UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-Q
/X/ QUARTERLY REPORT Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1995
Commission File No. 1-6485
________________________________________________________________
or
/ / TRANSITION REPORT Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
________________________________________________________________
ACTION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________
Pennsylvania
(State or other jurisdiction of incorporation or organization)
________________________________________________________________
25-0918682
(I.R.S. Employer Identification No.)
________________________________________________________________
460 Nixon Road, Cheswick, Pennsylvania 15024-1098
(Address of principal executive offices) (Zip Code)
________________________________________________________________
Registrant's telephone number, including area code: (412) 782-4800
_________________________________________________________________
The number of shares of the Registrant's common stock outstanding
at November 11, 1995 was 5,539,458.
_________________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
INDEX
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited) and
Independent Accountants' Review Report
Consolidated Balance Sheets -
September 30, 1995, September 24, 1994,
and June 24, 1995 3
Consolidated Statements of Operations -
Quarters Ended September 30, 1995 and
September 24, 1994 4
Consolidated Statements of Shareholders'
Equity - Quarters Ended September 30, 1995
and September 24, 1994 5
Consolidated Statements of Cash Flows -
Quarters Ended September 30, 1995 and
and September 24, 1994 6
Notes to Consolidated Financial Statements 7
Review by Independent Accountants 9
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
September September June
30, 1995 24, 1994 24, 1995
-------- -------- --------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $1,096 $313 $567
Trade accounts receivable, less allowances
of $478, $868, and $478 7,510 9,529 9,908
Inventories 18,414 16,757 18,133
Other current assets 1,130 1,235 1,111
------- ------- -------
Total Current Assets 28,150 27,834 29,719
Property, Plant and Equipment 7,687 8,112 7,964
Other Assets 1,688 2,473 1,863
------- ------- -------
$37,525 $38,419 $39,546
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes and acceptances payable $10,278 $5,112 $10,162
Accounts payable 4,217 4,561 4,406
Restructuring and discontinued operations 999 470 926
Other accrued liabilities 1,069 1,321 1,382
------- ------- -------
Total Current Liabilities 16,563 11,464 16,876
Long-Term Liabilities
Financing obligation - sale/leaseback 7,506 8,223 7,739
Long-term debt 115 115 115
Deferred compensation 1,416 2,126 1,688
------- ------- -------
Total Long-Term Liabilities 9,037 10,464 9,542
Shareholders' Equity
Common stock, $0.10 par value;
authorized 20,000,000 shares;
issued 7,187,428 shares 719 719 719
Capital in excess of par 25,498 25,498 25,498
Retained earnings (deficit) (2,718) 1,848 (1,515)
------- ------- -------
23,499 28,065 24,702
Less treasury shares, at cost 11,574 11,574 11,574
------- ------- -------
Total Shareholders' Equity 11,925 16,491 13,128
------- ------- -------
$37,525 $38,419 $39,546
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands except per share data)
<TABLE>
<CAPTION>
First Quarter Ended
-------------------------
September September
30, 1995 24, 1994
-------- --------
<S> <C> <C>
NET SALES $9,180 $11,035
COSTS AND EXPENSES
Cost of products sold 7,165 7,846
Operating expenses 2,719 2,932
Interest expense 654 380
------- -------
10,538 11,158
OTHER INCOME, NET 155 4
------- -------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,203) (119)
PROVISION FOR INCOME TAXES - -
------- -------
LOSS FROM CONTINUING OPERATIONS (1,203) (119)
LOSS FROM DISCONTINUED OPERATIONS
Operating loss - (233)
Provision for loss on disposal - -
------- -------
Total Loss from Discontinued Operations 0 (233)
------- -------
NET LOSS ($1,203) ($352)
======= =======
LOSS PER SHARE
Continuing operations ($0.22) ($0.02)
Discontinued operations 0.00 (0.04)
------- -------
NET LOSS PER SHARE ($0.22) ($0.06)
======= =======
Weighted average shares outstanding 5,539 5,566
</TABLE>
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(In thousands except share amounts)
<TABLE>
<CAPTION>
First Quarter Ended September 30, 1995 and September 24, 1994
-----------------------------------------------------------------------------------
Capital Retained
Common Stock In Excess Earnings Treasury Stock
Shares Amount of Par (Deficit) Shares Amount Total
------ ------ ------ --------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JUNE 25, 1994 7,187,428 $719 $25,498 $2,200 1,647,970 ($11,574) $16,843
Net Loss - - - (352) - - (352)
-----------------------------------------------------------------------------------
BALANCE - SEPTEMBER 24, 1994 7,187,428 $719 $25,498 $1,848 1,647,970 ($11,574) $16,491
===================================================================================
BALANCE - JUNE 24, 1995 7,187,428 $719 $25,498 ($1,515) 1,647,970 ($11,574) $13,128
Net Loss - - - (1,203) - - (1,203)
-----------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1995 7,187,428 $719 $25,498 ($2,718) 1,647,970 ($11,574) $11,925
===================================================================================
</TABLE>
See notes to consolidated financial statements.
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
First Quarter Ended
------------------------------
September September
30, 1995 24, 1994
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($1,203) ($119)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 238 286
Provision for doubtful accounts - (266)
Cash used in discontinued operation - (250)
Changes in operating assets and liabilities:
Trade accounts receivable 2,398 (401)
Inventories (281) 827
Other current assets (19) (48)
Accounts payable and accrued expenses (429) (230)
------ ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 704 (201)
====== ======
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment - (142)
------ ------
NET CASH USED IN INVESTMENT ACTIVITIES 0 (142)
====== ======
FINANCING ACTIVITIES:
Notes and acceptances payable 116 (327)
Principal payments on long-term obligations (233) (149)
Other, net (58) 332
------ ------
NET CASH USED IN FINANCING ACTIVITIES (175) (144)
====== ======
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 529 (487)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 567 800
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,096 $313
====== ======
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
A. The consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission. With the exception
of the consolidated balance sheet which was derived from the
audited financial statements as of June 24, 1995, such
statements have not been audited. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual
Report on Form 10-K. Effective July 1995 Company changed its
fiscal calendar from a 52-53 week year ending on the last
Saturday of each fiscal month to the last day of the calendar
month. The fiscal year end remains at the end of the month of
June. The Company's fiscal year 1996 will end June 30, 1996.
B. The accompanying financial statements reflect all adjustments
(consisting of normal recurring accruals and estimates) which
are, in the opinion of management, necessary for a fair
presentation.
C. The results of operations for the quarter ended September 30,
1995 are not necessarily indicative of the results to be
expected for the full year.
D. Inventories consist primarily of merchandise held for resale.
Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
E. The Company has a credit agreement which provides for up to $15
million in committed credit lines through December 31, 1995 and
up to $10 million through June 30, 1997. Availability under
the credit line is further limited by the level of eligible
accounts receivable and inventories. At September 30, 1995
outstanding borrowings under the credit agreement were $10.3
million and outstanding letters of credit were $1.5 million.
The unused borrowing capacity was $1.0 million as of September
30, 1995. Subsequent to September 30, 1995, availability under
the credit agreement decreased as a result of decreased
accounts receivable related to the low level of sales in the
first quarter. The Company has amended the credit agreement to
provide a temporary increase in available credit which is
believed to be sufficient to meet operating needs until
sufficient sales are made to develop adequate credit
availability under the borrowing formula. Interest is payable
at 3.5% over the prime rate of interest. The Company has met
all of the restrictive covenants under the credit agreement as
of September 30, 1995.
F. No income tax benefits were provided on the losses in the
fiscal quarters ended September 30, 1995 and September 24, 1994
because realization of such benefits is not reasonably assured.
Net operating loss carryforwards available to offset future
taxable income and thereby reduce income taxes payable in
fiscal 1996 and beyond are approximately $20 million for income
tax reporting purposes.
G. In September 1995 the Company sold the principal assets and the
business of Kensington Lamp Company (KLC), its lamp assembly
operation, to its managers. Terms of the sale include
retention of accounts receivable by the Company, assumption of
inventory-related accounts payable by the buyer, and an
interest bearing note secured by a second mortgage on
inventories and receivables, payable over a forty-two month
period beginning November 1, 1995. The note receivable from the
sale is included in other current assets and other long-term
assets in the accompanying balance sheet. The consolidated
financial statements for the prior year have been restated to
reflect KLC as a discontinued operation.
REVIEW BY INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, independent auditors, have performed a limited
review of the consolidated financial statements for the quarters
ended September 30, 1995 and September 24, 1994, as indicated in
their report on the limited review included on page 10. Since they
did not perform an audit, they express no opinion on the financial
statements referred to above. Management has given effect to any
significant adjustments and disclosures proposed in the course of
the limited review.
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Board of Directors
Action Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheets of Action Industries, Inc. and Subsidiaries as of September
30, 1995 and September 24, 1994, and the related condensed
consolidated statements of operations, shareholders' equity, and
cash flows for the fourteen-week and thirteen-week periods ended
September 30, 1995 and September 24, 1994, These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Action
Industries, Inc. for the year ended June 25, 1994, and the related
consolidated statements of operations, shareholders' equity and
cash flows for the year then ended (not presented herein) and in
our report dated September 14, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 24, 1995, is fairly stated,
in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 10, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company has experienced declining sales in its traditional
promotional business in recent years. The decline continued in the
first quarter of fiscal 1996 principally due to continuing reduced
business ($600,000) with the Company's largest customer of fiscal
year 1994, with whom a significant decrease in sales was
experienced last year. Also, Replenishment sales decreased
$400,000 related to new store setup business last year which was
not repeated in the current year. Further, the Company closed its
retail store in September 1995, which accounted for $200,000 in
decreased sales. The Company experienced additional lost sales
opportunities in both fiscal 1996 and 1995 as a result of its
efforts to reduce low margin and guaranteed sale business from the
level of such business experienced in 1993 and 1994.
The historical decline in sales is the result of many factors,
including a changing retail marketplace, the increasing complexity
of the promotional business itself, and strategic decisions to exit
or downsize unprofitable product lines.
The Company is implementing marketing plans for 1996 based on
providing its customers with promotional events which combine the
right PRODUCT with the right DISPLAY vehicle, centered upon the
right PROMOTION, and utilizing the right SERVICES. The objective
is to produce a synergy with the ongoing , in-line business of the
customer to both enhance and add to that business. This
combination of promotional elements is called the "SOLUTION
MATRIX ". All new promotional offerings must meet the requirements
of the SOLUTION MATRIX before they can be offered to customers.
The Company is adding $4 and $5 items to its Dollar Days
merchandise mix to improve return for the customer and the Company,
and is also assessing the feasibility of adding new licensed, well-known
brand names of merchandise and upscale theme-based events to
attract customers who have migrated away from Dollar Days.
Additionally the Company is implementing in-store service for
Replenishment and selected Dollar Days programs to improve turnover
and appearance, and is developing a premerchandising approach for
all promotions to improve delivery and production planning.
The major source of cash during the first fiscal quarter ended
September 30, 1995 was collections on receivables. Operating
losses and repayment of current and long-term obligations were the
primary uses of cash. Working capital of $11.6 million at
September 30, 1995 decreased from $12.8 million at June 24, 1995,
and $16.4 million at September 24, 1994. As a result, the current
ratio at September 30, 1995 was 1.70, decreased from 1.76 at June
24, 1995, and 2.43 at September 24, 1994. The long-term debt to
equity ratio (including the sale/leaseback financing obligation) of
0.64 at September 30, 1995 increased from 0.60 at June 24, 1995 and
0.51 at September 24, 1994.
Cash and cash equivalents were $1,096,000 at September 30, 1995 as
compared to $567,000 at June 24, 1995 and $313,000 at September 24,
1994. Cash balances fluctuate daily to meet operating
requirements.
Accounts receivable of $7.5 million at September 30, 1995 decreased
from $9.5 million at September 24, 1994 as a result of decreased
sales in the first quarter in the current year and improved
collections. Receivables decreased seasonally from $9.9 million at
June 24, 1995.
Inventories of $18.4 million were comparable to $18.1 million at
June 24, 1995, and increased from $16.7 million at September 24,
1994. Lower than anticipated sales in the current year and earlier
arrival of merchandise have resulted in inventory levels higher
than originally planned at September 30, 1995. Inventory
reductions are planned for the second quarter of the 1996 fiscal
year, such that inventory levels at the end of December and
subsequent months are expected to be lower than the prior year, as
the Company continues to pursue its inventory reduction plan.
Aggregate borrowings (long-term debt and notes payable) increased
from $13.5 million at September 24, 1994 to $18.0 million at June
24, 1995 and $17.9 million at September 30, 1995, primarily as a
result of operating losses incurred. Letters of credit outstanding
were $1.5 million at September 30, 1995, $1.9 million at September
24, 1994 and $909,000 at June 24, 1995.
The Company's Credit Agreement provides for up to $15 million in
committed credit lines through December of 1995 and $10 million
through June 30, 1997, consistent with the Company's anticipated
needs. Availability under the line is further limited by the level
of eligible accounts receivable and inventories. At September 30,
1995 outstanding borrowings under the credit agreement were $10.3
million and outstanding letters of credit were $1.5 million. The
unused borrowing capacity was $1.0 million as of September 30,
1995. Subsequent to September 30, 1995, availability under the
credit agreement decreased as a result of decreased accounts
receivable related to the low level of sales in the first quarter
and subsequently. The Company has amended the credit agreement to
provide a temporary increase in available credit which is believed
to be sufficient to meet operating needs until sufficient sales are
shipped to develop adequate credit availability under the borrowing
formula.
The Company's made no capital expenditures in the first fiscal
quarter ended September 30, 1995. The Company initiated a project
in 1994 to replace all of its core information systems computer
hardware and software. Future expenditures of $700,000 to $1
million will be made in fiscal 1996 or later in connection with
this project.
Inflation
The Company periodically discontinues or replaces in its
promotional programs items for which costs increase. In addition,
the Company strives to continually add new items to replace others
in its product offerings for the benefit of its customers. These
practices serve as offsets to the effects of inflation. The
Company believes its FIFO cost method of valuing inventories
provides for appropriate matching of current costs with current
revenues, and that the Company's buying practices and improving
inventory turnover reduce the appreciation in inventory values due
to inflation and other price increases.
Inflationary increases in the Company's costs of acquiring
merchandise may adversely affect the Company's operating margins,
since there is no assurance that the Company can pass such
increases along to its customers.
RESULTS OF OPERATIONS
First Quarter Fiscal 1996 Compared with First Quarter Fiscal 1995
Net Sales. Aggregate net sales for the fiscal 1996 first quarter
were $9,180,000, a decrease of $1,855,000 (16.8%) compared to
$11,035,000 in the prior year first quarter.
Sales to the Company's largest customer from 1994 declined
materially in fiscal 1995 and accounted for $600,000 in decreased
sales in the first quarter of fiscal 1996. In addition,
Replenishment sales decreased $400,000 as a result of new store
setup business last year which did not repeat in the current year.
The Company closed its retail store in September 1995, resulting in
decreased first quarter sales of $200,000.
The Company's sales volume has declined materially in each of the
last several years. It is the Company's belief that economic
conditions and other changes in the retail marketplace, along with
increased ability on the part of the Company's customers to create
their own promotional programs and a shifting customer base, have
contributed to the decline in sales volume. While the Company is
implementing marketing plans designed to refocus its business and
take advantage of this changing retail marketplace, there can be no
assurance that further sales declines will not occur for these or
other reasons. In addition, the decisions to further reduce the
Gift program business and to reduce the level of guaranteed sale
business will likely have a continuing adverse impact on the
Company's core promotional sales volume.
Following is a comparison of net sales by type of program:
<TABLE>
<CAPTION>
NET SALES
First Quarter Ended
-----------------------------
September September Increase
30, 1995 24, 1994 (Decrease)
--------- --------- ----------
<S> <C> <C> <C>
Dollar Days $ 6,069,000 $ 7,199,000 $ (1,130,000)
Replenishment 2,058,000 2,493,000 (435,000)
----------- ----------- -------------
Core Promotional Business 8,127,000 9,692,000 (1,565,000)
Gift 910,000 937,000 (27,000)
Other 143,000 406,000 (263,000)
----------- ----------- ------------
$ 9,180,000 $11,035,000 $(1,855,000)
=========== =========== ============
</TABLE>
Cost of Products Sold and Gross Profit Margins. Gross profit
margins (as a percentage of sales) decreased from 28.9% in fiscal
1995 to 22.0% in the current year, principally due to increased
cost of merchandise sold in core business programs, related
primarily to the mix of programs sold and increased plastic
manufacturing costs related to lower levels of production. Also,
higher than anticipated returns on prior period guaranteed sales
contributed to decreased gross margins.
Operating Expenses. Operating expenses decreased from $2,932,000
(26.6% of sales) in the fiscal 1995 first quarter to $2,719,000
(29.6% of sales) in fiscal 1996. The decrease in costs was
primarily the result of the Company's continuing cost reduction
efforts and the lower level of sales in 1996.
Interest Expense. The increase of $274,000 was due to higher
average borrowing levels in the current year and increased
effective interest rates and other borrowing costs.
Other Income (Expense), Net. Other income of $155,000 in the first
quarter of fiscal 1996 represented miscellaneous items. The prior
year other income amount of $4,000 was also comprised of
miscellaneous items.
Loss From Continuing Operations Before Income Taxes. The loss
increased from $119,000 in fiscal 1995 to $1,203,000 in fiscal
1996. The increase of $1,084,000 reflects the combined effect of
all the above.
Provision for Income Taxes. No income tax benefits were provided
on the losses in the first quarter of fiscal 1996 and 1995 because
realization of such benefits is not reasonably assured. Net
operating loss carryforwards available to offset future taxable
income and thereby reduce future income taxes payable in fiscal
1996 and beyond are approximately $20 million for income tax
reporting purposes.
Loss From Continuing Operations. The increase of $1,084,000
reflects the combined effect of all of the above.
Loss From Discontinued Operation. In fiscal 1995 the Company
adopted a plan to sell its lamp business, and completed the sale in
September of 1995. Operating losses of $233,000 for the first
quarter of fiscal 1995 were reclassified.
Net Loss. The increased loss of $851,000 reflects the combined
effect of all the above.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
Page
(a) Exhibits:
10 Amended and Restated Loan and Security Agreement
dated October 20, 1995, filed herein. 18
23 Acknowledgment of Independent Auditors, filed herein. 69
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the
thirteen weeks ended September 30, 1995:
September 7, 1995 - Report of the resignation and subsequent
replacement of the Company's Chairman, President and Chief
Executive Officer.
September 18, 1995 - Report of the sale of certain assets and
the business of the Company's subsidiary, Kensington Lamp
Collection.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ACTION INDUSTRIES, INC.
(Registrant)
Date: November 13, 1995 T. Ronald Casper
-----------------------------
T. Ronald Casper
Acting President and
Chief Executive Officer
Date: November 13, 1995 Kenneth L. Campbell
------------------------------
Kenneth L. Campbell
Senior Vice President, Finance
(Principal Financial and
Accounting Officer)
E X H I B I T 10
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
by and between
ACTION INDUSTRIES, INC.
and
FOOTHILL CAPITAL CORPORATION
Dated as of October 20, 1995
________________________________________________________________
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . 10
1.3 Code . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 Construction . . . . . . . . . . . . . . . . . . . . 10
1.5 Schedules and Exhibits.. . . . . . . . . . . . . . . 11
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . 11
2.1 Revolving Advances.. . . . . . . . . . . . . . . . . 11
2.2 Letters of Credit and Letter of Credit Guarantees. . 12
2.3 Intentionally Omitted. . . . . . . . . . . . . . . . 14
2.4 Overadvances . . . . . . . . . . . . . . . . . . . . 14
2.5 Interest: Rates, Payments, and Calculations . . . . 14
2.6 Crediting Payments; Application of Collections . . . 15
2.7 Statements of Obligations. . . . . . . . . . . . . . 16
2.8 Fees . . . . . . . . . . . . . . . . . . . . . . . . 16
3. CONDITIONS; TERM OF AGREEMENT . . . . . . . . . . . . . . 16
3.1 Conditions Precedent to Initial Advance, L/C, or
L/C Guaranty . . . . . . . . . . . . . . . . . . . . 16
3.2 Conditions Precedent to All Advances, L/Cs, or L/C
Guarantees.. . . . . . . . . . . . . . . . . . . . . 17
3.3 Term; Automatic Renewal. . . . . . . . . . . . . . . 18
3.4 Effect of Termination. . . . . . . . . . . . . . . . 18
3.5 Early Termination by Borrower. . . . . . . . . . . . 18
3.6 Termination Upon Event of Default. . . . . . . . . . 18
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . 19
4.1 Grant of Security Interest . . . . . . . . . . . . . 19
4.2 Negotiable Collateral. . . . . . . . . . . . . . . . 19
4.3 Collection of Accounts, General Intangibles,
Negotiable Collateral. . . . . . . . . . . . . . . . 19
4.4 Delivery of Additional Documentation Required. . . . 19
4.5 Power of Attorney. . . . . . . . . . . . . . . . . . 19
4.6 Right to Inspect . . . . . . . . . . . . . . . . . . 20
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 20
5.1 No Prior Encumbrances. . . . . . . . . . . . . . . . 20
5.2 Eligible Accounts. . . . . . . . . . . . . . . . . . 20
5.3 Eligible Inventory . . . . . . . . . . . . . . . . . 21
5.4 Location of Inventory and Equipment. . . . . . . . . 21
5.5 Inventory Records. . . . . . . . . . . . . . . . . . 21
5.6 Location of Chief Executive Office; FEIN . . . . . . 21
5.7 Due Organization and Qualification . . . . . . . . . 21
5.8 Due Authorization; No Conflict . . . . . . . . . . . 21
5.9 Litigation . . . . . . . . . . . . . . . . . . . . . 21
5.10 No Material Adverse Change in Financial Condition. . 22
5.11 Solvency . . . . . . . . . . . . . . . . . . . . . . 22
5.12 Employee Benefits. . . . . . . . . . . . . . . . . . 22
5.13 Environmental Condition. . . . . . . . . . . . . . . 23
5.14 Reliance by Foothill; Cumulative . . . . . . . . . . 23
6. AFFIRMATIVE COVENANTS.. . . . . . . . . . . . . . . . . . 23
6.1 Accounting System. . . . . . . . . . . . . . . . . . 23
6.2 Collateral Reports . . . . . . . . . . . . . . . . . 23
6.3 Schedules of Accounts. . . . . . . . . . . . . . . . 24
6.4 Financial Statements, Reports, Certificates. . . . . 24
6.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . 25
6.6 Guarantor Reports. . . . . . . . . . . . . . . . . . 25
6.7 Designation of Inventory . . . . . . . . . . . . . . 25
6.8 Returns. . . . . . . . . . . . . . . . . . . . . . . 25
6.9 Title to Equipment . . . . . . . . . . . . . . . . . 26
6.10 Maintenance of Equipment . . . . . . . . . . . . . . 26
6.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . 26
6.12 Insurance. . . . . . . . . . . . . . . . . . . . . . 26
6.13 Financial Covenants. . . . . . . . . . . . . . . . . 27
6.14 No Setoffs or Counterclaims. . . . . . . . . . . . . 27
6.15 Location of Inventory and Equipment. . . . . . . . . 27
6.16 Compliance with Laws . . . . . . . . . . . . . . . . 27
6.17 Employee Benefits. . . . . . . . . . . . . . . . . . 27
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . 28
7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . 28
7.2 Liens. . . . . . . . . . . . . . . . . . . . . . . . 29
7.3 Restrictions on Fundamental Changes. . . . . . . . . 29
7.4 Extraordinary Transactions and Disposal of Assets. . 29
7.5 Change Name. . . . . . . . . . . . . . . . . . . . . 29
7.6 Guarantee. . . . . . . . . . . . . . . . . . . . . . 29
7.7 Restructure. . . . . . . . . . . . . . . . . . . . . 29
7.8 Prepayments. . . . . . . . . . . . . . . . . . . . . 30
7.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.10 Capital Expenditures . . . . . . . . . . . . . . . . 30
7.11 Consignments . . . . . . . . . . . . . . . . . . . . 30
7.12 Distributions. . . . . . . . . . . . . . . . . . . . 30
7.13 Accounting Methods . . . . . . . . . . . . . . . . . 30
7.14 Investments. . . . . . . . . . . . . . . . . . . . . 30
7.15 Transactions with Affiliates . . . . . . . . . . . . 30
7.16 Suspension . . . . . . . . . . . . . . . . . . . . . 30
7.17 Compensation . . . . . . . . . . . . . . . . . . . . 30
7.18 Use of Proceeds. . . . . . . . . . . . . . . . . . . 31
7.19 Change in Location of Chief Executive Office;
Inventory and Equipment with Bailees.. . . . . . . . 31
8. EVENTS OF DEFAULT.. . . . . . . . . . . . . . . . . . . . 31
9. FOOTHILL'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . 33
9.1 Rights and Remedies. . . . . . . . . . . . . . . . . 33
9.2 Remedies Cumulative. . . . . . . . . . . . . . . . . 35
10. TAXES AND EXPENSES REGARDING THE COLLATERAL . . . . . . . 35
11. WAIVERS; INDEMNIFICATION. . . . . . . . . . . . . . . . . 36
11.1 Demand; Protest; etc.. . . . . . . . . . . . . . . . 36
11.2 Foothill's Liability for Collateral. . . . . . . . . 36
11.3 Indemnification. . . . . . . . . . . . . . . . . . . 36
12. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . 36
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. . . . . . . . 37
14. DESTRUCTION OF BORROWER'S DOCUMENTS . . . . . . . . . . . 38
15. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . 38
15.1 Effectiveness. . . . . . . . . . . . . . . . . . . . 38
15.2 Successors and Assigns . . . . . . . . . . . . . . . 38
15.3 Section Headings . . . . . . . . . . . . . . . . . . 38
15.4 Interpretation . . . . . . . . . . . . . . . . . . . 38
15.5 Severability of Provisions . . . . . . . . . . . . . 38
15.6 Amendments in Writing. . . . . . . . . . . . . . . . 39
15.7 Counterparts; Telefacsimile Execution. . . . . . . . 39
15.8 Revival and Reinstatement of Obligations . . . . . . 39
15.9 Confidentiality. . . . . . . . . . . . . . . . . . . 39
15.10 Amendment and Restatement.. . . . . . . . . . . 40
15.11 Integration . . . . . . . . . . . . . . . . . . 40
SCHEDULES
Schedule E-1 Eligible Inventory
Schedule E-2 In Transit Inventory Limits
Schedule P-1 Permitted Liens
Schedule 5.9 Litigation
Schedule 5.13 Environmental Exceptions
Schedule 6.15 Location of Inventory and Equipment
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, is
entered into as of October 20, 1995, between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a place of
business located at 11111 Santa Monica Boulevard, Suite 1500, Los
Angeles, California 90025-3333, and ACTION INDUSTRIES, INC., a
Pennsylvania corporation ("Borrower"), with its chief executive
office located at Action Industries Park, 460 Nixon Road, Cheswick,
Pennsylvania 15024.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Account Debtor" means any Person who is or who may
become obligated under, with respect to, or on account of an
Account.
"Accounts" means all currently existing and hereafter
arising accounts, contract rights, and all other forms of
obligations owing to Borrower arising out of the sale or lease of
goods or the rendition of services by Borrower, irrespective of
whether earned by performance, and any and all credit insurance,
guaranties, or security therefor.
"Affiliate" means, as applied to any Person, any other
Person directly or indirectly controlling, controlled by, or under
common control with, that Person. For purposes of this definition,
"control" as applied to any Person means the possession, directly
or indirectly, of the power to direct or cause the direction of the
management and policies of that Person, whether through the
ownership of voting securities, by contract, or otherwise.
"Agency Business" means transactions in which Borrower
serves as an agent for certain of its customers in the purchasing
of merchandise for which Borrower will only be paid a commission.
"Agreement" means this Amended and Restated Loan and
Security Agreement and any extensions, riders, supplements, notes,
amendments, or modifications to or in connection with this Amended
and Restated Loan and Security Agreement.
"Authorized Officer" means any officer of Borrower.
"Average Unused Portion of Maximum Amount" means (a) the
Maximum Amount; less (b) the sum of: (i) the average Daily Balance
of advances made by Foothill under Section 2.1 that were
outstanding during the immediately preceding month; plus (ii) the
average Daily Balance of the undrawn L/Cs and L/C Guarantees issued
by Foothill under Section 2.2 that were outstanding during the
immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code
(11 U.S.C. Section 101 et seq.), as amended, and any successor statute.
"Borrower" has the meaning set forth in the preamble to
this Agreement.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records indicating, summarizing, or
evidencing Borrower's properties or assets (including the
Collateral) or liabilities; all information relating to Borrower's
business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer
prepared information, and the equipment containing such
information.
"Borrowing Base" has the meaning set forth in Section
2.1.
"Business Day" means any day which is not a Saturday,
Sunday, or other day on which national banks are authorized or
required to close.
"Closing Date" means the date of the initial advance or
the date of the initial issuance of an L/C or an L/C Guaranty,
whichever occurs first.
"Code" means the California Uniform Commercial Code.
"Collateral" means each of the following: the Accounts;
Borrower's Books; the Equipment; the General Intangibles; the
Inventory; the Negotiable Collateral; any money, or other assets of
Borrower which now or hereafter come into the possession, custody,
or control of Foothill; and the proceeds and products, whether
tangible or intangible, of any of the foregoing including proceeds
of insurance covering any or all of the Collateral, and any and all
Accounts, Borrower's Books, Equipment, General Intangibles,
Inventory, Negotiable Collateral, money, deposit accounts, or other
tangible or intangible property resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or any
portion thereof or interest therein, and the proceeds thereof.
"Consolidated Current Assets" means, as of any date of
determination, the aggregate amount of all current assets of
Borrower and its subsidiaries calculated on a consolidated basis
that would, in accordance with GAAP, be classified on a balance
sheet as current assets.
"Consolidated Current Liabilities" means, as of any date
of determination, the aggregate amount of all current liabilities
of Borrower and its subsidiaries, calculated on a consolidated
basis that would, in accordance with GAAP, be classified on a
balance sheet as current liabilities. For purposes of this
definition, all advances outstanding under this Agreement shall be
deemed to be current liabilities without regard to whether they
would be deemed to be so under GAAP.
"Daily Balance" means the amount of an Obligation owed at
the end of a given day.
"Dilution" means Inventory returns, discounts, credits,
writeoffs and other adjustments to Accounts which result in the
reduction of the amounts due from the Account Debtors.
"Early Termination Premium" has the meaning set forth in
Section 3.5.
"Eligible Accounts" means those Accounts created by
Borrower in the ordinary course of business that arise out of
Borrower's sale of goods or rendition of services, that strictly
comply with all of Borrower's representations and warranties to
Foothill, and that are and at all times shall continue to be
acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time to time
by Foothill in Foothill's reasonable credit judgment. Eligible
Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to
pay within one hundred fifty (150) days of invoice date or Accounts
that are more than sixty (60) days past due; and all Accounts owed
by an Account Debtor that has failed to pay fifty percent (50%) or
more if its Accounts owed to Borrower within sixty (60) days of due
date or within one hundred fifty (150) days of invoice date;
(b) Accounts with respect to which the Account
Debtor is an officer, employee, Affiliate, or agent of Borrower;
(c) Accounts with respect to which goods are placed
on consignment, guaranteed sale, sale or return, sale on approval,
bill and hold, or other terms by reason of which the payment by the
Account Debtor may be conditional;
(d) Accounts with respect to which the Account
Debtor is not a resident of the United States, and which are not
either (i) covered by credit insurance in form and amount, and by
an insurer, satisfactory to Foothill, or (ii) supported by one or
more letters of credit that are assignable by their terms and have
been delivered to Foothill in an amount, of a tenor, and issued by
a financial institution, acceptable to Foothill;
(e) Accounts with respect to which the Account
Debtor is the United States or any department, agency, or
instrumentality of the United States; except for Accounts with
AAFAS and those accounts with respect to which Borrower has fully
complied with the Federal Assignment of Claims Act (31 U.S.C.
Section 3737);
(f) Accounts with respect to which Borrower is or
may become liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower; provided, however, that
with respect to advertising allowances payable in the ordinary
course of Borrower's business, such Accounts will only be
ineligible to the extent of such allowances;
(g) Accounts with respect to an Account Debtor
whose total obligations owing to Borrower exceed the higher of:
(i) ten percent (10%) of all Eligible
Accounts, or twenty percent (20%) of all Eligible Accounts in the
case of each of American Drug Stores, Consolidated Stores and Revco
Drug Stores, and fifteen percent (15%) of all Eligible Accounts in
the case of each of Family Dollar Stores, Lucky Stores, Supermarket
Services (A&P) and Wal-Mart, to the extent of the obligations owing
by such Account Debtor is in excess of such percentage; or
(ii) Accounts with respect to an Account Debtor
that meets the following criteria will only be ineligible to the
extent that the following percentage limitations are exceeded:
(a) the Account Debtor has a Dun & Bradstreet credit rating of 3A2
or better, (b) Accounts owed by the Account Debtor do not exceed
the limit of Borrower's credit insurance as to such Account Debtor
(less the deductible amount), (c) Accounts owed by any single
Account Debtor do not exceed forty five percent (45%) of Eligible
Accounts at any time; and (d) Accounts owed by Borrower's six (6)
largest Account Debtors, in the aggregate, do not exceed eighty
five percent (85%) of Eligible Accounts at any time;
(h) Accounts with respect to which the Account
Debtor disputes liability or makes any claim with respect thereto,
or is subject to any Insolvency Proceeding, or becomes insolvent,
or goes out of business;
(i) Accounts the collection of which Foothill, in
its reasonable credit judgment, believes to be doubtful by reason
of the Account Debtor's financial condition;
(j) Accounts that are payable in other than United
States Dollars; and
(k) Accounts that represent progress payments or
other advance billings that are due prior to the completion of
performance by Borrower of the subject contract for goods or
services.
"Eligible Inventory" means Inventory consisting of first
quality finished goods held for sale in the ordinary course of
Borrower's business, that are located at Borrower's premises
identified on Schedule E-1, are acceptable to Foothill in all
respects, and strictly comply with all of Borrower's
representations and warranties to Foothill. Eligible Inventory
shall also include first quality finished goods held for sale in
the ordinary course of Borrower's business that is in transit to
Borrower for which a bill of lading or forwarder's cargo receipt
has been issued and Borrower's interest in such Inventory has been
insured in a manner reasonably acceptable to Foothill to the extent
that such Inventory does not exceed the applicable amount set forth
on Schedule E-2. Eligible Inventory shall not include slow moving
or obsolete items, restrictive or custom items, raw materials other
than resin, work-in-process, components that are not part of
finished goods, spare parts, packaging and shipping materials,
supplies used or consumed in Borrower's business, Inventory at any
location other than those set forth on Schedule E-1, Inventory
subject to a security interest or lien in favor of any third
Person, bill and hold goods, Inventory that is not subject to
Foothill's perfected security interests, returned or defective
goods, "seconds," and Inventory acquired on consignment. Eligible
Inventory shall be valued at the lower of Borrower's cost or market
value.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture,
furnishings, trade fixtures, vehicles (including motor vehicles and
trailers), tools, parts, dies, jigs, goods (other than consumer
goods, farm products, or Inventory), wherever located, and any
interest of Borrower in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located.
"ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time, or any predecessor,
successor, or superseding laws of the United States of America,
together with all regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or
not incorporated) which, within the meaning of Section 414 of the
IRC, is: (i) under common control with Borrower; (ii) treated,
together with Borrower, as a single employer; (iii) treated as a
member of an affiliated service group of which Borrower is also
treated as a member; or (iv) is otherwise aggregated with the
Borrower for purposes of the employee benefits requirements listed
in IRC Section 414(m)(4).
"ERISA Event" means any one or more of the following:
(i) a Reportable Event with respect to a Qualified Plan or a
Multiemployer Plan; (ii) a Prohibited Transaction with respect to
any Plan; (iii) a complete or partial withdrawal by Borrower or any
ERISA Affiliate from a Multiemployer Plan; (iv) the complete or
partial withdrawal of Borrower or an ERISA Affiliate from a
Qualified Plan during a plan year in which it was, or was treated
as, a "substantial employer" as defined in Section 4001(a)(2) of
ERISA; (v) a failure to make full payment when due of all amounts
which, under the provisions of any Plan or applicable law, Borrower
or any ERISA Affiliate is required to make; (vi) the filing of a
notice of intent to terminate, or the treatment of a plan amendment
as a termination, under Sections 4041 or 4041A of ERISA; (vii) an
event or condition which might reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Qualified Plan or
Multiemployer Plan; (viii) the imposition of any liability under
Title IV of ERISA, other than PBGC premiums due but not delinquent
under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate;
and (ix) a violation of the applicable requirements of Sections 404
or 405 of ERISA, or the exclusive benefit rule under Section 403(c)
of ERISA, by any fiduciary or disqualified person with respect to
any Plan for which Borrower or any ERISA Affiliate may be directly
or indirectly liable.
"Event of Default" has the meaning set forth in Section
8.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to
this Agreement.
"Foothill Expenses" means all: costs or expenses
(including taxes, photocopying, notarization, telecommunication and
insurance premiums) required to be paid by Borrower under any of
the Loan Documents that are paid or advanced by Foothill;
documentation, filing, recording, publication, appraisal (including
periodic Collateral appraisals), real estate survey, environmental
audit, and search fees assessed, paid, or incurred by Foothill in
connection with Foothill's transactions with Borrower; costs and
expenses incurred by Foothill in the disbursement of funds to
Borrower (by wire transfer or otherwise); charges paid or incurred
by Foothill resulting from the dishonor of checks; costs and
expenses paid or incurred by Foothill to correct any default or
enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing,
shipping, selling, preparing for sale, or advertising to sell the
Collateral, or any portion thereof, irrespective of whether a sale
is consummated; costs and expenses paid or incurred by Foothill in
examining Borrower's Books; costs and expenses of third party
claims or any other suit paid or incurred by Foothill in enforcing
or defending the Loan Documents; and Foothill's reasonable
attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in
connection with a "workout," a "restructuring," or an Insolvency
Proceeding concerning Borrower or any guarantor of the
Obligations), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as
in effect from time to time in the United States, consistently
applied.
"General Intangibles" means all of Borrower's present and
future general intangibles and other personal property (including
contract rights, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill, patents, trade
names, trademarks, servicemarks, copyrights, blueprints, drawings,
purchase orders, customer lists, monies due or recoverable from
pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringements, claims,
computer programs, computer discs, computer tapes, literature,
reports, catalogs, deposit accounts, insurance premium rebates, tax
refunds, and tax refund claims), other than goods and Accounts.
"Hazardous Materials" means all or any of the following:
(a) substances that are defined or listed in, or otherwise
classified pursuant to, any applicable laws or regulations as
"hazardous substances," "hazardous materials," "hazardous wastes,"
"toxic substances," or any other formulation intended to define,
list, or classify substances by reason of deleterious properties
such as ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity, or "EP toxicity"; (b) oil, petroleum, or
petroleum derived substances, natural gas, natural gas liquids,
synthetic gas, drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of
crude oil, natural gas, or geothermal resources; (c) any flammable
substances or explosives or any radioactive materials; and (d)
asbestos in any form or electrical equipment which contains any oil
or dielectric fluid containing levels of polychlorinated biphenyls
in excess of fifty (50) parts per million.
"Indebtedness" means: (a) all obligations of Borrower
for borrowed money; (b) all obligations of Borrower evidenced by
bonds, debentures, notes, or other similar instruments and all
reimbursement or other obligations of Borrower in respect of
letters of credit, letter of credit guaranties, bankers
acceptances, interest rate swaps, controlled disbursement accounts,
or other financial products; (c) all obligations under capitalized
leases; (d) all obligations or liabilities of others secured by a
lien or security interest on any property or asset of Borrower,
irrespective of whether such obligation or liability is assumed;
and (e) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend,
letter of credit, or other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by
or against any Person under any provision of the Bankruptcy Code or
under any other bankruptcy or insolvency law, including assignments
for the benefit of creditors, formal or informal moratoria,
compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other similar
relief.
"Inventory" means all present and future inventory in
which Borrower has any interest, including goods held for sale or
lease or to be furnished under a contract of service and all of
Borrower's present and future raw materials, work in process,
finished goods, and packing and shipping materials, wherever
located, and any documents of title representing any of the above.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section
2.2(a).
"Loan Documents" means this Agreement, the Lock Box
Agreements, any note or notes executed by Borrower and payable to
Foothill, and any other agreement entered into in connection with
this Agreement.
"Lock Box" has the meaning provided in the respective
Lock Box Agreements.
"Lock Box Agreements" means those certain Lockbox
Operating Procedural Agreements and Depository Account Agreements,
in form and substance satisfactory to Foothill, each of which is
among Borrower, Foothill, and one of the Lock Box Banks.
"Lock Box Banks" means Nationsbank, PNC Bank, National
Association and First National Bank of Detroit.
"Maximum Amount" has the meaning set forth in Section
2.1.
"Multiemployer Plan" means a multiemployer plan as
defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414 of
the IRC in which employees of Borrower or an ERISA Affiliate
participate or to which Borrower or any ERISA Affiliate contribute
or are required to contribute.
"Negotiable Collateral" means all of Borrower's present
and future letters of credit, notes, drafts, instruments,
certificated and uncertificated securities (including the shares of
stock of subsidiaries of Borrower), documents, personal property
leases (wherein Borrower is the lessor), chattel paper, and
Borrower's Books relating to any of the foregoing.
"Obligations" means all loans, advances, debts,
principal, interest (including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued), contingent
reimbursement obligations owing to Foothill under any outstanding
L/Cs or L/C Guarantees, premiums, liabilities (including all
amounts charged to Borrower's loan account pursuant to any
agreement authorizing Foothill to charge Borrower's loan account),
obligations, fees (including Early Termination Premiums), lease
payments, guaranties, covenants, and duties owing by Borrower to
Foothill of any kind and description (whether pursuant to or
evidenced by the Loan Documents, by any note or other instrument,
or pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether
direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to others that
Foothill may have obtained by assignment or otherwise, and further
including all interest not paid when due and all Foothill Expenses
that Borrower is required to pay or reimburse by the Loan
Documents, by law, or otherwise.
"Overadvance" has the meaning set forth in Section 2.4.
"PBGC" means the Pension Benefit Guaranty Corporation as
defined in Title IV of ERISA, or any successor thereto.
"Permitted Liens" means: (a) liens and security interests
held by Foothill; (b) liens for unpaid taxes that are not yet due
and payable or for taxes that are due and payable but are being
contested in good faith in accordance with Section 6.11 and do not
exceed One Hundred Thousand Dollars ($100,000) outstanding at any
one time; (c) liens and security interests set forth on Schedule P-1
attached hereto; (d) purchase money security interests and liens
of lessors under capitalized leases to the extent that the
acquisition or lease of the underlying asset was permitted under
Section 7.10, and so long as the security interest or lien only
secures the purchase price of the asset; (e) easements, rights of
way, reservations, covenants, conditions, restrictions, zoning
variances, and other similar encumbrances that do not materially
interfere with the use or value of the property subject thereto;
(f) obligations and duties as lessee under any lease existing on
the date of this Agreement; and (g) mechanics', materialmen's,
warehousemen's, or similar liens.
"Person" means and includes natural persons,
corporations, limited partnerships, general partnerships, limited
liability companies, joint ventures, trusts, land trusts, business
trusts, or other organizations, irrespective of whether they are
legal entities, and governments and agencies and political
subdivisions thereof.
"Plan" means an employee benefit plan (as defined in
Section 3(3) of ERISA) which Borrower or any ERISA Affiliate
sponsors or maintains or to which Borrower or any ERISA Affiliate
makes, is making, or is obligated to make contributions, including
any Multiemployer Plan or Qualified Plan.
"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) of the
IRC.
"Qualified Plan" means a pension plan (as defined in
Section 3(2) of ERISA) intended to be tax-qualified under Section
401(a) of the IRC which Borrower or any ERISA Affiliate sponsors,
maintains, or to which any such person makes, is making, or is
obligated to make, contributions, or, in the case of a multiple-employer
plan (as described in Section 4064(a) of ERISA), has made
contributions at any time during the immediately preceding period
covering at least five (5) plan years, but excluding any
Multiemployer Plan.
"Reference Rate" means the highest of the variable rates
of interest, per annum, most recently announced by (a) Bank of
America, N.T. & S.A., (b) Mellon Bank, N.A., and (c) Citibank,
N.A., or any successor to any of the foregoing institutions, as its
"prime rate" or "reference rate," as the case may be, irrespective
of whether such announced rate is the best rate available from such
financial institution.
"Renewal Date" has the meaning set forth in Section 3.3.
"Reportable Event" means any event described in Section
4043 (other than Subsections (b)(7) and (b)(9)) of ERISA.
"Solvent" means, with respect to any Person on a
particular date, that on such date (a) at fair valuations, all of
the properties and assets of such Person are greater than the sum
of the debts, including contingent liabilities, of such Person,
(b) the present fair salable value of the properties and assets of
such Person is not less than the amount that will be required to
pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize
upon its properties and assets and pay its debts and other
liabilities, contingent obligations and other commitments as they
mature in the normal course of business, (d) such Person does not
intend to, and does not believe that it will, incur debts beyond
such Person's ability to pay as such debts mature, and (e) such
Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such
Person's properties and assets would constitute unreasonably small
capital after giving due consideration to the prevailing practices
in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that
such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents
the amount that reasonably can be expected to become an actual or
matured liability.
"Subsidiary" means a corporation at least ninety percent
(90%) of whose capital stock is owed by Borrower.
"Tangible Net Worth" means, as of the date any
determination thereof is to be made, the difference of: (a)
Borrower's total stockholder's equity; minus (b) the sum of: (i)
all intangible assets of Borrower; (ii) all of Borrower's prepaid
expenses; and (iii) all amounts due to Borrower from Affiliates,
calculated on a consolidated basis.
"Unfunded Benefit Liability" means the excess of a Plan's
benefit liabilities (as defined in Section 4001(a)(16) of ERISA)
over the current value of such Plan's assets, determined in
accordance with the assumptions used by the Plan's actuaries for
funding the Plan pursuant to Section 412 of the IRC for the
applicable plan year.
"Voidable Transfer" has the meaning set forth in Section
15.8.
"Working Capital" means the result of subtracting
Consolidated Current Liabilities from Consolidated Current Assets.
1.2 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with
GAAP. When used herein, the term "financial statements" shall
include the notes and schedules thereto. Whenever the term
"Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrower on a
consolidated basis unless the context clearly requires otherwise.
1.3 Code. Any terms used in this Agreement which are
defined in the Code shall be construed and defined as set forth in
the Code unless otherwise defined herein.
1.4 Construction. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the
singular, references to the singular include the plural, the term
"including" is not limiting, and the term "or" has, except where
otherwise indicated, the inclusive meaning represented by the
phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this
Agreement as a whole and not to any particular provision of this
Agreement. Section, subsection, clause, schedule, and exhibit
references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this
Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications,
renewals, replacements, substitutions, and supplements, thereto and
thereof, as applicable.
1.5 Schedules and Exhibits. All of the schedules and
exhibits attached to this Agreement shall be deemed incorporated
herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to make revolving advances to Borrower
in an amount not to exceed the Borrowing Base. For purposes of
this Agreement, "Borrowing Base" shall mean the sum of:
(i) an amount equal to the lesser of: (y)
seventy five percent (75%) of the amount of Eligible Accounts,
and (z) an amount equal to Borrower's cash collections for the
immediately preceding sixty (60) day period; plus
(ii) an amount equal to the lowest of: (x)
fifty five percent (55%) of the amount of Eligible Inventory
through October 31, 1995, fifty percent (50%) of the amount of
Eligible Inventory from November 1, 1995 through December 31,
1995, forty five percent (45%) of the amount of Eligible
Inventory from January 1, 1996 through June 30, 1996, and
forty percent (40%) of the amount of Eligible Inventory at all
times thereafter, (y) two hundred percent (200%) of the amount
of credit availability created by Section 2.1(a)(i) unless the
Borrowing Base is determined during the months of May, June,
September and October of each year when such percentage shall
be increased to three hundred percent (300%) of the amount of
credit availability created by Section 2.1(a)(i), and (z) Ten
Million Dollars ($10,000,000) through December 31, 1995, Seven
Million Five Hundred Thousand Dollars ($7,500,000) from
January 1, 1996 through June 30, 1996, and Five Million
Dollars ($5,000,000) at all times thereafter.
(b) To the extent that Dilution exceeds ten percent
(10%), Foothill shall have the right, in its discretion, to
establish a reserve against Eligible Accounts in an amount equal to
one (1) percentage point for each percentage point in excess of ten
percent (10%). Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may reduce its advance rates based upon
Eligible Accounts or Eligible Inventory without declaring an Event
of Default if it determines, in its reasonable discretion, that
there is a material impairment of the prospect of repayment of all
or any portion of the Obligations or a material impairment of the
value or priority of Foothill's security interests in the
Collateral.
(c) Foothill shall have no obligation to make
advances hereunder to the extent they would cause the outstanding
Obligations to exceed Fifteen Million Dollars ($15,000,000) from
the date hereof through December 31, 1995 and Ten Million Dollars
($10,000,000) at all times thereafter (the amount in effect at any
given time, the "Maximum Amount").
(d) Foothill is authorized to make advances under
this Agreement based upon telephonic or other instructions received
from anyone purporting to be an Authorized Officer of Borrower, or
without instructions if pursuant to Section 2.5(d). Borrower
agrees to establish and maintain a single designated deposit
account for the purpose of receiving the proceeds of the advances
requested by Borrower and made by Foothill hereunder. Unless
otherwise agreed by Foothill and Borrower, any advance requested by
Borrower and made by Foothill hereunder shall be made to such
designated deposit account. Amounts borrowed pursuant to this
Section 2.1 may be repaid and, subject to the terms and conditions
of this Agreement, reborrowed at any time during the term of this
Agreement.
2.2 Letters of Credit and Letter of Credit Guarantees.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to issue commercial or standby letters
of credit for the account of Borrower (each, an "L/C") or to issue
standby letters of credit or guarantees of payment (each such
letter of credit or guaranty, an "L/C Guaranty") with respect to
commercial or standby letters of credit issued by another Person
for the account of Borrower in an aggregate face amount not to
exceed the lesser of: (i) the Borrowing Base less the amount of
advances outstanding pursuant to Section 2.1, and (ii) Three
Million Dollars ($3,000,000). Borrower expressly understands and
agrees that Foothill shall have no obligation to arrange for the
issuance by other financial institutions of letters of credit that
are to be the subject of L/C Guarantees. Borrower and Foothill
acknowledge and agree that certain of the letters of credit that
are to be the subject of L/C Guarantees may be outstanding on the
Closing Date. Each such L/C (including those that are the subject
of L/C Guarantees) shall have an expiry date no later than fifteen
(15) days prior to the date on which this Agreement is scheduled to
terminate under Section 3.3 (without regard to any potential
renewal term) and all such L/Cs and L/C Guarantees shall be in form
and substance acceptable to Foothill in its sole discretion.
Foothill shall not have any obligation to issue L/Cs or L/C
Guarantees to the extent that the face amount of all outstanding
L/Cs and L/C Guarantees, plus the amount of advances outstanding
pursuant to Section 2.1, would exceed the Maximum Amount. The L/Cs
and the L/C Guarantees issued under this Section 2.2 shall be used
by Borrower, consistent with this Agreement, for its general
working capital purposes or to support its obligations with respect
to workers' compensation premiums or other similar obligations. If
Foothill is obligated to advance funds under an L/C or L/C
Guaranty, the amount so advanced immediately shall be deemed to be
an advance made by Foothill to Borrower pursuant to Section 2.1
and, thereafter, shall bear interest at the rates then applicable
under Section 2.5.
(b) Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless from any loss, cost, expense, or
liability, including payments made by Foothill, expenses, and
reasonable attorneys fees incurred by Foothill arising out of or in
connection with any L/Cs or L/C Guarantees. Borrower agrees to be
bound by the issuing bank's regulations and interpretations of any
letters of credit guarantied by Foothill and opened to or for
Borrower's account or by Foothill's interpretations of any L/C
issued by Foothill to or for Borrower's account, even though this
interpretation may be different from Borrower's own, and Borrower
understands and agrees that Foothill shall not be liable for any
error, negligence, or mistakes, whether of omission or commission,
in following Borrower's instructions or those contained in the L/Cs
or any modifications, amendments, or supplements thereto. Borrower
understands that the L/C Guarantees may require Foothill to
indemnify the issuing bank for certain costs or liabilities arising
out of claims by Borrower against such issuing bank. Borrower
hereby agrees to indemnify, save, defend, and hold Foothill
harmless with respect to any loss, cost, expense (including
attorneys fees), or liability incurred by Foothill under any L/C
Guaranty as a result of Foothill's indemnification of any such
issuing bank.
(c) Borrower hereby authorizes and directs any bank
that issues a letter of credit guaranteed by Foothill to deliver to
Foothill all instruments, documents, and other writings and
property received by the issuing bank pursuant to the letter of
credit, and to accept and rely upon Foothill's instructions and
agreements with respect to all matters arising in connection with
the letter of credit and the related application. Borrower may or
may not be the "applicant" or "account party" with respect to such
letter of credit.
(d) Any and all service charges, commissions, fees,
and costs incurred by Foothill relating to the L/Cs guaranteed by
Foothill shall be considered Foothill Expenses for purposes of this
Agreement and immediately shall be reimbursable by Borrower to
Foothill. On the first day of each month, Borrower will pay
Foothill a fee equal to two and three quarters percent (2.75%) per
annum times the actual Daily Balance of the undrawn L/Cs and L/C
Guarantees that were outstanding during the immediately preceding
month. Service charges, commissions, fees, and costs may be
charged to Borrower's loan account at the time the service is
rendered or the cost is incurred.
(e) In addition to revolving advances pursuant to
Section 2.1(a) and the issuance of L/Cs or L/C Guarantees pursuant
to Section 2.2(a), Foothill agrees to issue additional commercial
L/Cs for the account of Borrower or L/C Guarantees arising out of
Borrower's Agency Business in an aggregate amount outstanding at
any one time of not more than Five Million Dollars ($5,000,000).
Such L/Cs shall be issued to suppliers of merchandise for customers
of Borrower's Agency Business. Foothill will only issue such L/Cs
or L/C Guarantees to the extent that Borrower has a firm purchase
order from an Agency Business customer for merchandise which
purchase order is secured by a commercial letter of credit in form
and substance satisfactory to Foothill, issued by a financial
institution satisfactory to Foothill, and payable to Foothill or an
account controlled by Foothill. Foothill's L/C or L/C Guaranty
shall not exceed ninety five percent (95%) of the amount of each
customer order for the Agency Business.
(f) Immediately upon the termination of this
Agreement, Borrower agrees to either: (i) provide cash collateral
to be held by Foothill in an amount equal to the maximum amount of
Foothill's obligations under L/Cs plus the maximum amount of
Foothill's obligations to any Person under outstanding L/C
Guarantees, or (ii) cause to be delivered to Foothill releases of
all of Foothill's obligations under its outstanding L/Cs and L/C
Guarantees. At Foothill's discretion, any proceeds of Collateral
received by Foothill after the occurrence and during the
continuation of an Event of Default may be held as the cash
collateral required by this Section 2.2(e).
2.3 Intentionally Omitted.
2.4 Overadvances. If, at any time or for any reason,
the amount of Obligations owed by Borrower to Foothill pursuant to
Sections 2.1 and 2.2 is greater than either the dollar or
percentage limitations set forth in Sections 2.1 or 2.2 (an
"Overadvance"), Borrower immediately shall pay to Foothill, in
cash, the amount of such excess to be used by Foothill first, to
repay non-contingent Obligations and, thereafter, to be held by
Foothill as cash collateral to secure Borrower's obligation to
repay Foothill for all amounts paid pursuant to L/Cs or L/C
Guarantees.
2.5 Interest: Rates, Payments, and Calculations.
(a) Interest Rate. All Obligations, except for
undrawn L/Cs and L/C Guarantees, shall bear interest, on the actual
Daily Balance, at a per annum rate of three and one half (3.50)
percentage points above the Reference Rate.
(b) Default Rate. All Obligations, except for
undrawn L/Cs and L/C Guarantees, shall bear interest, from and
after the occurrence and during the continuance of an Event of
Default, at a per annum rate equal to five and three quarter (5.75)
percentage points above the Reference Rate. From and after the
occurrence and during the continuance of an Event of Default, the
fee provided in Section 2.2(d) shall be increased to a fee equal to
six and three quarter percent (6.75%) per annum times the actual
Daily Balance of the undrawn L/Cs and L/C Guarantees that were
outstanding during the immediately preceding month.
(c) Minimum Interest. In no event shall the rate
of interest chargeable hereunder be less than seven and three
quarter percent (7.75%) per annum.
(d) Payments. Interest hereunder shall be due and
payable on the first day of each month during the term hereof.
Borrower hereby authorizes Foothill, at its option, without prior
notice to Borrower, to charge such interest, all Foothill Expenses
(as and when incurred), and all installments or other payments due
under note or other Loan Document to Borrower's loan account, which
amounts shall thereafter accrue interest at the rate then
applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable
hereunder.
(e) Computation. The Reference Rate as of this
date is eight and three quarter percent (8.75%) per annum. In the
event the Reference Rate is changed from time to time hereafter,
the applicable rate of interest hereunder automatically and
immediately shall be increased or decreased by an amount equal to
such change in the Reference Rate. The rates of interest charged
hereunder shall be based upon the average Reference Rate in effect
during the month. All interest and fees chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty
(360) day year for the actual number of days elapsed.
(f) Intent to Limit Charges to Maximum Lawful Rate.
In no event shall the interest rate or rates payable under this
Agreement, plus any other amounts paid in connection herewith,
exceed the highest rate permissible under any law that a court of
competent jurisdiction shall, in a final determination, deem
applicable. Borrower and Foothill, in executing this Agreement,
intend to legally agree upon the rate or rates of interest and
manner of payment stated within it; provided, however, that,
anything contained herein to the contrary notwithstanding, if said
rate or rates of interest or manner of payment exceeds the maximum
allowable under applicable law, then, ipso facto as of the date of
this Agreement, Borrower is and shall be liable only for the
payment of such maximum as allowed by law, and payment received
from Borrower in excess of such legal maximum, whenever received,
shall be applied to reduce the principal balance of the Obligations
to the extent of such excess.
2.6 Crediting Payments; Application of Collections. The
receipt of any wire transfer of funds, check, or other item of
payment by Foothill (whether from transfers to Foothill by the Lock
Box Banks pursuant to the Lock Box Agreements or otherwise)
immediately shall be applied to provisionally reduce the
Obligations, but shall not be considered a payment on account
unless such wire transfer is of immediately available federal funds
and is made to the appropriate deposit account of Foothill or
unless and until such check or other item of payment is honored
when presented for payment. From and after the Closing Date,
Foothill shall be entitled to charge Borrower for three (3)
Business Days of `clearance' at the applicable rates set forth in
Sections 2.5(a) and 2.5(b) (applicable to advances under Section
2.1) on all collections, checks, wire transfers, or other items of
payment that are received by Foothill (regardless of whether
forwarded by the Lock Box Banks to Foothill, whether provisionally
applied to reduce the Obligations, or otherwise). This across-the-board
three (3) Business Day clearance charge on all receipts is
acknowledged by the parties to constitute an integral aspect of the
pricing of Foothill's facility to Borrower, and shall apply
irrespective of the characterization of whether receipts are owned
by Borrower or Foothill, and irrespective of the level of
Borrower's Obligations to Foothill. Should any check or item of
payment not be honored when presented for payment, then Borrower
shall be deemed not to have made such payment, and interest shall
be recalculated accordingly. Anything to the contrary contained
herein notwithstanding, any wire transfer, check, or other item of
payment shall be deemed received by Foothill only if it is received
into Foothill's Operating Account (as such account is identified in
the Lock Box Agreements) on or before 11:00 a.m. Los Angeles time.
If any wire transfer, check, or other item of payment is received
into Foothill's Operating Account (as such account is identified in
the Lock Box Agreements) after 11:00 a.m. Los Angeles time it shall
be deemed to have been received by Foothill as of the opening of
business on the immediately following Business Day.
2.7 Statements of Obligations. Foothill shall render
statements to Borrower of the Obligations, including principal,
interest, fees, and including an itemization of all charges and
expenses constituting Foothill Expenses owing, and such statements
shall be conclusively presumed to be correct and accurate and
constitute an account stated between Borrower and Foothill unless,
within thirty (30) days after receipt thereof by Borrower, Borrower
shall deliver to Foothill by registered or certified mail at its
address specified in Section 12, written objection thereto
describing the error or errors contained in any such statements.
2.8 Fees. Borrower shall pay to Foothill the following
fees:
(a) Renewal Fee. A one time renewal fee of One
Hundred Forty Five Thousand Dollars ($145,000) which is earned, in
full, and is due and payable by Borrower to Foothill in connection
with this Agreement as of the date hereof;
(b) Unused Line Fee. On the first day of each
month during the term of this Agreement, a fee in an amount equal
to one half of one percent (.50%) per annum times the Average
Unused Portion of the Maximum Amount;
(c) Annual Facility Fee. On each anniversary of
the Closing Date, a fee in an amount of Sixty Thousand Dollars
($60,000), such fee to be fully earned on each such anniversary;
(d) Financial Examination, Documentation, and
Appraisal Fees. Foothill's customary fee of Six Hundred Fifty
Dollars ($650) per day per examiner, plus out-of-pocket expenses
for each financial analysis and examination of Borrower performed
by Foothill or its agents; Foothill's customary appraisal fee of
One Thousand Dollars ($1,000) per day per appraiser, plus out-of-pocket
expenses for each appraisal of the Collateral performed by
Foothill or its agents; and, on each anniversary of the Closing
Date, Foothill's customary fee of One Thousand Dollars ($1,000) per
year for its loan documentation review. Foothill shall have the
right, in its reasonable discretion, to have Borrower's Inventory
appraised by an independent appraiser every six (6) months; and
(e) Servicing Fee. On the first day of each month
during the term of this Agreement, and thereafter so long as any
Obligations are outstanding, a servicing fee in an amount equal to
Five Thousand Dollars ($5,000) per month.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to Initial Advance, L/C, or L/C
Guaranty. The obligation of Foothill to make the initial advance
or to provide the initial L/C or L/C Guaranty is subject to the
fulfillment, to the satisfaction of Foothill and its counsel, of
each of the following conditions on or before the Closing Date:
(a) Action Investment Company shall have reaffirmed
its Continuing Guaranty of Borrower's Obligations to Foothill;
(b) Foothill shall have received a certificate from
the Secretary of Borrower attesting to the resolutions of
Borrower's Board of Directors authorizing its 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;
(c) Foothill 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;
(d) Foothill 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;
(e) Foothill shall have received the certified
copies of the policies of insurance, together with the endorsements
thereto, as are required by Section 6.12 hereof, the form and
substance of which shall be satisfactory to Foothill and its
counsel; and
(f) all other documents and legal matters in
connection with the transactions contemplated by this Agreement
shall have been delivered or executed or recorded and shall be in
form and substance satisfactory to Foothill and its counsel.
3.2 Conditions Precedent to All Advances, L/Cs, or L/C
Guarantees. The following shall be conditions precedent to all
advances, L/Cs, or L/C Guarantees hereunder:
(a) the representations and warranties contained in
this Agreement and the other Loan Documents shall be true and
correct in all respects on and as of the date of such advance, L/C,
or L/C Guaranty, as though made on and as of such date (except to
the extent that such representations and warranties relate solely
to an earlier date);
(b) no Event of Default or event which with the
giving of notice or passage of time would constitute an Event of
Default shall have occurred and be continuing on the date of such
advance, L/C, or L/C Guaranty, nor shall either result from the
making of the advance; and
(c) no injunction, writ, restraining order, or
other order of any nature prohibiting, directly or indirectly, the
making of such advance or the issuance of such L/C or L/C Guaranty
shall have been issued and remain in force by any governmental
authority against Borrower, Foothill, or any of their Affiliates.
3.3 Term; Automatic Renewal. This Agreement shall
become effective upon the execution and delivery hereof by Borrower
and Foothill and shall continue in full force and effect for a term
ending on June 30, 1997 (the "Renewal Date") and automatically
shall be renewed for successive one (1) year periods thereafter,
unless sooner terminated pursuant to the terms hereof. Either
party may terminate this Agreement effective on the Renewal Date or
on any anniversary of the Renewal Date by giving the other party at
least ninety (90) days prior written notice by registered or
certified mail, return receipt requested. The foregoing
notwithstanding, Foothill shall have the right to terminate its
obligations under this Agreement immediately and without notice
upon the occurrence and during the continuation of an Event of
Default.
3.4 Effect of Termination. On the date of termination,
all Obligations (including contingent reimbursement obligations
under any outstanding L/Cs or L/C Guarantees) immediately shall
become due and payable without notice or demand. No termination of
this Agreement, however, shall relieve or discharge Borrower of
Borrower's duties, Obligations, or covenants hereunder, and
Foothill's continuing security interests in the Collateral shall
remain in effect until all Obligations have been fully and finally
discharged and Foothill's obligation to provide advances hereunder
is terminated. If Borrower has sent a notice of termination
pursuant to the provisions of Section 3.3, but fails to pay all
Obligations on the date set forth in said notice, then Foothill
may, but shall not be required to, renew this Agreement for an
additional term of one (1) year.
3.5 Early Termination by Borrower. The provisions of
Section 3.3 that allow termination of this Agreement by Borrower
only on the Renewal Date and certain anniversaries thereof
notwithstanding, Borrower has the option, at any time upon ninety
(90) days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations
(including an amount equal to the full amount of the L/Cs or L/C
Guarantees), together with a premium (the "Early Termination
Premium") equal to two percent (2%) of the Maximum Amount if such
termination occurs on or before June 30, 1996, and one percent (1%)
of the Maximum Amount if such termination occurs at any time
thereafter.
3.6 Termination Upon Event of Default. If Foothill
terminates this Agreement upon the occurrence of an Event of
Default, in view of the impracticability and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Foothill's lost profits as a
result thereof, Borrower shall pay to Foothill upon the effective
date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be
presumed to be the amount of damages sustained by Foothill as the
result of the early termination and Borrower agrees that it is
reasonable under the circumstances currently existing. The Early
Termination Premium provided for in this Section 3.6 shall be
deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower hereby grants
to Foothill a continuing security interest in all currently
existing and hereafter acquired or arising Collateral in order to
secure prompt repayment of any and all Obligations and in order to
secure prompt performance by Borrower of each of its covenants and
duties under the Loan Documents. Foothill's security interests in
the Collateral shall attach to all Collateral without further act
on the part of Foothill or Borrower. Anything contained in this
Agreement or any other Loan Document to the contrary
notwithstanding, and other than sales of Inventory to buyers in the
ordinary course of business, Borrower has no authority, express or
implied, to dispose of any item or portion of the Collateral.
4.2 Negotiable Collateral. In the event that any
Collateral, including proceeds, is evidenced by or consists of
Negotiable Collateral, Borrower shall, immediately upon the request
of Foothill, endorse and assign such Negotiable Collateral to
Foothill and deliver physical possession of such Negotiable
Collateral to Foothill.
4.3 Collection of Accounts, General Intangibles,
Negotiable Collateral. Foothill, Borrower, and the Lock Box Banks
shall enter into the Lock Box Agreements, in form and substance
satisfactory to Foothill in its sole discretion, pursuant to which
all of Borrower's cash receipts, checks, and other items of payment
(including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds) will be forwarded to Foothill on a daily
basis. At any time, Foothill or Foothill's designee may: (a)
notify customers or Account Debtors of Borrower that the Accounts,
General Intangibles, or Negotiable Collateral have been assigned to
Foothill or that Foothill has a security interest therein; and (b)
collect the Accounts, General Intangibles, and Negotiable
Collateral directly and charge the collection costs and expenses to
Borrower's loan account. Borrower agrees that it will hold in
trust for Foothill, as Foothill's trustee, any cash receipts,
checks, and other items of payment (including, insurance proceeds,
proceeds of cash sales, rental proceeds, and tax refunds) that it
receives and immediately will deliver said cash receipts, checks,
and other items of payment to Foothill in their original form as
received by Borrower.
4.4 Delivery of Additional Documentation Required. At
any time upon the request of Foothill, Borrower shall execute and
deliver to Foothill all financing statements, continuation
financing statements, fixture filings, security agreements, chattel
mortgages, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other
documents that Foothill may reasonably request, in form
satisfactory to Foothill, to perfect and continue perfected
Foothill's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated hereby and
under the other the Loan Documents.
4.5 Power of Attorney. Borrower hereby irrevocably
makes, constitutes, and appoints Foothill (and any of Foothill's
officers, employees, or agents designated by Foothill) as
Borrower's true and lawful attorney, with power to: (a) if
Borrower refuses to, or fails timely to execute and deliver any of
the documents described in Section 4.4, sign the name of Borrower
on any of the documents described in Section 4.4; (b) at any time
that an Event of Default has occurred and is continuing or Foothill
deems itself insecure (in accordance with Section 1208 of the
Code), sign Borrower's name on any invoice or bill of lading
relating to any Account, drafts against Account Debtors, schedules
and assignments of Accounts, verifications of Accounts, and notices
to Account Debtors; (c) send requests for verification of Accounts;
(d) endorse Borrower's name on any checks, notices, acceptances,
money orders, drafts, or other item of payment or security that may
come into Foothill's possession; (e) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself
insecure (in accordance with Section 1208 of the Code), notify the
post office authorities to change the address for delivery of
Borrower's mail to an address designated by Foothill, to receive
and open all mail addressed to Borrower, and to retain all mail
relating to the Collateral and forward all other mail to Borrower;
(f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with
Section 1208 of the Code), make, settle, and adjust all claims
under Borrower's policies of insurance and make all determinations
and decisions with respect to such policies of insurance; and (g)
at any time that an Event of Default has occurred and is continuing
or Foothill deems itself insecure (in accordance with Section 1208
of the Code), settle and adjust disputes and claims respecting the
Accounts directly with Account Debtors, for amounts and upon terms
which Foothill determines to be reasonable, and Foothill may cause
to be executed and delivered any documents and releases which
Foothill determines to be necessary. The appointment of Foothill
as Borrower's attorney, and each and every one of Foothill's rights
and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully and finally repaid and
performed and Foothill's obligation to extend credit hereunder is
terminated.
4.6 Right to Inspect. Foothill (through any of its
officers, employees, or agents) shall have the right, from time to
time hereafter to inspect Borrower's Books and to check, test, and
appraise the Collateral in order to verify Borrower's financial
condition or the amount, quality, value, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Foothill as follows:
5.1 No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of liens,
claims, security interests, or encumbrances, except for Permitted
Liens.
5.2 Eligible Accounts. The Eligible Accounts are, at
the time of the creation thereof and as of each date on which
Borrower includes them in a Borrowing Base calculation or
certification, bona fide existing obligations created by the sale
and delivery of Inventory or the rendition of services to Account
Debtors in the ordinary course of Borrower's business,
unconditionally owed to Borrower without defenses, disputes,
offsets, counterclaims, or rights of return or cancellation. The
property giving rise to such Eligible Accounts has been delivered
to the Account Debtor, or to the Account Debtor's agent for
immediate shipment to and unconditional acceptance by the Account
Debtor. At the time of the creation of an Eligible Account and as
of each date on which Borrower includes an Eligible Account in a
Borrowing Base calculation or certification, Borrower has not
received notice of actual or imminent bankruptcy, insolvency, or
material impairment of the financial condition of any applicable
Account Debtor regarding such Eligible Account.
5.3 Eligible Inventory. All Eligible Inventory is now
and at all times hereafter shall be of good and merchantable
quality, free from defects.
5.4 Location of Inventory and Equipment. The Inventory
and Equipment are not stored with a bailee, warehouseman, or
similar party (without Foothill's prior written consent) and are
located only at the locations identified on Schedule 6.15 or
otherwise permitted by Section 6.15.
5.5 Inventory Records. Borrower now keeps, and
hereafter at all times shall keep, correct and accurate records
itemizing and describing the kind, type, quality, and quantity of
the Inventory, and Borrower's cost therefor.
5.6 Location of Chief Executive Office; FEIN. The chief
executive office of Borrower is located at the address indicated in
the preamble to this Agreement and Borrower's FEIN is 25-0918682.
5.7 Due Organization and Qualification. Borrower is
duly organized and existing and in good standing under the laws of
the state of its incorporation and qualified and licensed to do
business in, and in good standing in, any state where the failure
to be so licensed or qualified could reasonably be expected to have
a material adverse effect on the business, operations, condition
(financial or otherwise), finances, or prospects of Borrower or on
the value of the Collateral to Foothill.
5.8 Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within
Borrower's corporate powers, have been duly authorized, and are not
in conflict with nor constitute a breach of any provision contained
in Borrower's Articles or Certificate of Incorporation, or By-laws,
nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which its properties
or assets may be bound.
5.9 Litigation. There are no actions or proceedings
pending by or against Borrower before any court or administrative
agency and Borrower does not have knowledge or belief of any
pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for:
(a) ongoing collection matters in which Borrower is the plaintiff;
(b) matters disclosed on Schedule 5.9; and (c) matters arising
after the date hereof that, if decided adversely to Borrower, would
not materially impair the prospect of repayment of the Obligations
or materially impair the value or priority of Foothill's security
interests in the Collateral.
5.10 No Material Adverse Change in Financial Condition.
All financial statements relating to Borrower or any guarantor of
the Obligations that have been delivered by Borrower to Foothill
have been prepared in accordance with GAAP and fairly present
Borrower's (or such guarantor's, as applicable) financial condition
as of the date thereof and Borrower's results of operations for the
period then ended. There has not been a material adverse change in
the financial condition of Borrower (or such guarantor, as
applicable) since the date of the latest financial statements
submitted to Foothill on or before the Closing Date.
5.11 Solvency. Borrower is Solvent. No transfer of
property is being made by Borrower and no obligation is being
incurred by Borrower in connection with the transactions
contemplated by this Agreement or the other Loan Documents with the
intent to hinder, delay, or defraud either present or future
creditors of Borrower.
5.12 Employee Benefits. Each Plan is in compliance in
all material respects with the applicable provisions of ERISA and
the IRC. Each Qualified Plan and Multiemployer Plan has been
determined by the Internal Revenue Service to qualify under Section
401 of the IRC, and the trusts created thereunder have been
determined to be exempt from tax under Section 501 of the IRC, and,
to the best knowledge of Borrower, nothing has occurred that would
cause the loss of such qualification or tax-exempt status. There
are no outstanding liabilities under Title IV of ERISA with respect
to any Plan maintained or sponsored by Borrower or any ERISA
Affiliate, nor with respect to any Plan to which Borrower or any
ERISA Affiliate contributes or is obligated to contribute which
could reasonably be expected to have a material adverse effect on
the financial condition of Borrower. No Plan subject to Title IV
of ERISA has any Unfunded Benefit Liability which could reasonably
be expected to have a material adverse effect on the financial
condition of Borrower. Neither Borrower nor any ERISA Affiliate
has transferred any Unfunded Benefit Liability to a person other
than Borrower or an ERISA Affiliate or has otherwise engaged in a
transaction that could be subject to Sections 4069 or 4212(c) of
ERISA which could reasonably be expected to have a material adverse
effect on the financial condition of Borrower. Neither Borrower
nor any ERISA Affiliate has incurred nor reasonably expects to
incur (x) any liability (and no event has occurred which, with the
giving of notice under Section 4219 of ERISA, would result in such
liability) under Sections 4201 or 4243 of ERISA with respect to a
Multiemployer Plan, or (y) any liability under Title IV of ERISA
(other than premiums due but not delinquent under Section 4007 of
ERISA) with respect to a Plan, which could, in either event,
reasonably be expected to have a material adverse effect on the
financial condition of Borrower. No application for a funding
waiver or an extension of any amortization period pursuant to
Section 412 of the IRC has been made with respect to any Plan. No
ERISA Event has occurred or is reasonably expected to occur with
respect to any Plan which could reasonably be expected to have a
material adverse effect on the financial condition of Borrower.
Borrower and each ERISA Affiliate have complied in all material
respects with the notice and continuation coverage requirements of
Section 4980B of the IRC.
5.13 Environmental Condition. Except as disclosed on
Schedule 5.13, none of Borrower's properties or assets has ever
been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators in the disposal of, or to produce,
store, handle, treat, release, or transport, any Hazardous
Materials. Except as disclosed on Schedule 5.13, none of
Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a candidate for
closure pursuant to any environmental protection statute. No lien
arising under any environmental protection statute has attached to
any revenues or to any real or personal property owned or operated
by Borrower. Except as disclosed on Schedule 5.13, Borrower has
not received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by Borrower
resulting in the releasing or disposing of Hazardous Materials into
the environment.
5.14 Reliance by Foothill; Cumulative. Each warranty and
representation contained in this Agreement automatically shall be
deemed repeated with each advance or issuance of an L/C or L/C
Guaranty and shall be conclusively presumed to have been relied on
by Foothill regardless of any investigation made or information
possessed by Foothill. The warranties and representations set
forth herein shall be cumulative and in addition to any and all
other warranties and representations that Borrower now or hereafter
shall give, or cause to be given, to Foothill.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of
the Obligations, and unless Foothill shall otherwise consent in
writing, Borrower shall do all of the following:
6.1 Accounting System. Borrower shall maintain a
standard and modern system of accounting in accordance with GAAP
with ledger and account cards or computer tapes, discs, printouts,
and records pertaining to the Collateral which contain information
as from time to time may be requested by Foothill. Borrower also
shall keep proper books of account showing all sales, claims, and
allowances on its Inventory.
6.2 Collateral Reports. Borrower shall deliver to
Foothill, no later than the fifteenth (15th) day of each fiscal
month during the term of this Agreement, a detailed aging, by
total, of the Accounts, a summary aging of outstanding accounts,
and, upon Foothill's reasonable request, a detailed listing, by
vendor, of checks held. Original sales invoices evidencing daily
sales shall be mailed by Borrower to each Account Debtor with, at
Foothill's request, a copy to Foothill, and, at Foothill's
direction, the invoices shall indicate on their face that the
Account has been assigned to Foothill and that all payments are to
be made directly to Foothill. Borrower shall deliver to Foothill,
as Foothill may from time to time require, collection reports,
sales journals, invoices, original delivery receipts, customer's
purchase orders, shipping instructions, bills of lading, and other
documentation respecting shipment arrangements. Absent such a
request by Foothill, copies of all such documentation shall be held
by Borrower as custodian for Foothill.
6.3 Schedules of Accounts. With such regularity as
Foothill shall require, Borrower shall provide Foothill with
schedules describing all Accounts which schedules shall separately
described Accounts arising from guaranteed sales. Foothill's
failure to request such schedules or Borrower's failure to execute
and deliver such schedules shall not affect or limit Foothill's
security interests or other rights in and to the Accounts.
6.4 Financial Statements, Reports, Certificates.
Borrower agrees to deliver to Foothill: (a) as soon as available,
but in any event within forty five (45) days after the end of each
fiscal month during each of Borrower's fiscal years (except for the
month of June which shall be sixty (60) days), a company prepared
balance sheet, income statement, and cash flow statement covering
Borrower's operations during such period; and (b) as soon as
available, but in any event within ninety (90) days after the end
of each of Borrower's fiscal years, financial statements of
Borrower for each such fiscal year, audited by independent
certified public accountants reasonably acceptable to Foothill and
certified, without any qualifications, by such accountants to have
been prepared in accordance with GAAP, together with a certificate
of such accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any event or
condition constituting an Event of Default, or that would, with the
passage of time or the giving of notice, constitute an Event of
Default. Such audited financial statements shall include a balance
sheet, profit and loss statement, and cash flow statement, and, if
prepared, such accountants' letter to management. If Borrower is
a parent company of one or more subsidiaries, or Affiliates, or is
a subsidiary or Affiliate of another company, then, in addition to
the financial statements referred to above, Borrower agrees to
deliver financial statements prepared on a consolidating basis so
as to present Borrower and each such related entity separately, and
on a consolidated basis.
Together with the above, Borrower also shall deliver
to Foothill Borrower's Form 10-Q Quarterly Reports, Form 10-K
Annual Reports, and Form 8-K Current Reports, and any other filings
made by Borrower with the Securities and Exchange Commission, if
any, as soon as the same are filed, or any other information that
is provided by Borrower to its shareholders, and any other report
reasonably requested by Foothill relating to the Collateral and
financial condition of Borrower.
Each month, together with the financial statements
provided pursuant to Section 6.4(a), Borrower shall deliver to
Foothill a certificate signed by its chief financial officer to the
effect that: (i) all reports, statements, or computer prepared
information of any kind or nature delivered or caused to be
delivered to Foothill hereunder have been prepared in accordance
with GAAP and fairly present the financial condition of Borrower;
(ii) Borrower is in timely compliance with all of its covenants and
agreements hereunder; (iii) the representations and warranties of
Borrower contained in this Agreement and the other Loan Documents
are true and correct in all material respects on and as of the date
of such certificate, as though made on and as of such date (except
to the extent that such representations and warranties relate
solely to an earlier date); and (iv) on the date of delivery of
such certificate to Foothill there does not exist any condition or
event that constitutes an Event of Default (or, in each case, to
the extent of any non-compliance, describing such non-compliance as
to which he or she may have knowledge and what action Borrower has
taken, is taking, or proposes to take with respect thereto).
To the extent that Foothill has requested the same
from Borrower and Borrower has not promptly provided same to
Foothill, Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to
Foothill, at Borrower's expense, copies of Borrower's financial
statements, papers related thereto, and other accounting records of
any nature in their possession, and to disclose to Foothill any
information they may have regarding Borrower's business affairs and
financial condition.
6.5 Tax Returns. Borrower agrees to deliver to Foothill
copies of each of Borrower's future federal income tax returns, and
any amendments thereto, within thirty (30) days of the filing
thereof with the Internal Revenue Service.
6.6 Guarantor Reports. Borrower agrees to cause any
guarantor of any of the Obligations to deliver its annual financial
statements at the time when Borrower provides its audited financial
statements to Foothill and copies of all federal income tax returns
as soon as the same are available and in any event no later than
thirty (30) days after the same are required to be filed by law.
6.7 Designation of Inventory. Borrower shall now and
from time to time hereafter, but not less frequently than monthly,
execute and deliver to Foothill a designation of Inventory
specifying Borrower's cost and the wholesale market value of
Borrower's raw materials, work in process, and finished goods, and
further specifying such other information as Foothill may
reasonably request.
6.8 Returns. Returns and allowances, if any, as between
Borrower and its Account Debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they
exist at the time of the execution and delivery of this Agreement.
If, at a time when no Event of Default has occurred and is
continuing, any Account Debtor returns any Inventory to Borrower,
Borrower promptly shall determine the reason for such return and,
if Borrower accepts such return, issue a credit memorandum (with a
copy to be sent to Foothill) in the appropriate amount to such
Account Debtor. If, at a time when an Event of Default has
occurred and is continuing, any Account Debtor returns any
Inventory to Borrower, Borrower promptly shall determine the reason
for such return and, if Foothill consents (which consent shall not
be unreasonably withheld), issue a credit memorandum (with a copy
to be sent to Foothill) in the appropriate amount to such Account
Debtor. On a daily basis, Borrower shall notify Foothill of all
returns and recoveries and of all disputes and claims.
6.9 Title to Equipment. Upon Foothill's request,
Borrower immediately shall deliver to Foothill, properly endorsed,
any and all evidences of ownership of, certificates of title, or
applications for title to any items of Equipment.
6.10 Maintenance of Equipment. Borrower shall keep and
maintain the Equipment in good operating condition and repair
(ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Borrower
shall not permit any item of Equipment to become a fixture to real
estate (other than a trade fixture) or an accession to other
property, and the Equipment is now and shall at all times remain
personal property.
6.11 Taxes. All assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or
assessed against Borrower or any of its property have been paid,
and shall hereafter be paid in full, before delinquency or before
the expiration of any extension period; provided, however, that
such taxes need not be paid if they are being contested in good
faith by Borrower, by appropriate proceedings, diligently pursued,
and any reserves or other provisions required by GAAP have been
established. Borrower shall make due and timely payment or deposit
of all federal, state, and local taxes, assessments, or
contributions required of it by law, and will execute and deliver
to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto. Borrower will
make timely payment or deposit of all tax payments and withholding
taxes required of it by applicable laws, including those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state,
and federal income taxes, and will, upon request, furnish Foothill
with proof satisfactory to Foothill indicating that Borrower has
made such payments or deposits.
6.12 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft,
explosion, sprinklers, and all other hazards and risks, and in such
amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property
damage insurance relating to Borrower's ownership and use of the
Collateral, as well as insurance against larceny, embezzlement, and
criminal misappropriation.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably
satisfactory to Foothill. All such policies of insurance (except
those of public liability and property damage) shall contain a
438BFU lender's loss payable endorsement, or an equivalent
endorsement in a form satisfactory to Foothill, showing Foothill as
sole loss payee thereof, and shall contain a waiver of warranties,
and shall specify that the insurer must give at least ten (10) days
prior written notice to Foothill before canceling its policy for
any reason. Borrower shall deliver to Foothill certified copies of
such policies of insurance and evidence of the payment of all
premiums therefor. All proceeds payable under any such policy
shall be payable to Foothill to be applied on account of the
Obligations.
6.13 Financial Covenants. Borrower shall maintain all of
the following for the quarter ended September 30, 1995 and for each
fiscal quarter thereafter:
(a) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least one
and forty five one hundreds to one (1.45:1.0), measured on a fiscal
quarter-end basis;
(b) Total Liabilities to Tangible Net Worth Ratio.
A ratio of Borrower's total liabilities divided by Tangible Net
Worth of not more than two and forty one hundreds to one
(2.40:1.0), measured on a fiscal quarter-end basis;
(c) Tangible Net Worth. Tangible Net Worth of at
least Ten Million Dollars ($10,000,000), measured on a fiscal
quarter-end basis; and
(d) Working Capital. Working Capital of not less
than Ten Million Five Hundred Thousand Dollars ($10,500,000),
measured on a fiscal quarter-end basis.
6.14 No Setoffs or Counterclaims. All payments hereunder
and under the other Loan Documents made by or on behalf of Borrower
shall be made without setoff or counterclaim and free and clear of,
and without deduction or withholding for or on account of, any
federal, state, or local taxes.
6.15 Location of Inventory and Equipment. Borrower shall
keep the Inventory and Equipment only at the locations identified
on Schedule 6.15; provided, however, that Borrower may amend
Schedule 6.15 so long as such amendment occurs by written notice to
Foothill not less than thirty (30) days prior to the date on which
the Inventory or Equipment is moved to such new location, so long
as such new location is within the continental United States, and
so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to
perfect and continue perfected Foothill's security interests in
such assets and also provides to Foothill a landlord's waiver in
form and substance satisfactory to Foothill.
6.16 Compliance with Laws. Borrower shall comply with
the requirements of all applicable laws, rules, regulations, and
orders of any governmental authority, including the Fair Labor
Standards Act and the Americans With Disabilities Act, other than
laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not have and could not
reasonably be expected to have a material adverse effect on the
business, operations, condition (financial or otherwise), finances,
or prospects of Borrower or on the value of the Collateral to
Foothill.
6.17 Employee Benefits.
(a) Borrower shall deliver to Foothill a written
statement by the chief financial officer of Borrower specifying the
nature of any of the following events and the actions which
Borrower proposes to take with respect thereto promptly, and in any
event within ten (10) days of becoming aware of any of them, and
when known, any action taken or threatened by the Internal Revenue
Service, PBGC, Department of Labor, or other party with respect
thereto: (i) an ERISA Event with respect to any Plan; (ii) the
incurrence of an obligation to pay additional premium to the PBGC
under Section 4006(a)(3)(E) of ERISA with respect to any Plan; and
(iii) any lien on the assets of Borrower arising in connection with
any Plan.
(b) Borrower shall also promptly furnish to
Foothill copies prepared or received by Borrower or an ERISA
Affiliate of: (i) at the request of Foothill, each annual report
(Internal Revenue Service Form 5500 series) and all accompanying
schedules, actuarial reports, financial information concerning the
financial status of each Plan, and schedules showing the amounts
contributed to each Plan by or on behalf of Borrower or its ERISA
Affiliates for the most recent three (3) plan years; (ii) all
notices of intent to terminate or to have a trustee appointed to
administer any Plan; (iii) all written demands by the PBGC under
Subtitle D of Title IV of ERISA; (iv) all notices required to be
sent to employees or to the PBGC under Section 302 of ERISA or
Section 412 of the IRC; (v) all written notices received with
respect to a Multiemployer Plan concerning (x) the imposition or
amount of withdrawal liability pursuant to Section 4202 of ERISA,
(y) a termination described in Section 4041A of ERISA, or (z) a
reorganization or insolvency described in Subtitle E of Title IV of
ERISA; (vi) the adoption of any new Plan that is subject to Title
IV of ERISA or Section 412 of the IRC by Borrower or any ERISA
Affiliate; (vii) the adoption of any amendment to any Plan that is
subject to Title IV of ERISA or Section 412 of the IRC, if such
amendment results in a material increase in benefits or Unfunded
Benefit Liability; or (viii) the commencement of contributions by
Borrower or any ERISA Affiliate to any Plan that is subject to
Title IV of ERISA or Section 412 of the IRC.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of
the Obligations, Borrower will not do any of the following without
Foothill's prior written consent:
7.1 Indebtedness. Create, incur, assume, permit,
guarantee, or otherwise become or remain, directly or indirectly,
liable with respect to any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in the latest financial
statements of Borrower submitted to Foothill on or prior to the
Closing Date;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (b) and (c) of this Section
7.1 (and continuance or renewal of any Permitted Liens associated
therewith) so long as: (i) the terms and conditions of such
refinancings, renewals, or extensions do not materially impair the
prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not
result in an increase in the aggregate principal amount of the
Indebtedness so refinanced, renewed, or extended, (iii) such
refinancings, renewals, refundings, or extensions do not result in
a shortening of the average weighted maturity of the Indebtedness
so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of
payment to the Obligations, then the subordination terms and
conditions of the refinancing Indebtedness must be at least as
favorable to Foothill as those applicable to the refinanced
Indebtedness.
7.2 Liens. Create, incur, assume, or permit to exist,
directly or indirectly, any lien on or with respect to any of its
property or assets, of any kind, whether now owned or hereafter
acquired, or any income or profits therefrom, except for Permitted
Liens (including liens that are replacements of Permitted Liens to
the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement liens secure only
those assets or property that secured the original Indebtedness).
7.3 Restrictions on Fundamental Changes. Enter into any
acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate,
wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its business,
property, or assets, whether now owned or hereafter acquired, or
acquire by purchase or otherwise all or substantially all of the
properties, assets, stock, or other evidence of beneficial
ownership of any Person.
7.4 Extraordinary Transactions and Disposal of Assets.
Except for the relocation of Borrower's principal warehouse to a
location listed on Schedule 6.15, enter into any transaction not in
the ordinary and usual course of Borrower's business, including the
sale, lease, or other disposition of, moving, relocation, or
transfer, whether by sale or otherwise, of any of Borrower's
properties or assets (other than sales of Inventory to buyers in
the ordinary course of Borrower's business as currently conducted)
and sales of Equipment having a cost of not more than Ten Thousand
Dollars ($10,000) in any single transaction and not more than One
Hundred Thousand Dollars ($100,000) in the aggregate in any fiscal
year.
7.5 Change Name. Change Borrower's name, FEIN, business
structure, or identity, or add any new fictitious name.
7.6 Guarantee. Guarantee or otherwise become in any way
liable with respect to the obligations of any third Person except
by endorsement or instruments or items of payment for deposit to
the account of Borrower or which are transmitted or turned over to
Foothill.
7.7 Restructure. Make any change in Borrower's
financial structure, or the principal nature of Borrower's business
operations.
7.8 Prepayments. Except in connection with a
refinancing permitted by Section 7.1(d), prepay any Indebtedness
owing to any third Person.
7.9 Intentionally Omitted.
7.10 Capital Expenditures. Make any capital expenditures
where the aggregate amount of such capital expenditures, made in
any fiscal year, is in excess of One Million Six Hundred Thousand
Dollars ($1,600,000).
7.11 Consignments. Consign any Inventory or sell any
Inventory on bill and hold, sale or return, sale on approval, or
other conditional terms of sale, if the aggregate amount thereof at
any one time exceeds One Million Two Hundred Thousand Dollars
($1,200,000).
7.12 Distributions. Make any distribution or declare or
pay any dividends (in cash or in stock) on, or purchase, acquire,
redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding.
7.13 Accounting Methods. Modify or change its method of
accounting or enter into, modify, or terminate any agreement
currently existing, or at any time hereafter entered into with any
third party accounting firm or service bureau for the preparation
or storage of Borrower's accounting records without said accounting
firm or service bureau agreeing to provide Foothill information
regarding the Collateral or Borrower's financial condition.
Borrower waives the right to assert a confidential relationship, if
any, it may have with any accounting firm or service bureau in
connection with any information requested by Foothill pursuant to
or in accordance with this Agreement, and agrees that Foothill may
contact directly any such accounting firm or service bureau in
order to obtain such information.
7.14 Investments. Directly or indirectly make or acquire
any beneficial interest in (including stock, partnership interest,
or other securities of), or make any loan, advance, or capital
contribution to, any Person.
7.15 Transactions with Affiliates. Directly or
indirectly enter into or permit to exist any material transaction
with any Affiliate of Borrower except for transactions that are in
the ordinary course of Borrower's business, upon fair and
reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in arm's
length transaction with a non-Affiliate.
7.16 Suspension. Suspend or go out of a substantial
portion of its business.
7.17 Compensation. Increase the annual fee or per-meeting
fees paid to directors during any year by more than fifteen percent
(15%) over the prior year; pay or accrue total cash compensation,
during any year, to officers and senior management employees in an
aggregate amount in excess of one hundred fifteen percent (115%) of
that paid or accrued in the prior year.
7.18 Use of Proceeds. Use the proceeds of the advances
made hereunder for any purpose other than: (a) to pay transactional
fees, costs and expenses incurred in connection with this
Agreement; and (b) thereafter, consistent with the terms and
conditions hereof, for its lawful and permitted corporate purposes.
7.19 Change in Location of Chief Executive Office;
Inventory and Equipment with Bailees. Borrower covenants and
agrees that it will not, without thirty (30) days prior written
notification to Foothill, relocate its chief executive office to a
new location and so long as, at the time of such written
notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's
security interests and also provides to Foothill a landlord's
waiver in form and substance satisfactory to Foothill. The
Inventory and Equipment shall not at any time now or hereafter be
stored with a bailee, warehouseman, or similar party without
Foothill's prior written consent.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute
an event of default (each, an "Event of Default") under this
Agreement:
8.1 If Borrower fails to pay when due and payable or
when declared due and payable, any portion of the Obligations
(whether of principal, interest (including any interest which, but
for the provisions of the Bankruptcy Code, would have accrued on
such amounts), fees and charges due Foothill, reimbursement of
Foothill Expenses, or other amounts constituting Obligations);
8.2 If Borrower fails or neglects to perform, keep, or
observe any term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in
any other present or future agreement between Borrower and
Foothill; or if such failure or neglect arises under Section 6.2,
6.4 or Section 6.5 and such failure or neglect is not cured within
five (5) Business Days of its occurrence;
8.3 If there is a material impairment of the prospect of
repayment of any portion of the Obligations owing to Foothill or a
material impairment of the value or priority of Foothill's security
interests in the Collateral;
8.4 If in the reasonable judgment of Foothill any
material portion of Borrower's properties or assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by
Borrower;
8.6 If an Insolvency Proceeding is commenced against
Borrower and any of the following events occur: (a) Borrower -
consents to the institution of the Insolvency Proceeding against
it; (b) the petition commencing the Insolvency Proceeding is not
timely controverted; (c) the petition commencing the Insolvency
Proceeding is not dismissed within forty-five (45) calendar days of
the date of the filing thereof; provided, however, that, during the
pendency of such period, Foothill shall be relieved of its obliga-
tion to make additional advances or issue additional L/Cs or L/C
Guarantees hereunder; (d) an interim trustee is appointed to take
possession of all or a substantial portion of the properties or
assets of, or to operate all or any substantial portion of the
business of, Borrower; or (e) an order for relief shall have been
issued or entered therein;
8.7 If Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any
material part of its business affairs;
8.8 If a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's properties or assets by
the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or
governmental agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower's properties or
assets and the same is not paid on the payment date thereof and in
all cases if the lien, levy or assessment is not released within
thirty (30) days; provided, however, that during the pendency of
such period, Foothill shall be relieved of its obligation to make
additional advances or issue L/Cs or L/C Guarantees hereunder;
8.9 If a judgment or other claim becomes a lien or
encumbrance upon any material portion of Borrower's properties or
assets and such lien is not released within thirty (30) days;
8.10 If there is a default in any material agreement to
which Borrower is a party with one or more third Persons resulting
in a right by such third Persons, irrespective of whether
exercised, to accelerate the maturity of Borrower's obligations
thereunder;
8.11 If Borrower makes any payment on account of
Indebtedness that has been contractually subordinated in right of
payment to the payment of the Obligations, except to the extent
such payment is permitted by the terms of the subordination
provisions applicable to such Indebtedness;
8.12 If any material misstatement or misrepresentation
exists now or hereafter in any warranty, representation, statement,
or report made to Foothill by Borrower or any officer, employee,
agent, or director of Borrower, or if any such warranty or
representation is withdrawn;
8.13 If the obligation of any guarantor or other third
Person under any Loan Document is limited or terminated by
operation of law or by the guarantor or other third Person
thereunder, or any such guarantor or other third Person becomes the
subject of an Insolvency Proceeding; or
8.14 With respect to any Plan, there shall occur any of
the following which could reasonably be expected to have a material
adverse effect on the financial condition of Borrower: (i) the
violation of any of the provisions of ERISA; (ii) the loss by a
Plan intended to be a Qualified Plan of its qualification under
Section 401(a) of the IRC; (iii) the incurrence of liability under
Title IV of ERISA; (iv) a failure to make full payment when due of
all amounts which, under the provisions of any Plan or applicable
law, Borrower or any ERISA Affiliate is required to make; (v) the
filing of a notice of intent to terminate a Plan under Sections
4041 or 4041A of ERISA; (vi) a complete or partial withdrawal of
Borrower or an ERISA Affiliate from any Plan; (vii) the receipt of
a notice by the plan administrator of a Plan that the PBGC has
instituted proceedings to terminate such Plan or appoint a trustee
to administer such Plan; (viii) a commencement or increase of
contributions to, or the adoption of or the amendment of, a Plan;
and (ix) the assessment against Borrower or any ERISA Affiliate of
a tax under Section 4980B of the IRC.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence of an
Event of Default Foothill may, at its election, without notice of
its election and without demand, do any one or more of the
following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable;
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement, under any of the
Loan Documents, or under any other agreement between Borrower and
Foothill;
(c) Terminate this Agreement and any of the other
Loan Documents as to any future liability or obligation of
Foothill, but without affecting Foothill's rights and security
interests in the Collateral and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Foothill
considers advisable, and in such cases, Foothill will credit
Borrower's loan account with only the net amounts received by
Foothill in payment of such disputed Accounts after deducting all
Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory
in trust for Foothill, segregate all returned Inventory from all
other property of Borrower or in Borrower's possession and
conspicuously label said returned Inventory as the property of
Foothill;
(f) Without notice to or demand upon Borrower or
any guarantor, make such payments and do such acts as Foothill
considers necessary or reasonable to protect its security interests
in the Collateral. Borrower agrees to assemble the Collateral if
Foothill so requires, and to make the Collateral available to
Foothill as Foothill may designate. Borrower authorizes Foothill
to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or
lien that in Foothill's determination appears to conflict with its
security interests and to pay all expenses incurred in connection
therewith. With respect to any of Borrower's owned premises,
Borrower hereby grants Foothill a license to enter into possession
of such premises and to occupy the same, without charge, for up to
one hundred twenty (120) days in order to exercise any of
Foothill's rights or remedies provided herein, at law, in equity,
or otherwise;
(g) Without notice to Borrower (such notice being
expressly waived), and without constituting a retention of any
collateral in satisfaction of an obligation (within the meaning of
Section 9505 of the Code), set off and apply to the Obligations any
and all (i) balances and deposits of Borrower held by Foothill
(including any amounts received in the Lock Boxes), or (ii)
indebtedness at any time owing to or for the credit or the account
of Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances
and deposits of Borrower held by Foothill, and any amounts received
in the Lock Boxes, to secure the full and final repayment of all of
the Obligations;
(i) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell
(in the manner provided for herein) the Collateral. Foothill is
hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure
to Foothill's benefit;
(j) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such
places (including Borrower's premises) as Foothill determines is
commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(k) Foothill shall give notice of the disposition
of the Collateral as follows:
(1) Foothill shall give Borrower and each
holder of a security interest in the Collateral who has filed with
Foothill a written request for notice, a notice in writing of the
time and place of public sale, or, if the sale is a private sale or
some other disposition other than a public sale is to be made of
the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(2) The notice shall be personally delivered
or mailed, postage prepaid, to Borrower as provided in Section 12,
at least five (5) days before the date fixed for the sale, or at
least five (5) days before the date on or after which the private
sale or other disposition is to be made; no notice needs to be
given prior to the disposition of any portion of the Collateral
that is perishable or threatens to decline speedily in value or
that is of a type customarily sold on a recognized market. Notice
to Persons other than Borrower claiming an interest in the
Collateral shall be sent to such addresses as they have furnished
to Foothill;
(3) If the sale is to be a public sale,
Foothill also shall give notice of the time and place by publishing
a notice one time at least five (5) days before the date of the
sale in a newspaper of general circulation in the county in which
the sale is to be held;
(l) Foothill may credit bid and purchase at any
public sale; and
(m) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and
subject to the rights of third Persons, by Foothill to Borrower.
9.2 Remedies Cumulative. Foothill's rights and remedies
under this Agreement, the Loan Documents, and all other agreements
shall be cumulative. Foothill shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by
law, or in equity. No exercise by Foothill of one right or remedy
shall be deemed an election, and no waiver by Foothill of any Event
of Default shall be deemed a continuing waiver. No delay by
Foothill shall constitute a waiver, election, or acquiescence by
it.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If Borrower fails to pay any monies (whether taxes,
rents, assessments, insurance premiums, or otherwise) due to third
Persons, or fails to make any deposits or furnish any required
proof of payment or deposit, all as required under the terms of
this Agreement, then, to the extent that Foothill reasonably
determines that such failure by Borrower could have a material
adverse effect on Foothill's interests in the Collateral, in its
discretion and without prior notice to Borrower, Foothill may do
any or all of the following: (a) make payment of the same or any
part thereof; (b) set up such reserves in Borrower's loan account
as Foothill deems necessary to protect Foothill from the exposure
created by such failure; or (c) obtain and maintain insurance
policies of the type described in Section 6.12, and take any action
with respect to such policies as Foothill deems prudent. Any such
amounts paid by Foothill shall constitute Foothill Expenses. Any
such payments made by Foothill shall not constitute an agreement by
Foothill to make similar payments in the future or a waiver by
Foothill of any Event of Default under this Agreement. Foothill
need not inquire as to, or contest the validity of, any such
expense, tax, security interest, encumbrance, or lien and the
receipt of the usual official notice for the payment thereof shall
be conclusive evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives demand,
protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of
accounts, documents, instruments, chattel paper, and guarantees at
any time held by Foothill on which Borrower may in any way be
liable.
11.2 Foothill's Liability for Collateral. So long as
Foothill complies with its obligations, if any, under Section 9207
of the Code, Foothill shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or
fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or
destruction of the Collateral shall be borne by Borrower.
11.3 Indemnification. Except for liabilities or losses
determined in a final judgment by a court of competent jurisdiction
to have resulted from the gross negligence or willful misconduct of
Foothill, Borrower agrees to defend, indemnify, save, and hold
Foothill and its officers, employees, and agents harmless against:
(a) all obligations, demands, claims, and liabilities claimed or
asserted by any other Person arising out of or relating to the
transactions contemplated by this Agreement or any other Loan
Document, and (b) all losses (including attorneys fees and
disbursements) in any way suffered, incurred, or paid by Foothill
as a result of or in any way arising out of, following, or
consequential to the transactions contemplated by this Agreement or
any other Loan Document. This provision shall survive the
termination of this Agreement.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices
or demands by any party relating to this Agreement or any other
Loan Document shall be in writing and (except for financial
statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or
sent by registered or certified mail, postage prepaid, return
receipt requested, or by prepaid telex, TWX, telefacsimile, or
telegram (with messenger delivery specified) to Borrower or to
Foothill, as the case may be, at its address set forth below:
If to Borrower: ACTION INDUSTRIES, INC.
Action Industrial Park
460 Nixon Road
Cheswick, Pennsylvania 15024
Attn.: Kenneth L. Campbell,
Chief Financial Officer
Telefacsimile No. (412) 782-8606
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn.: Business Finance Division
Manager
Telefacsimile No. (310) 479-2690
The parties hereto may change the address at which they
are to receive notices hereunder, by notice in writing in the
foregoing manner given to the other. All notices or demands sent
in accordance with this Section 12, other than notices by Foothill
in connection with Sections 9504 or 9505 of the Code, shall be
deemed received on the earlier of the date of actual receipt or
three (3) days after the deposit thereof in the mail. Borrower
acknowledges and agrees that notices sent by Foothill in connection
with Sections 9504 or 9505 of the Code shall be deemed sent when
deposited in the mail or transmitted by telefacsimile or other
similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES
HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED
HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT
ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT
IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND
WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT
PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT
THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE
EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION
13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS. BORROWER AND FOOTHILL REPRESENT THAT EACH HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other
papers delivered to Foothill may be destroyed or otherwise disposed
of by Foothill four (4) months after they are delivered to or
received by Foothill, unless Borrower requests, in writing, the
return of said documents, schedules, or other papers and makes
arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness. This Agreement shall be binding and
deemed effective when executed by Borrower and Foothill.
15.2 Successors and Assigns. This Agreement shall bind
and inure to the benefit of the respective successors and assigns
of each of the parties; provided, however, that Borrower may not
assign this Agreement or any rights or duties hereunder without
Foothill's prior written consent and any prohibited assignment
shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign
this Agreement and its rights and duties hereunder and no consent
or approval by Borrower is required in connection with any such
assignment. Foothill reserves the right to sell, assign, transfer,
negotiate, or grant participations in all or any part of, or any
interest in Foothill's rights and benefits hereunder. In
connection with any such assignment or participation, Foothill may
disclose all documents and information which Foothill now or
hereafter may have relating to Borrower or Borrower's business. To
the extent that Foothill assigns its rights and obligations
hereunder to a third Person, Foothill shall thereafter be released
from such assigned obligations to Borrower and such assignment
shall effect a novation between Borrower and such third Person.
15.3 Section Headings. Headings and numbers have been
set forth herein for convenience only. Unless the contrary is
compelled by the context, everything contained in each section
applies equally to this entire Agreement.
15.4 Interpretation. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved
against Foothill or Borrower, whether under any rule of
construction or otherwise. On the contrary, this Agreement has
been reviewed by all parties and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this
Agreement for the purpose of determining the legal enforceability
of any specific provision.
15.6 Amendments in Writing. This Agreement can only be
amended by a writing signed by both Foothill and Borrower.
15.7 Counterparts; Telefacsimile Execution. This
Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when
executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the
same Agreement. 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 also shall 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.
15.8 Revival and Reinstatement of Obligations. If the
incurrence or payment of the Obligations by Borrower or any
guarantor of the Obligations or the transfer by either or both of
such parties to Foothill of any property of either or both of such
parties should for any reason subsequently be declared to be void
or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property
(collectively, a "Voidable Transfer"), and if Foothill is required
to repay or restore, in whole or in part, any such Voidable
Transfer, or elects to do so upon the reasonable advice of its
counsel, then, as to any such Voidable Transfer, or the amount
thereof that Foothill is required or elects to repay or restore,
and as to all reasonable costs, expenses, and attorneys fees of
Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored
and shall exist as though such Voidable Transfer had never been
made.
15.9 Confidentiality. Foothill recognizes and
acknowledges that, in the course of its dealings with Borrower
pursuant to this Agreement, it will acquire certain information
regarding Borrower or its Affiliates. Foothill agrees that except
as otherwise expressly permitted by this Agreement, it shall not,
without the prior written consent of the Borrower, misappropriate,
disclose or make available to anyone for use outside Foothill's
organization except for Foothill's loan participants, if any, at
any time any information regarding the Borrower or its Affiliates.
Foothill agrees to take reasonable steps to assure that its
employees, affiliates, representatives, loan participants and any
other third party to which such information is disclosed in
accordance with Section 15.2 maintain the confidentiality of such
information. The foregoing shall not apply to: (i) any
information which, at the time of disclosure or thereafter, became
or becomes generally known to the public through no act or omission
of Foothill; or (ii) information that was or becomes required to be
disclosed by law, provided that Foothill shall give prior written
notice of such disclosure to the Borrower, use its best efforts to
limit such disclosure, and make such disclosure only to the extent
so required.
15.10 Amendment and Restatement. This Agreement
amends, restates and supersedes in its entirety that certain Loan
And Security Agreement between Borrower and Foothill dated as of
January 20, 1994, as amended.
15.11 Integration. This Agreement, together with the
other Loan Documents, reflect the entire understanding of the
parties with respect to the transactions contemplated hereby and
shall not be contradicted or qualified by any other agreement, oral
or written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in Los Angeles, California.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: MATTHEW J. SIMONEAU
Title: Assistant Vice President
ACTION INDUSTRIES, INC.,
a Pennsylvania corporation
By: KENNETH L. CAMPBELL
Title: Senior Vice President
SCHEDULE E-1
INVENTORY BY LOCATION -- Action Industries, Inc.
<TABLE>
<CAPTION>
BALANCE
8/31/95
-------
<S> <C>
HEADQUARTERS
460 NIXON ROAD -- CHESWICK, PA 15024 $13,421,060
GENERAL STORAGE & DISTRIBUTION
160 COLUMBUS ROAD -- MT VERNON, OHIO 43050 $761,957
GENERAL STORAGE & DISTRIBUTION
711 DISTRIBUTION DRIVE -- COLUMBUS, OHIO 43228 Opens Nov 95
LAMP & ACTION EXPRESS
HILLIS STREET -- YOUNGWOOD, PA 15697 $2,559,850 (A)
RETAIL STORE
MANUFACTURERS MARKET PLACE -- HOLLAND, MI 49424 $20,295 (B)
MERCHANDISE IN WAREHOUSE $16,763,162
IN-TRANSIT $2,992,563
CONSIGNED -- AT CUSTOMER LOCATION $187,198
RESERVES & OTHER $138,690
-----------
TOTAL INVENTORY PER FINANCIAL STATEMENTS $20,081,613
===========
</TABLE>
(A) Lamp business including inventories sold September 1995
(B) Retail store closed September 1995
SCHEDULE E-2 TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Eligible In Transit Invenstory
Eligible Inventory may include in transit Inventory so long as
such in transit Inventory does not exceed the amounts specified
below during the periods specified below:
<TABLE>
<CAPTION>
Dollar Amount Month or Period
------------- ---------------
<C> <C>
$3,000,000 October 1995
2,000,000 November 1995
750,000 December 1995
1,000,000 August 1996 and
September 1996
3,000,000 October 1996
2,000,000 November 1996
500,000 December 1996
</TABLE>
SCHEDULE P - 1
PERMITTED LIENS --- Action Industries, Inc. --- 10/95
<TABLE>
<CAPTION>
BALANCE MONTHLY Date of Las
TYPE DESCRIPTION PAYEE 9/30/95 PAYMENT Payment
---- ----------- ----- ------- ------- -----------
Action Industries, Inc.
- -----------------------
<S> <C> <C> <C> <C> <C>
Debentures 9% Convertible Subordinated Integra Bank, Trustee $115,000 None 01-Apr-98
Lease Headquarters Bldg Continental Asset Mgmt $7,506,448 $132,032 June 2002
Lease California Office (Closed) Century Business Park N / A $5,332 31-Jul-96
Lease Closed Store (Carlisle PA) Crown American N / A $3,135 31-Jan-97
Lease Closed Store (West Erie PA) Peter J. Schmitt N / A $6,161 (A) 30-Dec-97
Lease Youngwood PA Whse # 42 Distribution Resources N / A $9,000 (B) 31-Jan-99
Lease Youngwood PA Whse # 43 Distribution Resources N / A $9,000 (B) 31-Jan-99
Lease Mt Vernon OH Whse Distribution II N / A $7,800 varies month to month
Lease Columbus OH Whse Distribution II N / A Starts Nov 95 varies month to month
Lease Forklifts Raymond Leasing N / A $4,610 30-Oct-96
Lease Copiers/Printers Xerox N / A $17,619 month to month
Lease Copiers Alco Capital N / A $8,989 month to month
Lease Copiers Allegheny Business Machines N / A $1,857 month to month
Lease Copiers Ricoh Corp N / A $129 month to month
Lease FAX Machines Pitney Bowes N / A $470 month to month
Lease Copiers GE Capital N / A $160 month to month
(A) Facilities are currently subleased for the remainder of the lease, and sub-tenant pays rent directly
(B) Leased assigned to Kensington Collection, buyer of Company's lamp business.
</TABLE>
SCHEDULE 5.9
LITIGATION
Pending or threatended litigation (excluding insured product
liability matters):
1. Lloyd T. Whitaker, as Trustee of the Estate of Olympia Holding
Corporation vs. Action Industries, Inc. -- Complaint for
additional freight charges in the amount of $91,540.
2. In Re Phar-Mor, et al., Official Committee of Unsecured
Creditors of Phar-Mor, Inc. And Fifteen Affiliated Companies
vs. Action Industries, Inc., et al. -- Complaint for recovery
of proceeds for shares tendered by defendants in connection
with a Phar-Mor tender offer, based upon claim that Phar-Mor
was then insolvent or had unreasonably small capital, and,
therefore, payment for the shares constituted a fraudulent
transfer. In Action Industries' case, the claim is for
$2,639,960. In August 1995 summary judgment was entered in
favor of the defendants. In September 1995 the plaintiffs
appealed.
3. Tisman-Woods Associates, Inc. vs. Action Industries, Inc. --
Complaint filed in arbitration by independent sales
representative for additional sales commissions, amount
unspecified.
4. Carol Remaley vs. Action Industries, Inc. -- Complaint filed
with the Equal Employment Opportunity Commission by former
employee alleging sex discrimination.
5. Trans-Allied Audit Company, Inc., assignee of Churchill Truck
Lines, Inc. -- Claim (and threatened litigation) for
additional freight charges in the amount of $32,918.
SCHEDULE 5.13
ENVIRONMENTAL CONDITION
Borrower was notified in 1991 by the Michigan Department of Natural
Resources (MDNR) of certain violations of state environmental
regulations arising from material inside the former Mt. Clemens
Pottery Factory in Mt. Clemens, Michigan. These violations were
resolved with the MDNR. The property was subsequently sold in 1995
pursuant to an agreement that the purchaser conduct further
environmental remediation of the property.
SCHEDULE 6.15
LOCATION OF INVENTORY AND EQUIPMENT
1. Action Industries, Inc. Distribution Center
460 Nixon Road Headquarters Office
Allegheny Industrial Park
Cheswick, PA 15024
2. Transdistribution Distribution Center
160 Columbus Road
Mt. Vernon, OH 43050
3. Distribution II Distribution Center
711 Distribution Drive
Columbus, OH 43288
EXHIBIT 23
----------
Acknowledgement of Ernst & Young
We are aware of the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-48361 and 33-48362) of Action
Industries, Inc. for the registration of 450,000 and 55,300 shares
of its common stock in connection with its Stock Option Plan and
Nonemployee Director Stock Option Plan, respectively, of our report
dated November 10, 1995, relating to the unaudited condensed
consolidated interim financial statements of Action Industries,
Inc. which are included in its Form 10-Q for the quarter ended
September 30, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933, our reports
are not a part of the registration statement prepared or certified
by accountants within the meaning of Section 7 or 11 of the
Securities Act of 1933.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 10, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-25-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,096
<SECURITIES> 0
<RECEIVABLES> 7,510
<ALLOWANCES> 0
<INVENTORY> 18,414
<CURRENT-ASSETS> 28,150
<PP&E> 30,210
<DEPRECIATION> 22,523
<TOTAL-ASSETS> 37,525
<CURRENT-LIABILITIES> 16,563
<BONDS> 7,621
<COMMON> 719
0
0
<OTHER-SE> 11,206
<TOTAL-LIABILITY-AND-EQUITY> 37,525
<SALES> 9,180
<TOTAL-REVENUES> 9,180
<CGS> 7,165
<TOTAL-COSTS> 9,884
<OTHER-EXPENSES> (155)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 654
<INCOME-PRETAX> (1,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,203)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
