at the rate then applicable to Base Rate Loans.
2.8. Issuance of Letters of Credit.
(A) Borrowing Agent may request Lender to issue or cause to be
issued by Bank (or such other financial institution as may be acceptable to
Lender) a Letter of Credit by delivering to Lender the applicable commercial
letter of credit application (the "Letter of Credit Application"), completed to
the reasonable satisfaction of Lender and such other certificates, documents and
other papers and information as Lender may reasonably request.
(B) Each Letter of Credit shall, among other things, (i)
provide for the payment of sight or time drafts when presented for honor
thereunder in accordance with the terms thereof and when accompanied by the
documents described therein and (ii) have an expiry date occurring not later
than the earlier of (1) the Expiration Date or (2) twelve months after such
Letter of Credit's date of issuance. Each Letter of Credit Application and each
Letter of Credit shall be subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, and any amendments or revision thereof and, to the extent
not inconsistent therewith, the laws of the State of New York.
(C) In connection with the issuance or creation of any Letter
of Credit, each Borrower hereby indemnifies, saves and holds Lender harmless
from any loss, cost, expense or liability, including, without limitation,
payments made by Lender, and expenses and reasonable attorneys' fees incurred by
Lender arising out of, or in connection with any Letter of Credit to be issued
or created for any Borrower except to the extent any loss, cost, expense or
liability is attributable to Lender's or the Bank's gross negligence or willful
misconduct or that of its correspondents. Each Borrower shall be bound by
Lender's or any Issuing Bank's regulations and good faith interpretations of any
Letter of Credit issued or created for such Borrower's account, although this
interpretation may be different from such Borrower's own, and neither Lender,
nor the Issuing Bank, nor any of its correspondents shall be liable for any
error, negligence and/or mistakes, whether of omission or commission, in
following any Borrower's instructions or those contained in any Letter of Credit
of any
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modifications, amendments or supplements thereto or in creating or paying any
Letter of Credit, except for Lender's or the Issuing Bank's gross negligence or
willful misconduct or that of its correspondents.
(D) Each Borrower shall authorize and direct Bank or any other
bank or financial institution which issues a Letter of Credit (an "Issuing
Bank") to name such Borrower as the "Account Party" therein and to deliver to
Lender, with a copy to such Borrower, all instruments, documents, and other
writings and property received by the Issuing Bank pursuant to the Letter of
Credit or in connection with any acceptance and to accept and rely upon Lender's
instructions and agreements with respect to all matters arising in connection
with the Letter of Credit, the Letter of Credit Application therefor or any
acceptance thereof.
2.9. Disbursements and Reimbursement Obligations.
(A) Lender will notify Borrowing Agent promptly of the
presentment for payment under a Letter of Credit, following receipt by it of
notification from the Issuing Bank of such presentment, together with notice of
the date such payment was made. All disbursements shall be deemed irrevocably to
be a request by the applicable Borrower for a Revolving Credit Loan on the date
such disbursement was made.
(B) Each Borrower's obligation to reimburse Lender under
Section 2.9(A) shall be absolute and unconditional under any and all
circumstances and irrespective of any setoff, counterclaim or defense to payment
which any Borrower may have against, Lender, the Issuing Bank or the beneficiary
of the Letter of Credit, including, without limitation, any defense based upon
any draft, demand or certificate or other document presented under the Letter of
Credit proving to be forged, fraudulent, invalid or insufficient, the failure of
any disbursement or payment by the Issuing Bank under the Letter of Credit
("Bank Payment") to conform to the terms of the Letter of Credit (if, in the
Issuing Bank's good faith opinion such disbursement or Bank Payment is
determined to be appropriate and other than as a consequence of Lender's or the
Bank's gross negligence or willful misconduct) or any non-application or
misapplication by the beneficiary of the proceeds of such disbursement or Bank
Payment or the legality, validity, form, regularity or enforceability of the
Letter of Credit.
(C) Upon the occurrence and during the continuation of any
Event of Default, at the option of Lender, Borrowers will pay to Lender, for the
account of Lender, cash in an amount equal to the undrawn face amount of the
Letters of Credit. Such cash shall be held by Lender in a cash collateral
account (the "Cash Collateral Account"). The Cash Collateral Account shall be
maintained at a bank designated by Lender, which shall be (i) any domestic
commercial bank having capital and surplus in excess of $100,000,000 or (ii) an
Affiliate of Lender, if an Affiliate of Lender then maintains a presence as a
bank in the United States of America, in the name of Lender as secured party,
and shall be under the sole dominion and control of Lender and subject to the
terms of this Section 2.9. Borrowers hereby pledge, and grant to Lender a
security interest in, all such cash and other amounts held in the Cash
Collateral Account from time to time and all earnings thereof and proceeds
thereon, as security for the payment of all Obligations. Interest and earnings
on the Cash Collateral Account shall be the property of Borrowers but shall be
held in the Cash Collateral Account as Collateral, provided that the Lender
shall release from the Cash Collateral Account and return to Borrowers any funds
remaining in the Cash Collateral Account upon satisfaction in full of the
Obligations. At such time
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<PAGE>
when all Events of Default shall have been cured or waived, Lender shall return
any monies then remaining in the Cash Collateral Account. If at any time, and
from time to time, the aggregate amount of the Cash Collateral Account exceeds
the maximum liability, fixed or contingent, of Lender with respect to the
aggregate face amount of all Letters of Credit then issued and outstanding,
Lender shall return any excess to Borrowers.
(D) Borrowers shall assume all risks of the acts, omissions or
misuse of any Letter of Credit by the beneficiary thereof. Lender and any
Issuing Bank (except in the event of its own gross negligence or willful
misconduct) shall not be responsible for:
(i) the form, validity, sufficiency,
accuracy, genuineness or legal effect of the Letter of Credit
or any document submitted by any party in connection with the
application for and issuance of the Letter of Credit, even if
it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged;
(ii) the form, validity, sufficiency,
accuracy, genuineness or legal effect of any instrument
transferring or assigning or purporting to transfer or assign
the Letter of Credit or the rights or benefits thereunder or
proceeds thereof in whole or in part, which may prove to be
invalid or ineffective for any reason;
(iii) errors, omissions, interruptions or
delays in transmission or delivery of any messages by mail,
cable, telegraph, telex or otherwise; or
(iv) any loss or delay in the transmission
or otherwise of any document or draft required in order to
make a disbursement.
None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted Lender hereunder. In furtherance, and not in limitation
or derogation of any of the foregoing, any action taken or omitted to be taken
by the Issuing Bank and Lender in good faith in the absence of gross negligence
or willful misconduct, shall be binding upon Borrowers and shall not put the
Issuing Bank or Lender, as the case may be, under any resulting liability
therefor.
SECTION 3. INTEREST, FEES, TERM AND REPAYMENT
3.1. Interest, Fees and Charges.
<TABLE>
(A) Interest. Interest shall accrue on the principal amount of
Base Rate Loans outstanding at the end of each day (computed on the actual days
elapsed over a year of 360 days) at a fluctuating rate per annum equal to the
Base Rate plus the Applicable Margin. The Applicable Margin shall be (a) zero
percent (0%) with respect to Base Rate Loans and (b) two and one-quarter percent
(2.25%) with respect to Eurodollar Rate Loans, provided that the Applicable
Margin shall be adjusted as set forth below (subject to imposition of the
Default Rate as provided herein) based upon the Fixed Charge Coverage Ratio for
the four quarter period immediately preceding the date of determination as set
forth below and as reflected in the most recent financial statements delivered
pursuant to Section 9.1(K)(ii) hereof (commencing with the financial statements
for the fiscal quarter ending
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<PAGE>
September 30, 1998 and for each fiscal quarter ended thereafter). Each such
adjustment shall take effect (if at all) as of the first day of the first month
following the date that the applicable financial statements were received by
Lender and shall remain in effect until the date that delivery of such financial
statement demonstrates a change in Fixed Charge Coverage whereupon, subject to
the imposition of the Default Rate as provided herein, the Applicable Margin
shall be decreased or increased, as the case may be, to the applicable
percentages set forth below:
<CAPTION>
Applicable Margin With Applicable Margin With
Fixed Charge Coverage Respect to Base Rate Loans Respect to Eurodollar Rate Loans
---------------------- -------------------------- --------------------------------
<S> <C> <C>
Less than 1:00 to 1:00 +0% +2.25%
1:00 to 1:00 through and including -.25% +2.00%
1:24 to 1:00
1:25 to 1:00 through and including -.50% +1.75%
1:49 to 1:00
Greater than or equal to 1:50 to 1:00 -.75% +1.50%
</TABLE>
After the date hereof, the foregoing rate of interest shall be increased or
decreased, as the case may be, by an amount equal to any increase or decrease in
the Base Rate, with such adjustments to be effective as of the opening of
business on the day that any such change in the Base Rate becomes effective. The
Base Rate in effect on the date hereof shall be the Base Rate effective as of
the opening of business on the date hereof, but if this Agreement is executed on
a day that is not a Business Day, the Base Rate in effect on the date hereof
shall be the Base Rate effective as of the opening of business on the last
Business Day immediately preceding the date hereof. Eurodollar Loans shall bear
interest on the principal amount thereof owing, at a rate per annum equal to the
Eurodollar Rate plus the Applicable Margin.
(B) Letter of Credit Fees. Borrowers shall pay Lender for
issuing or causing the issuance of each Letter of Credit, (i) a letter of credit
opening charge of Two Hundred Fifty Dollars ($250.00) ("L/C Opening Charge") and
(ii) a fee computed at a rate per annum of one and one-half percent (1.50%) on
the outstanding amount of each such Letter of Credit from time to time ("Letter
of Credit Fee") and (iii) Issuing Bank's other customary charges payable in
connection with Letters of Credit as in effect from time to time (the amount of
which charges shall be furnished to Borrowing Agent by Lender upon request). The
L/C Opening Charge shall be payable on the opening of each Letter of Credit and
the Letter of Credit Fee shall be payable monthly in arrears on the first
Business Day of each month, computed through the last calendar day of the
preceding month. All other charges in respect of any Letter of Credit issued
hereunder shall be payable on demand. Any charge in effect at the time of a
particular transaction shall be the charge for that transaction, notwithstanding
any subsequent change in Issuing Bank's prevailing charges for that type of
transaction. All fees and charges payable hereunder shall be deemed earned in
full on the date when the same are due and payable hereunder and shall not be
subject to rebate or proration upon the termination of this Agreement for any
reason.
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<PAGE>
(C) Default Rate Applicable to Interest and Fees. Upon and
after the occurrence of an Event of Default under Section 11.1(A), and during
the continuation thereof, the Obligations shall bear interest and Letter of
Credit Fees shall be calculated daily (computed on the actual days elapsed over
a year of 360 days), at (i) a fluctuating rate per annum with respect to
interest equal to two percent (2.0%) above the respective rates of interest then
in effect with respect to outstanding Base Rate Loans and Eurodollar Loans, as
the case may be, and (ii) a per annum fee with respect to Letters of Credit
equal to two (2.0%) percent above the applicable Letter of Credit Fee (the
"Default Rate").
(D) Unused Line Fee. Borrowers acknowledge that the
administrative costs associated with the financing to be extended by Lender
under this Agreement are such that Lender cannot continue to finance Borrowers
at a level of profitability sufficient to justify Lender's maintaining the
Maximum Revolving Credit Amount for Borrowers' use in the event that the Average
Monthly Loan Balance outstanding during each month or portion thereof for which
this Agreement shall be effective is less than the Maximum Revolving Credit
Amount. In order to compensate Lender for agreeing to make funds available to
Borrowers, in the event that Borrowers should fail to fully utilize the Maximum
Revolving Credit Amount, and to compensate Lender for any loss of profitability
as a result thereof, Borrowers agree that if the Average Monthly Loan Balance
outstanding for any month shall be less than the Maximum Revolving Credit
Amount, then there shall be a charge for such month, in addition to any interest
due under this Agreement and under the Notes, in an amount equal to the product
of (a) the excess, if any of (x) the Maximum Revolving Credit Amount over (y)
the actual amount of the Average Monthly Loan Balance so calculated; times (b)
one-quarter of one percent (0.25%); times (c) that fraction, the numerator of
which shall be the actual number of days in such month and the denominator of
which shall be 360, payable monthly, in arrears, on the first Business Day of
each month, computed through the last calendar day of the preceding month, or
upon the termination of this Agreement, whichever first occurs. Without
prejudice to Lender's obligation to make Revolving Credit Loans under this
Agreement, in no event, however, shall any charge be payable for any month for
which the Average Monthly Loan Balance was less than the Maximum Revolving
Credit Amount by reason of Lender's declining to extend Revolving Credit Loans
to Borrowers in amounts equal to the Borrowing Base, nor shall any charge be
payable for any month during which or after Lender accelerates the maturity or
demands payment of the Obligations by reason of the occurrence of any Event of
Default.
(E) Closing Fee. Borrowers shall pay to Lender a closing fee
of $200,000, which shall be deemed fully earned and nonrefundable at the closing
of the transactions contemplated hereby and shall be paid concurrently with the
initial Loan hereunder. Such fee shall compensate Lender for the costs
associated with the origination, structuring, processing, approving and closing
of the transactions contemplated by this Agreement, including, but not limited
to, administrative, out-of-pocket, general overhead and lost opportunity costs,
but not including any expenses for which Borrowers have agreed to reimburse
Lender pursuant to any other provision of this Agreement or any of the other
Loan Documents, such as, by way of example, legal fees and expenses.
(F) Examination and Inspection Fees. Borrowers shall pay to
Lender on demand an examination and inspection fee in connection with Lender's
examinations and inspections of Borrowers' books and records in an amount equal
to Lender's out-of-pocket expenses for loan analysts and loan administrators
conducting such examinations and inspections; provided, however, that so long as
no Default or Event of Default has occurred and is continuing, Borrowers shall
only be obligated to
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<PAGE>
pay for two such examinations and inspections during any Contract Year,
provided, further, that such provision shall not in any way limit Lender's right
to perform additional examinations and inspections during any Contract Year at
its own cost and expense.
(G) No Impact of Usury Laws; Limitation on Interest.
(i) Notwithstanding anything to the contrary
contained in this Agreement, each Borrower agrees (to the
extent that such Borrower may lawfully do so) that it will not
at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereof in
force, which may affect the covenants or the performance of
this Agreement; and each Borrower (to the extent that such
Borrower may lawfully do so) hereby expressly waives all
benefit or advantage of any such law, and covenants that they
will not hinder, by resort to any such law, delay or impede
the execution of any power herein granted to Lender, but will
suffer and permit the execution of every such power as though
no such law had been enacted.
(ii) No provision of this Agreement shall
require the payment or permit the collection of interest in
excess of the rate then permitted by applicable law; provided
that if any provision is so limited by such applicable law,
the interest shall be the maximum amount permitted thereunder.
In the event that a court of competent jurisdiction determines
that Lender has charged or received interest hereunder in
excess of the maximum permitted rate, Lender shall promptly
refund to Borrowers any interest received by Lender in excess
of the maximum permitted rate or, if so requested by Borrower,
shall apply such excess to the principal balance of the
Obligations.
3.2. Term of Agreement. Subject to Lender's right to terminate this
Agreement upon or after the occurrence of an Event of Default, this Agreement
shall be in effect for a period of four (4) years from the date hereof, through
and including May 4, 2002 (the "Original Term"), and this Agreement shall
automatically renew itself for one (l) year periods thereafter (the "Renewal
Terms"), unless terminated as provided in Section 3.3 hereof provided, that (i)
the Original Term shall be automatically extended to five (5) years through and
including May 4, 2003 in the event that the executed consent agreements referred
to on Exhibits 1.1(B)(1) and 1.1(B)2 hereof received by Fleet evidence consent
of PIDC, PIDA and Quality to this Agreement and the Mortgages each having a term
of five (5) years and (ii) if the foregoing shall not occur, this Agreement
shall be automatically renewed for a Renewal Term for the fifth year if at such
time Borrowers have sufficient Aggregate Adjusted Availability to meet their day
to day operating expenses after the imposition of a reserve in an amount equal
to the unpaid balance of all sums due and owing by Quality to PIDA and PIDC.
3.3. Termination.
(A) Upon at least thirty (30) days prior written notice to
Lender, Borrowers may, at their option, terminate this Agreement; provided,
however, no such termination shall be effective until Borrowers have paid all of
the Obligations in immediately available funds and all Letters of Credit issued
by Lender or Issuing Bank have expired or been terminated or Borrower shall have
deposited an
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<PAGE>
amount equal to the undrawn face amount of all outstanding Letters of Credit in
a Cash Collateral Account.
(B) At the effective date of any such termination (the
"Termination Date") by Borrowers, Borrowers shall pay to Lender (in addition to
the then outstanding principal, accrued interest and other charges owing under
the terms of this Agreement and any of the other Loan Documents), as liquidated
damages for the loss of the bargain and not as a penalty, an amount equal to (a)
one-half of one percent (.50%) of the Termination Amount if such Termination
Date occurs during the first or second Contract Year; and (b) one quarter of one
percent (.25%) of the Termination Amount if the Termination Date occurs during
the third Contract Year. If the Termination Date occurs any time during or after
the fourth Contract Year, no termination charge shall be payable. Further, no
termination charge shall be payable if Borrowers shall terminate this Agreement
in connection with: (a) the sale of all or substantially all of the assets of
the Borrowers in a bona fide arms length transaction; (b) an Equity Event; or
(c) the refinancing of the Loans with another senior secured credit facility
pursuant to a signed commitment letter by such replacement lender, provided that
prior to termination, Borrowers shall have delivered a copy of such signed
commitment letter to Lender, and provided Lender a good faith opportunity to
match the terms of the proposed replacement financing with respect to interest
rate, principal amount, maturity date and borrowing base availability and Lender
shall have determined not to match the aforementioned terms. Notwithstanding the
foregoing, if Lender shall match the aforementioned terms of such replacement
financing and Borrower decides not to terminate this Agreement, Lender and
Borrower shall agree to amend this Agreement to reflect such revised provisions
and Lender shall have the option of adopting the financial covenants contained
in such replacement financing. Thereafter, if Borrowers decide to terminate this
Agreement, all applicable termination charges shall apply to such subsequent
termination.
(C) Lender may terminate this Agreement effective upon written
notice to Borrowing Agent provided no later than (a) 365 days prior to the end
of the Original Term and (b) 180 days prior to the end of any Renewal Term or
without notice upon the occurrence of an Event of Default and during the
continuance thereof.
(D) All of the Obligations shall be due and payable upon any
termination of this Agreement. Except as otherwise expressly provided for in
this Agreement or the other Loan Documents, no termination or cancellation
(regardless of cause or procedure) of this Agreement or any of the other Loan
Documents shall in any way affect or impair the rights, powers, or privileges of
Lender or obligations, duties, rights, and liabilities of Borrowers or Lender in
any way relating to (i) any transaction or event occurring prior to such
termination or cancellation or (ii) any of the undertakings, agreements,
covenants, warranties or representations of Borrowers contained in this
Agreement or any of the other Loan Documents. All such undertakings, agreements,
covenants, warranties and representations of Borrowers shall survive such
termination or cancellation and Lender shall retain its Liens in the Collateral
and all of its rights and remedies under this Agreement and the other Loan
Documents notwithstanding such termination or cancellation, until all of the
Obligations have been paid in full, in immediately available funds.
(E) It is understood that Borrowers may elect to terminate
this Agreement in its entirety only, no section or lending facility may be
terminated singly.
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<PAGE>
3.4. Payments. All payments of principal, interest and other amounts
payable hereunder, or under any of the related agreements, shall be made to
Lender at its Lending Office on the due date therefor not later than 1:00 p.m.
(New York time) in Dollars in Federal or other funds immediately available to
Lender. Lender shall have the right to effectuate payment on any and all
Obligations due and owing hereunder by charging Borrowers' accounts or by making
Loans as provided in Section 2.3 hereof and Lender shall provide the Borrowing
Agent with written notice of such Loans. Except where evidenced by notes or
other instruments issued or made by Borrowers to Lender specifically containing
payment provisions which are in conflict with this Section 3.4 (in which event
the conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of:
(A) Principal, payable on account of Loans made by Lender to
Borrowers pursuant to this Agreement, shall be payable by Borrowers to Lender
immediately upon the earliest of (i) the receipt by Lender or Borrowers of any
proceeds of any of the Collateral referred to in Section 2.2(B), to the extent
required in accordance with Section 2.2(B), (ii) the occurrence of an Event of
Default if Lender elects to accelerate the maturity and payment of such Loans,
or (iii) termination of this Agreement pursuant to Section 3.3 hereof; provided,
however, that if the principal balance of Revolving Credit Loans outstanding at
any time shall exceed the Borrowing Base at such time, Borrower shall, on
demand, repay the Revolving Credit Loans in an amount sufficient to reduce the
aggregate unpaid principal amount of such Revolving Credit Loans by an amount
equal to such excess;
(B) Interest accrued on the Loans shall be due on the earliest
of (i) the first Business Day of each month (for the immediately preceding
month), computed through the last calendar day of the preceding month, (ii) the
occurrence of an Event of Default if Lender elects to accelerate the maturity
and payment of the Obligations or (iii) termination of this Agreement pursuant
to Section 3.3 hereof; provided, however, that with respect to Eurodollar Loans,
interest shall only be payable at the end of each Interest Period, except that
with respect to Eurodollar Loans having an Interest Period of 180 days, interest
due on each such Eurodollar Loan shall be due at the end of 90 days and 180
days;
(C) Costs, fees and expenses payable pursuant to this
Agreement shall be payable by Borrowers, on demand, to Lender or to any other
Person designated by Lender in writing; and
(D) The balance of the Obligations requiring the payment of
money, if any, shall be payable by Borrowers to Lender as and when provided in
this Agreement or the Loan Documents.
3.5. Application of Payments and Collections. Upon the occurrence of an
Event of Default and during the continuation thereof, each Borrower irrevocably
waives the right to direct the application of any and all payments and
collections at any time or times hereafter received by Lender from or on behalf
of any Borrower, and each Borrower does hereby irrevocably agree that Lender
shall have the continuing exclusive right to apply and reapply any and all such
payments and collections received at any time or times hereafter by Lender or
its agent against the Obligations, in such manner as Lender may deem advisable,
notwithstanding any entry by Lender upon any of its books and records. If as the
result of collections of Accounts as authorized by Section 5.4 hereof a credit
balance exists in the Loan Account, such credit balance shall not accrue
interest in favor of Borrowers, but so long as no Event of Default shall then
exist, Lender shall remit such credit balance (to the extent of the actual
collected portion thereof) to Borrowers in immediately available funds not later
than one
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<PAGE>
Business Day following the creation of such credit balance. In no event shall
such credit balance be applied or be deemed to have been applied as a prepayment
of the Term Loan or the Equipment Loans unless so requested by Borrowing Agent,
but Lender may offset such credit balance against the Obligations upon or after
the occurrence of an Event of Default.
3.6. Statements of Account. Lender will account to Borrowers monthly
with a statement of Loans, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive upon Borrowers unless Lender is notified by Borrowing Agent in
writing to the contrary within thirty (30) days after the date each account is
mailed to Borrowers. Such notice shall only be deemed an objection to those
items specifically objected to therein.
3.7. Increased Costs. In the event that any change, after the date of
this Agreement, in any applicable law or treaty, or in the interpretation or
application thereof, or compliance by Lender with any request or directive
(whether or not having the force of law) from any central bank or other
financial, monetary or other regulatory authority, shall:
(A) (i) subject Lender to any tax with respect to this
Agreement (other than (a) any tax based on or measured by net income or
otherwise in the nature of a net income tax, including, without limitation, any
franchise tax or any similar tax based on capital, net worth or comparable basis
for measurement and (b) any tax collected by a withholding on payments and which
neither is computed by reference to the net income of the payee nor is in the
nature of an advance collection of a tax based on or measured by the net income
of the payee) or (ii) change the basis of taxation of payments to Lender of
principal, fees, interest or any other amount payable hereunder or under any
Loan Documents (other than in respect of (a) any tax based on or measured by net
income or otherwise in the nature of a net income tax, including, without
limitation, any franchise tax or any similar tax based on capital, net worth or
comparable basis for measurement and (b) any tax collected by a withholding on
payments and which neither is computed by reference to the net income of the
payee nor is in the nature of an advance collection of a tax based on or
measured by the net income of the payee);
(B) impose, modify or hold applicable any reserve (except any
reserve taken into account in the determination of the applicable Eurodollar
Rate), special deposit, assessment or similar requirement against assets held
by, or deposits in or for the account of, advances or loans by, or other credit
extended by, any office of Lender, including (without limitation) pursuant to
Regulation D of the Board of Governors of the Federal Reserve System; or
(C) impose on Lender or the London interbank eurodollar market
any other condition with respect to any Loan Document;
and the result of any of the foregoing is to increase the cost to Lender of
making, renewing or maintaining its Loans hereunder by an amount that Lender
deems to be material or to reduce the amount of any payment (whether of
principal, interest or otherwise) in respects of any of the Loans by an amount
that Lender deems to be material, then, in any such case, Borrowers shall
promptly pay Lender, upon its demand and certification, such additional amount
as will compensate Lender for such additional cost or such reduction, as the
case may be, to the extent Lender has not otherwise been
33
<PAGE>
compensated, with respect to a particular Loan, for such increased cost as a
result of an increase in the Base Rate. An officer of Lender shall certify the
amount of such additional cost or reduced amount to Borrowers, and provide a
written explanation of such additional cost or reduction to Borrowers. Such
certification shall be conclusive absent manifest error. If Lender claims any
additional cost or reduced amount pursuant to this Section 3.7, then Lender
shall use reasonable efforts (consistent with legal and regulatory restrictions)
to designate a different Lending Office or to file any certificate or document
reasonably requested by Borrowers if the making of such designation or filing
would avoid the need for, or reduce the amount of, any such additional cost or
reduced amount and would not, in the sole discretion of Lender, be otherwise
disadvantageous to Lender.
3.8. Basis For Determining Interest Rate Inadequate or Unfair. In the
event that Lender shall have determined that:
(A) reasonable means do not exist for ascertaining the
Eurodollar Rate for any Interest Period; or
(B) Dollar deposits in the relevant amount and for the
relevant maturity are not available in the London interbank eurodollar market
with respect to an outstanding Eurodollar Loan, a proposed Eurodollar Loan, or a
proposed conversion of a Base Rate Loan into a Eurodollar Loan;
Lender shall give Borrowers prompt written, telephonic or telegraphic notice of
its determination of such effect. If such notice is given, (i) any such
requested Eurodollar Loan shall be made as a Base Rate Loan, unless Borrowers
shall notify Lender no later than 10:00 a.m. (New York City time) three (3)
Business Days prior to the date of such proposed borrowing, that the request for
such borrowing shall be cancelled or made as an unaffected type of Eurodollar
Loan, and (ii) any Base Rate Loan which was to have been converted to an
affected type of Eurodollar Loan shall be continued as or converted into a Base
Rate Loan, or, if Borrowers shall notify Lender, no later than 10:00 a.m. (New
York City time) three (3) Business Days prior to the proposed conversion, shall
be maintained as an unaffected type of Eurodollar Loan.
3.9. Capital Adequacy.
(A) In the event that Lender shall have determined that any
applicable law or guideline regarding capital adequacy, or any change therein,
or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Lender with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on Lender's capital as a
consequence of its obligations hereunder to a level below that which Lender
could have achieved but for such adoption, change or compliance (taking into
consideration Lender's policies with respect to capital adequacy) by an amount
deemed by Lender to be material, then, from time to time, upon written demand by
Lender, Borrowers shall pay to Lender such additional amount or amounts as will
compensate Lender for such reduction. In determining such amount or amounts,
Lender may use any reasonable averaging or attribution methods. The protection
of this Section 3.9 shall be available to Lender regardless of any possible
contention of invalidity or inapplicability with respect to the applicable law
or condition.
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<PAGE>
(B) A certificate of an officer of Lender setting forth such
amount or amounts as shall be necessary to compensate Lender pursuant to Section
3.9 hereof and the reasons therefor when delivered to Borrowers shall be
conclusive absent manifest error.
SECTION 4. COLLATERAL: GENERAL TERMS
4.1. Security Interest in Collateral. To secure the prompt payment and
performance to Lender of the Obligations (except PMSI Loans which are secured by
the Equipment financed thereby), each Borrower hereby grants to Lender a
continuing security interest in and Lien upon all of the following Property of
such Borrower, whether now owned or existing or hereafter created, acquired or
arising and wheresoever located:
(A) Accounts;
(B) Inventory;
(C) Equipment;
(D) General Intangibles;
(E) Investment Property;
(F) All monies and other Property of any kind, now or at any
time or times hereafter, in the possession or under the control of Lender or a
bailee of Lender;
(G) All accessions to, substitutions for and all replacements,
products and cash and non-cash proceeds of (A), (B), (C), (D), (E) and (F)
above, including, without limitation, proceeds of and unearned premiums with
respect to insurance policies insuring any of the Collateral; and
(H) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs, and other computer
materials and records) of such Borrower pertaining to any of (A), (B), (C), (D),
(E), (F) or (G) above.
provided, however, that the foregoing grant of a security interest and Lien
shall not include any rights or interests in the Property listed on Exhibit 4.1
and any other comparable General Intangibles or contract rights or any Property
of such Borrower that is the subject of a Permitted Purchase Money Lien securing
Permitted Purchase Money Indebtedness if and to the extent that (a) the terms of
the document or documents creating or evidencing such General Intangibles or
contract rights or Permitted Purchase Money Lien or Permitted Purchase Money
Indebtedness, as the case may be, prohibit such grant or encumbrance thereof and
(b) the term prohibiting such assignment or encumbrance is effective as a matter
of law and (c) the term prohibiting such grant or encumbrance has not been
waived or the consent of the necessary party to the grant of a security interest
or Lien to Lender has not been obtained following commercially reasonable effort
on the part of such Borrower to obtain such waiver or consent if the seeking
thereof would be commercially reasonable; provided further, however, that (i)
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if any such prohibition is subsequently lifted, terminated or is otherwise no
longer effective as a matter of law or is waived or the consent of the necessary
party is obtained, the security interest granted hereby shall automatically
include such rights or interests in General Intangibles or contract rights
formerly subject to such prohibition without any further action on the part of
such Borrower or Lender and (ii) the exclusion in the foregoing proviso shall
not limit, impair or otherwise affect Lender's security interest in any rights
or interests of such Borrower in or to monies due or to become due under any
such General Intangibles or contract rights (including, without limitation, any
Accounts).
4.2. Lien on Realty. The due and punctual payment and performance of
the Obligations shall also be secured by the Lien created by the Mortgage upon
all Real Property of Borrowers described therein. If any Borrower shall acquire
at any time or times hereafter any interest in other Real Property, then such
Borrower shall promptly notify Lender of such acquisition and upon Lender's
request, which request may be made by Lender in its sole discretion, such
Borrower shall promptly execute and deliver to Lender, as additional security
and Collateral for the Obligations, deeds of trust, security deeds, mortgages or
other collateral assignments satisfactory in form and substance to Lender and
its counsel (herein collectively referred to as "New Mortgages") covering such
Real Property. The Mortgage and each New Mortgage shall be duly recorded in each
office where such recording is required to constitute a valid Lien on the Real
Property covered thereby. Borrowers shall deliver to Lender, at Borrowers'
expense, mortgagee title insurance policies issued by a title insurance company
reasonably satisfactory to Lender insuring Lender as mortgagee; such policies
shall be in form and substance reasonably satisfactory to Lender and shall
insure a valid first Lien in favor of Lender on the Property covered thereby,
subject only to those exceptions reasonably acceptable to Lender and its
counsel. Borrowers shall deliver to Lender such other documents, including,
without limitation, as-built survey prints of the Real Property, as Lender and
its counsel may reasonably request relating to the Real Property subject to the
Mortgages and any such New Mortgages.
4.3. Representations, Warranties and Covenants --Collateral. To induce
Lender to enter into this Agreement, each Borrower represents, warrants, and
covenants to Lender:
(A) The Collateral is now and, so long as any Obligations are
outstanding, will continue to be owned solely by Borrowers. No other Person has
or will have any right, title, interest, claim, or Lien therein, thereon or
thereto other than a Permitted Lien.
(B) Except as otherwise described on Exhibit 4.3(B) attached
hereto and made a part hereof, the Liens granted to Lender shall be first and
prior on the Collateral and as to the Accounts and proceeds, including insurance
proceeds resulting from the sale, disposition or loss thereof. No further action
need be taken to perfect the Liens granted to Lender, other than the filing of
continuation statements under the Code or other applicable law, continued
possession by Lender of that portion of the Collateral constituting instruments
or documents, the filing or recording in the United States Patent and Trademark
Office of appropriate instruments with respect to Liens on patents and
trademarks and the processing of Lien notations on motor vehicle title
certificates and the recording of the Mortgages.
(C) All goods evidenced by the Collateral constituting chattel
paper, documents or instruments, the possession of which has been given to
Lender, are owned by each Borrower and the same are free and clear of any prior
Lien. Borrowers further warrant and guarantee the value, quantities, sound
condition, grades and qualities of the goods and services described therein.
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Borrowers shall pay and discharge all taxes, levies and other charges upon said
Collateral and upon the goods evidenced by any documents constituting Collateral
and shall defend Lender against and save it harmless from all claims of any
Person with respect to the Collateral. This indemnity shall include reasonable
attorneys' fees and legal expenses.
4.4. Lien Perfection. At Lender's request, Borrower agrees to execute
the financing statements provided for by the Code together with any and all
other instruments, assignments or documents, and shall take such other action,
in each case, as may be required to perfect or to continue the perfection of
Lender's security interest in the Collateral, including, without limitation, the
execution at Lender's request for all documents reasonably deemed necessary by
Lender to cause Lender's Lien to be noted on any motor vehicle title
certificates for motor vehicles forming a material part of the Collateral.
Unless prohibited by applicable law, each Borrower hereby authorizes Lender to
execute and file any such financing statement on such Borrower's behalf.
Subsequent to Lender's execution and filing of the aforementioned financing
statements, Lender shall provide Borrowing Agent with notice of the same. The
parties agree that a carbon, photographic or other reproduction of this
Agreement shall be sufficient as a financing statement and may be filed in any
appropriate office in lieu thereof.
4.5. Real Property Lien Documentation. Each Borrower agrees to execute
and cause to be executed for Lender's benefit the Mortgages and such leasehold
mortgages, deeds of trust or other documents evidencing a collateral assignment
of such Borrower's interest in the Real Property and any additional Real
Property owned by such Borrower ("Additional Real Property") as Lender may
reasonably request other than Additional Real Property, the purchase of which is
otherwise permitted hereunder and is subject to a Permitted Purchase Money Lien
and as to which, if and to the extent any Collateral is located at any such
Additional Real Property, Lender has received a mortgagee waiver in form and
substance reasonably satisfactory to Lender. Such documents shall be recorded,
at the expense of such Borrower, with such filing offices as may be required to
evidence Lender's Lien upon the Real Property owned or hereafter acquired by
such Borrower. Notwithstanding the foregoing, to the extent any of the
aforementioned real property documentation is required to be executed or
consented to by a Person other than or in addition to any Borrower or Lender,
each Borrower shall use its good faith efforts to cause such Person to execute,
or consent to, any such documentation. Each Borrower acknowledges that its
failure to cause any such Person to execute such documentation may result in
Lender's establishment of a Contingency Reserve in the exercise of its
commercially reasonable judgment.
4.6. Location of Collateral. All Collateral, other than Inventory in
transit and motor vehicles, will at all times be kept by Borrowers at one or
more of the business locations set forth in Exhibit 4.6 and shall not, without
the prior written approval of Lender, be moved therefrom except, prior to an
Event of Default and subsequent to an Event of Default except to the extent
Lender has provided Borrowers with written notice to the contrary, for (A) sales
of Inventory in the ordinary course of business; (B) the storage of Inventory at
locations within the continental United States other than those shown on Exhibit
4.6 if (i) any Borrower gives Lender written notice of the new storage location
at least thirty (30) days prior to storing Inventory at such location, (ii)
Lender's security interest in such Inventory is and continues to be a duly
perfected, first priority Lien thereon, (iii) neither the applicable Borrower's
nor Lender's right of entry upon the premises where such Inventory is stored, or
its right to remove the Inventory therefrom, is unreasonably restricted, (iv)
the
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owner of such premises agrees with Lender to subordinate or not to assert any
landlord's, bailee's or other Lien in respect of the Inventory for unpaid rent
or storage charges and (v) all negotiable documents and receipts in respect of
any Collateral maintained at such premises are promptly delivered to Lender;
provided, however, if any Borrower fails to meet requirements of clauses (i)
through (v) but the amount of Inventory stored at any such location is less than
$500,000 in the aggregate for all such locations, then the sole consequence of
such failure shall be the exclusion of such Inventory from the determination of
the Borrowing Base; (C) removals in connection with dispositions of tangible
fixed assets that are authorized by Section 9.2(N) hereof; (D) removal of
Equipment for purposes of repair or maintenance; (E) location of Equipment at
sites other than referred to above in connection with the leasing thereof to
customers, the use thereof by subcontractors in connection with performing of
production or other activities for the benefit of Borrowers or for other
purposes related to the conduct of the business of Borrowers, provided that (i)
the aggregate fair market value thereof does not exceed $250,000 and (ii)
Borrowers has taken steps satisfactory to Lender to maintain the priority and
perfection of Lender's security interest therein and (F) to the extent not
covered by the foregoing subsections (B), (C), (D) and (E) Equipment at
locations other than as set forth in Exhibit 4.6 having an aggregate fair market
value of not more than $250,000.
4.7. Insurance of Collateral. Borrowers shall bear the full risk of any
loss of any nature whatsoever with respect to the Collateral. Each Borrower
agrees to maintain and pay for insurance upon all Collateral (other than
Accounts) wherever located, in storage or in transit in vehicles, including
goods evidenced by documents, covering casualty, hazard, public liability and
other risks and in such amounts as are described in this Section 4.7 and with
such insurance companies as shall be reasonably satisfactory to Lender to insure
Lender's interest in the Collateral. Borrowers shall deliver copies of such
policies with satisfactory Lender's loss payable endorsements naming Lender Loss
Payee to Lender as requested by Lender. Each policy of insurance or endorsement
shall contain a clause requiring the insurer to give not less than thirty (30)
days prior written notice to Lender in the event of cancellation of the policy
for any reason whatsoever and a clause that the interest of Lender in the
Collateral owned by Borrowers shall not be impaired or invalidated by an act or
neglect of Borrowers or owner of the Property nor by the occupation of the
premises for purposes more hazardous than are permitted by said policy. If
Borrowers fail to provide and pay for such insurance, Lender may, at Borrowers'
expense, procure the same, but shall not be required to do so. Borrowers agree
to deliver to Lender, promptly as rendered, true copies of all reports made in
any reporting forms to insurance companies. Each Borrower shall (a) keep all of
its insurable properties in which such Borrower has an interest insured against
the hazards of fire, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to such Borrower's
including, but not limited to, business interruption insurance; (b) maintain a
bond in such amounts, if any, as is customary in the case of companies engaged
in businesses similar to such Borrower's insuring against larceny, embezzlement
or other criminal misappropriation of insured's officers and employees who may
either singly or jointly with others at any time have access to the assets or
funds of such Borrower either directly or through authority to draw upon such
funds or to direct generally the disposition of such assets; (c) maintain public
and product liability insurance against claims for personal injury, death or
property damage suffered by others; (d) maintain all such workmen's compensation
or similar insurance as may be required under the laws of any jurisdiction in
which such Borrower is engaged in business; and (e) furnish Lender with (i)
copies, as requested by Lender, of all policies and evidence of the maintenance
of such policies by the renewal thereof at least fifteen (15) days before any
expiration
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date, and (ii) appropriate loss payable endorsements in form and substance
reasonably satisfactory to Lender, naming Lender as loss payee (and a mortgagee
with respect to the Real Property) as its interest may appear with respect to
the property coverage described in clause 4.7(a) above and the property coverage
shall provide (A) that, except as provided below, all proceeds thereunder
otherwise payable to any Borrower shall be payable to Lender, (B) no such
insurance shall be affected by any act or neglect of the insured or owner of the
property described in such policy or by the occupation of the premises for
purposes more hazardous than are permitted by said policy and (C) that such
policy and loss payable clauses may not be cancelled, amended or terminated
unless at least thirty (30) days' prior written notice is given to Lender and
(i) a certificate of insurance or other endorsement indicating, among other
things, the Lender has been named as an additional or co-insured with respect to
each Borrower's liability insurance policies. In the event of any loss
thereunder, except as provided below, the property coverage carriers named
therein hereby are directed by Lender and each Borrower to make payment for such
loss to Lender and not to such Borrower and Lender jointly. If any such
insurance losses are paid by check, draft or other instrument payable to any
Borrower and Lender jointly, Lender may endorse such Borrower's name thereon and
do such other things as Lender may deem advisable to reduce the same to cash. If
an Event of Default shall have occurred and is continuing, (x) Lender is hereby
authorized to adjust and compromise claims under insurance coverage referred to
in clauses (a) and (b) above and (y) all insurance recoveries received by Lender
upon any such insurance shall be applied to the Obligations, in such order as
Lender in its sole discretion shall determine. If an Event of Default shall not
exist, then any insurance recovery arising out of any theft, destruction or
other loss of any property of Borrowers shall be applied in accordance with the
applicable provisions in Section 2.2(B). If Borrowers elect to apply such
insurance proceeds to the replacement, restoration or repair of such property,
then, pending such application, such proceeds shall be held by Lender in an
interest-bearing cash collateral account until disbursed as directed by such
Borrower. At any Borrower's option, any proceeds held for application to
replacement, restoration or repair of property may be applied to repay Revolving
Credit Loans and, upon the terms and subject to the conditions of this
Agreement, such Borrower shall be entitled to reborrow the amount so repaid for
purposes of such replacement, restoration or repair. Insurance recoveries
received by Lender arising out of theft, destruction or other loss of any
property of such Borrower for which specific application is not provided as
aforesaid shall be paid by Lender to such Borrower. Any surplus in insurance
recoveries, in excess of the then outstanding Obligations, shall be paid by
Lender to Borrowers or applied as may be otherwise required by law. If all
Obligations hereunder are required to be repaid as a result of any casualty, any
deficiency thereon shall be paid by Borrowers to Lender, on demand.
4.8. Protection of Collateral. All insurance expenses and all expenses
of protecting, storing, warehousing, insuring, handling, maintaining and
shipping the Collateral, any and all excise, property, sales, and use taxes
imposed by any state, federal, or local authority on any of the Collateral or in
respect of the sale thereof shall be borne and paid by Borrowers. If Borrowers
fail to promptly pay any portion thereof when due (except if being contested as
permitted by Section 9.1(A) hereof), Lender may, at its option, but shall not be
required to, pay the same and charge the Loan Account therefor. Each Borrower
agrees to reimburse Lender promptly therefor with interest as provided in this
Agreement. All sums so paid or incurred by Lender for any of the foregoing and
all costs and expenses (including attorneys' fees, legal expenses and court
costs) which Lender may incur in enforcing or protecting its Lien on or rights
and interest in the Collateral or any of its rights or remedies under this or
any other agreement between the parties hereto or in respect of any of the
transactions to be had hereunder until paid by Borrowers to Lender with
interest, shall be considered
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Obligations owing by Borrowers to Lender hereunder. Such Obligations shall be
secured by all Collateral and by any and all other collateral, security, assets,
reserves, or funds of Borrowers in or coming into the hands or inuring to the
benefit of Lender. Lender shall not be liable or responsible in any way for the
safekeeping of any of the Collateral or for any loss or damage thereto (except
for reasonable care in the custody thereof while any Collateral is in Lender's
actual possession) or for any diminution in the value thereof, or for any act or
default of any warehouseman, carrier, forwarding agency, or other person
whomsoever, but the same shall be at Borrowers' sole risk.
SECTION 5. PROVISIONS RELATING TO ACCOUNTS
5.1. Representations, Warranties and Covenants. Each Borrower
represents and warrants to Lender that Lender may rely, in determining which
Accounts are Eligible Accounts, on all statements and representations made by
such Borrower on its own behalf with respect to any Account or Accounts, and,
unless otherwise indicated in writing to Lender, that with respect to each
Account included by any Borrower within any calculation of the Borrowing Base:
(A) It is genuine and in all respects what it purports to be,
and it is not evidenced by a judgment;
(B) It arises out of a completed, bona fide sale and delivery
of goods or rendition of services by such Borrower in the ordinary course of its
business and in accordance in all material respects with the terms and
conditions of all purchase orders, contracts or other documents relating thereto
and forming a part of the contract between such Borrower and the Account Debtor;
(C) It is for a liquidated amount maturing as stated in the
duplicate invoice covering such sale or rendition of services, a copy of which
has been furnished or is available to Lender;
(D) Such Account, and Lender's security interest therein, is
not, and will not, to Borrower's knowledge, be in the future, subject to any
offset, Lien, deduction, defense, dispute, counterclaim or any other adverse
condition except for disputes resulting in returned goods where the amount in
controversy is deemed by Lender to be immaterial, and, to such Borrower's
knowledge, each such Account is absolutely owing to such Borrower and is not
contingent in any respect or for any reason;
(E) No Borrower has made any agreement with any Account Debtor
thereunder for any deduction therefrom, except discounts or allowances which are
reflected in the calculation of the net amount of each respective invoice
related thereto;
(F) To each Borrower's knowledge, there are no facts, events
or occurrences which in any way impair the validity or enforceability thereof or
tend to reduce the amount payable thereunder from the face amount of the invoice
and statements delivered to Lender with respect thereto;
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(G) To each Borrower's knowledge, the Account Debtor
thereunder (i) had the capacity to contract at the time any contract or other
document giving rise to the Account was executed and (ii) such Account Debtor is
Solvent; and
(H) No Borrower has knowledge of any fact or circumstance
which would impair the validity or collectability of the Account, and to each
Borrower's knowledge there are no proceedings or actions which are threatened or
pending against any Account Debtor thereunder which could reasonably be expected
to result in any material adverse change in such Account Debtor's financial
condition or the collectability of such Account.
5.2. Assignments, Records and Schedules of Accounts. If so requested by
Lender, each Borrower shall execute and deliver to Lender a Borrowing Base
Certificate and formal written assignments of all Accounts weekly or, if
requested by Lender, daily, which shall include all Accounts that have been
created since the date of the last assignment, together with copies of invoices
or invoice registers related thereto. On or before the fifteenth day of each
month ("Delivery Date") from and after the date hereof, each Borrower shall
deliver to Lender, in form reasonably acceptable to Lender, a detailed aged
trial balance of all Accounts existing as of the last day of the preceding
month, specifying the names, addresses, face value, dates of invoices and due
dates for each Account Debtor obligated on an Account so listed ("Schedule of
Accounts"), and, upon Lender's reasonable request therefor, copies of proof of
delivery and the original copy of all documents, including, without limitation,
repayment histories and present status reports relating to the Accounts so
scheduled and such other matters and information relating to the status of then
existing Accounts as Lender shall reasonably request. Notwithstanding the
foregoing, if any Borrower has sent to Lender a Schedule of Accounts on or prior
to the Delivery Date but Lender has not received such Schedule of Accounts by
the Delivery Date, then such Borrower shall have an additional five days to
deliver such Schedule of Accounts following notice by Lender of its failure to
receive any such Schedule of Accounts which notice may be given as provided in
Section 12.10 hereof or by telephone.
5.3. Administration of Accounts.
(A) Upon the granting of any discounts, allowances or credits
by any Borrower that are not shown on the face of the invoice for the Account
involved, each Borrower shall promptly report such discounts, allowances or
credits, as the case may be, to Lender and in no event later than the time of
its submission to Lender of the next Schedule of Accounts as provided in Section
5.2. Upon and after the occurrence of an Event of Default, Lender shall have the
right to settle or adjust all disputes and claims directly with the Account
Debtor and to compromise the amount or extend the time for payment of the
Accounts upon such terms and conditions as Lender may deem advisable, and to
charge the costs and expenses thereof, including attorney's fees, to Borrowers.
Borrowers shall remain liable for any deficiency.
(B) If an Account includes a charge for any tax payable to any
governmental taxing authority, Lender is authorized, if any Borrower does not do
so in a timely manner, to pay the amount thereof to the proper taxing authority
for the account of such Borrower and to charge the Loan Account therefor.
Borrowers shall notify Lender if any Account includes any tax due to any
governmental taxing authority and, in the absence of such notice, Lender except
as otherwise provided herein shall
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not be liable for any taxes to any governmental taxing authority that may be due
by Borrowers by reason of the sale and delivery creating the Account.
(C) Whether or not a Default or an Event of Default has
occurred, any of Lender's officers, employees or agents shall have the right, at
any time or times hereafter, in the name of Lender, any designee of Lender or
Borrowers, to verify the validity, amount or any other matter relating to any
Account by mail, telephone, telegraph or otherwise. At Borrowing Agent's
request, Lender will provide Borrowing Agent with reasonable general information
about the manner in which Lender intends to conduct its verifications during
periods when an Event of Default does not exist. Borrowers shall cooperate fully
with Lender in an effort to facilitate and promptly conclude any such
verification process.
5.4. Collection of Accounts.
(A) To expedite collection, Borrowers shall endeavor in the
first instance to make collection of their Accounts for Lender. All remittances
received by Borrowers on account of Accounts shall be held by Borrowers as
trustee of an express trust for Lender's benefit and Borrowers shall immediately
deposit the same in the Dominion Account. Such express trust shall cease with
respect to any funds transferred by the Dominion Account Bank to the applicable
Borrower in accordance with the Dominion Account Agreement. Lender retains the
right after an Event of Default to notify Account Debtors that Accounts have
been assigned to Lender and to collect Accounts directly in its own name and to
charge the collection costs and expenses, including attorneys' fees, to the
applicable Borrower. Lender has no duty to protect, insure, collect or realize
upon the Accounts or preserve rights in them.
(B) Each Borrower shall deposit all proceeds of Collateral or
cause the same to be deposited in kind in a Dominion Account pursuant to a
lockbox arrangement reasonably acceptable to Lender. Each Borrower shall issue
to any such banks an irrevocable letter of instruction directing such banks to
deposit all payments or other remittances received in the lockbox to the
Dominion Account for application in accordance with this Agreement. All funds
deposited in the Dominion Account shall immediately become Collateral and
Borrowers shall obtain the agreement by such banks to waive any offset rights
against the funds so deposited. Lender assumes no responsibility for such
lockbox arrangement, including, without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank
thereunder.
(C) All funds on deposit in the Dominion Account shall be
subject to the provisions of the Dominion Account Agreement.
5.5. Notice Regarding Disputed Accounts. In the event any amounts due
and owing in excess of $100,000 are in dispute between any Borrower and any
Account Debtor, such Borrower shall provide Lender with written notice thereof
at the time of submission of the next Schedule of Accounts, explaining in detail
the reason for the dispute, all claims related thereto and the amount in
controversy.
SECTION 6. PROVISIONS RELATING TO INVENTORY
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6.1. Representations, Warranties and Covenants. With respect to
Inventory, each Borrower represents and warrants to Lender that Lender may rely,
in determining which items of Inventory constitute Eligible Inventory, on all
statements and representations made by such Borrower with respect to any
Inventory and, unless otherwise indicated in writing to Lender, that:
(A) All Inventory is presently and will continue to be located
at Borrowers' places of business listed on Exhibit 6.1A or at public warehouses
listed thereon and will not be removed therefrom except as authorized by Section
4.6 of this Agreement;
(B) Except as referred to in Section 6.1(A) and as provided in
Section 4.6, no Inventory is now, nor shall any Inventory at any time or times
hereafter be, stored with a bailee, warehouseman or similar party without
Lender's prior written consent not to be unreasonably withheld or delayed and,
if Lender gives such consent, each Borrower will concurrently therewith, at
Lender's request, cause any such bailee, warehouseman, or similar party to issue
and deliver to Lender, in form and substance reasonably acceptable to Lender,
warehouse receipts therefor in Lender's name, to the extent such warehouse
receipts are negotiable;
(C) No Inventory is or will be consigned to any Person without
Lender's prior written consent not to be unreasonably withheld or delayed, and,
if such consent is given, Borrowers shall, prior to the delivery of any
Inventory on consignment, (i) provide Lender with all consignment agreements to
be used in connection with such consignment, all of which shall be reasonably
acceptable to Lender, (ii) prepare, execute and file appropriate financing
statements with respect to any consigned Inventory, showing Lender as assignee,
(iii) conduct a search of all filings made against the consignee in all
jurisdictions in which any consigned Inventory is to be located and deliver to
Lender copies of the results of all such searches and (iv) notify, in writing,
all the creditors of the consignee which are or may be holders of Liens in the
Inventory to be consigned (as indicated by such search) that such Borrower
expects to deliver certain Inventory to the consignee, all of which Inventory
shall be described in such notice by item or type; and
(D) No Inventory is or will be produced in violation in any
material respect of the Fair Labor Standards Act.
6.2. Inventory Reports. Borrowers agree to furnish Lender with
Inventory reports at such times as Lender may reasonably request, but at least
once each month. Such reports shall be in form and detail reasonably
satisfactory to Lender. Borrowers shall conduct a physical inventory no less
frequently than annually and shall provide to Lender a report based on each such
physical inventory promptly thereafter, together with such supporting
information as Lender shall in its reasonable discretion request.
6.3. Returns of Inventory. If at any time or times hereafter any
Account Debtor returns any Inventory to any Borrower the shipment of which
generated an Account on which such Account Debtor is obligated in excess of
$500,000 such Borrower shall notify Lender of the same immediately, specifying
the reason for such return and the location and condition of the returned
Inventory. After the occurrence of an Event of Default, each Borrower shall hold
all returned Inventory in trust for Lender, and shall conspicuously label such
Inventory as the Property of Lender.
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SECTION 7. PROVISIONS RELATING TO EQUIPMENT
7.1. Representations, Warranties and Covenants. With respect to the
Equipment, each Borrower represents, warrants and covenants to and with Lender
that:
(A) The Equipment is in adequate operating condition and
repair, except for such Equipment which is not materially necessary to the
operation of each Borrower's business, and all necessary replacements of and
repairs thereto shall be made so that the value and operating efficiency of the
Equipment shall be maintained and preserved, reasonable wear and tear excepted;
and
(B) No Borrower will permit any of the Equipment to become
affixed to any Real Property leased to such Borrower so that an interest arises
therein under the real estate laws of the applicable jurisdiction unless the
landlord of such Real Property has executed a landlord waiver or leasehold
mortgage in favor of Lender, and no Borrower will permit any of the Equipment to
become an accession to any personal Property other than Equipment subject to
first priority Liens in favor of Lender or subject to Permitted Liens.
7.2. Evidence of Ownership of Equipment. Promptly upon a reasonable
request therefor by Lender, each Borrower shall deliver to Lender evidence of
ownership, if any, of any of the Equipment (including, without limitation,
certificates of title and applications for title).
7.3. Records and Schedules of Equipment. Each Borrower shall maintain
accurate records itemizing and describing the type, quantity and book value of
the Equipment and all dispositions made in accordance with Section 9.2(N)
hereof, and shall make available to Lender a current schedule containing the
foregoing information on at least an annual basis and more often if reasonably
requested by Lender.
SECTION 8. REPRESENTATIONS AND WARRANTIES
8.1. General Representations and Warranties. To induce Lender to enter
into this Agreement and to make advances hereunder, each Borrower warrants,
represents and covenants to Lender that:
(A) Organization and Qualification. Each Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation listed on Exhibit 8.1(A) attached
hereto and made a part hereof. Each Borrower has duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
each state or jurisdiction listed on Exhibit 8.1(A) which includes all states
and jurisdictions where the character of its Properties or the nature of its
activities make such qualification necessary, except where the failure to so
qualify would not have a Material Adverse Effect.
(B) Corporate Names. During the preceding five (5) years, no
Borrower has been known as or used any corporate, fictitious or trade names
except as disclosed on Exhibit 8.1(B) attached hereto and made a part hereof.
Except as set forth on Exhibit 8.1(B), no Borrower has, during
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the preceding five (5) years, been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person.
(C) Corporate Power and Authority. Each Borrower has the right
and power and is duly authorized and empowered to enter into, execute, deliver
and perform this Agreement and each of the other Loan Documents to which it is a
party. The execution, delivery and performance of this Agreement and each of the
other Loan Documents have been duly authorized by all necessary corporate action
and do not and will not (i) require any consent or approval of the shareholders
of any Borrower; (ii) contravene any Borrower's charter, certificate of
incorporation or by-laws; (iii) violate, or cause any Borrower to be in default
under, any provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award in effect having applicability to any
Borrower; (iv) result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other agreement, lease or instrument to which
such Borrower is a party or by which it or its Properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any Lien
(other than Permitted Liens) upon or with respect to any of the Properties now
owned or hereafter acquired by any Borrower.
(D) Legally Enforceable Agreement. This Agreement is, and each
of the other Loan Documents when delivered under this Agreement will be, a
legal, valid and binding obligation of each Borrower and enforceable against it
in accordance with their respective terms, except to the extent limited by
applicable bankruptcy, insolvency and other similar laws affecting creditors'
rights generally or by general principles of equity.
(E) Use of Proceeds. Borrowers' uses of the proceeds of any
Loans pursuant to this Agreement are, and will continue to be, legal and proper
corporate uses, duly authorized by its respective Board of Directors, and such
uses will not violate in any material respect any applicable laws including,
without limitation, the Foreign Assets Control Regulations, the Foreign Funds
Control Regulations and the Transaction Control Regulations of the United States
Treasury Department (31 CFR, Subtitle B, Chapter V, as amended).
(F) Margin Stock. No Borrower is engaged principally, or as
one of its important activities, in the business of purchasing or carrying
"margin stock" (within the meaning of Regulation G or U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Loans will be used to purchase or carry any margin stock or to extend credit to
others for the purpose of purchasing or carrying any margin stock, or be used
for any purpose which violates or is inconsistent with the provisions of
Regulation X of said Board of Governors.
(G) Governmental Consents. Each Borrower has, and is in good
standing with respect to, all governmental consents, approvals, authorizations,
permits, certificates, inspections, and franchises necessary in any material
respect to continue to conduct its business as heretofore or proposed to be
conducted by it and to own or lease and operate its Properties as now owned or
leased by such Borrower.
(H) Patents, Trademarks, Copyrights and Licenses. Each
Borrower owns or possesses all the patents, trademarks, service marks, trade
names, copyrights and licenses necessary for the present conduct of its business
without any conflict known on the Closing Date with the rights of
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others. All such patents, trademarks, service marks, tradenames, copyrights,
licenses and other similar rights are listed on Exhibit 8.1(H) attached hereto
and made a part hereof.
(I) Capital Structure. Exhibit 8.1(I) attached hereto and made
a part hereof states (a) the correct name of each of the Subsidiaries of each
Borrower, the jurisdiction of incorporation and the percentage of its Voting
Stock owned by such Borrower, (b) the name of each Borrower's Affiliates and the
nature of the affiliation, (c) the number, nature and holder of all outstanding
Securities of Borrowers, and (d) the number of authorized, issued and treasury
shares of each Borrower. Holdings has good title to all of the shares of stock
it purports to own of Custom and Quality and each Borrower has good title to all
of the shares it purports to own of the stock of each of its respective
Subsidiaries, free and clear in each case of any Lien other than Permitted
Liens. All such shares have been duly issued and are fully paid and
non-assessable. Except as set forth on Exhibit 8.1(I), there are not outstanding
any options to purchase, or any rights or warrants to subscribe for, or any
commitments or agreements to issue or sell, or any capital stock, Securities or
obligations convertible into, or any powers of attorney relating to, shares of
the capital stock of any Borrower. Except as set forth on Exhibit 8.1(I), there
are not outstanding any agreements or instruments binding upon any of any
Borrower's shareholders relating to the ownership of its shares of capital
stock.
(J) Solvent Financial Condition. (i) Each Borrower, on an
individual basis, and (ii) Holdings and its Subsidiaries on a Consolidated
basis, are now and, after giving effect to initial extensions of credit to be
made hereunder, at all times will be, Solvent.
(K) Restrictions. No Borrower is a party or subject to any
contract, agreement, or charter or other corporate restriction, which materially
and adversely affects its business or the use or ownership of any of its
Properties. No Borrower is a party or subject to any contract or agreement which
restricts its right or ability to incur Indebtedness, other than as set forth on
Exhibit 8.1(K) attached hereto, none of which prohibit the execution of or
compliance with this Agreement by any Borrower. No Borrower has agreed or
consented to cause or permit in the future (upon the happening of a contingency
or otherwise) any of its Property, whether now owned or hereafter acquired, to
be subject to a Lien that is not a Permitted Lien.
(L) Litigation. Except as set forth on Exhibit 8.1(L) attached
hereto and made a part hereof, there are no actions, suits, proceedings or, to
the knowledge of each Borrower, investigations pending, or to the knowledge of
each Borrower, any of the foregoing threatened, against or affecting any
Borrower, or the business, operations, Properties, profits or condition of any
Borrower, in any court or before any governmental authority or arbitration board
or tribunal, that could reasonably be expected to have a Material Adverse Effect
on any Borrower or the ability of any Borrower to perform this Agreement. No
Borrower is in default in any material respect with respect to any order, writ,
injunction, judgment, decree or rule of any court, governmental authority or
arbitration board or tribunal.
(M) Title to Properties. Each Borrower has good, indefeasible
and marketable title to and fee simple ownership of, or valid and subsisting
leasehold interests in, all of its Real Property, and good title to all of its
other Property, in each case, free and clear of all Liens except Permitted
Liens.
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(N) Financial Statements; Fiscal Year; Pro Forma Financial
Statements.
(i) The audited Consolidated balance sheets
of Holdings and such other Persons described therein
(including the accounts of all Subsidiaries for the respective
periods during which a Subsidiary relationship existed) as at
March 31, 1997, and the related statements of income, changes
in stockholder's equity, and cash flow for the periods ended
on such dates, have been prepared in accordance with GAAP, and
present fairly in all material respects the financial position
of Holdings on a Consolidated basis at such dates and the
results of Borrowers' operations for such periods. Since
December 31, 1997, there has been no material adverse change
in the condition, financial or otherwise, of any Borrower and
such other Persons as shown on the Consolidated balance sheet
as of such date. The Fiscal Year of each Borrower ends on the
last Saturday of March of each year.
(ii) The pro forma balance sheet of Holdings
on a Consolidated basis, copies of which have been delivered
to Lender ("Pro Forma Balance Sheet"), is the unaudited
Consolidated balance sheet of Holdings as of March 31, 1998
adjusted to give effect (as if such events had occurred on
such date) to (a) the Letters of Credit to be issued and Loans
to be advanced on the Closing Date, (b) repayment of all
outstanding loans and other obligations of Borrowers to Prior
Lenders, and (c) the payment of all legal, accounting and
other fees related to the foregoing transactions to the extent
known at such date. Such Pro Forma Balance Sheet fairly
reflects the pro forma capitalization of Holdings and its
Subsidiaries as of March 31, 1998 after giving effect to the
foregoing transactions. The Pro Forma Balance Sheet has been
certified by the chief financial officer of Holdings.
(iii) The five (5) year cash flow
projections of Holdings and its Subsidiaries, the projected
balance sheets and profit and loss statements of each as of
the Closing Date, copies of which have been delivered to
Lender (the "Projections") were prepared by the chief
financial officer of Holdings. Such Projections represent
projections of future events that may or may not occur and are
based on assumptions that may or may not prove to be accurate
and should not be relied upon as indicative of the actual
results that may be obtained by each Borrower; provided,
however, such projections and assumptions have been made by
the management of Holdings based on its good faith belief in
the reasonableness thereof in light of (i) the financial and
operating condition of Holdings and each Borrower and plus
their Subsidiaries existing at the time such projections were
prepared and (ii) the prospects for the industry in which
Holdings and Borrowers and their Subsidiaries compete existing
at the time such projections were prepared.
(O) Full Disclosure. The financial statements referred to in
Section 8.1(N) above, do not, nor does this Agreement or any other written
statement of any Borrower to Lender (including, without limitation, any
Borrower's filings, if any, with the Securities and Exchange Commission),
contain any untrue statement of a material fact or omit a material fact known to
any Borrower necessary to make the statements contained therein or herein not
misleading. There is no fact known to any Borrower which such Borrower has
failed to disclose to Lender in writing which materially
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affects adversely or, so far as such Borrower can now reasonably foresee, will
materially affect adversely the Properties, business, prospects, profits, or
condition (financial or otherwise) of any Borrower or the ability of any
Borrower to perform this Agreement.
(P) Pension Plans. Exhibit 8.1(P) identifies each Plan
maintained, sponsored or contributed to by any Borrower. With respect to each
Plan, no Borrower, nor any ERISA Affiliate of Borrower is, in any material
respect, in violation of the applicable provisions of ERISA, the IRC, or other
applicable laws. Except as set forth on Exhibit 8.1(P), within the six (6) years
prior to the date of this Agreement, (a) no Prohibited Transaction with respect
to which any Borrower or any ERISA Affiliate of any Borrower may incur any
liability or Reportable Event has occurred with respect to any Plan, nor has any
Plan been the subject of a waiver of the minimum funding standard under Section
412 of the IRC (other than with respect to a Multiemployer Plan (of which such
deficiency such Borrower has no knowledge)); (b) no Plan has experienced an
accumulated funding deficiency under Section 412 of the IRC; (c) no Lien has
been imposed upon any Borrower or any ERISA Affiliate of any Borrower under
Section 412(n) of the IRC; (d) no Plan has been amended in such a way that the
security requirements of Section 401(a)(29) of the IRC apply; (e) no notice of
intent to terminate a Plan has been distributed to affected parties or filed
with the PBGC under Section 4041 of ERISA, nor has any Plan been terminated
under Section 4041(e) of ERISA; (f) the PBGC has not instituted proceedings to
terminate, or appoint a trustee to administer, a Plan and no event has occurred
or condition exists which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Plan;
(g) neither any Borrower nor any ERISA Affiliate of any Borrower would be liable
for any amount pursuant to Sections 4062, 4063 or 4064 of ERISA if all Plans
terminated as of the most recent valuation dates of such Plans; (h) neither any
Borrower nor any ERISA Affiliate of any Borrower maintains any employee welfare
benefit plan, as defined in Section 3(1) of ERISA, which provides any benefits
to an employee or the employee's dependents with respect to claims incurred
after the employee separates from service other than is required by applicable
law; (i) neither any Borrower nor any ERISA Affiliate of any Borrower has
incurred any material liability for any excise tax arising under Section 4972 or
4980B of the IRC and no fact or event exists which would give rise to any such
material liability; and (j) except as disclosed on Exhibit 8.1(P), neither any
Borrower nor any ERISA Affiliate of any Borrower has incurred or expects to
incur any withdrawal liability to any Multiemployer Plan.
(Q) Taxes. The federal tax identification numbers for each
Borrower set forth on Exhibit 8.1(Q). Each Borrower has filed all federal, state
and local tax returns and other reports it is required by law to file and has
paid, or made provision for the payment of, all taxes, assessments, fees and
other governmental, charges that are due and payable, except such taxes, if any,
as are being actively contested in good faith and as to which adequate reserves
in accordance with GAAP have been provided. The provision for taxes on the books
of each Borrower is adequate in accordance with GAAP for all years not closed by
applicable statutes, and for its current Fiscal Year.
(R) Labor Relations. Except as described on Exhibit 8.1(R)
attached hereto and made a part hereof, no Borrower is a party to any collective
bargaining agreement, and there are no grievances, disputes or controversies
with any union or any other organization of any Borrower's employees, or threats
of strikes, work stoppages or any asserted pending demands for collective
bargaining by any union or organization in any case which could reasonably be
expected to have a Material Adverse Effect.
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(S) Compliance With Laws. Except as set forth on Exhibit
8.1(S), each Borrower has duly complied in all material respects with, and its
Properties, business operations and leaseholds are in compliance in all material
respects with, the provisions of all federal, state and local laws, rules and
regulations materially applicable to such Borrower, its Properties or the
conduct of its business, including, without limitation, OSHA, the Securities Act
of 1933, the Securities Exchange Act of 1934, the Fair Labor Standards Act,
Environmental Laws, laws relating to income, unemployment, payroll or social
security taxes and Plans under ERISA, the Flood Disaster Protection Act of 1973,
the Consumer Credit Protection Act, the Federal Trade Commission Act, statutes
creating and governing the Bureau of Alcohol, Tobacco and Firearms, and any and
all similar state statutes or regulations addressing, or related to, the same
subjects as or comparable to those covered by such enumerated federal statutes,
and there have been no material citations, notices or orders of noncompliance
issued to any Borrower under any such law, rule or regulation which have not
been duly complied with in all material respects by such Borrower.
(T) Surety Obligations. Except as set forth on Exhibit 8.1(T),
no Borrower is obligated as surety or indemnitor under any surety or similar
bond or other contract issued or entered into any agreement to assure payment,
performance or completion of performance of any undertaking or obligation of any
Person.
(U) No Defaults. No event has occurred and no condition exists
which would, upon the execution and delivery of this Agreement or any Borrower's
performance hereunder, constitute a Default or an Event of Default. No Borrower
is in default, and no event has occurred and no condition exists which
constitutes, or which with the passage of time or the giving of notice or both
would constitute, a default in the payment of any Indebtedness to any Person for
Money Borrowed. No Borrower is in default in any respect under any contract,
agreement or instrument to which it is a party or by which it or any of its
property is bound which default could reasonably be expected to have a Material
Adverse Effect.
(V) Brokers. Except as set forth on Exhibit 8.1(V), there are
no claims for brokerage commissions, finder's fees or investment banking fees in
connection with the transactions contemplated by this Agreement.
(W) Business Locations; Agent for Process. During the
preceding five (5) year period, no Borrower has had no office, place of business
or agent for service of process located in any state or county other than as
shown on Exhibit 8.1(W).
(X) Trade Relations. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between any Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of the Borrowers taken as a whole, or with any material supplier, and
there exists no present condition or state of facts or circumstances which would
have a Material Adverse Effect on any Borrower or prevent any Borrower to any
material extent from conducting their business after the consummation of the
transaction contemplated by this Agreement in substantially the same manner in
which it has heretofore been conducted.
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(Y) Leases. Exhibit 8.1(Y)(i) attached hereto is a complete
listing of all capitalized leases of each Borrower and Exhibit 8.1(Y)(ii)
attached hereto is a complete listing of all operating leases of each Borrower.
(Z) Investment Company Act. No Borrower is an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
(AA) OSHA and Environment Compliance. There are no material
outstanding unresolved citations, notices or orders of non-compliance issued to
any Borrower relating to their respective business, assets, Property, leaseholds
or Equipment under any Environmental Laws, rules or regulations. Each Borrower
has been issued all material applicable federal, state and local licenses,
certificates or permits relating to all applicable Environmental Laws.
(BB) Senior Indebtedness. Each Borrower's Obligations under
this Agreement and the obligations of each Borrower under the Other Agreements
are, and will continue to constitute, Senior Debt or Senior Indebtedness under
the terms of any agreement or instrument evidencing Subordinated Debt.
(CC) Indebtedness. No Borrower has Indebtedness for Money
Borrowed other than Indebtedness expressly permitted by the provisions contained
in Section 9.2(C) hereof, after giving effect to the transactions contemplated
by this Agreement, the Indenture, and the payments being made on the Closing
Date.
(DD) True Copies of Charter and Other Documents. Each Borrower
has furnished or caused to be furnished to Lender true and complete copies of
(a) all charter and other incorporation documents (together with any amendments
thereto), with respect to each Borrower and (b) their respective by-laws
(together with any amendments thereto).
(EE) Certain Transactions. Except as listed and described on
Exhibit 8.1(EE) hereto, none of the officers, directors, or employees of any
Borrower, or any of Borrower's Subsidiaries is, as of the date hereof, a party
to any transaction with Borrower, such Subsidiary or Affiliate (other than for
services as employees, officers and directors), including, without limitation,
any contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal Property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
(FF) No Borrower maintains, as of the Closing Date, any bank
accounts except as set forth on Exhibit 8.1(FF).
8.2. Reaffirmation. Each request for a Loan made by Borrowing Agent
pursuant to this Agreement or any of the other Loan Documents shall constitute
(i) an automatic representation and warranty by Borrowers to Lender that there
does not then exist any Default or Event of Default and (ii) a reaffirmation as
of the date of said request of all of the representations and warranties in all
material respects of Borrowers contained in this Agreement and the other Loan
Documents.
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8.3. Survival of Representations and Warranties. Each Borrower
covenants, warrants and represents to Lender that all representations and
warranties of such Borrower contained in this Agreement or any of the other Loan
Documents shall be true in all material respects at the time of such Borrower's
execution of this Agreement and the other Loan Documents and shall survive the
execution, delivery and acceptance thereof by Lender and the parties thereto and
the closing of the transactions described therein or related thereto except for
representations and warranties which, by their nature, speak of a particular
date which shall be deemed to have been made as of such particular date. Any
Borrower may, at any time and from time to time (and subject to subsection
9.2(M)), amend any one or more of the Schedules referred in this Section 8 or
add a Schedule to this Section 8 and any representation or warranty contained
herein which refers to any such Schedule shall from and after the date of any
such amendment refer to such Schedule as so amended; provided, however, that in
no event may any Borrower amend any such Schedule if the existence of the
information contained in such amendment would reflect or evidence a Default or
Event of Default.
SECTION 9. COVENANTS AND CONTINUING AGREEMENTS
9.1. Affirmative Covenants. During the Term and thereafter for so long
as there are any Obligations to Lender, each Borrower covenants that, unless
otherwise consented to by Lender in writing, it shall:
(A) Taxes and Liens. Pay and discharge, all material taxes,
assessments and governmental charges upon it, its income and Properties and upon
the goods evidenced by any documents constituting Collateral as and when such
taxes, assessments and charges are due and payable, except and to the extent
only that such taxes, assessments and charges are being actively contested in
good faith and by appropriate proceedings, the applicable Borrower maintains
adequate reserves on its books therefor in accordance with GAAP and the
nonpayment of such taxes, assessments and charges does not result in a Lien upon
any material Properties of such Borrower other than a Permitted Lien. Each
Borrower shall also pay and discharge any material lawful claims which, if
unpaid, could reasonably be expected to become a Lien against any of such
Borrower's material Properties except for Permitted Liens.
(B) Tax Returns. File all material federal, state and local
tax returns and other reports each Borrower is required by law to file and
maintain adequate reserves in accordance with GAAP for the payment of all taxes,
assessments, governmental charges, and levies imposed upon it, its income, or
its profits, or upon any Property belonging to it.
(C) Payment of Bank Charges. Pay to Lender, on demand, any and
all fees, costs or expenses which Lender or any Participating Lender pays to a
bank or other similar institution (including, without limitation, any fees paid
by the Lender to any Participating Lender) arising out of or in connection with
(i) the forwarding to any Borrower or any other Person on behalf of any
Borrower, or by Lender or any Participating Lender, proceeds of loans made by
Lender to any Borrower pursuant to this Agreement and (ii) the depositing for
collection by Lender or any Participating Lender of any check or item of payment
received or delivered to Lender or any Participating Lender on account of the
Obligations.
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(D) Business and Existence. Except as permitted by Section
9.2(A), preserve and maintain its separate corporate existence and all material
rights, privileges, and franchises in connection therewith, and maintain its
qualification and good standing in all states in which the failure to be so
qualified could reasonably be expected to have a Material Adverse Effect on any
Borrower.
(E) Maintain Properties. Maintain its Properties in adequate
condition, except for such Equipment which is not materially necessary to the
operation of such Borrower's business, reasonable wear and tear excepted, and
make all necessary renewals, repairs, replacements, additions and improvements
thereto.
(F) Compliance with Laws. Comply in all material respects with
all laws, ordinances, governmental rules and regulations to which it is subject,
including, without limitation, all Environmental Laws, and obtain and keep in
force any and all material licenses, permits, franchises, or other governmental
authorizations from, give all such notices promptly to, register, enroll or file
promptly all such agreements, instruments or documents required by applicable
laws with, and promptly take all such other legally required action with respect
to, any governmental or regulatory authority, agency or official, including,
without limitation, any state or federal agency or subdivision that regulates
environmental activities or is otherwise involved in monitoring or enforcing
Environmental Laws as is required under any provision of any applicable law,
except where the failure to do so could not reasonably be expected to have a
Material Adverse Effect on any Borrower.
(G) ERISA Compliance. (i) At all times make prompt payment of
contributions required to meet the minimum funding standards set forth in ERISA
to the extent applicable with respect to each Plan; (ii) promptly after the
filing thereof, furnish to Lender copies of any annual report required to be
filed pursuant to ERISA in connection with each Plan and its Affiliates; (iii)
notify Lender as soon as practicable of any Reportable Event and of any
additional act or condition arising in connection with any Plan which any
Borrower believes might constitute grounds for the 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; and (iv)
furnish to Lender, promptly upon Lender's request therefor, such additional
information concerning any Plan as may be reasonably requested.
(H) ERISA Events. Furnish to Lender: (a) as soon as possible,
but in no event later than thirty (30) days after any Borrower knows or has
reason to know that any Reportable Event with respect to any Plan has occurred,
a statement of the Chief Financial Officer of such Borrower setting forth the
details concerning such Reportable Event and the action which such Borrower
proposes to take with respect thereto, together with a copy of the notice of
such Reportable Event given to the PBGC, if a copy of such notice is available
to such Borrower; (b) promptly after receipt thereof, a copy of any notice of
any potential material liability, adverse determination letter, ruling or
opinion any Borrower may receive from the PBGC or the Internal Revenue Service
with respect to any Plan; (c) when the same is made available to participants in
a Plan, all notices of a significant reduction in the rate of benefit accrual or
plan termination to the participants by the administrator of such Plan; and (d)
promptly after receipt thereof, any notice from any Multiemployer Plan to which
any Borrower or any ERISA Affiliate of any Borrower contributes which quantifies
any actual or potential withdrawal
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liability which will or may be imposed upon the withdrawal of Borrower or any
ERISA Affiliate of any Borrower from such Multiemployer Plan.
(I) Business Records. Keep adequate records and books of
account with respect to its business activities in which proper entries are made
in accordance with GAAP reflecting all its financial transactions.
(J) Visits and Inspections. Permit representatives of Lender,
from time to time, as often as may be reasonably requested, but only during
normal business hours without undue disruption of the normal business operations
of Borrower, to visit and inspect the Properties or Borrower, inspect and make
extracts from its books and records, and discuss with its officers, its
employees and the Accountants, each Borrower's business, assets, liabilities,
financial condition, business prospects and results of operations.
(K) Financial Statements. Cause to be prepared and furnished
to Lender the following (all to be prepared in accordance with GAAP applied on a
consistent basis, unless the Accountants concur in any change therein and such
change is disclosed to Lender and is consistent with GAAP):
(i) as soon as practicable, but not later than ninety
(90) days after the close of each Fiscal Year of Borrowers,
unqualified audited financial statements of Holdings on a
Consolidated basis as of the end of such year including, but
not limited to, statements of income and stockholders' equity
and cash flow from the beginning of the current year to the
end of the current year and the balance sheet as at the end of
such year together with consolidating statements for each
Borrower, setting forth in comparative form the corresponding
figures for the preceding year, reported on without
qualification as to the scope of the audit or as to the "going
concern" status of each Borrower and its Subsidiaries by the
Accountants;
(ii) as soon as practicable, but not later than
forty-five (45) days after the end of each month hereafter,
unaudited interim Consolidated financial statements of
Holdings as of the end of such month and of the portion of
Holdings Fiscal Year then elapsed, on a Consolidated basis, an
unaudited balance sheet of Holdings and unaudited statements
of income and stockholders' equity and cash flow of Holdings
reflecting results of operations from the beginning of the
year to the end of such month and for such month, setting
forth in comparative form the corresponding figures for the
comparable period in the preceding year together with
consolidated statements for each Borrower, certified by the
chief financial officer of Holdings as prepared in accordance
with GAAP and fairly presenting in all material respects the
Consolidated financial position and results of operations of
Holdings and its Subsidiaries for such month and period
subject only to changes from audit and year-end adjustments
and except that such statements need not contain notes;
(iii) promptly after the sending or filing thereof,
as the case may be, copies of any proxy statements, financial
statements or reports which any Borrower has made available to
its shareholders, the Trustee under the Indenture or the
holders of the Senior
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Guaranteed Notes and copies of any regular, periodic and
special reports or registration statements which any Borrower
files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or
any national securities exchange; and
(iv) promptly after receipt thereof, copies of all
management letters and other material reports delivered by the
Accountants in connection with any annual or interim audit of
any Borrower;
(v) at delivery of each annual financial statement, a
computation in reasonable detail showing compliance by each
Borrower with the covenants set forth in Sections 9.2(L)
hereof, certified by the chief financial officer of each
Borrower;
(vi) as soon as available, and in any event no later
than forty-five (45) days after the end of each Fiscal Year,
deliver to Lender Consolidated Projections of Holdings for the
immediately succeeding Fiscal Year, on a month-by-month basis;
and
(vii) such other data and information (financial and
otherwise) as Lender, from time to time, may reasonably
request, bearing upon or related to the Collateral, Borrower's
financial condition or results of operations, including,
without limitation, consolidating financial statements for
Holdings, Borrowers and their Subsidiaries, federal income tax
returns of Holdings, Borrowers and their Subsidiaries,
accounts payable ledgers, and bank statements.
Concurrently with the delivery of the financial statements described in
clause (i) of this Section 9.1(K), Borrowing Agent shall forward to Lender a
copy of the Accountants' letter to Holdings' management that is prepared in
connection with such financial statements. Concurrently with the delivery of the
financial statements described in clauses (i) and (ii) of this Section 9.1(K),
each Borrower shall cause to be prepared and furnished to Lender a certificate,
in the form of the Compliance Certificate referenced in Section 9.1(O) hereof,
from the chief financial officer of each Borrower certifying to Lender that, to
the best of his knowledge, Borrowers have kept, observed, performed and
fulfilled each and every covenant, obligation and agreement binding upon each
Borrower in this Agreement and the Other Agreements and that no Default or Event
of Default has occurred during the most recently concluded fiscal year, or, if
such Default or Event of Default has occurred, specifying the nature thereof.
Notwithstanding the foregoing, if any Borrower has sent to Lender the financial
statements described in subsections (i) and (ii) of this Section 9.1(K) on or
prior to the date such Borrower is required to deliver the same to Lender, but
Lender has not received such financial statements by such date, then such
Borrower shall have an additional five (5) days to deliver such financial
statements following notice by Lender of its failure to receive the same which
notice may be given as provided in Section 12.1 hereof or by telephone.
(L) Notices to Lender. Notify Lender in writing: (i) promptly
after learning thereof, of the commencement of any material litigation affecting
any Borrower or any of its Properties, whether or not the claim is considered by
such Borrower to be covered by insurance, and of the institution of any
administrative proceeding which could reasonably be expected to have a Material
Adverse Effect on such Borrower and its Subsidiaries, and their properties or
Lender's Lien upon any
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of the Collateral; (ii) at least thirty (30) days prior thereto, of such
Borrower's opening of any new material office or place of business or any
Borrower's closing of any material existing office or place of business; (iii)
promptly after any Borrower's learning thereof, of any labor dispute to which
such Borrower may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which it
is a party or by which it is bound if any such event could reasonably be
expected to have a Material Adverse Effect on such Borrower; (iv) promptly after
any Borrower's learning thereof, of any material default by Borrower under any
note, indenture, loan agreement, mortgage, lease, deed, guaranty or other
similar agreement relating to any Indebtedness for Money Borrowed of Borrower or
any of its Subsidiaries exceeding $500,000; (v) promptly after any Borrower's
learning thereof, of any Default or Event of Default; (vi) promptly after any
Borrower's learning thereof, of any default by any obligor under any note or
other evidence of Indebtedness for Money Borrowed payable to Borrower in an
amount exceeding $500,000; (vii) promptly after the rendition thereof, of any
judgment rendered against any Borrower in an amount in excess of $500,000;
(viii) at least ten (10) days prior thereto, of any Borrower's opening of any
Dominion Account not identified in Exhibit 8.1(AF) and (ix) at least ten (10)
days prior thereto, of any Borrower's opening of any bank account (other than a
Dominion Account) not identified in Exhibit 8.1(AF).
(M) Landlord Agreements. Provide Lender with copies of all
agreements between any Borrower and any landlord which owns any premises at
which any books or records relating to Accounts may, from time to time, be kept.
(N) Subordinations. Provide Lender with debt subordination
agreements, in form and substance satisfactory to Lender, from any Person who is
an officer, director or Affiliate of any Borrower to whom such Borrower is or
hereafter becomes indebted for Money Borrowed, subordinating in right of payment
and claim all of such Indebtedness and any future advances thereon to the full
and final payment and performance of the Obligations.
(O) Compliance Certificate. Within ninety (90) days after the
end of each Fiscal Year, or more frequently if requested by Lender, cause the
chief financial officer of each Borrower to prepare and deliver to Lender a
Compliance Certificate in the form of Exhibit 9.1(O) attached hereto, with
appropriate insertions.
(P) Environmental Matters.
(i) Each Borrower will ensure that the Real
Property remains in compliance with all Environmental Laws and
it will not place or permit to be placed any Hazardous
Substances on any Real Property except as not prohibited by
applicable Law; except for such non-compliance which would not
have a Material Adverse Effect.
(ii) Each Borrower will establish and
maintain a system to assure and monitor continued compliance
by it in all material respects with all applicable
Environmental Laws which system shall include periodic reviews
of such compliance and shall be appropriate to the nature of
such Borrower's and any of its subsidiaries business.
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(iii) Each Borrower will use reasonable
efforts to (a) employ in connection with use of the Real
Property appropriate technology necessary to maintain
compliance in all material respects with any applicable
Environmental Laws and (b) dispose of any and all Hazardous
Waste generated at the Real Property only at facilities and
with carriers that maintain valid permits under RCRA and any
other applicable Environmental Laws. To the extent required by
applicable Environmental Laws, the applicable Borrower shall
obtain certificates of disposal, such as hazardous waste
manifest receipts, from all treatment, transport, storage or
disposal facilities or operators in connection with the
transport or disposal of any Hazardous Waste generated at the
Real Property.
(iv) In the event any Borrower obtains,
gives or receives written notice of any Release or threat of
Release of a reportable quantity of any Hazardous Substances
at the Real Property (any such event being hereinafter
referred to as a "Hazardous Discharge") or receives any
written notice of violation, request for information or
notification that it is potentially responsible for
investigation or cleanup of environmental conditions at the
Real Property, demand letter or complaint, order, citation, or
other written notice with regard to any Hazardous Discharge or
violation of Environmental Laws affecting the Real Property or
Borrower's interest therein (any of the foregoing is referred
to herein as an "Environmental Complaint") from any Person or
entity, including any state agency responsible in whole or in
part for environmental matters in the state in which the Real
Property is located or the United States Environmental
Protection Agency (any such person or entity hereinafter the
"Authority"), which Hazardous Discharge or Environmental
Complaint could reasonably be expected to (a) have a Material
Adverse Effect, or (b) result in the imposition of a Lien in
excess of $200,000, then such Borrower shall, within five (5)
Business Days, give written notice of same to Lender setting
forth facts and circumstances giving rise to the Hazardous
Discharge or Environmental Complaint. Such information is to
be provided to allow Lender to protect its security interest
in the Real Property and is not intended to create nor shall
it create any obligation upon Lender with respect thereto.
(v) Each Borrower shall promptly forward to
Lender copies of any request for information, notification of
potential liability, demand letter relating to potential
responsibility with respect to the investigation or cleanup of
Hazardous Substances at any other site owned, operated or used
by such Borrower to dispose of Hazardous Substances which
notice, potential liability or potential responsibility could
reasonably be expected to (a) have a Material Adverse Effect,
or (b) result in the imposition of a Lien in excess of
$200,000 and shall continue to forward copies of
correspondence between such Borrower and the Authority
regarding such claims to Lender until the claim is settled.
Each Borrower shall promptly forward to Lender copies of all
documents and reports concerning a Hazardous Discharge at the
Real Property (which Hazardous Discharge could reasonably be
expected to have a Material Adverse Effect), that such
Borrower is required to file under any Environmental Laws.
Such information is to be provided solely to allow Lender to
protect Lender's security interest in the Real Property and
the Collateral.
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(vi) Each Borrower shall respond promptly to
any Hazardous Discharge or Environmental Complaint and take
all action required under Environmental Laws in order to
safeguard the health of any Person and to avoid subjecting the
Collateral or Real Property to any Lien. If any Borrower shall
fail to respond promptly to any Hazardous Discharge or
Environmental Complaint or any Borrower shall fail to comply
with any of the requirements of any Environmental Laws which
failure would in Lender's reasonable judgment after due
inquiry could reasonably be expected to (a) have a Material
Adverse Effect or (b) result in the imposition of a Lien in
excess of $200,000 Lender may, but without the obligation to
do so, for the sole purpose of protecting Lender's interest in
Collateral and on five (5) Business Days prior written notice
to such Borrower (except in instances when Lender reasonably
determines after due inquiry that an emergency situation
exists in which event only one (1) day's notice which may be
telephonic) shall be required: (A) give such notices (if such
Borrower has failed to do so) or (B) enter onto the Real
Property (or authorize third parties to enter onto the Real
Property) and take such actions as Lender (or such third
parties as directed by Lender) deem reasonably necessary or
advisable after due inquiry, to clean up, remove, mitigate or
otherwise deal with any such Hazardous Discharge or
Environmental Complaint if such Borrower has failed to take
each of the foregoing actions prior to the expiration of the
five (5) day or one (1) day notice period, whichever is
applicable. All reasonable costs and expenses incurred by
Lender (or such third parties) in the exercise of any such
rights, including any sums paid in connection with any
judicial or administrative investigation or proceedings, fines
and penalties, together with interest thereon from the date
expended at the Default Rate for Loans constituting Base Rate
Loans shall be paid upon demand by Borrowers, and until paid
shall be added to and become a part of the Obligations secured
by the Liens created by the terms of this Agreement or any
other agreement between Lender and Borrowers.
(vii) Promptly upon the written request of
Lender, which request shall be made only when Lender
reasonably believes after due inquiry that a Hazardous
Discharge which can reasonably be expected to have a Material
Adverse Effect has occurred, each Borrower shall provide
Lender, at the Borrowers' expense, with an environmental site
assessment or environmental audit report prepared by an
environmental engineering firm acceptable to Lender to assess
with a reasonable degree of certainty the existence of such
Hazardous Discharge and the potential costs in connection with
abatement, cleanup and removal of Hazardous Substances found
on, under, at or within the Real Property. Any report or
investigation of such Hazardous Discharge proposed and
acceptable to an appropriate Authority that is charged to
oversee the clean-up of such Hazardous Discharge shall be
acceptable to Lender.
(viii) Each Borrower shall defend and
indemnify Lender and hold Lender, and its respective
employees, agents, directors and officers harmless from and
against all loss, liability, damage, claims, fines, penalties,
and reasonable costs and expenses, including reasonable
attorney's fees, suffered or incurred by Lender under or on
account of the application of any Environmental Laws to any
Borrower or any of its Property, including, without
limitation, the assertion of any lien thereunder, with respect
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to any Hazardous Discharge, the presence of any Hazardous
Substances affecting the Real Property, whether or not the
same originates or emerges from the Real Property or any
contiguous real estate (except to the extent such loss,
liability, damage and expense, claims, costs, fines and
penalties are caused by the gross negligence, (but not mere
negligence) or willful misconduct of Lender, its employees,
agents, directors or officers), including any material loss of
value of the Real Property as a result of the foregoing.
Borrowers' obligations under this Section 9.1(Q) shall arise
upon the discovery of the presence of any Hazardous Substances
at the Real Property in violation of any Environmental Laws,
whether or not any federal, state, or local environmental
agency has taken or threatened any action in connection with
the presence of any Hazardous Substances. Borrowers'
indemnifications hereunder shall survive the termination of
this Agreement.
(ix) For purposes of this Section 9.1(Q) all
references to Real Property shall be deemed to include all of
each Borrower's right, title and interest in and to leased
premises.
(Q) Further Assurances. At Lender's request, promptly execute
or cause to be executed and deliver to Lender any and all documents, instruments
and agreements reasonably deemed necessary by Lender to give effect to or carry
out the terms or intent of this Agreement or any of the Other Agreements.
Without limiting the generality of the foregoing, if any of the Accounts arises
out of a contract with the United States of America, or any department, agency,
subdivision or instrumentality thereof, the applicable Borrower shall promptly
notify Lender thereof in writing and execute, or cause its applicable Subsidiary
to execute, any instruments and take any other action reasonably required or
requested by Lender to comply with the provisions of the Federal Assignment of
Claims Act.
(R) Conduct of Business. Continue to engage, and cause each of
its Subsidiaries to continue to engage, primarily in the businesses engaged in
by it on the day prior to the Closing Date and such other businesses as shall be
reasonably related thereto.
(S) Notice of Amendments to Certain Documents. If (and on each
occasion that): (a) any Borrower's Certificate of Incorporation or any of the
charter or other incorporation documents of any Borrower shall at any time be
modified or amended in any material respect or if any new filings of such
documents shall at any time take place; or (b) any Borrowers' by-laws shall at
any time be modified or amended in any material respect; then such Borrower
will, not later than ten (10) Business Days prior to the date on which any such
modification, amendment, supplement, new agreement or new filing shall first
become effective, furnish to the Lender a true and complete copy of such
modification, amendment, supplement or new filing.
(T) Payment of Indebtedness for Money Borrowed. Pay all of its
Indebtedness for Money Borrowed (whether existing on the date hereof or arising
at any time thereafter) punctually when and as the same shall become due and
payable by it unless prohibited from doing so pursuant to the terms hereof or
the terms of any agreement related to Subordinated Debt.
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(U) Performance of Certain Obligations. Duly and properly
perform, observe and comply in all respects with all of its agreements,
covenants and obligations under each of the Other Agreements to which such
Borrower is or becomes a party or by which such Borrower is bound.
9.2. Negative Covenants. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lender, each Borrower
covenants that, unless Lender has first consented thereto in writing, it will
not:
(A) Mergers; Consolidations; Acquisitions. Merge or
consolidate with any Person, nor acquire all or any substantial part of the
Properties of any Person, except (i) a consolidation or merger solely involving
a Borrower and one or more of its wholly owned Subsidiaries or (ii) if, after
giving effect to any consolidation, merger, or acquisition ("Acquisition"), (1)
a Borrower is the surviving entity of any such merger or consolidation or (2)
such Borrower has acquired not less than sixty-six and two-thirds percent (66
2/3%) of the issued and outstanding capital stock of such Person and such Person
becomes a Guarantor or a Borrower hereunder and (3) (a) Borrower is Solvent, (b)
no Default or Event of Default has occurred which is then continuing or could
reasonably be anticipated to result therefrom, (c) the Acquisition is of a
Person or assets in the same business as such Borrower or another business
reasonably related thereto, (d) Lender has been given no less than thirty (30)
days prior written notice of any such Acquisition and shall be provided with all
information which it may reasonably request in connection with such Acquisition,
(e) such Borrower shall have delivered to Lender no later thirty (30) days prior
to closing of the Acquisition a pro forma balance sheet and cash flow
projections (which shall be based on reasonable assumptions) giving effect to
the Acquisition and with respect to such cash flow projections, cover the next
succeeding twelve month period which shall reflect the continuing compliance
with all financial covenants over such period, (f) after giving effect to the
Acquisition, no more than $10,000,000 of Loans and Letters of Credit shall have
been used in connection with the financing of the payment of the purchase price
of such Acquisition and all other Acquisitions, (g) the cash portion of the
total consideration paid to the sellers in connection with all such Acquisitions
which has been financed through the incurrence of indebtedness shall not exceed
the product of (I) five (5) multiplied by (II) an amount equal to (x) the
aggregate amount of Pro Forma EBITDA for the acquired businesses or entities in
all such Acquisitions, calculated for each acquired business or entity as at the
time of the Acquisition thereof based upon the then most recently available
twelve months' financial statements for such business or entity, (h) after
giving effect to any such Acquisition, Aggregate Adjusted Availability shall not
be less than an amount equal to $5,000,000, (i) the terms and conditions of all
third party financing related to such Acquisitions must be satisfactory to
Lender in its reasonable discretion and (j) Lender shall have received, prior to
or simultaneously with the closing of each such Acquisition, an opinion of
counsel reasonably satisfactory to Lender in all respects covering such
Borrower's due incorporation, valid existence, good standing and power and
authority to enter into the documents contemplated by the Acquisition (the
"Acquisition Documents"), the due authorization, execution, delivery and
enforceability of the Acquisition Documents, and such other matters as shall be
covered in any opinion rendered in favor of such Borrower in connection which
such Acquisition ("Permitted Acquisition").
(B) Loans. Make any loans or other advances of money (other
than for salary, bonuses, stock options, relocation, travel and entertainment
advances, advances against commissions and other similar advances in the
ordinary course of business) to any Person, including, without limitation, any
of Borrower's Affiliates, officers or employees, except that Borrowers may make
loans
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or other advances to (i) its employees, suppliers and customers in an amount not
to exceed One Million Dollars ($1,000,000) in the aggregate at any one time
outstanding and (ii) the other Borrowers, their Subsidiaries and CFP.
(C) Indebtedness For Money Borrowed. Create, incur, assume, or
suffer to exist, or permit any of its Subsidiaries to create, incur or suffer to
exist, any Indebtedness for Money Borrowed, except: (i) Obligations owing to
Lender; (ii) Indebtedness of any of its Subsidiaries to Borrower; (iii)
Indebtedness evidenced by the Senior Guaranteed Notes (which such Indebtedness
may be paid only in accordance with the terms of the Indenture as originally
executed or modified with the prior written consent of Lender but may not be
voluntarily prepaid; in whole or in part except as permitted pursuant to Section
9.2(I); (iv) Permitted Purchase Money Indebtedness; (v) liabilities arising out
of endorsements of checks and other negotiable instruments for deposit or
collection in the ordinary course of business; (vi) Indebtedness issued in
connection with a Permitted Refinancing; (vii) Indebtedness set forth on Exhibit
9.2(C); (viii) Indebtedness in connection with sale and leaseback transactions
otherwise permitted under Section 9.2(L); (ix) Indebtedness arising from the
issuance of Subordinated Repurchase Notes up to an aggregate principal amount of
$3,000,000; and (x) other Indebtedness for Money Borrowed in the aggregate not
to exceed the sum of Five Million Dollars ($5,000,000) at any one time
outstanding.
(D) Affiliate Transactions. Enter into, or be a party to any
transaction with any Affiliate or stockholder, except in the ordinary course of
or pursuant to the reasonable requirements of, any Borrower's business and upon
fair and reasonable terms which are fully disclosed to Lender and which are no
less favorable to such Borrower than such Borrower would obtain in a comparable
arm's length transaction with a Person not an Affiliate or stockholder of such
Borrower. The foregoing provision shall not restrict (i) any employment
agreement entered into by any Borrower in the ordinary course of business and
consistent with the past practices of such Borrower, (ii) transactions between
or among any of the Borrowers and the Borrowers' Subsidiaries, (iii) payments
and transactions pursuant to the Management Agreement as in effect on the
Closing Date and (iv) transactions permitted by Section 9.2(J) hereof.
(E) Partnerships or Joint Ventures. Become or agree to become
a general or limited partner in any general or limited partnership or a joint
venture in any joint venture which would require an aggregate investment by any
Borrower of greater than $1,000,000 if funded with Loans and $5,000,000 if
funded from other sources provided that such Borrower provides Lender with prior
written notice of any such investment and such investment is made at a time when
no Event of Default exists.
(F) Adverse Transactions. (i) Enter into any transaction the
performance of which would result in a material violation of this Agreement or
any Other Document, (ii) enter into any transaction, which would, at the time
such transaction is entered into, reasonably be anticipated to have a Material
Adverse Effect, or (iii) permit or agree to any material extension, compromise
or settlement or make any change or modification of any kind or nature with
respect to any Account, including any of the terms relating thereto, other than
any of the foregoing in the ordinary course of business, all of which shall be
reflected in the Schedules of Accounts submitted to Lender pursuant to Section
5.2 of this Agreement.
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(G) Guaranties. Guarantee, assume, endorse or otherwise, in
any way, become directly or contingently liable with respect to the Indebtedness
of any Person except (i) for endorsement of instruments or items of payment for
deposit or collection, (ii) one or more guarantees for the benefit of any
Borrower with respect to the Obligations and the Senior Guaranteed Notes, (iii)
guarantees by Borrower or any of its Subsidiaries in lieu of any loans permitted
by the provisions of Section 9.2(B); (iv) guarantees existing on the date
hereof; (v) Borrowers and their Subsidiaries may become and remain liable with
respect to guarantees in respect of obligations to pay purchase price, customary
indemnification and purchase price adjustment obligations incurred pursuant to
any Permitted Acquisitions or in connection with sales of assets; (vi) Borrowers
and their Subsidiaries may become and remain liable under guarantees in the
ordinary course of business to or of the obligations of suppliers, customers,
franchisees and licensees of Borrowers and their Subsidiaries; (vii) Borrowers
and their Subsidiaries may become and remain liable with respect to other
guarantees that are expressly subordinated by their terms to the Obligations;
provided that the maximum aggregate liability, contingent or otherwise, of
Borrowers and their Subsidiaries in respect of all such guarantees shall at no
time exceed $2,000,000.
(H) Limitation on Liens. Create or suffer to exist any Lien
upon any of its property, income or profits whether now owned or hereafter
acquired except: (i) Liens at any time granted in favor of Lender; (ii) Liens
for taxes (excluding any Lien imposed pursuant to any of the provisions of
ERISA) not yet due or being contested as permitted by Section 9.1(A) hereof, but
only if in Lender's commercially reasonable judgment such Lien does not
materially affect adversely Lender's rights or the priority of Lender's Lien in
the Collateral; (iii) Liens securing the claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like Persons for labor,
materials, supplies or rentals incurred in the ordinary course of any Borrower's
business, but only if the payment thereof is not at the time required and only
if such Liens are junior to the Liens in favor of Lender; (iv) Liens resulting
from deposits made in the ordinary course of business in connection with
workmen's compensation, unemployment insurance, social security and other like
Laws; (v) attachment, judgment and other similar non-tax Liens arising in
connection with court proceedings, but only if and for so long as the execution
or other enforcement of such Liens is and continues to be effectively stayed and
bonded on appeal in a manner satisfactory to Lender for the full amount thereof
the validity and amount of the claims secured thereby are being contested in
good faith and by appropriate lawful proceedings, and such Liens do not, in the
aggregate, materially detract from the value of the Property of such Borrower or
materially impair the use thereof in the operation of such Borrower's business;
(vi) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (vii)
reservations, exceptions, easements, rights of way, and other similar
encumbrances affecting Real Property, provided that, in Lender's commercially
reasonable judgment, they do not in the aggregate materially detract from the
value of said Properties or materially interfere with their use in the ordinary
conduct of such Borrower's business; (viii) Liens securing Indebtedness of a
Subsidiary of any Borrower to any Borrower; (ix) such other Liens as appear on
Exhibit 9.2(H) attached hereto; and (x) such other Liens as Lender may hereafter
approve in writing.
(I) Subordinated Debt. Make, or take any action to authorize
or effect, any payment of principal, interest, fees or charges on or in respect
of any payment of any part or all of any Subordinated Debt in violation of the
subordination provisions relating to such Subordinated Debt or voluntarily
prepay any Subordinated Debt; or otherwise repurchase, redeem or retire any
instrument evidencing any such Subordinated Debt prior to maturity; or enter
into any agreement (oral or written)
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to amend, modify, alter (in any manner materially adverse to Lender) or
terminate any one or more instruments or agreements evidencing or relating to
any Subordinated Debt, except that any Borrower may prepay, repurchase, redeem
or retire any Subordinated Debt prior to maturity out of the proceeds of the
issuance of capital stock, any other equity contribution permitted by this
Agreement or the issuance of Indebtedness in a Permitted Refinancing of the
Subordinated Debt so prepaid, repurchased, redeemed or retired.
(J) Distributions. Declare or make any (i) Distributions
required to allow repurchase of equity held by management pursuant to the
Stockholders Agreement not to exceed (x) in any Fiscal Year an amount equal to
the Cash Flow for the immediately preceding Fiscal Year so long as after giving
effect to such Distribution, Borrowers shall have not less than $5,000,000 of
Aggregate Adjusted Availability (including payments on Subordinated Debt issued
to such investors in lieu of cash) or (y) in any twelve (12) month period an
amount not to exceed $500,000 so long as after giving effect to such
Distribution Borrowers shall have not less than $7,500,000 of Aggregate Adjusted
Availability (including payments on Subordinated Debt issued to such investors
in lieu of cash), (ii) Distributions to CFP and Holdings required to pay their
franchise taxes and other fees and expenses related to maintenance of their
respective corporate existences, (iii) Distributions to make interest payments
to the holders of the Senior Guaranteed notes, (iv) Distributions to First
Atlantic Capital, Ltd. pursuant to the terms of the Management Agreement, (v)
Distributions to First Atlantic Capital, Ltd. for investment banking advisory
fees for each Permitted Acquisition and/or any other financing transaction in an
amount not to exceed, with respect to each Permitted Acquisition 2% of the
transaction value and, with respect to each other financing transaction, 2% of
the gross proceeds of such transaction (as determined in good faith by senior
management of the Borrowers) and (vi) Distributions by Quality and Custom to
Holdings.
(K) Subsidiaries. Hereafter create any Subsidiary of any
Borrower without giving Lender advance notice of the name of such Subsidiary and
the nature of its intended business and such Subsidiary has become a Guarantor
or divest itself of any material assets by transferring them to any other
Subsidiary of Borrower which has not become a Guarantor and to whose existence
Lender has not consented; provided, however, that (i) subject to Section 9.2(A),
any Borrower may create a Subsidiary for purposes of effecting the acquisition
of another corporation through a merger, a stock purchase transaction or an
asset purchase transaction and may transfer to such Subsidiary cash or other
property for purposes of paying the purchase price in such acquisition as well
as related fees and expenses, (ii) subject to Section 9.2(A), any Borrower may
acquire another corporation that becomes a Subsidiary pursuant to a stock
purchase transaction or a merger and (iii) any Borrower may create a Subsidiary
and transfer property to such Subsidiary to the extent permitted by Section
9.2(E).
(L) Capital Expenditures. Make Capital Expenditures
(including, without limitation, by way of capitalized leases) in the aggregate,
as to all Borrowers, in excess of the sum Seven Million Dollars ($7,000,000)
("Annual Amounts") for any Fiscal Year, provided, however, the unused portion of
any Annual Amount in any Fiscal Year not to exceed Five Million Dollars
($5,000,000) may be used by Borrowers in the immediately succeeding Fiscal Year
in addition to the Annual Amount for such succeeding year.
(M) Business Locations. Transfer their respective principal
place of business or chief executive office, or open new locations or transfer
existing locations, or maintain warehouses or
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records with respect to Accounts, to or at any locations other than those at
which the same are presently kept or maintained, except upon at least thirty
(30) days prior written notice to Lender and after the delivery to Lender of
financing statements, if required by Lender, in form satisfactory to Lender to
perfect or continue the perfection of Lender's Lien and security interest
hereunder.
(N) Change of Business. Enter into any new business unrelated
to the business conducted as of the Closing Date or make any material change in
any Borrowers business objectives, purposes and operations.
(O) Disposition of Assets. Sell, lease or otherwise dispose of
or transfer any of its respective Properties, including any disposition of
Property as part of a sale and leaseback transaction, to or in favor of any
Person, except (i) sales of inventory in the ordinary course of business, (ii) a
transfer of Property to a Borrower by a Subsidiary of such Borrower or another
Borrower or Guarantor, (iii) if an Event of Default shall not have occurred and
be continuing, dispositions of tangible fixed assets ("Disposed Asset") to the
extent such fixed assets are replaced with fixed assets of similar kind,
function and value, provided the replacement asset shall be ordered or
construction commenced no later than one hundred eighty (180) days following any
disposition of the asset to be replaced, the replacement asset (which shall
constitute Collateral provided that the Disposed Asset constituted Collateral)
shall be free and clear of Liens other than Permitted Liens that are not
Purchase Money Liens and Borrowers shall give Lender at least five (5) days
prior written notice of such disposition, (iv) if any Event of Default shall not
have occurred and be continuing, dispositions of tangible fixed assets which, in
the aggregate during any consecutive twelve month period, have a fair market
value or book value, whichever is less, of $500,000, provided that the Net
Proceeds thereof are applied as provided in Section 2.2(C), and (v) any sale and
leaseback transaction where the lease is an operating lease, and any sale and
leaseback transaction otherwise permitted by Section 9.2(L).
(P) Name of Borrower. Use any corporate name (other than its
own) or any fictitious name, tradestyle or "d/b/a" other than the names
disclosed on Exhibit 9.2(P) attached hereto except after at least thirty (30)
days prior written notice has been provided to Lender and Lender has been
provided with a tradestyle letter relating thereto in form and substance
reasonably satisfactory to Lender.
(Q) Use of Lender's Name. Without the prior written consent of
Lender, use the name of Lender or the name of any Affiliates of Lender in
connection with any Borrower's business or activities, except (i) as required by
law, (ii) in connection with the enforcement of its rights under this Agreement,
(iii) in connection with internal business matters, (iv) as required in dealings
with governmental agencies and financial institutions, (v) in filings with
governmental agencies under the federal and state securities laws, (vi) in its
financial statements, and (vii) in other statements to the extent that such
statements include information previously known to the Persons to which such
statements are addressed or generally known to the public and to trade creditors
of Borrowers solely for credit reference purposes.
(R) Margin Securities. Own, purchase or acquire (or enter into
any contract to purchase or acquire) any "margin security" as defined by any
regulation of the Federal Reserve Board as now in effect or as the same may
hereafter be in effect unless, prior to any such purchase or acquisition or
entering into any such contract, Lender shall have received an opinion of
counsel
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satisfactory to Lender to the effect that such purchase or acquisition will not
cause this Agreement to violate Regulations G or U or any other regulation of
the Federal Reserve Board then in effect.
(S) Restricted Investment. Except as otherwise provided in
Section 9.2(E) hereof, make or have, or permit any of its Subsidiaries to make
or have, any Restricted Investment.
(T) Fiscal Year. Change its Fiscal Year from a Fiscal Year
ending on the last Saturday of each March of each year.
(U) Stock of Subsidiary, Etc. Sell or otherwise dispose of any
shares of capital stock of any of its Subsidiaries, except in connection with a
transaction permitted under Section 9.2(A).
(V) Tax Consolidation. File or consent to the filing of any
consolidated income tax return with any Person other than its Subsidiaries.
(W) ERISA. Adopt or agree to contribute to any Plan which is
subject to Title IV of ERISA except for any Plan set forth on Exhibit 9.2(W)
provided that Lender has been provided with satisfactory evidence indicating
that Borrower does not have any material withdrawal liability in excess of
$500,000 with respect to such Plan.
(X) Other Agreements. Enter into any material amendment,
waiver or modification of any material agreements or its respective Certificate
of Incorporation, By-Laws or shareholders agreements the result of which would
have a Material Adverse Effect on any Borrower.
SECTION 10. CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of the
Other Agreements, and without affecting in any manner the rights of Lender under
the other Sections of this Agreement, it is understood and agreed that Lender
will not make the initial Loans or cause the issuance of the initial Letters of
Credit under Section 2 of this Agreement unless and until each of the following
conditions has been, and at the time of such initial extension of credit
continues to be, satisfied, all in form and substance reasonably satisfactory to
Lender and its counsel:
10.1. Documentation. Lender shall have received the following
documents, each to be in form and substance reasonably satisfactory to Lender
and its counsel:
(A) Certified copies of each Borrower's casualty insurance
policies, together with loss payable endorsements on Lender's standard form of
loss payee endorsement naming Lender as loss payee, and certified copies of each
Borrower's liability insurance policies, together with endorsements naming
Lender as a co-insured;
(B) Copies of all filing receipts or acknowledgments issued by
any governmental authority to evidence any filing under the Uniform Commercial
Code in applicable jurisdictions necessary to perfect the Liens of Lender in the
Collateral, and the Liens of Lender in the collateral granted to Lender pursuant
to each Subsidiary Security Agreement which Liens are subject to the
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Uniform Commercial Code, and evidence in a form acceptable to Lender that such
Liens constitute valid and perfected security interests and Liens, having the
Lien priority specified in Section 4.2(B) hereof;
(C) A copy of the Certificate of Incorporation of each
Borrower and each Guarantor, and all amendments thereto, certified by the
Secretary of State or other appropriate official of its jurisdiction of
incorporation and a true and accurate copy of the By-Laws of each Borrower and
each Guarantor in effect as of the Closing Date, certified by such corporation's
secretary;
(D) Good standing certificates for each Borrower and each
Guarantor, issued by the Secretary of State or other appropriate official of
each Borrower's or such Guarantor's jurisdiction of incorporation and each
jurisdiction where such Borrower or such Guarantor is qualified as a foreign
corporation;
(E) A closing certificate signed by the President and Chief
Financial Officer of each Borrower and each Guarantor dated as of the Closing
Date, stating that (i) the representations and warranties set forth in Section 8
hereof are true and correct in all material respects on and as of such date,
(ii) each Borrower is on such date in compliance in all material respects with
all the terms and provisions set forth in this Agreement and (iii) on such date
no Default or Event of Default has occurred or is continuing;
(F) Landlord waivers or access agreements duly executed,
accepted and acknowledged by or on behalf of each of the landlords with respect
to locations where a material amount of Collateral is located;
(G) The Other Agreements duly executed and delivered by each
required signatory thereto;
(H) the favorable written opinion of (i) O'Sullivan Graev &
Karabell, counsel to Borrowers, substantially in the form of Exhibit 10.1(I)(i),
(ii) Falk & Sharp and (iii) McCausland, Keen & Buckman.
(I) Written instructions from Borrowing Agent on behalf of
Borrowers directing the application of proceeds of any Loan to be made pursuant
to this Agreement on the Closing Date, and an initial Borrowing Base Certificate
from Borrowers reflecting that Borrowers have Eligible Accounts and Inventory in
amounts sufficient in value and amount to support Revolving Credit Loans in the
amount requested by Borrowers on the date of such certificate;
(J) Duly executed agreements from each Borrower establishing
the Dominion Account for the collection or servicing of the Accounts;
(K) Copies of any and all domestic and foreign governmental
consents, authorizations, orders or approvals necessary to permit the
effectuation of the transactions contemplated by this Agreement and the Other
Agreements and such consents and waivers of third parties that have claims
against the Collateral, as Lender and its counsel shall reasonably deem
necessary;
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(L) Copies of the resolutions in form and substance reasonably
satisfactory to it, of the Board of Directors of each Borrower authorizing the
execution, delivery and performance of this Agreement, the Loans, Notes, and the
Other Agreements on behalf of each Borrower which is a party thereto;
(M) Evidence reasonably satisfactory to Lender that (i) no
litigation, investigation or proceeding before or by any arbitrator or
governmental authority shall be continuing or threatened against any Guarantor
or any Borrower or against the officers or directors of any Guarantor or any
Borrower (A) in connection with the Loan Documents or any of the transactions
contemplated thereby and which, in the reasonable opinion of Lender, is deemed
material or (B) which could reasonably be expected to have a Material Adverse
Effect on any Borrower; and (ii) no injunction, writ, restraining order or other
order of any nature materially adverse to any Borrower or the conduct of its
business or inconsistent with the due consummation of the transactions
contemplated hereby shall have been issued by any governmental authority;
(N) Any Borrower shall have discharged, or simultaneously with
(or from the proceeds of) the initial Revolving Credit Loan and Term Loan shall
discharge, all of its obligations under its existing financing arrangements with
Prior Lender, including, without limitation, costs, fees and expenses in
connection therewith; and
(O) Such other documents, instruments and agreements as Lender
may reasonably request.
10.2. Other Conditions. The following conditions have been, and at the
time of the initial extension of credit hereunder shall continue to be,
satisfied, in the sole discretion of Lender:
(A) No Default or Event of Default shall exist;
(B) Each of the conditions precedent set forth in the Other
Agreements shall have been satisfied;
(C) Since December 31, 1997 there shall not have occurred any
material adverse change in the business, financial condition or results of
operations of any Guarantor or any Borrower, or the existence or value of any
material Collateral, or any event, condition or state of facts which would
reasonably be expected to have a Material Adverse Effect on any Borrower or any
Guarantor;
(D) No action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of Borrowers'
prior credit facility, this Agreement, the Other Agreements, or the consummation
of the transactions contemplated hereby or which would be reasonably likely to
result in a Material Adverse Effect on any Borrower or any Guarantor;
(E) Lender shall have received such certificates and documents
reflecting the Solvency of each Borrower and each Guarantor, as Lender shall
find acceptable, including, without
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limitation, Consolidated pro-forma balance sheets, forecasted financial
statements consisting of balance sheets, income statements and cash flow
statements for Holdings on a Consolidated basis covering at least the three-year
period commencing on the Closing Date, prepared by Holdings and a fair valuation
balance sheet for Holdings on a Consolidated basis showing that each Borrower
and Guarantor is Solvent;
(F) All instruments and documents required hereby or relating
to each Borrower's capacity and authority to execute the Other Agreements and
such other agreements, instruments, certificates, opinions and assurances as
Lender may reasonably request, and all procedures in connection herewith would
be subject to Lender's approval and the approval of Lender's counsel as to form
and substance.
(G) Each of the representations and warranties made by each
Borrower in or pursuant to this Agreement and any of the Other Agreements and
each of the representations and warranties contained in any certificate,
document or financial or other statement furnished any time under or in
connection with this Agreement or any Other Agreement shall be true and correct
in all material respects on and as of such date as if made on and as of such
date.
(H) Receipt by Lender of fully paid mortgagee title insurance
policies (or binding commitments to issue title insurance policies, marked to
Lender's satisfaction to evidence the form of such policies to be delivered
after the Closing Date), in standard ALTA form, issued by Chicago Title
Insurance Company or another title insurance company satisfactory to Lender,
containing such endorsements as shall be required by Lender in an amount equal
to not less than $4,000,000 insuring the Mortgages to create a valid first
priority and fourth priority Lien on all Real Property located at 5501 Tabor
Road, Philadelphia, Pennsylvania and valid Liens on the leasehold interest
described therein with no exceptions which Lender shall not have approved in
writing and no survey exceptions.
(I) Aggregate Adjusted Availability on the Closing Date shall
exceed Eight Million Dollars ($8,000,000), calculated after (1) giving effect to
payment of all Indebtedness of Borrower to Prior Lender, and (2) payment of all
out-of-pocket fees and costs incurred in connection with the Closing.
10.3. Conditions to Each Loan. The agreement of Lender to make any Loan
requested to be made on any date (including, without limitation, the initial
Loans), is subject to the satisfaction of the following conditions precedent as
of the date such Loan is made:
(A) Representations and Warranties. Each of the
representations and warranties made by each Borrower in or pursuant to this
Agreement and by each Borrower in any of the Other Agreements to which it is a
party, and each of the representations and warranties of each Borrower contained
in any certificate, or other written statement furnished at any time pursuant to
this Agreement or any of the Other Agreements shall be true and correct in all
material respects on and as of such date as if made on and as of such date,
except for representations and warranties which, by their nature, speak of a
particular date which shall be true and correct in all material respects as of
such particular date; and
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(B) No Default. No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Loans requested to be made, on such date; provided, however that Lender, in
its sole discretion, may continue to make Loans notwithstanding the existence of
an Event of Default or Default and that any Loans so made shall not be deemed a
waiver of any such Event of Default or Default.
SECTION 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
11.1. Events of Default. The occurrence of any one or more of the
following events shall constitute, after giving effect to any applicable notice
or grace period set forth below, an "Event of Default":
(A) Payment of Loans. Any failure to pay any installment of
principal, interest or premium, if any, owing on any Loan on the due date
thereof (whether due at stated maturity, upon acceleration or otherwise).
(B) Payment of Obligations. Any failure to pay any of the
Obligations that are not evidenced by a Note on the due date thereof (whether
due at stated maturity, on demand, upon acceleration or otherwise).
(C) Misrepresentations. Any representation or warranty made by
any Borrower in this Agreement or by any Borrower or any Guarantor in any of the
Other Agreements to which it is a party, or any representation or warranty of
any Borrower or any Guarantor contained in any certificate or other written
statement furnished at any time pursuant to this Agreement or any of the Other
Agreements proves to have been false or misleading in any material respect when
made.
(D) Breach of Covenants. Any Borrower shall breach (i) any
covenant contained in Sections 4.4, 4.5, 4.6, 5.2, 9.1(A), 9.1(F), 9.1(J),
9.1(K), 9.1(L)(viii), 9.2 (other than subsection (P) thereof) or 9.3 of this
Agreement, or (ii) any other covenant contained in this Agreement or any other
Agreement (other than a covenant a default in the performance or observance of
which is dealt with specifically elsewhere in this Section 11.1) and the breach
of such other covenant is not cured to Lender's satisfaction within thirty (30)
days after the sooner to occur of any Borrower's receipt of notice of such
breach from Lender or the date on which such breach becomes known to any officer
of such Borrower.
(E) Cancellation of Other Agreements. Any of the Other
Agreements shall be cancelled, terminated, revoked or rescinded otherwise than
in accordance with the express terms thereof or with the prior written
agreement, consent or approval of Lender; or any action at law, suit in equity
or other legal proceeding to cancel, revoke or rescind any of the Other
Agreements shall be commenced by or on behalf of any Borrower, any Guarantor or
any other Person or Persons bound thereby, or by any governmental or regulatory
authority or agency of competent jurisdiction; or any court or any other
governmental or regulatory authority or agency of competent jurisdiction shall
make a determination that, or shall issue a judgment, order, decree or ruling to
the effect that, any one or more of the Other Agreements or any one or more of
the obligations of any Borrower, any Guarantor
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or of any other Person or Persons under any one or more of the Other Agreements
are illegal, invalid or unenforceable in accordance with the terms thereof.
(F) Insolvency, Etc. Any resolution shall be passed or any
action shall be taken by any Borrower or any Guarantor for the termination,
winding up, liquidation or dissolution of such Person or its debts, or any
Borrower shall make an assignment for the benefit of creditors, or any Borrower
shall file a petition in voluntary liquidation or bankruptcy, or any Borrower or
any Guarantor shall file a petition or answer or consent seeking the
reorganization of such Person or the readjustment of any of the Indebtedness of
such person under applicable insolvency or bankruptcy laws now or hereafter
existing, or any Borrower or any Guarantor shall consent to the appointment of
any receiver, administrator, liquidator, custodian or trustee of all or any part
of its property or assets, or corporate action shall be taken by any Borrower or
any Guarantor or personal action taken by any Borrower or any Guarantor, in
either case for the purpose of effecting any of the foregoing.
(G) Bankruptcy Etc. By order or decree of any court of
competent jurisdiction, any Borrower or any Guarantor shall be adjudicated a
bankrupt or insolvent, or a petition for proceedings in bankruptcy or
liquidation or for the reorganization or the readjustment of its Indebtedness
under applicable bankruptcy or insolvency laws now or hereafter existing shall
be filed against any Borrower or any Guarantor, and any Borrower or Guarantor
shall admit the material allegations thereof, or any order, judgment or decree
shall be made approving such petition and such order, judgment or decree shall
not be vacated, set aside or stayed within sixty (60) days of their commencement
or any receiver, administrator, liquidator or trustee shall be appointed for any
Borrower or any Guarantor or for all or any part of the property of such Person
and such receiver, administrator, liquidator or trustee shall not be discharged
or his jurisdiction shall not be relinquished, vacated or stayed, on appeal or
otherwise, within sixty (60) days after his appointment.
(H) Other Defaults. There shall occur and be continuing any
event of default on the part of any Borrower or any Guarantor (including
specifically, but without limitation, due to non-payment) under any agreement,
document or instrument to which any Borrower or any Guarantor is a party or by
which any Borrower or any of its Property is bound, creating or relating to any
Indebtedness for Money Borrowed (including, but not limited to, the Senior
Guaranteed Notes) in excess of $1,000,000 the occurrence and continuation of
which event of default gives the holders of such Indebtedness the right to
accelerate the same.
(I) Uninsured Losses; Unauthorized Dispositions. Any loss,
theft, damage or destruction not fully covered by insurance (as required by this
Agreement and subject to such deductibles as Lender shall have agreed to in
writing), or sale, lease or encumbrance of any of the Collateral or the making
of any levy, seizure, or attachment thereof or thereon which could reasonably be
expected to have a Material Adverse Effect on any Borrower and its Subsidiaries,
except in all cases as may be specifically permitted by other provisions of this
Agreement.
(J) Adverse Changes. There shall occur any event or condition
which, in Lender's reasonable discretion, would have a Material Adverse Effect
on any Borrower and the Guarantors taken as a whole.
(K) Solvency. Any Borrower or any Guarantor shall cease to be
Solvent.
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(L) Business Disruption; Condemnation. There shall occur a
cessation of a substantial part of the business of any Borrower or any Guarantor
for a period which significantly affects such Borrower's or such Guarantor's
capacity to continue its business, on a profitable basis, the occurrence of
which could reasonably be expected to have a Material Adverse Effect on such
Borrower or such Guarantor; or any Borrower or any Guarantor shall suffer the
loss or revocation of any material license or permit now held or hereafter
acquired by any Borrower or any Guarantor which is necessary to the continued or
lawful operation of its business, the occurrence of which could reasonably be
expected to have a Material Adverse Effect on any Borrower or any Guarantor; or
any Borrower or any Guarantor shall be enjoined, restrained or in any way
prevented by court, governmental or administrative order from conducting all or
any material part of its business affairs, the occurrence of which could
reasonably be expected to have a Material Adverse Effect on any Borrower or any
Guarantor.
(M) Change of Ownership. (1) Any Borrower shall cease to own
and control, beneficially and of record, at least fifty one percent (51%) of the
issued and outstanding capital stock of its Subsidiaries; (2) Holdings shall
cease to own and control, beneficially and of record, at least one hundred
percent (100%) of the issued and outstanding capital stock of Custom and
Quality; or (3) any Person other than CFP Group, Inc. shall own and control,
beneficially and of record one hundred percent (100%) or more of the issued and
outstanding capital stock of Holdings.
(N) ERISA. A Reportable Event shall occur which Lender, in its
sole reasonable discretion, shall determine in good faith constitutes grounds
for the termination by the PBGC of any Plan or for the appointment by the
appropriate United States district court of a trustee for any Plan, or if any
Plan shall be terminated by the PBGC or any such trustee shall be requested or
appointed, or if any Borrower is in "default" (as defined in Section 4219(c)(5)
of ERISA) with respect to payments to a Multiemployer Plan resulting from such
Borrower's complete or partial withdrawal from such Plan.
(O) Litigation. Any Borrower or any Guarantor, or any
Affiliate of either, shall challenge or contest in any action, suit or
proceeding the validity or enforceability of this Agreement or any of the Other
Agreements, the legality or enforceability of any of the Obligations or the
perfection or priority of any Lien granted to Lender.
(P) Criminal Forfeiture. Any Borrower or any Guarantor shall
be criminally indicted or convicted under any law that could lead to a
forfeiture of any material Property of any Borrower or any Guarantor.
(Q) Judgments. Any final, unappealable money judgment, writ of
attachment or similar process is entered or filed against any Borrower or any
Guarantor or any of its Property ("Judgment") and results in the creation or
imposition of any Lien that is not a Permitted Lien if (i) any Judgment exceeds
$500,000 or the aggregate amount of all outstanding Judgments for all Borrowers
and the Guarantors at such time is in excess of $1,000,000, and (ii) such
Judgments are not discharged or stayed within forty (40) days.
11.2. Acceleration of the Obligations. Without in any way limiting the
right of Lender to demand payment of any portion of the Obligations payable on
demand in accordance with Section 3.4
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hereof, upon or at any time after the occurrence of an Event of Default and
during the continuance thereof as above provided, all or any portion of the
Obligations due or to become due from Borrowers to Lender, whether under this
Agreement, or any of the Other Agreements or otherwise, shall, at the option of
Lender and without notice or demand by Lender, become at once due and payable
and Borrowers shall forthwith pay to Lender, in addition to any and all sums and
charges due, the entire principal of and interest accrued on the Obligations.
11.3. Remedies. Upon and after the occurrence of an Event of Default,
Lender shall have and may exercise from time to time the following rights and
remedies:
(A) All of the rights and remedies of a secured party under
the Code or under other applicable law, and all other legal and equitable rights
to which Lender may be entitled, all of which rights and remedies shall be
cumulative, and none of which shall be exclusive, and shall be in addition to
any other rights or remedies contained in this Agreement or any of the Other
Agreements.
(B) The right to take immediate possession of the Collateral,
and (i) to require Borrowers and the Guarantors to assemble the Collateral, at
Borrower's expense, and make it available to Lender at a place designated by
Lender which is reasonably convenient to both parties, and (ii) to enter any of
the premises of any Borrower and the Guarantors or wherever any of the
Collateral shall be located.
(C) The proceeds realized from the sale of any Collateral may
be applied, upon collection, first to the costs, expenses and attorneys' fees
incurred by Lender in collecting the Obligations, in enforcing the rights of
Lender under the Other Agreements and in collecting, retaking, completing,
protecting, removing, storing, advertising for sale, selling and delivery any of
the Collateral; secondly, to interest due upon any of the Obligations; and
thirdly, to the principal of the Obligations. If any deficiency shall arise,
each Borrower and each Guarantor shall remain jointly and severally liable to
Lender therefor.
11.4. Remedies Cumulative; No Waiver. All covenants, conditions,
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrowers contained in this Agreement and of Borrowers and each Guarantor in the
Other Agreements, or in any document referred to herein or contained in any
agreement supplementary hereto or in any schedule or contained in any other
agreement between Lender and any Guarantor or any Borrower, heretofore,
concurrently, or hereafter entered into, shall be deemed cumulative to and not,
except as expressly provided thereby, in derogation or substitution of any of
the terms, covenants, conditions, or agreements of Borrowers herein contained.
The failure or delay of Lender to exercise or enforce any rights, Liens, powers,
or remedies hereunder or under any of the aforesaid agreements or other
documents or security or Collateral shall not operate as a waiver of such Liens,
rights, powers and remedies, but all such Liens, rights, powers, and remedies
shall continue in full force and effect until all Loans and all other
Obligations owing or to become owing from Borrowers to Lender shall have been
fully satisfied, and all Liens, rights, powers, and remedies herein provided for
are cumulative and none are exclusive.
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SECTION 12. MISCELLANEOUS
12.1. Power of Attorney. Borrowers hereby irrevocably designate, make,
constitute and appoint Lender (and all Persons designated by Lender) as
Borrowers' true and lawful agent (and attorney-in-fact) and Lender, or Lender's
agent, may, without notice to any Borrower and in any Borrower's or Lender's
name, but at the cost and expense of Borrower:
(A) At such time or times hereafter as Lender or said agent,
in its sole discretion, may determine, endorse any Borrower's name on any
checks, notes, acceptances, drafts, money orders or any other evidence of
payment or proceeds of the Collateral which come into the possession of Lender
or under Lender's control pursuant to the terms of this Guarantor Security
Agreement; and
(B) At such time or times upon or after the occurrence of an
Event of Default and during the continuance thereof as Lender or its agent in
its sole discretion may determine: (i) demand payment of the Accounts from the
Account Debtors, enforce payment of the Accounts by legal proceedings or
otherwise, and generally exercise all of Borrowers' rights and remedies with
respect to the collection of the Accounts; (ii) settle, adjust, compromise,
discharge or release any of the Accounts or other Collateral or any legal
proceedings brought to collect any of the Accounts or other Collateral; (iii)
sell or assign any of the Accounts and other Collateral upon such terms, for
such amounts and at such time or times as Lender deems advisable; (iv) take
control, in any manner, of any item of payment or proceeds relating to any
Collateral; (v) prepare, file and sign any Borrower's name to a proof of claim
in bankruptcy or similar document against any Account Debtor or to any notice of
lien, assignment or satisfaction of lien or similar document in connection with
any of the Collateral; (vi) receive, open and, unless any Borrower requests
delivery thereof to such Borrower after opening, dispose of all mail addressed
to such Borrower and to notify postal authorities to change the address for
delivery thereof to such address as Lender may designate; (vii) endorse the name
of any Borrower upon any of the items of payment or proceeds relating to any
Collateral and deposit the same to the account of Lender on account of the
Obligations; (viii) endorse the name of any Borrower upon any chattel paper,
document, instrument, invoice, freight bill, bill of lading or similar document
or agreement relating to the Accounts and any other Collateral; (ix) use any
Borrower's stationery and sign the name of any Borrower to verifications of the
Accounts and notices thereof to Account Debtors; (x) subject to any applicable
license agreements, use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the Accounts
and any other Collateral and to which any Borrower has access; (xi) make and
adjust claims under policies of insurance; and (xii) do all other acts and
things necessary, in Lender's reasonable determination, to fulfill any
Borrower's obligations under this Agreement.
12.2. Indemnity. Each Borrower hereby agrees to indemnify Lender and
hold Lender harmless from and against any liability, loss, damage, suit, action
or proceeding ever suffered or incurred by Lender as the result of any
Borrower's failure to observe, perform or discharge such Borrower's duties
hereunder. Without limiting the generality of the foregoing, this indemnity
shall extend to any claims asserted against Lender by any Person under any
Environmental Laws or similar laws by reason of any Borrower's or any other
Person's failure to comply with laws applicable to solid or hazardous waste
materials or other toxic substances. Notwithstanding any contrary provision of
this Agreement, the obligation of any Borrower under this Section 12.2 shall
survive the payment in full of
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the Obligations and the termination of this Agreement. This indemnity shall
include reasonable attorneys' fees and legal expenses.
12.3. Modification of Agreement; Sale of Interest. This Agreement may
not be modified, altered or amended, except by an agreement in writing signed by
each Borrower and Lender. No Borrower may sell, assign or transfer any interest
in this Agreement or any of the Other Agreements, or any portion thereof,
including, without limitation, such Borrower's rights, title, interests,
remedies, powers, and duties hereunder or thereunder. Lender shall not assign
any of its rights or interests in any of the Loan Documents without the prior
written consent of Borrowers. Notwithstanding the foregoing, if the transfer is
part of a transfer by Lender to a single assignee that is a reputable and
financially responsible financial institution that is in the business of
providing financing facilities of the types contemplated by this Agreement of a
significant portion of its portfolio of loans, Borrowers' consent is not
required. Lender may sell participations to one or more Participating Lenders in
or to all or any ratable portion of its rights and obligations under the Loan
Documents (including, without limitation, all or any ratable portion of the
Loans or the Letters of Credit); provided, however, that (a) Lender's
obligations under the Loan Documents shall remain unchanged, (b) Lender shall
remain solely responsible to the other parties to the Loan Documents for the
performance of such obligations, and (c) the other parties to the Loan Documents
shall continue to deal solely and directly with Lender in connection with
Lender's rights and obligations under this Agreement.
12.4. Reimbursement of Expenses. If, at any time or times prior or
subsequent to the date hereof, regardless of whether or not an Event of Default
then exists or any of the transactions contemplated hereunder are concluded,
Lender employs counsel for advice or other representation, or incurs legal
expenses or other costs or out-of-pocket expenses in connection with: (A) the
negotiation and preparation of this Agreement or any of the Other Agreements,
any amendment of or modification of this Agreement or any of the Other
Agreements (except in the event such modification or amendment is required
solely to correct any error contained in this Agreement or any of the Other
Agreements, which such error existed on the Closing Date); (B) any litigation,
contest, dispute, suit, proceeding or action (whether instituted by Lender, any
Borrower or any other Person) in any way relating to the Collateral, this
Agreement or any of the Other Agreements or any Borrower's affairs; (C) any
attempt to enforce any rights of Lender or any Participating Lender against any
Borrower or any other Person which may be obligated to Lender by virtue of this
Agreement or any of the Other Agreements, including, without limitation, the
Account Debtors; or (D) any attempt to inspect (subject to the limitations set
forth in Section 3.1(F) hereof), verify, protect, preserve, restore, collect,
sell, liquidate or otherwise dispose of or realize upon the Collateral; then, in
any such event, the reasonable attorneys' fees arising from such services and
all reasonable out-of-pocket expenses, costs and charges of Lender relating to
any of the events or actions described in this Section shall be payable, on
demand, by Borrowers to Lender and shall be additional Obligations hereunder
secured by the Collateral. Without limiting the generality of the foregoing,
such expenses, costs, charges and fees may include reasonable accountants' fees,
costs and expenses; court costs and expenses; photocopying and duplicating
expenses; court reporter fees, costs and expenses; long distance telephone
charges; air express charges; telegram charges; secretarial over-time charges;
and reasonable expenses for travel, lodging and food paid or incurred in
connection with the performance of such legal services. Additionally, if any
taxes (excluding (i) taxes imposed upon or measured by the net income of Lender
or otherwise in the nature of a net income tax, including, without limitation,
any franchise tax or any similar tax based on capital, net worth or comparable
basis for measurement and (ii) taxes collected by
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a withholding on payments and which neither are computed by reference to the net
income of the Payee nor are in the nature of an advance collection of a tax
based on or measured by the net income of the payee) shall be payable on account
of the execution or delivery of this Agreement, or the execution, delivery,
issuance or recording of any of the Other Agreements, or the creation of any of
the Obligations hereunder, by reason of any existing federal or state statute,
Borrowers will pay all such taxes, including, but not limited to, any interest
and penalties thereon, and will indemnify and hold Lender harmless from and
against liability in connection therewith. Notwithstanding the foregoing,
Borrowers shall not be obligated to pay or reimburse Lender to the extent any
amount otherwise payable by Borrowers resulted from the gross negligence or
willful misconduct of Lender or Bank.
12.5. Indulgences Not Waivers. Lender's failure, at any time or times
hereafter, to require strict performance by any Borrower of any provision of
this Agreement shall not waive, affect or diminish any right of Lender
thereafter to demand strict compliance therewith and performance thereof. Any
suspension or waiver by Lender of an Event of Default by any Borrower under this
Agreement or any of the Other Agreements shall not suspend, waive or affect any
other Event of Default by any Borrower under this Agreement or by any Borrower
or any Guarantor under any of the Other Agreements, whether the same is prior or
subsequent thereto and whether of the same or of a different type. None of the
undertakings, agreements, warranties, covenants and representations of any
Borrower contained in this Agreement or any of the Other Agreements and no Event
of Default by any Borrower under this Agreement or by any Borrower or any
Guarantor under any of the Other Agreements shall be deemed to have been
suspended or waived by Lender, unless such suspension or waiver is by an
instrument in writing specifying such suspension or waiver and is signed by a
duly authorized representative of Lender and directed to such Borrower.
12.6. Severability. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
12.7. Successors and Assigns. This Agreement and the Other Agreements
shall be binding upon and inure to the benefit of the successors and permitted
assigns of each Borrower and Lender. This provision, however, shall not be
deemed to modify Section 12.3 hereof.
12.8. Cumulative Effect; Conflict of Terms. The provisions of the Other
Agreements are hereby made cumulative with the provisions of this Agreement.
Except as otherwise provided in any of the Other Agreements by specific
reference to the applicable provision of this Agreement, if any provision
contained in this Agreement is in direct conflict with, or inconsistent with,
any provision in any of the Other Agreements, the provision contained in this
Agreement shall govern and control.
12.9. Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
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12.10. Notice. Except as otherwise provided herein, all notices,
requests and demands to or upon a party hereto whether under this Agreement or
any Other Agreement shall be in writing and shall be sent by certified or
registered mail, return receipt requested, recognized overnight courier or by
telecopy and, unless otherwise expressly provided herein, shall be deemed to
have been validly served, given or delivered when delivered (or, if such day is
not a Business Day, the immediately succeeding Business Day) against receipt or
five (5) days after deposit in the mail, postage prepaid, or, in the case of
telecopy notice, when receipt has been confirmed by the telecopy transmitter
(or, if such day is not a Business Day, the immediately succeeding Business
Day), addressed as follows:
(A) If to Lender: Fleet Capital Corporation
200 Glastonbury Boulevard
Glastonbury, Connecticut 06033
Telephone: (860) 659-3200
Telecopier: (860) 657-7759
Attention: Northeast Loan
Administration Manager
and Fleet Capital Corporation
60 East 42nd Street
New York, New York 10017
Telephone: (212) 885-8800
Telecopier: (212) 885-8807
Attention: Thomas Miale
With a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118-0075
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
Attention: Daniel J. Krauss, Esq.
(B) If to Borrowers: c/o CFP Holdings, Inc.
1117 West Olympic Blvd.
Montebello, California 90640
Telephone: (213) 727-0900
Telecopier: (213) 727-0412
Attention: Chief Financial Officer
With a copy to: O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Telephone: (212) 408-2400
Telecopier: (212) 408-2420
Attention: Stewart Kagan, Esq.
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and First Atlantic Capital
135 East 57th Street
New York, New York 10022
Telephone: (212) 750-0300
Telecopier: (212) 750-0954
Attention: James Long
or to such other address as each party may designate for itself by like notice
given in accordance with this Section 12.12; provided, however, that any notice,
request or demand to or upon Lender pursuant to Sections 2.3 or 3.3 shall not be
effective until received by Lender. Any written notice that is not sent in
conformity with the provisions hereof shall nevertheless be effective on the
date such notice is actually received by the noticed party.
12.11. Demand Obligations. Nothing in this Agreement shall affect or
abrogate the demand nature of any portion of the Obligations expressly made
payable on demand by this Agreement or by any instrument evidencing or securing
same, and the occurrence of an Event of Default shall not be a prerequisite for
Lender's requiring payment of such Obligations.
12.12. Entire Agreement. This Agreement and the Other Agreements,
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with respect
to the subject matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or written.
12.13. Interpretation. No provision of this Agreement or any of the
Other Agreements shall be construed against or interpreted to the disadvantage
of any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured, drafted or
dictated such provision.
12.14. GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
NEW YORK, NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE
LOCATED IN ANY JURISDICTION OTHER THAN NEW YORK, THE LAWS OF SUCH JURISDICTION
SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN
UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT
OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE
DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF NEW YORK. AS PART OF THE
CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED, AND REGARDLESS OF ANY PRESENT OR
FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF ANY BORROWER OR LENDER, EACH
BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPREME COURT OF NEW YORK COUNTY,
NEW YORK OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
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DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY BORROWER AND LENDER PERTAINING TO
THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT.
EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN
ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES
ANY OBJECTION WHICH SUCH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH
BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH BORROWER'S ACTUAL RECEIPT
THEREOF OR FIVE (5) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE
RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR
TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH
FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY
OTHER APPROPRIATE FORUM OR JURISDICTION.
12.15. WAIVER OF TRIAL BY JURY AND OTHER WAIVERS BY BORROWERS. EACH
BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES)
IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR
RELATED TO ANY OF THE OTHER AGREEMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii)
PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON
PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY
OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS,
CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN
ANY WAY BE LIABLE; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE
COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO
ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL
VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (v) ANY RIGHT ANY BORROWER MAY HAVE
UPON PAYMENT IN FULL OF THE OBLIGATIONS TO REQUIRE LENDER TO TERMINATE ITS
SECURITY INTEREST IN THE COLLATERAL OR IN ANY OTHER PROPERTY OF ANY BORROWER
UNTIL TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS OR WITH
LENDER'S CONSENT AND THE EXECUTION BY ANY BORROWER, AND BY ANY PERSON WHOSE
LOANS TO BORROWER IS USED IN WHOLE OR IN PART TO SATISFY THE OBLIGATIONS, OF AN
AGREEMENT INDEMNIFYING LENDER FROM ANY LOSS OR DAMAGE LENDER MAY INCUR AS THE
RESULT OF DISHONORED CHECKS OR OTHER ITEMS OF PAYMENT RECEIVED BY LENDER FROM
ANY BORROWER OR ANY ACCOUNT DEBTOR AND APPLIED TO THE OBLIGATIONS; AND (vi)
NOTICE OF ACCEPTANCE HEREOF. EACH BORROWER ACKNOWLEDGES THAT THE FOREGOING
WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND
THAT LENDER IS RELYING
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UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH ANY BORROWER. EACH
BORROWER WARRANTS AND REPRESENTS THAT IT HAS KNOWINGLY AND VOLUNTARILY WAIVED
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
12.16. Confidentiality. Lender shall hold all non-public information
obtained by Lender pursuant to the requirements of this Agreement in accordance
with Lender's customary procedures for handling confidential information of this
nature; provided, however, Lender may disclose such confidential information (a)
to its examiners, affiliates, outside auditors, counsel and other professional
advisors, (b) to any Participating Lenders and (c) as required by any
governmental agency or representative thereof or pursuant to legal process
SECTION 13. BORROWING AGENCY PROVISIONS.
13.1. Each Borrower hereby irrevocably designates Borrowing
Agent to be its attorney and agent and in such capacity to borrow, sign and
endorse notes, and execute and deliver all instruments, documents, writings and
further assurances now or hereafter required hereunder, on behalf of such
Borrower or Borrowers, and hereby authorizes Lender to pay over or credit all
loan proceeds hereunder in accordance with the request of Borrowing Agent.
13.2. The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to Borrowers and at their request. Lender shall not
incur any liability to Borrowers as a result thereof. To induce Lender to do so
and in consideration thereof, each Borrower hereby indemnifies Lender and holds
Lender harmless from and against any and all Obligations, expenses, losses,
damages and claims of damage or injury asserted against Lender by any Person
arising from or incurred by reason of the handling of the financing arrangements
of Borrowers as provided herein, reliance by Lender on any request or
instruction from Borrowing Agent or any other action taken by Lender with
respect to this Section 13 except due to willful misconduct or gross (not mere)
negligence by the indemnified party.
13.3. All Obligations shall be joint and several, and each
Borrower shall make payment upon the maturity of the Obligations, by
acceleration or otherwise, and such obligation and liability on the part of each
Borrower shall in no way be affected by any extensions, renewals and forbearance
granted by Lender to any Borrower, failure of Lender to give any Borrower notice
of borrowing or any other notice, any failure of Lender to pursue or preserve
its rights against any Borrower, the release by Lender of any Collateral now or
thereafter acquired from any Borrower, and such agreement by each Borrower to
pay upon any notice issued pursuant thereto is unconditional and unaffected by
prior recourse by Lender to the other Borrower or any Collateral for such
Borrower's Obligations or the lack thereof.
13.4. Each Borrower expressly waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution of any other
claim which such Borrower may now or hereafter have against the other Borrower
or other Person directly or contingently liable for the Obligations hereunder,
or against or with respect to the other Borrower's property (including, without
limitation, any property which is Collateral for the Obligations), arising from
the existence
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or performance of this Agreement, until all Obligations have been paid in full
and the irrevocable termination of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed in New York,
New York on the day and year specified at the beginning hereof.
CFP HOLDINGS, INC.
ATTEST:
???????????? By: /s/ Eric Ek
- --------------------- ----------------------------
Name: Eric Ek
Title: Vice President and CFO
CUSTOM FOOD PRODUCTS, INC.
ATTEST:
??????????? By: /s/ Eric Ek
- --------------------- ----------------------------
Name: Eric Ek
Title: Vice President and CFO
QF ACQUISITION CORP.
ATTEST:
??????????? By: /s/ Eric Ek
- --------------------- ----------------------------
Name: Eric Ek
Title: Vice President and CFO
FLEET CAPITAL CORPORATION
ATTEST:
??????????? By: /s/ Thomas Maiale
- --------------------- ----------------------------
Name: Thomas Maiale
Title: Vice President
EMPLOYMENT AGREEMENT
dated as of March 9, 1998, between
CFP HOLDINGS, INC., a Delaware
corporation (the "Company"), and
William G. Delchiaro (the
"Executive").
The Company desires to employ the Executive as President and Chief
Executive Officer of QF Acquisition Corp., a subsidiary of the Company doing
business under the name "Quality Foods" ("Quality Foods"), and the Executive
desires to accept employment with the Company upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties agree as follows:
SECTION 1. Employment.
The Company hereby employs the Executive and the Executive hereby
accepts employment by the Company upon the terms and conditions hereinafter set
forth.
SECTION 2. Term.
The employment of the Executive hereunder shall be for the period (the
"Employment Period") commencing on March 17, 1998 (the "Commencement Date") and
ending on (a) the third anniversary thereof (the "Scheduled Termination Date"),
or (b) such earlier date (the "Termination Date") upon which the employment of
the Executive shall terminate in accordance with the provisions hereof.
SECTION 3. Duties.
Until the first anniversary of the Commencement Date, the Executive
shall be employed as the President and Chief Executive Officer of Quality Foods.
Thereafter, the Executive shall serve as the President and Chief Executive
Officer of the Company and CFP Group, Inc., its parent company. The Executive
shall perform such duties as are consistent with his title and position, but
shall have such other titles and duties (including with respect to affiliates of
Quality Foods) consistent with the status of a senior level executive of the
Company as the Board of Directors of the Company (the "Board") shall in its
discretion designate. The Executive shall report to the Board and shall use his
best efforts to perform well and faithfully the foregoing duties and
responsibilities.
<PAGE>
SECTION 4. Time to be Devoted to Employment.
During the Employment Period, the Executive shall devote all of his
business time, attention and energies to the business of the Company and its
affiliates (except for vacations to which he is entitled pursuant to Section
6(b) and periods of illness or incapacity). During the Employment Period, the
Executive shall not engage in any business activity which, in the reasonable
judgment of the Board, conflicts with the duties of the Executive hereunder,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage.
SECTION 5. Compensation.
(a) The Company (or at the Company's option, any affiliate thereof)
shall pay or caused to be paid to the Executive an annual base salary (the "Base
Salary") during the Employment Period of $325 000 per annum, payable in such
installments (but not less often than monthly) as is generally the policy of the
Company with respect to its officers, less such deductions as are required by
applicable law. The Base Salary shall be subject to annual Board review and may
be increased in the sole discretion of the Board.
(b) In addition to the Base Salary, the Executive shall be eligible to
participate in the Company's incentive stock option plan to be formulated by the
Board of Directors of the Company.
(c) The Executive shall also be eligible to participate in the
Company's annual cash bonus plan based upon achieving and exceeding annual
performance targets as determined by the Board. Pursuant to such plan, provided
certain minimum performance thresholds are met, the Executive would be entitled
to receive an annual bonus of between 30% and 100% of the Base Salary, based
upon achieving 80% to 120% of the performance targets for such year (with a
bonus of 50% of the Base Salary to be payable if 100% of such targets are met).
(d) Within 30 days of the Commencement Date, the Company shall pay, or
cause to be paid, to the Executive a one-time "signing" bonus in the amount of
$75,000, less such deductions as are required by applicable law.
SECTION 6. Business Expenses; Benefits.
(a) The Company (or, at the Company's option, any affiliate thereof)
shall reimburse, or cause to be reimbursed, the Executive, in accordance with
the practice from time to time for senior executive employees of the Company,
for all reasonable and necessary expenses and other disbursements incurred by
the Executive for or on behalf of the Company in the performance of his duties
hereunder. The Executive shall
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provide such appropriate documentation of expenses and disbursements as may from
time to time be reasonably required by the Company.
(b) During the Employment Period, the Executive shall be entitled to
four weeks of paid vacation during each 12-month period worked beginning on the
Commencement Date.
(c) During the Employment Period, the Company shall provide the
Executive with group health, hospitalization and disability insurance and other
employee benefits consistent with such benefits as are generally made available
from time to time to senior executive employees of the Company. To the extent
the Company is not prohibited from doing so by contract or applicable law, the
Company shall make such benefits available to the Executive commencing as of the
Commencement Date.
(d) During the Employment Period, the Company shall also provide the
Executive with supplemental life and disability insurance, provided the premiums
therefor shall not exceed $5,000 on an annual basis.
(e) During the Employment Period, the Executive shall be entitled to an
allowance for a leased automobile not to exceed $1,200 per month (inclusive of
all maintenance, gasoline, insurance and other costs and expenses related to
such automobile).
SECTION 7. Involuntary Termination.
(a) If the Executive is incapacitated or disabled by accident, sickness
or otherwise so as to render him mentally or physically incapable of performing
the services required to be performed by him under this Agreement (such
condition being hereinafter referred to as a "Disability") for a period of 180
consecutive days, or for an aggregate of 210 days, or longer during any 12-month
period, the Company may, at any time during the continuation of such Disability,
at its option, terminate the employment of the Executive under this Agreement
immediately upon giving him written notice to that effect (such termination, as
well as a termination under Section 7(b), being hereinafter referred to as an
"Involuntary Termination"). Until the Executive's employment hereunder shall
have been terminated in accordance with the foregoing, the Executive shall be
entitled to receive his compensation notwithstanding any such Disability.
(b) If the Executive dies during the Employment Period, his employment
hereunder shall be deemed to cease as of the date of his death.
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SECTION 8. Termination For Cause.
The Company may terminate the employment of the Executive hereunder at
any time for Cause (as hereinafter defined) (such termination being referred to
herein as a "Termination For Cause") by giving the Executive written notice of
such termination, effective immediately upon the giving of such notice to the
Executive. As used in this Agreement (a) "Cause" means (i) the Executive's
material breach of this Agreement and, if such breach is capable of being cured,
the failure to cure such breach within 30 days of notice thereof from the
Company to the Executive, (ii) the Executive's past, present or future conduct
that has a Material Adverse Effect, whether or not previously disclosed, (iii)
the Executive's disregard of lawful instructions of the Board that are
consistent with the Executive's position, or neglect of duties or failure to
act, which, in any case, may reasonably be anticipated to have a Material
Adverse Effect, and the continuance of such condition for a period of 10 days
after notice thereof from the Company to the Executive, (iv) alcohol or drug
abuse by the Executive, (v) the commission by the Executive of a felony or an
act involving fraud, theft or dishonesty or (vi) the Executive's material breach
of any agreement with the Company or any of its affiliates and, if such breach
is capable of being cured, the failure to cure such breach within 30 days of
notice thereof from the Company to the Executive and (b) "Material Adverse
Effect" means a material adverse effect on the business, operations, financial
condition, results of operations, assets, liabilities or prospects of the
Company or any of its affiliates.
SECTION 9. Termination Without Cause.
The Company may terminate the employment of the Executive hereunder
without Cause (such termination being hereinafter referred to as a "Termination
Without Cause") by giving the Executive written notice of such termination,
which notice shall be effective on the date specified therein but not earlier
than the date on which such notice is given.
SECTION 10. Voluntary Termination.
Any termination of the employment of the Executive hereunder other than
as a result of an Involuntary Termination, a Termination For Cause, a
Termination Without Cause or a Termination For Nonrenewal (as hereinafter
defined) shall be deemed to be a "Voluntary Termination."
SECTION 11. Termination For Nonrenewal.
On the second anniversary of the Commencement Date, the Company and the
Executive shall enter into good faith negotiations for the renewal of this
Agreement following the Scheduled Termination Date. If the parties are unable,
within 90
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days after commencement of such negotiations, to agree to a renewal of this
Agreement on mutually acceptable terms, the Executive shall continue to perform
the services required hereunder until the Scheduled Termination Date, whereupon
a termination for nonrenewal (such termination being referred to herein as a
"Termination For Nonrenewal") shall be deemed to have occurred; provided,
however, that a Termination For Nonrenewal shall not be deemed to have occurred
in the event the Executive and the Company do in fact renew this Agreement prior
to the Scheduled Termination Date.
SECTION 12. Effect of Termination
(a) Upon the termination of the Executive's employment hereunder due to
a Termination for Cause or a Voluntary Termination, neither the Executive nor
his beneficiary or estate shall have any further rights or claims against the
Company or any of its affiliates under this Agreement, except to receive (i) the
unpaid portion, if any, of the Base Salary provided for in Section 5(a),
computed on a pro rata basis to the Termination Date (based on the actual number
of days elapsed over a year of 365 or 366 days, as applicable), (ii) any unpaid
accrued benefits of the Executive, and (iii) reimbursement for any expenses for
which the Executive shall not have been reimbursed as provided in Section 6(a).
(b) Upon the termination of the Executive's employment hereunder due to
an Involuntary Termination, neither the Executive nor his beneficiary or estate
shall have any further rights or claims against the Company or any of its
affiliates under the Agreement except (i) to receive the amounts set forth in
Section 12(a) above and (ii) to continue to receive the Base Salary, payable in
such installments as it was paid to the Executive prior to such termination of
employment, for a period of 12 months.
(c) Upon the termination of the Executive's employment hereunder due to
a Termination Without Cause, neither the Executive nor his beneficiary or estate
shall have any further rights or claims against the Company or any of its
affiliates under this Agreement except (i) to receive the amounts set forth in
Section 12(a) above, (ii) to continue to receive the Base Salary, payable in
such installments as it was paid to the Executive prior to such termination of
employment, for a period of 18 months and (iii) to participate in all group
health, hospitalization and disability insurance plans as contemplated by
Section 6(c) hereof for a period of 18 months; provided, however, that any such
rights under clauses (ii) and (iii) of this Section 12(c) shall be reduced, to
the extent the Executive shall obtain other employment during the period such
payments are required to be made, by the amount of the salary and benefits
received by the Executive in connection with such new employment.
5
<PAGE>
(d) Upon the termination of the Executive's employment hereunder due to
a Termination For Nonrenewal, neither the Executive nor his beneficiary or
estate shall have any further rights or claims against the Company or any of its
affiliates under this Agreement except (i) to receive the amounts set forth in
Section 12(a) above, (ii) to continue to receive the Base Salary, payable in
such installments as it was paid to the Executive prior to such termination of
employment, for a period of nine months and (iii) to participate in all group
health, hospitalization and disability insurance plans as contemplated by
Section 6(c) hereof for a period of nine months; provided, however, that any
such rights under clauses (ii) and (iii) of this Section 12(d) shall be reduced,
to the extent the Executive shall obtain other employment during the period such
payments are required to be made, by the amount of the salary and benefits
received by the Executive in connection with such new employment.
SECTION 13. Insurance.
The Company may, for its own benefit, maintain "key-man" life and
disability insurance policies (collectively, the "Insurance Policies") covering
the Executive. The Executive will cooperate with the Company and provide such
information or other assistance as the Company may reasonably request in
connection with the Company's obtaining and maintaining the Insurance Policies.
SECTION l4. Disclosure of Information.
The Executive agrees that he will enter into, and comply with the terms
of, the Company's customary form of secrecy and nondisclosure agreement. In
addition, and without limitation thereof, the Executive agrees that he will not,
at any time during the Employment Period or thereafter, disclose to any person,
firm, corporation or other business entity, except as required by law, any
non-public information concerning the business, clients or affairs of the
Company or any subsidiary or affiliate thereof for any reason or purpose
whatsoever nor shall the Executive make use of any of such non-public
information for his own purpose or for the benefit of any person, firm,
corporation or other business entity except the Company or any affiliate
thereof.
SECTION 15. Right to Inventions.
The Executive shall promptly disclose, grant and assign to the Company
for its sole use and benefit any and all marks, designs, logos, inventions,
improvements, technical information and suggestions relating in any way to the
business actually conducted by the Company, which he may develop or which may be
acquired by the Executive during the Employment Period (whether or not during
usual working hours), together with all trademarks,
6
<PAGE>
patent applications, letters patent, copyrights and reissues thereof that may at
any time be granted for or upon any such mark, design, logo, invention,
improvement or technical information. In connection therewith:
(a) the Executive shall without charge, but at the expense of the
Company, promptly at all times hereafter execute and deliver such applications,
assignments, descriptions and other instruments as may be necessary or proper in
the opinion of the Company to vest title to any such marks, designs, logos,
inventions, improvements, technical information, trademarks, patent
applications, patents, copyrights or reissues thereof in the Company and to
enable it to obtain and maintain the entire right and title thereto throughout
the world;
(b) the Executive shall render to the Company at its expense (including
a reasonable payment for the time involved in case he is not then in its employ
based on his last per diem earnings) all such assistance as it may require in
the prosecution of applications for said trademarks, patents, copyrights or
reissues thereof, in the prosecution or defense of interferences which may be
declared involving any said trademarks, applications, patents or copyrights and
in any litigation in which the Company may be involved relating to any such
trademarks, patents, inventions, improvements or technical information; and
(c) for the avoidance of doubt, it is hereby agreed that the foregoing
provisions shall be deemed to include an assignment of future copyright in
accordance with Section 37 of the Copyright Act of 1986 and any amendment or
re-enactment thereof.
SECTION 16. Restrictive Covenant.
(a) The Executive acknowledges and recognizes that during the
Employment Period he will be privy to non-public information critical to the
Company's and its affiliates' business and further acknowledges and recognizes
that the Company would find it extremely difficult to replace him. Accordingly,
in consideration of the premises contained herein, and the consideration to be
received by the Executive hereunder, during the Employment Period and the
Non-Competition Period (as defined below), the Executive shall not (i) directly
or indirectly engage in, represent in any way, or be connected with, any
Competing Business (as defined below), whether such engagement shall be as an
officer, director, owner, employee, partner, affiliate or other participant in
any Competing Business; (ii) assist others in engaging in any Competing
Business; (iii) induce any employee of the Company or any affiliate thereof to
terminate such employee's employment with the Company or any such affiliate or
to engage in any Competing Business; or (iv) induce any entity or person with
which the
7
<PAGE>
Company or any affiliate thereof has a business relationship to terminate or
alter such business relationship; provided, however, that the foregoing shall
not prevent the Executive from owning the securities of or an interest in any
business, provided such ownership of securities or interest represents less than
five percent (5%) of any class or type of securities of, or interest in, such
business.
(b) The Executive understands that the foregoing restrictions may limit
his ability to earn a livelihood in a business similar to the business of the
Company or any affiliate thereof, but he nevertheless believes that he has
received and will receive sufficient consideration and other benefits as an
employee of the Company and as otherwise provided hereunder and pursuant to
other agreements between the Company and the Executive to justify clearly such
restrictions which, in any event (given his education, skills and ability), the
Executive does not believe would prevent him from earning a living.
(c) As used herein, "Competing Business" shall mean any business in
North America if such business or the products sold by it are competitive,
directly or indirectly, with (i) the business of the Company or any of its
affiliates, (ii) any of the products manufactured, sold or distributed by the
Company or any of its affiliates or (iii) any products or business being
developed by the Company or any of its affiliates; and "Non-Competition Period"
shall mean the period commencing on the day immediately following the
Termination Date and ending on the later of (A) 18 months following the
Termination Date and (B) if the Executive owns any securities (including the
right to receive any such securities) of the Company or any of its affiliates on
the Termination Date, the date on which the Executive no longer owns any
securities (including the right to receive any such securities) issued by the
Company or any of its affiliates; provided, however, that at the election of the
Company at least 30 days prior to the date (the "Last Payment Date") on which
the last payment of Base Salary would otherwise be made pursuant to this
Agreement (including, without limitation, as contemplated by Section 12(c) or
Section 12(d) hereof), the Company may continue to pay the Executive his Base
Salary for up to 12 months beyond the Last Payment Date, in which case the
Non-Competition Period shall be extended for the duration of the period during
which the Company has elected to make such additional payments of Base Salary.
SECTION 17. Enforcement; Severability; Etc.
It is the desire and intent of the parties that the provisions of this
Agreement shall be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Agreement shall be adjudicated
to be invalid or unenforceable, such provision shall
8
<PAGE>
be deemed amended to delete therefrom the portion thus adjudicated to be invalid
or unenforceable, such deletion to apply only with respect to the operation of
such provision in the particular jurisdiction in which such adjudication is
made.
SECTION 18. Remedies.
The Executive acknowledges and understands that the provisions of this
Agreement are of a special and unique nature, the loss of which cannot be
adequately compensated for in damages by an action at law, and that the breach
or threatened breach of the provisions of this Agreement would cause the Company
irreparable harm. In the event of a breach or threatened breach by the Executive
of the provisions of this Agreement, the Company shall be entitled to an
injunction restraining him from such breach. Nothing contained in this Agreement
shall be construed as prohibiting the Company from or limiting the Company in
pursuing any other remedies available for any breach or threatened breach of
this Agreement.
SECTION 19. Notices.
All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given and delivered if personally delivered or it sent by
nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
if to the Company, to it at:
1205 West Olympic Boulevard
Montebello, California 90640
Attention: President
Telecopier: (213) 727-0412
Telephone: (213) 727-0900;
with a copy to:
First Atlantic Capital, Ltd.
135 East 57th Street
New York, New York 10022
Attention: Mr. James A. Long
Telecopier: (212) 750-0954
Telephone: (212) 750-0300; and
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Lawrence G. Graev, Esq.
Telecopier: (212) 408-2420
Telephone: (212) 408-2400;
9
<PAGE>
if to the Executive, to him at:
c/o QF Acquisition Corp.
5501 Tabor Road
Philadelphia, Pennsylvania 19120
Telecopier: (215) 288-5804
Telephone: (800) 275-8902
or to such other address as the party to whom notice is to be given may have
furnished to the other party or parties in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in the
case of personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of telecopy transmission, when received, and in the
case of mailing, on the third business day following that on which the piece of
mail containing such communication is posted.
SECTION 20. Successors and Assigns.
Subject to Section 25 hereof, the provisions of this Agreement will be
binding upon, and will inure to the benefit of, the respective heirs, legal
representatives, successors and permitted assigns of the parties.
SECTION 21. Governing Law.
This Agreement will be governed by, and construed and enforced in
accordance with, the laws of the State of New York (without giving effect to
principles of conflicts of laws).
SECTION 22. Waiver of Breach.
The waiver by either party of a breach of any provision of this
Agreement must be in writing and shall not operate or be construed as a waiver
of any other breach.
SECTION 23. Entire Agreement; Amendments.
This Agreement and the agreements referred to herein contain the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements or understandings between the parties with
respect thereto. This Agreement may be amended only by an agreement in writing
signed by the parties.
SECTION 24. Headings.
The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
10
<PAGE>
SECTION 25. Assignment.
This Agreement is personal in its nature and the parties shall not,
without the consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder; provided, however, that the Company may assign
this Agreement to any of its affiliates and the provisions of this Agreement
shall inure to the benefit of, and be binding upon, each successor of the
Company, whether by merger, consolidation, transfer of all or substantially all
of its assets, or otherwise.
SECTION 26. Counterparts.
This Agreement may be executed in counterparts, and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
SECTION 27. Gender.
Any reference to the masculine gender shall be deemed to include the
feminine and neuter genders unless the context otherwise requires.
* * * *
11
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Employment
Agreement as of the date first written above
CFP HOLDINGS, INC.
By: /s/ James A. Long
--------------------------
Name:
Title:
/s/ William G. Delchiaro
------------------------------
William G. Delchiaro
12
AMENDMENT NO. 1 dated as of
September 15, 1997 between CFP
HOLDINGS, INC., a Delaware
corporation (the "Company"), and
DAVID COHEN (the "Executive").
The Company and the Executive are parties to an Employment Agreement
dated as of December 31, 1996 (the "Employment Agreement") and desire to enter
into this Amendment No. 1 (the "Amendment") to the Employment Agreement to
memorialize their agreement to amend certain provisions of the Employment
Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree:
A. Effective as of September 15, 1997, the Employment Agreement is
amended as fo1lows;
1. Section 2 ("Term") of the Employment Agreement is hereby amended by
deleting the reference to "third" in subsection (a) thereof and inserting in its
place "fifth".
2. Section 3 ("Duties") of the Employment Agreement is hereby amended
by deleting the first sentence in subsection (a) thereof and inserting in its
place the following:
During the Employment Period, the Executive shal1 be employed
as the Vice Chairman of Quality Foods and shall at all times
report directly to Robert Gioia ("Gioia") or, if Gioia shall
cease to serve as Chairman, President or Chief Executive
Officer of the Company or Quality Foods, the Executive shall
report directly to the President of the Parent (as hereinafter
defined). The Executive shall perform such duties as are
consistent with the position of Vice Chairman, but shall have
such other titles
<PAGE>
and duties (including with respect to affiliates of Quality
Foods) consistent with the status of a senior level executive
of the Company, as the Board of Directors of the Company (the
"Board") shall in its discretion designate.
3. Section 4 ("Time to be Devoted to Employment") of the Employment
Agreement is hereby amended by deleting the first sentence thereof and inserting
in its place the following;
During the Employment Period, the Executive shall devote not
less than two nor more than three full days of his working
time, attention and energies to the business of the Company
and its subsidiaries (except for vacations to which he is
entitled pursuant to Section 6(b) and except for illness or
incapacity).
4. Section 5 ("Compensation; Bonus") of the Employment Agreement is
hereby amended by:
(a) deleting the reference to "$240,000" in subsection (a) thereof and
inserting in its place "$125,000";
(b) deleting subsections (c), (d) and (e) thereof and inserting in
their place the following:
(c) In addition to the Base Salary, in respect of each of the
1998 through 2001 fiscal years (each, a "Bonus Year"), the Company
shall award the Executive cash bonus (the "Annual Cash Bonus") of up to
100% of the Executive's Base Salary, depending upon the achievement of
milestones (the "Annual Milestones") established (and assigned point
values) by the Board on a yearly basis in advance of the relevant year,
according to the following schedule:
Annual Milestones Cash Bonus as %
Point Total of Base Salary
----------------- ---------------
less than 80 0%
80 30%
85 35%
-2-
<PAGE>
90 40%
95 45%
100 50%
105 62.5%
110 75%
115 87.5%
120 100%
;provided, however, that in each Bonus Year (as long as the Employee
has been continuously employed throughout such year), the Executive
shall be entitled to a cash bonus in the amount of at least $50,000
(the "Minimum Annual Bonus"), except that in the event this Agreement
expires upon the Scheduled Termination Date without being renewed, the
Executive shall be entitled to a pro rata share of such amount for the
period the Executive was actually employed during the 2001 Bonus Year.
The Annual Milestones and related point values for the 1998 Bonus Year
shall be as set forth on Schedule I attached hereto.
; (c) amending subsection (h) by deleting the first sentence thereof
and inserting in its place the following:
Upon the Commencement Date, the Company's parent, CFP Group, Inc., a
Delaware corporation (the "Parent"), shall grant the Executive options
to purchase Class B Nonvoting Common Stock, $.01 par value (the "Class
B Nonvoting Stock"), of the Parent representing up to 1.07% (determined
on the Commencement Date on a fully diluted basis) of the issued and
outstanding Common Stock, $.0l par value, of the Parent.
; and (d) relettering subsections (f), (g) and (h) as (d), (e) and (f),
respectively.
5. Section 10A ("Renewal of Agreement") of the Employment Agreement is
hereby amended by deleting the reference to "second" in the first sentence
thereof and inserting in its place "fourth".
6. Section 11 ("Effect of Termination") of the Employment Agreement is
hereby amended by:
-3-
<PAGE>
(a) deleting the reference to "Section 5(f)" in clause (ii) of
subsection (a) thereof and inserting in its place "Section 5(d)";
(b) deleting clause (iii) of subsection (c) thereof and inserting in
its place "to receive the pro rata portion (based upon the number of periods
elapsed in the fiscal year up to the Termination Date) of the Minimum Annual
Bonus and"; and
(c) deleting the last two sentences of subsection (c) thereof.
B. Except as specified herein, each provision of the Employment
Agreement shall remain in full force and effect.
* * * *
-4-
<PAGE>
IN WITNESS WHEREOF the parties have duly executed this Amendment No. 1
as of the date first above written.
CFP HOLDINGS, INC.
By: /s/ James A. Long
--------------------------
Name:
Title:
/s/ David Cohen
------------------------------
David Cohen
<TABLE>
Exhibit 12.1
CFP Group, Inc.
Earnings to Fixed Charge Ratio
<CAPTION>
Six Months Six Months
Ended Year Ended Ended Year Ended
September 30, September 30, March 31, March 31,
--------------------------------------------
1993 1994 1995 1996 1997 1998
-------------- ------------- -------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
(Loss) Earnings Before Tax $ 574 $ 1,713 $ 2,343 $ (1,562) $ (3,902) $ (5,498)
-------------- ------------- -------------- ------------- ------------- -------------
Plus: Fixed Charges
Interest Expense 1,307 2,443 2,632 3,232 4,681 17,236
1/3 of Rent expense 94 217 206 206 148 406
-------------- ------------- -------------- ------------- ------------- -------------
Total Fixed Charges 1,401 2,660 2,838 3,438 4,829 17,642
-------------- ------------- -------------- ------------- ------------- -------------
Earnings 1,975 4,373 5,181 1,876 927 12,144
-------------- ------------- -------------- ------------- ------------- -------------
Ratio 1.41 1.64 1.83 - - -
Deficiency (1,562) (3,902) (5,498)
</TABLE>
40
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001030776
<NAME> CPF Holdings,Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,344
<SECURITIES> 0
<RECEIVABLES> 12,122
<ALLOWANCES> 115
<INVENTORY> 15,718
<CURRENT-ASSETS> 29,959
<PP&E> 34,052
<DEPRECIATION> 7,048
<TOTAL-ASSETS> 133,079
<CURRENT-LIABILITIES> 14,452
<BONDS> 115,000
0
0
<COMMON> 8,342
<OTHER-SE> (30,779)
<TOTAL-LIABILITY-AND-EQUITY> 133,079
<SALES> 181,378
<TOTAL-REVENUES> 181,378
<CGS> 152,484
<TOTAL-COSTS> 152,484
<OTHER-EXPENSES> 17,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,236
<INCOME-PRETAX> (5,498)
<INCOME-TAX> 30
<INCOME-CONTINUING> (5,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,528)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
