<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
REGISTRATION NO. 333-27227
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------------
AUTOMOTIVE ONE PARTS STORES, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 5013 59-1867299
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
701 WEST CHURCH STREET
ORLANDO, FLORIDA 32802
(407) 422-1110
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
ROBERT H. GENTRY, III
PRESIDENT
AUTOMOTIVE ONE PARTS STORES, INC.
701 WEST CHURCH STREET
ORLANDO, FLORIDA 32802
(407) 422-1110
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
<TABLE>
<C> <C>
RANDOLPH H. FIELDS, ESQ. WILLIAM M. PRIFTI, ESQ.
GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & 220 BROADWAY
QUENTEL, P.A. SUITE 204
111 NORTH ORANGE AVENUE, SUITE 2050 LYNNFIELD, MA 01940
ORLANDO, FLORIDA 32801 TELEPHONE: (781) 593-4525
TELEPHONE: (407) 420-1000 TELECOPIER: (781) 593-5222
TELECOPIER: (407) 420-5909
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value(2)....................... $20,160,000 $ 6,109
- ----------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase Warrants(3)(4)....... $ 187,510 $ 57.82
- ----------------------------------------------------------------------------------------------------------------------
Total............................................. $20,347,510 $6,166.82
======================================================================================================================
</TABLE>
Previously Paid $9,582
Amended Fee $6,166.82
Amount Due $0
----------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 (o) under the Securities Act of
1933, as amended.
(2) Includes (i) 1,200,000 shares of Common Stock offered hereby, (ii) 1,200,000
shares of Common Stock issuable upon exercise of the Five-year Redeemable
Common Stock Purchase Warrants (the "Warrants") offered hereby, (iii)
180,000 shares of Common Stock subject to the Underwriters' over-allotment
option, (iv) 180,000 shares of Common Stock issuable upon exercise of
Warrants subject to Underwriters' over-allotment option, (v) 120,000 shares
of Common Stock issuable upon exercise of Underwriters' Warrants and (vi)
120,000 shares of Common Stock underlying the Warrants issuable upon
exercise of Underwriters' Warrants.
(3) Includes (i) 1,200,000 Warrants offered hereby, (ii) 180,000 Warrants
subject to the Underwriters' over-allotment option and (iii) 120,000
Warrants subject to the Underwriters' Warrants.
(4) Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement also covers such indeterminable additional shares of Common Stock
as may become issuable as a result of any future anti-dilution adjustment in
accordance with the terms of the Warrants.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1997
PROSPECTUS
AUTOMOTIVE ONE LOGO
AUTOMOTIVE ONE PARTS STORES, INC.
1,200,000 SHARES OF COMMON STOCK AND
1,200,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Automotive One Parts Stores, Inc., a Florida corporation (the "Company"),
hereby offers (the "Offering") 1,200,000 shares of common stock, $.01 par value
(the "Common Stock"), of the Company and 1,200,000 Five-year Redeemable Common
Stock Purchase Warrants (the "Warrants"). The Common Stock and the Warrants
offered hereby (sometimes hereinafter collectively referred to as the
"Securities") will be separately tradable immediately upon issuance. Each
Warrant entitles the holder to purchase one share of Common Stock at a price of
$7.20 per share (the "Exercise Price"). The Warrants are each redeemable by the
Company for $.10 per Warrant, upon thirty days' prior written notice to the
Warrant holders, provided the closing price of the Common Stock exceeds $9.00
per share for a period of ten consecutive trading days, ending on the third day
prior to the date of the Company's redemption notice. See "Description of
Securities."
Prior to this Offering, there has been no public market for the Company's
Common Stock or Warrants, and there can be no assurance that such a public
market will develop or be sustained after the completion of the Offering. The
Company has submitted an application for the listing of the Common Stock and
Warrants on the NASDAQ SmallCap Market ("NASDAQ") under the symbols [AONE] and
[AONEW], respectively, and on the Boston Stock Exchange ("BSE") under the
symbols [AOC] and [AOW], respectively. The Company may also apply for listing
the Securities on the Chicago Stock Exchange. For discussion of the factors
considered in determining the offering prices of the Common Stock and Warrants,
see "Underwriting."
------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE AND
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED
UNDER THE CAPTION "RISK FACTORS" WHICH APPEAR BEGINNING ON PAGE 8 OF THIS
PROSPECTUS. SEE ALSO "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS
TO PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock...................... $6.00 $.60 $5.40
Per Warrant.................................... $0.125 $.0125 $.1125
Total(3)....................................... $7,350,000 $735,000 $6,615,000
=======================================================================================================================
</TABLE>
(1) In addition, the Company has agreed to pay the Underwriters in the form
of: (i) a non-accountable expense allowance equal to 3% of the gross
proceeds of this Offering, of which $25,000 has been paid to the present
Underwriter, and (ii) an Underwriters' Warrant ("Underwriters' Warrant")
for the purchase of (a) 120,000 shares of Common Stock, and (b) 120,000
Warrants at 150% of the initial public Offering price exercisable for a
period of four years, commencing one year after the date of this
Prospectus (the "Effective Date"). The Company and the Underwriters have
agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Act").
See "Underwriting."
(2) Before deducting expenses, estimated at $556,000, payable by the
Company, including the Underwriters' non-accountable expense allowance.
(3) The Company and certain shareholders (the "Selling Shareholders") have
granted to the Underwriters an option, exercisable within 45 days from
the date of this Prospectus, to purchase up to 180,000 additional
Securities, on the same terms set forth above, solely for the purpose of
covering over-allotments, if any. Up to 94,478 shares of Common Stock
which are subject to the over-allotment option may be purchased from the
Selling Shareholders, and the Company will not receive any proceeds from
the sale of such Common Stock. The Warrants included in the Securities
which are subject to the over-allotment option will be issued by the
Company. If the over-allotment option is exercised in full, excluding
the Underwriter's non-accountable expense allowance, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $8,452,500, $845,250,
$7,097,069 and $510,181, respectively. See "Principal and Selling
Shareholders" and "Underwriting."
-------------------------
The Securities offered by this Prospectus are being offered by the
Underwriters on a "firm commitment" basis subject to prior sale, when, as and if
accepted by the Underwriters, approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer without notice and reject any
order in whole or in part. It is expected that delivery of the certificates
representing the Securities will be made in Orlando, Florida on or about
, 1998.
NUTMEG SECURITIES, LTD.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
[PHOTOGRAPHS OF COMPANY FACILITIES
WITH OVERLAY OF AREA MAP
SHOWING STORE LOCATION.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. Unless
otherwise specified, all references herein reflect a 23,600 for one split of the
Company's Common Stock which will be effected for shareholders of record
immediately prior to consummation of this Offering. Further, unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised. Each prospective investor is urged to
read this Prospectus in its entirety.
THE COMPANY
Automotive One Parts Stores, Inc. (the "Company" or "Automotive One") was
incorporated in Florida in November 1978. The Company is a specialty supplier
and retailer of automotive replacement parts, tools, supplies, equipment and
accessories ("Automotive Products") to both professional mechanics and service
technicians ("Professional Installers") and "do-it-yourself" ("DIY") customers.
The Company operates 14 auto parts stores, one machine shop, one speed shop, and
one warehouse facility in Central Florida, all of which are located in or within
one hour's drive of Orlando, Florida. The Company determined that some of its
stores service overlapping geographical areas. Thus, the Company closed one
store in each of July 1997, and August 1997, and, by the end of the second
quarter of 1998, intends to close two additional stores. The inventory from the
closed stores will be either returned to the Company's suppliers for credit or
transferred to other stores. The Company plans to either sell or lease the
properties vacated as a result of the closures. Management of the Company hopes
to retain the same market share in those market areas but at a reduced overhead
cost. In June 1997, the Company also closed a manufacturing unit located on the
premises of its corporate headquarters. All of the auto parts stores are
traditional stores selling both to Professional Installers and DIY customers.
The Company also maintains approximately 100 vehicles which guarantee the
delivery of parts to Professional Installers within 30 minutes. The Company's
customized computerized inventory control system allows it to determine the
exact location of each item of its inventory, sales from each store and other
general accounting features. Stores carry an extensive product line of brakes,
belts, hoses, filters, cooling system parts, tuneup parts, shock absorbers,
gaskets, batteries, bearings, engine parts, remanufactured alternators and
starters, chassis parts and exhaust systems, and other hard parts ("Hard
Parts"). In addition, the Company also carries: (i) maintenance items, such as
oil, antifreeze, fluids, engine additives and appearance products; (ii)
accessories such as floor mats and seat covers; (iii) automotive tools; and (iv)
professional service equipment. For the year ended December 31, 1996,
approximately 95% of the Company's sales was derived from Hard Parts, and 5%
from other merchandise. Approximately 75% of the Company's product sales was
derived from Professional Installers and the remaining 25% from DIY customers
during 1996.
The Company maintains its principal executive offices at 701 W. Church
Street, Orlando, Florida 32802; telephone (407) 422-1110, fax (407) 422-1041.
The Company was organized under the laws of the State of Florida in November
1978 succeeding to a sole proprietorship which commenced operations in Kentucky
in 1934.
OPERATING STRATEGIES
Accumulation of Market Share. By serving both the Professional Installer
and DIY markets through its store network, the Company believes it is able to:
(i) reach most consumers of Automotive Products within its market; (ii) offer a
broader selection of stock keeping units ("SKU's"); and (iii) provide responsive
customer service with its technically trained sales personnel and in-house
delivery force.
Inventory Management and Distribution System. The Company has agreed to
buy approximately 75% of its merchandise from A.P.S., Inc. ("APS"), a national
distributor of automotive replacement parts headquartered in Houston, Texas. APS
carries over 160,000 SKU's and distributes its products through approximately
150 suppliers. The Company's stores have next day access to these products
through a Product Purchase Agreement with APS.
3
<PAGE> 5
The Company also owns and operates its own approximately 30,000 square foot
warehouse facility. This facility is used to inventory certain items which the
Company purchases directly from manufacturers. Thus, the Company is able to
price such parts competitively within the market. The warehouse provides all the
Company's stores with same-day delivery service.
Customer Service. The Company believes that each Company store attracts
new customers and retains existing customers by conducting a variety of
advertising and promotional programs and by offering: (i) in store service
through technically trained sales personnel, (ii) call-in-delivery service
available to all wholesale customers, (iii) an extensive selection of SKU's
stocked in each store, (iv) same day or next day delivery of Automotive
Products, (v) attractive stores in convenient locations, (vi) full-time sales
personnel, (vii) competitive pricing, and (viii) a counter in each store
specifically designated for wholesale customers to provide quick service. The
Company's management believes that the Company's commitment to service
excellence has provided the foundation of a strong relationship with both the
Professional Installer and DIY segments of the aftermarket automotive parts
industry. The Company believes that while pricing is essential in the highly
competitive environment of the automotive aftermarket business, ultimately it is
customer satisfaction (whether the customer is a Professional Installer or a
DIY) through customer service that will generate increased sales and
profitability.
Development of Repeat Customers. The Company is committed to developing
repeat customers through (i) trained and experienced sales personnel who provide
customer service, (ii) a high concentration of convenient and accessible
neighborhood locations, (iii) prompt delivery service to wholesale customers
through approximately 100 vehicles and (iv) a broad selection of brand name and
other high quality products with an emphasis on replacement Hard Parts.
GROWTH STRATEGIES
Repayment of Debt. The Company has experienced recent losses due to
increased debt and an inability to take advantage of available vendor discount
programs due to cash constraints. The Company's growth strategy involves
repayment of a portion of the debt from the Offering proceeds, refinancing the
remainder of the debt, consolidating certain stores in the Orlando market, and
acquiring additional auto parts businesses in Florida and other areas in the
Southeastern United States.
The Company will be repaying approximately $3.0 million in debt including
accrued and unpaid interest currently owed to APS from the Offering proceeds.
The Company will seek to refinance the remainder of the debt owed to APS on more
favorable terms, which refinancing has been made a condition of this Offering by
the Underwriters. As a result of the debt repayment, the Company believes it
will substantially reduce the $232,000 per year in interest payments it
currently makes to service its debt obligations to APS. Further, the Company
will be able to take advantage of discounts offered by APS and other vendors for
early payments of invoices.
Senior Credit Facility. On October 29, 1997, the Company obtained a
non-binding commitment from Finova Capital Corporation ("Finova") to provide up
to $4,000,000 to the Company (the "Finova Credit Facility") in accordance with
the terms of a loan and security agreement (the "Credit Agreement"). Finova's
execution of and performance under the Credit Agreement is subject to a number
of conditions, including, but not limited to, the closing of this Offering and
the receipt by the Company of the proceeds of this Offering. The Credit
Agreement is to be executed simultaneously with the closing hereof. The Company
will use a portion of these funds, approximately $3,000,000, to repay the
remaining indebtedness to APS. The remainder of the funds available under the
Finova Credit Facility will be used by the Company to facilitate its growth
strategy or for working capital.
Consolidation or Closing of Overlapping Stores. The Company has 11 auto
parts stores located in the Orlando market and 3 stores located in Brevard
County serving Titusville, Cocoa Beach and Melbourne. The Company has closed two
stores and plans to close two additional stores by the end of the second quarter
of 1998. The Company expects to retain the same market share in those areas but
at a reduced overhead cost since the Company has other existing stores serving
the same market areas.
New Store Openings. Due to the recent trend of consolidation in the
aftermarket automotive parts industry at the expense of smaller independent
operators and less specialized mass merchandisers, the
4
<PAGE> 6
Company anticipates its future growth will occur primarily as a result of
acquisitions of single and multiple store operations. The Company plans to
concentrate its efforts on acquiring stores in other Florida locations and in
markets in the Southeastern United States. The Company's strategy for additional
store openings is to expand into population pockets of 75,000 to 100,000
inhabitants within metropolitan areas with populations of 1,000,000 or more.
Continuing Improvement of Merchandising. The Company stocks a broad line
of nationally recognized products (under the "Big A" label of APS) for domestic
and imported vehicles. The Company constantly seeks to improve its merchandising
concepts, primarily by broadening product selection and emphasizing the sale of
replacement Hard Parts. The Company plans on updating certain stores to improve
merchandise presentation and in-stock positions.
THE OFFERING
Securities Offered......... 1,200,000 shares of Common Stock, $.01 par value.
1,200,000 Warrants. Each Warrant entitles the
holder, for $7.20, to purchase one share of Common
Stock for a period of five years commencing on the
date of this Prospectus (the "Effective Date"). The
Warrants are each redeemable by the Company for
$.10 per Warrant at any time, upon thirty days'
prior written notice to the Warrant holders,
provided the average closing price of the Common
Stock exceeds $9.00 per share for a period of ten
consecutive trading days ending on the third day
prior to the date of the Company's redemption
notice. See "Description of
Securities -- Warrants."
Securities Outstanding
Prior to the Offering.... 2,360,000 shares of Common Stock(1)
Securities Outstanding
Subsequent to the
Offering(2).............. 3,560,000 shares of Common Stock(1)
1,200,000 Warrants(1)
Estimated Net
Proceeds(3).............. $6,059,000
Use of Proceeds by
Company.................. The Company intends to use the net proceeds of this
Offering for repaying loans from APS and certain
other loans (including loans from certain
principals of the Company in the approximate
aggregate amount of $466,000), working capital and
general corporate purposes. See "Use of Proceeds."
Risk Factors............... Investment in the Securities offered hereby are
speculative and involve a high degree of risk and
immediate substantial dilution. See "Risk Factors"
and "Dilution."
Proposed NASDAQ SmallCap
Market Symbols(4)........ Common Stock -- [AONE]
Warrants -- [AONEW]
Proposed BSE Symbols(4).... Common Stock -- [AOC]
Warrants -- [AOW]
- ---------------
(1) Does not include (i) 500,000 shares of Common Stock reserved for future
issuance under the Company's 1997 Stock Option Plan, (ii) 120,000 shares of
Common Stock reserved for issuance upon exercise of the Underwriters'
Warrants, and (iii) 120,000 shares of Common Stock reserved for issuance
upon exercise of Warrants issuable upon exercise of the Underwriters'
Warrants. See "Management -- Consulting Agreements" and "-- Stock Option
Plan."
5
<PAGE> 7
(2) Does not include 180,000 additional shares of Common Stock or 180,000
Warrants issuable upon exercise of the Underwriters' over-allotment option.
See "Underwriting."
(3) After deducting expenses of this Offering payable by the Company estimated
at $1,291,000 (inclusive of commissions and underwriting discounts and
assuming no exercise of the Underwriters' over-allotment option).
(4) Although the Company has applied for listing the Securities for quotation on
the NASDAQ SmallCap Market and the Boston Stock Exchange, there can be no
assurance that the Company's securities will be accepted for listing or that
if listed it will be able to continue to meet the requirements for continued
quotation, or that a public trading market will develop or that if such
market develops, it will be sustained. The Company may also apply for
listing the Securities on the Chicago Stock Exchange. See "Risk
Factors -- Lack of Prior Market for Securities, "-- Possible Delisting of
Securities; NASDAQ SmallCap Market," "-- Penny Stock Regulation."
6
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
The following financial data as of December 31, 1996 and for the years
ended December 31, 1995 and 1996 has been derived from the financial statements
of the Company which have been audited by Grant Thornton LLP, independent
certified public accountants, whose report on the Balance Sheet as of December
31, 1996 and the related Statements of Operations, Shareholders' Equity and Cash
Flows for each of the two years in the period ended December 31, 1996, is
included elsewhere herein. The selected financial information set forth below as
of October 31, 1997 and for the ten months ended October 31, 1996 and 1997 have
been derived from the unaudited financial statements of the Company and includes
all adjustments the Company considers necessary for a fair presentation of
results of operations for the periods presented. Operating results for the ten
months ending October 31, 1997 are not necessarily indicative of the results
which may be expected for the full year ended December 31, 1997. The summary
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Financial Statements (including the Notes thereto) presented elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
----------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
SUMMARY BALANCE SHEET DATA
Working capital (deficiency)................................ $(2,492,698) $ 3,396,111
Total assets................................................ 9,955,848 12,550,260
Total liabilities........................................... 10,024,310 6,559,722
Shareholders' equity (deficit).............................. (68,462) 5,990,538
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA
Net sales................................... $11,691,338 $12,094,341 $10,291,236 $ 9,206,871
Cost of goods sold.......................... 7,689,551 8,075,176 6,871,217 5,727,418
----------- ----------- ----------- -----------
Gross profit................................ 4,001,787 4,019,165 3,420,019 3,479,453
Selling, general and administrative
expenses.................................. 3,986,570 4,463,849 3,773,117 3,549,708
----------- ----------- ----------- -----------
Earnings (loss) from operations............. 15,217 (444,684) (353,098) (70,255)
Gain on sale of property.................... -- -- -- 185,707
Rental income............................... 165,245 191,804 159,837 143,355
Interest expense............................ (495,174) (785,088) (655,851) (638,532)
Offering costs.............................. -- -- -- (68,714)
----------- ----------- ----------- -----------
Net loss.................................... $ (314,712) $(1,037,968) $ (849,112) $ (448,439)
=========== =========== =========== ===========
Net (loss) per common share(2)(3)(4)........ $ (0.13) $ (0.44) $ (0.36) $ (0.19)
=========== =========== =========== ===========
Weighted average common shares
outstanding(3)............................ 2,360,000 2,360,000 2,360,000 2,360,000
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) Adjusted to give effect to the sale of 1,200,000 shares of Common Stock and
1,200,000 Warrants at the assumed public offering prices of $6.00 per share
and $.125 per Warrant, less underwriting discounts and commissions and
estimated Offering expenses payable by the Company, and the application of
net proceeds therefrom. (See "Use of Proceeds"). No effect has been given to
the exercise of the (i) Warrants, (ii) the Underwriters' over-allotment
option, (iii) the Underwriters' Warrants, or (iv) outstanding options.
(2) Prior to this Offering, the Company was taxed as an S corporation.
Simultaneously with the consummation of this Offering, the Company will
convert to "C" Corporation status. Pro forma net loss for the years ended
December 31, 1995 and 1996 and the ten months ended October 31, 1996 and
1997 is not presented herein, because the Company has cumulative net
operating losses and it is not more likely than not that the tax benefit
will be realized. Therefore, the historical and pro forma net loss would be
the same for all periods presented. See Note I to Financial Statements.
7
<PAGE> 9
(3) Adjusted to give effect to 23,600-for-one stock split to be effected
immediately prior to consummation of this Offering.
(4) Supplemental pro forma loss per common share for the year ended December 31,
1996 and the ten months ended October 31, 1997 giving effect to the
reduction of outstanding indebtedness of approximately $3.0 million from the
use of a portion of the Offering's proceeds and the increased number of
shares, is ($0.25) and ($0.06) per common share (assuming 2,922,978 and
2,940,806 weighted average common shares outstanding, respectively).
8
<PAGE> 10
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree of
risk and substantial dilution and should only be purchased by investors who can
afford to lose their entire investment. Prospective investors, prior to making
an investment, should carefully consider the following risks and speculative
factors, as well as other information set forth elsewhere in this Prospectus,
associated with this Offering, including the information contained in the
Financial Statements herein and Notes thereto.
FORWARD LOOKING STATEMENTS
This Prospectus contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act, which represent the Company's
expectations or beliefs. The words "believe," "expect," "anticipate,"
"estimate," "project," "intend" and similar expressions identify forward-looking
statements, which speak only as of the date such statement was made.
Forward-looking statements may include, but not be limited to, future results of
operations, growth plans, integration of new operations, financing needs,
industry trends, consumer demand and levels of competition. These statements by
their nature involve substantial risks and uncertainties, some of which cannot
be predicted or quantified. Future events and actual results could differ
materially from those expressed in, contemplated by or underlying any such
forward-looking statements. Statements in this Prospectus, including those
contained in the section entitled "Risk Factors," in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in the Notes to the Company's Financial Statements, describe
factors, among others, that could contribute to or cause such differences.
Recent Losses; Going Concern. The Company had net losses of $314,712 and
$1,037,968 and $448,439 for the years ended December 31, 1995 and 1996 and the
ten months ended October 31, 1997 respectively and a working capital deficiency
of $1,847,194 and $2,492,698 at December 31, 1996 and October 31, 1997,
respectively. Furthermore, the Company has approximately $5.8 million of
outstanding indebtedness including interest, that matures no later than February
28, 1998. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The Company's independent certified public
accountants have issued its report which includes an explanatory paragraph for a
going concern uncertainty on the Company's financial statements as of December
31, 1996 and for the year then ended. The Company's ability to continue as a
going concern and achieve positive earnings is dependent upon the Company's
successful implementation of its operating strategy which includes (1) reducing
certain debt from proceeds of this Offering; (2) completing its search for a
qualified Chief Financial Officer candidate to oversee the financial aspects of
the Company's business; (3) evaluating the network of its store locations in
order to determine the most advantageous number and locations of its stores to
effectively and efficiently serve the central Florida market and implementing
the results of such evaluation; and (4) implementing certain cost containment
programs in order to reduce the current level of selling, general and
administrative expenses. There can be no assurance that the implementation of
these plans along with management's plans to use a portion of the proceeds from
this Offering to reduce debt will result in increased profitability in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Financial Statements and Notes thereto presented
elsewhere in this Prospectus.
Reliance on One Supplier. The Company's business is dependent in a
material respect upon its close relationship with its principal vendor, APS, and
its ability to continue to purchase products from this vendor at favorable
prices and favorable terms, including those offered through financial incentives
such as cooperative advertising arrangements, other marketing incentive programs
and non-financial benefits such as distribution services. The Company has
entered into a product purchasing agreement with APS ending in October 2000 to
purchase a minimum average of 75% of the Company's cost of goods sold, less
certain allowable exceptions, over any given consecutive four month billing
period. A disruption of this vendor relationship, or a material change in any of
the terms of purchase, advertising, incentive or other programs, would likely
have a material adverse effect on the Company's business. During the year ended
December 31, 1996, APS supplied the Company with approximately 70% of its total
inventory of stock items, which represented at least 55.4% of the Company's cost
of goods sold, after deduction of certain allowable exceptions. See
"Business -- Purchasing" and "-- Inventory Management."
9
<PAGE> 11
Growth through Acquisitions. The Company's growth strategy includes
pursuing acquisition opportunities. There can be no assurance that the Company
will be able to successfully identify suitable acquisition candidates, secure
financing on acceptable terms, complete acquisitions, integrate acquired
operations into existing operations or expand into new markets. There can also
be no assurance that future acquisitions will not have an adverse effect upon
the Company's operating results, particularly in the fiscal quarters immediately
following the completion of such acquisitions while the operations of the
acquired business are being integrated into the Company's operations. Once
integrated, acquired operations may not achieve levels of revenues,
profitability or productivity comparable with those achieved by the acquired
company's existing operations, or otherwise perform as expected. In addition,
the Company competes for acquisition and expansion opportunities with companies
that have substantially greater resources. See "Business -- Growth Strategy" and
"-- Competition."
Need for Additional Financing. The Company is dependent upon the proceeds
of this Offering to reduce the approximately $3,000,000 of it's indebtedness to
APS, to implement its growth strategy and to finance its working capital
requirements. The Company intends to satisfy the remainder of its indebtedness
to APS from a portion of the proceeds to be obtained from the Finova Credit
Facility. Additionally, the Company anticipates expanding its business through
acquisitions. To facilitate these acquisitions, the Company intends to utilize
up to $2,000,000 of the proceeds from this Offering and any remaining funds that
may be available under the Finova Credit Facility, as well as obtaining, if and
to the extent necessary to appropriately implement the Company's growth
strategies, additional lines of credit. However, currently the Company has not
entered into any preliminary agreements or understandings for any additional
lines of credit with any lenders. To the extent that the Company incurs
indebtedness to fund growth, the Company will be subject to the risks associated
with incurring additional indebtedness, including the risks that interest rates
may fluctuate and cash flow may be insufficient to pay principal and interest on
any such indebtedness. There can be no assurance that the Company will be
successful in obtaining a line of credit or, if obtained, that it will be
available to the Company on commercially reasonable terms, or that it will be
sufficient for the Company's growth. If the proceeds of this Offering and the
funds available pursuant to the Finova Credit Facility are not sufficient to
fully implement the Company's growth strategies, and if additional financing is
not available, the Company may have to curtail its long-range growth strategy.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Additionally, the Finova Credit Facility expires two years after the
closing of this Offering, subject only to subsequent annual renewals at Finova's
sole discretion. If Finova does not renew the Credit Facility it is unlikely
that the Company will be financially capable of satisfying its obligation to
repay Finova. The Company would seek to refinance the indebtedness due to Finova
at that time. However, there can be no assurances that the Company will be
successful in obtaining a new line of credit or, if obtained, that it will be
available to the Company on commercially reasonable terms, or that it will be
sufficient for the Company's needs.
Competition. Both the Professional Installer and DIY portions of the
Company's business are highly competitive. The Company's major competitors in
the Professional Installer portion of its business include independent warehouse
distributors and parts stores, automobile dealerships and national warehouse
distributors and associations, such as National Automotive Parts Association
("NAPA"), Carquest and All Pro. Competitors in the DIY portion of the Company's
business include national and regional automotive parts chains such as AutoZone,
Western Auto and Pep Boys, independently owned parts stores, automobile
dealerships and mass or general merchandise, discount and convenience chains
that carry Automotive Products. Many of the Company's competitors are larger and
have greater financial resources than the Company. Some of the larger DIY
competitors have entered into the Professional Installer portion of the business
and this could have material adverse effect on the Company's operations. See
"Business -- Competition."
Dependence of Key Executive. The success of the Company is dependent on
the services and efforts of its existing key management personnel. Robert H.
Gentry, III has an employment agreement with the Company. The loss of the
services of Mr. Gentry would have a material adverse effect on the Company's
business. The Company has obtained a key-man life insurance policy on Robert H.
Gentry, III, but will not
10
<PAGE> 12
maintain life insurance policies covering any other officer or employee.
Pursuant to the terms of the Credit Agreement with Finova and as a condition to
Finova's obligations under the Credit Facility, the key-man life insurance
policy will be collaterally assigned to Finova at the closing of this Offering.
The Company's success and plans for future growth will depend on its ability to
attract and retain additional qualified personnel. There is no assurance that
the Company will be able to hire or retain such personnel in the future. See
"Management."
Control by Management. Robert H. Gentry, III is currently the sole
director of the Company and as such has sole authority to manage the policies
and direction of the Company. The Company anticipates having in place an
expanded board of at least four additional members by the Effective Date, at
least three of whom will be independent directors. The Company has identified
Messrs. Lawrence S. Goldfarb, William H. Burns and Stanley G. Miller as director
candidates and those individuals have agreed to serve on the board once they are
elected. See "Management."
Immediate and Substantial Dilution. Upon completion of this Offering, the
pro forma net tangible book value per share of the Common Stock would be $1.68,
representing an immediate dilution of $4.32 of net tangible book value per
share, or 72.0%, to the public investors and an increase of $1.85 per share to
existing shareholders. The exercise of the Warrants will result in further
dilution to the public investors. See "Dilution."
Benefits to Affiliates and Insiders from Offering Proceeds. Certain
benefits will accrue to certain shareholders and management as a result of the
Offering. Robert H. Gentry, III, the Company's principal shareholder, President
and Chief Executive Officer, advanced the Company approximately $430,000 for
working capital during 1997 and secured a loan to obtain such funds with a
mortgage on his residence. The outstanding principal balance of approximately
$320,000 plus Mr. Gentry's costs incurred in connection with the loan will be
paid from Offering proceeds. Further, to the extent that the Company applies a
portion of the net proceeds of this Offering to reduce the Company's obligations
to APS and Autoparts Finance Company, Inc. ("AFCO"), an affiliate of APS, Mr.
Gentry, and certain other family members, will be relieved of their personal
guarantees of such indebtedness. In addition, the Company is indebted to
Lawrence S. Goldfarb, a director nominee,in the approximate amount of $146,000,
including interest, for advances to the Company during 1996 and 1997. The
Company plans to repay that obligation from proceeds of this Offering. See "Use
of Proceeds" and "Certain Transactions."
Control by Current Shareholders. Upon consummation of this Offering,
Robert H. Gentry, III, and his sisters, Marguerite Seifert and Jennifer Rideout
will beneficially own approximately 66%, of the shares of Common Stock
outstanding. Together, they will be in a position to control the affairs of the
Company. For example, those shareholders, individually and as a group, or
together with others, including directors and executive officers of the Company,
will be able to control the outcome of shareholder votes, including votes
concerning the election of directors, the adoption of amendments to the
Company's articles of incorporation or bylaws and the approval of certain
mergers and other significant corporate transactions, including a sale of
substantially all of the Company's assets. Such control by existing shareholders
could also have the effect of delaying, deferring or preventing a change in
control of the Company. Mrs. Rideout is the wife of William Rideout, the
Company's Vice President of Purchasing and Inventory. Marguerite Seifert is
employed by the Company in its Accounts Payable and Human Resources Departments.
See "Beneficial Ownership of Principal Stockholders and Management" and
"Description of Securities."
No Dividends Anticipated. The Company does not intend to pay dividends in
the foreseeable future. Any earnings which the Company may realize in the
foreseeable future will be retained to finance the growth of the Company. See
"Dividend Policy."
No Prior Public Market; Arbitrary Determination of Offering Prices;
Possible Volatility of Securities. Prior to this Offering, there has been no
public market for the Company's Securities. Accordingly, there can be no
assurance that an active trading market will develop or, if developed, that it
will be sustained upon the completion of this Offering or that the market prices
of the Securities will not decline below the initial public offering prices. The
initial public offering prices of the Securities and the terms of the Warrants
have been arbitrarily determined by negotiations between the Company and the
Underwriters and do not necessarily bear
11
<PAGE> 13
any relationship to the Company's assets, book value, net earnings, net sales or
other established criteria of value, and should not be considered indicative of
the actual value of the Securities. See "Underwriting." The stock market has,
from time to time, experienced extreme price and volume fluctuations, which
often have been unrelated to the operating performance of particular companies.
Regulatory developments and economic and other external factors, as well as
period-to-period fluctuations in financial assets of the Company, may have a
significant impact on market prices of the Securities.
Prior S Corporation Status and Other Tax Matters. The Company has been
treated as an S Corporation for federal (and most state) tax purposes, however,
the Company will convert to a C Corporation upon the close of this Offering.
Unlike a C Corporation, an S Corporation is generally not subject to income tax
at the corporate level. In the event that the Internal Revenue Service were to
deny such S Corporation status for periods during which the Company was treated
as an S Corporation by reason of the failure to satisfy the S Corporation
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), the
Company would be subject to income tax as a C Corporation. Any net operating
losses related to the Company's operation as an S Corporation will not be
available to offset taxable income, if any, of the Company once it converts to C
Corporation status.
Potential Adverse Effect of Redemption of Warrants. The Warrants are
subject to redemption by the Company. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
current market price when they might otherwise wish to hold the Warrants, or to
accept the redemption price, which may be substantially less than the market
value of the Warrants at the time of the redemption. The holders of the Warrants
will automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised before
they are redeemed. The holders of Warrants will not possess any rights as
shareholders of the Company unless and until the Warrants are exercised. See
"Description of Securities -- Warrants."
Current Prospectus and State Blue Sky Registration in Connection with
Exercise of Warrants. The Company will be able to issue shares of its Common
Stock upon exercise of the Warrants only if there is a then current prospectus
relating to the Common Stock issuable upon the exercise of the Warrants under an
effective registration statement filed with the Securities and Exchange
Commission ("SEC") and only if such Common Stock is then qualified for sale or
exempt from qualification under applicable state securities laws of the
jurisdictions in which the various holders of Warrants reside. Although the
Company will use its best efforts to meet such requirements, there can be no
assurance that the Company will be able to do so. The failure of the Company to
meet such requirements may deprive the Warrants of any value and cause the
resale or other disposition of Common Stock issued upon the exercise of the
Warrants to become unlawful. See "Description of Securities -- Warrants."
Possible Adverse Impact on Market of Warrant Exercise. In the event of the
exercise of a substantial number of Warrants within a reasonably short period of
time after the right to exercise commences, the resulting increase in the amount
of Common Stock of the Company in the trading market could substantially affect
the market price of the Common Stock. See "Description of
Securities -- Warrants."
Possible Adverse Impact of Underwriters' Warrants. In connection with the
Offering, the Company will sell to the Underwriters, for nominal consideration
of $10, Underwriters' Warrants exercisable for 120,000 shares of Common Stock
and 120,000 Warrants, exercisable per share at 150% of the initial public
offering price. The Underwriters' Warrants will be exercisable for a period of
four years, commencing one year after the date of this Prospectus. The
Underwriters' Warrants will not be redeemable by the Company. The holders of the
Underwriters' Warrants will have the opportunity to profit from a rise in the
market price of the Securities, if any, without assuming the risk of ownership.
The Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Underwriters'
Warrants are outstanding. At any time when the holders thereof might be expected
to exercise them, the Company would probably be able to obtain additional
capital on terms more favorable than those provided by the Underwriters'
Warrants.
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<PAGE> 14
The Underwriters have "piggy back" and demand registration rights with
respect to the Common Stock issuable upon exercise of the Underwriters' Warrants
(and the Warrants issuable thereunder). Any future exercise of these
registration rights may cause the Company to incur substantial expense and could
impair the Company's ability to raise capital through the public sale of its
securities. See "Dilution," "Shares Eligible for Future Sale" and
"Underwriting."
Effect of Certain Charter and Bylaw Provisions; Antitakeover
Effects. Certain provisions of Florida law and the Company's Amended and
Restated Articles of Incorporation ("Articles of Incorporation") may deter or
frustrate a takeover attempt of the Company that a shareholder might consider in
his best interest. The Company is subject to the "affiliated transactions" and
"control share acquisition" provisions of the Florida Business Corporation Act.
These provisions require, subject to certain exceptions, that an "affiliated
transaction" be approved by the holders of two-thirds of the voting shares other
than those beneficially owned by an "interested shareholder" or by a majority of
disinterested directors. Voting rights must also be conferred on "control
shares" acquired in specified control share acquisitions, generally only to the
extent conferred by resolution approval by the shareholders, excluding holders
of shares defined as "interested shares." The Company's Articles of
Incorporation, among other things, provide that (i) any action required or
permitted to be taken by the shareholders of the Company may be effected only at
an annual or special meeting of shareholders, and not by written consent of the
shareholders, (ii) any meeting of the shareholders may be called only the Board
of Directors or upon the written demand of the holders of not less than 50% of
the votes entitled to be cast at a special meeting, (iii) an advance notice
procedure must be followed for nomination of directors and for other shareholder
proposals to be considered at annual shareholders' meetings, and (iv) the
Company's Board of Directors, divided into three classes, each of which serves
for staggered three year periods. In addition, the Company will be authorized to
issue additional shares of Common Stock and up to five million shares of
preferred stock in one or more series, having terms fixed by the Board of
Directors without shareholder approval, including voting, dividend or
liquidation rights that could be greater than or senior to the rights of holders
of Common Stock. Issuance of additional shares of Common Stock or new shares of
Preferred Stock could also be used as an anti-takeover device. Except as set
forth herein, the Company has no current intentions or plans to issue additional
Common Stock or issue Preferred Stock. See "Description of Securities."
Possible Dilutive Effect of Options and Warrants and Adverse Effect on
Market Price. No assurance can be given as to the effect, if any, that future
sales of Common Stock, or the availability of shares of Common Stock for future
sales, will have on the market price of the Common Stock from time to time.
Sales of substantial amounts of Common Stock (including shares issued upon the
exercise of warrants or stock options), or the possibility that such sales could
occur, could adversely affect the market price of the Common Stock and could
also impair the Company's ability to raise capital through an offering of its
equity securities in the future. The Company has established a Stock Option Plan
for employees, officers, directors and consultants, and has reserved 500,000
shares of Common Stock for issuance upon exercise of stock options that will be
granted under the Plan in the future. The issuance of any additional shares by
the Company in the future may result in a reduction of the book value or market
price of the then outstanding Common Stock. For the life of the Warrants, the
non-public warrants, and options granted in the future, the holders thereof may
be given the opportunity to profit from a rise in the market price of the Common
Stock. Any rise in the market price of the Common Stock may encourage the
holders to exercise such warrants or options, which may result in a dilution of
the interests of other shareholders. As a result, the Company may find it more
difficult to raise additional equity capital if it should be needed for the
business of the Company while such warrants and options are outstanding. See
"Description of Securities."
Shares Eligible for Future Sale; Registration Rights; Possible Adverse
Effect on Future Market Prices. Sales of a substantial number of shares of
Common Stock in the public market following this Offering could adversely affect
the market price of the Common Stock. Upon completion of this Offering, the
Company will have outstanding 3,560,000 shares of Common Stock, of which the
1,200,000 shares of Common Stock and 1,200,000 Warrants sold in this Offering
will be freely tradable. Of the remaining shares, the Company anticipates that
2,360,000 shares, or 2,265,522 giving effect to the Underwriters over-allotment
option, will be subject to an agreement with the Representative under which such
shares may not be offered, sold or
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<PAGE> 15
otherwise disposed of for a period of twelve months after the date of this
Prospectus without the prior written consent of the Representative, but will
thereafter be eligible for sale pursuant to Rule 144 of the Securities Act. See
"Description of Securities -- Registration Rights" and "Shares Eligible for
Future Sale."
Possible Delisting of Securities; NASDAQ SmallCap Market. Prior to this
Offering, there has been no established trading market for the Company's
Securities and there is no assurance that a trading market for such Securities
will develop after the completion of this Offering. If a trading market does in
fact develop for the Securities offered hereby, there can be no assurance that
it will be sustained. Trading in such Securities is subject to official notice
of issuance that the Common Stock and the Warrants have been approved for
trading on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). If the listing is approved, the continued
trading of the Common Stock and the Warrants on the NASDAQ SmallCap Market is
conditioned upon the Company meeting certain criteria. The National Association
of Securities Dealers ("NASD"), which administrators NASDAQ, currently requires
that, in order for a company's securities to be listed on the NASDAQ SmallCap
Market, the Company must have among other requirements: (a) either $4,000,000 in
net tangible assets (total assets, excluding goodwill, minus total liabilities),
or $50,000,000 market capitalization or $750,000 net income (in the latest
fiscal year or 2 of the last 3 fiscal years); (b) a public float of 1,000,000
shares having a market value of at least $5,000,000; (c) a minimum bid price of
not less than $4 per share; (d) 3 market makers; and (e) round lot shareholders
(holders of 100 shares or more) of at least 300. Continued Listing of the
Company's Securities on the NASDAQ SmallCap Market requires, among, other
things: (a) either $2,000,000 in net tangible assets or $35,000,000 market
capitalization or $500,000 net income (in the last fiscal year or 2 of the last
3 fiscal years); (b) a public float of 500,000 shares having a market value of
at least $4,000,000; (c) a minimum bid price of not less than $1 per share; (d)
2 market makers; and (e) round lot shareholders of at least 300. While NASDAQ
requirements to continue a Company's listing are less strenuous, there can be no
assurances that the Company will continue to meet such standards. If the Company
fails to meet any of these criteria, the Common Stock and/or the Warrants could
be delisted from trading on the NASDAQ SmallCap Market, which delisting could
materially adversely affect the trading market for the Common Stock and/or the
Warrants. In such event, trading in the Securities would be conducted in the
over-the-counter market known as the NASD OTC Electronic Bulletin Board, or the
"pink sheets", whereupon trading in the Company's securities would be subject to
the "Penny Stock" regulations. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Company's Common Stock. There can be no assurance that the Securities
will not be delisted. See "Underwriting."
Penny Stock Regulation. In the event the Common Stock is delisted from
trading on NASDAQ SmallCap Market and the trading price of the Common Stock is
less than $5.00 per share, trading in the Common Stock would also be subject to
the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"). Under such rule, broker/dealers who recommend such
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of
1990 also require additional disclosure in connection with any trades involving
a stock defined as a "penny stock" (generally, according to recent regulations
adopted by the Securities and Exchange Commission of less than $5.00 per share,
subject to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock and the ability of purchasers in this Offering to
sell their securities in the secondary market. There can be no assurance that
the Common Stock will not be treated as a penny stock.
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock and 1,200,000 Warrants offered hereby will be approximately $6.1
million ($6.5 million if the Underwriters' over-allotment option is exercised in
full) at an Offering price of $6.00 per share and $.125 per Warrant after
deducting aggregate underwriting discounts and the estimated expenses of the
Offering approximating $1,291,000 ($1,361,000 if the Underwriters'
over-allotment is exercised in full). See "Underwriting." The Company expects
such funds to be utilized approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- ----------------------- ------------- -------------
<S> <C> <C>
Repayment of APS/AFCO Debt(1)............................... $3,000,000 49.5%
Repayment of Debt to Related Parties(2)..................... 466,000 7.7
Acquisitions and Expansion(3)............................... 2,000,000 33.0
Working Capital(4).......................................... 593,000 9.8
---------- ----
Total(5).......................................... $6,059,000 100%
========== ====
</TABLE>
- ---------------
(1) To be paid to APS and AFCO upon the closing of this Offering. The $3,000,000
allocation of proceeds set forth above will only be sufficient to pay
approximately half of the amount due to APS and AFCO for loans to the
Company. The Company is seeking to refinance the remainder of the APS and
AFCO indebtedness, and thereby retire that debt in full, which refinancing
has been made a condition to closing this offering by the Underwriters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) This amount will be used to repay Robert H. Gentry, III, the principal
shareholder, an officer and director of the Company, and Lawrence Goldfarb,
a director nominee, for loans they have made to the Company. Of the $466,000
allocated above, approximately $320,000 shall be paid to Barnett Bank, N.A.
to repay a mortgage on Mr. Gentry's residence used to secure a loan with an
original principal amount of $500,000 for the benefit of the Company. The
Company also intends to repay $146,000 owed to Lawrence Goldfarb, a director
nominee. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Transactions".
(3) To be used for the implementation of the Company's growth and expansion
strategies, acquisition of new locations for the Company's auto parts stores
and expansion, where appropriate, of existing facilities.
(4) To be used for implementation of the Company's growth strategy,
refurbishment of several stores, the hiring of a Chief Financial Officer,
acquisition of a key man life insurance policy on Mr. Gentry and general
corporate purposes. The Company also intends to renegotiate interest rates
on outstanding indebtedness due to various holders of mortgages against the
Company's properties. Such amounts total approximately $730,000 and bear
interest at rates currently ranging from 11.0% to 16.0% per annum. To the
extent the Company is unsuccessful in its renegotiations, it will repay such
indebtedness. If the Representative exercises the Underwriter's
over-allotment option, the Company, the Selling Shareholders and the
Representative have agreed that the first 85,522 shares of the Common Stock
shall be sold by and on behalf of the Company. The proceeds from this sale
and the sale of the related Warrants, approximately $466,000, shall be
allocated to Working Capital by the Company.
(5) If the Representative exercises the Underwriter's over-allotment option and
sells 85,522 shares and related warrants allocated for sale by the Company
thereunder, the net total proceeds to the Company will be approximately
$6,525,000.
The foregoing represents the Company's current estimate of the allocation
of the net proceeds of the Offering based upon certain assumptions relating to
the costs associated with the Company's business operations. The Company
believes that the net proceeds of this Offering will satisfy the Company's
capital requirements for at least twelve months.
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<PAGE> 17
Prior to expenditures, the net proceeds of this Offering will be invested
principally in high grade short-term interest-bearing investments. Any proceeds
received upon exercise of the over-allotment option or any of the Company's
Warrants will be used for working capital.
DILUTION
The net tangible book deficit of the Company at October 31, 1997 was
($401,065) or ($0.17) per share of Common Stock. Net tangible book value
(deficit) per share is determined by dividing the net tangible book value
(deficit) of the Company (total tangible assets less total liabilities) by the
number of shares of Common Stock outstanding. After giving effect to the receipt
of net proceeds from the sale of the shares of Common Stock and warrants offered
hereby by the Company at an Offering price of $6.00 per share of Common Stock,
and $.125 per Warrant and after deducting estimated offering expenses and
underwriting discounts, the net tangible book value of the Company at October
31, 1996, would have been approximately $5,990,538 or $1.68 per pro forma share
of Common Stock, representing an immediate dilution of $4.32 (or approximately
70.5%) per share to the public investors. This represents an immediate and
substantial dilution to new investors purchasing Common Stock in this Offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $6.00
Net tangible book (deficit) per share before Offering....... ($0.17)
Increase in net tangible book value per share attributable
to public investors....................................... 1.85
------
Pro Forma net tangible book value per share after
Offering(1)(2)............................................ 1.68
-----
Dilution per share to public investors(5)................... $4.32
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of the date of
this Prospectus, the number of shares of Common Stock purchased, the percentage
of total shares purchased, the total consideration paid, the percentage of total
consideration paid and the average price per share paid by the existing
stockholders of the Company and the investors in this Offering.
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION(1)(2) PRICE(1)
---------------------- -------------------------- ---------
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders........ 2,360,000 66.3%(4) $ 262,006 3.5%(4) $0.11(4)
Public Investors(3)(4)....... 1,200,000 33.7%(4) 7,200,000(4) 96.5%(4) $6.00(4)
--------- ----- ----------- -----
Total.............. 3,560,000 100.0% $ 7,462,006 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Gives effect to the 23,600-for-one stock split to be effected immediately
prior to consummation of this Offering.
(2) Does not include: (a) up to 180,000 shares and 180,000 Warrants subject to
issuance under the overallotment option; (b) 120,000 shares and 120,000
Warrants (and shares issuable thereunder) subject to the Underwriters'
Warrants and (c) other outstanding warrants. To the extent that any warrants
are exercised, there may be further dilution to the public investors.
(3) In the event that the Underwriters exercise their over-allotment option in
full, the net tangible book value after this Offering would be $1.77 per
share which would result in an immediate dilution of $4.23 to the public
investors.
(4) Allocates no value to the Warrants offered hereby.
(5) Assumes no exercise of Warrants related to the Offering.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the debt and capitalization of the Company
at October 31, 1997, and as adjusted to give effect to the sale of 1,200,000
shares of Common Stock and 1,200,000 Warrants by the Company in the Offering at
an Offering price of $6.00 per share of Common Stock and $.125 per Warrant, and
the application of the net proceeds therefrom. This information should be read
in conjunction with the financial statements and the notes thereto, as well as
"Summary Financial Information," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
---------------------------
ACTUAL(1) AS ADJUSTED(2)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion................... $6,862 $ 3,407
------ -------
Shareholders' equity
Preferred Stock, $.01 par value; authorized: 5,000,000
shares; issued and outstanding: none................... -- --
Common Stock, $.01 par value; authorized: 20,000,000
shares; issued and outstanding: 2,360,000 actual and
3,560,000 as adjusted.................................. 24 36
Additional paid-in capital.................................. 435 6,482
Accumulated deficit......................................... (527) (527)
------ -------
Total Shareholders' equity (deficit).............. (68) 5,991
------ -------
Total capitalization...................................... $6,794 $ 9,398
====== =======
</TABLE>
- ---------------
(1) Gives effect to the 23,600-for-one stock split to be effected immediately
prior to consummation of this Offering.
(2) Does not include: (a) up to 180,000 shares and 180,000 Warrants subject to
issuance under the overallotment option; (b) 120,000 shares and 120,000
Warrants (and shares issuable thereunder) subject to the Underwriters
Warrant; or (c) other outstanding warrants.
DIVIDEND POLICY
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. Any earnings which the Company may realize in the
foreseeable future will be retained to finance the growth of the Company. Future
dividend policy will depend upon the Company's earnings, capital requirements,
financial condition and other factors considered relevant by the Company's Board
of Directors. See "Description of Securities."
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
This discussion contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Factors that might cause
such a difference include but are not limited to those discussed in "Risk
Factors."
OVERVIEW
The Company opened its first store in Florida in 1978 and by 1996 expanded
to 15 stores, one speed shop, one machine shop, and one warehouse. In 1996, the
Company opened a manufacturing unit at its headquarters to manufacture axles.
Historically, the Company purchased its merchandise directly from various
manufacturers and distributors, including APS. However, in October, 1993, the
Company entered into a product purchasing agreement with APS, a national
distributor of auto parts, from which the Company purchases approximately 70% of
its inventory stock items. The agreement was subsequently amended in October
1995. The Company determined that some of its stores service overlapping
geographic areas, thus management decided to close stores 2, 14, 17, and 18.
Stores 2 and 18 were closed during the ten months ended October 31, 1997. The
Company intends to close stores 17 and 14 during the first and second quarter of
1998, respectively. Approximately 80% of the Company's sales are to Professional
Installers that utilize the Company's telephone ordering and delivery systems.
Therefore, the Company does not anticipate a significant decline in net sales
attributable to these stores due to its ability to continue to deliver its
products to these customers from its remaining store locations. For the year
ended December 31, 1996 and the ten months ended October 31, 1997 the net
aggregate sales for the aforementioned stores were approximately $2,005,000 and
$1,531,000, respectively. The direct operating expenses for the aforementioned
stores for the same periods were $458,000 and $424,000, respectively. These
direct operating expenses include store personnel compensation and related
benefits, building rent and utility costs, insurance, vehicle costs,
advertising, and various sales costs. Management believes that the direct
operating expenses attributable to store personnel compensation and benefits,
building rent and utilities, insurance costs and certain advertising and selling
costs for the aforementioned stores can be reduced by approximately 75 to 80%.
The Company also plans to expand into other markets in Florida and the Southeast
generally through the acquisition of existing stores and/or the opening of new
stores.
RESULTS OF OPERATIONS
The following table sets forth certain selected historical operating
results for the Company as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
---------------- ----------------
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................................... 65.8 66.8 66.8 62.2
------ ------ ------ ------
Gross profit.......................................... 34.2 33.2 33.2 37.8
Selling, general and administrative expenses............ 34.1 36.9 36.7 38.6
------ ------ ------ ------
Earnings (loss) from operations....................... .1 (3.7) (3.5) (.8)
Rental income........................................... 1.4 1.6 1.6 1.6
Interest expense........................................ (4.2) (6.5) (6.4) (6.9)
Gain on sale of property................................ -- -- -- 2.0
------ ------ ------ ------
Offering costs.......................................... -- -- -- (.8)
Net earnings (loss)..................................... (2.7)% (8.6)% (8.3)% (4.9)%
====== ====== ====== ======
</TABLE>
18
<PAGE> 20
Ten Months Ended October 31, 1996 Compared to Ten Months Ended October 31, 1997
Net Sales. Product sales decreased by approximately $1,084,000, or
approximately 10.6%, from $10,291,236 in the ten months ended October 31, 1996
to $9,206,871 in the ten months ended October 31, 1997. This decrease was
primarily attributable to the reorganization of the Company's product portfolio
and revisions made to the Company's purchase criteria policy. During the
refurbishment of the Company's product portfolio, certain low margin product
lines (mainly consisting of accessories) were removed from the product mix, and
as a result of the deletion of these lines the sales for this period declined,
while the Company's gross profit increased from 33.2% to 37.8%. Also,
contributing to the reduction in sales was the loss of most of the business of a
large regional account, management's decision to raise the quantity of the
Company's minimal product order amount and the requirements to qualify for an
open account credit, which are within the Company's purchase criteria policy.
Cost of Goods Sold. Cost of goods sold decreased from $6,871,217 or 66.8%
of net sales during the ten months ended October 31, 1996 to $5,727,418 or 62.2%
of net sales during the ten months ended October 31, 1997. This decrease in
dollar amounts was primarily attributable to the decrease in net sales and the
Company's ability in 1997 to purchase certain product lines on more favorable
terms compared to the same period in 1996. In addition, in order to expand the
Company's relationship with an existing regional account, the Company replaced
certain obsolete inventory held by that regional account which resulted in a
one-time expense write-off for obsolete inventory totaling $118,021 during the
ten months ended October 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses decreased from $3,773,117 or 36.7% of net sales
during the ten months ended October 31, 1996 to $3,549,708 or 38.6% of net sales
during the ten months ended October 31, 1997. The decreased dollar amount of
SG&A expenses resulted primarily from (1) a reduction of overtime costs
resulting from improved utilization of store employees, (2) the one time expense
incurred during the ten months ended October 31, 1996 for the settlement of a
lawsuit totaling approximately $50,000 and (3) reduced healthcare and other
insurance costs as the result of management's negotiation of new insurance
policies.
Interest Expense. Interest expense decreased from $655,851 or 6.4% of net
sales during the ten months ended October 31, 1996 to $638,532 or 6.9% of net
sales during the ten months ended October 31, 1997. This dollar decrease was
primarily attributable to a reduction in the overall weighted average interest
rate which was partially offset by an increase in the average outstanding
indebtedness as a result of the Company's need to increase its borrowings to
fund operations.
Gain on Sale of Property. During the ten months ended October 31, 1997 the
Company sold property not being used in its core business which resulted in a
gain of $185,707. There were no such sales during the ten months ended October
31, 1996.
Rental Income. The Company receives rental income from various commercial
and residential properties it owns that are not related to its core business.
Rental income decreased minimally from $159,837 during the ten months ended
October 31, 1996 to $143,355 during the ten months ended October 31, 1997.
Offering Costs. The Company expensed $68,714 of its offering costs during
the ten months ended October 31, 1997 as a result of a delay in the Company's
Offering.
Income Taxes. The are no income taxes recorded in the ten months ended
October 31, 1996 and 1997 because the Company was an S Corporation.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Net Sales. Product sales increased by approximately $400,000, or
approximately 3.5%, from $11,691,338 in 1995 to $12,094,341 in 1996. This
increase was primarily due to (1) the substantial expansion of an arrangement
with one of the Company's regional accounts during 1996 which resulted in
increased sales and (2) the continued improvement in the Company's customer
service. Total net sales to such regional account was less than 10% of the
Company's total net sales in 1995 and 1996. See "Business -- Operating
Strategy."
19
<PAGE> 21
Cost of Goods Sold. Cost of goods sold increased from $7,689,551 or 65.8%
of net sales in 1995 to $8,075,176 million or 66.8% of net sales in 1996. The
increased dollar amount was primarily attributable to the Company's inability to
take advantage of vendor discount programs due to the Company's cash constraints
while offering sales discounts to the Company's regional accounts. Further,
marginal working capital during 1996 periodically prohibited the Company from
maintaining adequate inventory on certain items. Therefore, the Company
satisfied customer demand for such items by buying from competitors at prices
that generated minimal gross margins. In addition, in connection with its
expanded relationship with a regional account in 1996, the Company replaced
certain obsolete inventory held by that account with the Company's products at
no cost to the customers, which resulted in a one-time expense write-off for
obsolete inventory totaling $118,021 during 1996. The Company also opened a
manufacturing unit in 1996 which was not profitable. Management ceased
operations of this unit in June 1997.
Selling, General and Administrative Expenses. SG&A expenses increased from
$3,986,570 or 34.1% of net sales in 1995 to $4,463,849 or 36.9% of net sales in
1996. The increased dollar amount of SG&A expenses resulted primarily from (1)
hiring additional sales personnel in anticipation of the Company's planned
growth strategies ($330,000), (2) expenses incurred in establishing and
operating the manufacturing unit opened in 1996 ($38,000), (3) the expenses
associated with the settlement of a lawsuit ($50,000) and (4) the increased
operating expenses resulting from the Company's inadequate cash position.
Interest Expense. Interest expense increased from $495,174 in 1995 or 4.2%
of net sales to $785,088 in 1996 or 6.5% of net sales. This increase was
primarily attributable to an increase in weighted average outstanding
indebtedness from 1995 to 1996. In October 1995, the Company consolidated
various obligations into two loans from APS and AFCO totaling $4.95 million.
Many of the obligations that were consolidated were non-interest bearing.
However, the APS and AFCO loans bear interest at interest rates ranging from 10%
to prime plus 2% (10.25% at December 31, 1996), which substantially increased
the Company's interest expense. In addition, in October 1995, APS began to
charge the Company interest of 10% per annum on its open account balance.
Rental Income. The Company receives rental income from various commercial
and residential properties it owns that are not related to its core business.
Rental income increased from $165,245 in 1995 to $191,804 in 1996.
Income Taxes. There are no income taxes recorded in 1995 and 1996 because
the Company was an S Corporation.
SFAS No. 128, Earnings Per Share and SFAS No. 129, Disclosure of
Information about Capital Structure, will be effective for the Company's
financial statements issued after December 15, 1997. Early adoption of the new
standards is not permitted. SFAS 128 eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed. SFAS
No. 129 requires disclosing information about an entity's capital structure. The
adoption of these new standards is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in 1998
and expects no material impact to the Company's financial statement
presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for fiscal years beginning after December 15, 1997.
This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries. This Statement requires annual financial statements to disclose
information about products and services, geographic areas and major customers
based on a management approach, along with interim reports.
20
<PAGE> 22
The management approach requires disclosing financial and descriptive
information about an enterprise's reportable operating segments based on
reporting information the way management organizes the segments for making
business decisions and assessing performance. It also eliminates the requirement
to disclose additional information about subsidiaries that were not
consolidated. The Company plans to adopt SFAS No. 131 in 1998 with impact only
to the Company's disclosure information and not its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, TEN MONTHS ENDED OCTOBER 31,
----------------------- -----------------------------
1995 1996 1996 1997
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............. $(3,763,058) $ 320,812 $ 275,036 $(406,520)
Net cash provided by (used in)
investing activities............. (198,264) (248,186) (200,594) 182,852
Net cash provided by (used in)
financing activities............. 3,846,424 (86,536) (88,304) 216,580
----------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................. $ (114,898) $ (13,910) $ (13,862) $ (7,088)
=========== ========= ========= =========
</TABLE>
During 1996, the Company's operations provided $320,812 compared to using
approximately $3.8 million of cash during 1995. The increase in cash provided by
operations in 1996 was due primarily to an increase in the timing of payments on
the Company's trade accounts payable and certain other working capital
liabilities due to cash constraints. In addition, in 1995 the Company
substantially reduced the amount of non-interest bearing working capital
liabilities and consolidated certain other indebtedness through the use of
proceeds obtained from interest bearing debt obtained from APS and AFCO. The
increase in cash provided from operations was also due to a slower increase in
the build up of inventory in 1996. In 1995 the Company began to expand its
product line to carry more accessory items and tools based on recommendations
made by its primary supplier. As a result, per store inventory increased
substantially in 1995. The expansion of inventory continued in 1996, however, at
a slower pace as the Company achieved its desired product mix. The Company
averaged 1.5 inventory turns in 1996 which is lower than the industry average of
2.5 turns as a result of this expansion. Toward the end of 1996 the Company
began to reevaluate this new product mix and during the first quarter of 1997
has refined its product mix to focus its efforts on the distribution of Hard
Parts. Management currently reviews inventory movement reports weekly to
identify any slow moving and excess inventory. In addition, the Company performs
cycle counts on at least a monthly basis. Once identified as slow moving or
obsolete, such inventory items are adjusted to the lower of cost or market. The
effects of the above resulting increases were partially offset by the increase
in the net loss in 1996 compared to 1995. The Company's allowance for doubtful
accounts represents 23.4% of the total trade accounts receivable at October 31,
1997.
The accounts receivable by days outstanding are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, TEN MONTHS ENDED OCTOBER 31,
----------------------- ----------------------------
1996 1997
--------- ---------
<S> <C> <C>
Current............................. $501,850 $462,156
30 days............................. 133,662 72,902
31-60 days.......................... 28,343 30,872
61-90 days.......................... 14,678 13,809
over 90 days........................ 217,898 333,136
-------- -----------
$896,431 $912,875
======== ===========
</TABLE>
The increase in over 90 days for the ten months ended October 31, 1997
compared to the year ended December 31, 1996 is attributable to approximately
twelve accounts which became delinquent during 1997.
21
<PAGE> 23
The Company's policy is to not write off older receivables while it pursues
collection. These accounts have been placed on a payment plan which management
believes will bring the accounts current within the next twelve months.
The increase in cash used in operations for the ten months ended October
31, 1997 compared to the same period in 1996 was primarily attributable to the
payments to APS for inventory purchased in prior periods and the payment for
weekly purchases of inventory from APS in accordance with the Loan Modification
Agreement. Also contributing to the increase in cash used in operations were the
costs incurred in connection with the Company's planned public offering. These
increases were partially offset by a reduction in the Company's inventory levels
resulting from management's efforts to reduce overall store inventories and
improve its product mix.
The Company used cash for investing activities in the amount of $198,264,
$248,186 and $200,594 in 1995 and 1996 and the ten months ended October 31,
1996, respectively, for the purchase of property and equipment. The Company
provided cash from investing activities in the amount of $182,852 during the ten
months ended October 31, 1997 primarily from proceeds from the sale of land and
building not used in its core business. This increase was partially offset by
purchases of real property and equipment of $45,298.
Net cash used in financing activities in the year ended December 31, 1996
was $86,536 compared to net cash provided from financing activities in 1995 of
$3,846,424. Cash provided by financing activities in the year ended December 31,
1995 was primarily from the proceeds of loans from APS and AFCO. The proceeds
from such indebtedness was used primarily to reduce the amount of non-interest
bearing working capital liabilities and to consolidate certain other
indebtedness. Cash was used in the year ended December 31, 1996 primarily for
the repayment of debt. The increase in cash provided from financing activities
during the ten months ended October 31, 1997 was primarily attributable to the
proceeds from a $430,000 loan from the principal owner of the Company and was
partially offset by the scheduled repayment of debt.
As a result of the foregoing, the Company's independent certified public
accountants issued its report, which included an explanatory paragraph for a
going concern uncertainty, on the Company's financial statements as of December
31, 1996. The ability of the Company to continue as a going concern is dependent
on the consummation of this Offering and repayment of the APS and AFCO
obligations in the approximate amount of $5.8 million including accrued interest
of approximately $639,000 and the improvement of its future operations.
Management believes the repayment of those obligations will save the Company
approximately $232,000 in annual interest.
The Company had working capital deficiencies of $1,847,194 and $2,492,698
at December 31, 1996 and October 31, 1997, respectively. Since 1995, the
Company's cash flows have not been sufficient to finance operations due to its
substantial debt service, inability to take advantage of vendor discounts, and
increased selling, general and administrative expenses. As a result, during 1996
and the first ten months of 1997, the Company has been dependent on loans from
third parties in order to maintain its operations. In the second quarter of
1997, the Company borrowed $430,000 from Robert H. Gentry, III, a shareholder
and principal of the Company, who borrowed those funds from a bank. During 1996
and 1997 the Company borrowed $135,000 from Lawrence Goldfarb, a director
candidate whose company, S&G Automotive Warehouse, Inc., is one of the Company's
vendors. The $319,588 loan outstanding to Mr. Gentry at October 31, 1997, plus
his expenses incurred in connection with that loan, and the obligation owed to
Mr. Goldfarb ($135,000, plus accrued interest) will be paid from the proceeds of
this Offering.
In October 1995, APS and its financing affiliate, AFCO, loaned the Company
$2,450,000 (the "APS Note") and $2,500,000 (the "AFCO Note"), respectively, for
reduction of certain mortgage obligations and other debt. The APS Note had a one
year term and accrued interest of 10% per annum and matured in October 1996. The
AFCO Note has a term of 15 years, with a principal and interest payment payable
monthly at prime, plus 2% (10.25% at December 31, 1996). APS and AFCO obtained a
security interest in all of the Company's personal and real property in
connection with those loans. The outstanding principal balance and accrued and
unpaid aggregated default and non-default interest at January 31, 1997 was
approximately $2,666,679 and $132,455, respectively, on the APS loan, and
$2,465,467 and $204,529, respectively, on the AFCO loan.
22
<PAGE> 24
On February 20, 1997, the Company entered into a Loan Modification
Agreement with APS and AFCO. Under the terms of this agreement, the APS Note and
AFCO Note will continue to accrue interest at their specific contractual
interest rates, however, no payments of principal and interest will be required
until the maturity date. The maturity date is the earlier of the date the
Company receives proceeds from its planned initial public offering of shares of
its Common Stock, or July 31, 1997. Effective July 31, 1997 the Loan
Modification Agreement was amended to extend the maturity date to December 31,
1997 (the "Second Amendment"). On December 22, 1997, the Company entered into a
Third Amendment to Loan Agreement (the "Third Amendment") to extend the maturity
date to February 28, 1998. The Third Amendment reaffirms and incorporates the
terms and conditions of the preceding amendments and the initial loan agreement
(the Second Amendment and Third Amendment may sometimes be referred to hereafter
as the "Amendments"). In addition, from July 31, 1997 to the maturity date, the
Company is required to pay APS before the close of business on Monday of each
week an amount equal to the preceding week's purchases. During the period from
February 27, 1997 through July 31, 1997, the Company purchased from APS
approximately $80,000 of product per week. The outstanding principal balance and
accrued and unpaid aggregated default and non-default interest at October 31,
1997 was approximately $2,666,679 and $715,462, respectively, on the APS loan
and $2,465,467 and $441,747, respectively, on the AFCO loan.
The Company's compliance with the financial covenants under the terms of
the original loan agreements with APS and AFCO were waived under the terms of
the Amendments. The Amendments contain certain financial and other covenants
that, among other things, require the Company to (1) make timely payments to APS
for its merchandise purchases, and (2) complete its planned initial public
offering by February 28, 1998. Failure to comply with the covenants included in
the Amendments would cause the Company to be in default under the terms of such
agreement. Should such default occur APS and AFCO could foreclose on the
Company's assets collateralizing the APS Note and AFCO Note. As long as the
Company complies with the terms of the Amendments and repays by the maturity
date, the outstanding principal and accrued and unpaid interest amounts due
under the APS Note and AFCO Note, along with certain amounts due APS for
merchandise purchases, the default interest charge due to APS and AFCO of
approximately $460,000 and $58,000, respectively, at October 31, 1997 will be
waived. As of December 22, 1997, the Company was in compliance with the terms of
the Amendments.
In January 1997, the Company was 60 days in arrears of its open account
with APS and at that time owed $1,363,036. The Company has since been making
substantial payments on that account and at October 25, 1997, the account
balance was at approximately $1,062,000 (which amount contemplates a $71,000
credit from APS for returns). The account is considered current when the balance
is approximately $400,000. Once the account is current, as defined, the Company
will be able to take advantage of APS's 2% discount for early payment of
invoices, which it has not been able to do since February, 1996.
By making more efficient use of its alliance with APS, repaying the AFCO
and APS Notes, renegotiating certain high interest rate mortgage loans
(approximately $730,000), taking advantage of the discount offered by APS to
customers with current accounts, and by instituting cost containment programs,
management believes that the proceeds to the Company from this Offering and cash
expected to be provided by operating activities will be sufficient to fund the
capital needs of the Company for at least the next 12 months. However, there can
be no assurance that the Company can return to profitability and generate
sufficient cash flows in the future to meet its obligations when due. The
Company's future performance is subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control.
As part of its growth strategy, the Company plans to expand into other
urban areas in Florida and the Southeast. To facilitate acquisitions, the
Company intends to utilize up to $2,000,000 of the proceeds of this Offering and
any remaining funds that may be available under the Finova Credit Facility (to
the extent not used for Working Capital), and, if and to the extent necessary to
appropriately implement the Company's growth strategies, to seek additional
lines of credit after the close of this Offering. The Company currently does not
have any preliminary agreements or understandings with any lenders for any
additional lines of credit. To the extent that the Company incurs indebtedness
to fund growth, the Company will be subject to the risks associated with
incurring additional indebtedness, including the risks that interest rates may
fluctuate and cash flow may be insufficient to pay principal and interest on any
such indebtedness. There can be no assurance that
23
<PAGE> 25
the Company will be successful in obtaining a line of credit or, if obtained,
that it will be available to the Company on commercially reasonable terms, or
that it will be sufficient for the Company's growth. If the proceeds of this
Offering and the funds available pursuant to the Finova Credit Facility are not
sufficient to fully implement the Company's growth strategy, and if additional
financing is not available, the Company may have to curtail its long-range
growth strategy.
INFLATION AND SEASONALITY
The Company does not believe its operations are materially affected by
inflation. The Company has been successful, in many cases, in reducing the
effects of merchandise cost increases principally by taking advantage of vendor
incentive programs, economies of scale resulting from increased volume of
purchases and selective forward buying.
Although store sales have historically been somewhat higher in the second
and third quarters (March through August), the Company does not consider its
business to be materially affected by seasonality.
INDUSTRY OVERVIEW
According to industry estimates, the size of the domestic automotive
aftermarket for replacement parts, maintenance items and accessories is believed
to be in excess of $70 billion of which approximately $3.4 billion is generated
in the State of Florida. The Company believes that the market is growing because
of, among other things: (i) an increase in the size and age of the country's
automotive fleet, (ii) an increase in the number of miles driven annually per
vehicle, (iii) the increased number and higher cost of new cars and (iv) the
higher cost of replacement parts as a result of technological changes in more
recent models of vehicles.
The automotive aftermarket distribution channels are highly fragmented. The
Company believes, however, that the industry is consolidating as national and
regional specialty retail chains gain market share at the expense of smaller
independent operators and less specialized mass merchandisers. General repair
garages are being replaced by specialists and some stations are concentrating on
non-repair services. The Company believes that the DIY market is changing due to
the lack of tools and skills necessary to repair the newer, complex vehicle
systems. Today's consumers are depending more on the professional service
technicians. Automotive specialty chains with multiple locations in given market
areas are believed to enjoy competitive advantages in purchasing, distribution,
advertising and marketing compared to most small independent operators. In
addition, the increase in the number of automotive replacement parts caused by
the significant increase in recent years in the variety of domestic and imported
vehicle makes and models has made it difficult for smaller independent operators
and less specialized mass merchandise chains to maintain inventory selection
broad enough to meet customer demands. The Company believes that this has
created a competitive advantage for those automotive chains, such as the
Company, that have the resources and distribution capability to deliver an
inventory selection broad enough to meet customer needs.
The automotive aftermarket essentially operates three different types of
auto part outlets, the retail store, the traditional store, and the wholesale
store. These stores basically service two distinct types of customers, the
Professional Installer and the DIY customer. Each of the three different types
of outlets carries a different type of inventory selection -- a mixture of Hard
Parts and accessories (waxes, chemicals, car covers, etc.) Following are brief
descriptions of each type of outlet, its customer base, type of inventory, and
general marketing concept:
Retail Store. The retail store customer base is the DIY customer. The
store emphasizes accessories but carries Hard Parts. Both consist of mainly fast
moving items with limited stocking of less popular items. The retail store
relies on heavy advertising, sales clerks and extended store hours.
Traditional Store. The traditional store customer base is a mix of the
Professional Installer and DIY customers with a larger percentage of sales to
Professional Installers. The store emphasizes Hard Parts but carries
accessories. The larger mix of Professional Installers requires slow selling
items to be stocked as well as the fast moving items. The store uses outside
salesmen to call on the Professional Installers, has knowledgea-
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ble employees and offers free delivery service. It generally spends less on
advertising than the retail store and keeps fewer store hours.
Wholesale Store. The wholesale customer base is limited to the
Professional Installer. Inventory consists of Hard Parts only. The store uses
outside salesmen to call on the Professional Installer, has knowledgeable
employees and offers free delivery service. Store hours are limited and
advertising is generally at a minimum.
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BUSINESS
The Company is a specialty supplier and retailer of automotive replacement
parts, tools, supplies, equipment and accessories to both Professionals
Installers and DIY customers. The Company operates 14 auto parts stores, one
speed shop that retails high-performance items primarily to the car enthusiast,
one machine shop engaged in the building and reconditioning of certain engine
parts, and one warehouse facility that holds inventories of specific high-volume
items which are purchased in bulk directly from manufacturers, all of which are
located in, or within a one hour drive of Orlando, Florida. The Company also
maintains approximately 100 vehicles that can make most deliveries to its
wholesale customers within 30 minutes. Stores carry an extensive product line of
Hard Parts including brakes, belts, hoses, filters, cooling system parts, tune-
up parts, shock absorbers, gaskets, batteries, bearings, engine parts,
remanufactured alternators and starters, and chassis parts. In addition, the
Company carries (i) maintenance items, such as oil, antifreeze, fluids, engine
additives and appearance products; (ii) accessories, such as floor mats and seat
covers; (iii) automotive tools and (iv) professional service equipment. For the
fiscal year ended December 31, 1996, approximately 95% of the Company's product
sales was derived from Hard Parts and 5% from other merchandise. Approximately
75% of the Company's sales was derived from Professional Installers and the
remaining 25% from DIY customers during fiscal 1996.
STORE OPERATIONS
The Company's stores are traditional stores that generally range in size
from 3,000 to 8,000 square feet. The Company believes that its stores are
"destination stores" generating their own traffic rather than relying on the
traffic created by the presence of other stores in the immediate vicinity.
Consequently, all stores are freestanding buildings situated on or near major
traffic thoroughfares, which offer ample parking and easy customer access. Each
store carries a mixture of Hard Parts and accessories. The stores carry
16,000-18,000 different SKU's of which 15,000-17,500 represent Hard Parts. The
store sales are generated by a full-time technically trained sales force, a
call-in delivery service for wholesale customers, an extensive selection of
SKU's stocked in each store, express delivery for Professional Installers (with
approximate 30-minute delivery time) on in stock items, and a separate center
for Professional Installers in each store to facilitate quick service.
Company stores service two distinct types of customers -- the Professional
Installer (wholesale) customer and the DIY (retail) customer. The Company's
stores average 75% in Professional Installer sales and 25% in DIY sales. The
Company also provides a delivery service to its wholesale customers with
approximately 100 vehicles. Each of the Company's 14 stores also receive
inventory deliveries nightly from APS and four to six deliveries daily from the
Company's own warehouse. The deliveries replenish each store with the inventory
sold the previous day and also provides a store with the ability to special
order SKU's not normally stocked by the Company's stores. This enables the
Company to provide fast response service to both the wholesale and DIY
customers.
The Company's stores offer the Professional Installer and the DIY customer
a wide selection of nationally recognized brand names and "Big A" (APS private
label) products for domestic and imported automobiles, vans and trucks. In 1996,
new and remanufactured automotive Hard Parts, such as engines and transmission
parts, alternators, starters, water pumps, and brake shoes and pads, accounted
for approximately 95% of the Company's total sales. Each store also carries an
extensive selection of maintenance items, such as oil, antifreeze, fluids,
engine additives, appearance products, and accessories, such as floor mats and
seat covers, automotive tools and professional service equipment.
OPERATING STRATEGY
Accumulation of Marketshare. Because the Company pursues both the
Professional Installer and the DIY portions of the automotive aftermarket
through its store network, the Company believes that it is able to reach most
consumers of automotive products within its market areas. The demand generated
by this customer base permits the Company to offer a broad selection of SKUs and
restock and fill special orders from its principal supplier, APS, and from the
Company's own warehouse facilities, on an overnight or in some
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cases, a same-day basis. The Company maintains a warehouse for products it
purchases directly from the manufacturers; however, because of its distribution
arrangement with APS, the Company does not need to maintain a warehouse for
those products supplied by APS. This allows the Company to utilize its working
capital and management resources for store operations, but still provide its
customers with up to 160,000 SKUs. See "Purchasing" and "Inventory Management."
Quality Workforce. The Company believes that its service to both the
Professional Installer and DIY portions of the automotive market results in
additional benefits not generally enjoyed by competitors serving only one
portion of the market. Because the Company deals with the more
technically-oriented Professional Installer, the Company's sales personnel are
required to be more technically proficient, particularly with regard to Hard
Parts. The Company has found that such technical proficiency is also valued by
its DIY consumers, thereby enhancing the Company's ability to fulfill its
customer service strategy. The Company's philosophy is to be a wholesale
customer's one call and a DIY customer's one stop for all their automotive
needs.
Equity Financing. To enhance its potential for better financial
performance, the Company must reduce its debt obligations and improve
operations. Approximately $3.0 million of this Offering's net proceeds will be
used to reduce debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Further, the Company intends to retain a
Chief Financial Officer and is focusing on implementing improved receivables,
inventory and cash management systems.
The Company also plans to use some of its working capital to refurbish some
of its stores for improved merchandise presentation, and to consolidate four of
its stores that have overlapping markets into two stores. Although the Company
expects to retain market share and reduce overhead costs as a result of the
consolidation, there can be no assurance that market fluctuations, increased
competition, or other factors will not adversely impact these or other stores.
Inventory Management and Distribution System. The Company has formed an
alliance with APS, a national distributor of automotive replacement parts, which
allows the Company's stores to have next day access to over 160,000 SKUs.
Simultaneously with the APS alliance, the Company also maintains its own square
foot warehouse from which it provides same-day delivery, of inventory purchased
directly from manufacturers, to its stores. In the past, the Company maintained
a mix of high volume and lower volume items. The costs associated with carrying
the slower moving inventory affected the Company's profitability in 1995 and
1996. The Company plans to improve its operating strategy by warehousing
primarily high volume items and to take better advantage of APS's ability to
carry slower moving inventory.
Customized Computer Information Software. The Company has developed a
customized computer software program that provides inventory management and
accounts payable information to management on a timely basis. The computer
system and software is networked between the Company's corporate office and each
of the stores. By inputting data at each store, the software collates, organizes
and produces reports on inventory status, location and quantity, and accounts
payable aging and status. The Company believes that its computer software is one
of the more advanced software packages utilized in the industry. By delivering
faster and more accurate information to management, the Company believes that it
can improve in-stock positions and lower inventory carrying cost, all of which
management believes will help to increase profitability. The software is
continually upgraded to improve the quality of and speed with which the
information can be made available to management. The system is also capable of
accommodating the addition of new stores as the Company implements its growth
plan.
Customer Service. The Company believes it is not only in the business of
selling auto parts, but just as important, is in the service business. Heavy
emphasis is placed on having professional personnel provide responsive customer
service. Employees receive extensive on-the-job training.
The Company's number one priority is customer satisfaction. The Company
seeks to attract new Professional Installer and DIY customers and to retain
existing customers by conducting a variety of advertising and promotional
programs and by offering: (i) superior in-store service through highly
motivated, technically-proficient sales people; (ii) an extensive selection of
SKUs stocked in each store; (iii) next day
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delivery of over 160,000 SKUs, and same day delivery for inventory maintained at
the Company's warehouse; (iv) attractive stores in convenient locations; (v)
competitive pricing and (vi) a national warranty program.
Each of the Company's sales personnel is required to be technically
proficient in the workings and application of Automotive Products. This degree
of technical proficiency is essential because of the significant portion of the
Company's business represented by the Professional Installer. The Company has
found that the typical DIY customer often seeks assistance from sales people,
particularly in connection with the purchase of Hard Parts. The Company believes
that the ability of its sales personnel to provide such assistance is valued by
the DIY customers, and therefore is likely to result in repeat DIY business.
GROWTH STRATEGY
Horizontal Integration. In addition to improving the efficiency of its
internal operations, the Company's growth strategy is to expand its operations
in other urban areas of Florida and the Southeast by purchasing automotive parts
stores as they become available on terms acceptable to the Company, as well as
opening new stores. The Company's growth to date has been accomplished primarily
by opening new stores instead of acquiring existing businesses. However, the
Company believes that because of the recent trend in consolidation occurring in
the auto parts industry, its future growth will occur as a result of
acquisitions of both single and multiple store operations. Depending on the
competitive characteristics of the industry, the Company plans to pursue all
future acquisition opportunities in addition to, or in place of, new store
openings. Key factors considered by the Company in the opening of new stores or
the acquisition of existing automotive parts stores include population density
and growth-patterns, age and per capita income, vehicle traffic counts, the
number and type of existing automotive repair facilities, other auto parts
stores and other competitors within a predetermined radius, and the operational
strength of such competitors. Although the cost to acquire the business of an
independently owned parts store varies, depending primarily on the amount of
inventory and the size of real estate, if any, being acquired, the Company
estimates that the average cost to acquire such a business and convert it to a
Company store ranges from approximately $230,000 to $355,000, excluding real
estate. Of this amount, approximately $175,000 to $300,000 is allocable to
inventory and the remainder to fixed assets. The Company estimates that an
additional $55,000 would be needed to fund the stores' operations for the
initial four month period of operations. In the event acquisitions in a targeted
area are not possible, or impractical, the Company may attempt to lease a store
site and refurbish it as a Company store. The costs associated with opening a
new leased location are slightly greater than acquiring a business and
converting it to a Company store. The Company plans to focus on expanding into
areas having population pockets of 75,000 to 100,000 in an overall statistical
market area of approximately 1,000,000 population. Although the Company has
identified possible acquisition candidates, the Company has not entered into any
definitive agreements with them. None of such candidates are affiliated with the
Company, its management or shareholders, either directly or indirectly. However,
if the Company were to enter into any such transactions in the future involving
either directly or indirectly affiliates of the Company, the transactions would
be negotiated arm's length transactions. The Company anticipates that it will
consummate acquisitions through the use of cash and/or stock. To facilitate its
growth, the Company anticipates that it will be able to negotiate a line of
credit once the APS and AFCO obligations are repaid. There is no assurance that
the Company will be able to successfully identify acquisition candidates or to
successfully finance or complete such transactions. See "Risk Factors -- Growth
through Acquisitions."
Increasing Existing Store Sales. Same store growth through increased sales
and profitability is also an important part of the Company's growth strategy. To
achieve improved sales and profitability at Company stores, the Company
continually strives to improve upon the service provided to its customers. The
Company believes that while pricing is essential in the highly competitive
environment of the automotive aftermarket business, ultimately it is customer
satisfaction (whether of the Professional Installer or the DIY customer),
resulting from superior customer service, that generates increased sales and
profitability.
Quality Assurance Reviews. In order to help assure continuous store
improvement and overall high level of customer service, the Company conducts
"Quality Assurance Reviews" of each of its stores semi-annually. Each review
encompasses a comprehensive agenda of store characteristics and performance
criteria. The review teams are comprised of store managers from high performing
locations, as well as senior management
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from the Company's corporate office. A written evaluation is prepared for each
store reviewed. The review team meets with the location manager to discuss the
evaluation and to provide direction in seeking improvements in store
performance. Management believes these reviews help to improve overall store
performance.
PURCHASING
In October, 1995, the Company entered into a product purchase agreement
with APS, a national distributor of a broad array of "Big A" brand and
manufacturers branded automotive replacement parts, as well as tools, equipment,
supplies and accessories. Under the terms of this agreement, the Company agreed
to purchase, for a period of five years, merchandise from APS over any given
four month consecutive billing period at a minimum average of 75% of the
Company's cost of goods, less certain exceptions. Purchases under this agreement
aggregated approximately $4.5 million during both years ended December 31, 1995
and 1996. Due to the fact that the Company has not been current on certain debt
obligations owed APS, it has not been able to take advantage of discounted
payment terms offered by APS. See "Risk Factors -- Recent Losses; Going
Concern." However, the Company expects to bring its open account with APS
current before the close of this Offering and as a result will be able to take
advantage of APS's discount payment terms.
APS operates approximately 28 warehouses throughout the United States with
the nearest warehouse to the Company's stores being located in Ocala, Florida.
APS has been able to provide the Company with next day delivery of needed parts.
The Company participates in several APS "Big A" programs, among which are
the following:
- A national warranty program ("NWP"). The Company is able to offer its
customers a NWP, good at approximately 2,100 Big A parts sources across
the country. This program is fully funded by APS.
- A national advertising program. The Company believes that national
advertising is helpful in markets such as Orlando's four county market
area. The national advertising program, plus the NWP, gives the Company
stores added recognition and a competitive edge.
- A national account program. This program makes the Company a
pre-approved vendor to most national service centers such as Firestone,
Sears, Montgomery Ward, etc.
In addition to the above programs, APS provides the Company with: (i) brand
name products; (ii) pricing economies through increased purchasing power and
(iii) various services, including assistance in marketing, cataloging and
inventory control.
APS is a publicly held corporation whose shares of common stock are traded
on the NASDAQ National Market System. According to reports filed by APS with the
Securities and Exchange Commission, APS, formed in 1989, believes that it is the
second largest warehouse distributor of automotive replacement parts in the
United States. It supplies parts to more than 1,800 "Big A" parts stores owned
by independent jobbers and over 300 APS-owned auto parts stores. For the year
ended January 27, 1997, APS had net sales of approximately $858 million and a
net loss of approximately $10.8 million because of a first year write off in
connection with a major acquisition. Its total stockholders' equity at January
27, 1997 was approximately $114.6 million.
A disruption of the Company's vendor relationship with APS, or a material
change in any of the terms of purchase, advertising, incentive or other programs
offered by APS, would likely have a material adverse effect on the Company's
business. However, the Company believes that if its relationship with APS were
to end, it would be able to replace APS with another distributor of similar
parts which offers similar programs.
In addition to purchasing products from APS, the Company purchases in bulk
certain items directly from manufacturers, which it stores in its 32,000 square
foot warehouse. Purchasing such items direct in bulk enables the Company to
price such parts competitively and increase its gross margin.
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INVENTORY MANAGEMENT
Through its alliance with APS, a national distributor of a broad range of
"Big A" brand manufacturers branded replacement parts, the Company is provided
next day access to over 160,000 different SKU's. The alliance with APS provides
the Company with flexibility and competitiveness in the aftermarket segments of
the industry. The Company constantly seeks to improve its merchandising concepts
by expanding product selection and emphasizing the sale of the high-margin Hard
Parts. As a result of its alliance with APS, the Company does not inherit all of
the extraordinary costs associated with carrying such a large inventory, such as
(i) development and maintenance of large warehouse facilities (larger than the
Company's current warehouse which houses certain items; (ii) planning,
procurement, and management of inventories and (iii) providing distribution
methods of inventory between different locations. APS provides the Company with
the ability to return slow moving APS inventory, thereby virtually eliminating
loss from obsolescence. The Company also utilizes its own 20,000 square foot
warehouse to inventory certain parts it orders direct from manufacturers to take
advantage of purchase price discounts offered on purchases from certain of its
vendors. The Company plans to improve its operating strategy by warehousing
primarily high volume items and to take better advantage of APS's ability to
carry slower moving inventory.
MARKETING
Since a majority of the Company's revenues are derived from the sale of
Automotive Products to the Professional Installer, the Company devotes
substantial time and energy to the development of its Professional Installer
business. These businesses include gas stations, new and used car dealership
service centers, oil change and quick lube shops, tire centers, muffler shops
and auto mechanic garages. There are four full-time sales people operating from
the Company's stores dedicated solely to calling upon and selling to the
Professional Installer. Moreover, each store manager participates in these
activities by calling on existing and potential new Professional Installers on a
regular and periodic basis. The Company has approximately 100 vehicles to
provide prompt delivery service to the Professional Installer. Approximately 70
inside technically trained sales personnel market products to retail and
wholesale customers.
The Company anticipates promoting sales to DIY consumers through an
advertising program which includes direct mail, newspaper and limited radio and
television advertising in selected markets. Newspaper advertisements are
generally directed toward specific product and price promotions, frequently in
connection with specific sales events and promotions. The Company also sponsors
several automotive related events in its market area each year in an effort to
reach wholesale and retail customers. Such events include sponsoring a trade
show and conducting training clinics several times a year for the Professional
Installers which focus on electrical, emission control, chassis and suspension,
and air conditioning. The Company believes that its advertising and promotional
activities have resulted in significant name recognition in its market area.
The Company believes that a competitive pricing policy is essential in
order to compete successfully. Product pricing is generally established to meet
the pricing policies of competitors in the market area selected by each store.
Most automotive products sold by the Company are priced at discounts from the
manufacturer's suggested list prices and additional savings are offered through
volume discounts and special promotional pricing.
COMPETITION
The automotive parts aftermarket is highly competitive. Automotive
products, similar or identical to those sold at the Company's stores, are
generally available from a variety of different competitors in the communities
served by the Company's stores. The principle arenas of competition are delivery
time and location, customer service, merchandise selection and availability, and
price. The Company competes either directly or indirectly with each of these
areas for the business of both Professional Installers and DIY customers.
The Company's major competitors in the Professional Installer portion of
its business include independent warehouse distributors and independently owned
parts stores, automobile dealers and national warehouse distributors and
associations, such as National Automotive Parts Association (NAPA), Carquest,
All Pro,
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Ace Auto Parts, and Steego. The more traditional of those stores emphasize Hard
Parts which cater to the Professional Installers, but also carry accessories and
other items as demanded by the DIY segment. Those stores typically use outside
sales representatives to call on Professional Installers, maintain operating
hours similar to wholesale stores and generally spend less on advertising than
retail stores.
Competitors in the DIY portion of the Company's business within its current
market area include automotive parts chains such as AutoZone, Western Auto,
Discount Auto Parts and Pep Boys, independently owned parts stores, automobile
dealerships and mass or general merchandisers, discount and convenience chains
that carry automotive products. Such retail stores emphasize accessories and
carry few Hard Parts in inventory. They compete for the DIY customers through
heavy advertising, strong in-store customer service, and extended operating
hours. Some of the larger DIY competitors have entered into the Professional
Installer portion of the business and this could have a material adverse effect
on the Company's operations.
Since the Company's primary target market is the Professional Installer,
the Company is faced with a significant amount of direct competition from
wholesale stores. The customer base for wholesale stores is the Professional
Installer. The wholesale store limits inventory to Hard Parts, offers free
delivery service, and uses knowledgeable outside sales representatives to call
on the Professional Installers. Companies competing in this segment include
National Automotive Parts Association -- "NAPA" and APS -- "Big A."
The focus of the Company's business is on the Professional Installer
segment of the aftermarket auto parts industry. The Company, along with its
successful competitors, will compete based upon the changing needs of its
customer environment. The Company's management believes that the needs of
today's mechanics, in order of importance, are as follows: delivery time
(location), customer service, and pricing. Currently, physical location of the
store is the fundamental component of a quick delivery time. Turnaround time,
the amount of time needed to repair a car and return it to its owner, is a
primary need of the Company's secondary customer, the car owner; therefore to
help expedite a reasonable turnaround time, the parts must be delivered to the
Professional Installer quickly.
Customer service, as it applies to the Professional Installers, is
reflected in order processing time (a main ingredient of quick delivery) and
product knowledge. The multiple tasks which are combined to create order
processing time include - understanding the order, referencing the item code,
confirming the part in inventory, negotiating a price, pulling the part from
inventory, packaging the goods, and routing delivery drivers. Product knowledge
is considered a valuable competitive advantage in this industry segment based
upon the fact that often the mechanic will counsel with the parts person in
order to accurately diagnose the problem and select the appropriate replacement
part.
Although product pricing should be competitive, the Company's management
believes that having the lowest price will not guaranty the sale and that
delivery time and customer service have priority over price.
Although the Company believes that it competes effectively in its market
area with many locations in the Orlando metropolitan area, its emphasis on
customer service, and its competitive pricing, some of its competitors, or their
parent organizations, are larger in terms of sales volume and have access to
greater capital and management resources.
EMPLOYEES
As of December 15, 1997, the Company had 164 full-time employees, 65 of
whom were employed at the Company's stores including 6 at its machine shop, 74
of whom were engaged as delivery personnel, 22 of whom were engaged as corporate
and administrative personnel, and 3 of whom worked at the warehouse facility.
The Company's employees are not subject to a collective bargaining agreement.
The Company considers its relations with its employees to be excellent.
SERVICE MARKS AND TRADEMARKS
The Company owns no registered marks or trademarks. The Company believes
that its business is not materially dependent on any patent, trademark, service
mark or copyright.
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LEGAL
The Company has instituted a lawsuit (the "Lawsuit") against The Parts
Source, Inc. d/b/a Ace Auto Parts, a prior aborted suitor, and certain former
employees of the Company for certain tortious acts alleged to have caused damage
to the Company estimated at approximately $1.5 million. The Company is also
seeking an injunction against the defendants in its Lawsuit. The Lawsuit,
currently in the pleading and discovery stage, was filed on March 20, 1997, in
the Circuit Court in and for Orange County, Florida. In the opinion of
management, the ultimate outcome of this lawsuit should not have a material
adverse impact on the Company's financial position, results of operations or
liquidity.
SENIOR CREDIT FACILITY
The Company has obtained a non-binding commitment from Finova Capital
Corporation (previously defined as "Finova") to provide a revolving line of
credit (previously defined as the "Finova Credit Facility") of up to four
million dollars ($4,000,000) to the Company in accordance with the terms of a
loan and security agreement (previously defined as the "Credit Agreement").
Finova's execution of and performance under the Credit Agreement is subject to a
number of conditions, including, but not limited to, the closing of this
Offering and the receipt by the Company of the proceeds of this Offering. The
Company intends to use up to $3,000,000 provided by this Credit Facility,
together with approximately $3,000,000 from the proceeds of this Offering, to
repay in full the indebtedness to APS. The remainder of the Finova Credit
Facility may be utilized by the Company as working capital or for acquisitions
in furtherance of the Company's growth strategy. The proceeds from the Finova
Credit Facility will not be available to the Company, assuming the Credit
Agreement is executed and all its conditions are satisfied by the Company, until
this Offering is closed.
To secure the Credit Facility, the Company has agreed to grant Finova a
first priority security interest in substantially all of its personal property,
including without limitation, all of its eligible accounts receivable,
equipment, machinery, vehicles, general intangibles and inventory, and a first
mortgage lien upon certain parcels of real estate (specifically including the
following properties: (i) 100 South Parramore, Orlando, FL; (ii) 701 and 711
West Church Street, Orlando, FL; (iii) 714, 718, and 720 West Pine Street,
Orlando, FL; (iv) 5251 South US Highway 17-92, Casselberry, FL; (v) 2535 French
Avenue, Sanford, FL; and (vi) 409 East Michigan Road, Orlando, FL). In addition
to other conditions set forth in the Credit Agreement, the proceeds from this
Credit Facility will be made available to the Company based upon the Company's
ability to provide sufficient security for such advances, calculated as follows:
seventy percent (70%) of the value of certain accounts receivable deemed
eligible for advance by Finova and fifty percent (50%) of the value of certain
inventory deemed eligible for advance by Finova.
The Company will pay to Finova monthly interest on the aggregate daily loan
balance at a floating rate equal to the Prime Rate plus two percent (2%). The
"Prime Rate" is the rate announced from time-to-time by Citibank, N.A. New York,
New York. The minimum monthly interest charge for the Finova Credit Facility is
fifteen thousand dollars ($15,000). Interest charges are computed on the basis
of a year of three hundred sixty (360) days and actual days elapsed are payable
to Finova in arrears on the first business day of each month and are subject to
increase following a default.
The initial term of the Credit Facility is two years, with annual renewals
thereafter at the discretion of Finova. In the event that the Credit Facility is
for any reason terminated prior to the expiration of the initial term, the
Company will be obligated to pay Finova an early termination fee of three
percent (3%) of the total Credit Facility if terminated during the first year of
the initial term, and one percent (1%) of the total Credit Facility if
terminated during the second year of the initial term.
On the closing date of this Credit Facility, which is scheduled to occur
simultaneously with the closing of this Offering, the Company will pay to Finova
a one time Closing fee in the amount of one and a half percent (1 1/2%), or
$60,000, of the total amount of this Credit Facility ($4,000,000) less a $20,000
portion of such fee which has previously been paid to Finova. With respect to
each fiscal quarter, during the tenure of this Credit Facility, the Company
shall also be obligated to pay to Finova an unused line fee of one half of one
percent ( 1/2%) of the unused portion of the Credit Facility, which will be
calculated and paid on a quarterly basis effective the first quarter after the
closing of this transaction.
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The Credit Facility contains the usual and customary default covenants and
remedy provisions associated with similar revolving debt instruments. Upon
receipt by the Company of a written notice of default from Finova and the
Company's failure to cure such default during the applicable cure period, Finova
may, at its option and in accordance with the terms of the Credit Agreement,
cease making loans to the Company, terminate the Credit Agreement, impose a
default interest rate and/or declare the full payment immediately due and
repayable.
PROPERTIES
The Company operates, in the central Florida metropolitan area, 14 auto
parts stores, one speed shop (which retails high-performance items to car
enthusiasts), one machine shop and one warehouse. All of these facilities are
owned by the Company except for two stores, which are leased. The Company's
headquarters and administrative offices, which include the Company's warehouse,
machine shop, and manufacturing unit (which was closed on June 1, 1997), consist
of six buildings totaling 48,000 square feet and are located on 2.5 acres in
Orlando.
The Company also owns a 32,000 square foot warehouse in Virginia which the
Company leases to a manufacturing company and receives rental income from that
property of approximately $42,000 per year. The Company also owns 10 other
commercial and residential properties in the Orlando area and one residential
property in Virginia from which it receives aggregate rental income of
approximately $132,000 per year. These properties are commercial and residential
properties.
Nine of the Company's real properties are encumbered by approximately
$1,379,000 in outstanding notes, maturing between December 1, 1997 and March 3,
2010, with varying interest rates ranging from 7.00% to 16% per annum. The
aggregate monthly installments are approximately $23,323, including interest.
The Company is current in its payments of those obligations. The Company intends
to renegotiate the interest rates on $730,000 of these loans.
With the exception of the Virginia property, all of the Company's
properties are encumbered by a mortgage and/or a security agreement in favor of
APS and AFCO securing two loans with an aggregate current balance of $5.8
million (including accrued and unpaid interest) at October 1, 1997. Interest
accrues at interest rates varying from 10% to prime plus 2% (10.50% at October
31, 1997), and the outstanding principal balance and accrued interest is due and
payable on or before December 31, 1997. The Company plans to retire this debt by
using a combination of $3,000,000 from the proceeds of this Offering and a
portion of the funds received from refinancing the balance of the APS
indebtedness which refinancing has been made a condition to closing this
Offering by the Underwriters. On October 29, 1997, the Company obtained a
commitment from Finova to provide up to $4,000,000 pursuant to the terms and
conditions of the Credit Agreement to be executed simultaneously with the
closing of this Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
33
<PAGE> 35
The following property schedule and accompanying footnotes identifies the
Company's corporate offices, warehouse and retail outlets, their approximate
square footage, whether leased or owned, and whether they are to be sold or
refurbished, which are in process or planned to occur within the next 18 months.
All lease agreements are with non-affiliated parties and on commercially
reasonable terms and conditions.
PROPERTY SCHEDULE: CORPORATE OFFICES, WAREHOUSES AND STORES
<TABLE>
<CAPTION>
RENT DESCRIPTION
GENERAL SQUARE --------------------------
STORE # LOCATION DESCRIPTION FOOTAGE OWN/RENT EXPENSE TERM
- --------- ----------------------------- ---------------------------------- ------- -------- --------- --------------
<C> <S> <C> <C> <C> <C> <C>
1 6464 E. Colonial, Orlando Traditional retail parts store 3,200 Rent $ 1,378 month-to-month
2 2619 N. Pine Hills Rd., Traditional retail parts store (1) 3,800 Own
Orlando
3 1409 N. Main, Kissimmee Traditional retail parts store 3,500 Own
4 100 S. Parramore, Orlando Traditional retail parts store (2) 5,000 Own
Warehouse 701 W. Church St., Orlando Distribution center (3) 32,000 Own
Corporate Pine Street Corporate offices 5,000 Own
Corporate 733 W. Church St., Orlando Corporate offices 12,000 Own
6 1803 S. Orange, Orlando Speed parts store 3,800 Own
7 5251 S. US Hwy. 17-92, Traditional retail parts store(4) 6,000 Own
Casselberry
8 725 W. Church St., Orlando Machine shop 8,000 Own
9 2535 French Ave., Sanford Traditional retail parts store 3,980 Own
12 104448 E. Colonial, Orlando Traditional retail parts store(5) 4,000 Own
14 715 N. Powers, Orlando Traditional retail parts store(6) 3,205 Own
15 736 S. Dillard, Winter Garden Traditional retail parts store(7) 4,200 Own
16 1271 LaQuinta Drive, Suite $2,300.67
13, Orlando Traditional retail store (8) 6,000 Rent + tax 9/97-8/00
17 380 W. Hwy. 434, Winter Traditional retail parts store(8) 2,684 Own
Springs
18 71 Geneva Drive, Oveido Traditional retail parts store(10) 2,000 Rent $ 909.50 month-to-month
21 1411 Cypress Dr., Melbourne Traditional retail parts store 4,800 Own
24 3412 Aloma Ave., Winter Park Traditional retail parts store(10) 4,400 Own
25 37 S. Park Ave., Titusville Traditional retail parts store 3,160 Own
27 710 W. King, Cocoa Traditional retail parts store 5,600 Own
<CAPTION>
PROPERTIES TO BE:
------------------
STORE # SOLD REFURBISHED
- --------- ---- -----------
<C> <C> <C>
1
2 x
3
4
Warehouse x
Corporate x
Corporate x
6 x
7
8
9
12
14 x
15
16
17 x
18
21 x
24 x
25 x
27
</TABLE>
- ---------------
(1) The Company closed Store 2 on August 25, 1997. Management expects the
revenue generated by the sales from Store 2 to be captured, instead by
Stores 4 and 15, located in a similar and nearby geographic region. In
accordance with the Company's growth strategy, the Company utilized the
inventory from Store 2 to open a store in a new geographic region where
the Company had no other presence. This new store is now designated Store
16. The Company has leased the property underlying Store 2 to an unrelated
third party pursuant to a lease requiring rental payments of $1,600 per
month and granting the lessee an option to purchase the real property for
approximately $160,000.
(2) The Company intends to expand Store 4 in order to better position this
store to absorb some of the revenue previously generated by Stores 2 and
14, which the Company intends to close in the second quarter of 1998.
(3) The Company intends to expand its Warehouse and distribution center by
taking in inventory from Stores 2, 14, 17 and 18, which are closed or
scheduled to be closed.
(4) The Company intends to expand Store 7 in order to better position this
store to absorb some of the revenue previously generated by Store 17,
which the Company intends to close.
(5) The Company intends to expand Store 12 in order to better position this
store to absorb some of the revenue previously generated by Store 18,
which the Company intends to close.
(6) The Company intends to close Store 14 during the second quarter of 1998.
The Company intends to transfer the inventory at this location to its
Warehouse for use as inventory at other of the Company's stores.
Management expects the revenue generated by the sales from this store to
be captured, instead by Stores 4 and 15, located in a similar and nearby
geographic region.
(7) The Company intends to expand Store 15 in order to better position this
store to absorb some of the revenue previously generated by Stores 2 and
14, which the Company intends to close.
(8) The Company opened Store 16 with the inventory from Store 2 in a new
geographic region where the Company had previously had no other presence,
in furtherance of its grow strategy.
(9) The Company intends to close Store 17 during the first quarter of 1998. It
is expected that the inventory at this location will either be returned to
APS to reduce the outstanding balance of that loan or transferred to Store
7 for use as inventory. Management expects the revenue generated by the
sales from this store to be captured, instead by Store 7, located in a
similar and nearby geographic region.
(10) The Company closed Store 18 on July 31, 1997. The inventory at this
location was returned to APS to reduce the outstanding balance of that
loan and transferred to Stores 12 and 24 for use as inventory. Management
expects the revenue generated by the sales from this store to be captured,
instead by Stores 12 and 24, located a in similar and nearby geographic
region.
(11) The Company intends to expand Store 24 in order to better position this
store to absorb some of the revenue previously generated by Store 18, which
the Company closed on July 31, 1997.
34
<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Robert H. Gentry, III.................. 54 President, Chief Executive Officer and
Director
William H. Burns, Jr................... 50 Director (nominee)
Lawrence S. Goldfarb................... 70 Director (nominee)
Daniel T. Guilfoile.................... 37 Director (nominee)
Stanley G. Miller...................... 64 Director (nominee)
David O. O'Neal........................ 55 Vice President
Patrick J. Power....................... 27 Vice President -- Corporate Development
and Investor Relations
Herchel L. Rideout..................... 51 Vice President
</TABLE>
ROBERT H. GENTRY, III, has served as President, Chief Executive Officer,
and a Director of the Company since 1980. From 1978 to 1980, Mr. Gentry was the
Company's Chief Operating Officer and was responsible for managing the Company's
stores and inventory. Mr. Gentry has been involved in the automotive parts
industry for over 34 years. Mr. Gentry attended the University of Kentucky where
he studied Accounting and Business Administration.
WILLIAM H. BURNS, JR., is a director nominee. From 1995 to 1996, Mr. Burns
was the Executive Vice President and Chief Operating Officer of Virtuem
Entertainment, Inc., a Chicago-based start-up corporation in the business of
entertainment, retail sales and interactive technology. From 1993 to 1995, Mr.
Burns held the position of President of the Entertainment Center Division of the
Blockbuster Entertainment Group, a new operating division responsible for the
concept development, start-up and operation of the initial Blockbuster
entertainment centers as well as the identification of acquisition candidates
for Blockbuster in the entertainment field. From 1969 through 1993, Mr. Burns
held various development and operations positions with the Walt Disney World
Company both in Orlando, Florida and Burbank, California. Mr. Burns earned a
Masters in Business Administration from Rollins College and a Bachelor of
Science in Journalism from the University of Florida.
LAWRENCE S. GOLDFARB, is a director nominee. Since 1980, Mr. Goldfarb has
served as the President of S & G Automotive Warehouse, Inc., a seller of
automotive replacement parts in central Florida. Mr. Goldfarb has been involved
in the automotive parts industry for over 50 years.
DANIEL T. GUILFOILE, is a director nominee and the director designee of
Nutmeg Securities Ltd. (the "Representative"). Mr. Guilfoile has been employed
with the Representative since 1990, where he has served as the Director of
Investment Banking since January 1, 1997. From 1992 to December 31, 1996 Mr.
Guilfoile served as Vice President of Syndicate and Corporate Finance for the
Representative Mr. Guilfoile received a Bachelor of Arts degree in Economics
from Villanova University in 1982 and a Masters of Finance degree from Fordham
University in 1988.
STANLEY G. MILLER, is a director nominee. Although Mr. Miller has been
retired since March, 1992 he previously served as Senior Vice President for
Exide Corporation, one of the largest manufacturers of automobile batteries.
DAVID O. O'NEAL, has served as Vice President of Management Information
Systems since joining the Company in 1993. Prior thereto, from 1990 to 1993, Mr.
O'Neal was a Senior Programming Analyst at Autopower Corp., a software
development firm in Orlando. Mr. O'Neal earned a Masters of Business
Administration from the University of Central Michigan and a Bachelors of
Computer Science from the University of Southern Illinois.
35
<PAGE> 37
PATRICK J. POWER, was appointed Vice President of Corporate Development and
Investors Relations effective October 1, 1996. From November 1995 to October
1996, Mr. Power was the Director of Investor Relations for Eckler Industries,
Inc. (now known as "SmartChoice Automotive Group, Inc.", Titusville, Florida).
Prior to and concurrent with working for Eckler Industries, Mr. Power served as
the Director of Strategic Planning for Greyhouse Services Corporation, a
subsidiary of Florida Gulf Capital and Equity Corporation, from March 1994 to
October 1996. During the period from March 1993 to March 1994, Mr. Power was
employed as a researcher of municipal and federal fixed income financial
products by Olde Discount Stock Brokers Corporation. Mr. Power received a
B.S.B.A. in Finance from the University of Central Florida in 1993.
HERCHEL L. RIDEOUT, JR., was appointed Vice President of Purchasing and
Inventory in 1996. From 1980 to 1996, Mr. Rideout worked for Automotive One in a
variety of positions of increasing responsibility in the areas of business
operations and employee management, including Store Operations
Manager -- Central Florida Region, Director of Risk Management, and Human
Resources Manager. Mr. Rideout is the brother-in-law of Mr. Gentry.
The Board and Shareholders of the Company have authorized the expansion of
the Board to 5 members and the selection of Messrs. Miller, Goldfarb, Burns and
Guilpoile, the nominee directors identified above, to serve on the Board with
Mr. Gentry commencing on the Effective Date.
The Company intends to hire a qualified chief financial officer and other
management personnel as soon as possible. The Company has allocated a portion of
the proceeds from this Offering for use in attracting and retaining the services
of qualified management personnel. See, "Use of Proceeds."
BOARD COMMITTEES
The Board of Directors has established an Audit Committee consisting of
Messrs. Burns, Goldfarb and Miller, to review the results and scope of the audit
and other services provided by the Company's independent certified public
accountants.
EXECUTIVE COMPENSATION
The following table sets forth cash compensation paid by the Company to, as
well as any other compensation paid to or earned by, the President and Chief
Executive Officer of the Company and those executive officers compensated at or
greater than $100,000 for services rendered the Company in all capacities during
the fiscal years ended December 31, 1995 and 1996. For information regarding
current compensation paid to the Company's executive officers, see "Employment
Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
YEAR OTHER ANNUAL
NAME AND POSITION ENDED SALARY BONUS COMPENSATION(1)
- ----------------- ------------ ------- ------- ---------------
<S> <C> <C> <C> <C>
Robert H. Gentry, III........................ 12/31/96 $60,000 -- $30,000
President, CEO............................... 12/31/95 60,000 -- 30,000
</TABLE>
- ---------------
(1) Reflects payments made by the Company for life insurance policies and
vehicle leases or payments.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive compensation for
serving as directors. The Company anticipates compensating its independent
directors for their services in the form of fees and/or stock options, yet to be
determined; however, the Representative's designee shall serve without
compensation. All directors will be reimbursed for their reasonable
out-of-pocket expenses incurred in connection with attending
36
<PAGE> 38
meetings of the Board of Directors and for other expenses incurred in their
capacity as directors of the Company.
EMPLOYMENT AGREEMENTS
On May 13, 1997, the Company entered into a five-year employment agreement
with Robert H. Gentry, III, the Company's President and CEO. Upon expiration of
its initial five-year term, the agreement is renewable for successive two-year
periods. Under the agreement, Mr. Gentry's annual salary is $80,000 for 1997,
increasing to $100,000 January 1, 1998 through December 31, 1999, and $120,000
January 1, 2000 through December 31, 2002. The employment agreement provides
that the Company's Board of Directors shall use its best efforts to establish by
April 1, 1998 a bonus program and a discretionary stock option plan for
executive officers of the Company which will be tied to the Company's
performance. The agreement provides that in the event Mr. Gentry's employment is
terminated "without cause", he shall receive compensation and benefits equal to
those he was receiving immediately prior to said termination for the greater of
the remainder of the employment term or twelve months. In the event Mr. Gentry's
employment is terminated for any other reason, including for "cause", he will
receive severance payments in an amount equal to the compensation that Mr.
Gentry was receiving immediately prior to such termination for a period of
twelve months. Under the employment agreement, Mr. Gentry will also be entitled
to five weeks paid vacation, either an automobile or an automobile allowance of
$800 per month, and reimbursements for expenses incurred in connection with
Company business.
Effective June 1, 1997, the Company entered into a three-year employment
agreement with Patrick J. Power to serve as the Company's Vice President of
Corporate Development and Investor Relations. Under the agreement, Mr. Power's
annual salary is $35,000 per year, accruing as of June 1, 1997 but payable
commencing on the closing of this Offering in accordance with the Company's
normal payroll practices. The employment agreement provides for a starting bonus
of $35,000, representing, in part, accrued but unpaid salary, to be paid on the
Closing of this Offering. The employment agreement further provides that the
Company's Board of Directors, in their sole and exclusive discretion, may grant
a bonus to Mr. Power based on extraordinary performance or contributions to the
Company. The agreement provides that in the event Mr. Power's employment is
terminated "without cause", he shall receive compensation and benefits equal to
those he was receiving immediately prior to said termination for the greater of
the remainder of the employment term or six months. The employment agreement
recognizes that Mr. Power is engaged in other endeavors and requires Mr. Power
to devote only that portion of his time as is reasonably necessary to perform
his duties. Mr. Power will not receive any vacation, sick days or healthcare
coverage, but has been granted 30,000 non-qualified stock options under the
Company's 1997 Stock Option Plan. The options shall vest over a three year
period, and be exercisable for a period of not less than five years.
STOCK OPTION PLAN
In May 1997, the Company established a 1997 Employee Stock Option Plan (the
"Plan") under which 500,000 shares of Common Stock are reserved for issuance
upon exercise of stock options. The Plan is designed to serve as an incentive
for retaining qualified and competent employees. The Company's Board of
Directors, or a committee thereof (the "Committee"), will administer and
interpret the Plan and will be authorized to grant options thereunder to all
eligible employees of the Company, including officers and directors (whether or
not employees) of the Company and consultants.
The Plan provides for the granting of both incentive stock options and
non-qualified stock options. Options will be granted under the Plan on such
terms and at such prices as determined by the Committee, except that the per
share exercise price of incentive stock options cannot be less than the fair
market value of the Common Stock on the date of grant and the per share exercise
price of non-qualified stock options may not be less than par value. Each option
will be exercisable after the period or periods specified in the option
agreement, but no option can be exercised until six months after the date of
grant or after the expiration of 10 years from the date of grant. Options
granted under the Plan will not be transferable other than by will or by the
laws of descent and distribution.
37
<PAGE> 39
The Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of Common Stock subject to options
which expire without being exercised or which are canceled as a result of
cessation of employment are available for further grants.
The Company has granted 30,000 non-qualified Common Stock options under the
Plan to Mr. Patrick J. Power, Vice President -- Corporate Development and
Investor Relations.
The Company may grant independent directors of the Company non-qualified
stock options outside of the Plan.
INDEMNIFICATION, DIRECTORS AND OFFICERS
Under the FBCA, a director is not personally liable for monetary damages to
the corporation or any other person for any statement, vote, decision, or
failure to act unless (i) the director breached or failed to perform his duties
as a director and (ii) a director's breach of, or failure to perform, those
duties constitutes (1) a violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable cause to
believe his conduct was unlawful, (2) a transaction from which the director
derived an improper personal benefit, either directly or indirectly, (3) a
circumstance under which an unlawful distribution is made, (4) in a derivative
proceeding, conscious disregard for the best interest of the corporation or
willful misconduct, or (5) in a non-derivative proceeding, recklessness or an
act or omission which was committed in bad faith or with malicious purpose or in
a manner exhibiting wanton and willful disregard of human rights, safety, or
property. A corporation may purchase and maintain insurance on behalf of any
director or officer against any liability asserted against him and incurred by
him in his capacity or arising out of his status as a director, whether or not
the corporation would have the power to indemnify him against such liability
under the FBCA.
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws provide that the Company shall indemnify all directors and
officers of the Company to the full extent permitted by the FBCA. Under such
provisions, any director or officer, who in his capacity as such, is made or
threatened to be made, a party to any suit or proceeding, may be indemnified if
the Board of Directors determines such director or officer acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interest of the Company. The Amended and Restated Articles of
Incorporation, Amended and Restated Bylaws and the FBCA further provide that
such indemnification is not exclusive of any other rights to which such
individual may be entitled under the Amended and Restated Articles of
Incorporation, the Amended and Restated Bylaws, any agreement, vote of
shareholders or disinterested directors or otherwise.
It is anticipated that the Company's Board of Directors and executive
officers will enter into indemnification agreements with the Company. The
agreements follow the indemnification and expense advancement provisions of
FBCA. In addition, the indemnitee under the agreements is entitled to
indemnification against all expenses actually and reasonably incurred by him or
on his behalf in connection with serving as a witness in any proceeding (as
defined in the agreement) by virtue of his or her status with the Company. The
agreements also provide a procedural mechanism under which the indemnitee can
claim and obtain indemnification, including a procedure for the Board or
independent counsel to determine entitlement to indemnification under specific
situations. In the event the indemnitee does not receive the indemnification to
which he would otherwise be entitled under the terms of the agreement, the
indemnitee is entitled to seek a judicial determination. In the event the
indemnitee seeks a judicial adjudication to enforce his or her rights under, or
to recover damages for breach of, the agreement, the indemnitee is entitled to
recover from the Company his or her reasonable legal fees and other expenses in
connection with the legal proceeding, subject to proration in the event the
amount of the aware is less than the amount of indemnification sought.
The Company and the Underwriters have agreed to indemnify each other
(including officers and directors) against certain liabilities arising under the
Securities Act. See "Underwriting."
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the
38
<PAGE> 40
Company has been advised that in the opinion of the Securities Exchange
Commission ("SEC"), such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of October 1, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person or entity known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company who
owns any shares of Common Stock, (iii) each stockholder that has granted
over-allotment options to the Underwriters (the "Selling Shareholders") and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of Common Stock owned by them, except to the
extent such power may be shared with a spouse.
<TABLE>
<CAPTION>
PERCENT SHARES BENEFICIALLY
BENEFICIALLY OWNED AFTER OFFERING
SHARES BENEFICIALLY OWNED AFTER PERCENTAGE OF IF OVER-ALLOTMENT
OWNED PRIOR TO THE OFFERING SHARES OPTIONS ARE
OFFERING(2)(3) IF OVER-ALLOTMENT SUBJECT TO EXERCISED IN FULL(2)
NAME AND ADDRESS OF ------------------- OPTIONS ARE NOT OVER-ALLOTMENT ---------------------
BENEFICIAL OWNER(1) NUMBER PERCENT EXERCISED OPTIONS NUMBER PERCENT
------------------- --------- ------- ----------------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Gentry, III....... 1,652,000 70.0% 46.4% (7) 1,588,367 42.5%
Marguerite Siefert.......... 354,000 15.0% 9.9% (7) 340,371 9.1%
Jennifer Rideout............ 354,000 15.0% 9.9% (7) 340,371 9.1%
Stanley G. Miller(4)........ -0- -- --
William H. Burns, Jr.(4).... -0- -- --
Lawrence S. Goldfarb(4)..... -0- -- --
Patrick J. Power(5)......... -0- -- --
All Officers and Directors
as a group (8
persons)(6)............... 2,360,000 100.0% 66.2% 2,269,109 60.7%
</TABLE>
- ---------------
(1) The address of each of the beneficial owners identified is c/o Automotive
One Parts Stores, Inc., 701 West Church Street, Orlando, FL 32802.
(2) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared
voting power (including the power to dispose or direct the disposition of)
with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire such
power(s) during the next 60 days. Unless otherwise noted, beneficial
ownership consists of sole ownership, voting and investment rights.
(3) Gives effect to the 23,600-for-one stock split to be effected prior to
consummation of this Offering.
(4) Messrs. Miller, Burns and Goldfarb are director candidates.
(5) Mr. Power is an officer of the Company.
(6) Includes the director candidates.
(7) The Company, the Selling Shareholders and the Representative have agreed
that of the 180,000 shares available for sale in the Underwriter's
over-allotment, the first 85,522 shares shall be sold on behalf of the
Company. The proceeds to the Company resulting from the sale of the 85,522
shares shall be allocated to working capital. See "Use of Proceeds." The
Shares allocable to and the proceeds resulting from the sale of the
remaining 94,478 shares subject to the Underwriter's over-allotment options
shall be apportioned between Mr. Gentry, Ms. Siefert and Ms. Rideout in
accordance with their percentage of holdings.
39
<PAGE> 41
CERTAIN TRANSACTIONS
In April 1997, Mr. Gentry borrowed $500,000 from Barnett Bank, N. A., which
is secured by Mr. Gentry's residence. In turn, Mr. Gentry loaned approximately
$446,000 of those funds to the Company for operations, evidenced by a promissory
note made by the Company in favor of Mr. Gentry bearing interest at the rate of
8% per annum and maturing February 12, 2002. The Barnett Bank note has a term of
thirty years and bears interest at 7.25% per annum. The monthly payments are
$3,410.88. The Company will repay the Barnett Bank loan from the net proceeds of
this Offering and will reimburse Mr. Gentry's out-of-pocket costs made in
connection with the Barnett Bank loan whereupon Mr. Gentry's note will be
canceled. The Company owed Mr. Gentry $319,588 at October 31, 1997.
S & G Automotive Warehouse, Inc., a supplier of merchandise to the Company,
is owned by Lawrence Goldfarb, a nominated director of the Company. During the
years ended December 31, 1995 and 1996, and the ten months ended October 31,
1996 and 1997, the Company paid to S & G Automotive Warehouse, Inc. $191,395,
$226,037, $164,284 and $303,506, respectively, for merchandise.
During 1996, Lawrence Goldfarb, a nominated director, loaned the Company an
aggregate of $95,000 at an interest rate of 10% per annum. The outstanding
principal balance of those loans were consolidated into one note and currently
totals $95,000 and $135,000 at December 31, 1996 and October 31, 1997,
respectively. The note accrues interest at 10% per annum and is payable upon the
earlier of the closing of this Offering or December 31, 1997. The Company
anticipates repaying that obligation from the proceeds of this Offering.
During 1995 and 1996, the Company made advances to and borrowed money from
officers, shareholders and family members from time to time. The Company owed
$67,000 and $86,272 to these individuals at December 31, 1996 and July 31, 1997,
respectively. In addition, these individuals owed the Company $70,384 and
$61,591 at December 31, 1996 and October 31, 1997, respectively.
The Company does not anticipate any new transactional activity between the
Company and its officers, directors, 5% shareholders or their affiliates, other
than S & G Automotive Warehouse, Inc. However, in the event any such
transactions were proposed, including any new transactions with S & G Automotive
Warehouse, Inc., they would be subject to full disclosure to and authorization
by a majority of Board members or Board-appointed committee not having an
interest in the transaction, full disclosure to and approval of a majority of
the shareholders who do not have an interest in the transaction, or the
transaction is fair and reasonable as to the Company under Florida law at the
time it is authorized by the Board or the shareholders. Further, affiliated
transactions having fair market values exceeding certain statutory amounts are
required to be approved by holders of two-thirds of the voting shares other than
the shares beneficially owned by the shareholder interested in the transaction,
unless the transaction is approved by a majority vote of disinterested
directors.
40
<PAGE> 42
DESCRIPTION OF SECURITIES
The following summary description relating to the capital stock and
Warrants does not purport to be complete and is qualified in its entirety by
reference to the Amended and Restated Articles and ByLaws of the Company, and
the Warrant Agreement, which are filed as exhibits to the Registration Statement
of which this Prospectus forms a part.
GENERAL
As of the date of this Prospectus, the outstanding capital stock of the
Company consisted of 100 shares of Common Stock held by three shareholders of
record. Immediately prior to the consummation of this Offering the Company will
complete a recapitalization (the "Recapitalization") pursuant to which all
outstanding shares of Common Stock will be split 23,600-for-one and exchanged
simultaneously on a one-for-one basis for shares of the Company's newly
authorized Common Stock.
The Company's Board of Directors and shareholders have approved the Amended
and Restated Articles of Incorporation and the Amended and Restated Bylaws
("Bylaws") to become effective on the Effective Date of this Offering, and the
following discussions describe the provisions of the Company's capital stock,
Amended Articles and Bylaws that will be in effect after this offering. The
following summary description relating to the capital stock does not purport to
be complete and is qualified in its entirety by reference to the Amended
Articles and Bylaws of the Company which are filed as exhibits to the
Registration Statement of which this Prospectus forms a part. Upon consummation
of the Offering, the authorized capital stock of the Company will consist of
20,000,000 shares of common stock, $.01 par value ("Common Stock"), and
5,000,000 shares of "blank check" preferred stock, $.01 par value ("Preferred
Stock"). Upon the closing of this Offering, there will be 3,560,000 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share. The holders
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared by the Board of Directors out of legally available funds. Shares of
Common Stock are not redeemable and have not preemptive, conversion or similar
rights. The outstanding shares of Common Stock issuable hereby will be, when and
if issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority without further action by the
stockholders to issue up to 5,000,000 shares of Preferred Stock in one or more
series. The Board of Directors is authorized to establish from time to time the
number of shares to be included in and the designation of, any such series, to
determine or alter the rights, preferences, privileges and restrictions, there
of without further action by the shareholders. The Board of Directors of the
Company has not designated any new series of Preferred Stock. Satisfaction of
any divided preferences of outstanding Preferred Stock, if any, would reduce the
amount of funds available for the payment of dividends on Common Stock. Also,
the holders of Preferred Stock, if any, would normally be entitled to receive a
preference payment in the event of any liquidation or other dissolution or
winding up of the Company before any payment is made to the holders of Common
Stock. In addition, any outstanding shares of Preferred Stock having conversion
rights would potentially increase the number of shares of Common Stock
outstanding.
WARRANTS
Redeemable Common Stock Purchase Warrants. Each Warrant offered hereby
entitles the holder thereof to purchase one share of Common Stock at a price of
$7.20 per share. Each Warrant is redeemable, in whole or in part, by the Company
at a price of $.10 per Warrant, upon thirty days' prior written notice to the
Warrant holders, provided that the closing price of the Company's Common Stock
exceeds $9.00 per share for a period of ten consecutive trading days ending on
the third day prior to the date of the Company's redemption
41
<PAGE> 43
notice. Pursuant to applicable federal and state securities laws, in the event a
current prospectus is not available, the Warrants may not be exercised by the
holders thereof and the Company will be precluded from redeeming the Warrants.
There can be no assurance that the Company will not be prevented by financial or
other considerations from maintaining a current prospectus. Any Warrant holder
that does not exercise prior to the redemption date, as set forth in the
Company's notice of redemption, will forfeit the right to purchase the Common
Stock underlying the Warrants, and after the redemption date or upon conclusion
of the exercise period any outstanding Warrants will become void and be of no
further force or effect, unless extended by the Board of Directors of the
Company. See "Underwriting" for the terms of the Warrants issuable pursuant to
the Underwriters' Warrants.
The number of shares of Common Stock that may be purchased is subject to
adjustment upon the occurrence of certain events including a dividend
distribution to the Company's shareholders or a subdivision, combination or
reclassification of the outstanding Common Stock. Further, the Warrant exercise
price is subject to adjustment in the event the Company issues additional stock
or rights to acquire stock at a price per share that is less than the current
market price per share of Common Stock on the record date established for the
issuance of additional stock or rights to acquire stock. The term "current
market price" is defined as the average of the daily closing prices for the
twenty consecutive trading days ending three days prior to the record date.
However, the Warrant exercise price will not be adjusted in the case of the
issuance or exercise of options pursuant to the Company's stock option plans,
the issuance of the Underwriters' Warrants or any other options or warrants
outstanding as of the date of this Offering. The Warrant exercise price is also
subject to adjustment in the event of a consolidation or merger where a
distribution by the Company is made to its shareholders of the Company's assets
or evidences of indebtedness (other than cash or stock dividends) or pursuant to
certain subscription rights or other rights to acquire Common Stock. The
Warrants are also subject to price adjustment upon the occurrence of certain
events including subdivisions or combinations of the Common Stock.
The Company may at any time, and from time to time, extend the exercise
period of the Warrants, provided that written notice of such extension is given
to the Warrant holders prior to the expiration date then in effect. Also, the
Company may reduce the exercise price of the Warrants for limited periods or
through the end of the exercise period if deemed appropriate by the Board of
Directors of the Company, in addition to the adjustments to the exercise price
arising from certain events as discussed above. Any extension of the terms
and/or reduction of the exercise price of the Warrants will be subject to
compliance with Rule 13e-4 under the Exchange Act including the filing of a
Schedule 13E-4. Notice of any extension of the exercise period and/or reduction
of the exercise price will be given to the Warrant holders. The Company does not
presently contemplate any extension of the exercise period nor does it
contemplate any reduction in the exercise price of the Warrants.
The Warrants are to be issued pursuant to the terms and conditions of a
Warrant Agreement between the Company and American Stock Transfer & Trust
Company.
REGISTRATION RIGHTS
For a description of the registration rights contained in the Underwriters'
Warrants, see "Underwriting".
ANTI-TAKEOVER EFFECTS OF FLORIDA LAW, CHARTER PROVISIONS, UNISSUED STOCK
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. Certain provisions of Florida law, the Company's Amended
Articles and Bylaws, may deter or frustrate a takeover attempt of the Company
that a shareholder might consider in its best interest, including attempts that
might result in a premium over the market price for the shares held by
shareholders. The Company is subject to several anti-takeover provisions under
Florida law that apply to a public corporation organized under Florida law,
unless the corporation has elected to opt out of such provisions in its articles
or bylaws. The Company is subject to the "affiliated transactions" and
"control-share acquisition" provisions of the Florida Business Corporation Act
(the "FBCA"). These provisions require, subject to certain exceptions, that an
"affiliate transaction" be approved by the holders of two-thirds of the voting
shares other than those beneficially owned
42
<PAGE> 44
by an "interested shareholder" or by a majority of disinterested directors.
Additionally, voting rights are conferred on "control shares" acquired in
specified control share acquisitions generally only to the extent conferred by
resolution approval by the shareholders, excluding holders of shares defined as
"interested shares."
In addition, certain provisions of the Company's Amended Articles or Bylaws
provide that (i) commencing with the consummation of this offering, any action
required or permitted to be taken by the shareholders of the Company may be
effected only at an annual or special meeting of shareholders, and not by
written consent of the shareholders, (ii) any meeting of shareholders may be
called only by the Chairman of the Board, or upon the affirmative vote of at
least a majority of the members of the Board of Directors or upon the written
demand of the holders of not less than 50% of the votes entitled to be cast at a
special meeting, and (iii) an advance notice procedure must be followed for the
nomination of directors and for other shareholder proposals to be considered at
annual meetings of shareholders. In general, notice of intent to nominate a
director or to raise business at such meetings must be received by the Company
not less than 60 nor more than 90 days before the meeting, and must contain
certain information concerning the person to be nominated or the matters to be
brought before the meeting and concerning the shareholder submitting the
proposal. The affirmative vote of at least a majority of the directors or the
holders of at least 66 2/3% of the voting power of the Company's voting stock is
required to alter, amend or repeal, or adopt any provision inconsistent with,
the provisions described in this paragraph.
The directors of the Company are subject to the "general standards for
directors" provisions set forth in the FBCA. These provisions provide that in
discharging his or her duties and determining what is in the best interests of
the Company, a director may consider such factors as the director deems
relevant, including the long-term prospects and interests of the Company and its
shareholders and the social, economic, legal or other effects of any proposed
action on the employees, suppliers or customers of the Company, the community in
which the Company operates and the economy in general. Consequently, in
connection with any proposed action, the Board of Directors is empowered to
consider interests of other constituencies in addition to the Company's
shareholders, and directors who take into account these other factors may make
decisions which are less beneficial to some, or a majority, of the shareholders
than if the law did not permit consideration of such other factors. The Board of
Directors is divided into three classes, with the directors of each class to be
elected for staggered terms of three years and to serve until their successors
are duly elected and qualified or until their earlier resignation, death or
removal from office.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Company's Articles of Incorporation provide that shareholders
seeking to bring business before an annual meeting of shareholders, or to
nominate candidates for election as directors at an annual or special meeting of
shareholders, must provide timely notice thereof in writing. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 120 days nor more than
180 days prior to the first anniversary of the date of the Company's notice of
annual meeting for the previous year's annual meeting. However, if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed to be more than 30 calendar days earlier than the date contemplated by
the previous year's notice of annual meeting, such notice by the shareholder
must be delivered or received not later than the close of business on the fifty
day following the date on which notice of the date of the annual meeting is
given to shareholders or made public, whichever first occurs. The Company's
Amended Articles also specify certain requirements for a shareholder's notice to
be in proper written form. These provisions may preclude shareholders from
bringing matters before the shareholders at an annual or special meeting or from
making nominations for directors at an annual or special meeting.
Certain Effects of Authorized but Unissued Stock. Upon consummation of
this Offering, the Company will be authorized to issue additional Common Stock
and up to five million shares of preferred stock in one or more series, having
terms fixed by the Board of Directors without shareholder approval, including
voting, dividend or liquidation rights that could be greater than or senior to
the rights of holders of Common Stock. The existence of authorized but unissued
and unreserved shares of Common Stock and Preferred Stock may enable the Board
of Directors to issue shares of persons friendly to current management which
would render more difficult or discourage an attempt to obtain control of the
Company by means of proxy contest, tender
43
<PAGE> 45
offer, merger or otherwise, and thereby protect the continuity of the Company's
management. Issuance of shares of Common Stock or Preferred Stock could also be
used as an anti-takeover device. The Company has no current intentions or plans
to issue any such shares of Common Stock or Preferred Stock. See "Description of
Capital Stock."
TRANSFER AND WARRANT AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the warrant agent
for the Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New
York, New York.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have 3,560,000 shares
of Common Stock outstanding (3,649,139 shares, if the Underwriters'
over-allotment option is exercised in full), of which 1,200,000 shares offered
hereby (1,380,000 shares, if the underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act. The remaining 2,265,522 shares are deemed
to be "restricted securities," as that term is defined under Rule 144, in that
such shares were issued and sold by the Company in private transactions not
involving a public offering and, as such, may only be sold pursuant to an
effective registration under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. The shareholders holding the 2,265,522 shares of restricted
Common Stock will be eligible to sell such shares under Rule 144 as of the date
of this Prospectus, subject to certain volume and other limitations. However,
those shareholders have agreed not to sell those shares for a period of one year
from the Effective Date, without the prior consent of the Representative. Sales
of such shares in the public market, or the availability of such shares for
sale, could adversely affect the market price for the Common Stock. The
Representative may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to the lock-up agreements.
\ In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or person whose
shares are aggregated with an affiliate), who has owned restricted shares of
Common Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock (approximately 35,600 shares based
on the number of shares expected to be outstanding after this Offering exclusive
of the over-allotment) or, if the Common Stock is quoted on NASDAQ, the average
weekly trading volume during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. A person who has not been an affiliate of the Company for at least
three months immediately preceding the sale and who has beneficially owned
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
No prediction can be made as to the effect, if any, that public sales of
shares of Common Stock or the availability of such securities for sale will have
on the market prices of such securities prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for
these securities and could impair the Company's ability in the future to raise
additional capital through the sale of its equity securities.
45
<PAGE> 47
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to the Underwriters, severally and not jointly, and
the Underwriters have severally and not jointly agreed to purchase from the
Company, on a "firm commitment" basis, if any are purchased, the number of
Securities (exclusive of Securities issuable upon exercise of the underwriters'
over-allotment option) set forth opposite their respective names below:
<TABLE>
<CAPTION>
SHARES OF
UNDERWRITERS COMMON STOCK & WARRANTS
- ------------ -----------------------
<S> <C>
Nutmeg Securities, Ltd. ....................................
---------
Total............................................. 1,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Securities offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all shares
of Securities offered hereby (other than those covered by the over-allotment
option described below) if any such shares are purchased.
The Underwriters, for whom Nutmeg Securities, Ltd. is acting as
Representative (the "Representative"), propose to offer the Securities directly
to the public at the public offering price set forth on the cover page of this
Prospectus and may allow certain dealers who are National Association of
Securities Dealers, Inc. ("NASD") members to offer a part of the Securities at a
price which represents a concession not in excess of $ per share and
$ per Warrant. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share and $ per
Warrant to certain other dealers.
Prior to this Offering, there has not been any public market for the Common
Stock or the Warrants. The initial public offering prices of the shares of
Common Stock and the Warrants and the exercise price and other terms of the
Warrants were determined by negotiations between the Company and the
Representative and do not necessarily relate to the assets, book value or
results of operations of the Company or any other established criteria of value.
Certain Selling Shareholders and the Company have granted to the
Underwriters an option, exercisable for 45 days from the date of this
Prospectus, to purchase up to an aggregate of 180,000 additional shares of
Common Stock and 180,000 additional Warrants, at the public offering price set
forth on the cover page of this Prospectus, less the underwriting discounts and
commissions. The Representative may exercise such option solely for the purpose
of covering over-allotments, if any, in connection with the sale of the
Securities offered hereby. If the Underwriter's over-allotment option is
exercised, the Company shall be entitled to sell and receive the proceeds from
the first 85,522 shares of Common Stock sold.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be provided to officers, directors or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
The Company has agreed to pay to the Underwriters at the closing of the
Offering a non-accountable expense allowance of 3% of the aggregate offering
price of the shares of Common Stock and Warrants offered hereby (including any
shares of Common Stock and Warrants purchased pursuant to the Underwriters'
over-allotment option), of which $27,500 was paid to a previous broker-dealer
and $25,000 to the present Representative.
Certain shareholders who will beneficially hold an aggregate of 2,360,000
shares of Common Stock (assuming the underwriters' warrant is not exercised)
following the close of the Offering, have agreed that for a twelve month period
following the date of this Prospectus, they will not, without the prior written
consent of the Representative offer, sell, contract to sell, or otherwise
dispose of any shares of Common Stock of the
46
<PAGE> 48
Company or any securities convertible into, or exercisable or exchangeable for
Common Stock of the Company.
The Company has agreed to sell to the Representative or its designees, for
$10.00, common stock purchase warrants (the "Underwriters' Warrants")
exercisable for 120,000 shares of Common Stock and 120,000 Warrants at a
purchase price of 150% of the initial public offering prices for these
Securities. The Underwriters' Warrants may not be sold, transferred, assigned or
hypothecated, except to officers and directors of the Underwriters, for a period
of six months after the Effective Date, and is exercisable for four years
commencing one year from the Effective Date (or until the close of business five
years after the Effective Date) (the "Exercise Term"). During the Exercise Term,
the holders of the Underwriters' Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Company's Common
Stock. To the extent that the Underwriters' Warrants are exercised, dilution of
the interests of the Company's stockholders will occur. Further, the terms on
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the Underwriters' Warrants can be
expected to exercise it any time when the Company would, in all likelihood, be
able to obtain any needed capital on terms more favorable to the Company than
those provided in the Underwriters' Warrants. Any profit realized by the
Underwriters on the sale of the shares of Common Stock underlying the
Underwriters' Warrants may be deemed additional underwriting compensation. The
Company has also agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the gross proceeds from the sale of the Securities
offered hereby of which $52,500 has been prepaid by the Company.
The Underwriters have been given certain "piggyback" and demand
registration rights with respect to the Common Stock underlying the
Underwriters' Warrants for a period of four years commencing one year from the
date of this Prospectus (or until the close of business five years after the
Effective Date). The exercise of any of such registration rights by the
Underwriters may result in dilution to the interest of the Company's
shareholders, hinder efforts by the Company to arrange future financing of the
Company and/or have an adverse effect on the market price of the Securities.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriters may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the Representative, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of other Underwriters, the selling concession with respect to shares of
Common Stock and Warrants that are distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock and Warrants at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken they may be discontinued at
any time.
Beginning twelve months from the Effective Date of the Offering, the
Company has agreed with the Representative that the Company will pay to the
Underwriters a warrant solicitation fee (the "Warrant Solicitation Fee") equal
to 3% of the exercise price of the Warrants which are exercised pursuant to a
solicitation of exercise of the warrants or in connection with a redemption and
to the extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Commission (including NASD Notice to Members 81-38). Such
Warrant Solicitation Fee will be paid to the Underwriters if (a) the market
price of the Common Stock on the date that any Warrant is exercised is greater
than the exercise price of the Warrant; (b) the exercise of such Warrant was
solicited by the Underwriters; (c) prior specific written approval for
47
<PAGE> 49
exercise is received from the customer if the Warrant is held in a discretionary
account: (d) disclosure of this compensation agreement is made prior to or upon
the exercise of such Warrant; (e) solicitation of the exercise is not in
violation of Regulation M of the Exchange Act; (f) the Underwriters provided
bona fide services in exchange for the Warrant Solicitation Fee; and (g) the
Underwriters have been specifically designated in writing by the holders of the
Warrants as the broker. Unless granted an exemption by the Commission from
Regulation M under the Exchange Act, the Underwriters will be prohibited from
engaging in any market making activities or solicited brokerage activities with
respect to the Securities for the period from five business days prior to any
solicitation by the Underwriters of the exercise of any Warrant until the
termination of such solicitation activity by the Underwriters. The foregoing
5-day restriction period is reduced to one day where the security has an average
daily trading volume of $100,000 and the public float for the issuer's equity
securities is at least $25 million; and, there is no restrictive period where
the average daily trading volume of the security is $1 million and the public
float for the issuer's equity securities is at least $150 million. As a result,
the Underwriters may be unable to continue to provide a market for the
Securities during certain periods while the Warrants are exercisable.
The Company has agreed that, for a period of five years following the
completion of this Offering, it will use its best efforts to cause the election
to its Board of Directors one designee of the Representative, provided that such
designee is reasonably acceptable to and approved by the Company.
The underwriting agreement provides for the retention of the Representative
for a period of 24 months at the rate of $3,000 per month to continue the
development of interest and sponsorship in the Common Stock of the Company.
The foregoing includes a summary of certain provisions of the Underwriting
Agreement which has been filed as an exhibit to the Registration Statement.
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon for
the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., Orlando,
Florida. Certain matters are being passed upon for the Underwriters by William
M. Prifti, Esq., Lynnfield, MA.
EXPERTS
The financial statements of the Company at December 31, 1996, and for each
of the two years in the period ended December 31, 1996, appearing in this
Prospectus and in the Registration Statement, have been audited by Grant
Thornton LLP, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
is included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is not presently a reporting company and does not file reports
or other information with the SEC. Upon effectiveness of the Registration
Statement filed with the SEC in connection with this Offering, the Company will
become a reporting company. Further, the Company will register its securities
under the Exchange Act. Accordingly, upon effectiveness of its Exchange Act
registration, the Company will be subject to the additional report requirements
of the Exchange Act and in accordance therewith will file reports, proxy
statements and other information with the SEC. In addition, after the effective
date of this Offering, the Company intends to furnish its shareholders with
annual reports containing audited financial statements and interim reports, in
each case as it may determine to furnish or as may be required by law. The year
end of the Company is December 31 of each year.
The Company has filed with the Washington, D. C. Office of the SEC a
Registration Statement on Form SB-2 (with all amendments, exhibits and
schedules, thereto, the "Registration Statement") under the Securities Act of
which this Prospectus forms a part. This Prospectus does not contain all of the
information
48
<PAGE> 50
set forth in the Registration Statement, as permitted by the rules and
regulations of the SEC. For further information with respect to the Company and
the Securities offered hereby, reference is hereby made to such Registration
Statement. Statements contained in this Prospectus concerning the provisions or
contents of any contract or other document referred to herein are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Copies of the Registration Statement may be inspected without charge at the
SEC's principal office at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549; and at the following Regional Offices of the Commission, except that
copies of the exhibits may not be available at certain of the Regional Offices:
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and New York Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of all or any part of such material may be obtained from
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 upon
payment of certain fees prescribed by the SEC. The SEC maintains a worldwide web
site on the Internet at http://www.sec.gov that contains reports and other
information concerning the Company filed electronically with the SEC.
49
<PAGE> 51
AUTOMOTIVE ONE PARTS STORES, INC.
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Balance Sheets as of December 31, 1996 and October 31, 1997
(unaudited)............................................... F-3
Statements of Operations for the years ended December 31,
1995 and 1996 and the ten months ended October 31, 1996
and 1997 (unaudited)...................................... F-4
Statement of Shareholders' Equity for the years ended
December 31, 1995 and 1996 and the ten months ended
October 31, 1997 (unaudited).............................. F-5
Statements of Cash Flows for the years ended December 31,
1995 and 1996 and the ten months ended October 31, 1996
and 1997 (unaudited)...................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Automotive One Parts Stores, Inc.
We have audited the accompanying balance sheet of Automotive One Parts
Stores, Inc. as of December 31, 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Automotive One Parts Stores,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,037,968 during the year ended December 31,
1996 and, as of that date, the Company had a working capital deficiency of
approximately $1,847,000. Management states that the 1997 operations have not
been adequate to generate sufficient cash flow in order to satisfy obligations
maturing December 31, 1997 totaling approximately $5,331,000 at December 31,
1996 and $5,772,000 at October 31, 1997. The Company's major creditors, APS,
Inc. and Autoparts Finance Company, Inc., have extended the maturity of
$5,132,000 plus accrued and unpaid interest of $639,000 of such indebtedness to
February 28, 1998. These factors, among others as discussed in Note C to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regards to these matters,
including an initial public offering which is in process, are also described in
Note C. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
Tampa, Florida
May 14, 1997, except for Note C
as to which the date is December 22, 1997
The foregoing auditor's report is in the form which will be signed upon
consummation of the transaction described in paragraph 2 of Note A to the
Financial Statements.
GRANT THORNTON LLP
Tampa, Florida
December 22, 1997
F-2
<PAGE> 53
AUTOMOTIVE ONE PARTS STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 32,124 $ 25,036
Receivables
Trade accounts, less allowance for doubtful accounts of
$210,000............................................... 686,431 702,875
Note from vendor.......................................... 180,000 160,745
Employee and officer advances............................. 74,444 61,592
Inventories................................................. 5,575,768 5,454,034
Prepaid expenses............................................ 910 910
---------- ----------
Total current assets.............................. 6,549,677 6,405,192
PROPERTY AND EQUIPMENT, net................................. 2,490,246 2,376,153
PROPERTY HELD FOR SALE OR LEASE............................. 862,197 823,351
OTHER ASSETS................................................ 49,349 351,152
---------- ----------
Total assets...................................... $9,951,469 $9,955,848
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt........................ $5,501,621 $5,735,719
Checks written in excess of cash............................ 62,509 93,194
Accounts payable............................................ 2,356,045 1,903,756
Accrued expenses............................................ 267,557 463,356
Interest payable............................................ 209,139 701,865
---------- ----------
Total current liabilities......................... 8,396,871 8,897,890
LONG-TERM DEBT, less current portion........................ 1,174,621 1,126,420
COMMITMENTS AND CONTINGENCIES............................... -- --
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding................... -- --
Common stock, $0.01 par value, 20,000,000 shares authorized,
2,360,000 issued and outstanding.......................... 23,600 23,600
Additional paid-in capital.................................. 434,932 434,932
Accumulated deficit......................................... (78,555) (526,994)
---------- ----------
Total shareholders' equity (deficit).............. 379,977 (68,462)
---------- ----------
Total liabilities and shareholders' equity
(deficit)...................................... $9,951,469 $9,955,848
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 54
AUTOMOTIVE ONE PARTS STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31,
------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................. $11,691,338 $12,094,341 $10,291,236 $9,206,871
Cost of goods sold........................ 7,689,551 8,075,176 6,871,217 5,727,418
----------- ----------- ----------- ----------
Gross profit............................ 4,001,787 4,019,165 3,420,019 3,479,453
Selling, general and administrative
expenses................................ 3,986,570 4,463,849 3,773,117 3,549,708
----------- ----------- ----------- ----------
Earnings (loss) from operations......... 15,217 (444,684) (353,098) (70,255)
Other income (expense)
Gain on sale of property................ -- -- -- 185,707
Rental income........................... 165,245 191,804 159,837 143,355
Interest expense........................ (495,174) (785,088) (655,851) (638,532)
Offering costs.......................... -- -- -- (68,714)
----------- ----------- ----------- ----------
Net loss........................ $ (314,712) $(1,037,968) $ (849,112) $ (448,439)
=========== =========== =========== ==========
Net loss per common share............... $ (0.13) $ (0.44) $ (0.36) $ (0.19)
=========== =========== =========== ==========
Weighted average common shares
outstanding.......................... 2,360,000 2,360,000 2,360,000 2,360,000
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 55
AUTOMOTIVE ONE PARTS STORES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995..................... $23,600 $238,406 $ 1,274,125 $ 1,536,131
Contributed capital -- contribution of
inventory.................................... -- 196,526 -- 196,526
Net loss....................................... -- -- (314,712) (314,712)
------- -------- ----------- -----------
Balance at December 31, 1995................... 23,600 434,932 959,413 1,417,945
Net loss....................................... -- -- (1,037,968) (1,037,968)
------- -------- ----------- -----------
Balance at December 31, 1996................... 23,600 434,932 (78,555) 379,977
Net loss (unaudited)........................... -- -- (448,439) (448,439)
------- -------- ----------- -----------
Balance at October 31, 1997 (unaudited)........ $23,600 $434,932 $ (526,994) $ (68,462)
======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 56
AUTOMOTIVE ONE PARTS STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED DECEMBER 31, OCTOBER 31,
------------------------- ---------------------
1995 1996 1996 1997
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net earnings (loss)....................... $ (314,712) $(1,037,968) $(849,112) $(448,439)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Gain on sale of property............... -- -- -- (185,707)
Depreciation and amortization.......... 173,318 181,410 150,833 155,796
Interest expense added to principal.... -- 231,684 -- --
Changes in assets and liabilities:
Trade accounts receivable............ (118,047) 25,762 (12,552) (50,796)
Employee and officer advances
receivable........................ (22,483) (51,961) (7,242) 47,204
Inventories.......................... (1,275,368) (646,563) (30,979) 121,734
Prepaid expenses and other assets.... (33,710) 14,490 (11,454) (282,548)
Accounts payable..................... (1,887,386) 1,339,526 556,514 (452,289)
Accrued expenses..................... (274,002) 102,547 111,096 195,799
Interest payable..................... (10,668) 161,885 367,932 492,726
----------- ----------- --------- ---------
Net cash provided by (used in)
operating activities............ (3,763,058) 320,812 275,036 (406,520)
----------- ----------- --------- ---------
Cash flows from investing activities
Acquisition of property and equipment..... (198,264) (248,186) (200,594) (45,298)
Proceeds from sale of property and
equipment.............................. -- -- -- 228,150
----------- ----------- --------- ---------
Net cash provided by (used in) investing
activities............................. (198,264) (248,186) (200,594) 182,852
----------- ----------- --------- ---------
Cash flows from financing activities:
Net change in checks written in excess of
cash................................... 106,375 (43,866) (36,508) 30,684
Proceeds from long-term debt.............. 5,662,992 368,377 311,771 513,972
Repayments of long-term debt.............. (1,922,943) (411,047) (363,567) (328,076)
----------- ----------- --------- ---------
Net cash provided by (used in)
financing activities............ 3,846,424 (86,536) (88,304) 216,580
----------- ----------- --------- ---------
Net decrease in cash........................ (114,898) (13,910) (13,862) (7,088)
Cash, beginning of year..................... 160,932 46,034 46,034 32,124
----------- ----------- --------- ---------
Cash, end of year........................... $ 46,034 $ 32,124 $ 32,172 $ 25,036
=========== =========== ========= =========
Supplemental cash flow information:
Cash paid for interest.................... $ 505,842 $ 391,519 $ 286,309 $ 76,183
=========== =========== ========= =========
</TABLE>
Non-cash financing activities:
During 1996, approximately $232,000 of interest payable was added to the
principal of the note payable.
During 1995, approximately $197,000 of inventory was contributed by a
related party to the Company.
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 57
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF ORGANIZATION AND BUSINESS
BUSINESS
Automotive One Parts Stores, Inc. (the "Company") was incorporated in
Florida in November 1978. The Company is a specialty supplier and retailer of
automotive replacement parts, tools, supplies, equipment and accessories to both
professional installers and, do-it-yourself customers throughout the Central
Florida area.
In connection with the planned initial public offering, the Board of
Directors plans to increase the Company's Common Stock authorized from 100
shares of $1.00 par value to 20,000,000 shares of $0.01 par value Common Stock.
The Company's increase in the issued and outstanding Common Stock will be
effected through a stock split whereby each share of common stock will be
exchanged for 23,600 shares of new Common Stock. All share and per share data
presented herein have been retroactively restated for all periods in
contemplation of this planned transaction.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1996 or October 31, 1997.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally
determined by the first-in, first-out (FIFO) method.
The Company periodically evaluates its inventory for obsolescence and
expenses any inventory considered obsolete.
PROPERTY AND EQUIPMENT, NET
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided for using the
straight-line or declining balance methods over the estimated service lives of
the assets. Accelerated methods are used for tax purposes.
Property held for sale is stated at the lower of cost or estimated net
realizable value and includes certain property no longer used in the Company's
operations.
Expenditures for additions, major renewals or betterments are capitalized
and expenditures for repairs and maintenance are charged to earnings as
incurred.
DEFERRED OFFERING COSTS
Deferred offering costs, which are included in other assets at December 31,
1996 and October 31, 1997, amounted to approximately $31,000 and $333,000,
respectively. These costs consist of legal and accounting fees and other direct
costs attributable to the Company's current planned initial public offering.
These costs are being deferred until the proceeds from the offering have been
received, at which time they will be charged
F-7
<PAGE> 58
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
against the gross proceeds. Offering costs totalling approximately $69,000 were
charged to expense as a result of a delay in the offering. If the offering is
not successful, the remaining costs will be charged to earnings.
ADVERTISING
The Company expenses its share of all advertising costs as such costs are
incurred. The portion of advertising expenditures which are to be recovered from
vendors and other cooperative programs are recorded as receivables. The Company
does not defer any portion of its share of advertising costs. During the years
ended December 31, 1995 and 1996 and the ten months ended October 31, 1996 and
1997, the Company incurred advertising costs of approximately $73,000 and
$76,000, $60,000 and $32,000, respectively.
INCOME TAXES
The Company is taxed as an S Corporation under the provisions of the
Internal Revenue Code. As such, the Company's taxable income is includable in
the individual income tax returns of its stockholders for federal and state
income tax purposes. Accordingly, no provisions for federal and state income
taxes have been recorded in the accompanying historical financial statements.
In conjunction with the completion of the initial public offering, the
Company will terminate its S Corporation election and become subject to
corporate income taxes from that date forward (See Note I).
CONCENTRATION OF RISK
The Company grants credit to customers who meet pre-established credit
requirements. The Company does not require collateral when trade credit is
granted to customers. Credit losses are provided for in the financial statements
and have consistently been within management's expectations.
Currently, the Company purchases most of its inventory from one vendor. A
sufficient number of other suppliers and/or manufacturers could supply the same
inventory. A disruption of this vendor relationship, or a material reduction in
any of the terms of purchase, advertising, incentive or other programs, would
likely materially, adversely affect the Company's business.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of ("SFAS"). Under SFAS No. 121, impairment
losses on long-lived assets are recognized when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. The impairment loss is equal
to the difference between the carrying amount of the long-lived asset and the
estimated fair value of such asset. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The adoption of SFAS
No. 121 by the Company did not result in an impairment loss. The Company did not
incur an impairment loss during the year ended December 31, 1996 and the ten
months ended October 31, 1997.
STOCK BASED COMPENSATION
Effective January 1, 1996 the Company adopted SFAS No. 123, Accounting for
Stock Based Compensation. As it relates to stock options granted to employees,
SFAS No. 123 permits companies who have not done so already to, either adopt the
accounting method promulgated by Accounting Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to Employees to measure compensation, or to
adopt the fair value base method prescribed by SFAS No. 123. If APB No. 25's
method is followed, pro forma disclosures are required as if SFAS No. 123
accounting recognition method was adopted. SFAS No. 123 pertains to stock
options granted after December 31, 1995. Management has determined not to adopt
SFAS No. 123's accounting recognition provisions related to stock options
granted to employees and accordingly, will continue following APB No. 25's
accounting provisions. All other provisions of SFAS No. 123 have been
F-8
<PAGE> 59
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
implemented effective January 1, 1996. The implementation of SFAS No. 123 did
not have an effect on the Company's financial statements.
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements and related notes thereto for October
31, 1996 and 1997 include all normal and recurring adjustments which in the
opinion of management are necessary for a fair presentation and are prepared on
the same basis as the audited annual statements. The interim results are not
necessarily indicative of the results that may be expected for the full year.
NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 128, Earnings Per Share and SFAS No. 129, Disclosure of
Information about Capital Structure, will be effective for the Company's
financial statements issued after December 15, 1997. Early adoption of the new
standards is not permitted. SFAS 128 eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed. SFAS
No. 129 requires disclosing information about an entity's capital structure. The
adoption of these new standards is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in 1998
and expects no material impact to the Company's financial statement
presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for fiscal years beginning after December 15, 1997.
This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries. This Statement requires annual financial statements to disclose
information about products and services, geographic areas and major customers
based on a management approach, along with interim reports. The management
approach requires disclosing financial and descriptive information about an
enterprise's reportable operating segments based on reporting information the
way management organizes the segments for making business decisions and
assessing performance. It also eliminates the requirement to disclose additional
information about subsidiaries that were not consolidated. The Company plans to
adopt SFAS No. 131 in 1998 with impact only to the Company's disclosure
information and not its results of operations.
NOTE C -- REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. Continuation of the Company as a going concern
contemplates the realization of assets and settlement of liabilities and
commitments in the normal course of business. However, the Company had a net
loss of $1,037,968 and $448,439 for the year ended December 31, 1996 and the ten
months ended October 31, 1997, respectively and a working capital deficiency of
$1,847,194 and $2,492,698 at December 31, 1996 and October 31, 1997,
respectively. In addition, the Company was in default under the terms of its
indebtedness to APS, Inc. ("APS") and Autoparts Finance Company, Inc. ("AFCO"),
an affiliate of APS, at December 31, 1996. In February 1997, the Company entered
into a Loan Modification Agreement with APS and AFCO whereby the maturity date
on such indebtedness was extended to not later than July 31, 1997, (See Note E).
The Loan Modification Agreement was amended effective July 31, 1997, to extend
the maturity date to December 31,
F-9
<PAGE> 60
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997. On December 22, 1997, the Loan Modification Agreement was further amended
to extend the maturity date to February 28, 1998. The Company is not currently
able to generate sufficient cash flows from its existing operations to repay the
amounts due to APS and AFCO by the maturity date of such indebtedness. These
factors, among others, raise substantial doubt about the ability of the Company
to continue as a going concern.
Management recognizes that the Company must generate additional financial
resources and reduce operating costs to continue its operations as follows:
- The Company has obtained a commitment for a $4 million senior credit
facility available upon the successful completion of the contemplated
initial public offering. A portion of the proceeds form this facility
will be used to repay APS and AFCO.
- The Company is in the process of completing an initial public offering
of its Common Stock in order to generate sufficient proceeds, in
conjunction with the aforementioned credit facility, to repay APS and
AFCO and to finance the acquisition of additional auto parts stores.
- During November 1997 the Company received loan proceeds of
approximately $205,000 from the mortgage of a parcel of its land. The
proceeds from the loan will be used to support its need for working
capital.
- The Company is evaluating its current network of store locations in
order to determine the most advantageous number and location of its
stores in order to effectively and efficiently serve the central
Florida market, its primary service area. To date the Company has
identified four existing stores that can be merged into two store
locations.
- The Company has begun to institute certain cost containment measures
in order to reduce its current level of selling, general and
administrative expenses. Management cannot presently determine the
financial impact of these cost containment measures, however, it
believes such cost containment measures will not have an impact on the
services provided to its customers.
If the Company is not successful in completing its planned initial public
offering and is unable to obtain alternative financing in order to repay APS and
AFCO, APS and AFCO could foreclose on substantially all the assets of the
Company.
In view of the matters described in the preceding paragraphs,
recoverability of a substantial portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to generate
sufficient proceeds from its planned initial public offering to repay its
obligations to APS and AFCO, and to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset and liability amounts that
might be necessary should the Company be unable to continue in existence.
F-10
<PAGE> 61
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, LIFE OCTOBER 31,
1996 (YEARS) 1997
------------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 1,026,177 $1,026,177
Buildings........................................... 2,055,859 40 2,055,859
Vehicles............................................ 1,067,303 3-5 1,073,012
Equipment........................................... 825,535 5 825,535
Computer equipment.................................. 243,291 2 260,635
Furniture and fixtures.............................. 39,151 5-7 39,151
------------ ----------
5,257,316 5,280,369
Less: accumulated depreciation and amortization..... 2,767,070 2,904,216
------------ ----------
$ 2,490,246 $2,376,153
============ ==========
</TABLE>
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following:
MORTGAGE LOANS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Various notes payable; maturing between December 1997 and
March 2010, varying interest rates ranging from 7% to 12.95%
per annum, due in monthly installments of $19,461 including
interest; collateralized by real property................... $1,129,418 $1,036,936
Adjustable rate note payable to AFCO, interest at the prime
rate plus 2% per annum (10.25% at December 31, 1996)
principal and interest due and payable not later than
December 31, 1997; collateralized by real property,
inventory, equipment, and all other assets of the
Company..................................................... 2,465,467 2,465,467
Note payable to APS; 10% interest per annum, principal and
interest due and payable not later than December 31, 1997;
collateralized by real property, inventory, equipment, and
all other assets of the Company............................. 2,666,679 2,666,679
VEHICLE LOANS
7.25% to 11% notes payable to banks; due in monthly
installments of $5,436 including interest through October
1999; collateralized by vehicles............................ 112,859 58,217
INVENTORY LOANS
9% note payable to a vendor; payable in monthly installments
of $5,612, including interest through February 1, 1998;
collateralized by inventory................................. 74,322 27,282
</TABLE>
F-11
<PAGE> 62
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
UNSECURED LOANS
7.50% unsecured demand note payable to an individual; due in
monthly installments of $500 plus accrued interest, through
August 2002................................................. 34,000 28,500
10% to 12% unsecured demand notes payable to individuals;
principal due on demand with quarterly payments of accrued
interest.................................................... 126,497 173,198
RELATED PARTY LOANS
Unsecured note payable to the principal shareholder; 8%
interest per annum, principal and interest is due and
payable at February 12, 2000................................ -- 319,588
12% unsecured demand note payable to an individual; with
interest in the amount of $650 due in monthly
installments................................................ 65,000 65,000
Non-interest bearing demand notes payable to an officers and
directors................................................... 2,000 21,272
---------- ----------
Total long-term debt.............................. 6,676,242 6,862,139
Less current portion.............................. 5,501,621 5,735,719
---------- ----------
$1,174,621 $1,126,420
========== ==========
</TABLE>
Aggregate maturities of long-term obligations are as follows for the years
ending December 31,
<TABLE>
<S> <C>
1997........................................................ $5,501,621
1998........................................................ 148,343
1999........................................................ 112,597
2000........................................................ 108,000
2001........................................................ 118,509
Thereafter.................................................. 687,172
----------
$6,676,242
==========
</TABLE>
The note payable to APS ("APS Note") matured on October 24, 1996 and had
not been repaid by the Company as of December 31, 1996. In addition, the Company
ceased making scheduled payments on the adjustable rate note due to AFCO ("AFCO
Note") during the year ended December 31, 1996. As a result of these conditions,
the Company was in default of these obligations along with its trade accounts
payable balance due to APS of approximately $1,333,000 at December 31, 1996. As
a result of the default on its indebtedness to APS and AFCO, the Company
incurred an additional default interest charge on such indebtedness totaling
approximately $113,000 at December 31, 1996.
On February 20, 1997, the Company entered into a Loan Modification
Agreement with APS and AFCO. Under the terms of this agreement, the APS Note and
AFCO Note will continue to accrue interest at their specific contractual
interest rates, however, no payments of principal and interest will be required
until the maturity date. The maturity date is the earlier of the date the
Company receives proceeds from its planned initial public offering of shares of
its Common Stock, or July 31, 1997. On July 31, 1997 the Loan Modification
Agreement was amended to extend the maturity date to December 31, 1997. On
December 22, 1997, the Loan Modification Agreement was further amended to extend
the maturity date to February 28, 1998. In addition, from the date of the Loan
Modification Agreement and the maturity date, the Company is required to pay APS
before the close of business on Monday of each week an amount equal to the
preceding week's purchases of merchandise from APS.
F-12
<PAGE> 63
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's compliance with the financial covenants under the terms of
the original loan agreements with APS and AFCO were waived under the terms of
the Loan Modification Agreement. The Loan Modification Agreement contains
certain financial and other covenants that, among other things, require the
Company to: 1) make timely payments to APS for its merchandise purchases; 2)
file a Registration Statement with the Securities and Exchange Commission in
connection with the Company's planned initial public offering by May 31, 1997
and 3) complete its planned initial public offering by July 31, 1997. On July
31, 1997 the Loan Modification Agreement was amended to extend the maturity date
to December 31, 1997, and was subsequently amended to extend the maturity date
to February 28, 1998. Failure to comply with the covenants included in the Loan
Modification Agreement would cause the Company to be in default under the terms
of such agreement. Should such default occur APS and AFCO could foreclose on the
Company's assets collateralizing the APS Note and AFCO Note. As long as the
Company complies with the terms of the Loan Modification Agreement and repays by
the maturity date, the outstanding principal and accrued and unpaid interest
amounts due under the APS Note and AFCO Note, along with certain amounts due APS
for merchandise purchases, the default interest charge due to APS and AFCO will
be waived. As of October 31, 1997, the Company was in compliance with the terms
of the Loan Modification Agreement. The APS Note and AFCO Note balances are
included in the current portion of long-term debt as of December 31, 1996 and
October 31, 1997.
Management believes that APS and AFCO will not require repayment in full of
the Company's outstanding indebtedness, including any accrued and unpaid
interest, on February 28, 1998, as long as the Company continues to proceed with
its planned initial public offering and is in compliance with the remainder of
the covenants included in the Loan Modification Agreement dated February 20,
1997 and remains in compliance with such other covenants until the initial
public offering is completed. However, no assurances can be given that APS and
AFCO will not require repayment of such indebtedness on February 28, 1998.
NOTE F -- SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized, without further shareholder action,
to divide any or all shares of the authorized Preferred Stock into series and to
fix and determine the designation, preferences, privileges, options or other
special rights, and qualifications, limitations, or restrictions thereon, of any
series so established, including voting powers, dividend rights, liquidation
preferences, redemption rights, and conversion privileges. In May 1997, the
Board has authorized 5,000,000 shares of $0.01 par value preferred stock. No
shares of Preferred Stock have been issued and there are no plans, agreements or
understandings for the issuance of any shares of Preferred Stock.
COMMON STOCK
In connection with its planned public offering, the Company plans to effect
a stock split (See Note A).
STOCK OPTION PLAN
In May 1997, the Company established a 1997 Employee Stock Option Plan (the
"Plan") under which 500,000 shares of Common Stock have been reserved for
issuance upon exercise of stock options. The Plan is designed to serve as an
incentive for retaining qualified and competent employees. The Company's Board
of Directors, or a committee thereof (the "Committee"), will administer and
interpret the Plan and will be authorized to grant options thereunder to all
eligible employees of the Company, including officers and directors (whether or
not employees) of the Company and consultants.
The Plan provides for the granting of both incentive stock options and
non-qualified stock options. Options will be granted under the Plan on such
terms and at such prices as determined by the Committee,
F-13
<PAGE> 64
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
except that the per share exercise price of incentive stock options cannot be
less than the fair market value of the Common Stock on the date of grant and the
per share exercise price of non-qualified stock options will not be less than
par value on the date of grant. Each option will be exercisable after the period
or periods specified in the option agreement, but no option can be exercised
until six months after the date of grant or after the expiration of 10 years
from the date of grant. Options granted under the Plan will not be transferable
other than by will or by the laws of descent and distribution.
The Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of Common Stock subject to options
which expire without being exercised or which are canceled as a result of
cessation of employment are available for further grants. The Company has
granted a non-qualified option to purchase 30,000 shares of Common Stock under
the Plan to its Vice President of Corporate Development and Investor Relations.
These Options are exercisable at the Offering price.
NOTE G -- COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
In 1995, the Company entered into a product purchase agreement with APS, a
national distributor of replacement auto parts. Under the terms of this
agreement, the Company agreed, for a fifteen-year period commencing on January
1, 1995, to purchase 75% of the resale merchandise inventory from APS, less
certain exceptions and not perform a bulk transfer of assets nor transfer its
leasehold interests in properties where it conducts business without giving APS
a 45-day written notice and giving APS the right of first refusal. In February
1997, in connection with the modification of the Company's loan agreements (see
Note E) with APS and AFCO in February 1997; the Company and APS amended the
product purchase agreement. Under the terms of this amended agreement, the term
of the agreement was reduced from fifteen years to five years. In addition, the
period required to provide APS with written notice of the Company's intent to
bulk transfer its assets and/or transfer its leasehold interests was reduced
from 45 days to 20 days. Purchases under the agreement with APS aggregated
approximately $4.5 million in both 1995 and 1996.
The Company has a $180,000 agreement with APS for the reimbursement of
costs incurred by the Company to refurbish certain of its store locations. Such
costs were incurred by the Company in connection with the execution of the
product purchase agreement with APS. At October 31, 1997 the Company had a
receivable of $160,745 in connection with this agreement.
LEASES
The Company leases two of its stores under month-to-month leases. All other
facilities are owned by the Company. The Company also leases an insignificant
amount of equipment.
LITIGATION
The Company has instituted a lawsuit (the "Lawsuit") against The Parts
Source, Inc. d/b/a Ace Auto Parts, a prior aborted suitor and certain former
employees of the Company for certain tortious acts alleged to have caused damage
to the Company estimated at approximately $1.5 million dollars. The Company is
also seeking an injunction against the defendants in its Lawsuit. The Lawsuit,
currently in the pleading and discovery stage of the case, was filed on March
20, 1997, in the Circuit Court in and for Orange County, Florida. In the opinion
of management, the ultimate outcome of this Lawsuit should not have a material
adverse impact on the Company's financial position, results of operations or
liquidity.
NOTE H -- RELATED PARTY TRANSACTIONS
The Company makes advances to and borrows money from officers, shareholders
and family members from time to time. As discussed in Note E above, the Company
owed $67,000 and $86,272 to these individuals
F-14
<PAGE> 65
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at December 31, 1996 and October 31, 1997, respectively. In addition, these
individuals owed the Company $70,384 and $61,591 at December 31, 1996 and
October 31, 1997, respectively.
During the year ended December 31, 1995 the son of the principal
shareholder of the Company contributed inventory to the Company that had a
carrying value (cost) to the son of $196,526, which also approximated the fair
value of such inventory.
Subsequent to December 31, 1996, the principal shareholder of the Company
loaned $446,000 to the Company for operations. The loan plus out-of-pocket costs
and interest payments made by such individual are to be repaid from the proceeds
of the Company's planned initial public offering.
At December 31, 1996 and October 31, 1997, respectively the Company had
outstanding indebtedness to a director candidate of $95,000 and $135,000 at an
interest rate of 10.0% per annum. The Company plans to repay such indebtedness,
including any accrued and unpaid interest from the proceeds of the Company's
planned initial public offering.
NOTE I -- PRO FORMA INFORMATION
PRO FORMA INCOME TAXES
In conjunction with the completion of its planned initial public offering,
the Company will terminate its S Corporation election and become subject to
corporate income taxes from that date forward.
The statements of operations for all periods presented reflect the pro
forma effect on income taxes (benefits) as if the Company's losses had been
subjected to federal and state income taxes as a C Corporation.
In the determination whether to recognize any tax benefits from the
Company's operating losses on a pro forma basis, management considered the
Company's history of net operating losses. During the two years ended December
31, 1996, the Company incurred a cumulative net loss of approximately $1.3
million. Management believes using the more likely than not criteria established
by SFAS No. 109, Accounting for Income Taxes, that no tax benefits should be
recognized for any reported period.
Reconciliation of the federal statutory income tax rate of 34% to the
effective income tax rate reflected herein is as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED OCTOBER 31,
-------------- ------------------
1995 1996 1996 1997
----- ----- ------- -------
<S> <C> <C> <C> <C>
Federal income tax (benefit) at statutory rates..... (34.0)% (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal benefit.......... (3.3) (3.3) (3.3) (3.3)
Net operating losses, not currently utilizable...... 37.3 37.3 37.3 --
Utilization of net operating loss carryforwards..... -- -- -- (37.3)
----- ----- ----- -----
Income tax expense.................................. --% --% --% --%
===== ===== ===== =====
</TABLE>
Since the Company's cumulative net operating losses have passed directly to
its S Corporation shareholders, the losses will not be available to the Company
upon conversion to C Corporation status.
At December 31, 1995 and 1996 and October 31, 1996 and 1997, there were
differences between the bases for the Company's assets and liabilities as
reported for income tax return purposes and as reported for financial statement
purposes. The aggregate bases difference at these dates are not material to the
Company (principally accrued vacation, depreciation and inventory).
F-15
<PAGE> 66
AUTOMOTIVE ONE PARTS STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- NET LOSS PER COMMON SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period (see Note A). Pro
forma net loss is the same as historical net loss because no pro forma provision
for income taxes is required as a result of the historical net losses for all
years presented, assuming the Company had been subject to income taxes during
the period it was an S Corporation for income tax purposes. Net loss per share
does not include the assumed exercise of these warrant since the inclusion would
have been anti-dilutive.
The Company is contemplating an initial public offering of which
approximately $3.0 million of the total proceeds therefrom will be used to pay
down or retire debt. The supplementary pro forma net income (loss) per common
share for 1996 and the seven months ended October 31, 1997 as if this debt was
retired at the beginning of the respective periods, would be $(0.25) and $0.03 a
share respectively (assuming 2,922,978 and 2,940,806 weighted average common
shares outstanding).
NOTE K -- FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 and October 31, 1997, the carrying amount of cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short-term maturities of these items.
The carrying amounts of current and long-term portions of debt approximate
fair market value since the interest rates on these instruments generally
approximate market interest rates.
F-16
<PAGE> 67
(FOUR PHOTOGRAPHS OF COMPANY WAREHOUSE,
MACHINE SHOP, AND STORES WITH COMPANY LOGO
IN CENTER OF PAGE.)
<PAGE> 68
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, OR ANY UNDERWRITER OR BROKER/DEALER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 9
USE OF PROCEEDS....................... 15
DILUTION.............................. 16
CAPITALIZATION........................ 17
DIVIDEND POLICY....................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 18
INDUSTRY OVERVIEW..................... 24
BUSINESS.............................. 26
MANAGEMENT............................ 35
PRINCIPAL AND SELLING SHAREHOLDERS.... 39
CERTAIN TRANSACTIONS.................. 40
DESCRIPTION OF SECURITIES............. 41
SHARES ELIGIBLE FOR FUTURE SALE....... 45
UNDERWRITING.......................... 46
LEGAL MATTERS......................... 48
EXPERTS............................... 48
AVAILABLE INFORMATION................. 48
FINANCIAL STATEMENTS INDEX............ F-1
</TABLE>
------------------
UNTIL 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
1,200,000 SHARES
OF COMMON STOCK
AND
1,200,000 REDEEMABLE
COMMON STOCK
PURCHASE WARRANTS
AUTOMOTIVE ONE LOGO
AUTOMOTIVE ONE PARTS
STORES, INC.
-------------------------
PROSPECTUS
-------------------------
NUTMEG SECURITIES, LTD.
495 POST ROAD EAST
WESTPORT, CT 06880
(203) 226-1857
, 1998
======================================================
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under the Florida Business Corporation Act to
indemnify its directors and officers to the extent provided in such statute. The
Registrant's Articles of Incorporation provide that the Registrant shall
indemnify its executive officers and directors to the fullest extent permitted
by law either now or hereafter. The Registrant is also entering into an
agreement with each of its directors and certain of its officers wherein it is
agreeing to indemnify each of them to the fullest extent permitted by law. In
general, Florida law permits a Florida corporation to indemnify its directors,
officers, employees and agents, and persons serving at the corporation's request
in such capacities for another enterprise against liabilities arising from
conduct that such persons reasonably believed to be in, or not opposed to, the
best interest of the corporation and, with respect to any criminal action or
proceeding, had not reasonable cause to believe their conduct was unlawful.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful, (b)
deriving an improper personal benefit from a transaction, (c) voting for or
assenting to an unlawful distribution, and (d) willful misconduct or a conscious
disregard for the best interests of the Registrant in a proceeding by or in the
right of the Registrant to procure a judgment in its favor or in a proceeding by
or in the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the Federal securities laws or
state or Federal environmental laws.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought from the Registrant, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification from the Registrant by
any officer or director.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration fee............................................ $ 9,582
National Association of Securities Dealers, Inc............. 2,535
NASDAQ listing fee.......................................... 10,000*
Boston Stock Exchange Listing Fee........................... 15,000*
Printing and engraving expenses............................. 65,000*
Accounting fees and expenses................................ 50,000*
Legal fees and expenses..................................... 150,000*
Blue sky fees and expenses.................................. 25,000*
Transfer agent and registrar fees........................... 7,500*
Underwriters' non-accountable expense allowance (assuming no
exercise of over-allotment option)........................ 220,500
Miscellaneous............................................... 883*
--------
Total............................................. $556,000
========
</TABLE>
- ---------------
* Estimated expenses.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE> 70
ITEM 27. EXHIBITS
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement**
1.2 Agreement Among Underwriters**
1.3 Selected Dealer Agreement**
3.1 Form of Amended and Restated Articles of Incorporation**
3.2 Form of Amended and Restated ByLaws**
4.1 Form of Underwriters' Warrant Agreement**
4.2 Specimen of Common Stock Certificate
4.3 Specimen of Redeemable Common Stock Purchase Warrant
4.4 Form of Warrant Agreement between the Company and American
Stock Transfer & Trust Company
4.5 Form of 12-month Lock-Up Agreement
5 Form of Opinion of Greenberg Traurig Hoffman Lipoff Rosen &
Quentel, P. A., Counsel for the Company***
10.1 1997 Stock Option Plan**
10.2 Promissory Note in the principal amount of $2,450,000 in
favor of A. P. S., Inc.**
10.3 Promissory Note in the principal amount of $2,500,000 in
favor of Autoparts Finance Company, Inc.**
10.4 Loan Agreement between the Company, Autoparts Finance
Company, Inc., and A.P.S., Inc.**
10.4 .1 Loan Modification Agreement between the Company, A.P.S.,
Inc., and Autoparts Finance Company, Inc.**
10.4 .2 Second Amendment to Loan Agreement between the Company,
A.P.S., Inc., and Autoparts Finance Company, Inc. effective
July 31, 1997.**
10.4.3 Third Amendment to Loan Agreement between the Company,
A.P.S., Inc. and Autoparts Finance Company, Inc. dated
December 22, 1997.
10.5 Amended and Restated Guaranty Agreement between Robert H.
Gentry, III and Janice Sue Gentry, his wife, A.P.S., Inc.
and Autoparts Finance Company, Inc.**
10.6 Product Purchase Agreement, between A.P.S., Inc. and the
Company.**
10.6 .1 First Amendment to Product Purchase Agreement dated February
20, 1997 between A.P.S., Inc. and the Company.**
10.7 Form of Indemnification Agreement between the Company and
Indemnitee.**
10.8.1 Employment Agreement between the Company and Robert H.
Gentry, III.**
10.8.2 Employment Agreement between the Company and Patrick J.
Power.
10.9 Financial Consulting Agreement between the Underwriter and
the Company**
10.10 Form of Loan and Security Agreement between the Company and
Finova Capital Corporation.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P. A. (included in Exhibit 5).
27 Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Originally executed opinion to be filed by amendment
II-2
<PAGE> 71
ITEM 28. UNDERTAKINGS.
(a) The small business issuer will:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered, (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Act, treat each post-effective
amendment as a new registration statement of the securities offered, and
the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The small business issuer will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule 424(b)(l) or (4) or 497(h)
under the Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form SB-2
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Tampa, State of Florida, on December 23, 1997.
AUTOMOTIVE ONE PARTS STORES, INC.
By: /s/ ROBERT H. GENTRY, III
------------------------------------
Robert H. Gentry, III
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ROBERT H. GENTRY, III Sole Director, President, December 23, 1997
- ----------------------------------------------------- and Chief Executive
Robert H. Gentry, III Officer
</TABLE>
II-4
<PAGE> 1
Exhibit 4.2
FORM OF COMMON STOCK CERTIFICATE
COMMON STOCK COMMON STOCK
AUTOMOTIVE ONE PARTS STORES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF FLORIDA
SEE REVERSE FOR CERTAIN
ABBREVIATIONS
CUSIP 05329F 10 9
THIS CERTIFIES THAT:_______________________________________________________
________________________________________________________________________________
IS THE OWNER OF ________________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF:
AUTOMOTIVE ONE PARTS STORES, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
<TABLE>
<CAPTION>
<S> <C> <C>
SECRETARY CORPORATE PRESIDENT
SEAL
</TABLE>
Countersigned and Registered:
American Stock Transfer &
Trust Company, Transfer Agent
and Registrar
By: ____________________________
Authorized Officer
<PAGE> 2
The following abbreviations, when used in the inscription on the fact of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <S>
TEN COM - as tenants in common UNIF GIFT MIN ACT- ______Custodian_______
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to Minors
JT TEN - as joint tenants Act________
with right of (State)
survivorship and not
as tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ________________________ hereby sell, assign and
transfer unto ________________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of Common Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint _____________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
<TABLE>
<S> <S>
Dated ________________________
_______________________________________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
</TABLE>
Signature(s) Guaranteed:
___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATION
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED MEDALLION SIGNATURE GUARANTEE
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad.16.
<PAGE> 1
EXHIBIT 4.3
NO. W__________ VOID AFTER 3:30 P.M. ________, 2003
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
AUTOMOTIVE ONE PARTS STORES, INC.
CUSIP 05329F 10 9
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and non-assessable share of Common Stock, $.01 par
value, of Automotive One Parts Stores, Inc., a Florida corporation (the
"Company"), at any time from _____, 1998 and prior to the Expiration Date (as
hereinafter defined) upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of American Stock Transfer & Trust Company, as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $7.20
per share, subject to adjustment (the "Purchase Price"), in lawful money of the
United States of America in cash or by check made payable to the Warrant Agent
for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated _________, 1998,
by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
<PAGE> 2
The term "Expiration Date" shall mean 3:30 P.M. (New York time) on
_______, 2003. If each such date shall in the State of New York be a holiday
or a day on which the banks are authorized to close, then the Expiration Date
shall mean 3:30 P.M. (New York time) the next following day which in the State
of New York is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has
covenanted and agreed that, if required by the Act, and unless during any
period it is not reasonably likely that the Warrants will be exercised, it will
file a registration statement under the act, use its best efforts to cause the
same to become effective, keep such registration statement current, if required
under the Act, while any of the Warrants are outstanding, and deliver a
prospectus which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this warrant. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident thereto, for
registration or transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant Represented hereby, the Registered
Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this warrant may be
redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time, provided that (i) the average closing bid price for the
Common Stock in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), or
(ii) the average closing sale price on the primary exchange on which the Common
Stock is traded, if the Common Stock is traded on a national securities
exchange, or (iii) the average closing sale price in the over-the-counter market
as furnished by The National Quotation Bureau, Inc., or NASD historical research
department, if the Common Stock is not listed or admitted for trading on any
national securities exchange, and is not reported by NASDAQ, shall have for
ten (10) consecutive trading days ending on the third day prior to the Notice of
Redemption, as defined below, exceeded $9.00 per share (subject to adjustment in
the event of any stock splits or other similar events). Notice of redemption
(the "Notice of Redemption") shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the
2
<PAGE> 3
date fixed for redemption, the Registered Holder shall have no rights with
respect to this Warrant except to receive the $.10 per Warrant upon surrender
of this Certificate.
Under certain circumstances, Nutmeg Securities, Ltd., its successors and
assigns shall be entitled to receive an aggregate of three percent (3%) of the
Purchase Price of the Warrants represented hereby.
Prior to due presentment for registration or transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to conflicts of
laws.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
AUTOMOTIVE ONE PARTS STORES, INC.
SEAL
By:______________________________
President
By:______________________________
Secretary
3
<PAGE> 4
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
______________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(please print or type name and address)
and be delivered to:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(please print or type name and address)
and if such Warrants shall not be all the Warrants evidenced by this Warrant
Certificate, that a new Warrant Certificate for the balance of such Warrants be
registered in the name of, and delivered to, the Registered Holder at the
address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
<TABLE>
<S> <C>
1. The exercise of this Warrant was
solicited by Nutmeg Securities, Ltd. [ ]
2. The exercise of this Warrant was
solicited by ______________________. [ ]
3. If the exercise of this Warrant was
not solicited, please check the
following box. [ ]
Dated: _____________________ X________________________________________________
_________________________________________________
_________________________________________________
Address
_________________________________________________
Social Security or Taxpayer Identification Number
_________________________________________________
_________________________________________________
Signature Guaranteed
_________________________________________________
</TABLE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, __________________________________________, hereby
sells, assigns, and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(please print or type name and address)
______________________of the Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and
appoints____________________________________________________, Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
<TABLE>
<S> <C>
Dated: ________________ X_______________________________________________
Signature Guaranteed
_______________________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUB-
SCRIPTION FORM MUST CORRESPOND TO THE NAME AS
WRITTEN UPON THE FACE OF THIS WARRANT CERTIFI-
CATE IN EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST
BE GUARANTEED BY A COMMERCIAL BANK OR TRUST
COMPANY OR A MEMBER FIRM OF THE AMERICAN STOCK
EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC
STOCK EXCHANGE, MIDWEST STOCK EXCHANGE OR
BOSTON STOCK EXCHANGE.
</TABLE>
<PAGE> 1
EXHIBIT 4.4
WARRANT AGREEMENT
This AGREEMENT, dated this __ day of ________, 1997 by and between
AUTOMOTIVE ONE PARTS STORES, INC., a Florida corporation (the "Company"), and
AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant
Agent").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of up to
1,200,000 shares of the Company's common stock, $.01 par value ("Common
Stock"), and 1,200,000 common stock redeemable warrants, entitling the holder
to purchase one share of Common Stock ("Redeemable Warrants") (collectively
referred to as the "Securities"), (ii) the over-allotment option to purchase up
to 180,000 shares of Common Stock and/or 180,000 Redeemable Warrants (the
"Over-allotment Option"), and (iii) the sale to Nutmeg Securities, Ltd., its
successors and assigns ("Nutmeg") of warrants (the "Underwriter's Warrants") to
purchase up to 120,000 shares of Common Stock and/or 120,000 Redeemable
Warrants, such Redeemable Warrants, except as otherwise set forth herein, being
identical to the Redeemable Warrants being sold to the public (the Redeemable
Warrants issuable upon the exercise of the Underwriter's Warrants are referred
to as the "Common Stock Warrants"), the Company will issue up to 1,380,000
Redeemable Warrants and may issue up to 120,000 Common Stock Warrants (subject
to increase as provided in the Underwriter's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Redeemable Warrants and the Common Stock Warrants
(collectively, the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the Underwriter,
the holders of certificates representing the Warrants and the Warrant Agent,
the parties hereto agree as follows:
<PAGE> 2
SECTION 1. DEFINITIONS. AS USED HEREIN, THE FOLLOWING TERMS SHALL HAVE THE
FOLLOWING MEANINGS, UNLESS THE CONTEXT SHALL OTHERWISE REQUIRE:
(a) "Common Stock" shall mean the common stock of the Company, par value
$.01 per share.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or its
successor) at which at any particular time its principal business shall be
administered, which office is located on the date hereof at 40 Wall Street, New
York, New York.
(c) "Exercise Date" shall mean, subject to the provisions of Section 5(b)
hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder hereof with such
Registered Holder's signature guaranteed, and (ii) payment in cash or by bank
or cashier's check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean the earlier of the date
upon which the Company gives a notice of redemption of the Redeemable Warrants
or, [__________, 1998] for the Redeemable Warrants and for the Common Stock
Warrants.
(e) "Initial Warrant Redemption Date" shall mean any time after the date
of this Agreement.
(f) "Purchase Price" shall mean, subject to modification and adjustment as
provided in Section 8, $7.20 per share of Common Stock.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Subsidiary" or "Subsidiaries" shall mean any corporation or
corporations, as the case may be, of which stock having ordinary power to elect
a majority of the Board of Directors of such corporation (regardless of whether
or not at the time stock of any other class or classes of such corporation
shall have or may have voting power by reason of the happening of any
contingency) is at the time directly or indirectly owned by the Company or by
one or more Subsidiaries, or by the Company and one or more Subsidiaries.
(i) "Transfer Agent" shall mean American Stock Transfer & Trust Company,
or its authorized successor.
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<PAGE> 3
(j) "Underwriting Agreement" shall mean the underwriting agreement dated
__________, 1997 between the Company and Nutmeg, relating to the purchase for
resale to the public of the Securities.
(k) "Underwriter's Warrant Agreement" shall mean the agreement dated as of
__________, 1997 between the Company and Nutmeg relating to and governing the
terms and provisions of the Underwriter's Warrants.
(l) "Warrant Certificate" shall mean a certificate representing each of
the Warrants substantially in the form annexed hereto as Exhibit A.
(m) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed
as provided in Section 9 hereof prior to such date, 3:30 p.m. (Eastern time) on
__________, 2003 for the Redeemable Warrants and for the Common Stock Warrants
or, if such date shall in the State of New York be a holiday or a day on which
banks are authorized to close, than 3:30 p.m. (Eastern time) on the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) One Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Purchase Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Common Stock upon the exercise thereof, subject to
modification and adjustment as provided in Section 8
(b) Upon execution of this Agreement, Warrant Certificates representing
1,200,000 Redeemable Warrants to purchase up to an aggregate of 1,200,000
shares of Common Stock (subject to modification and adjustment as provided in
Section 8) shall be executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Over-allotment Option, in whole or in part, and
payment of the applicable sums, Warrant Certificates representing up to 180,000
Redeemable Warrants to purchase up to an aggregate of 180,000 shares of Common
Stock (subject to modification and adjustment as provided in Section 8) shall
be executed by the Company and delivered to the Warrant Agent.
(d) Upon exercise of the Underwriter's Warrants as provided therein, and
payment of the applicable exercise price, Warrant Certificates representing
120,000 Common Stock Warrants to purchase up to an aggregate of 120,000 shares
of Common Stock and 120,000 Common Stock Warrants (subject to modification and
adjustment as provided in Section 8 hereof
3
<PAGE> 4
and in the Underwriter's Warrant Agreement), shall be executed by the
Company and delivered to the Warrant Agent.
(e) From time to time, up to the Warrant Expiration Date, as the case may
be, the Warrant Agent shall countersign and deliver Warrant Certificates in
required denominations of one or whole number multiplies thereof to the person
entitled thereto in connection with any transfer or exchange permitted under
this Agreement. Except as provided in Section 7 hereof, no Warrant
Certificates shall be issued except (i) Warrant Certificates initially issued
hereunder, (ii) Warrant Certificates issued upon any transfer or exchange of
Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued upon exercise of the Underwriter's Warrant Agreement
(including Common Stock Warrants in excess of 120,000 Underwriter's Warrants
issued as a result of the antidilution provisions contained in the
Underwriter's Warrant Agreement), and (v) at the option of the Company, Warrant
Certificates in such form as may be approved by its Board of Directors, to
reflect any adjustment or change in the Purchase Price, the number of shares of
Common Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 8 hereof.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated herein)
and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed
or engraved thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or
with any rule or regulation of any stock exchange on which the Warrants may be
listed, or to conform to usage. The Warrant Certificates shall be dated the
date of issuance thereof (whether upon initial issuance, transfer, exchange or
in lieu of mutilated, lost, stolen or destroyed Warrant Certificates).
(b) Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President and by its Treasurer or
an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual
signatures or by facsimile signatures printed thereon, and shall have imprinted
thereon a facsimile of the Company's seal. Warrant Certificates shall be
manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be such officer of
the Company before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
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<PAGE> 5
SECTION 4. EXERCISE.
(a) Warrants may be exercised commencing at any time on or after the
Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon
the terms and subject to the conditions set forth herein (including the
provisions set forth in Sections 5 and 9 hereof) and in the applicable Warrant
Certificate. A Warrant shall be deemed to have been exercised immediately
prior to the close of business on the Exercise Date, provided that the Warrant
Certificate representing such Warrant, with the exercise form thereon duly
executed by the Registered Holder thereof with such Registered Holder's
signature guaranteed, together with payment in cash or by bank or cashier's
check made payable to the order of the Company, of an amount in lawful money of
the United States of America equal to the applicable Purchase Price has been
received in good funds by the Warrant Agent. The person entitled to receive
the securities deliverable upon such exercise shall be treated for all purposes
as the holder of such securities as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date and in any event
within five business days after such date, upon due exercise of Warrants, the
Warrant Agent on behalf of the Company shall cause to be issued to the person
or persons entitled to receive the same a Common Stock certificate or
certificates for the shares of Common Stock deliverable upon such exercise, and
the Warrant Agent shall deliver the same to the person or persons entitled
thereto. Upon the exercise of any two or more even whole number multiples of
Warrants, the Warrant Agent shall promptly notify the Company in writing of
such fact and of the number of securities delivered upon such exercise and,
subject to subsection (b) below, shall cause all payments of an amount in cash
or by check made payable to the order of the Company, equal to the Purchase
Price, to be deposited promptly in the Company's bank account.
(b) At any time upon the exercise of Warrants after one year and one day
from the date hereof, (i) the market price of the Company's Common Stock is
equal to or greater than the Purchase Price, (ii) the exercise of the Warrant
is solicited by Nutmeg at such time while Nutmeg is a member of the National
Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held
in a discretionary account, (iv) disclosure of the compensation arrangement is
made in documents provided to the holders of the Warrants, and (v) the
solicitation of the Warrant is not in violation of Regulation M promulgated
under the Securities Exchange Act of 1934, then Nutmeg shall be entitled to
receive from the Company upon exercise of each of the Warrants so exercised, a
fee of three percent (3%) of the aggregate price of the Warrants so exercised
(the "Exercise Fee"). Within five (5) days after the end of each month,
commencing in _________ 1998, the Warrant Agent will notify Nutmeg of each
Warrant Certificate which has been properly completed for exercise by holders
of Warrants during the last month. The Warrant Agent will provide Nutmeg with
such information, in connection with the exercise of each Warrant, as Nutmeg
shall reasonably request. The Company hereby authorizes and instructs the
Warrant Agent to deliver to Nutmeg the Exercise Fee promptly after receipt by
the Warrant Agent from the Company of a check payable to the order of Nutmeg in
the amount of the Exercise Fee. In
5
<PAGE> 6
the event that an Exercise Fee is paid to Nutmeg with respect to a Warrant
which was not properly completed for exercise or in respect of which Nutmeg is
not entitled to an Exercise Fee, Nutmeg will return such Exercise Fee to the
Warrant Agent which shall forthwith return such fee to the Company. Nutmeg and
the Company may at any time after ____________, 1997, and during business
hours, examine the records of the Warrant Agent, including its ledger of
original Warrant Certificates returned to the Warrant Agent upon exercise of
Warrants. Notwithstanding any provision to the contrary, the provisions of
this Section 4(b) may not be modified, amended or deleted without the prior
consent of Nutmeg.
(c) The Company shall not be obligated to issue any fractional share
interests or fractional warrant interests upon the exercise of any Warrant or
Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. Any fractional interest shall be eliminated.
(d) Anything in this Section 4 notwithstanding, no Warrant will be
exercisable unless at the time of exercise the Company has filed with the
Securities and Exchange Commission a registration statement under the
Securities Act of 1933 covering the shares of Common Stock issuable upon
exercise of such Warrant and such shares have been so registered or qualified
or deemed to be exempt under the securities laws of the state of residence of
the holder of such Warrant.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of
issuance upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery thereof, be duly and
validly issued and fully paid and nonassessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issuance thereof,
and that upon issuance such shares shall be listed on each securities exchange,
if any, on which the other shares of outstanding Common Stock of the Company
are then listed.
(b) The Company covenants that, so long as any unexpired Warrants remain
outstanding, the Company will file such post-effective amendments to the
registration statement (Form SB-2, Registration No. 333-27227) (the
"Registration Statement") filed pursuant to the Securities Act of 1933 (the
"Act") with respect to the Warrants (or other appropriate registration
statements or post-effective amendment or supplements) as may be necessary to
permit it to deliver to each person exercising a Warrant, a prospectus meeting
the requirements of Section 10(a)(3) of the Act and otherwise complying
therewith, and will deliver such a prospectus to each such person. To the
extent that during any period it is not reasonably likely that the Warrants
will be exercised, due to market price or otherwise, the Company need not file
such a
6
<PAGE> 7
post-effective amendment or other registration statement or post-effective
amendments or supplements during such period. The Company will use its
reasonable efforts to obtain appropriate approvals or registrations under state
"blue sky" securities laws. With respect to any such securities, however,
Warrants may not be exercised by, or shares of Common Stock issued to, any
Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants or may be transferred in
whole or in part. Warrant Certificates to be so exchanged shall be surrendered
to the Warrant Agent at its Corporate Office, and the Company shall execute and
the Warrant's Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books in which, subject
to such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof. Upon due presentment for registration
of transfer of any Warrant Certificate at such office, the Company shall
execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for registration of
transfer, or for exchange or exercise, the subscription or exercise form, as
the case may be, on the reverse thereof shall be duly endorsed or be
accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof with such Registered Holder's
signature guaranteed.
7
<PAGE> 8
(d) A $10 service charge may be imposed for any exchange, registration or
transfer of Warrant Certificates. However, the Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(f) All Warrant Certificates surrendered for exercise or for exchange
shall be promptly canceled by the Warrant Agent.
(g) Prior to due presentment for registration or transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof of each Warrant represented
thereby (notwithstanding any notations of ownership or writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes and shall
not be affected by any notice to the contrary.
SECTION 7. LOSS OR MUTILATION.
(a) Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation)
upon surrender and cancellation thereof, the Company shall execute and the
Warrant Agent shall countersign and deliver in lieu thereof a new Warrant
Certificate representing an equal aggregate number of Warrants. Applicants for
a substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable fees as the Warrant Agent shall
establish.
SECTION 8. ADJUSTMENT OF EXERCISE PRICE.
(a) Except as hereinafter provided, in the event the Company shall, at any
time or from time to time after the date hereof, sell any shares of Common
Stock for a consideration per share less than the lower of (i) the average of
the closing bid prices of the Common Stock as reported on NASDAQ on the twenty
consecutive trading days ending three days prior to such sale (the "Market
Price"), or (ii) the Share Exercise Price then in effect, or issue any shares
of Common Stock as a stock dividend to the holders of Common Stock, or
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such sale, issuance, subdivision or combination
being herein called a "Change of Shares"), then, and thereafter immediately
before the date of the record date for each Change of Shares, the Share
Exercise Price for the Common Stock included in this Warrant (whether or not
the same shall be issued and outstanding) in effect immediately prior to such
Change of Shares shall be changed to a price (including any applicable fraction
of a cent to the nearest cent) determined by dividing (1) the product of (a)
the Share Exercise Price in effect immediately before such Change of Shares and
(b) the sum of (i) the total number of shares of Common Stock outstanding
immediately prior to such Change of Shares, and (ii) the number of shares
determined by dividing (A) the aggregate consideration, if any, received by the
Company upon such sale, issuance, subdivision
8
<PAGE> 9
or combination, by (B) the lesser of (x) the Market Price, and (y) the Share
Exercise Price, in effect immediately prior to such Change of Shares; by (2)
the total number of shares of Common Stock outstanding immediately after such
Change of Shares.
(b) For the purposes of any adjustment to be made in accordance with
Section 8(a) the following provisions shall be applicable:
(i) (A) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares of
Common Stock) for a consideration part or all of which shall be cash, the
amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price (before deducting
any commissions or any expenses incurred in connection therewith), if shares of
Common Stock are offered by the Company for subscription, or (ii) the public
offering price (before deducting therefrom any compensation paid or discount
allowed in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services, or any expenses incurred in
connection therewith), if such securities are sold to underwriters or dealers
for public offering without a subscription offering, or (iii) the gross amount
of cash actually received by the Company for such securities, in any other
case.
(B) In case of the issuance or sale (otherwise than as a dividend or other
distribution on any stock of the Company, and otherwise than on the exercise of
options, rights or warrants or the conversion or exchange of convertible or
exchangeable securities) of shares of Common Stock (or of other securities
deemed hereunder to involve the issuance or sale of shares of Common Stock) for
a consideration part or all of which shall be other than cash, the amount of
the consideration therefor other than cash deemed to have been received by the
Company shall be the value of such consideration as determined in good faith by
the Board of Directors of the Company.
(C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other than shares of
Common Stock into securities including shares of Common Stock shall be deemed
to involve the issuance of such shares of Common Stock for a consideration
other than cash immediately prior to the close of business on the date fixed
for the determination of security holders entitled to receive such shares, and
the value of the consideration allocable to such shares of Common Stock shall
be determined as provided in subsection (B) of this Section 8(a).
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<PAGE> 10
(E) The number of shares of Common Stock at any one time outstanding shall
be deemed to include the aggregate maximum number of shares issuable (subject
to readjustment upon the actual issuance thereof) upon the exercise of options,
rights or warrants and upon the conversion or exchange of convertible or
exchangeable securities.
(ii) Upon each adjustment of the Exercise Price pursuant to this Section
8, the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product so obtained
by the applicable adjusted Exercise Price.
(c) In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
a consideration per share (determined as provided in Section 8(a) and as
provided below) less than the lower of (i) the Market Price, or (ii) Share
Exercise Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, or without
consideration (including the issuance of any such securities by way of dividend
or other distribution), the Exercise Price for the Common Stock included in
this Underwriter's Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making the computation in
accordance with the provisions of Section 8(a) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as the case
may be, issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration
equal to the minimum Exercise Price per share provided for in such options,
rights or warrants at the time of issuance, plus the consideration, if any,
received by the Company for such options, rights or warrants; provided,
however, that upon the expiration or other termination of such options, rights
or warrants, if any thereof shall not have been exercised, the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(A) (and for the purposes of subsection (E) of Section 8(a) hereof) shall be
reduced by the number of shares as to which options, warrants and/or rights
shall have expired, and such number of shares shall no longer be deemed to be
issued and outstanding, and the Exercise Price then in effect shall forthwith
be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon the exercise of those options,
rights or warrants as to which the exercise rights shall not have expired or
terminated unexercised.
10
<PAGE> 11
(B) The aggregate maximum number of shares of Common Stock issuable or
that may become issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even if not
then currently convertible or exchangeable in full) shall be deemed to be
issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (B) (and for the purposes of subsection
(E) of Section 8(b) hereof) shall be reduced by the number of shares as to
which the conversion or exchange rights shall have expired or terminated
unexercised, and such number of shares shall no longer be deemed to be issued
and outstanding, and the Exercise Price then in effect shall forthwith be
readjusted and thereafter be the price that it would have been had adjustment
been made on the basis of the issuance only of the shares actually issued plus
the shares remaining issuable upon conversion or exchange of those convertible
or exchangeable securities as to which the conversion or exchange rights shall
not have expired or terminated unexercised.
(C) If any change shall occur in the exercise price per share provided for
in any of the options, rights or warrants referred to in subsection (A) of this
section 8(b), or in the price per share or ratio at which the securities
referred to in subsection (3) of this Section 8(b) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, to the extent not theretofore exercised, shall be
deemed to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities.
(d) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation and
which does not result in any reclassification or change of the then outstanding
shares of Common Stock or other capital stock issuable upon exercise of the
Warrants) or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, then,
as a condition of such reclassification, change, consolidation, merger, sale or
conveyance, the Company, or such successor or purchasing corporation, as the
case may be, shall make lawful and adequate provision whereby the Registered
Holder of each Public Warrant then outstanding shall have the right thereafter
to receive on exercise of such Public Warrant the kind and amount of securities
and property receivable upon such reclassification, change,
11
<PAGE> 12
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the Corporate Office of the Warrant Agent a statement signed
by its President or a Vice President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary evidencing such provision.
Such provisions shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
Section 8(a) and (b). The above provisions of this Section 8(c) shall
similarly apply to successive reclassifications and changes of shares of Common
Stock and to successive consolidations, mergers, sales or conveyances.
(e) Irrespective of any adjustments or changes in the Share Exercise Price
or the number of shares of Common Stock purchasable upon exercise of the Public
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to the terms hereof, continue to express the Share Exercise Price per
share and the number of shares purchasable thereunder as the Share Exercise
Price per share and the number of shares purchasable thereunder were expressed
in the Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Share Exercise Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Exercise Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at
his last address as it shall appear on the registry books of the Warrant Agent.
No failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity thereof except as to the holder to whom the
Company failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary
or an Assistant Secretary of the Company that such notice has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein.
(g) No adjustment of the Share Exercise Price or the number of shares
issuable shall be made as a result of or in connection with (A) the issuance or
sale of the Underwriter's Warrants or the Securities underlying the
Underwriter's Warrants, (B) the issuance or sale of the securities pursuant to
the Initial Public Offering, including the securities underlying the
Securities, (C) the issuance or sale of shares of Common Stock pursuant to
options, warrants, stock purchase agreements and convertible or exchangeable
securities outstanding or in effect on the date hereof, including options to be
granted under the Company's 1997 Employee Stock Option Plan or Common Stock
issuable on the exercise of such options, or (D) the issuance or sale of shares
of Common Stock if the amount of said adjustment shall be less than $.02 for
one share of Common Stock, provided, however, that in such case, any adjustment
that would
12
<PAGE> 13
otherwise be required then to be made shall be carried forward and shall be
made at the time of and together with the next subsequent adjustment that shall
amount, together with any adjustment so carried forward, to at least $.02 for
one share of Common Stock. In addition, Registered Holders shall not be
entitled to cash dividends paid by the Company prior to the exercise of any
Public Warrant or Public Warrants held by them.
SECTION 9. REDEMPTION.
(a) Commencing on the Initial Warrant Redemption Date, the Company may, on
30 days prior written notice redeem the Redeemable Warrants at $.10 per
Redeemable Warrant, in whole or in part, provided, however, that before any
such call for redemption of Warrants can take place, the (i) average closing
bid price for the Common Stock in the over-the-counter market as reported by
the NASD Automated Quotation System or (ii) the average closing sale price on
the primary exchange on which the Common Stock is traded, if the Common Stock
is traded on a national securities exchange, or (iii) average closing sale
price in the over-the-counter market as furnished by The National Quotation
Bureau, Inc., or NASD historical research department, if the Common Stock is
not listed or admitted for trading on any national securities exchange, and is
not reported by NASDAQ, shall have for ten (10) consecutive trading days ending
on the third day prior to the date of the notice of redemption exceeded $9.00
per share of Common Stock (subject to adjustment in the event of any stock
splits or other similar events as provided in Section 8 hereof).
(b) In the event the Company exercises its right to redeem the Redeemable
Warrants, it shall give or cause to be given notice to the Registered Holders
of the Redeemable Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, within 15 calendar days of the
aforementioned ten (10) consecutive trading days and not later than the
twenty-fifth (25th) day before the date fixed for redemption, at their last
address as shall appear on the records of the Warrant Agent. Any notice mailed
in the manner provided herein shall be conclusively presumed to have been duly
given whether or not the Registered Holder receives such notice. At the time
of the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to Nutmeg a
similar notice telephonically and confirmed in writing together with a list of
the Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or will
be given.
(c) The notice of redemption shall specify (i) the redemption price, (ii)
the date fixed for redemption, (iii) the place where the Warrant Certificate
shall be delivered and the redemption price shall be paid, and (iv) that the
right to exercise the Warrant shall terminate at 3:30 p.m. (New York time) on
the business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrants shall be the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom
13
<PAGE> 14
notice was not mailed or (b) whose notice was defective. An affidavit of the
Warrant Agent or the Secretary or Assistant Secretary of the Company that
notice of redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 3:30 p.m. (New York
time) on the business day immediately preceding the Redemption Date. The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
SECTION 10. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued
upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustment, or
with respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital or statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible
for any failure on the part of the Company to comply with any of its covenants
and obligations contained in this Agreement or in any Warrant Certificate, or
(iii) be liable for any act or omission in connection with this Agreement
except for its own gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board of Directors, Vice-Chairman or Secretary (unless
other evidence in respect thereof is herein specifically prescribed). The
Warrant Agent shall not be liable for any action taken, suffered or omitted by
it in accordance with such notice, statement, instruction, request, direction,
order or demand.
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<PAGE> 15
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; the Company further agrees to indemnify the Warrant Agent and save
it harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or willful misconduct), after
giving 30 days prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation the
Company shall appoint in writing a new warrant agent. If the Company shall
fail to make such appointment within a period of 30 days after it has been
notified in writing of such resignation by the resigning Warrant Agent, then
the Registered Holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court, shall be a
bank or trust company having a capital and surplus, as shown by its last
published report to its shareholders, of not less than $10,000,000 or a stock
transfer company doing business in New York, New York. After acceptance in
writing of such appointment by the new warrant agent is received by the
Company, such new warrant agent shall be vested with the same powers, rights,
duties and responsibilities as if it had been originally named herein as the
warrant agent, without any further assurance, conveyance, act or deed; but if
for any reason it shall be necessary or expedient to execute and deliver any
further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged, any corporation resulting from any consolidation to
which the Warrant Agent or any new warrant agent shall be a party, or any
corporation succeeding to the corporate trust business of the Warrant Agent or
any new warrant agent shall be a successor warrant agent under this Agreement
without any further act, provided that such corporation is eligible for
appointment as successor to the Warrant Agent under the provisions of the
preceding paragraph. Any such successor warrant agent shall promptly cause
notice of its succession as warrant agent to be mailed to the Company and to
the Registered Holders of each Warrant Certificate.
15
<PAGE> 16
(h) The Warrant Agent, its Subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from the date
of exercise any Warrant Certificate received by it upon such exercise, marked
to indicate its cancellation thereof in accordance with Section 6(e) hereof.
SECTION 11. MODIFICATION OF AGREEMENT.
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement without the approval of any holders of
Warrants (i) that they shall deem appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest mistake or error
herein contained; (ii) that they may deem necessary or desirable and which
shall not adversely affect the interests of the holders of Warrant
Certificates; or (iii) which may be required by law; provided, however, that
this Agreement shall not otherwise be modified, supplemented or altered in any
respect except with the consent in writing of the Registered Holders
representing not less than 50% of the Warrants then outstanding; provided,
further, that no change in the number of the securities purchasable upon the
exercise of any Warrant, or the Purchase Price therefor, shall be made without
the consent in writing of the Registered Holder of the Warrant Certificate,
other than such changes as are specifically permitted or prescribed by this
Agreement as originally executed. In addition, this Agreement may not be
modified, amended or supplemented without the prior written consent of Nutmeg,
other than (i) to cure any ambiguity or to correct any provision which is
inconsistent or which is a manifest mistake or error; (ii) to make any such
change that is necessary or desirable and which shall not adversely affect the
interests of Nutmeg; or (iii) except as may be required by law.
SECTION 12. NOTICES.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been made when delivered or five days
after mailed first-class postage prepaid, or upon receipt when sent by
facsimile, with confirmation received, if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company at 701 West Church Street,
Orlando, Florida 32802, Attention: President, or at such other address as may
have been furnished to the Warrant Agent in writing by the Company; and if to
the Warrant Agent, at its Corporate Office. Copies of any notice delivered
pursuant to this Agreement shall be delivered to Nutmeg at 495 Post Road East,
Westport, CT 06880, Attention: President, or at such other addresses as may
have been furnished to the Company and the Warrant Agent in writing.
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<PAGE> 17
SECTION 13. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Florida without giving effect to conflicts of laws.
SECTION 14. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from
time to time of Warrant Certificates or any of them. Except as hereinafter
stated, nothing in this Agreement is intended or shall be construed to confer
upon any other person any right, remedy or claim or to impose upon any other
person any duty, liability or obligation. Nutmeg is, and shall at all times
irrevocably be deemed to be, a third-party beneficiary of this Agreement, with
full power, authority and standing to enforce the rights granted to it
hereunder. In the event of any conflict relating to the Underwriter's Warrant
between the terms hereof and the terms of the Underwriter's Warrant Agreement,
the terms of the Underwriter's Warrant Agreement shall prevail.
SECTION 15. COUNTERPARTS.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
[SEAL]
<TABLE>
<S> <C>
AUTOMOTIVE ONE PARTS STORES, INC. AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ Robert H. Gentry, III By: _____________________
--------------------------
Name: Robert H. Gentry, III Name: _________________
Title: President Title: _________________
</TABLE>
Exhibit A
[FORM OF REDEEMABLE WARRANT CERTIFICATE]
18
<PAGE> 19
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
___________________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
______________________________________________
______________________________________________
______________________________________________
(please print or type name and address)
and be delivered to
______________________________________________
______________________________________________
______________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
<PAGE> 20
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by Nutmeg
Securities, Ltd.
2. The exercise of this Warrant was solicited
by __________________________________.
3. If the exercise of this Warrant was not
solicited, please check the following box.
<TABLE>
<S> <C>
Dated:_________________ X_____________________________
______________________________
______________________________
Address
______________________________
Social Security or Taxpayer
Identification Number
______________________________
Signature Guaranteed
______________________________
</TABLE>
<PAGE> 21
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________________, hereby sells, assigns
and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
______________________________________________
______________________________________________
______________________________________________
(please print or type name and address)
___________________________________________________ of the Warrants represented
by this Warrant Certificate, and hereby irrevocably constitutes and appoints
_____________________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated:_____________________ X_____________________________
Signature Guaranteed
______________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
MEDALLION GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF
THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE, WHO IS A MEMBER OF THE
MEDALLION PROGRAM.
<PAGE> 1
EXHIBIT 4.5
12-MONTH LOCK-UP AGREEMENT
NUTMEG SECURITIES, LTD
As Representative of the Several Underwriters
C/O NUTMEG SECURITIES, LTD.
495 Post Road East
Westport, Connecticut 06880
Ladies and Gentlemen:
The undersigned is a holder of securities of Automotive One Parts Stores,
Inc., a Florida corporation (the "Company"), and wishes to facilitate the
initial public offering of shares of the Company's Common Stock (the
"Offering"). The undersigned recognizes that such Offering, and the public
market for shares of the Company's common stock (the "Common Stock") created
thereby, will be of benefit to the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters and representatives ("Representatives") of the several
underwriters (collectively, the "Underwriters") in connection with the
Offering, the undersigned hereby agrees that he, she or it will not, directly
or indirectly, on behalf of the Underwriters, offer to sell, sell, contract to
sell, grant any option to purchase or otherwise dispose (or announce any offer,
offer of sale, contract of sale, grant of any option to purchase or other
disposition) of any shares of Common Stock (including, without limitation,
shares of Common Stock acquired or to be acquired by the undersigned in the
Offering as described in the Form SB-2 Registration Statement filed by the
Company with the Securities and Exchange Commission, File No. 333-27227, the
"Registration Statement"), options to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock of the
Company which he, she or it may own directly, indirectly or beneficially (as
defined by the Securities Exchange Act of 1934 and the rules and regulations
thereunder) for a period of twelve (12) months following the day on which the
registration Statement shall become effective by order of the Securities and
Exchange Commission; provided, however, that the foregoing restrictions shall
not apply to transfers by will and the laws of descent and distribution, bona
fide gifts or transfers to an affiliate of the undersigned so long as in each
case such transferee agrees in writing to be bound by the provisions of this
Agreement and such writing is delivered to the Company and the Representatives
prior to effecting such transfer. The undersigned further acknowledges and
consents to the entry by the Company of stop transfer instructions with the
Company's transfer agent restricting the transfer of shares of the Company's
Common Stock held by the undersigned, except for transfers in compliance with
the provisions hereof. The undersigned confirms that he, she or it understands
that the Underwriters and the Company will rely upon the representations set
forth in this Agreement in proceeding with the Offering.
Set forth below is the number of shares of Common Stock owned (including
shares of Common Stock acquired or to be acquired in the Offering), or that
could be acquired upon the exercise of any option or the conversion or exchange
of any security owned by the undersigned.
<PAGE> 1
EXHIBIT 5
December __, 1997
Automotive One Parts Stores, Inc.
701 West Church Street
Orlando, Florida 32802
Gentlemen:
You have requested our opinion in connection with the Registration
Statement on Form SB-2 (the "REGISTRATION STATEMENT") of Automotive One Parts
Stores, Inc. (the "COMPANY") relating to the following securities of the
Company (the "SECURITIES") to be issued pursuant to the Company's initial
public offering and pursuant to exercise of registered warrants as set forth
therein:
(a) 1,380,000 shares of Common Stock (including 85,522 shares from the
Company and 94,478 from the Selling Shareholders which the Underwriters have the
option to purchase to cover over-allotments) (the "COMMON STOCK");
(b) 1,380,000 redeemable Common Stock Purchase Warrants (including
180,000 warrants which the Underwriters have the option to purchase to
cover over-allotments) (the "WARRANTS"); and
(c) 1,380,000 shares of Common Stock issuable upon exercise of said
Warrants (including 180,000 over-allotment option) pursuant to the Warrant
Agreement between the Company and American Stock Transfer & Trust Company to be
executed in connection with the Company's initial offering (the "WARRANT
AGREEMENT").
We have made such examination of the corporate records and proceedings of
the Company and have taken such further action as we deemed necessary or
appropriate to the rendering of our opinion herein.
Based on the foregoing, we are of the opinion that the Common Stock and
Warrants, when issued as contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable. We are of the opinion that the
Common Stock underlying the Warrants, when paid for and issued as contemplated
by the Warrant Agreement, will be legally issued, fully paid and
non-assessable.
<PAGE> 2
Automotive One Parts Stores, Inc.
December __,1997
Page 2
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our firm under the heading "Legal Matters" therein.
Sincerely,
GREENBERG TRAURIG HOFFMAN LIPOFF
ROSEN & QUENTEL, P.A.
<PAGE> 1
EXHIBIT 10.4.3
THIRD AMENDMENT TO
LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT (the "THIRD AMENDMENT") made and
entered into as of the 22 day of December, 1997 by and between:
AUTOMOTIVE ONE PARTS STORES, INC., a Florida corporation, whose mailing
address is 701 West Church Street, Orlando, Florida 32801 (hereinafter
referred to "AUTOMOTIVE ONE")
and
A.P.S., INC., a Delaware corporation, and AUTOPARTS FINANCE COMPANY, INC.,
a Delaware corporation, each of whose mailing address is 15710 John F.
Kennedy Boulevard, Suite 700, Houston, Texas 77032 (hereinafter
respectively referred to as "APS and AFCO")
W I T N E S S E T H:
WHEREAS, on or about February 20, 1997, Automotive One, APS and AFCO
entered into a certain Loan Modification Agreement (the "INITIAL LOAN
AGREEMENT") dated February 20, 1997 pursuant to which APS and AFCO renewed,
reinstated and extended to Automotive One certain existing indebtedness
(collectively, the "INDEBTEDNESS") as described in the Initial Loan Agreement.
The Initial Loan Agreement, along with other Loan Documents (as defined in the
Initial Loan Agreement) were executed at that time to provide relief to
Automotive One through July 31, 1997 (the "MATURITY DATE") at its request and
as an alternative to APS and AFCO exercising one or more of its creditor rights
or remedies in connection with the Indebtedness; and
WHEREAS, on or about July 31, 1997, Automotive One, APS and AFCO entered
into that certain Second Amendment to Loan Agreement (the "SECOND AMENDMENT")
dated July 31, 1997 pursuant to which APS and AFCO, among other matters,
extended the Maturity Date of the Initial Loan Agreement from July 31, 1997 to
December 31, 1997 (the "FIRST EXTENDED MATURITY DATE"); and
WHEREAS, Automotive One for one or more reasons is not able to pay off the
Indebtedness by the First Extended Maturity Date and has requested additional
time in order to raise the necessary funds to pay off the Indebtedness in full.
Accordingly, Automotive One has requested APS and AFCO to extend the First
Extended Maturity Date of December 31, 1997 to February 28, 1998 (the "SECOND
EXTENDED MATURITY DATE"), APS and AFCO are prepared to agree to said request by
Automotive One pursuant to the terms and conditions of this Third Amendment.
<PAGE> 2
NOW, THEREFORE, for and in consideration of the above premises and the
mutual covenants and agreements contained herein, Automotive One, APS and AFCO
agree as follows:
1. DEFINITIONS. Unless defined or re-defined in this Third Amendment,
capitalized terms contained herein shall have the meanings defined and set forth
in the Initial Loan Agreement, as amended by the Second Amendment.
2. AMENDMENT OF EXISTING DEFINITIONS. The following definition set forth
in Section 1.01 of the initial Loan Agreement is hereby amended as follows:
(a) "MATURITY DATE" shall mean the earlier to occur of (i) the date
of receipt by Automotive One of the proceeds of a public offering of shares
of its common stock which are registered with the Securities Exchange
Commission or (ii) February 28, 1998.
3. AMENDMENTS TO INITIAL LOAN AGREEMENT. The Initial Loan Agreement is
hereby amended as follows:
(a) In regard to Section 2.1, the following sets forth as of the
dates set forth below the following amounts due on each Indebtedness
described below:
<TABLE>
<CAPTION>
Total
Accrued &
Accrued & Unpaid Unpaid
Principal Interest at Non- Interest at
Balance Default Rate Default Rate
------------- ----------------- -------------
<S> <C> <C> <C>
APS Indebtedness $2,434,995.73 $486,867.56 $460,278.91(1)
(as of 10/31/97)
AFCO Indebtedness $2,465,467.67 $383,918.04 $57,828.66(2)
(as of 10/31/97)
Open Account
Indebtedness
(i) Outstanding Past $586,892.53 N.A. See below.
Due Balance(3)
(ii) Delinquent past due $450,041.31 N.A. See below.
balance (i.e. the
"Delinquent
Amount") (as of
9/2/97)(4)
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
(iii) Outstanding $121,657.00 N/A $99,679.51
Current Balance (5)
------------- ------------ -------------
TOTALS $6,059,054.27 $70,785.60(4) $663,647.40(6)
</TABLE>
(1) This represents interest at the default rate calculated from the date of
maturity through October 31, 1997. This figure does not include accrued
interest at the contract rate prior to maturity.
(2) This represents default interest on past due principal balance amount of
loan balance without acceleration. If calculated on the accelerated balance
from date of initial default, interest amount would be substantially
greater.
(3) This represents the amount of the Open Account Indebtedness which was due
and owing as of January 25, 1997 less payments and credits which have been
applied to said Indebtedness from January 25, 1997 to October 31, 1997.
(4) This represents the amount which Automotive One owes to APS as of
September 2, 1997 for the purchase of product and which has not been paid
and is in default. Under Section 3.1 of the Initial Loan Agreement,
Automotive One was required on a weekly basis to pay to APS the amount due
for the immediately preceding weeks purchase of merchandise from APS. This
amount represents said purchases for which payment is past due as of
September 2, 1997 and has not been made and is inclusive of all credits
which may be charged against said amount. This amount referred to above as
the Delinquent Amount.
(5) This represents what is referred to as the current portion of the Open
Account Indebtedness and represents the amounts due for merchandise
purchases for the period beginning August 13, 1997. This amount must be
paid as set forth in Section 3.1 of the Initial Loan Agreement, i.e. on a
weekly basis.
(6) This does not include additional interest which is to be determined and is
to be added to these Totals as set forth in the above Table.
As set forth in Section 5 below, Automotive One reaffirms Section 2.3 of
the Initial Loan Agreement as to the foregoing amounts due and agrees that
said amounts are now absolutely and unconditionally due and owing to APS
and AFCO in accordance with the terms of the Loan Documents, as modified
hereby, and are not subject to any claim, counterclaim, or other rights of
off-set.
(b) In Section 2.4 of the Initial Loan Agreement, it sets forth in
subsection the date of June 25, 1997, which is an acknowledgement by all
parties that all Product Return Credits have been processed for returns
received from Automotive One on or prior to said date. The parties now
agrees that said date of "JUNE 25, 1997" is amended to read "NOVEMBER 30,
1997".
<PAGE> 4
(c) Section 2.4 of the Initial Loan Agreement also provides that
Automotive One is available to receive certain change over credits ("CHANGE
OVER CREDITS") in accordance with that certain letter dated February 25,
1997 from Mr. Michael I. Preston of APS to Mr. Bobby Gentry of Automotive
One. In regard to these Change Over Credits, provided Automotive One is not
in default, and otherwise fulfills all its duties and obligations under the
Loan Documents, as modified by the Initial Loan Agreement, as amended by
that certain Second Amendment, and as further amended by this Third
Amendment, APS agrees to extend to February 28, 1998 the time period within
which Automotive One may apply for Change Over Credits. If, however,
Automotive One defaults under the Loan Documents, as modified by the
Initial Loan Agreement, the Second Amendment and this Third Amendment (and
said default is not cured within any applicable grace or notice period),
then unless waived by APS, Automotive One shall not be entitled to receive
any further Change Over Credits including any Change Over Credits for which
Automotive One has by said date made application for but not yet received.
(d) Default interest shall remain subject to the provisions of Section
3.3. If the Indebtedness is paid by Automotive One in accordance with
Section 3.1, then APS and AFCO agree to waive any right to default
interest.
4. REAFFIRMATION OF REMEDIES. In connection hereto, Automotive One has
reviewed (with the advice of counsel) the provisions of Article IV of the
Initial Loan Agreement and fully understands the provisions of all of said
Sections. Based upon said review, Automotive One specifically and expressly
reaffirms and ratifies all of the provisions of said Article IV. APS and AFCO
have requested this specific paragraph, in addition to the provisions set forth
in paragraph 3(a) above, as APS and AFCO have agreed to the extensions requested
of Automotive One as set forth in this Third Amendment in express reliance upon
the provisions set forth in Article IV, and elsewhere in the Initial Loan
Agreement.
5. AMOUNTS OWING ON INDEBTEDNESS. Automotive One does hereby state and
agree with APS and AFCO that the amounts set forth in paragraph 3(a) of this
Third Amendment are absolutely and unconditionally due and owing to APS and AFCO
as of the date hereof or the date described above, as applicable, and that said
amounts are not subject to any claims, counterclaims, defenses or other right of
off-sets whatsoever, provided, however, Automotive One shall be entitled to
Product Return Credits and Change Over Credits as expressly permitted under the
terms of the Initial Loan Agreement and this Third Amendment. To the extent
Automotive One does have any claim, counterclaim, defense or other right of
off-set (again, other than for Product Return Credits and Change Over Credits),
Automotive One does hereby (after consultation with counsel) expressly and
unconditionally waive any such claim, counterclaim, defense or other right of
off-set not only against the Indebtedness set forth above, but as to any and all
other matters involving APS and AFCO. Automotive One understands and
acknowledges that, among other provisions of this Third Amendment, APS and AFCO
would not have agreed to the requested extensions by Automotive One if
Automotive One was unwilling to reaffirm the Indebtedness and provide for the
waivers as set forth in this paragraph.
6. LOAN AGREEMENT. From and after the date of this Third Amendment, the
term "LOAN AGREEMENT", shall mean the Initial Loan Agreement, as modified by the
Second Amendment, and as further modified by this Third Amendment. Further, to
the extent applicable, all Loan Documents shall
4
<PAGE> 5
be deemed hereof to be automatically amended so as to refer to and reflect the
transactions contemplated by the Initial Loan Agreement, the Second Amendment
and this Third Amendment. This Third Amendment shall be deemed to be a permitted
amendment to the Initial Loan Agreement and, accordingly, shall be deemed to be
a Loan Document.
7. Guarantors. By their individual execution of this Agreement, Mr. Robert
H. Gentry, III and Janice Sue Gentry, his wife, each a shareholder of Automotive
One, do hereby execute this Third Amendment for the following purposes:
(a) To acknowledge and agree that the obligations of APS and AFCO as
set forth herein are due and owing as set forth in this Third Amendment.
(b) To confirm and ratify each Loan Document.
(c) To confirm that the Guaranty is in full force and effect and is
not subject to any claim, counterclaim, defense, or other right of off-set.
<PAGE> 6
8. COSTS AND ATTORNEYS' FEES. In regard to the cost and attorneys' fees
incurred by APS and AFCO in connection with the matters contemplated by the
Initial Loan Agreement, the Second Amendment, as well as by this Third
Amendment, those costs and attorneys' fees will be added to the Indebtedness. As
such, the indebtedness does not include cost and attorneys' fees incurred by APS
and AFCO either in connection with the Initial Loan Agreement, the Second
Amendment or this Third Amendment, all of which will be added to the
Indebtedness.
9. RATIFICATION. Except as set forth in this Third Amendment, Automotive
One does hereby ratify and confirm the Initial Loan Agreement, and all other
Loan Documents.
IN WITNESS WHEREOF, each of the parties hereto has caused this Third
Amendment to be executed, sealed and delivered, as applicable, by their duly
authorized officers on the day and year first above written.
AUTOMOTIVE ONE PARTS STORES, INC.
By: /s/
------------------------------
Robert H. Gentry, III,
President
/s/
------------------------------
Robert H. Gentry, III,
individually, as a Guarantor
/s/
------------------------------
Janice Sue Gentry,
individually, as a Guarantor
A.P.S., INC.
By: /s/ E. Eugene Lauver
------------------------------
E. Eugene Lauver
Senior Vice President
5
<PAGE> 7
AUTOPARTS FINANCE COMPANY, INC.
By: /s/ E. Eugene Lauver
---------------------------
E. Eugene Lauver,
Senior Vice President
6
<PAGE> 1
Exhibit 10.8.2
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is made and entered into as of and
effective June 1, 1997 by and between AUTOMOTIVE ONE PARTS STORES, INC., a
Florida corporation (the "Company"), and PATRICK J. POWER (hereinafter called
the "Executive").
R E C I T A L S
- - - - - - - -
A. The Company believes that the attraction and retention of key employees
such as the Executive is essential to the Company's growth and success; and
B. The Company desires to employ Executive as its Vice President of
Corporate Development and Investor Relations, and Executive is willing and able
to render his services to the Company from and after the date hereof, on the
terms and conditions of this Employment Agreement; and
C. The Executive has extensive experience relating to the strategic
planning, corporate development and the development of appropriate investor
relations policies and procedures for publicly held corporations; and
D. The Executive is willing to make his services available to the Company
and on the terms and conditions hereinafter set forth; and
E. The Board has determined that this Agreement will encourage the
Executive's dedication to the Company, and is in the best interests of the
Company.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties agree as follows:
1. Employment.
----------
1.1 Employment. The Company hereby agrees to employ the Executive and the
Executive hereby agrees to serve the Company on the terms and conditions set
forth herein.
1.2 Duties of Executive. During the term of this Agreement, the Executive
shall serve as Vice President of Corporate Development and Investor Relations
of the Company, shall diligently perform all services as may be assigned to him
by the Board, and shall exercise such power and authority as may from time to
time be delegated to him by the Board. The Executive shall devote sufficient
time to perform his duties (it being understood and agreed that Executive's
responsibilities do not require his full time activity), and use his best
efforts to promote the interests of the Company.
<PAGE> 2
2. Term.
----
2.1 Term. The term of this Agreement, and the employment of the Executive
hereunder, shall be effective as of June 1, 1997 (the "Commencement Date") and
shall expire on May 31, 2000, unless sooner terminated in accordance with the
terms and conditions hereof (the "Term").
2.2 Expiration Date. The date on which the term of this Agreement shall
expire, is sometimes referred to in this Agreement as the Expiration Date.
3. Compensation.
------------
3.1 Base Salary. The Executive shall receive a base salary (the "Base
Salary") during each year of the Term, payable in installments consistent with
the Company's normal payroll schedule and subject to applicable withholding and
other taxes, in the amount of $35,000 per year.
3.2 Incentive Bonus. The Executive shall be eligible to receive an
incentive bonus based on his annual performance, as valued and determined by
and in the sole discretion of the Board of Directors.
4. Expense Reimbursement and Other Benefits.
----------------------------------------
4.1 Reimbursement of Expenses. During the term of Executive's employment
hereunder, upon the submission of proper substantiation by the Executive, and
subject to such rules and guidelines as the Company may from time to time
adopt, the Company shall reimburse the Executive for all reasonable expenses
actually paid or incurred by the Executive in the course of and pursuant to the
business of the Company. The Executive shall account to the Company in writing
for all expenses for which reimbursement is sought and shall supply to the
Company copies of all relevant invoices, receipts or other evidence reasonably
requested by the Company.
4.2 Compensation/Benefit Programs. During the term of this Agreement, the
Executive not be entitled to participate in all medical, dental,
hospitalization, accidental death and dismemberment, disability, travel and
life insurance plans, and any and all other plans as are presently and
hereinafter offered by the Company to its executives, including savings,
pension, profit-sharing and deferred compensation plans.
4.3 Working Facilities. Executive shall be provided with an office and
appropriate secretarial support adequate for the performance of his duties
hereunder when working in the Company's principal office, and shall be
reimbursed for all approved reasonable office expenses incurred outside of the
Company's principal office when working on Company business.
2
- -
<PAGE> 3
4.4 Stock Options. During the term of his employment, Employee will be
provided with 30,000 non-qualified stock options under the Company's stock
option plan.
4.5 Other Benefits. The Executive shall receive such additional benefits,
if any, as the Board of the Company shall from time to time determine.
5. Termination.
-----------
5.1 Termination for Cause. The Company shall at all times have the right,
upon written notice to the Executive, to terminate the Executive's employment
hereunder, for cause. For purposes of this Agreement, the term "cause" shall
mean (i) an action or omission of the Executive which constitutes a willful and
material breach of this Agreement which is not cured within fifteen (15) days
after receipt by the Executive of written notice of same, (ii) fraud,
embezzlement, misappropriation of funds or breach of trust in connection with
his services hereunder, (iii) conviction of any crime which involves dishonesty
or a breach of trust, (iv) gross negligence in connection with the performance
of the Executive's duties hereunder, or (v) the material and willful or knowing
failure or refusal (other than as a result of a disability) by the Executive to
perform his duties hereunder. Any termination for cause shall be made in
writing to the Executive, which notice shall set forth in detail all acts or
omissions upon which the Company is relying for such termination. The
Executive shall have the right to address the Board regarding the acts set
forth in the notice of termination. Upon any termination pursuant to this
Section 5.1, the Company shall pay to the Executive only his Base Salary to the
date of termination. The Company shall have no further liability hereunder
(other than for reimbursement for reasonable business expenses incurred prior
to the date of termination, subject, however, to the provisions of Section
4.1).
5.2 Disability. The Company shall at all times have the right, upon
written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall become entitled to benefits under the
Company's Long Term Disability Plan as then in effect, or, if the Executive
shall as the result of mental or physical incapacity, illness or disability,
become unable to perform his obligations hereunder for a period of 90 days in
any 12-month period. The Company shall have sole discretion based upon
competent medical advice to determine whether the Executive continues to be
disabled. Upon any termination pursuant to this Section 5.2, the Company shall
(i) pay to the Executive any unpaid Base Salary through the effective date of
termination specified in such notice, and (ii) pay to the Executive a severance
payment equal to 3 months of the Executive's Base Salary at the time of the
termination of the Executive's employment with the Company. The Company shall
have no further liability hereunder (other than for reimbursement for
reasonable business expenses incurred prior to the date of termination,
subject, however to the provisions of Section 4.1).
5.3 Death. In the event of the death of the Executive during the term of
his employment hereunder, the Company shall pay to the estate of the deceased
Executive any
3
- -
<PAGE> 4
unpaid Base Salary through the Executive's date of death. The Company shall
have no further liability hereunder (other than for (x) reimbursement for
reasonable business expenses incurred prior to the date of the Executive's
death, subject, however to the provisions of Section 4.1).
5.4 Termination Without Cause. At any time the Company shall have the
right to terminate the Executive's employment hereunder by written notice to
the Executive. Upon any termination pursuant to this Section 5.4 (that is not
a termination under any of Sections 5.1, 5.2, 5.3 or 5.5) the Company shall (i)
pay to the Executive any unpaid Base Salary through the effective date of
termination specified in such notice, and (ii) continue to pay the Executive's
Base Salary following the termination of the Executive's employment with the
Company for the Period (as hereinafter defined) in the manner and at such time
as the Base Salary otherwise would have been payable to the Executive. For the
purposes of this Section the "Period" shall be defined as the number of days
remaining under the Term of this Agreement. The Company shall have no further
liability hereunder (other than for reimbursement for reasonable business
expenses incurred prior to the date of termination, subject, however, to the
provisions of Section 4.1).
5.5 Resignation by Executive. The Executive shall at all times have the
right, upon sixty (60) days written notice to the Company, to terminate the
Executive's employment hereunder. Upon any termination pursuant to this
Section 5.5, the Company shall pay to the Executive any unpaid Base Salary
through the effective date of termination specified in such notice. The
Company shall have no further liability hereunder (other than for reimbursement
for reasonable business expenses incurred prior to the date of termination,
subject, however, to the provisions of Section 4.1).
5.6 Survival. The provisions of this Article 5 shall survive the
termination of this Agreement, as applicable.
6. Restrictive Covenants.
---------------------
6.1 Non-competition. At all times while the Executive is employed by the
Company and for a six (6) month period after the termination of the Executive's
employment with the Company for any reason, the Executive shall not, directly
or indirectly, engage in or have any interest in any sole proprietorship,
partnership, corporation or business or any other person or entity (whether as
an employee, officer, director, partner, agent, security holder, creditor,
consultant or otherwise) that directly or indirectly (or through any affiliated
entity) engages in competition with the Company located within a fifty (50)
mile radius of Company's current place of business or any subsequent location
Company may conduct business from where the Company markets and sells its
products or its services (for this purpose, any business that engages in the
retail or wholesale automotive parts and accessories business shall be deemed
to be in competition with the Company); provided that such provision shall not
apply to the Executive's ownership of Common Stock of the Company or the
acquisition by the Executive, solely as an investment, of securities of any
issuer that is registered under Section 12(b) or 12(g)
4
- -
<PAGE> 5
of the Securities Exchange Act of 1934, as amended, and that are listed or
admitted for trading on any United States national securities exchange or that
are quoted on the National Association of Securities Dealers Automated
Quotations System, or any similar system or automated dissemination of
quotations of securities prices in common use, so long as the Executive does
not control, acquire a controlling interest in or become a member of a group
which exercises direct or indirect control or, more than five percent of any
class of capital stock of such corporation. During the term of Executive's
employment relationship with Company, the geographical limitation of a fifty
(50) mile radius contained above shall not be applicable, and Executive shall
be prohibited from such ownership and/or activity regardless of the
geographical location of such other business.
6.2 Nondisclosure. The Executive shall not at any time, directly or
indirectly, divulge, communicate, use to the detriment of the Company or for
the benefit of any other person or persons, or misuse in any way, any
Confidential Information (as hereinafter defined) pertaining to the business of
the Company. Any Confidential Information or data now or hereafter acquired by
the Executive with respect to the business of the Company (which shall include,
but not be limited to, information concerning the Company's financial
condition, prospects, technology, customers, suppliers, sources of leads and
methods of doing business) shall be deemed a valuable, special and unique asset
of the Company that is received by the Executive in confidence and as a
fiduciary, and Executive shall remain a fiduciary to the Company with respect
to all of such information. For purposes of this Agreement, "Confidential
Information" means information disclosed to the Executive or known by the
Executive as a consequence of or through his employment by the Company
(including information conceived, originated, discovered or developed by the
Executive) prior to or after the date hereof, and not generally known, about
the Company or its business. Notwithstanding the foregoing, nothing herein
shall be deemed to restrict the Executive from disclosing Confidential
Information to the extent required by law.
6.3 Nonsolicitation of Employees and Customers. At all times while the
Executive is employed by the Company and for a six (6) month period after the
termination of the Executive's employment with the Company for any reason, for
the Executive shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) employ
or attempt to employ or enter into any contractual arrangement with any
employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of six
months, and/or (b) divert, attempt to divert, call on or solicit any of the
actual or targeted prospective customers of the Company on behalf of any person
or entity in connection with any business competitive with the business of the
Company, nor shall the Executive make known the names and addresses of such
clients or any information relating in any manner to the Company's trade or
business relationships with such customers, other than in connection with the
performance of Executive's duties under this Agreement.
5
- -
<PAGE> 6
6.4 Books and Records. All books, records, and accounts relating in any
manner to the customers or clients of the Company, whether prepared by the
Executive or otherwise coming into the Executive's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company on termination of the Executive's employment hereunder or on the
Company's request at any time.
6.5 Definition of Company. Solely for purposes of this Section 6, the
term "Company" also shall include any existing or future subsidiaries of the
Company that are operating during the time periods described herein and any
other entities that directly or indirectly, through one or more intermediaries,
control, are controlled by or are under common control with the Company during
the periods described herein.
6.6 Acknowledgment by Executive. The Executive acknowledges and confirms
that the length of the term of the provisions of this Section 6 and the
geographical restrictions contained in Section 6.1 are fair and reasonable and
not the result of overreaching, duress or coercion of any kind. The Executive
further acknowledges and confirms that his full, uninhibited and faithful
observance of each of the covenants contained in this Section 6 will not cause
him any undue hardship, financial or otherwise, and that enforcement of each of
the covenants contained herein will not impair his ability to obtain employment
commensurate with his abilities and on terms fully acceptable to him or
otherwise to obtain income required for the comfortable support of him and his
family and the satisfaction of the needs of his creditors. The Executive
acknowledges and confirms that his special knowledge of the business of the
Company is such as would cause the Company serious injury or loss if he were to
use such ability and knowledge to the benefit of a competitor or were to
compete with the Company in violation of the terms of this Section 6. The
Executive further acknowledges and confirms that the Confidential Information,
the substantial relationships with Company's specific prospective and existing
customers and suppliers: (i) are valuable, special, and a unique asset of
Company; (ii) have provided and will hereafter provide Company with a
substantial competitive advantage in the operation of its business; and (iii)
are a legitimate business interest of Company. Company and Executive also
agree that the existence of these legitimate business interests justifies the
need for the restrictive covenants set forth in this Section, and the
restrictive covenants are reasonably necessary to protect Company's legitimate
business interests.
6.7 Reformation by Court. In the event that a court of competent
jurisdiction shall determine that any provision of this Section 6 is invalid or
more restrictive than permitted under the governing law of such jurisdiction,
then only as to enforcement of this Section 6 within the jurisdiction of such
court, such provision shall be interpreted and enforced as if it provided for
the maximum restriction permitted under such governing law.
6.8 Extension of Time. If the Executive shall be in violation of any
provision of this Section 6, then each time limitation set forth in this
Section 6 shall be extended for a period of time equal to the period of time
during which such violation or violations occur. If the Company seeks
injunctive relief from such violation in any court, then the covenants set
forth in
6
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<PAGE> 7
this Section 6 shall be extended for a period of time equal to the pendency of
such proceeding including all appeals by the Executive.
6.9 Survival. The provisions of this Section 6 shall survive the
termination of this Agreement, as applicable.
7. Injunction and Remedies.
-----------------------
7.1 It is recognized and hereby acknowledged by the parties hereto that a
breach by the Executive of any of the covenants contained in Section 6 of this
Agreement will cause irreparable harm and damage to the Company, the monetary
amount of which may be virtually impossible to ascertain. As a result, the
Executive recognizes and hereby acknowledges that the Company shall be entitled
to an injunction from any court of competent jurisdiction enjoining and
restraining any violation of any or all of the covenants contained in Section 6
of this Agreement by the Executive or any of his affiliates, associates,
partners or agents, either directly or indirectly, and that such right to
injunction shall be cumulative and in addition to whatever other remedies the
Company may possess. In the event that the Company does apply for such an
injunction, Executive shall not raise as a defense thereto that the Company has
an adequate remedy at law. Executive hereby consents and agrees that temporary
and permanent injunctive relief may be granted in any proceedings which might
be brought to enforce any such terms, covenants, or provisions without the
necessity of proof of actual damages or posting of a bond.
7.2 Executive and Company hereby acknowledge and agree that, in the event
of any breach by Executive, directly or indirectly, of the foregoing
restrictive covenants, it will be difficult to ascertain the precise amount of
damages that may be suffered by Company by reason of such breach; and
accordingly, the parties hereby agree that, as liquidated damages (and not as a
penalty) in respect of any such breach, Executive shall be required to provide
an accounting of any and all benefits received by Executive as a result of such
breach, including, but not limited to, true and correct financial records, or
other data detailing the financial benefit Executive received or derived,
directly or indirectly, from any and all violative acts or activities, and
Executive thereafter shall be required to pay to Company, as damages, cash
amounts equal to any and all gross revenues received or derived by Executive,
directly or indirectly, from any and all violative acts or activities. The
parties hereby agree that the foregoing constitutes a fair and reasonable
estimate of the actual damages that might be suffered by reason of any breach
of Section 6 by Executive, and the parties hereby agree to such liquidated
damages in lieu of any and all other measures of damages that might be asserted
in respect of any subject breach.
8. Claims not a Defense. Executive expressly agrees that the existence of
any claims that he may have against the Company, whether or not arising from
this Agreement, shall not constitute a defense to the enforcement of the
covenants or provisions set forth in Sections 6 and 7.
7
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<PAGE> 8
9. Assignment. Neither party shall have the right to assign or delegate
his rights or obligations hereunder, or any portion thereof, to any other
person.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida. Each party hereto agrees to
submit to the personal jurisdiction and venue of the State and/or Federal
Courts located in Orange County, Florida, for resolution of all disputes
arising out of, in connection with, or by reason of the interpretation,
construction, and enforcement of this Agreement, and hereby waives the claim or
defense therein that such courts constitute an inconvenient forum.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between the Executive and the Company (or
any of its affiliates) with respect to such subject matter. This Agreement may
not be modified in any way unless by a written instrument signed by both the
Company and the Executive.
12. Notices: All notices required or permitted to be given hereunder
shall be in writing and shall be personally delivered by courier, sent by
registered or certified mail, return receipt requested or sent by confirmed
facsimile transmission addressed as set forth herein. Notices personally
delivered, sent by facsimile or sent by overnight courier shall be deemed given
on the date of delivery and notices mailed in accordance with the foregoing
shall be deemed given upon the earlier of receipt by the addressee, as
evidenced by the return receipt thereof, or three (3) days after deposit in the
U. S. mail. Notice shall be sent (i) if to the COMPANY, addressed to: 701
West Church Street, Orlando, Florida, 32805, Telecopier (407) 422-1041,
Attention: Chief Financial Officer, and (ii) if to the EXECUTIVE, to his
address as reflected on the payroll records of the Company, or to such other
address as either party hereto may from time to time give notice of to the
other.
13. Benefits; Binding Effect. This Agreement shall be for the benefit of
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether
by merger, consolidation, sale of stock, sale of assets or otherwise.
14. Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
8
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15. Waivers. The waiver by either party hereto of a breach or violation
of any term or provision of this Agreement shall not operate nor be construed
as a waiver of any subsequent breach or violation.
16. Damages. Nothing contained herein shall be construed to prevent the
Company or the Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any
term or provision of this Agreement. In the event that either party hereto
brings suit for the collection of any damages resulting from, or the injunction
of any action constituting, a breach of any of the terms or provisions of this
Agreement, then the party found to be at fault shall pay all reasonable court
costs and attorneys' fees of the other, including all costs of collection or
appeals.
17. Section 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.
18. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
COMPANY:
AUTOMOTIVE ONE PARTS STORES, INC.,
a Florida corporation
By: /s/
----------------------------
Name: Robert H. Gentry, III
Title: President
EXECUTIVE:
/s/
--------------------------------
Patrick J. Power
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<PAGE> 1
Exhibit 10.10
[LOGO]
LOAN AND SECURITY AGREEMENT
AUTOMOTIVE ONE PARTS STORES, INC.
701 WEST CHURCH STREET
ORLANDO, FLORIDA 32802
59-1867299
BORROWER FED ID TAX NO.
$4,000,000
CREDIT LIMIT
JANUARY ___, 1998
============================
CORPORATE FINANCE
============================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS.................................................... 1
1.1 Defined Terms................................... 1
1.2 Other Terms..................................... 6
2. LOANS; INTEREST RATE AND OTHER CHARGES......................... 6
2.1 Total Facility.................................. 6
2.2 Loans........................................... 6
2.3 Overlines; Overadvances......................... 6
2.4 [Intentionally Deleted]......................... 6
2.5 Loan Account.................................... 6
2.6 Interest; Fees.................................. 6
2.7 Default Interest Rate........................... 6
2.8 Examination Fee................................. 7
2.9 Excess Interest................................. 7
2.10 Principal Payments; Proceeds of Collateral..... 8
2.11 Application of Collateral...................... 9
2.12 Application of Payments........................ 9
2.13 Notification of Closing...................................... 9
3. SECURITY....................................................... 9
3.1 Security Interest in the Collateral............. 9
3.2 Perfection and Protection of Security Interest.. 10
3.3 Preservation of Collateral...................... 10
3.4 Insurance....................................... 10
3.5 Collateral Reporting; Inventory................ 10
3.6 Receivables..................................... 11
3.7 Equipment....................................... 11
3.8 Other Liens; No Disposition of Collateral..... 11
3.9 Collateral Security............................. 12
4. CONDITIONS OF CLOSING.......................................... 12
4.1 Initial Advance................................. 12
4.2 Subsequent Advances............................. 15
5. REPRESENTATIONS AND WARRANTIES................................. 15
Borrower represents and warrants that:.............. 15
5.1 Due Organization................................ 15
5.2 Other Names..................................... 16
5.3 Due Authorization............................... 16
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5.4 Binding Obligation.............................. 16
5.5 Intangible Property............................. 16
5.6 Capital......................................... 16
5.7 Material Litigation............................. 16
5.8 Title; Security Interests of FINOVA............. 16
5.9 Restrictive Agreements; Labor Contracts......... 16
5.10 Laws........................................... 16
5.11 Consents....................................... 16
5.12 Defaults....................................... 16
5.13 Financial Condition............................ 17
5.14 ERISA.......................................... 17
5.15 Taxes.......................................... 17
5.16 Locations; Federal Tax ID No................... 17
5.17 Business Relationships......................... 17
5.18 Reaffirmations................................. 17
6. COVENANTS...................................................... 17
6.1 Affirmative Covenants........................... 17
6.1.1 Taxes......................................... 17
6.1.2 Notice of Litigation.......................... 17
6.1.3 ERISA......................................... 17
6.1.4 Change in Location............................ 18
6.1.5 Corporate Existence........................... 18
6.1.6 Labor Disputes................................ 18
6.1.7 Violations of Law............................. 18
6.1.8 Defaults...................................... 18
6.1.9 Capital Expenditures.......................... 18
6.1.10 Books and Records............................ 18
6.1.11 Leases; Warehouse Agreements................. 18
6.1.12 Additional Documents......................... 18
6.1.13 Financial Covenants.......................... 18
6.2 Negative Covenants.............................. 18
6.2.1 Mergers....................................... 18
6.2.2 Loans......................................... 18
6.2.3 Dividends..................................... 19
6.2.4 Adverse Transactions.......................... 19
6.2.5 Indebtedness of Others........................ 19
6.2.6 Repurchase.................................... 19
6.2.7 Name.......................................... 19
6.2.8 Prepayment.................................... 19
6.2.9 Capital Expenditure........................... 19
6.2.10 Compensation................................. 19
6.2.11 Indebtedness................................. 19
6.2.12 Affiliate Transactions....................... 19
6.2.13 Nature of Business........................... 19
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6.2.14 FINOVA's Name................................. 19
6.2.15 Margin Security.............................. 19
6.2.16 Real Property................................ 20
6.2.17 A.P.S. Supply Agreement...................... 20
7. DEFAULT AND REMEDIES............................................ 20
7.1 Events of Default..................................... 20
7.2 Remedies.............................................. 21
7.3 Standards for Determining Commercial Reasonableness... 22
8. EXPENSES AND INDEMNITIES........................................ 22
8.1 Expenses.............................................. 22
8.2 Environmental Matters................................ 22
9. MISCELLANEOUS................................................... 22
9.1 Examination of Records; Financial Reporting......... 22
9.2 Term; Termination..................................... 23
9.3 Recourse to Security; Certain Waivers................. 23
9.4 No Waiver by FINOVA................................... 23
9.5 Binding on Successor and Assigns...................... 24
9.6 Severability.......................................... 24
9.7 Amendments; Assignments............................... 24
9.8 Integration........................................... 24
9.9 Survival.............................................. 24
9.10 Evidence of Obligations.............................. 24
9.11 Loan Requests........................................ 24
9.12 Notices.............................................. 24
9.13 Brokerage Fees....................................... 24
9.14 Disclosure........................................... 24
9.15 Publicity............................................ 25
9.16 Captions............................................. 25
9.17 Injunctive Relief.................................... 25
9.18 Counterparts; Facsimile Execution.................... 25
9.19 Construction......................................... 25
9.20 Time of Essence...................................... 25
9.21 Limitation of Actions................................ 25
9.22 Liability............................................ 25
9.23 Notice of Breach by FINOVA........................... 25
9.24 Application of Insurance Proceeds.................... 26
9.25 Power of Attorney................................... 26
9.26 Governing Law; Waivers............................... 26
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL................. 26
</TABLE>
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THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to Loan
Agreement (the "SCHEDULE") attached hereto, the "AGREEMENT") dated the date set
forth on the cover page, is entered into by and between the borrower named on
the cover page (jointly and severally, the "Borrower"), whose address is set
forth on the cover page and FINOVA CAPITAL CORPORATION ("FINOVA"), whose
address is 355 South Grand Avenue, Los Angeles, California 90071.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
the definitions set forth below:
"ADA" has the meaning set forth in Section 4.1(z) hereof.
"Additional Sums" has the meaning set forth in Section 2.9(a) hereof.
"Affiliate" means any Person controlling, controlled by or under common
control with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction
of the management and policies of any Person, whether through ownership of
common or preferred stock or other equity interests, by contract or otherwise.
Without limiting the generality of the foregoing, each of the following shall
be an Affiliate: any officer, director, employee or other agent of Borrower,
any shareholder, member or subsidiary of Borrower, and any other Person with
whom or which Borrower has common shareholders, officers or directors.
"Agreement" has the meaning set forth in the preamble.
"Applicable Usury Law" has the meaning set forth in Section 2.9(b) hereof.
"Assignment of Life Insurance" has the meaning set forth in Section 4.1(u)
hereof.
"Blocked Account" has the meaning set forth in Section 2.10(c) hereof.
"Business Day" means any day on which commercial banks in both Los
Angeles, California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities
incurred for the acquisition of any fixed asset or improvement, replacement,
substitution or addition thereto which has a useful life of more than one year
and including, without limitation, those arising in connection with Capital
Leases.
"Capital Lease" means any lease of property by Borrower that, in
accordance with GAAP, should be capitalized for financial reporting purposes
and reflected as a liability on the balance sheet of Borrower.
"Change of Control" means any of the following: (i) the sale, lease,
transfer, conveyance or other disposition of, in one or a series of related
transactions, of all or substantially all of the assets of Borrower to any
person (as such term is used in Section 13(d)(3) of the Securities Exchange Act
of 1940) (each an "Acquiring Person"), (ii) the adoption of a plan relating to
the liquidation or dissolution of Borrower, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" becomes the "beneficial owner" (as each
such term is defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange
Act of 1940), directly or indirectly, of more than 25.0% of the voting Stock of
Borrower, other than Robert H. Gentry III, or (iv) during any period of twelve
consecutive calendar months, individuals who at the beginning of such period
constituted the board of directors of Borrower (together with any new directors
whose election by the board of directors of Borrower or whose nomination for
election by the stockholders of Borrower was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason other than death or disability to
constitute a majority of the directors then in office.
"Closing Fee" has the meaning set forth in the Schedule.
"Closing Date" means the date of the initial advance made by FINOVA
pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
"Collateral Monitoring Fee" has the meaning set forth in the Schedule.
"Current Assets" at any date means the amount at which the current assets
of Borrower would be shown on a balance sheet of Borrower as at such date,
prepared in accordance with GAAP, provided that amounts due from Affiliates and
investments in Affiliates shall be excluded therefrom.
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"Current Liabilities" at any date means the amount at which the current
liabilities of Borrower would be shown on a balance sheet of Borrower as at
such date, prepared in accordance with GAAP.
"Deposit Accounts" has the meaning set forth in Section 9105 of the Code.
"Dominion Account" has the meaning set forth in Section 2.10(c) hereof.
"Earnings Before Interest, Taxes, Depreciation and Amortization" for any
fiscal period of Borrower means the net income of Borrower for such fiscal
period, plus interest expense, depreciation and amortization and provision for
income taxes for such fiscal period, and minus non-recurring miscellaneous
income and expenses, all calculated in accordance with GAAP.
"Eligible Inventory" means Inventory which FINOVA, in its Permitted
Discretion, deems Eligible Inventory, based on such considerations as FINOVA
may from time to time deem appropriate. Without limiting the generality of the
foregoing, no Inventory shall be Eligible Inventory unless, in FINOVA's
Permitted Discretion, such Inventory (i) consists of raw materials and finished
goods, in good, new and salable condition which are not obsolete, defective, or
otherwise unmerchantable; (ii) are not comprised of work in process, packaging
materials, supplies, returned cores or items for which, in FINOVA's discretion,
a supply in excess of that which is expected to be sold within a two-year
period in the ordinary course of Borrower's business exists, but only to the
extent of such excess; (iii) meets all standards imposed by any governmental
agency or authority; (iv) conforms in all respects to the warranties and
representations set forth herein; (v) is at all times subject to FINOVA's duly
perfected, first priority security interest; and (vi) is situated at a location
in compliance with Section 5.16 hereof.
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
FINOVA, in its Permitted Discretion, shall deem eligible based on such
considerations as FINOVA may from time to time deem appropriate. Without
limiting the foregoing, a Receivable shall not be deemed to be an Eligible
Receivable if (i) the account debtor has failed to pay the Receivable within a
period of the earlier to occur of ninety (90) days after invoice date and sixty
(60) days past the stated due date, in either case to the extent of any amount
remaining unpaid after such period; (ii) the account debtor has failed to pay
more than 25% of all outstanding Receivables owed by it to Borrower within
ninety (90) days after invoice date; (iii) the account debtor is an Affiliate
of Borrower; (iv) the goods relating thereto are placed on consignment,
guaranteed sale, "bill and hold," "COD" or other terms pursuant to which
payment by the account debtor may be conditional; (v) the account debtor is not
located in the United States, unless the Receivable is supported by a letter of
credit or other form of guaranty or security, in each case in form and
substance satisfactory to FINOVA; (vi) the account debtor is the United States
or any department, agency or instrumentality thereof or any State, city or
municipality of the United States; (vii) Borrower is or may become liable to
the account debtor for goods sold or services rendered by the account debtor to
Borrower; (viii) the account debtor's total obligations to Borrower exceed 15%
of all Eligible Receivables, to the extent of such excess; (ix) the account
debtor disputes liability or makes any claim with respect thereto (up to the
amount of such liability or claim), or is subject to any insolvency or
bankruptcy proceeding, or becomes insolvent, fails or goes out of a material
portion of its business; (x) the amount thereof consists of late charges or
finance charges; (xi) the amount thereof consists of a credit balance more than
sixty (60) days past due; (xii) the face amount thereof exceeds $3,000, unless
accompanied by evidence of shipment of the goods relating thereto satisfactory
to FINOVA in its Permitted Discretion; (xiii) the invoice constitutes a
progress billing on a project not yet completed, except that the final billing
at such time as the matter has been completed and delivered to the customer may
be deemed an Eligible Receivable; or (xiv) the amount thereof is not yet
represented by an invoice or bill issued in the name of the applicable account
debtor.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrower is a member and which is treated as a
single employer under ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
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"Examination Fee" has the meaning set forth in the Schedule.
"Excess Availability" means, as of the date of determination thereof, the
amount by which the average daily total principal balance of the Revolving
Credit Loans facility which Borrower would be permitted to have outstanding
over the prior 30 days, based on the formulas and reserves set forth in the
Schedule, exceeds the sum of the Receivable Loans and the Inventory Loans then
actually outstanding, such excess then being reduced by an amount necessary to
provide for the payment of all accounts payable of Borrower which are more than
30 days past due date and all book overdrafts.
"FINOVA Affiliate" has the meaning set forth in Section 9.22 hereof.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time as set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on
the basis of such principles in effect on the date hereof and consistent with
those used in the preparation of the audited financial statements delivered to
Lender prior to the date hereof.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks, Licenses and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower to secure
payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Guarantor(s)" shall mean any Person which at any time guaranties all or
any portion of the Obligations owing to FINOVA under the Loan Documents.
"Indebtedness" means all of Borrower's present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and
(v) deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"Insurance Collateral" has the meaning set forth in Section 4.1(u) hereof.
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be
furnished under any contract of service or held for sale or lease, all raw
materials, work in process, finished goods and materials and supplies of any
kind, nature or description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all documents of title or other documents representing
them.
"Inventory Loans" has the meaning set forth in the Schedule.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Life Insurance Policy" has the meaning set forth in Section 4.1(u)
hereof.
"Loans" has the meaning set forth in Section 2.2 hereof.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this
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Agreement, together with all alterations, amendments, changes, extensions,
modifications, refinancings, refundings, renewals, replacements, restatements,
or supplements, of or to any of the foregoing.
"Loan Party" means Borrower, each Guarantor, each Subordinating Creditor
and each other party (other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, such amounts as
FINOVA may from time to time establish and revise in good faith reducing the
amount of Revolving Credit Loans which would otherwise be available to Borrower
under the lending formula(s) provided in the Schedule: (a) to reflect events,
conditions, contingencies or risks which, as determined by FINOVA in good
faith, do or may affect either (i) the Collateral or any other property which
is security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and
other rights of FINOVA in the Collateral (including the enforceability,
perfection and priority thereof) or (b) to reflect FINOVA's good faith belief
that any collateral report or financial information furnished by or on behalf
of Borrower or any Guarantor to FINOVA is or may have been incomplete,
inaccurate or misleading in any material respect or (c) in respect of any state
of facts which FINOVA determines in good faith constitutes an Event of Default
or may, with notice or passage of time or both, constitute an Event of
Default."
"Loan Year" means each twelve month period commencing on the Closing Date.
"Maximum Interest Rate" has the meaning set forth in Section 2.9(c)
hereof.
"Minimum Interest Charge" has the meaning set forth in the Schedule.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Net Sale Proceeds" has the meaning set forth in Section 3.8 hereof.
"Obligations" means all present and future loans, advances, debts,
liabilities, obligations, covenants, duties and indebtedness at any time owing
by Borrower to FINOVA, whether evidenced by this Agreement, any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by FINOVA in Borrower's debts
owing to others), absolute or contingent, due or to become due, including,
without limitation, all interest, charges, expenses, fees, attorney's fees,
expert witness fees, Examination Fee, Collateral Monitoring Fee, Closing Fee,
Facility Fee, Termination Fee, Minimum Interest Charge and any other sums
chargeable to Borrower hereunder or under any other agreement with FINOVA.
"Operating Cash Flow/Actual" means, for any period, Borrower's net income
or loss (excluding the effect of any extraordinary gains or losses), determined
in accordance with GAAP, plus or minus each of the following items, to the
extent deducted from or added to the revenues of Borrower in the calculation of
net income or loss: (i) depreciation; (ii) amortization and other non-cash
charges; (iii) interest expense paid or accrued; and (iv) total federal and
state income tax expense determined as the accrued liability of Borrower in
respect of such period, regardless of what portion of such expense has actually
been paid by Borrower during such period, and after deduction for each of (a)
federal and state income taxes, to the extent actually paid during such period;
(b) any non-cash income; and (c) all actual Capital Expenditures made during
such period and not financed.
"Overadvance" has the meaning set forth in Section 2.3.
"Overline" has the meaning set forth in Section 2.3.
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Discretion" means FINOVA's judgment exercised in good faith
based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could adversely affect the value of any Collateral, the
enforceability or priority of FINOVA's liens thereon or the amount which FINOVA
would be likely to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii) suggests that
any collateral report or financial information delivered to FINOVA by any
Person on behalf of the Borrower is incomplete, inaccurate or misleading in any
material respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the Borrower, any Loan
Party or any of the Collateral, or (iv) creates or reasonably could be expected
to create an Event of Default. In exercising such judgment, FINOVA may
consider such factors already included in or tested by the definition of
Eligible Receivables or Eligible Inventory, as well as any of the following:
(i) the financial and business climate of the Borrower's industry and general
macroeconomic conditions, (ii) changes in
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collection history and dilution with respect to the Receivables, (iii) changes
in demand for, and pricing of, Inventory, (iv) changes in any concentration of
risk with respect to Receivables and/or Inventory, and (v) any other factors
that change the credit risk of lending to the Borrower on the security of the
Receivables and Inventory. The burden of establishing lack of good faith
hereunder shall be on the Borrower.
"Permitted Encumbrance" means each of the liens, mortgages and other
security interests set forth on the Schedule.
"Permitted Senior Indebtedness" has the meaning set forth in the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the date
set forth in the Schedule in the section entitled 'Reporting Requirements' ,
and as of each subsequent date on which audited balance sheets are delivered to
FINOVA from time to time hereunder, and the related statements of operations,
changes in stockholder's equity and changes in cash flow for the periods ended
on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
"Prohibited Transaction" means any transaction described in Section 406 of
ERISA which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Receivable Loans" has the meaning set forth on the Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), proceeds of any letters of
credit naming Borrower as beneficiary, contract rights, chattel paper,
instruments, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Registration Statement" means Borrower's Form SB-2 Registration Statement
filed with the Securities and Exchange Commission in connection with the
planned initial public offering of its common stock and certain warrants
together with all amendments thereto filed prior to the Closing Date.
"Reportable Event" means a reportable event described in Section 4043 of
ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section
4068(f) of ERISA.
"Revolving Credit Loans" has the meaning set forth in the Schedule.
"Revolving Credit Limit" has the meaning set forth in the Schedule.
"Revolving Interest Rate" has the meaning set forth in the Schedule.
"Schedule" has the meaning set forth in the preamble.
"Senior Contractual Debt Service" means, for any period, the sum of
payments made or required to be made by Borrower during such period for (i)
interest only payments due on the Revolving Credit Loans facility plus the
Collateral Monitoring Fee and the Unused Line Fee, and (ii) principal and
interest payments due on the Permitted Senior Indebtedness.
"Start Date" has the meaning set forth in the Schedule.
"Subordinated Debt" means liabilities of Borrower the repayment of which
is subordinated, to the payment and performance of the Obligations, pursuant to
a subordination agreement acceptable to FINOVA in its sole discretion.
"Subordinating Creditor" has the meaning set forth in the Schedule.
"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
"Total Contractual Debt Service" means, for any period, the sum of
payments made (or, as to clause (i) of this sentence, required to be made) by
Borrower during such period for (i) Senior Contractual Debt Service, and (ii)
interest and scheduled principal payments due on any and all other Indebtedness
of Borrower, including without limitation any Subordinated Indebtedness.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
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"Trademarks, Copyrights, Licenses and Patents" means all of Borrower's
right, title and interest in and to, whether now owned or hereafter acquired:
(i) trademarks, trademark registrations, trade names, trade name registrations,
and trademark or trade name applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, and (e) the goodwill of the business operated by Borrower connected with
and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto throughout the
world; (iii) license agreements, including without limitation such as are
listed on the Schedule attached hereto and made a part hereof, and the right to
prepare for sale, sell and advertise for sale any Inventory now or hereafter
owned by Borrower and now or hereafter covered by such licenses; and (iv)
patents and patent applications, registered or pending, including without
limitation such as are listed on the Schedule attached hereto, together with
all income, royalties, shop rights, damages and payments thereto, the right to
sue for infringements thereof, and all rights thereto throughout the world and
all reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof.
"Unused Line Fee" has the meaning set forth in the Schedule.
1.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, FINOVA shall, upon Borrower's request, make
advances to Borrower from time to time in an aggregate outstanding principal
amount not to exceed the Total Facility amount (the "TOTAL FACILITY") set forth
on the Schedule hereto, subject to deduction of reserves for accrued interest
and such other reserves as FINOVA deems proper from time to time, and less
amounts FINOVA may be obligated to pay in the future on behalf of Borrower.
The Schedule is an integral part of this Agreement and all references to
"herein", "herewith" and words of similar import shall for all purposes be
deemed to include the Schedule.
2.2 Loans. Advances under the Total Facility ("LOANS" and individually, a
"LOAN") shall be comprised of the amounts shown on the Schedule.
2.3 Overlines; Overadvances. If at any time or for any reason the
outstanding amount of advances extended or issued pursuant hereto exceeds any
of the dollar limitations ("OVERLINE") or percentage limitations
("OVERADVANCE") in the Schedule, then Borrower shall, upon FINOVA's demand,
immediately pay to FINOVA, in cash, the full amount of such Overline or
Overadvance which, at FINOVA's option, may be applied to reduce the outstanding
principal balance of the Loans. Without limiting Borrower's obligation to
repay to FINOVA on demand the amount of any Overline or Overadvance, Borrower
agrees to pay FINOVA interest on the outstanding principal amount of any
Overline or Overadvance, on demand, at the rate set forth on the Schedule and
applicable to the Revolving Credit Loans.
2.4 [Intentionally Deleted].
2.5 Loan Account. All advances made hereunder shall be added to and
deemed part of the Obligations when made. FINOVA may from time to time charge
all Obligations of Borrower to Borrower's loan account with FINOVA.
2.6 Interest; Fees. Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations at the per annum rate set forth on the
Schedule. Borrower shall also pay FINOVA the fees set forth on the Schedule.
2.7 Default Interest Rate. Upon the occurrence and during the continuation
of an Event of Default, Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations at a rate per annum which is four
percent (4%) in excess of the rate which would otherwise be applicable thereto
pursuant to the Schedule.
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2.8 Examination Fee. Borrower agrees to pay to FINOVA the Examination Fee
in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
The parties hereto acknowledge and agree that the initial Examination Fee
described on the Schedule for the audit and examination performed prior to
closing has been fully earned by FINOVA and has been paid in full from the
deposit previously provided to FINOVA by Borrower.
2.9 Excess Interest.
(a) The contracted for rate of interest of the loan contemplated hereby,
without limitation, shall consist of the following: (i) the interest rate set
forth on the Schedule, calculated and applied to the principal balance of the
Obligations in accordance with the provisions of this Agreement; (ii) interest
after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective
contracted for rate of interest which is the sum of the above-referenced
elements. The Examination Fee, attorneys fees, expert witness fees, letter of
credit fees, collateral monitoring fees, closing fees, facility fees,
Termination Fees, Minimum Interest Charges, other charges, goods, things in
action or any other sums or things of value paid or payable by Borrower
(collectively, the "ADDITIONAL SUMS"), whether pursuant to this Agreement or
any other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction,
shall be payable by Borrower as, and shall be deemed to be, additional interest
and for such purposes only, the agreed upon and "contracted for rate of
interest" of this lending transaction shall be deemed to be increased by the
rate of interest resulting from the inclusion of the Additional Sums.
(b) It is the intent of the parties to comply with the usury laws of the
State of Arizona (the "APPLICABLE USURY LAW"). Accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Agreement, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "MAXIMUM INTEREST RATE"). In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, or (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other Person now or hereafter liable
for the payment of the Obligations shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Maximum Interest Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount of the Obligations or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall
be automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made
for the purpose of determining whether such rate would exceed the Maximum
Interest Rate shall be made by amortizing, prorating, allocating and spreading
during the period of the full stated term of the loan evidenced hereby, all
interest at any time contracted for, charged or received from Borrower or
otherwise in connection with such loan; and (y) in the event that the effective
rate of interest on the loan should at any time exceed the Maximum Interest
Rate, such excess interest that would otherwise have been collected had there
been no ceiling imposed by the Applicable Usury Law shall be paid to FINOVA
from time to time, if and when the effective interest rate on the loan
otherwise falls below the Maximum Interest Rate, to the extent that interest
paid to the date of calculation does not exceed the Maximum Interest Rate,
until the entire amount of interest which would otherwise have been collected
had there been no ceiling imposed by the Applicable Usury Law has been paid in
full. Borrower further agrees that should the Maximum Interest Rate be
increased at any time hereafter because of a change in the Applicable Usury
Law, then to the extent not prohibited by the Applicable Usury Law, such
increases shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the Maximum Interest Rate be decreased because of a change in the
Applicable Usury Law, such decreases shall not apply to the indebtedness
evidenced hereby regardless of when incurred.
2.10 Principal Payments; Proceeds of Collateral.
(a) Principal Payments. Except where evidenced by notes or other
instruments issued or made
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by Borrower to FINOVA specifically containing payment provisions which are in
conflict with this Section 2.10 (in which event the conflicting provisions of
said notes or other instruments shall govern and control), that portion of the
Obligations consisting of principal payable on account of Loans shall be
payable by Borrower to FINOVA immediately upon the earliest of (i) the receipt
by FINOVA or Borrower of any proceeds of any of the Collateral, to the extent
of said proceeds (or Net Sale Proceeds, in the case of dispositions of
Collateral with the consent of FINOVA pursuant to Section 3.8 hereto), (ii) the
occurrence of an Event of Default in consequence of which FINOVA elects to
accelerate the maturity and payment of such loans, or (iii) any termination of
this Agreement pursuant to Section 9.2 hereof; provided, however, that any
Overadvance or Overline shall be payable on demand pursuant to the provisions
of Section 2.3 hereof.
(b) Collections. Until FINOVA notifies Borrower to the contrary, Borrower
may make collection of all Receivables for FINOVA by directing all account
debtors and other third parties to remit all payments owing to Borrower to the
lockbox established in connection with the Blocked Account. In the event
Borrower shall nevertheless directly receive any payments or other financial
proceeds of any Collateral, Borrower shall receive all payments as trustee of
FINOVA and immediately deliver all payments to FINOVA in their original form as
set forth below, duly endorsed in blank or cause the same to be deposited into
a Blocked Account Dominion Account. FINOVA or its designee may, at any time,
notify account debtors that the Receivables have been assigned to FINOVA and of
FINOVA's security interest therein, and may collect the Receivables directly
and charge the collection costs and expenses to Borrower's loan account.
Borrower agrees that, in computing the charges under this Agreement, all items
of payment shall be deemed applied by FINOVA on account of the Obligations
three (3) Business Days after receipt by FINOVA of good funds which have been
finally credited to FINOVA's account, whether such funds are received directly
from Borrower or from the Blocked Account bank or the Dominion Account bank,
pursuant to Section 2.10(c) hereof, and this provision shall apply regardless
of the amount of the Obligations outstanding or whether any Obligations are
outstanding; provided, that if any such good funds are received after 12:00
p.m. noon (New York time) on any Business Day or at any time on any day not
constituting a Business Day, such funds shall be deemed received on the
immediately following Business Day. FINOVA is not, however, required to credit
Borrower's account for the amount of any item of payment which is
unsatisfactory to FINOVA in its Permitted Discretion and FINOVA may charge
Borrower's loan account for the amount of any item of payment which is returned
to FINOVA unpaid.
(c) Establishment of a Lockbox Account or Dominion Account. Unless
Borrower shall be otherwise directed by FINOVA in writing, Borrower shall cause
all proceeds of Collateral to be deposited into a lockbox account, or such
other "blocked account" as FINOVA may require (each, a "BLOCKED ACCOUNT")
pursuant to an arrangement with such bank as may be selected by Borrower and be
acceptable to FINOVA which proceeds, unless otherwise provided herein, shall be
applied in payment of the Obligations in such order as FINOVA determines in its
sole discretion. Borrower shall issue to any such bank an irrevocable letter
of instruction directing said bank to transfer such funds so deposited to
FINOVA, either to any account maintained by FINOVA at said bank or by wire
transfer to appropriate account(s) of FINOVA. All funds deposited in a Blocked
Account shall immediately become the sole property of FINOVA and Borrower shall
obtain the agreement by such bank to waive any offset rights against the funds
so deposited. FINOVA assumes no responsibility for any Blocked Account
arrangement, including without limitation, any claim of accord and satisfaction
or release with respect to deposits accepted by any bank thereunder.
Alternatively, FINOVA may establish depository accounts in the name of FINOVA
at a bank or banks for the deposit of such funds (each, a "DOMINION ACCOUNT")
and Borrower shall deposit all proceeds of Receivables and all cash proceeds of
any sale of Inventory or, to the extent permitted herein, Equipment or cause
same to be deposited, in kind, in such Dominion Accounts of FINOVA in lieu of
depositing same to Blocked Accounts, and, unless otherwise provided herein, all
such funds shall be applied by FINOVA to the Obligations in such order as
FINOVA determines in its sole discretion.
(d) Payments Without Deductions. Borrower shall pay principal, interest,
and all other amounts payable hereunder, or under any other Loan Document,
without any deduction whatsoever, including, but not limited to, any deduction
for any setoff or counterclaim.
(e) Collection Days Upon Repayment. In the event Borrower repays the
Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to Borrower's loan account three
(3) Business Days after FINOVA's receipt thereof.
(f) Monthly Accountings. FINOVA shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated
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(except for reverses and reapplications of payments made and corrections of
errors discovered by FINOVA), unless Borrower notifies FINOVA in writing to the
contrary within thirty (30) days after each account is rendered, describing the
nature of any alleged errors or admissions.
2.11 Application of Collateral. Except as otherwise provided herein,
FINOVA shall have the continuing and exclusive right to apply or reverse and
re-apply any and all payments to any portion of the Obligations in such order
and manner as FINOVA shall determine in its sole discretion. To the extent
that Borrower makes a payment or FINOVA receives any payment or proceeds of the
Collateral for Borrower's benefit which is subsequently invalidated, declared
to be fraudulent or preferential, set aside or required to be repaid to a
trustee, debtor in possession, receiver or any other party under any bankruptcy
law, common law or equitable cause, or otherwise, then, to such extent, the
Obligations or part thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by FINOVA.
2.12 Application of Payments. The amount of all payments or amounts
received by FINOVA with respect to the Loan shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the
date of such payment, including any Default Interest; (ii) then, to any late
fees, overdue risk assessments, Examination Fee and expenses, collection fees
and expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loan; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure Obligations relating to any contingent obligations
arising under the Loan Documents and/or (y) applied to amounts owed to FINOVA
by Borrower as FINOVA in its sole discretion may determine. In calculating
interest and applying payments as set forth above: (a) interest shall be
calculated and collected through the date a payment is actually applied by
FINOVA under the terms of this Agreement; (b) interest on the outstanding
balance shall be charged during any grace period permitted hereunder; (c) at
the end of each month, all accrued and unpaid interest and other charges
provided for hereunder shall be added to the principal balance of the Loan; and
(d) to the extent that Borrower makes a payment or FINOVA receives any payment
or proceeds of the Collateral for Borrower's benefit that is subsequently
invalidated, set aside or required to be repaid to any other Person, then, to
such extent, the Obligations intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by FINOVA and
FINOVA may adjust the Loan balances as FINOVA, in its sole discretion, deems
appropriate under the circumstances.
2.13 Notification of Closing. Borrower shall provide FINOVA with at least
forty-eight (48) hours prior written notice of the Closing Date, to enable
FINOVA to arrange for the availability of funds. In the event the closing does
not take place on the date specified in Borrower's notice to FINOVA, other than
through the fault of FINOVA, Borrower agrees to reimburse FINOVA for FINOVA's
costs to maintain the necessary funds available for the closing, at the Term
Interest Rate with respect to the amount specified in the Schedule, and at the
Revolving Interest Rate with respect to an amount equal to the initial advance
under the Revolving Credit Loans facility which is to be made on the Closing
Date, for the number of days which elapse between the date specified in
Borrower's notice and the date upon which the closing actually occurs (which
number of days shall not include the date specified in Borrower's notice, but
shall include the Closing Date).
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, Borrower hereby grants to FINOVA a
first priority security interest (subject only to Permitted Encumbrances) in
all of Borrower's now owned or hereafter acquired or arising Inventory,
Equipment, Receivables, life insurance policies and the proceeds thereof,
Trademarks, Copyrights, Licenses and Patents, Investment Property (as defined
in Section 9-115 of the Code), General Intangibles, including, without
limitation, all of Borrower's Deposit Accounts, money, any and all property now
or at any time hereafter in FINOVA's possession (including claims and credit
balances), and all real properties owned by Borrower listed on Exhibit 3.1
hereto, and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records and computer data related to any of the foregoing (all of the
foregoing, together with all other property in which FINOVA may be granted a
lien or security interest, is referred to herein, collectively, as the
"COLLATERAL").
3.2 Perfection and Protection of Security Interest. Borrower shall, at
its expense, take all actions requested by FINOVA at any time to perfect,
maintain, protect and enforce FINOVA's first priority security interest and
other rights in the Collateral and the priority thereof from time to time,
including, without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and delivering
such documents and titles in connection with
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motor vehicles as FINOVA shall require, all in form and substance satisfactory
to FINOVA, (ii) maintaining a perpetual inventory and complete and accurate
stock records, (iii) delivering to FINOVA warehouse receipts covering any
portion of the Collateral located in warehouses and for which warehouse
receipts are issued, and transferring Inventory to warehouses designated by
FINOVA, (iv) placing notations on Borrower's books of account to disclose
FINOVA's security interest therein and (v) delivering to FINOVA all letters of
credit on which Borrower is named beneficiary. FINOVA may file, without
Borrower's signature, one or more financing statements disclosing FINOVA's
security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral
is at any time in the possession or control of any warehouseman, bailee or any
of Borrower's agents or processors, Borrower shall notify such Person of
FINOVA's security interest in such Collateral and, upon FINOVA's request,
instruct them to hold all such Collateral for FINOVA's account subject to
FINOVA's instructions. From time to time, Borrower shall, upon FINOVA's
request, execute and deliver confirmatory written instruments pledging the
Collateral to FINOVA, but Borrower's failure to do so shall not affect or limit
FINOVA's security interest or other rights in and to the Collateral. Until the
Obligations have been fully satisfied and FINOVA's obligation to make further
advances hereunder has terminated, FINOVA's security interest in the Collateral
shall continue in full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted Discretion,
at any time discharge any lien or encumbrance on the Collateral or bond the
same, pay any insurance, maintain guards, pay any service bureau, obtain any
record or take any other action to preserve the Collateral and charge the cost
thereof to Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee, additional insured, and other endorsements,
satisfactory to FINOVA. All premiums with respect to such insurance shall be
paid by Borrower as and when due. Accurate and certified copies of the
policies shall be delivered by Borrower to FINOVA. If Borrower fails to comply
with this Section, FINOVA may (but shall not be required to) procure such
insurance and endorsements at Borrower's expense and charge the cost thereof to
Borrower's loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
(a) Invoices. Borrower shall not re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes evidenced by a
promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to FINOVA
appropriately endorsed to FINOVA and, regardless of the form of any
presentment, demand, notice of dishonor, protest and notice of protest with
respect thereto, Borrower shall remain liable thereon until such instrument is
paid in full.
(c) Physical Inventory. Borrower shall conduct a physical count of the
Inventory at such intervals as FINOVA requests and promptly supply FINOVA with
a copy of such accounts accompanied by a report of the value (calculated at the
lower of cost or market value on a first in, first out basis) of the Inventory
and such additional information with respect to the Inventory as FINOVA may
request from time to time.
(d) Returns. For so long as no Event of Default has occurred and is
continuing and subject to the provisions of Section 3.6(b), if any account
debtor returns any Inventory to Borrower in the ordinary course of its
business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the account debtor (sending a copy to
FINOVA) in the appropriate amount. In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for FINOVA, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as FINOVA's property, and (iv) immediately notify FINOVA of the
return of any Inventory, specifying the reason for such return, the location
and condition of the returned Inventory, and on FINOVA's request deliver such
returned Inventory to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Receivables.
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(a) Eligibility. (i) Borrower represents and warrants that each
Receivable covers and shall cover a bona fide sale or lease and delivery by it
of goods or the rendition by it of services in the ordinary course of its
business, and shall be for a liquidated amount and FINOVA's security interest
shall not be subject to any offset, deduction, counterclaim, rights of return
or cancellation, lien or other condition. If any representation or warranty
herein is breached as to any Receivable or any Receivable ceases to be an
Eligible Receivable for any reason other than payment thereof, then FINOVA may,
in addition to its other rights hereunder, designate any and all Receivables
owing by that account debtor as not Eligible Receivables; provided, that FINOVA
shall in any such event retain its security interest in all Receivables,
whether or not Eligible Receivables, until the Obligations have been fully
satisfied and FINOVA's obligation to provide loans hereunder has terminated.
(ii) FINOVA at any time shall be entitled to (i) establish and increase or
decrease reserves against Eligible Receivables and Eligible Inventory, (ii)
reduce the advance rates in the Schedule or restore such advance rates to any
level equal to or below the advance rates set forth in the Schedule or (iii)
impose additional restrictions (or eliminate the same) to the standards of
eligibility set forth in the definitions of "Eligible Receivables" and
"Eligible Inventory," in the exercise of its Permitted Discretion. FINOVA may
but shall not be required to rely on the schedules an/or reports delivered to
FINOVA in connection herewith in determining the then eligibility of
Receivables and Inventory. Reliance thereon by FINOVA from time to time shall
not be deemed to limit the right of FINOVA to revise advance rates or standards
of eligibility as provided above.
(b) Disputes. Borrower shall notify FINOVA promptly of all disputes or
claims and settle or adjust such disputes or claims at no expense to FINOVA,
but no discount, credit or allowance shall be granted to any account debtor and
no returns of merchandise shall be accepted by Borrower without FINOVA's
consent, except for discounts, credits and allowances made or given in the
ordinary course of Borrower's business. FINOVA may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with account debtors for amounts and upon terms which FINOVA considers
advisable in its reasonable credit judgment and, in all cases, FINOVA shall
credit Borrower's loan account with only the net amounts received by FINOVA in
payment of any Receivables.
3.7 Equipment. Borrower shall keep and maintain the Equipment in good
operating condition and repair and make all necessary replacements thereto to
maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrower's past practice, ordinary wear and tear excepted.
Borrower shall not permit any item of Equipment to become a fixture (other than
a trade fixture) to real estate or an accession to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower represents,
warrants and covenants that except for FINOVA's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by FINOVA in its sole discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever and (b) Borrower shall not, without FINOVA's
prior written approval, sell, encumber or dispose of or permit the sale,
encumbrance or disposal of any Collateral or all or any substantial part of any
of its other assets (or any interest of Borrower therein), except for the sale
of Inventory in the ordinary course of Borrower's business. In the event
FINOVA gives any such prior written approval with respect to any such sale of
Collateral, the same may be conditioned on the sale price being equal to, or
greater than, an amount acceptable to FINOVA. The proceeds of any such sales
of Collateral, net of customary and reasonable costs and expenses of sale owing
by Borrower, ("NET SALE PROCEEDS") shall be remitted to FINOVA pursuant to this
Agreement for application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan
secured by the Collateral. FINOVA may, in its sole discretion, (i) exchange,
waive or release any of the Collateral, (ii) apply Collateral and direct the
order or manner of sale thereof as it may determine, and (iii) after providing
Borrower notice of the occurrence of an Event of Default, settle, compromise,
enforce, collect or otherwise liquidate any Collateral in any manner without
affecting its right to take any other action with respect to any other
Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial advance
hereunder is subject to the fulfillment, to the satisfaction of FINOVA and its
counsel, of each of the following conditions on or prior to the date set forth
on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following Loan
Documents: (i) the Agreement fully and properly executed by Borrower; (ii)
promissory notes in such amounts and on such terms and conditions as FINOVA
shall specify, executed by Borrower; (iii) Validity and Support Agreements
executed by the applicable parties; (iv) such security agreements,
intellectual property assignments, pledge
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agreements, mortgages and deeds of trust as FINOVA may require with respect to
this Agreement, executed by each of the parties thereto and, if applicable,
duly acknowledged for recording or filing in the appropriate governmental
offices; (v) Subordination Agreements in form and substance acceptable to
FINOVA, executed by each of the Subordinating Creditors, together with copies
of all instruments subject thereto showing a legend indicating such
subordination; (vi) such Blocked Account or Dominion Account agreements as it
shall determine; and (vii) such other documents, instruments and agreements
in connection herewith as FINOVA shall require, executed, certified and/or
acknowledged by such parties as FINOVA shall designate;
(b) Minimum Excess Availability. Borrower shall have Excess Availability
under the Revolving Credit Loans facility of not less than the amount specified
in the Schedule, after giving effect to the initial advance hereunder and after
giving effect to any applicable Loan Reserves against borrowing availability
under the Revolving Credit Loans.
(c) Terminations by Existing Lender. Borrower's existing lender(s) shall
have executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the assets of
Borrower or a subordination agreement in form and substance satisfactory to
FINOVA in its sole discretion;
(d) Charter Documents. FINOVA shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(e) Good Standing. FINOVA shall have received a certificate of corporate
status with respect to Borrower, dated within ten (10) days of the Closing
Date, by the Secretary of State of the state of incorporation of Borrower,
which certificate shall indicate that Borrower is in good standing in such
state;
(f) Foreign Qualification. FINOVA shall have received certificates of
corporate status with respect to Borrower and each other Loan Party, each dated
within ten (10) days of the Closing Date, issued by the Secretary of State of
each state in which such party's failure to be duly qualified or licensed would
have a material adverse effect on its financial condition or assets, indicating
that such party is in good standing;
(g) Authorizing Resolutions and Incumbency. FINOVA shall have received a
certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors, and shareholders or members if
necessary, authorizing the borrowing of money from FINOVA and execution and
delivery of this Agreement and the other Loan Documents to which Borrower is a
party, and authorizing specific officers of Borrower to execute same, and (ii)
the authenticity of original specimen signatures of such officers;
(h) Insurance. FINOVA shall have received the insurance certificates and
certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel, together with an additional
insured endorsement in favor of FINOVA with respect to all liability policies
and a lender's loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel;
(i) Title Insurance. FINOVA shall have received binding commitments to
issue such title insurance with respect to Collateral which is comprised of
real property as it shall determine;
(j) Searches; Certificates of Title. FINOVA shall have received searches
reflecting the filing of its financing statements and fixture filings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been duly executed in a
manner sufficient to perfect all of the security interests granted to FINOVA;
(k) Landlord, Bailee and Mortgagee Waivers. FINOVA shall have received
landlord, bailee and/or mortgagee waivers from the lessors, bailees and/or
mortgagees of all locations where any Collateral is located;
(l) Fees. Borrower shall have paid all fees payable by it on the Closing
Date pursuant to this Agreement;
(m) Opinion of Counsel. FINOVA shall have received an opinion of
Borrower's counsel covering such matters as FINOVA shall determine in its sole
discretion;
(n) Officer Certificate. FINOVA shall have received a certificate of the
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(o) Solvency Certificate. If requested, FINOVA shall have received a
signed certificate of the Borrower's duly elected Chief Financial Officer
concerning the solvency and financial condition of Borrower, on FINOVA's
standard form;
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(p) Blocked Account. The Blocked Account referred to in Section 2.10(c)
hereof shall have been established to the satisfaction of FINOVA in its sole
discretion;
(q) Environmental Assessment. If required by FINOVA, Borrower shall have
caused a Phase I Environmental Assessment to be conducted on the property or
properties owned or occupied by Borrower, all at Borrower's own expense and the
results of such assessment(s) shall have been in form and substance
satisfactory to FINOVA in its sole discretion. Such assessment(s) shall have
included, in FINOVA's discretion, core samplings, and shall have been conducted
by an environmental engineer acceptable to FINOVA;
(r) Environmental Certificate. FINOVA shall have received an
Environmental Certificate from Borrower, in form and substance satisfactory to
FINOVA in its discretion, with respect to all locations of Collateral;
(s) Search and References. FINOVA shall have received and approved the
results of UCC, tax lien, litigation, judgment, and bankruptcy searches
regarding Borrower and such members of the senior management of Borrower as
FINOVA shall determine and shall have received satisfactory customer, vendor
and credit reference checks on Borrower.
(t) Initial Public Offering. Borrower shall have successfully completed
an initial public offering of its common stock and warrants and received net
cash proceeds of not less than $6,000,000 after payment of all expenses and
fees related thereto, including all amounts payable to Borrower's underwriters.
(u) Life Insurance. FINOVA shall require that Borrower maintain a life
insurance policy on the life of the persons specified in the Schedule in an
amount specified in the Schedule (the "LIFE INSURANCE POLICY"). The Life
Insurance Policy shall be collaterally assigned to FINOVA (pursuant to an
assignment in form satisfactory to FINOVA, hereinafter referred to as the
"ASSIGNMENT OF LIFE INSURANCE") and be accepted and acknowledged in writing by
the applicable insurer or its authorized representative. Borrower hereby
grants to FINOVA a security interest in the Life Insurance Policy, all
replacements thereof, any supplementary contract issued in connection
therewith, and all proceeds of the foregoing (including without limitation, the
beneficiary's interest therein, collectively referred to as the "INSURANCE
COLLATERAL") to secure Borrower's payment and performance of all the
Obligations. The insurer under the Life Insurance Policy and the terms and
conditions of the Life Insurance Policy are subject to the approval of FINOVA.
The original of the policy evidencing the Life Insurance Policy, signed by an
authorized insurance company representative, shall be delivered to FINOVA at
the closing together with a duly executed Collateral Assignment of Life
Insurance which has been accepted and acknowledged in writing by the applicable
insurer or its authorized representative. The Life Insurance Policy shall
require the insurer to provide FINOVA with thirty (30) days advance written
notice of any cancellation and/or any material change in coverage. Borrower
warrants and represents that it is and will be (throughout the entire term of
the Loan) the owner and beneficiary of the Life Insurance Policy.
Notwithstanding anything herein to the contrary, upon the maturity of the Life
Insurance Policy or upon the death of the individual insured, the proceeds of
the Life Insurance Policy shall be paid directly to FINOVA, shall (at the
option of FINOVA) be treated as a prepayment and, if treated as a prepayment,
shall be applied in order against (a) all of Borrower's Obligations, other than
as set forth in the remaining subsections of this paragraph, (b) all costs and
expenses of FINOVA in connection with such prepayment, (c) accrued interest,
and (d) the unpaid principal balance of the Loans in such manner as FINOVA
shall elect. No prepayment premium or Termination Fee shall be due and owing
in connection with such prepayment. To the extent that the proceeds of said
Life Insurance Policy exceed the amount of Borrower's Obligations, any such
excess shall be paid by FINOVA directly to Borrower. Notwithstanding anything
to the contrary herein, the obligations, undertakings and representations of
Borrower under this Section 4.1(u) shall survive the Closing Date and shall be
a continuing obligation and agreement of Borrower hereunder.
(v) No Material Adverse Changes. Prior to the Closing Date, there shall
have occurred no material adverse change in the financial condition of Borrower
from that shown on the financial statements for Borrower set forth in the
Registration Statement. At the closing, Borrower shall deliver to FINOVA an
officer's certification confirming that Borrower is unaware of the existence of
any such material adverse change in Borrower's financial condition.
(w) Material Agreements. FINOVA shall have received, reviewed and
approved all material agreements to which Borrower shall be a party, including
without limitation, Borrower's product purchasing agreement with A.P.S., Inc.
(x) Projections. Borrower shall submit cash flow projections and pro
forma balance sheet with adjusting entries (i) showing that the proposed
financing will provide sufficient funds for the Borrower's projected working
capital needs, and (ii) showing: (1) that the Borrower will have reasonably
sufficient capital for the conduct of its business following the initial
funding, and
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(2) that the Borrower will not incur debts beyond its ability to pay such debts
as they mature.
(y) Opinions. To the extent any Person other than Borrower shall be
parties to the Loan Documents, FINOVA reserves the right to require
satisfactory opinions of counsel for each such Person concerning the proper
organization of such Person and the due authorization, execution, delivery,
enforceability, validity and binding effect of the Loan Documents to which such
Person is a party. Each such opinion of counsel shall confirm, to the
satisfaction of FINOVA, that the opinion is being delivered to FINOVA at the
instruction of the party represented by such counsel, that FINOVA is entitled
to rely on such opinion and that for purposes of such reliance, FINOVA is
deemed to be in privity with the opining counsel.
(z) ADA Compliance. If necessary, as of the Closing Date, Borrower shall
be in compliance with the Americans with Disabilities Act of 1990 ("ADA"), or,
if any renovations of Borrower's facilities or modifications of Borrower's
employment practices shall be required to bring them into compliance with the
ADA, review and approval by FINOVA of Borrower's proposed plan to come into
such compliance. Borrower shall deliver representations and warranties to
FINOVA concerning Borrower's compliance with the ADA, and no evidence shall
have come to the attention of FINOVA indicating that Borrower is not in
compliance with the ADA (except to the extent that FINOVA has reviewed and
approved Borrower's plan to come into compliance).
(aa) Subordination and Intercreditor Agreements. FINOVA and each
Subordinating Creditor shall have entered into a Subordination Agreement, in
form and substance satisfactory to FINOVA.
(bb) Asset Appraisal. Borrower shall have provided to FINOVA, at
Borrower's sole cost and expense, an asset appraisal of all Borrower's fixed
assets, real estate and rolling stock upon which FINOVA shall be granted a
first priority lien and security interest, which appraisal must be acceptable
to FINOVA, in its sole discretion, in all respects.
(cc) Taxes. FINOVA shall be satisfied that upon giving effect to the
initial public offering contemplated by the Registration Statement and the
application of proceeds therefrom, all due but unpaid tax obligations owing by
Borrower to any governmental authority (including all interest, penalties, and
related expenses accruing with respect thereto) shall be satisfied in full.
(dd) APS and Gentry Debt. FINOVA shall be satisfied that upon giving
effect to the initial public offering contemplated by the Registration
Statement, the application of proceeds therefrom and the application of the
proceeds from the initial advance hereunder, all amounts due to under
Borrower's existing credit facilities with A.P.S., Inc. and its affiliates and
all outstanding loans owing to Robert H. Gentry III shall be paid in full and
all obligations of, and Liens granted by, Borrower thereunder shall be
terminated and released.
(ee) Application of IPO Proceeds. FINOVA shall have received and deemed
acceptable a written accounting of the application of the proceeds of the
initial public offering contemplated by the Registration Statement and shall be
satisfied that Borrower has received the proceeds of such initial public
offering.
(ff) Transaction Costs. Borrower shall provide to FINOVA a complete,
itemized summary of all transaction costs paid or incurred by any Person in
connection with the making of the Loan and the consummation of the initial
public offering contemplated by the Registration Statement, which transaction
costs shall not exceed the amount set forth in the Schedule, as well as
appropriate documentation evidencing such costs and the payment thereof. All
such information must be acceptable to FINOVA, in FINOVA's sole discretion,
exercised in good faith.
(gg) Schedule Conditions. Borrower shall have complied with all
additional conditions precedent as set forth in the Schedule attached hereto.
(hh) Other Matters. All other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance satisfactory to FINOVA
and its counsel including, without limitation, each of the items listed on the
Closing Checklist attached as EXHIBIT 4.1 hereto.
4.2 Subsequent Advances. The obligation of FINOVA to make any advance
hereunder (including the initial advance) shall be subject to the further
conditions precedent that, on and as of the date of such advance: (a) the
representations and warranties of Borrower set forth in this Agreement shall be
accurate, before and after giving effect to such advance or issuance and to the
application of any proceeds thereof; (b) no Event of Default and no event
which, with notice or passage of time or both, would constitute an Event of
Default has occurred and is continuing, or would result from such advance or
issuance or from the application of any proceeds thereof; (c) no material
adverse change has occurred in the Borrower's business, operations, financial
condition, in the condition of the Collateral or other assets of Borrower or in
the prospect of repayment of the Obligations; and (d) FINOVA shall have
received such
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other approvals, opinions or documents as FINOVA shall reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly
existing and in good standing under the laws of the State set forth on the
Schedule, is qualified and authorized to do business and is in good standing in
all states in which such qualification and good standing are necessary in order
for it to conduct its business and own its property, and has all requisite
power and authority to conduct its business as presently conducted, to own its
property and to execute and deliver each of the Loan Documents to which it is a
party and perform all of its Obligations thereunder, and has not taken any
steps to wind-up, dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years,
been known by or used any other corporate or fictitious name except as set
forth on the Schedule, nor has Borrower been the surviving corporation of a
merger or consolidation or acquired all or substantially all of the assets of
any Person during such time;
5.3 Due Authorization. The execution, delivery and performance by
Borrower of the Loan Documents to which it is a party have been authorized by
all necessary corporate action and do not and shall not constitute a violation
of any applicable law or of Borrower's Articles or Certificate of Incorporation
or By-Laws or any other document, agreement or instrument to which Borrower is
a party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is a
party is the legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications
and trade names for the present and planned future conduct of its business
without any known conflict with the rights of others, and each is valid and has
been duly registered or filed with the appropriate governmental authorities;
each of Borrower's patents, patent applications, copyrights, trademarks and
trademark applications which have been registered or filed with any
governmental authority (including the U.S. Patent and Trademark Office and the
Library of Congress) are listed by name, date and filing number on the
Schedule;
5.6 Capital. Borrower has capital sufficient to conduct its business, is
able to pay its debts as they mature, and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
5.7 Material Litigation. Borrower has no pending or overtly threatened
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. Borrower has good, indefeasible
and merchantable title to the Collateral and, upon the execution and delivery
of the Loan Documents, the filing of UCC-1 Financing Statements, delivery of
the certificate(s) evidencing any pledged securities, the filing of any
collateral assignments or security agreements regarding Borrower, Trademarks,
Copyrights, Licenses and/or Patents, if any, with the appropriate governmental
offices and the recording of any mortgages or deeds of trust with respect to
real property, in each case in the appropriate offices, this Agreement and such
documents shall create valid and perfected first priority liens in the
Collateral, subject only to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to
any labor dispute. In addition, no labor contract is scheduled to expire
during the Initial Term of this Agreement, except as disclosed to FINOVA in
writing prior to the date hereof;
5.10 Laws. Borrower is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be obtained or issued
any required consent of a governmental agency or other Person in connection
with the financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event
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occurred which, with the giving of notice or the lapse of time, or both, would
cause such a default;
5.13 Financial Condition. The Prepared Financials fairly present
Borrower's financial condition and results of operations and those of such
other Persons described therein as of the date thereof in accordance with GAAP;
there are no material omissions from the Prepared Financials or other facts or
circumstances not reflected in the Prepared Financials; and there has been no
material and adverse change in such financial condition or operations since the
date of the initial Prepared Financials delivered to FINOVA hereunder;
5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or has
been in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan. No lien upon the assets of Borrower has arisen with respect to a Plan. No
prohibited transaction or Reportable Event has occurred with respect to a Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability
with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have
made all contributions required to be made by them to any Plan or Multiemployer
Plan when due. There is no accumulated funding deficiency in any Plan, whether
or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports as
it is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
5.16 Locations; Federal Tax ID No. Borrower's chief executive office and
the offices and locations where it keeps the Collateral (except for Inventory
in transit) are at the locations set forth on the Schedule, except to the
extent that such locations may have been changed after notice to FINOVA in
accordance with Section 6.4 hereof; Borrower's federal tax identification
number is as shown on the Schedule;
5.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no
present condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by Borrower pursuant to
this Agreement shall constitute (i) an automatic representation and warranty by
Borrower to FINOVA that there does not then exist any Event of Default and (ii)
a reaffirmation as of the date of said request of all of the representations
and warranties of Borrower contained in this Agreement and the other Loan
Documents.
6. COVENANTS.
6.1 AFFIRMATIVE COVENANTS. Borrower covenants that, so long as any
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate provision for
the payment of all taxes, assessments and other charges on or prior to the date
when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of any
litigation, suit or administrative proceeding which may materially and
adversely affect the Collateral or Borrower's business, assets, operations,
prospects or condition, financial or otherwise, whether or not the claim is
covered by insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the occurrence of
any event described in Paragraph 4043 of ERISA, other than a termination,
partial termination or merger of a Plan or a transfer of a Plan's assets and
(ii) prior to any termination, partial termination or merger of a Plan or a
transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45) days
prior to any change in the location of Borrower's chief executive office or the
location of any Collateral, or Borrower's opening or closing of any other place
of business;
6.1.5 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any labor
dispute to which
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Borrower is or may become subject and the expiration of any labor contract to
which Borrower is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency thereof, applicable to Borrower which may materially
and adversely affect the Collateral or Borrower's business, assets, prospects,
operations or condition, financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business Days of
Borrower's default under any note, indenture, loan agreement, mortgage, lease
or other agreement to which Borrower is a party or by which Borrower is bound,
or of any other default under any Indebtedness of Borrower;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of the
making of any Capital Expenditure materially affecting Borrower's business,
assets, prospects, operations or condition, financial or otherwise, except to
the extent permitted in the Schedule;
6.1.10 Books and 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 of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide FINOVA with (i) copies of
all agreements between Borrower and any landlord, warehouseman or bailee which
owns any premises at which any Collateral may, from time to time, be located
(whether for processing, storage or otherwise), and (ii) without limiting the
landlord, bailee and/or mortgagee waivers to be provided pursuant to Section
4.1(j) hereof, additional landlord, bailee and/or mortgagee waivers in form
acceptable to FINOVA with respect to all locations where any Collateral is
hereafter located;
6.1.12 Additional Documents. At FINOVA's request, promptly execute or
cause to be executed and delivered to FINOVA any and all documents, instruments
or agreements deemed necessary by FINOVA to facilitate the collection of the
Obligations or the Collateral or otherwise to give effect to or carry out the
terms or intent of this Agreement or any of the other Loan Documents. Without
limiting the generality of the foregoing, if any of the Receivables with a face
value in excess of $1,000 arises out of a contract with the United States of
America or any department, agency, subdivision or instrumentality thereof,
Borrower shall promptly notify FINOVA of such fact in writing and shall execute
any instruments and take any other action required or requested by FINOVA to
comply with the provisions of the Federal Assignment of Claims Act;
6.1.13 Financial Covenants. Comply with the financial covenants set forth
on the Schedule; and
6.1.14 Chief Financial Officer. Engage a new Chief Financial Officer
within 180 days following the Closing Date and continue to employ a Chief
Financial Officer at all times thereafter.
6.2 NEGATIVE COVENANTS. Without FINOVA's prior written consent, which
consent FINOVA may withhold in its sole discretion, so long as any Obligation
remains outstanding and this Agreement is in effect, Borrower shall not:
6.2.1 Mergers. Merge or consolidate with or acquire any other Person, or
make any other material change in its capital structure or in its business or
operations which might adversely affect the repayment of the Obligations;
6.2.2 Loans. Make advances, loans or extensions of credit to, or invest in,
any Person, except for loans or cash advances to employees which are
permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends upon any of its stock or
distribute any of its property or redeem, retire, purchase or acquire
directly or indirectly any of its stock;
6.2.4 Adverse Transactions. Enter into any transaction which materially and
adversely affects the Collateral or its ability to repay the Obligations
in full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
contingently liable for the Indebtedness of any Person, except by endorsement
of instruments for deposit and except for the existing guarantees made by
Borrower prior to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis (other than return rights normally provided to
retail and wholesale customers in the ordinary course of Borrower's business
provided such returns occasioned by such return rights do not exceed $1,000 in
any five (5) Business Day period with respect to any particular customer);
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6.2.7 Name. Use any corporate or fictitious name other than its corporate
name as set forth in its Articles or Certificate of Incorporation on the date
hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade payables and
other than the Obligations;
6.2.9 Capital Expenditure. Make or incur any Capital Expenditure if,
after giving effect thereto, the aggregate amount of all Capital Expenditures
by Borrower in any fiscal year would exceed the amount set forth on the
Schedule;
6.2.10 Compensation. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year
to all of Borrower's executives, officers and directors (or any relative
thereof) in an amount in excess of the amount set forth on the Schedule;
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers and
customers incurred in the ordinary course of business, and (iii) other
Indebtedness existing on the date of this Agreement and reflected in the
Prepared Financials (except Indebtedness paid on the date of this Agreement
from proceeds of the initial advances hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth below, sell, transfer,
distribute or pay any money or property to any Affiliate, or invest in (by
capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may pay compensation permitted by
Section 6.2.10 to employees who are Affiliates and, if no Event of Default has
occurred, Borrower may (i) engage in transactions with Affiliates in the normal
course of business, in amounts and upon terms which are fully disclosed to
FINOVA and which are no less favorable to Borrower than would be obtainable in
a comparable arm's length transaction with a Person who is not an Affiliate,
and (ii) make payments to a Subordinating Creditor that is an Affiliate,
subject to and only to the extent expressly permitted in the Subordination
Agreement between such Subordinating Creditor and FINOVA;
6.2.13 Nature of Business. Enter into any new business or make any
material change in any of Borrower's business objectives, purposes or
operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with any of
Borrower's business or activities, except in connection with internal business
matters or as required in dealings with governmental agencies and financial
institutions or with trade creditors of Borrower, solely for credit reference
purposes; or
6.2.15 Margin Security. Borrower will not (and has not in the past)
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation G or Regulation U issued by the Board of Governors of
the Federal Reserve System), and no proceeds of any Loan or other advance 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 in any manner which
might cause such Loan or other advance or the application of such proceeds to
violate (or require any regulatory filing under) Regulation G, Regulation T,
Regulation U, Regulation X or any other regulation of the Board of Governors of
the Federal Reserve System, in each case as in effect on the date or dates of
such Loan or other advance and such use of proceeds. Further, no proceeds of
any Loan or other advance will be used to acquire any security of a class which
is registered pursuant to Section 12 of the Securities Exchange Act of 1934.
6.2.16 Real Property. Purchase or acquire any real property without
FINOVA's prior written consent, a condition of which consent shall include
delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel.
6.2.17 Supply Agreement. Permit the product purchasing agreement with
A.P.S., Inc. to be terminated prior to its stated term or to be amended or
otherwise modified in any respect on terms materially less favorable to
Borrower than the terms existing as of the Closing Date (after giving effect to
the repayment of indebtedness owing to A.P.S., Inc. and its Affiliates with the
proceeds of Borrower's initial public offering pursuant to the Registration
Statement) unless, in the case of any such termination, Borrower obtains a new
supply agreement on terms and conditions and with an alternate vendor deemed
acceptable by FINOVA within 10 days of the date of such termination.
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7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
(b) Borrower or any other Loan Party fails or neglects to perform, keep,
or observe any Obligation including, but not limited to, any term, provision,
condition, covenant or agreement contained in any Loan Document to which
Borrower or such other Loan Party is a party; provided that Borrower's failure
to timely comply with the provisions of (1) Section 9.1(b)(iv) and 9.1(b)(v)
which relate to the delivery of monthly or annual financial statements, (2)
Section 6.1.3 with regard to the provision of notice regarding certain ERISA
matters, (3) Section 6.1.4 with regard to prior notice of changes in location,
or (4) Section 6.1.11 with regard to providing copies of certain agreements and
waivers regarding warehouse, bailee and/or leased locations shall not, in the
case of any of items (1)-(4) above, constitute an Event of Default under this
clause (b) unless the same remains unremedied or uncured for a period of 10
days after the initial occurrence of such noncompliance; provided further that
in the event the Borrower fails to comply with the financial covenant for the
"Current Ratio " described in Section 6.1.13 of the Schedule, Borrower shall
have fifteen (15) days to cure such failure to the satisfaction of FINOVA in
its sole discretion before such noncompliance results in an Event of Default
under this clause (b);
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Any portion of Borrower's assets is seized, attached, subjected to a
writ or distress warrant, is levied upon or comes into the possession of any
judicial officer;
(f) Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation
of such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by
Borrower, or any such proceeding is commenced against Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with respect
to any of Borrower's assets;
(i) Any judgments are entered against Borrower in an aggregate amount
exceeding $25,000 in any fiscal year;
(j) Any default shall occur under (i) any material agreement between
Borrower and any third party including, without limitation, any default which
would result in a right by such third party to accelerate the maturity of any
Indebtedness of Borrower to such third party, or (ii) any Subordinated Debt;
(k) Any representation or warranty made or deemed to be made by Borrower,
any Affiliate or any other Loan Party in any Loan Document or any other
statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Any Guarantor dies, terminates or attempts to terminate its Guaranty
or any security therefor or becomes subject to any bankruptcy or other
insolvency proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of Borrower; any lien upon the assets of Borrower in connection with
any Plan shall arise; Borrower or any of its ERISA Affiliates shall fail to
make full payment when due of all amounts which Borrower or any of its ERISA
Affiliates may be required to pay to any Plan or any Multiemployer Plan as one
or more contributions thereto; Borrower or any of its ERISA Affiliates creates
or permits the creation of any accumulated funding deficiency, whether or not
waived; or
(n) Any Change of Control shall occur.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE RIGHT
TO CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND THEREAFTER
IF AN EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at
its option and in its sole discretion and in addition to all of its other
rights under the Loan Documents, cease making Loans, terminate this Agreement
and/or declare all of the Obligations to be immediately payable in full.
Borrower
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agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default Borrower hereby consents to the appointment of a receiver by FINOVA in
any action initiated by FINOVA pursuant to this Agreement and to the
jurisdiction and venue set forth in Section 9.25 hereof, and Borrower waives
notice and posting of a bond in connection therewith. Further, FINOVA may, at
any time, take possession of the Collateral and keep it on Borrower's premises,
at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA
may desire, or Borrower shall, upon FINOVA's demand, at Borrower's sole cost,
assemble the Collateral and make it available to FINOVA at a place reasonably
convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA
deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Borrower agrees that FINOVA has no
obligation to preserve rights to the Collateral or marshall any Collateral for
the benefit of any Person. FINOVA is hereby granted a license or other right
to use, without charge, Borrower's labels, patents, copyrights, name, trade
secrets, trade names, trademarks and advertising matter, or any similar
property, in completing production, advertising or selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure
to FINOVA's benefit. Any requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys
fees and other expenses of sale, and second, to the Obligations in such order
as FINOVA shall elect, in its sole discretion. FINOVA shall return any excess
to Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in
its sole discretion of other or different times, places and manners of noticing
and conducting any disposition of Collateral shall not be deemed unreasonable):
Any public or private disposition: (i) as to which on no later than the fifth
calendar day prior thereto written notice thereof is mailed or personally
delivered to Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof describing in general
non-specific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be
conducted (provided that no notice of any public or private disposition need be
given to the Borrower or published if the Collateral is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized
market); (ii) which is conducted at any place designated by FINOVA, with or
without the Collateral being present; and (iii) which commences at any time
between 8:00 a.m. and 5:00 p.m. Without limiting the generality of the
foregoing, Borrower expressly agrees that, with respect to any disposition of
accounts, instruments and general intangibles, it shall be commercially
reasonable for FINOVA to direct any prospective purchaser thereof to ascertain
directly from Borrower any and all information concerning the same, including,
but not limited to, the terms of payment, aging and delinquency, if any, the
financial condition of any obligor or account debtor thereon or guarantor
thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any Obligation remains
outstanding and this Agreement remains in effect, it shall promptly reimburse
FINOVA for all costs, fees and expenses incurred by FINOVA in connection with
the negotiation, preparation, execution, delivery, administration and
enforcement of each of the Loan Documents, including, but not limited to, the
attorneys' and paralegals' fees of in-house and outside counsel, expert witness
fees, lien, title search and insurance fees, appraisal fees, all charges and
expenses incurred in connection with any and all environmental reports and
environmental remediation activities, and all other costs, expenses, taxes and
filing or recording fees payable in connection with the transactions
contemplated by this Agreement, including without limitation all such costs,
fees and expenses as FINOVA shall incur or for which FINOVA shall become
obligated in connection with (i) any inspection or verification of the
Collateral, (ii) any proceeding relating to the Loan Documents or the
Collateral, (iii) actions taken with respect to the Collateral and FINOVA's
security interest therein, including, without limitation, the defense or
prosecution of any action involving FINOVA and Borrower or any third party,
(iv) enforcement of any of FINOVA's rights and remedies with respect to the
Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other
proceeding involving any Loan Party or any Affiliate, whether or not suit is
filed or the issues
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are peculiar to federal bankruptcy or state insolvency laws. Borrower shall
also pay all FINOVA charges in connection with bank wire transfers, forwarding
of loan proceeds, deposits of checks and other items of payment, returned
checks, establishment and maintenance of lockboxes and other Blocked Accounts,
and all other bank and administrative matters, in accordance with FINOVA's
schedule of bank and administrative fees and charges in effect from time to
time.
8.2 Environmental Matters.
The Environmental Certificate dated on or about the date of this Agreement
is incorporated herein for all purposes as if fully stated in this Agreement.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
(a) Examinations. FINOVA shall at all reasonable times have full access
to and the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents,
instruments and agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Borrower shall deliver to FINOVA any
instrument necessary for FINOVA to obtain records from any service bureau
maintaining records for Borrower. All instruments and certificates prepared by
Borrower showing the value of any of the Collateral shall be accompanied, upon
FINOVA's request, by copies of related purchase orders and invoices. FINOVA
may, at any time after the occurrence of an Event of Default, remove from
Borrower's premises Borrower's books and records (or copies thereof) or require
Borrower to deliver such books and records or copies to FINOVA. FINOVA may,
without expense to FINOVA, use such of Borrower's personnel, supplies and
premises as may be reasonably necessary for maintaining or enforcing FINOVA's
security interest.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon request,
such information and statements as FINOVA shall request from time to time
regarding Borrower's business affairs, financial condition and the results of
its operations. Without limiting the generality of the foregoing, Borrower
shall provide FINOVA with: (i) FINOVA's standard form collateral and loan
report, daily, and upon FINOVA's request, copies of sales journals, cash
receipt journals, and deposit slips; (ii) upon FINOVA's request, copies of
sales invoices, customer statements and credit memoranda issued, remittance
advices and reports; (iii) copies of shipping and delivery documents, upon
request; (iv) on or prior to the date set forth on the Schedule, monthly agings
(aged from invoice date) and reconciliations of Receivables (with listings of
concentrated accounts), payables reports, inventory reports, compliance
certificates and unaudited financial statements with respect to the prior month
prepared on a basis consistent with such statements prepared in prior months
and otherwise in accordance with GAAP; (v) audited annual consolidated and
consolidating financial statements, prepared in accordance with GAAP applied on
a basis consistent with the most recent Prepared Financials provided to FINOVA
by Borrower, including balance sheets, income and cash flow statements,
accompanied by the unqualified report thereon of independent certified public
accountants acceptable to FINOVA, as soon as available, and in any event,
within ninety (90) days after the end of each of Borrower's fiscal years; and
(vi) such certificates relating to the foregoing as FINOVA may request,
including, without limitation, a monthly certificate from the president and the
chief financial officer of Borrower showing Borrower's compliance with each of
the financial covenants set forth in this Agreement, and stating whether any
Event of Default has occurred or event which, with giving of notice or the
passage of time, or both, would constitute an Event of Default, and if so, the
steps being taken to prevent or cure such Event of Default. All reports or
financial statements submitted by Borrower shall be in reasonable detail and
shall be certified by the principal financial officer of Borrower as being
complete and correct.
(c) Guarantor's Financial Statements and Tax Returns. To the extent any
Guarantor shall hereafter exist, Borrower shall cause each of the Guarantors to
deliver to FINOVA such Guarantor's annual financial statement (in form
acceptable to FINOVA) and a copy of such Guarantor's federal income tax return
with respect to the corresponding year, in each case on the date when such tax
return is due or, if earlier, on the date when available.
9.2 Term; Termination.
(a) Term. The Initial Term of the Revolving Credit Loans facility and the
obligation of FINOVA to made advances with respect thereto in accordance with
this Agreement shall be as set forth on the Schedule, and the Revolving Credit
Loans facility and this Agreement shall be automatically renewed for one or
more Renewal Term(s) as set forth in the Schedule, unless earlier terminated as
provided herein.
(b) Prior Notice. Each party shall have the right to terminate this
Agreement effective at the end of the Initial Term or at the end of any Renewal
Term by giving the other party written notice not less than thirty
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(30) days prior to the effective date of such termination, by registered or
certified mail.
(c) Payment in Full. Upon the effective date of termination, the
Obligations shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure set
forth in Section 9.2(b), Borrower may terminate this Agreement at any time but
only upon thirty (30) days' prior written notice and prepayment of the
Obligations. Upon any such early termination by Borrower or any termination of
this Agreement by FINOVA upon the occurrence of an Event of Default, then, and
in any such event, Borrower shall pay to FINOVA upon the effective date of such
termination a fee (the "TERMINATION FEE") in an amount equal to the amount
shown on the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be
payable by Borrower as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time.
Borrower waives presentment and protest of any instrument and notice thereof,
notice of default and, to the extent permitted by applicable law, all other
notices to which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right,
remedy or option under this Agreement, any supplement, the Loan Documents or
other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be prohibited
or invalid under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified, altered
or amended, except by an agreement in writing signed by Borrower and FINOVA.
Borrower may not sell, assign or transfer any interest in this Agreement or any
other Loan Document, or any portion thereof, including, without limitation, any
of Borrower's rights, title, interests, remedies, powers and duties hereunder
or thereunder. Borrower hereby consents to FINOVA's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, FINOVA's rights, title, interests,
remedies, powers and duties hereunder or thereunder. In connection therewith,
FINOVA may disclose all documents and information which FINOVA now or hereafter
may have relating to Borrower or Borrower's business. To the extent that
FINOVA assigns its rights and obligations hereunder to a third party, FINOVA
shall thereafter be released from such assigned obligations to Borrower and
such assignment shall effect a novation between Borrower and such third party.
9.8 Integration. This Agreement, together with the Schedule (which is a
part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower
contained in this Agreement shall survive the execution, delivery and
acceptance of this Agreement by the parties. No termination of this Agreement
or of any guaranty of the Obligations shall affect or impair the powers,
obligations, duties, rights, representations, warranties or liabilities of the
parties hereto and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's
discretion, be evidenced by notes or other instruments issued or made by
Borrower to FINOVA. If not so evidenced, such Obligation shall be evidenced
solely by entries upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan by any Person
who purports to be any employee, officer or authorized agent of Borrower shall
be made to FINOVA on or prior to 11:00 a.m., New York time, on the Business Day
on which the proceeds thereof are requested to be paid to Borrower and shall be
conclusively presumed to be made by a Person authorized by Borrower to do so
and the crediting of a loan to Borrower's operating account shall conclusively
establish Borrower's obligation to repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to Borrower's
operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and
addressed to the Borrower and FINOVA at their addresses set forth at the
beginning of this Agreement. Notices hereunder shall be deemed
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received on the earlier of receipt, whether by mail, personal delivery,
facsimile, or otherwise, or upon deposit in the United States mail, postage
prepaid.
9.13 Brokerage Fees. Except fees owing to Merrill Lynch & Co., Inc.,
Borrower represents and warrants to FINOVA that, with respect to the financing
transaction herein contemplated, no Person is entitled to any brokerage fee or
other commission, and Borrower agrees to indemnify and hold FINOVA harmless
against any and all such claims (other than in respect of fees due to Merrill
Lynch & Co., Inc. which shall be payable by FINOVA).
9.14 Disclosure. No representation or warranty made by Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to
Borrower or which reasonably should be known to Borrower which Borrower has not
disclosed to FINOVA in writing with respect to the transactions contemplated by
this Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation
of this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are without
substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower
fails to perform, observe or discharge any of its Obligations under this
Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed in
one or more counterparts, each of which taken together shall constitute one and
the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall
also deliver a manually executed counterpart of this Agreement, but the failure
to deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction
to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement or any
amendments or exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by
FINOVA's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by Borrower by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing of a complaint within one year after
the first act, occurrence or omission upon which such claim or cause of action,
or any part thereof, is based and service of a summons and complaint on an
officer of FINOVA or any other Person authorized to accept service of process
on behalf of FINOVA, within 30 days thereafter. Borrower agrees that such
one-year period of time is a reasonable and sufficient time for Borrower to
investigate and act upon any such claim or cause of action. The one-year
period provided herein shall not be waived, tolled, or extended except by a
specific written agreement of FINOVA. This provision shall survive any
termination of this Loan Agreement or any other agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong relating to this Agreement or
the Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the
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Borrower through the ordinary negligence of FINOVA, or any FINOVA Affiliate.
"FINOVA AFFILIATE" shall mean FINOVA's directors, officers, employees, agents,
attorneys or any other Person or entity affiliated with or representing FINOVA.
9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written
notice of (i) any action or inaction by FINOVA or any attorney of FINOVA in
connection with any Loan Documents that may be actionable against FINOVA or any
attorney of FINOVA or (ii) any defense to the payment of the Obligations for
any reason, including, but not limited to, commission of a tort or violation of
any contractual duty or duty implied by law. Borrower agrees that unless such
notice is fully given as promptly as possible (and in any event within thirty
(30) days) after Borrower has knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such action, inaction or defense,
Borrower shall not assert, and Borrower shall be deemed to have waived, any
claim or defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of any casualty
insurance insuring the Collateral, after deducting all costs and expenses
(including attorneys' fees) of collection, shall be applied, at FINOVA's
option, either toward replacing or restoring the Collateral, in a manner and on
terms satisfactory to FINOVA, or toward payment of the Obligations. Any
proceeds applied to the payment of Obligations shall be applied in such manner
as FINOVA may elect. In no event shall such application relieve Borrower from
payment in full of all installments of principal and interest which thereafter
become due in the order of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as
Borrower's attorney, with the power to endorse Borrower's name on any checks,
notes, acceptances, money orders or other forms of payment or security that
come into FINOVA's possession; to sign Borrower's name on any invoice or bill
of lading relating to any Receivable, on drafts against customers, on
assignments of Receivables, on notices of assignment, financing statements and
other public records, on verifications of accounts and on notices to customers
or account debtors; to send requests for verification of Receivables to
customers or account debtors; after the occurrence of any Event of Default, to
notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by FINOVA and to open and dispose of
all mail addressed to Borrower; and to do all other things FINOVA deems
necessary or desirable to carry out the terms of this Agreement. Borrower
hereby ratifies and approves all acts of such attorney. Neither FINOVA nor any
of its designees shall be liable for any acts or omissions nor for any error of
judgment or mistake of fact or law while acting as Borrower's attorney. This
power, being coupled with an interest, is irrevocable until the Obligations
have been fully satisfied and FINOVA's obligation to provide loans hereunder
shall have terminated
9.26 GOVERNING LAW; WAIVERS. THIS AGREEMENT, INCLUDING WITHOUT LIMITATION
ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA
GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED WITHIN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE SOLE
OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND
VENUE. BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET
FORTH IN SECTION 9.12 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES
ANY RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED
AGAINST IT.
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA and Borrower each
hereby waives the right to trial by jury in any action or proceeding based
upon, arising out of, or in any way relating to: (i) this Agreement; (ii) any
other present or future instrument or agreement between FINOVA and Borrower; or
(iii) any conduct, acts or omissions of FINOVA or Borrower or any of their
directors, officers, employees, agents, attorneys or any other persons
affiliated with FINOVA or Borrower; in each of the foregoing cases, whether
sounding in contract or tort or otherwise.
24
<PAGE> 29
AUTOMOTIVE ONE PARTS STORES, INC.
FED. TAX ID #59-1867299
BY_______________________________
PRESIDENT OR VICE PRESIDENT
FINOVA:
FINOVA CAPITAL CORPORATION
BY_______________________________
TITLE______________________________
[SIGNATURE PAGE TO LOAN AND SECURITY AGREEMENT]
<PAGE> 30
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: AUTOMOTIVE ONE PARTS STORES, INC.
ADDRESS: 701 WEST CHURCH STREET
ORLANDO, FLORIDA 32802
DATE: JANUARY _____, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
DEFINITIONS (SECTION 1):
"Permitted Senior Indebtedness" means the indebtedness listed on Schedule
1.1(a) hereto.
"Subordinating Creditor" means _________________________________________
TOTAL FACILITY (SECTION 2.1):
$4,000,000
LOANS (SECTION 2.2):
REVOLVING CREDIT LOANS: A revolving line of credit
consisting of loans against Borrower's Eligible Receivables
("RECEIVABLE LOANS") and against Borrower's Eligible
Inventory ("INVENTORY LOANS") (the Receivable Loans and the
Inventory Loans shall be collectively referred to as the
"REVOLVING CREDIT LOANS") in an aggregate outstanding
principal amount not to exceed the lesser of (a) or (b)
below:
(a) Four Million Dollars ($4,000,000) (the "REVOLVING
CREDIT LIMIT"), less any Loan Reserves, or
(b) the sum of
(i) an amount equal to 70% of the net amount of
Eligible Receivables; plus
(ii) an amount equal to 50% of the value of
Borrower's Eligible Inventory, calculated at the lower
of cost or market value and determined on a first-in,
first-out basis, less
<PAGE> 31
(iii) any Loan Reserves.
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay FINOVA interest
on the daily outstanding balance of Borrower's Revolving
Credit Loans at a per annum rate of 2.0% in excess of the
rate of interest announced publicly by Citibank, N.A., (or
any successor thereto), from time to time as its "prime
rate" (the " PRIME RATE") which may not be such
institution's lowest rate. The interest rate chargeable
hereunder in respect of the Revolving Credit Loans (herein,
the "REVOLVING INTEREST RATE") shall be increased or
decreased, as the case may be, without notice or demand of
any kind, upon the announcement of any change in the Prime
Rate. Each change in the Prime Rate shall be effective
hereunder on the first day following the announcement of
such change. Interest charges and all other fees and charges
herein shall be computed on the basis of a year of 360 days
and actual days elapsed and shall be payable to FINOVA in
arrears on the first day of each month.
Minimum Interest Charge. With respect to each calendar
month or portion thereof during the term of this Agreement
(excluding the calendar month in which this Agreement is
executed), Borrower shall also pay FINOVA, on the first day
of the next month, as a minimum charge, the amount by which
accrued interest pursuant to the Revolving Interest Rate
section above for such month or portion thereof is less than
$15,000 (the "MINIMUM INTEREST CHARGE"). Notwithstanding
the occurrence of any Event of Default hereunder or
termination of this Agreement by FINOVA as a result thereof,
the Minimum Interest Charge shall be paid by Borrower for
the unexpired portion of the Initial Term or any Renewal
Term of this Agreement.
Closing Fee. At or before the closing of this transaction,
Borrower shall pay to FINOVA a closing fee in an amount
equal to 1.5% of the Total Facility less the portion of the
commitment fee previously paid by Borrower pursuant to the
Commitment letter dated November 25, 1997 ("CLOSING FEE"),
which shall be deemed fully earned on the date such payment
is due.
Unused Line Fee. With respect to each fiscal quarter, or
portion thereof during the term of this Agreement, Borrower
shall unconditionally pay to FINOVA a fee equal to one-half
of one percent (0.50%) per annum of the difference between
the Revolving Credit Limit and the average daily outstanding
balance of the Revolving Credit Loans during such quarter,
or portion thereof ("UNUSED LINE FEE"), which fee shall be
calculated and payable quarterly, in arrears, and shall be
due and payable, commencing on the first Business Day of
2
<PAGE> 32
the Borrower's first fiscal quarter following the Closing
Date and continuing on the first Business Day of each fiscal
quarter thereafter.
Examination Fee. Borrower agrees to pay to FINOVA an
examination fee in the amount of $600 per person per day in
connection with each audit or examination of Borrower
performed by FINOVA prior to or after the date hereof, plus
all costs and expenses incurred in connection therewith (the
"EXAMINATION FEE"). Such examinations shall be performed no
less frequently than on a quarterly basis. Without limiting
the generality of the foregoing, Borrower shall pay to
FINOVA an initial Examination Fee in an amount equal to $600
per person per day, plus all costs and expenses incurred in
connection therewith. Such initial Examination Fee shall be
deemed fully earned at the time of payment and due and
payable upon the closing of this transaction, and shall be
deducted from any good faith deposit paid by Borrower to
FINOVA prior to the date of this Agreement.
NOTIFICATION OF CLOSING (SECTION 2.13):
The amount for purposes of Section 2.13 shall be $4,000,000.
CONDITIONS OF CLOSING (SECTION 4.1):
The obligation of FINOVA to make the initial advance
hereunder is subject to the fulfillment, to the satisfaction
of FINOVA and its counsel, of each of the following
conditions, in addition to the conditions set forth in
Sections 4.1 and 4.2 above:
(a) Minimum Excess Availability (Section 4.1(c)). Minimum
Excess Availability shall not be less than $500,000 after
reserving from loan availability an amount equal to accounts
payable outstanding thirty (30) days or more from their
originally scheduled due date.
(b) Life Insurance (Section 4.1(u)). Life insurance
policies shall be maintained on the following individuals
and at the following amounts:
Robert H. Gentry III, of not less than $1,000,000.
(c) No Material Adverse Change (Section 4.1(v)). Further,
no material adverse change has occurred in the Borrower's
business, operations, financial condition, or assets or in
the prospect of repayment of the Obligations since the date
of the latest financial statements for Borrower set forth in
the Registration Statement.
(d) Validity and Support Agreements. Robert H. Gentry III
shall have delivered a Validity and Support Agreement in
favor of FINOVA, and in form and substance satisfactory to
FINOVA.
3
<PAGE> 33
(e) Transaction Costs (Section 4.1(gg)). Transaction Costs
for the initial public offering and the closing of the
refinancing contemplated thereby and by this Agreement shall
not to exceed $_________.
Borrower shall cause the conditions precedent set forth in
Section 4.1 of this Agreement and set forth above in this
Schedule to be satisfied, and shall provide evidence to
FINOVA that all such conditions precedent have been
satisfied, on or before the earlier of (i) a date not later
than five (5) Business Days following the successful
completion of the initial public offering contemplated by
the Registration Statement and (ii) February 28, 1998.
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 5.1): Florida
Borrower's copyrights, patents trademarks, and licenses (Section 5.5): None.
Fictitious Names/Prior Corporate Names in last 5 years (Section 5.2):
Prior Corporate Names: NONE
Fictitious Names: NONE
Borrower Locations (Section 5.16). See Exhibit 5.16 hereto.
Borrower's Federal Tax Identification Number (Section 5.16): 59-1867299
Permitted Encumbrances (Section 1.1): See Exhibit 1.1(a) hereto.
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the end
of each month or quarter (as determined by FINOVA in its
sole discretion), except as otherwise specifically
provided below:
Current Ratio Borrower shall maintain a ratio of Current Assets to
Current Liabilities of not less than 1.3 to 1.0.
EBITDA. Borrower shall maintain Earnings Before Interest, Taxes,
Depreciation and Amortization of not less than (i) One
Hundred Twenty Five Thousand Dollars ($125,000) in each
fiscal quarter of Borrower commencing with the Fiscal
Quarter ending March 31, 1998, and (ii) Five Hundred
Thousand Dollars ($500,000) for each Fiscal Year of
Borrower commencing with the Fiscal Year ending December
31, 1998.
4
<PAGE> 34
Senior Debt Service
Coverage Ratio As of the last day of each calendar quarter ended March
31, June 30, September 30 or December 31, Borrower's
Operating Cash Flow/Actual for the consecutive 12-month
period ending as of such last day must be at least 1.70
times the amount necessary to meet Borrower's Senior
Contractual Debt Service for such 12-month period;
provided however, that, with respect to the
calculations set forth herein for the period from the
Closing Date through September 30, 1998, Borrower's
Operating Cash Flow/Actual and Senior Contractual Debt
Service shall be determined beginning as of January 1,
1998 (the "START DATE") and be measured as follows: (x)
the time period from the Start Date through March 31,
1998, shall be for such amounts for such period, (y)
the time period from the Start Date through June 30,
1998, shall be for such amounts for such period, and
(z) the time period from the Start Date through
September 30, 1998, shall be for such amounts for such
period; and, provided further, that all such
determinations shall be made on a consolidated basis.
Total Debt Service
Coverage Ratio As of the last day of each calendar quarter ended March
31, June 30, September 30 or December 31, Borrower's
Operating Cash Flow/Actual for the consecutive 12-month
period ending as of such last day must be at least 1.1
times the amount necessary to meet Borrower's Total
Contractual Debt Service for such 12-month period;
provided however, that, with respect to the
calculations set forth herein for the period from the
Closing Date through September 30, 1998, Borrower's
Operating Cash Flow/Actual and Total Contractual Debt
Service shall be determined beginning as of the Start
Date and be measured as follows: (x) the time period
from the Start Date through March 31, 1998, shall be
for such amounts for such period, (y) the time period
from the Start Date through June 30, 1998, shall be for
such amounts for such period, and (z) the time period
from the Start Date through September 30, 1998, shall
be for such amounts for such period; and, provided
further, that all such determinations shall be made on
a consolidated basis.
NEGATIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or advances to
Employees except in the ordinary course of business and
consistent with past practices of Borrower in an
aggregate amount not exceeding at any time $5,000.
Existing Guaranties: None.
Capital
Expenditures: Borrower shall not make or incur any Capital
Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by
5
<PAGE> 35
Borrower in any fiscal year (beginning with the fiscal
year commencing January 1, 1998) would exceed $100,000
(excluding from such amount any Capital Expenditure
which has been (i) leased from a third party pursuant
to a capital lease or (ii) financed by a third party on
an unsecured basis or a purchase money security
interest basis provided that any liens securing any
such third party lease or financing arrangement such
repayment are limited solely to the asset being
financed and the Indebtedness and Financial covenants
set forth herein are not violated
Compensation: Borrower shall not pay total compensation, including
salaries, withdrawals, fees, bonuses, commissions,
drawing accounts and other payments, whether directly
or indirectly, in money or otherwise, during any fiscal
year to (i) Robert H. Gentry III in an amount in excess
of that set forth in the Registration Statement
(provided that in no event shall the aggregate cash
bonus amounts exceed 115% of the base salary of such
Person without FINOVA's prior written consent) or (ii)
to any of Borrower's other executives, officers and
directors (or any relative thereof) in an amount in
excess of 115% of such total compensation paid in the
immediately preceding fiscal year.
Indebtedness: Borrower shall not create, incur, assume or permit to
exist any Indebtedness (including Indebtedness in
connection with Capital Leases and any purchase money
security interest financings) in excess of $100,000
other than (i) the Obligations, (ii) trade payables and
other contractual obligations to suppliers and
customers incurred in the ordinary course of business
and (iii) other Indebtedness existing on the date of
this Agreement and reflected in Exhibit 6.2(a) attached
hereto (other than Indebtedness paid on the date of
this Agreement from proceeds of the initial advances
hereunder).
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly agings aged
by invoice date and reconciliations of Receivables
within ten (10) days after the end of each month.
2. Borrower shall provide FINOVA with monthly accounts
payable agings aged by invoice date, outstanding or
held check registers and inventory certificates within
ten (10) days after the end of each month.
3. Borrower shall provide FINOVA with monthly perpetual
inventory reports for the Inventory valued on a
first-in, first-out basis at the lower of cost or
market (in accordance with GAAP) or such other
inventory reports as are reasonably requested by
FINOVA, all within ten (10) days after the end of each
month.
4. Borrower shall provide FINOVA with monthly unaudited
financial statements within thirty (30) days after the
end of each month.
6
<PAGE> 36
5. Borrower shall provide FINOVA with audited consolidated
and consolidating fiscal financial statements within
one hundred twenty (120) days after the end of each
fiscal year, as more specifically described in Section
9.1(b) hereof, and with an opinion issued by a
Certified Public Accountant which is acceptable to
FINOVA.
6. Borrower shall provide FINOVA with annual operating
budgets (including income statements, balance sheets
and cash flow statements, by month) for the upcoming
fiscal year of Borrower within thirty (30) days prior
to the end of each fiscal year of Borrower.
7. Borrower's balance sheets for purposes of the
definition of Prepared Financials shall be as of
October 31, 1997.
8. Borrower shall, promptly upon their becoming available,
provide FINOVA with copies of (i) all financial
statements, reports, notices and proxy statements made
publicly available by Borrower to its security holders
including all 10Q and 10K Reports; (ii) all regular and
periodic reports and all registration statements and
prospectuses, if any, filed by Borrower with any
securities exchange or with the Securities and Exchange
Commission or any governmental or private regulatory
authority; and (iii) all press releases and other
statements made available by Borrower to the public
concerning material changes or developments in the
business of any such Person;
9. Borrower shall, within five (5) Business Days after
receipt thereof by Borrower, provide FINOVA with copies
of all management letters, exception reports or similar
letters or reports received by Borrower from its
independent certified public accounts.
TERM (SECTION 9.2):
The initial term of this Agreement shall be two (2) year(s)
from the date hereof (the "INITIAL TERM") and shall be
automatically renewed for successive periods of one (1) year
each (each, a "RENEWAL TERM"), unless earlier terminated as
provided in Section 7 or 9.2 above or elsewhere in this
Agreement.
TERMINATION FEE (SECTION 9.2):
Revolving Credit Loans Facility. The Termination Fee
applicable to the Revolving Credit Loans facility provided
for in Section 9.2(d) shall be an amount equal to the
following percentage of the average daily outstanding
balance of the Obligations for the 180-day period (or lesser
period if applicable) preceding the date of termination:
7
<PAGE> 37
(i) three percent (3%), if such early termination occurs on
or prior to the first anniversary of the date of this
Agreement;
(ii) one percent (1%), if such early termination occurs
after the first anniversary of the date of this Agreement;
provided that in the event such facility is terminated at
the option of Borrower in connection with a refinancing
provided by Merrill Lynch & Co., Inc. or an Affiliate
thereof at any time after the first anniversary of this
Agreement, the Termination Fee shall be waived.
DISBURSEMENT (SECTION 9.11):
Unless and until Borrower otherwise directs FINOVA in
writing, all loans shall be wired to Borrower's following
operating account:
________________________________________________________
________________________________________________________
ADDITIONAL PROVISIONS:
1. Eligible Unencumbered Property. Following the occurrence
of any Event of Default, Borrower shall promptly, upon FINOVA's
request therefor, duly execute and deliver, or cause to be duly
executed and delivered, to FINOVA (a) a mortgage or deed of trust in
form and substance acceptable to FINOVA (a "MORTGAGE") with respect
to any or all real property owned by Borrower not then subject to a
lien in favor of FINOVA or subject to an agreement with a third
party holding a lien thereon prohibiting the grant of a subordinate
lien to another party (an "ELIGIBLE UNENCUMBERED PROPERTY") together
with (a) a title insurance policy, current as-built survey, zoning
letters and certificates of occupancy, in each case satisfactory in
form and substance to FINOVA; (b) evidence that counterparts of the
Mortgage have been recorded in all places to the extent necessary or
desirable, in the judgment of FINOVA, to create a valid and
enforceable first priority lien (subject to Permitted Encumbrances)
on such Eligible Unencumbered Property in favor of FINOVA for the
benefit of itself and Lenders (or in favor of such other trustee as
may be required or desired under local law); and (c) an opinion of
counsel in each state in which such Eligible Unencumbered Property
is located in form and substance and from counsel satisfactory to
FINOVA.
2. Vehicle Titles. Within 30 days following the Closing Date,
FINOVA shall have received original certificates of title for each
of the vehicles specified in Exhibit 4.1(j) hereto issued by the
relevant state agency properly noting FINOVA as the first and only
lien holder thereupon.
8
<PAGE> 38
FINOVA:
BORROWER: FINOVA CAPITAL
AUTOMOTIVE ONE PARTS STORES, INC. CORPORATION
BY_______________________________ BY_______________________________
PRESIDENT OR VICE PRESIDENT TITLE_____________________________
[SIGNATURE PAGE TO SCHEDULE TO LOAN AND SECURITY AGREEMENT]
<PAGE> 39
STATE OF )
) ss.
COUNTY OF )
BEFORE ME, a Notary Public, in and for said county and state, personally
appeared the above-named Automotive One Parts Stores, Inc., a Florida
corporation, by _______________________________, its _______________________,
who acknowledged that he/she did sign the foregoing agreement and that the same
is his/her free act and deed and the free act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal at
__________, __________ this ___ day of __________, 1997.
___________________________________
Notary Public
<PAGE> 40
EXHIBIT 5.16
BORROWER'S LOCATIONS
A. LOCATION OF COLLATERAL
----------------------
B. OTHER OWNED REAL PROPERTIES
---------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report (which includes an explanatory paragraph for a going
concern uncertainty) dated May 14, 1997 except for Note C as to which the date
is December 22, 1997 accompanying the financial statements of Automotive One
Parts Stores, Inc. contained in the Registration Statement and Prospectus which
will be signed upon consummation of the transaction described in paragraph two
of Note A to the financial statements. We consent to the use of the
aforementioned report in the Amendment No. 2 to the Registration Statement (File
No. 333-27227) and Prospectus, and to the use of our name as it appears under
the caption "Experts" and "Summary Financial Information."
/s/ GRANT THORNTON LLP
Tampa, Florida
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTOMOTIVE ONE PARTS STORES, INC. FOR THE TEN
MONTH PERIOD ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 913
<ALLOWANCES> 210
<INVENTORY> 5,454
<CURRENT-ASSETS> 6,405
<PP&E> 6,104
<DEPRECIATION> 2,904
<TOTAL-ASSETS> 9,956
<CURRENT-LIABILITIES> 8,898
<BONDS> 1,126
0
0
<COMMON> 24
<OTHER-SE> (92)
<TOTAL-LIABILITY-AND-EQUITY> 9,956
<SALES> 9,207
<TOTAL-REVENUES> 9,207
<CGS> 5,727
<TOTAL-COSTS> 5,727
<OTHER-EXPENSES> 3,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> (448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (448)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
