<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended January 31, 1995 Commission file number 1-7927
---------------- ------
HOUSE OF FABRICS, Inc.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3426136
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
13400 Riverside Drive, Sherman Oaks, California 91423-2598
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 995-7000
--------------
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class Name of each exchange
on which registered
Common stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g)
of the Act NONE
----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past ninety (90) days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT, (Estimated solely for purpose of this cover page. Only market
value of shares held by officers, directors and 5% stockholders have been
excluded.)
$8,904,645 as of May 11, 1995
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Common stock, $.10 par value; outstanding 13,697,107 shares as of May 11, 1995.
LIST HEREUNDER DOCUMENTS INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K
INTO WHICH THE DOCUMENT IS INCORPORATED.
Portions of the 1995 Proxy Statement Part III
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
<TABLE>
<CAPTION>
PAGE NUMBER
1995 PROXY INCLUDED
STATEMENT HEREIN
<S> <C> <C> <C>
PART I
Item 1. Business 1 - 6
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 7
Item 6. Selected Financial Data 7 - 8
Item 7. Management's Discussion and Analysis of Operations
and Financial Condition 8 - 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 16
PART III
Item 10. Directors and Executive Officers of the Registrant 3,12 16 - 17
Item 11. Executive Compensation 5-10 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management 2 17
Item 13. Certain Relationships and Related Transactions 4 17
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18 - 35
Signatures 36
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
House of Fabrics, Inc. and subsidiaries (the "Company") is one of the largest
home sewing/craft retailers in the United States, operating 433 Company-owned
stores in 34 states selling medium priced fabrics, crafts, notions, and sewing
machines. The Company was incorporated in 1946 and has been in the retail
fabric and notions business since that date.
In the fiscal year ended January 31, 1995, the Company's sales consisted of
fabrics, sold by the yard and used principally for clothing, home decorating and
crafts (46.4%), sewing notions and accessories (28.8%), crafts (19.4%) and
sewing machines and related accessories (5.4%). Needlecrafts and sewing
machines are sold in substantially all of the Company's stores.
In July, 1991, the Company acquired Fabricland, Inc. ("Fabricland") a specialty
retailer of fabrics, sewing notions, yarns and crafts. Fabricland currently
operates in the six western states and Alaska.
All of the Company's stores located west of the Rocky Mountains are operated
under the name "House of Fabrics", "Fabricland" or "Fabric King". Its stores in
other states are operated under the name "So-Fro Fabrics" or "House of Fabrics".
The Company operates substantially all of its stores in leased premises,
principally in neighborhood shopping centers or stand-alone locations, and does
not engage in any franchising activity. The Company's stores range in size
generally between 10,000 and 29,000 square feet and are called "super stores".
The Company purchases finished goods directly from mills and manufacturers and
has facilities in South Carolina for processing and warehousing merchandise for
distribution to its stores.
The company's executive offices are located at 13400 Riverside Drive, Sherman
Oaks, California 91423-2598, and its telephone number is (818) 995-7000.
REORGANIZATION
On November 2, 1994 (the "Petition Date"), the Company filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") in the United States Bankruptcy Court for the Central
District of California (the "Bankruptcy Court"). The Company is currently
operating its business as debtors-in-possession, subject to the supervision of
the Bankruptcy Court.
EVENTS LEADING UP TO CHAPTER 11 FILING
The Company renegotiated its loan agreement with its banks during the second
quarter of fiscal 1995 but was unable to remain in compliance with certain
nonfinancial and financial covenants contained in the amended agreement,
primarily as a result of the significant loss experienced in the first two
quarters of fiscal 1995. Reduced credit resulted in inventory shortages in
basic and seasonal products that caused further sales declines and increased
uncertainty about the upcoming fall and winter season. During August 1994, the
Company announced a restructuring plan to close certain underperforming super
stores (see further discussion below) with the majority of the funds generated
by the store liquidation sales to be used for permanent reductions of the bank
loan. With such restrictions on cash flow and an inability to raise additional
capital through other sources, inventory shortages continued, adversely
impacting sales.
1
<PAGE>
These events led to the Company's decision to file for protection under Chapter
11. The Company continues to conduct normal business operations as Debtors-in-
Possession subject to the jurisdiction of the Bankruptcy Court and intends to
propose a plan of reorganization pursuant to Chapter 11. As Debtors-in-
Possession, the Company may not engage in transactions outside the ordinary
course of business without approval of the Bankruptcy Court, after notice and
hearing.
Under Chapter 11, actions to enforce claims against the Company are stayed if
the claims arose, or are based on events that occurred, on or before the
petition date of November 2, 1994, and such claims cannot be paid or
restructured prior to the conclusion of the Chapter 11 proceedings or approval
of the Bankruptcy Court. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts, including leases, or
the Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. Substantially all liabilities as of the Petition Date are intended to
be dealt with in accordance with a plan of reorganization to be filed by the
Company that will be voted upon by all classes of impaired creditors and
approved by the Bankruptcy Court. The Creditors' Committee has been formed and
it reviews non-ordinary course of business transactions and is participating in
the formulation of the plan of reorganization.
The Company has estimated the amount of prepetition liabilities subject to
settlement under reorganization proceedings; however the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. This reconciliation process
and/or the termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities. The Company
generally is continuing to pay interest on secured debt although principal
payments have generally been suspended.
On March 31, 1995, the Company entered into and the Bankruptcy Court approved an
agreement with Bank of America NT & SA, acting as agent bank, to provide
Debtors-in-Possession financing in the form of a $20 million line of credit (The
"D.I.P. Financing"). The D.I.P. Financing agreement provides for cash borrowings
of $10 million and the issuance of up to $10 million in letters of credit.
Interest and fees are payable monthly. See Note 5 to the Consolidated Financial
Statements included herein in Item 14.
RETAIL STORES AND RESTRUCTURING PLANS
The Company locates its stores primarily in cities with populations in excess of
25,000. The Company's stores range in size generally between 10,000 and 29,000
square feet and are located principally in neighborhood shopping centers or
stand-alone locations. At January 31, 1995, the Company operated 433 stores in
34 states.
1993 PLAN
Effective September 1, 1993, the Company's Board of Directors approved a plan of
restructuring (the "1993 Plan") that, among other things, provided for the
closure of its 110 then remaining mall stores, which averaged approximately
4,200 square feet. Accordingly, in the third quarter of fiscal 1994, the
Company recorded a pretax restructuring charge of $12,909,000 for disposition of
the remaining 110 mall stores. This charge included the following components:
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Asset dispositions at closing $9,965,000
Operating losses through closing 2,325,000
Lease termination and occupancy costs 427,000
Professional fees and other store closing costs 192,000
-----------
$12,909,000
===========
</TABLE>
At January 31, 1995, a total of 93 stores have been closed under the 1993 Plan,
and six of the remaining mall stores will be closed by August 31, 1995. The
Company has canceled the planned closure of 11 mall stores due to better than
expected performance and subsequently reversed the related portion of the
restructuring charge. In addition, the Company decreased by $1,900,000 their
estimate of the reserve needed to complete the 1993 Plan. During fiscal 1995,
mall store sales of $21,548,000 and operating losses of $5,656,000 were excluded
from operating results and charged to the restructuring reserve.
1994 PLAN
Effective August 26, 1994, the Company's Board of Directors approved a plan of
restructuring (the "1994 Plan") to close 125 underperforming super stores. This
plan was subsequently amended to included an additional 63 super stores bringing
the total number of super stores slated for closure to 188. The 1994 Plan
includes two groups of stores. The first group consists of 132 super stores
that were turned over to a liquidation company to conduct the liquidation of
store inventories. The liquidation sales began in September 1994 and were
completed in February 1995. The second group of 56 super stores began
liquidation in January 1995 and are expected to be completed by August 31, 1995.
Accordingly, in the third quarter of fiscal 1994, the Company recorded a pretax
restructuring charge of $49,600,000 which included the following components:
<TABLE>
<CAPTION>
<S> <C>
Lease termination and occupancy costs $17,600,000
Operating losses through closing 14,700,000
Asset dispositions at closing 14,100,000
Professional fees and other store closing costs 3,200,000
-----------
$49,600,000
===========
</TABLE>
At January 31, 1995, a total of 126 stores have been closed under the 1994 Plan,
and 50 of the remaining super stores will be closed by August 31, 1995. The
Company has canceled the planned closure of 12 super stores due to better than
expected performance and subsequently reversed the related portion of the
restructuring charge. During fiscal 1995, super store operating losses of
$18,539,000 were excluded from operating results and charged to the
restructuring reserve.
Under the 1993 Plan and the 1994 Plan, asset dispositions include the write off
of the remaining net book value of all leasehold improvements for mall and super
stores being closed as well as certain costs to liquidate merchandise
inventories at closed stores. Lease termination and occupancy costs are solely
related to the estimated costs of terminating store leases.
3
<PAGE>
STORE OPERATIONS
Information with respect to the number of stores operated by the Company for
each of the last three years is set forth below.
<TABLE>
<CAPTION>
YEAR ENDED
JAN. 31 OPENED CLOSED TOTAL
<S> <C> <C> <C>
1995 1 213 433
1994 31 81 645
1993 91 63 695
</TABLE>
The terms of the Company's leases range from month-to-month to 20 years. Most
new leases are for a term of 10 to 15 years. Of the current leases, 74 expire
in fiscal year ending 1999 or sooner.
Each store has a manager, an assistant manager and a number of full-time and
part-time personnel averaging 19 per store. District sales managers are each
responsible for supervising approximately 12 stores, and report to one of the
Company's regional sales supervisors who in turn report to the Executive Vice
President - Store Operations. Almost all district sales managers, and regional
sales supervisors are former store managers.
MERCHANDISE INVENTORIES
In September 1993, the Company reduced the carrying value of certain of its
inventories by $21,825,000 primarily to implement its repricing strategy for
certain fabric, notion and craft inventories.
In August 1994, the Company implemented a new marketing and merchandising
strategy that is designed to increase inventory turnover and attract a wider and
more diverse customer base. The Company will narrow its fabric offerings,
concentrating on fewer stock-keeping-units that will allow it to increase
inventory turnover rates. In addition, the Company is shifting its merchandise
mix to place more emphasis on craft and home decorating products. As a result
of this new marketing and merchandising strategy, the Company recorded a
markdown reserve of $19,000,000 to aggressively markdown and liquidate certain
inventories that no longer fit into its revised merchandising model. As of
January 31, 1995, $9,081,000 had been charged against the markdown reserve, and
the Company believes that the balance of inventories contemplated by the
markdown reserve will be liquidated during fiscal 1996.
FABRICS AND NOTIONS
All stores carry a fabric inventory for apparel and non-apparel use, which
includes cottons, rayons, synthetics, woolens, silks and laces. Each store also
sells notions, including threads, zippers, patterns, buttons, sewing accessories
and ornamentations. Stores carry basic non-seasonal merchandise as well as
stylized seasonal inventory purchased for the spring and fall seasons. The
Company's policy is to avoid carrying stylized seasonal fabrics over to the
following season, and at the end of each season such fabrics are normally marked
down and sold.
The Company allows its customers to return any merchandise purchased. Returns,
however, are not significant. The Company makes sales for cash, check, or
credit card, and consequently offers no credit terms. Historically, inventory
levels have tended to build slightly during the second and third quarters in
anticipation of somewhat greater third and fourth quarter sales.
4
<PAGE>
CRAFTS
The Company established craft departments in selected stores in 1981, and
substantially all its stores now operate a craft department offering a diverse
selection of products ranging from soft crafts to hard-line crafts, including
florals, garment embellishments, needlework kits, needlepoint kits, yarn and
seasonal gifts. In March, 1994, the Company opened a prototype of an expanded
craft department, known as a "Creative Concept Center" ("CCC"). A CCC consists
of expanded craft, floral and seasonal departments, with more emphasis on home
decorating and quilting fabrics with a new merchandising approach. The goods
are merchandised and displayed so as to generate high volume craft and seasonal
product sales. The Company believes that the CCC will increase its craft sales
without adversely affecting other department sales. The Company currently has
opened eight CCC departments and plans to open approximately 10 additional CCC
departments over the next year.
SEWING MACHINES
The Company became an authorized dealer for the sale of Singer sewing machines
and related accessories upon Singer's withdrawal in 1980 from direct retailing
of sewing machines in the United States. The Company has become Singer's
largest retail sewing machine dealer in the United States. The Company sells
sewing machines in substantially all of its super stores. The Company's
agreement with Singer is not exclusive, and Singer has retained the right to
sell its products directly and to other retailers. The Company has the right to
use the Singer trademarks to identify and advertise Singer products offered at
its stores, and to participate in Singer's cooperative advertising programs.
The agreement continues for one-year periods until terminated.
The Company's stores also carry other alternative brands of sewing machines.
PROCESSING AND SUPPLIERS
The Company purchases fabrics directly from mills, principally in the United
States, and processes such fabrics at its facility in Mauldin, South Carolina
(see "Properties"). The fabrics are generally received in bulk, unrolled and
inspected, cut into 10 to 25-yard lengths, and rolled on fabrics boards and
packaged for shipment to stores. Substantially all notions sold by the Company
are purchased directly from manufacturers. The Company maintains a fleet of
tractors and trailers for delivering inbound merchandise to some of its stores.
The Company's fleet handles approximately 33% of total store deliveries and 68%
of inbound bulk fabric freight. When possible, the Company seeks freight from
third parties in connection with return trips to South Carolina, to minimize
non-productive fleet travel.
The Company has no long-term contracts for the purchase of merchandise and
purchases no more than 10% of its merchandise from any one supplier. The
Company historically has been one of the largest purchasers of fabrics in the
United States.
COMPETITION
The retail fabric, notion, sewing machine and craft businesses are highly
competitive. In selling fabrics, notions and crafts, the Company competes with
other national, regional, and the local retail fabric, craft and department
stores. Competition in the fabric, notions and craft businesses is based
primarily on location, product selection, quality, price and personal service.
In selling sewing machines, the Company competes with department store chains
and other independent dealerships (including independent Singer dealerships).
While the Company is one of the largest Singer dealers in the United States, and
most other
5
<PAGE>
fabric and notions retailers do not offer sewing machines, several of the
Company's major home sewing competitors also are Singer dealers. Competition in
the sewing machine business is based primarily on product, quality, price and
service.
EMPLOYEES
As of January 31, 1995, the Company had approximately 8,600 employees, of whom
approximately 8,200 were engaged in retail sales. Approximately 5,400 of these
sales employees worked on a part-time basis. The number of Company employees
increases during peak seasons. The Company has never experienced a work
stoppage and no employees are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's executive offices are located in a 72,000 square foot building in
Sherman Oaks, California owned by the Company. The Company has leased
approximately 22,684 square feet that it does not occupy to non-affiliated
tenants.
House of Fabrics of South Carolina, Inc., a wholly-owned subsidiary of the
Company, owns and leases parcels of land totaling approximately 28 acres from
the County of Greenville, in Mauldin, South Carolina. The remaining lease is
for a 20-year term ending in 1998. A 550,000 square foot warehouse and
processing facility has been constructed on the properties, which was expanded
by the addition of 240,000 square feet completed in July, 1993. The Company has
guaranteed all obligations of the subsidiary under the lease. At the end of the
lease term, the subsidiary has the right to acquire fee title to the remaining
property at a nominal price. To finance the purchase of the land and
construction of the plant, Greenville County issued three series of industrial
revenue bonds in the aggregate principal amount of $4,750,000. One bond series
matured in 1989 and another in 1992. The remaining bond series matures in
fiscal 1998. The interest rate on the industrial bond series is 7% per annum.
The lease provides (1) for annual payment of $125,000 which payment is
sufficient to pay all interest on and to redeem the bond series by the end of
the lease term, and (2) for the Company to pay all taxes.
The Company's leases for retail stores are described in leased facilities under
"Business - Retail Stores and Restructuring Plans".
ITEM 3. LEGAL PROCEEDINGS
On November 2, 1994 the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company continues to operate its business as debtors-in-
possession pursuant to authorization of the Bankruptcy Court.
There are no other pending legal proceedings, except for ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a part or to which any of their property is the subject. Except
where a relief from stay has been granted, litigation against the Company has
been stayed as a result of the filing under Chapter 11.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
6
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange and Pacific
Stock Exchange under the symbol "HF". At May 1, 1995 there were approximately
1,380 registered stockholders.
The following table sets forth the high and low per share sales prices of the
Company's common stock for the last two fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, 1995 JANUARY 31, 1994
---------------- ----------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $7.50 $5.88 $13.50 $10.13
Second Quarter $6.50 $3.00 $11.75 $ 8.75
Third Quarter $4.13 $1.38 $ 9.00 $ 7.75
Fourth Quarter $2.00 $0.88 $ 8.88 $ 7.25
</TABLE>
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995 1994 1993 1992(A) 1991
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Sales $416,276,000 $546,664,000 $557,521,000 $493,062,000 $393,495,000
Gross Profit $159,893,000 $222,907,000 $256,823,000 $242,059,000 $197,529,000
Interest Expense $ 13,983,000 $ 8,176,000 $ 5,296,000 $ 4,039,000 $ 2,308,000
Income Taxes (Benefit) $ (2,325,000) $(15,218,000) $ 3,750,000 $ 12,796,000 $ 9,414,000
Net Income (Loss) $(95,385,000) $(29,542,000) $ 5,203,000 $ 19,691,000 $ 13,831,000
Net Income (Loss) Per Share $ (6.96) $ (2.16) $ .37 $ 1.44 $ 1.13
Cash Dividends Per Share - - - - $ .06
Return (Loss) on Average
Stockholders' Equity (92.9)% (17.9)% 2.9% 13.8% 13.0%
Return (Loss) on Average
Tangible Stockholders'
Equity (151.3)% (23.8)% 3.7% 16.1% 13.0%
------------ ------------ ------------ ------------ ------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992(a) 1991
<S> <C> <C> <C> <C> <C>
Year End Position
Assets $327,597,000 $393,055,000 $383,132,000 $363,698,000 $212,443,000
Long-Term Debt $ 454,000 $ 2,862,000 $ 17,216,000 $ 6,742,000 $ 11,216,000
Stockholders' Equity $ 55,024,000 $150,409,000 $179,592,000 $182,592,000 $103,103,000
Tangible Stockholders'
Equity $ 15,884,000 $110,197,000 $138,308,000 $141,758,000 $103,103,000
Stockholders' Equity
Per Share $ 4.02 $ 10.98 $ 13.15 $ 12.97 $ 9.01
Tangible Stockholders'
Equity Per Share $ 1.16 $ 8.05 $ 10.13 $ 10.07 $ 9.01
Number of Stores 433 645 695 667 604
------------ ------------ ------------ ------------ ------------
</TABLE>
(a) On July 16, 1991, the Company acquired all of the common stock of
Fabricland, Inc. See Note 2 to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
House of Fabrics, Inc. and subsidiaries (Debtors-in-Possession) (the "Company")
is one of the largest home sewing/craft retailers in the United States,
operating 433 stores in 34 states as of January 31, 1995. The Company's stores
are located throughout the United States and operate under the names "House of
Fabrics," "So-Fro Fabrics," "Fabricland" or "Fabric King." The Company operates
most of its stores in leased premises, principally in neighborhood shopping
centers or stand-alone locations.
OVERVIEW
Store for store sales decreased 11.3%, comparing the year ended January 31, 1995
to the previous fiscal year, and the net loss increased to $95,385,000 for the
year ended January 31, 1995. The net loss for the years ended January 31, 1995
and 1994 includes restructuring charges of $49,600,000 and $12,909,000,
respectively, to close a substantial number of stores. The net loss for the year
ended January 31, 1995 also includes a charge to cost of sales of $19,000,000 to
markdown and liquidate certain inventories that no longer fit into the Company's
revised merchandising model. The net loss for the year ended January 31, 1994
includes a charge to cost of sales of $21,825,000 primarily to implement the
Company's repricing strategy. Stockholders' equity decreased over the two years
ended January 31, 1995 from $179,592,000 to $55,024,000.
8
<PAGE>
This performance resulted from a variety of factors, including an overstored
retail fabric industry, competitive conditions and a highly promotional
environment in the industry, declining demand for fabrics used for apparel, weak
economic conditions, especially in California and the East Coast, and lack of
new product in the stores.
CHAPTER 11 REORGANIZATION
The Company renegotiated its loan agreement with its banks during the second
quarter of fiscal 1995 but was unable to remain in compliance with certain
nonfinancial and financial covenants contained in the amended agreement,
primarily as a result of the significant loss experienced in the first two
quarters of fiscal 1995. Reduced credit resulted in inventory shortages in
basic and seasonal products that caused further sales declines and increased
uncertainty about the upcoming fall and winter season. During August 1994, the
Company announced a restructuring plan to close certain underperforming super
stores (see further discussion below) with the majority of the funds generated
by the store liquidation sales to be used for permanent reductions of the bank
loan. With such restrictions on cash flow and an inability to raise additional
capital through other sources, inventory shortages continued, adversely
impacting sales. These events led to the Company's decision to file for
protection under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
on November 2, 1994. The Company continues to conduct normal business
operations as Debtors-in-Possession subject to the jurisdiction of the
Bankruptcy Court and intends to propose a plan of reorganization pursuant to
Chapter 11. As Debtors-in-Possession, the Company may not engage in
transactions outside the ordinary course of business without approval of the
Bankruptcy Court, after notice and hearing.
Under Chapter 11, actions to enforce claims against the Company are stayed if
the claims arose, or are based on events that occurred, on or before the
petition date of November 2, 1994, and such claims cannot be paid or
restructured prior to the conclusion of the Chapter 11 proceedings or approval
of the Bankruptcy Court. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts, including leases, or
the Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. Liabilities subject to compromise (see Note 3 to the Consolidated
Financial Statements) in the accompanying consolidated balance sheet represent
the Company's estimate of liabilities as of January 31, 1995, subject to
adjustment in the reorganization process. The Company is continuing to pay
interest on secured debt although principal payments have generally been
suspended.
RESULTS OF OPERATIONS
The consolidated financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 filing and circumstances relating to
this event, realization of assets and satisfaction of liabilities is subject to
uncertainty. A plan of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements, which do not
give effect to adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of a plan of reorganization. The
Company's ability to continue as a going concern is contingent upon, among other
things, its ability to formulate a plan of reorganization that will be confirmed
by the Bankruptcy Court, achieve satisfactory levels of profitability and cash
flow from operations, maintain compliance with the Debtors-in-Possession
financing agreement (see Note 5 to the consolidated financial statements), and
obtain financing sources to meet future obligations.
9
<PAGE>
The following table sets forth, as a percentage of sales, selected items
appearing in the consolidated statements of operations for the years ended
January 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Sales 100.0 % 100.0 % 100.0 %
Expenses:
Cost of Sales 61.6 59.2 53.9
Store and Operating 38.6 38.1 37.2
General and Administrative 8.7 7.0 6.3
Interest 3.4 1.5 1.0
Restructuring charges 10.4 2.4
Reorganization costs 0.8
----- ----- -----
Income (Loss) Before Income Taxes (23.5) (8.2) 1.6
Income Taxes (Benefit) (0.6) (2.8) 0.7
----- ----- -----
Net Income (Loss) (22.9)% (5.4)% 0.9 %
===== ===== =====
</TABLE>
In both fiscal 1994 and 1995, the Company implemented restructuring plans that
involve the closing of a significant number of stores and significant revisions
to the Company's marketing and merchandising strategies. A summary of each plan
follows:
1993 PLAN
Effective September 1, 1993, the Company's Board of Directors approved a plan of
restructuring (the "1993 Plan") that, among other things, provided for the
closure of its 110 then remaining mall stores. Accordingly, in the third
quarter of fiscal 1994, the Company recorded a pretax restructuring charge of
$12,909,000 for disposition of the remaining 110 mall stores. This charge
included the following components:
<TABLE>
<CAPTION>
<S> <C>
Asset dispositions at closing $9,965,000
Operating losses through closing 2,325,000
Lease termination and occupancy costs 427,000
Professional fees and other store closing costs 192,000
-----------
$12,909,000
===========
</TABLE>
At January 31, 1995, a total of 93 stores have been closed under the 1993 Plan,
and six of the remaining mall stores will be closed by August 31, 1995. The
Company has canceled the planned closure of 11 mall stores due to better than
expected performance and subsequently reversed the related portion of the
restructuring charge. In addition, the Company decreased by $1,900,000 their
estimate of the reserve needed to complete the 1993 Plan. During fiscal 1995,
mall store sales of $21,548,000 and operating losses of $5,656,000 were excluded
from operating results and charged to the restructuring reserve.
10
<PAGE>
1994 PLAN
Effective August 26, 1994, the Company's Board of Directors approved a plan of
restructuring (the "1994 Plan") to close 125 underperforming super stores. This
plan was subsequently amended to included an additional 63 super stores bringing
the total number of super stores slated for closure to 188. The 1994 Plan
includes two groups of stores. The first group consists of 132 super stores
that were turned over to a liquidation company to conduct the liquidation of
store inventories. The liquidation sales began in September 1994 and were
completed in February 1995. The second group of 56 super stores began
liquidation in January 1995 and are expected to be completed by August 31, 1995.
Accordingly, in the third quarter of fiscal 1994, the Company recorded a pretax
restructuring charge of $49,600,000 which included the following components:
<TABLE>
<CAPTION>
<S> <C>
Lease termination and occupancy costs $17,600,000
Operating losses through closing 14,700,000
Asset dispositions at closing 14,100,000
Professional fees and other store closing costs 3,200,000
-----------
$49,600,000
===========
</TABLE>
At January 31, 1995, a total of 126 stores have been closed under the 1994 Plan,
and 50 of the remaining super stores will be closed by August 31, 1995. The
Company has canceled the planned closure of 12 super stores due to better than
expected performance and subsequently reversed the related portion of the
restructuring charge. During fiscal 1995, super store operating losses of
$18,539,000 were excluded from operating results and charged to the
restructuring reserve.
A reconciliation of the restructuring charge reported in the Company's Statement
of Operations for the year ended January 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
1994 Plan restructuring charge $49,600,000
Cancellation of planned closure of 11 stores under the 1993 Plan (1,300,000)
Cancellation of planned closure of 12 stores under the 1994 Plan (2,900,000)
Change in estimate of reserve needed to complete the 1993 Plan (1,900,000)
-----------
$43,500,000
===========
</TABLE>
Under the 1993 and 1994 Plans, asset dispositions include the write off of the
remaining net book value of all leasehold improvements for mall and super stores
being closed as well as certain costs to liquidate merchandise inventories at
closed stores. Lease termination and occupancy costs are solely related to the
estimated costs of terminating store leases.
MERCHANDISE INVENTORIES
In September 1993, the Company reduced the carrying value of certain of its
inventories by $21,825,000 primarily to implement its repricing strategy for
certain fabric, notion and craft inventories.
In August 1994, the Company implemented a new marketing and merchandising
strategy that is designed to increase inventory turnover and attract a wider and
more diverse customer base. The Company will narrow its fabric offerings,
concentrating on fewer stock-keeping-units that will allow it to increase
11
<PAGE>
inventory turnover rates. In addition, the Company is shifting its merchandise
mix to place more emphasis on craft and home decorating products. As a result
of this new marketing and merchandising strategy, the Company recorded a
markdown reserve of $19,000,000 to aggressively markdown and liquidate certain
inventories that no longer fit into its revised merchandising model. As of
January 31, 1995, $9,081,000 had been charged against the markdown reserve, and
the Company believes that the balance of inventories contemplated by the
markdown reserve will be liquidated during fiscal 1996.
SALES
Sales for the year ended January 31, 1995 decreased 23.9% to $416,276,000, from
$546,664,000 in the prior fiscal year. The decrease in sales of $130,388,000,
consisted of an 11.3% decrease in store for store sales, in addition to the
elimination of sales in fiscal 1995 for stores under the 1994 Plan of
$59,375.000. Sales that were eliminated under the 1993 Plan in fiscal 1995
amounted to $21,548,000. During fiscal 1995, the Company closed 72 mall stores
under the 1993 Plan, 126 super stores under the 1994 Plan and 15 additional
stores not included in either plan. The Company opened one store during fiscal
1995.
The decrease in store for store sales resulted from the lack of product in the
stores for both basics and for the fall selling season. The company experienced
severe liquidity issues that prevented it from being able to acquire the proper
level of goods necessary to stock its stores adequately. In addition, the
Company began liquidation of underperforming super stores in September 1994,
along with the liquidation of the remaining mall stores. Many of the
liquidation stores were in direct competition with the Company's continuing
store base and negatively affected the continuing store sales. The decrease in
store for store sales also resulted in part from competitive pressure in the
fabric retailing industry. The Company will continue to close super stores
under the 1994 Plan in addition to mall stores under the 1993 Plan as described
above through August 31, 1995.
Sales for the year ended January 31, 1994 decreased 0.2% to $546,664,000 from
$557,521,000 in the prior year. The decrease in sales of $10,857,000 consisted
of a 2.2% decrease in store for store sales, in addition to the elimination of
sales for mall stores under the 1993 Plan of $18,750,000 all of which were
substantially offset by sales attributable to new stores which exceeded sales
attributable to closed stores. During fiscal 1994, the Company closed 21 mall
stores under the 1993 Plan, closed 39 mall stores that were not part of the 1993
Plan, closed 21 super stores, and opened 31 super stores. The decrease in store
for store sales resulted in part from the generally poor economic conditions
(including California, which had 154 of the Company's super stores at January
31, 1994) and the competitive pressure in the fabric retailing industry.
COST OF SALES
Gross profit as a percentage of sales decreased to 38.4% for the year ended
January 31, 1995 from 40.8% for the year ended January 31, 1994. Gross profit
was decreased in fiscal 1995 by $19,000,000 (4.6% of sales) to aggressively
markdown and liquidate certain inventories that no longer fit into the Company's
merchandising model and in fiscal 1994 by $21,825,000 (4.0% of sales) primarily
to implement the Company's repricing strategy for certain fabric, notion and
craft inventories. In addition to the decrease in gross profit resulting from
these charges, gross profit as a percentage of sales decreased in fiscal 1995 in
comparison to fiscal 1994 due to (1) lower sales prices which resulted from the
highly promotional and competitive environment, (2) an increase in craft sales
as a percentage of total sales which generally have lower margins, and (3)
decreased purchase volume discounts resulting from lower purchases during fiscal
1995 compared to fiscal 1994.
12
<PAGE>
Gross profit as a percentage of sales decreased to 40.8% for the year ended
January 31, 1994 from 46.1% for the year ended January 31, 1993. This decrease
was due primarily to the $21,825,000 reduction in inventory carrying value
recorded during the third quarter of fiscal 1994.
STORE AND OPERATING EXPENSES
Store and operating expenses for the year ended January 31, 1995 decreased
$47,532,000 to $160,538,000 from $208,070,000 for the prior fiscal year. As a
percent of sales these expenses increased to 38.6% for the year ended January
31, 1995 from 38.1% for the prior fiscal year primarily due to higher fixed
costs as a percentage of sales in fiscal 1995 as compared to fiscal 1994, which
resulted from reduced sales from the Company's inability to acquire the proper
level goods necessary to stock its stores adequately.
Store and operating expenses for the year ended January 31, 1994 increased
$679,000 to $208,070,000 from $207,391,000 for the prior fiscal year. As a
percent of sales, these expenses increased to 38.1% for the year ended January
31, 1994 from 37.2% for the prior fiscal year, principally as a result of
increased rents for super stores which have higher rent expense due to larger
square footages, partially offset by a decrease in payroll expense, which is
part of the Company's strategy to reduce controllable expenses to their lowest
possible levels.
GENERAL AND ADMINISTRATIVE
General and administrative expense as a percent of sales increased to 8.7% for
the year ended January 31, 1995 from 7.0% for the prior fiscal year, primarily
as a result of higher fixed costs as a percentage of sales in fiscal 1995 as
compared to fiscal 1994. In addition, the store liquidation process that
continued throughout fiscal 1995 and the reorganization process that began in
the latter portion of fiscal 1995 require substantial administrative support,
although such efforts do not support reported sales as the operations of the
liquidation stores are charged to the restructuring reserves. The amount of
general and administrative expenses decreased for the year ending January 31,
1995 in comparison to the prior fiscal year primarily as a result of reductions
in personnel. General and administrative payroll costs decreased $2,200,000 for
fiscal 1995 in comparison to fiscal 1994.
General and administrative expense as a percent of sales increased to 7.0% for
the year ended January 31, 1994 from 6.3% for the prior fiscal year, primarily
as a result of higher insurance-related expenses.
INTEREST
Interest expense for the year ended January 31, 1995 increased $5,807,000
compared to the prior fiscal year primarily as a result of an increase in the
Company's average effective borrowing rates which resulted from market rate
increases and interest penalties charged when the Company was in default under
its loan agreement, prior to the Chapter 11 filing.
Interest expense for the year ended January 31, 1994 increased $2,880,000
compared to the prior fiscal year as a result of an increase in average
borrowings during the period of $36,071,000 in addition to an increase in the
Company's average effective borrowing rates.
13
<PAGE>
REORGANIZATION COSTS
Costs associated with the Company's Chapter 11 filing amounted to $3,416,000 for
the year ended January 31, 1995, which were comprised primarily of professional
fees. Store closure costs, including lease termination costs, are included in
the statement of operations as a component of restructuring charges (see
discussion above). The Company anticipates that additional reorganization costs
will be incurred throughout the Chapter 11 reorganization.
INCOME TAXES
Income tax benefit decreased to $2,325,000 for the year ended January 31, 1995,
compared to $15,218,000 for the prior fiscal year. As a percentage of loss
before income taxes, the tax benefit for the year ended January 31, 1995
decreased to 2.4% from 34.0% for the prior fiscal year. The decrease in the
rate of benefit occurred because only a portion of the net operating loss
generated in fiscal 1995 can be used to obtain refunds of income taxes paid in
previous years. Refundable taxes reflected in the consolidated balance sheet at
January 31, 1995 amount to $6,351,000. The net operating loss not used to
obtain refunds creates a net operating loss carryforward which, together with
other deferred tax assets, have been reduced, in aggregate, to their estimated
net realizable balance through a valuation allowance. (See Note 6 to the
Consolidated Financial Statements.)
Realization of the Company's deferred tax assets at January 31, 1994 was
considered more likely than not because the Company had taxable income in prior
carryback years to absorb future tax deductions related to the deferred tax
assets. Accordingly, an allowance to reduce the value of the deferred tax
assets was not considered necessary at January 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on, events that occurred on or before
the Filing Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization which requires the
approval of the impaired prepetition creditors and stockholders and confirmation
by the Bankruptcy Court. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts, including leases, or
the Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. The ultimate resolution of such liabilities, all of which are subject
to compromise, will be part of a plan of reorganization. Until a plan of
reorganization is confirmed by the Bankruptcy Court, only such payments on
prepetition obligations that are approved by the Bankruptcy court will be made.
There is no assurance that a plan of reorganization will be proposed, approved
or confirmed by the Bankruptcy Court.
Inherent in a successful plan of reorganization is a capital structure that will
enable the Company to generate sufficient cash flow after reorganization to meet
its restructured obligations and current obligations. Accordingly, the rights
of prepetition creditors and the ultimate payment of their claims may be
substantially altered and, in some cases, eliminated under the Bankruptcy Code.
It is not possible at this time to predict the ultimate outcome of the Chapter
11 filing or its effects on the Company's business or on the interests of
creditors or stockholders.
Beginning in the second quarter of fiscal 1995 and through the Filing Date, the
Company experienced significant credit restrictions and operating losses that
prevented it from making merchandise inventory purchases that otherwise would
have been made. In addition, the Company was in the process of liquidating
stores under the 1993 Plan and began the process of liquidating stores under the
1994 Plan.
14
<PAGE>
The Company was required to segregate the proceeds of the store liquidations in
an account that was controlled by Bank of America NT & SA pending the
reconciliation and settlement of inventory reductions under the Company's loan
agreement with the bank. These circumstances, together with the stay of
payments for prepetition liabilities provided under the Chapter 11 filing,
enabled the Company to report cash balances at January 31, 1995 of $47,381,000.
Net cash provided by operating activities amounted to $55,474,000 for the year
ended January 31, 1995 compared to cash used in operating activities for the
year ended January 31, 1994 of $28,888,000.
For the year ended January 31, 1994, the Company reduced the number of new
stores opened or acquired from 91 stores in fiscal 1993 to 31 stores in fiscal
1994. One store was opened in fiscal 1995. Capital expenditures for the years
ended January 31, 1995, 1994 and 1993, relating primarily to new store openings,
were $1,523,000, $12,425,000 and $21,776,000, respectively. Proceeds from the
sale of property during fiscal 1995 resulted primarily from the disposition of
the warehouse in Portland, Oregon that was classified as available for sale.
The Company's net operating loss generated in fiscal 1994 was carried back to
prior fiscal years and resulted in a tax refund of approximately $8,000,000. As
of January 31, 1995, the Company has additional tax refunds that will be
obtained as a result of the fiscal 1995 net operating loss. Refundable taxes at
January 31, 1995 amount to $6,351,000, which are expected to be realized during
fiscal 1996.
As described in Note 4 to the consolidated financial statements, the Company has
a Credit Agreement with a banking group for which Bank of America, NT & SA acts
as Agent Bank. Borrowings under the Credit Agreement are collateralized by
substantially all assets of the Company, excluding property. As a result of the
Chapter 11 filing, all required repayments of principal on the notes payable
under the Credit Agreement have been suspended, except for certain principal
repayments that have been approved by the Bankruptcy Court and are required by
the Company's debtors-in-possession financing agreement. Under such agreement,
up to a total of $28,000,000 of permanent principal reductions may be required
based on a preapproved formula through January 31, 1996 of which $6,000,000 was
repaid through March 31, 1995. The Company has continued to accrue and pay
interest at the contractual rate on these notes and has classified these notes
as subject to compromise in the accompanying consolidated balance sheets.
In connection with the Chapter 11 filing, subsequent to January 31, 1995, the
Company entered into and the Bankruptcy Court approved an agreement with Bank of
America NT & SA, acting as agent bank, to provide Debtors-in-Possession
financing in the form of a $20 million line of credit (The "D.I.P. Financing").
The D.I.P. Financing agreement provides for cash borrowing of $10 million and
the issuance of up to $10 million in letters of credit. Interest and fees are
payable monthly. Cash borrowings bear interest at the bank reference rate plus
1.5% per annum, and a commitment fee of .5% per annum on unused availability.
Fees for letters of credit are generally .25% per annum. This agreement is
collateralized by a first priority lien on generally all assets of the Company,
as defined. The Company is required to follow a formula for sequestration of
excess cash, as defined in the D.I.P. Financing agreement, for permanent
principal reductions of notes payable under the Credit Agreement. The Company is
also required to permanently reduce all or a portion of the borrowings under the
D.I.P. Financing agreement by an amount equal to the net proceeds from asset
dispositions which occur outside the normal course of business and, under
certain circumstances, a portion of the funds derived from store liquidations.
The agreement will terminate, generally, on January 31, 1996, or the effective
date of a plan of reorganization confirmed by the Bankruptcy Court.
15
<PAGE>
The Company expects to continue closing stores under the 1993 Plan and the 1994
Plan through August 31, 1995. Currently, the Company anticipates that total
capital expenditures for fiscal 1996 will approximate $6,000,000 which includes
an investment to upgrade its computer systems.
The Company believes that its ongoing operating cash flow, the D.I.P. Financing
agreement, and the refund of income taxes should enable to Company to meet
liquidity requirements in fiscal 1996. However, notwithstanding all of the
events and circumstances described above, there is substantial uncertainty with
respect to the Company's liquidity. The Company's ability to meet its
obligations as they come due and successfully emerge from Chapter 11 is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, maintain
compliance with the Debtors-in-Possession financing agreement and obtain
financing sources to meet future obligations.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, together with the report
thereon of Deloitte & Touche LLP, independent auditors, are included herein in
Item 14. on pages 19 to 35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors is included on pages 3 and 12 of the
Company's 1995 Proxy Statement and is incorporated by reference herein.
EXECUTIVE OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
<S> <C> <C>
Barney Sofro 53 Chairman of the Board, and a Director since 1970.
Gary L. Larkins 52 President and Chief Executive Officer, and a Director since 1978.
Donald R. Ardemagni 62 Executive Vice President - Buying since 1988.
Michael Brown 37 Senior Vice President - Store Operations since
September, 1994. From June, 1994 to September, 1994 he
was Vice President - Retail Sales; January, 1993 to
May, 1994, Regional Sales Manager; September, 1991 to
December 1992 District Sales
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
<S> <C> <C>
Manager; August, 1991 to November, 1991 Store Manager.
Prior to that he was Director of Preventive Services
and Education for the Rock Island County Council
of Addictions.
Marvin S. Maltzman 58 Sr. Vice President - Administration, Secretary and
General Counsel since 1993; Vice President, Secretary
and General Counsel from 1980 to 1993, and a Director
since 1991
Richard H. Shelton III 51 Sr. Vice President - Warehouse and Distribution since 1993. Vice President - Warehouse and
Distribution from 1988 to 1993.
James C. Webb 51 Sr. Vice President - Real Estate since 1993. Prior to that he was Vice President - Real Estate.
L. Jay Bowen 48 Vice President - Notions.
Mary A. Deaver 30 Vice President - Home Merchandise since September,
1994. From June, 1994 to August, 1994 she was a Craft
Merchandise Manager; from January, 1991 to May, 1994
she was a Craft Buyer. Prior to January, 1991 she was
a Buyer for Michael's Incorporated.
Norman L. Salvesen 42 Vice President - Controller since September, 1994.
From June, 1994 to August, 1994 he was Controller.
Prior to that he was Corporate Controller for Toshiba
America Information Systems, Inc. from September, 1991
to May, 1994, and prior to that Assistant Company
Controller for Toshiba America Information Systems,
Inc.
</TABLE>
Disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K, is
contained on page 13 of the Company's 1995 Proxy Statement and is incorporated
by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
This information is included on pages 5 through 10 of the Company's 1995 Proxy
Statement and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included on page 2 of the Company's 1995 Proxy Statement and
is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included on page 4 of the Company's 1995 Proxy Statement and
is incorporated by reference herein.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report.
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Financial statements;
Independent Auditors' Report 19
Consolidated Balance Sheets as of January 31, 1995 and 1994 20 - 21
Consolidated Statements of Operations
for the Years Ended January 31, 1995, 1994 and 1993 22
Consolidated Statements of Stockholders' Equity
for the Years Ended January 31, 1995, 1994 and 1993 23
Consolidated Statements of Cash Flows
for the Years Ended January 31, 1995, 1994 and 1993 24
Notes to Consolidated Financial Statements 25 - 35
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K was filed during the quarter ended January 31, 1995 on
November 9, 1994 which reported the Chapter 11 Bankruptcy filing,
the resignation of a director, and the appointment of a new director.
(c) Exhibits (Attached to Complete Copies)
<TABLE>
<CAPTION>
<S> <C>
Exhibit 10(a) $20,000,000 Revolving Credit Agreement among House of Fabrics, Inc., House of Fabrics of South
Carolina, Inc., Sofro Fabrics, Inc. and Metrolina Express, Inc. and The Financial Institutions party
hereto and Bank of America National Trust and Savings Association, as Issuing Bank and Bank of America
National Trust and Savings Association, as Agent Dated as of March 31, 1995.
Exhibit 22 Subsidiaries of the Registrant
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule.
Exhibit 28 Additional Exhibits.
</TABLE>
18
<PAGE>
To the Stockholders and Board of Directors of House of Fabrics, Inc.
We have audited the accompanying consolidated balance sheets of House of
Fabrics, Inc. and subsidiaries (Debtors-in-Possession) (the Company) as of
January 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended January 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of House of Fabrics,
Inc. And subsidiaries as of January 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company has filed for reorganization under Chapter
11 of the United States Bankruptcy Code. The accompanying consolidated
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such financial statements do not
purport to show (a) as to assets, their realizable value on a liquidation basis
or their availability to satisfy liabilities; (b) as to prepetition
liabilities, the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect of any
changes that may be made in the capitalization of the Company; or (d) as to
operations, the effect of any changes that may be made in the Company's
business. The outcome of these matters is not presently determinable.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
uncertainties inherent in the bankruptcy process and the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. The Company is currently operating its business as Debtors-in-
Possession under the jurisdiction of the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to (1) formulate a plan of reorganization that will be confirmed by the
Bankruptcy Court, (2) achieve satisfactory levels of profitability and cash flow
from operations, (3) maintain compliance with its Debtors-in-Possession
financing agreement, and (4) obtain financing sources to meet future
obligations. The consolidated financial statements do not include adjustments
that might result from the outcome of the uncertainties referred to herein and
in the preceding paragraph.
DELOITTE & TOUCHE LLP
Costa Mesa, California
May 5, 1995
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
<TABLE>
<CAPTION>
JANUARY 31 1995 1994
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 47,381,000 $ 9,758,000
Receivables, net 12,877,000 9,765,000
Merchandise Inventories, net 132,963,000 243,151,000
Prepaid Expenses and Other Current Assets 35,709,000 5,601,000
Refundable Income Taxes 6,351,000 10,738,000
Deferred Income Taxes 1,655,000 4,538,000
------------ ------------
Total Current Assets 236,936,000 283,551,000
Property:
Land 1,729,000 1,729,000
Buildings 15,035,000 14,403,000
Furniture & Fixtures 52,637,000 67,845,000
Leasehold Improvements 24,909,000 36,067,000
------------ ------------
94,310,000 120,044,000
Less Accumulated Depreciation and Amortization (47,695,000) (54,454,000)
------------ ------------
Property, net 46,615,000 65,590,000
Deferred Income Taxes 2,842,000
Property Held for Sale 2,740,000
Other Assets 2,064,000 962,000
Goodwill, net 39,140,000 40,212,000
------------ ------------
$327,597,000 $393,055,000
============ ============
</TABLE>
See independent auditor's report and
notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31 1995 1994
<S> <C> <C>
LIABILITIES
Current Liabilities:
Accounts Payable $ 12,806,000 $ 55,890,000
Accrued Liabilities 24,851,000 24,688,000
Restructuring Reserve 19,583,000 1,877,000
Notes Payable to Banks - 143,000,000
Current Portion of Long-Term Debt - 1,963,000
------------ ------------
Total Current Liabilities 57,240,000 227,418,000
------------ ------------
Deferred Income Taxes 4,497,000 3,110,000
Long-Term Debt - 2,862,000
Other Long-Term Liabilities 9,256,000
Liabilities Subject to Compromise under
reorganization proceedings 210,836,000 -
------------ ------------
Total Liabilities 272,573,000 242,646,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 Par Value;
Authorized 1,000,000 Shares; Outstanding, None
Common Stock, $.10 Par Value;
Authorized 29,000,000 Shares; 13,697,107 Shares
Issued and Outstanding in 1995 and 1994 1,370,000 1,370,000
Paid-In Capital 46,880,000 46,880,000
Retained Earnings 6,774,000 102,159,000
------------ ------------
Total Stockholders' Equity 55,024,000 150,409,000
------------ ------------
$327,597,000 $393,055,000
============ ============
See independent auditor's report and
notes to consolidated financial statements.
</TABLE>
21
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1995 1994 1993
<S> <C> <C> <C>
Sales $416,276,000 $546,664,000 $557,521,000
Expenses:
Cost of Sales 256,383,000 323,757,000 300,698,000
Store and Operating 160,538,000 208,070,000 207,391,000
General and Administrative 36,166,000 38,512,000 35,183,000
Interest 13,983,000 8,176,000 5,296,000
Restructuring Charge 43,500,000 12,909,000 -
------------ ------------ ------------
Total Expenses 510,570,000 591,424,000 548,568,000
------------ ------------ ------------
Income (Loss) Before Income Taxes (Benefit)
and Reorganization Costs (94,294,000) (44,760,000) 8,953,000
Reorganization Costs 3,416,000
------------ ------------ ------------
Income (Loss) Before Income Taxes (Benefit) (97,710,000) (44,760,000) 8,953,000
Income Taxes (Benefit) (2,325,000) (15,218,000) 3,750,000
------------ ------------ ------------
Net Income (Loss) $(95,385,000) $(29,542,000) $ 5,203,000
============= ============= ============
Net Income (Loss) Per Share $ (6.96) $ (2.16) $ .37
============= ============= ============
</TABLE>
See independent auditor's report and
notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
House of Fabrics, Inc. and Subsidiaries
(Debtors-In-Possession)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
<S> <C> <C> <C>
Balance, February 1, 1992 $1,432,000 $ 59,621,000 $126,498,000
Exercise of Stock Options 5,000 346,000 -
Tax Benefit Related to Stock Options - 214,000 -
Net Income - - 5,203,000
---------- ------------ ------------
Balance, January 31, 1993 1,437,000 60,181,000 131,701,000
Exercise of Stock Options 4,000 318,000 -
Tax Benefit Related to Stock Options - 37,000 -
Net Loss - - (29,542,000)
Treasury Stock Retired (71,000) (13,656,000) -
---------- ------------ ------------
Balance, January 31, 1994 1,370,000 46,880,000 102,159,000
Net Loss - - (95,385,000)
---------- ------------ ------------
Balance, January 31, 1995 $1,370,000 $ 46,880,000 $ 6,774,000
========== ============ ============
</TABLE>
See Independent Auditors Report and
Notes to Consolidated Financial Statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(95,385,000) $(29,542,000) $ 5,203,000
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used In) Operating Activities:
Depreciation and Amortization 10,329,000 11,186,000 9,853,000
Loss on Disposal of Fixed Assets 1,035,000 1,605,000 706,000
Deferred Income Taxes 1,428,000 (5,623,000) 234,000
Restructuring and Inventory Valuation Charges 62,500,000 34,734,000
Changes in Assets and Liabilities, Net of the Effects of the
Acquisition of Businesses:
Receivables (3,112,000) (2,929,000) 719,000
Merchandise Inventories 91,188,000 (10,714,000) (7,103,000)
Prepaid Expenses, Refundable Income Taxes and
Other Assets (26,823,000) (9,492,000) (1,024,000)
Accounts Payable and Accrued and Other Liabilities (42,921,000) (18,113,000) (16,890,000)
Restructuring Reserve (25,390,000)
Operating Payables subject to compromise
under Reorganization Proceedings 82,625,000
------------ ------------ ------------
Net Cash Provided by (Used In) Operating Activities 55,474,000 (28,888,000) (8,302,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (1,523,000) (12,425,000) (21,776,000)
Proceeds from Sale of Property 3,286,000 1,143,000 718,000
Acquisition of Businesses (1,200,000)
------------ ------------ ------------
Net Cash Provided by (Used In) Investing Activities 1,763,000 (11,282,000) (22,258,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Long-Term Debt (3,280,000) (1,205,000) (11,469,000)
Issuance of Long-Term Debt 15,000,000
Proceeds from Exercise of Stock Options 322,000 351,000
Net Borrowings (Repayments) Under Line of Credit Agreements (16,334,000) 48,597,000 40,261,000
Purchase of Treasury Stock (13,727,000)
------------ ------------ ------------
Net Cash (Used In) Provided by Financing Activities (19,614,000) 47,714,000 30,416,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 37,623,000 7,544,000 (144,000)
CASH AT BEGINNING OF YEAR 9,758,000 2,214,000 2,358,000
------------ ------------ ------------
CASH AT END OF YEAR $ 47,381,000 $ 9,758,000 $ 2,214,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Interest Paid $ 14,275,000 $ 8,562,000 $ 5,410,000
Income Taxes Paid (Refunded) $ (7,876,000) $ (891,000) $ 1,332,000
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES -
During the year ended January 31, 1994, long-term debt of $15,000,000 was
converted into Notes Payable to Banks. During the years ended January 31, 1995
and 1994, loss on disposal of property charged to the restructuring reserve
amounted to $8,417,000 and $123,000, respectively.
See independent auditor's report and
notes to consolidated financial statements.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Note 1: Reorganization, Basis of Reporting and Restructuring Plans
REORGANIZATION AND BASIS OF REPORTING:
House of Fabrics, Inc. and subsidiaries (Debtors-in-Possession) (the "Company")
is one of the largest home sewing/craft retailers in the United States,
operating 433 stores in 34 states as of January 31, 1995. The Company's stores
are located throughout the United States and operate under the names "House of
Fabrics," "So-Fro Fabrics," "Fabricland" or "Fabric King." The Company operates
most of its stores in leased premises principally in neighborhood shopping
centers or stand-alone locations.
The Company renegotiated its loan agreement with its banks during the second
quarter of fiscal 1995 but was unable to remain in compliance with certain
nonfinancial and financial covenants contained in the amended agreement,
primarily as a result of the significant loss experienced in the first two
quarters of fiscal 1995. Reduced credit resulted in inventory shortages in
basic and seasonal products that caused further sales declines and increased
uncertainty about the upcoming fall and winter season. During August 1994, the
Company announced a restructuring plan to close certain underperforming super
stores (see further discussion below) with the majority of the funds generated
by the store liquidation sales to be used for permanent reduction of the bank
loan. With such restrictions on cash flow and an inability to raise additional
capital through other sources, inventory shortages continued, adversely
impacting sales. These events led to the Company's decision to file for
protection under Chapter 11 of the United States Bankruptcy Code (Chapter 11) on
November 2, 1994. The Company continues to conduct normal business operations as
Debtors-in-Possession subject to the jurisdiction of the Bankruptcy Court and
intends to propose a plan of reorganization. As Debtors-in-Possession, the
Company may not engage in transactions outside the ordinary course of business
without approval of the Bankruptcy Court, after notice and hearing.
Under Chapter 11, actions to enforce claims against the Company are stayed if
the claims arose, or are based on events that occurred, on or before the
petition date of November 2, 1994, and such claims cannot be paid or
restructured prior to the conclusion of the Chapter 11 proceedings or approval
of the Bankruptcy Court. Other liabilities may arise or be subject to compromise
as a result of rejection of executory contracts, including leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. Liabilities subject to compromise (see Note 3) in the accompanying
consolidated balance sheet represent the Company's estimate of liabilities as of
January 31, 1995, subject to adjustment in the reorganization process. The
Company is continuing to pay interest on secured debt although principal
payments have generally been suspended.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, realization of assets and satisfaction of
liabilities are subject to uncertainty. A plan of reorganization could
materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities which may be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
confirmed by the Bankruptcy Court, to achieve satisfactory levels of
profitability and cash flow from operations, maintain compliance with the
Debtors-in-Possession financing agreement (see Note 5) and obtain financing
sources to meet future obligations.
RESTRUCTURING PLANS:
In both fiscal 1994 and fiscal 1995, the Company implemented restructuring plans
that involve the closing of a significant number of stores and significant
revisions to the Company's marketing and merchandising strategies.
1993 Plan
- ---------
Effective September 1, 1993, the Company's Board of Directors approved a plan of
restructuring (the "1993 Plan") for the closure of its 110 then remaining mall
stores and the implementation of a new merchandising strategy that focused on
everyday value pricing. Accordingly, in the third quarter of fiscal 1994, the
Company recorded a pretax restructuring charge of $12,909,000 for disposition of
the remaining 110 mall stores. This charge included the following components:
<TABLE>
<CAPTION>
<S> <C>
Asset dispositions at closing $9,965,000
Operating losses through closing 2,325,000
Lease termination and occupancy costs 427,000
Professional fees and other store closing costs 192,000
-----------
$12,909,000
===========
</TABLE>
At January 31, 1995, a total of 93 stores have been closed under the 1993 Plan,
and six of the remaining mall stores will be closed by August 31, 1995. The
Company has canceled the planned closure of 11 mall stores due to better than
expected performance and has subsequently reversed the related portion of the
restructuring charge. In addition, the Company decreased by $1,900,000, their
estimate of the reserve required to complete the 1993 Plan. During fiscal 1995,
mall store sales of $21,548,000 and operating losses of $5,656,000 were
excluded from operating results and charged to the restructuring reserve.
1994 Plan
- ---------
Effective August 26, 1994, the Company's Board of Directors approved a plan of
restructuring (the "1994 Plan") to close 125 underperforming super stores. This
plan was subsequently amended to included an additional 63 super stores,
bringing the total number of super stores slated for closure to 188. The 1994
Plan includes two groups of stores. The first group consists of 132 super
stores that were turned over to a liquidation company to conduct the liquidation
of store inventories. The liquidation sales began in September 1994 and were
completed in February 1995. The second group of 56 super stores began
liquidation in January 1995 and are expected to be completed by August 31, 1995.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Accordingly, in the third quarter of fiscal 1995, the Company recorded a pretax
restructuring charge of $49,600,000 which included the following components:
<TABLE>
<CAPTION>
<S> <C>
Lease termination and occupancy costs $17,600,000
Operating losses through closing 14,700,000
Asset dispositions at closing 14,100,000
Professional fees and other
store closing costs 3,200,000
-----------
$49,600,000
===========
</TABLE>
At January 31, 1995, a total of 126 stores have been closed under the 1994 Plan,
and 50 of the remaining super stores will be closed by August 31, 1995. The
Company has canceled the planned closure of 12 super stores due to better than
expected performance and subsequently reversed the related portion of the
restructuring charge. During fiscal 1995, super store sales of $59,375,000 and
operating losses of $18,539,000 were excluded from operating results and charged
to the restructuring reserve.
A reconciliation of the restructuring charge reported in the Company's
Consolidated Statement of Operations for the year ended January 31, 1995 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
1994 Plan Restructuring Charge $49,600,000
Cancellation of planned closure of
11 stores under 1993 Plan (1,300,000)
Cancellation of planned closure of 12
stores under 1994 Plan (2,900,000)
Change in estimate of reserve needed
to complete 1993 Plan (1,900,000)
-----------
$43,500,000
===========
</TABLE>
Under the 1993 Plan and the 1994 Plan, asset dispositions include the write off
of the remaining net book value of all leasehold improvements for mall and super
stores being closed as well as certain costs to liquidate merchandise
inventories at closed stores. Lease termination and occupancy costs are solely
related to the estimated costs of terminating store leases.
Merchandise Inventories
In September 1993, the Company reduced the carrying value of certain of its
inventories by $21,825,000 primarily to implement its repricing strategy for
certain fabric, notion and craft inventories.
During the third quarter of fiscal 1995, the Company implemented a new marketing
and merchandising strategy that is designed to increase inventory turnover and
attract a wider and more diverse customer base. The Company will narrow its
fabric offerings, concentrating on fewer stock-keeping-units that will allow it
to
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
increase inventory turnover rates. In addition, the Company is shifting its
merchandise mix to place more emphasis on craft and home decorating products.
As a result of this new marketing and merchandising strategy, the Company
recorded a markdown reserve of $19,000,000 to aggressively mark down and
liquidate certain inventories that no longer fit into its revised merchandising
model. As of January 31, 1995, $9,081,000 had been charged against the markdown
reserve, and the Company believes that the balance of inventories contemplated
by the markdown reserve will be liquidated during fiscal 1996.
Note 2: Summary of Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of all subsidiaries, all of which are wholly-owned. The Company's
subsidiaries include Fabricland, Inc., So-fro Fabrics, Inc., House of Fabrics of
South Carolina, Inc., and Metrolina Express, Inc. Intercompany accounts and
transactions have been eliminated in consolidation.
Inventories - Merchandise inventories are stated at the lower of cost or market,
cost being determined on the retail first-in, first-out method. Store
inventories are counted on a cycle basis throughout the year, and markdowns are
taken currently on out of season and discontinued merchandise.
Property - Property is stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method at rates
based on the estimated lives of the assets. Leasehold improvements are amortized
over the estimated life of the improvement or the term of the lease, whichever
is shorter.
Property Held for Sale - Property held for sale is valued at the lower of cost
or market and comprised a warehouse in Portland, Oregon, that was not currently
in use by the Company. The warehouse was sold during fiscal 1995.
Reorganization Costs - Professional fees and expenditures directly related to
the Chapter 11 filing are classified as reorganization costs and are expensed as
incurred. Reorganization costs for the year ended January 31, 1995 consisted
primarily of professional fees. Cash paid for reorganization costs during the
year ended January 31, 1995 amounted to $2,517,000.
Income Taxes - Effective February 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires a liability approach in accounting for income taxes. Deferred tax
assets and liabilities are recognized based on enacted tax laws for the
estimated future tax effects of events that have been recognized in the
Company's financial statements or tax returns. However, deferred tax assets are
recognized only to the extent that it is more likely than not that they will be
realized. For fiscal years prior to 1994, the Company accounted for income taxes
under the deferred method as promulgated by Accounting Principles Board Opinion
No. 11. The cumulative effect of adopting SFAS No. 109 was not material to the
Consolidated Financial Statements.
Net Income (Loss) Per Share - Net income (loss) per share is computed based on
the weighted average number of shares of common stock and the dilutive effect,
if any, of common stock equivalents outstanding during the year: 13,697,107 in
1995, 13,688,941 in 1994, and 13,990,112 in 1993.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Fair Value of Financial Instruments - The carrying amounts of receivables and
accounts payable represent a reasonable estimate of their fair values. The
carrying amounts of the Company's various debt instruments approximate fair
value because their interest rates are based on variable reference rates.
Subsequent to the Chapter 11 filing, a limited market has developed for the
trading of prepetition claims against the Company. However, since the market
for claims against companies under Chapter 11 is not well developed, no reliable
source of market prices is available.
Goodwill - The recoverability of Goodwill attributable to the acquisition of
Fabricland in fiscal 1992 is analyzed annually based on actual and projected
levels of profitability. Goodwill is being amortized over a 40-year period. As
of January 31, 1995, accumulated amortization of goodwill totaled $3,741,000.
Reclassifications - Certain amounts in prior fiscal year financial statements
have been reclassified to correspond to current year classifications.
Note 3: Liabilities Subject to Compromise
Liabilities subject to compromise consist of the following as of January 31,
1995:
<TABLE>
<CAPTION>
<S> <C>
Secured Liabilities:
Notes payable to banks (see Note 4) $126,666,000
Long term debt (see Note 7) 1,545,000
Unsecured Liabilities:
Accounts payable, trade 76,875,000
Other payables and accrued expenses 5,750,000
------------
$210,836,000
============
</TABLE>
A plan of reorganization ultimately approved by the Company's impaired
prepetition creditors and stockholders and confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities. Such
amounts are estimated as of January 31, 1995, and the Company anticipates that
claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. The additional liability arising
from this reconciliation process, if any, is not subject to reasonable
estimation, and accordingly, no provision has been recorded for these possible
claims. The termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities. Such amounts, if
any, will be recognized in the consolidated balance sheet as they are identified
and become subject to reasonable estimation.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Note 4: Notes Payable to Banks
The Company has a credit agreement (Credit Agreement) for which Bank of America
NT & SA acts as agent bank. The Credit Agreement provides for maximum
borrowings of $126,666,000 and bears interest at 10.7% as of January 31, 1995.
Borrowings were limited to 60 percent of eligible inventory through January 31,
1995 and are limited to 55 percent thereafter.
Borrowings under the Credit Agreement are collateralized by substantially all
assets of the Company, excluding property. The Credit Agreement imposes monthly,
quarterly and annual financial covenants requiring the Company to maintain
certain liquidity, leverage and interest coverage ratios and achieve certain
levels of tangible net worth. In addition, the Credit Agreement prohibits the
payment of dividends and restricts the level of capital expenditures.
As a result of the significant loss the Company experienced in fiscal 1995, the
Company was unable to remain in compliance with certain of its financial
covenants. On September 13, 1994, the Credit Agreement was amended to provide a
limited waiver of covenant defaults existing as of September 1, 1994 and also to
provide relief from other potential defaults through November 11, 1994. However,
on November 2, 1994 the Company filed for relief under Chapter 11 of the United
States Bankruptcy Code as described in Note 1. As a result of the Chapter 11
filing, all required repayments of principal on the notes payable under the
Credit Agreement have been suspended, except for certain principal repayments
that have been approved by the Bankruptcy Court and are required by the
Company's Debtors-in-Possession financing agreement (see Note 5). Under such
agreement, up to a total of $28,000,000 of permanent principal reductions may be
required based on a preapproved formula through January 31, 1996, of which
$6,000,000 was repaid through March 31, 1995.
The Company has continued to accrue and pay interest at the contractual rate on
these notes and has classified these notes as subject to compromise in the
accompanying consolidated balance sheets (see Note 3).
Note 5: Debtors-in-Possession Financing
Subsequent to January 31, 1995, the Company entered into, and the Bankruptcy
Court approved, an agreement with Bank of America NT & SA, acting as agent bank,
to provide Debtors-in-Possession financing in the form of a $20 million line of
credit (The "D.I.P. Financing"). The D.I.P. Financing agreement provides for
cash borrowings of $10 million and the issuance of up to $10 million in letters
of credit. Interest and fees are payable monthly. Cash borrowings bear interest
at the bank reference rate plus 1.5% per annum, and a commitment fee of .5% per
annum on unused availability. Fees for letters of credit are generally .25% per
annum. This agreement is collateralized by a first priority lien on generally
all assets of the Company, as defined. The Company is required to follow a
formula for sequestration of excess cash, as defined in the D.I.P. Financing
agreement, for permanent principal reductions of notes payable under the Credit
Agreement. The Company is also required to permanently reduce all or a portion
of the borrowings under the D.I.P. Financing agreement by an amount equal to the
net proceeds from asset dispositions which occur outside the normal course of
business and, under certain circumstances, a portion of the funds derived from
store liquidations. The agreement will terminate, generally, on January 31,
1996, or the effective date of a plan of reorganization confirmed by the
Bankruptcy Court.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Note 6: Income Taxes
Income taxes (benefit) was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $(4,003,000) $ (9,745,000) $3,199,000
State 250,000 150,000 317,000
----------- ------------ ---------
(3,753,000) (9,595,000) 3,516,000
----------- ------------ ---------
Deferred:
Federal 1,434,000 (5,272,000) 350,000
State (6,000) (351,000) (116,000)
----------- ------------ ---------
1,428,000 (5,623,000) 234,000
----------- ------------ ---------
Income taxes (benefit) $(2,325,000) $(15,218,000) $3,750,000
=========== ============ ==========
</TABLE>
A reconciliation to the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1995 1994 1993
-------------------------------------------------------------------------------
Effective Effective Effective
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes at the
statutory rate $(34,199,000) (35.0)% $(15,666,000) (35.0)% $3,044,000 34.0%
Increase in Valuation Allowance 28,355,000 29.0
State taxes, net of federal benefit 163,000 0.2 (245,000) (0.5) 312,000 3.5
Amortization of intangibles 375,000 0.4 364,000 0.8 435,000 4.9
Other 2,981,000 3.0 329,000 0.7 (41,000) (0.5)
------------ ------- ------------ ------------ ---------- ---------
Income taxes (benefit) $ (2,325,000) (2.4)% $(15,218,000) (34.0)% $3,750,000 41.9%
============ ======= ============ ============ ========== =========
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Deferred tax assets and liabilities comprise the following at January 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Restructuring reserve $ 6,658,000 $3,785,000
Net operating loss carryforward 18,200,000
Inventory reserve 3,373,000 1,809,000
Medical claims reserve 723,000 552,000
Vacation pay reserve 380,000 356,000
Rent reserve 876,000 399,000
Other reserves 2,744,000 453,000
Other 16,000 222,000
Valuation allowance (28,355,000)
------------ ----------
Total deferred tax assets $ 4,615,000 $7,576,000
============ ==========
Depreciation and other property differences $ 4,497,000 $5,971,000
Other 118,000 177,000
------------ ----------
Total deferred tax liabilities $ 4,615,000 $6,148,000
============ ==========
</TABLE>
The Company's taxable loss incurred in fiscal 1995 resulted in an expected
refund of taxes paid in previous years and the establishment of a net operating
loss carryforward, which will expire in fiscal 2010. The net realizable balance
of deferred tax assets at January 31, 1995 was determined based on the extent
that they can be offset by future reversals of deferred tax liabilities.
Deferred tax assets at January 31, 1994, with the exception of the net operating
loss carryforward, will reverse generally in fiscal 1996.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
Note 7: Long Term Debt
Long term debt consists of the following at January 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
7% first mortgage industrial revenue bonds $ 375,000 $ 500,000
Notes payable to bank-Fabricland 861,000 3,924,000
Other notes payable 309,000 401,000
---------- ----------
1,545,000 4,825,000
Less amounts contractually due within one year 1,091,000 1,963,000
---------- ----------
Total long-term debt $ 454,000 $2,862,000
========== ==========
</TABLE>
The industrial revenue bonds are being repaid through the Company's lease of the
facilities that are pledged as collateral for the bonds. The remaining bonds
mature in fiscal 1998. The capitalized assets which are pledged with respect to
these bonds have a net book value of $1,404,000 at January 31, 1995. Notes
payable to bank - Fabricland relate to debt assumed as part of the Fabricland
acquisition, are collateralized by certain real property of Fabricland, and bear
interest at prime plus .5% per annum (9.0% at January 31, 1995). By
authorization of the Bankruptcy Court, the Company has continued to pay interest
at the contractual rate on the industrial revenue bonds and the notes payable to
bank - Fabricland. Such notes have been classified as subject to compromise in
the accompanying consolidated balance sheets and are considered in default as a
result of the Chapter 11 filing (see Note 3).
Note 8: Capital Stock
The Company has two stock option plans which provide for the granting of
1,775,000 options to officers, directors and key employees. The non-qualified
stock option plan provides for the granting of 1,750,000 options, and the non-
employee directors' stock option plan provides for the granting of 25,000
options. In fiscal 1993, the Company terminated the effectiveness of its
incentive stock option plan.
The options granted allow officers, directors and employees to purchase shares
of the Company's common stock at fair market value on the date of grant.
Generally, the stock options become excercisable in three equal installments
commencing one year after the date of grant, and expire ten years after the date
of grant.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
At January 31, 1995, there were 1,101,345 options outstanding under both of
these plans, and 570,424 were available for future grant. Changes in stock
options for the years ended January 31, 1995, 1994, and 1993 are summarized
below:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Outstanding, beginning of year 999,556 953,208 1,024,984
Granted ($1.88 to $20.25 per share) 1,161,347 144,750 44,000
Exercised ($6.00 to $8.69 per share) (38,577) (46,170)
Canceled ($3.38 to $24.88 per share) (1,059,558) (59,825) (69,606)
---------- ------- ---------
Outstanding January 31 ($1.88 to
$20.00 per share) 1,101,345 999,556 953,208
========== ======= =========
Exercisable January 31 ($6.00 to
$20.00 per share) 93,165 793,473 641,875
========== ======= =========
</TABLE>
During fiscal 1995, as an incentive to key officers and employees, 840,557
options were canceled and exchanged for 714,473 options at the fair market value
of $2.00 per share. The exercise period for exchanged shares begins at the date
of exchange.
In fiscal 1991 and fiscal 1992, the Board of Directors authorized the purchase
of up to 4,000,000 of the Company's common shares. The Company repurchased
469,500 shares in fiscal 1993 and 240,200 shares in fiscal 1992. During fiscal
1994, these 709,700 shares held in treasury were retired.
Note 9: Commitments
Total rental expense, including real estate taxes and insurance, for the years
ended January 31, 1995, 1994 and 1993 was $51,395,000, $61,830,000, and
$57,188,000, respectively. Contingent rentals based on sales are not
significant. Most of the store leases require the Company to pay real estate
taxes and certain other expenses, and some contain renewal options for various
periods. Subject to the approval of the Bankruptcy Court, the Company can reject
executory contracts, including leases, under the relevant provisions of the
Bankruptcy Code. Rejection of a lease gives the lessor the right to assert a
prepetition claim against the Company. However, the amount of the claim may be
limited by the Bankruptcy Court. In connection with the closure of certain
stores under the Company's 1993 Plan and 1994 Plan (see Note 1), certain leases
have been renegotiated, settled or rejected. The actual or expected costs of
such lease terminations are included in the restructuring charges. The analysis
of lease commitments which follows has not been adjusted to reflect possible
future lease rejections.
Minimum future rentals under noncancelable operating leases at January 31, 1995
are summarized as follows: 1996: $46,579,000; 1997, $44,186,000; 1998,
$40,339,000; 1999, $35,535,000; 2000, $32,241,000; 2001-2014, $98,495,000 for a
total of $297,375,000.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
House of Fabrics, Inc. and Subsidiaries
(Debtors-in-Possession)
The Company has a retention bonus plan that compensates key employees for
continued service through certain vesting points in the Chapter 11 process.
Total expense during the year ended January 31, 1995 was $227,000. The maximum
future amounts payable under the plan will be $727,000.
Note 10: Employee Benefit Plans
The Company has a profit sharing and savings plan that covers employees who have
reached age 21 and completed one year of service. Employees may contribute up
to a maximum of 16% of monthly earnings. The Company, subject to profitability,
may match 1% for each year of employment up to a maximum of 6%. The Company
also has a separate plan for highly compensated officers and employees. Total
expense recognized under both plans was $0, $1,327,000 and $1,670,000 for the
years ended January 31, 1995, 1994 and 1993, respectively.
Note 11: Quarterly Financial Data for the Years Ended January 31, 1995 and 1994
<TABLE>
<CAPTION>
(Unaudited) 1995 April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $114,695,000 $110,114,000 $ 90,757,000 $100,892,000
Gross Profit $ 52,527,000 $ 45,330,000 $ 22,253,000 $ 65,395,000
Net Income (Loss) $ (1,470,000) $(11,648,000) $(73,201,000) $ (9,066,000)
Net Income (Loss) Per Share $ (0.11) $ (0.85) $ (5.34) $ (0.66)
(Unaudited) 1994
Sales $127,981,000 $129,240,000 $141,798,000 $147,645,000
Gross Profit $ 60,291,000 $ 57,963,000 $ 39,258,000 $ 65,395,000
Net Income (Loss) $ (693,000) $ (4,032,000) $(25,029,000) $ 212,000
Net Income (Loss) Per Share $ (0.05) $ (0.29) $ (1.82) $ 0.02
</TABLE>
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has fully caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOUSE OF FABRICS, INC.
May 15, 1995 By /s/ Barney Sofro
----------------------------------
Barney Sofro
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C> <C>
/s/ Barney Sofro Chairman of the Board & Director May 15, 1995
- ------------------------
Barney Sofro
/s/ Gary L. Larkins President, Chief Executive Officer May 15, 1995
- ------------------------ and Director
Gary L. Larkins
/s/ Marvin S. Maltzman Sr. Vice President - Secretary, May 15, 1995
- ------------------------ General Counsel and Director
Marvin S. Maltzman
/s/ William W. Pennell Director May 15, 1995
- ------------------------
William W. Pennell
/s/ Phillip G. Samovar Director May 15, 1995
- ------------------------
Phillip G. Samovar
/s/ Norman L. Salvesen Vice President - Controller May 15, 1995
- ------------------------
Norman L. Salvesen
</TABLE>
36
<PAGE>
EXHIBIT 10(a)
________________________________________________________________________________
$20,000,000
REVOLVING CREDIT AGREEMENT
Among
HOUSE OF FABRICS, INC.
FABRICLAND, INC.
HOUSE OF FABRICS OF SOUTH CAROLINA, INC.
SOFRO FABRICS, INC.
METROLINA EXPRESS, INC.
as Debtors and Debtors-in-Possession
and
THE FINANCIAL INSTITUTIONS PARTY HERETO
and
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Issuing Bank
and
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
Dated as of March 31, 1995
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1
DEFINITIONS.............................. 2
-----------
1.1 Defined Terms........................................................ 2
-------------
1.2 Other Interpretive Provisions........................................ 19
-----------------------------
(a) Defined Terms................................................... 19
-------------
(b) The Agreement................................................... 19
-------------
(c) Certain Common Terms............................................ 19
--------------------
(d) Performance; Time............................................... 19
-----------------
(e) Contracts....................................................... 20
---------
(f) Laws............................................................ 20
----
(g) Captions........................................................ 20
--------
(h) Independence of Provisions...................................... 20
--------------------------
1.3 Accounting Principles................................................ 20
---------------------
ARTICLE 2
THE REVOLVING CREDIT.......................... 20
--------------------
2.1 Amounts and Terms of Revolving Commitments........................... 20
------------------------------------------
2.2 Notes................................................................ 21
-----
2.3 Procedure for Borrowing.............................................. 21
-----------------------
2.4 Voluntary or Mandatory Termination or Reduction of Revolving
------------------------------------------------------------
Commitments.......................................................... 22
-----------
2.5 Optional Prepayments................................................. 23
--------------------
2.6 Joint Borrower Provisions............................................ 23
-------------------------
2.7 Repayment and Mandatory Prepayments.................................. 30
-----------------------------------
2.8 Interest............................................................. 30
--------
2.9 Fees................................................................. 31
----
(a) Commitment Fee.................................................. 31
--------------
(b) Facility Fee.................................................... 32
------------
2.10 Computation of Fees and Interest..................................... 32
--------------------------------
2.11 Payments by the Borrowers............................................ 32
-------------------------
2.12 Payments by the Banks to the Agent................................... 33
----------------------------------
2.13 Sharing of Payments, Etc............................................. 34
------------------------
2.14 Letters of Credit.................................................... 35
-----------------
(a) Commitment...................................................... 35
----------
(b) Issuance of Letters of Credit................................... 36
-----------------------------
(c) Amendment to Letters of Credit.................................. 36
------------------------------
(d) Payment of Amounts Drawn Under Letters of Credit................ 36
------------------------------------------------
(e) Payment by Banks................................................ 37
----------------
(f) Compensation.................................................... 38
------------
(g) Obligations Absolute............................................ 39
--------------------
(h) Indemnification: Nature of Issuing Bank's Duties............... 40
-------------------------------------------------
ARTICLE 3
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
TAXES AND YIELD PROTECTION....................... 41
--------------------------
3.1 Taxes................................... ............................ 41
-----
3.2 Increased Costs and Reduction of Return.............................. 45
---------------------------------------
3.3 Certificates of Banks................................................ 46
---------------------
3.4 Substitution of Banks................................................ 46
---------------------
3.5 Survival............................................................. 46
--------
ARTICLE 4
CONDITIONS PRECEDENT.......................... 46
--------------------
4.1 Conditions of Initial Loans and Conversion of Prior L/Cs............. 46
--------------------------------------------------------
(a) Agreement and Notes............................................. 46
-------------------
(b) Resolutions; Incumbency......................................... 47
-----------------------
(c) Articles of Incorporation: By-laws and Good Standing............ 47
----------------------------------------------------
(d) Legal Opinion................................................... 48
-------------
(e) Payment of Fees................................................. 48
---------------
(f) Certificate..................................................... 48
-----------
(g) The Projections................................................. 48
---------------
(h) Cash Collateral Stipulation..................................... 48
---------------------------
(i) Claim Certificate............................................... 48
-----------------
(j) Release of Claims............................................... 49
-----------------
(k) Credit Bank Consent............................................. 49
-------------------
(l) Acknowledgement................................................. 49
---------------
(m) DIP Financing Order............................................. 49
-------------------
(n) Security Documents.............................................. 49
------------------
(o) Credit Agreement Prepayment..................................... 49
---------------------------
(p) First Priority Lien............................................. 49
-------------------
(q) Mauldin Plan.................................................... 50
------------
(r) Real Property Documents......................................... 50
-----------------------
(s) Insurance Certificates.......................................... 50
----------------------
(t) Other Documents................................................. 50
---------------
4.2 Conditions to All Borrowings......................................... 50
----------------------------
(a) Notice of Borrowing............................................. 50
-------------------
(b) Continuation of Representations and Warranties.................. 51
----------------------------------------------
(c) No Existing Default............................................. 51
-------------------
4.3 Conditions to All Letters of Credit.................................. 51
-----------------------------------
(a) Notice.......................................................... 51
------
(b) Continuation of Representations and Warranties.................. 51
----------------------------------------------
(c) No Existing Default............................................. 51
-------------------
(d) Satisfaction of Other Conditions................................ 52
--------------------------------
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES..................... 52
------------------------------
5.1 Corporate Existence and Power........................................ 52
-----------------------------
5.2 Corporate Authorization: No Contravention........................... 52
-----------------------------------------
5.3 Governmental Authorization........................................... 53
--------------------------
5.4 Binding Effect....................................................... 53
--------------
5.5 Litigation........................................................... 53
----------
5.6 No Default........................................................... 53
----------
5.7 ERISA................................................................ 54
-----
5.8 Use of Proceeds; Margin Regulations.................................. 54
-----------------------------------
5.9 Title to Properties.................................................. 54
-------------------
5.10 Taxes................................................................ 54
-----
5.11 Continuing Collateral................................................ 55
---------------------
5.12 Environmental Matters................................................ 55
---------------------
5.13 Regulated Entities................................................... 56
------------------
5.14 Labor Relations...................................................... 56
---------------
5.15 Copyrights, Patents, Trademarks and Licenses, etc.................... 56
-------------------------------------------------
5.16 Subsidiaries......................................................... 56
------------
5.17 Brokers; Transaction Fees............................................ 57
-------------------------
5.18 Insurance............................................................ 57
---------
5.19 Full Disclosure...................................................... 57
---------------
5.20 Locations of Collateral and Places of Business....................... 57
----------------------------------------------
5.21 Locations of, and Information with Respect to, Deposit Accounts...... 58
---------------------------------------------------------------
5.22 Bankruptcy Code Protections.......................................... 58
---------------------------
5.23 Unsecured Credit..................................................... 58
----------------
5.24 Validity of Security Interest........................................ 58
-----------------------------
5.25 Superpriority Lien Status............................................ 59
-------------------------
ARTICLE 6
AFFIRMATIVE COVENANTS......................... 59
---------------------
6.1 Financial Statements................................................. 59
--------------------
6.2 Certificates: Other Information..................................... 60
--------------------------------
6.3 Notices.............................................................. 61
-------
6.4 Preservation of Corporate Existence, Etc............................. 62
-----------------------------------------
6.5 Maintenance of Property.............................................. 63
-----------------------
6.6 Insurance............................................................ 63
---------
6.7 Payment of Obligations............................................... 64
----------------------
6.8 Compliance with Laws................................................. 64
--------------------
6.9 Inspection of Property and Books and Records......................... 64
--------------------------------------------
6.10 Environmental Laws................................................... 65
------------------
6.11 Use of Proceeds...................................................... 65
---------------
6.12 Update of Collateral and Deposit Account Schedules................... 65
--------------------------------------------------
6.13 Bankruptcy Court Order............................................... 66
----------------------
6.14 Sequestration/Remittance of Excess Cash.............................. 66
---------------------------------------
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C> <C>
6.15 Turnaround Plan...................................................... 68
---------------
6.16 Revised Projections.................................................. 69
-------------------
6.17 Financial Covenants.................................................. 69
-------------------
6.18 Bankruptcy Proceedings............................................... 70
----------------------
6.19 Distribution/Warehouse Strategic Plan................................ 70
-------------------------------------
6.20 Watchlist Stores..................................................... 70
----------------
6.21 Cash Management System............................................... 71
----------------------
6.22 Administrative Expenses.............................................. 71
-----------------------
6.23 Termination of Exclusivity........................................... 71
--------------------------
6.24 Priority Liens....................................................... 71
--------------
ARTICLE 7
NEGATIVE COVENANTS........................... 72
------------------
7.1 Limitation on Liens.................................................. 72
-------------------
7.2 Disposition of Assets................................................ 74
---------------------
7.3 Consolidations and Mergers........................................... 74
--------------------------
7.4 Loans and Investments................................................ 75
---------------------
7.5 Limitation on Indebtedness........................................... 75
--------------------------
7.6 Transactions with Affiliates......................................... 76
----------------------------
7.7 Use of Proceeds...................................................... 76
---------------
7.8 Contingent Obligations............................................... 76
----------------------
7.9 Joint Ventures....................................................... 77
--------------
7.10 Subsidiaries......................................................... 77
------------
7.11 Lease Obligations.................................................... 77
-----------------
7.12 Restricted Payments.................................................. 78
-------------------
7.13 Capital Expenditures................................................. 78
--------------------
7.14 Change in Business................................................... 78
------------------
7.15 Accounting Changes................................................... 78
------------------
7.16 Relocation of Collateral, Chief Executive Offices, or Deposit
-------------------------------------------------------------
Accounts............................................................. 78
--------
7.17 No Negative Pledges in Favor of Others............................... 79
--------------------------------------
7.18 New Store Openings/Conversions....................................... 79
------------------------------
7.19 Bankruptcy Orders.................................................... 79
-----------------
7.20 Cash Collateral...................................................... 79
---------------
7.21 Inventory Return..................................................... 79
----------------
7.22 Exclusive Arrangements............................................... 79
----------------------
ARTICLE 8
EVENTS OF DEFAULT........................... 79
-----------------
8.1 Event of Default..................................................... 79
----------------
(a) Non-Payment..................................................... 79
-----------
(b) Representation or Warranty...................................... 80
--------------------------
(c) Specific Defaults............................................... 80
-----------------
(d) Other Defaults.................................................. 80
--------------
(e) Cross-Default................................................... 80
-------------
(f) Bankruptcy Orders............................................... 81
-----------------
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C> <C>
(g) Bankruptcy Proceedings.......................................... 81
----------------------
(h) Plan of Reorganization.......................................... 81
----------------------
(i) Superpriority Administrative Claims............................. 81
-----------------------------------
(j) Automatic Stay.................................................. 81
--------------
(k) Non-Monetary Judgments.......................................... 81
----------------------
(l) Change in Control............................................... 82
-----------------
(m) Loan Documents Cease to be in Effect............................ 82
------------------------------------
8.2 Remedies............................................................. 82
--------
8.3 Rights Not Exclusive................................................. 83
--------------------
ARTICLE 9
THE AGENT............................... 83
---------
9.1 Appointment and Authorization........................................ 83
-----------------------------
9.2 Delegation of Duties................................................. 84
--------------------
9.3 Liability of Agent................................................... 84
------------------
9.4 Reliance by Agent.................................................... 84
-----------------
9.5 Notice of Default.................................................... 85
-----------------
9.6 Credit Decision...................................................... 86
---------------
9.7 Indemnification...................................................... 86
---------------
9.8 Agent in Individual Capacity......................................... 87
----------------------------
9.9 Successor Agent...................................................... 87
---------------
ARTICLE 10
MISCELLANEOUS............................. 88
-------------
10.1 Amendments and Waivers............................................... 88
----------------------
10.2 Notices.............................................................. 89
-------
10.3 No Waiver: Cumulative Remedies...................................... 90
-------------------------------
10.4 Costs and Expenses................................................... 90
------------------
10.5 Indemnity............................................................ 91
---------
10.6 Marshaling; Payments Set Aside....................................... 92
------------------------------
10.7 Successors and Assigns............................................... 93
----------------------
10.8 Assignments, Participations, etc..................................... 93
---------------------------------
10.9 Set-off.............................................................. 96
-------
10.10 Debits of Fees...................................................... 96
--------------
10.11 Notification of Addresses, Lending Offices, Etc..................... 96
------------------------------------------------
10.12 Counterparts........................................................ 97
------------
10.13 Severability........................................................ 97
------------
10.14 No Third Parties Benefited.......................................... 97
--------------------------
10.15 Time................................................................ 97
----
10.16 Governing Law and Jurisdiction...................................... 97
------------------------------
10.17 Waiver of Right to Jury Trial....................................... 98
-----------------------------
10.18 Entire Agreement.................................................... 98
----------------
10.19 Interpretation...................................................... 98
--------------
10.20 Consultants......................................................... 98
-----------
10.21 Further Assurances.................................................. 99
------------------
</TABLE>
-v-
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
EXHIBIT A NOTICE OF BORROWING
EXHIBIT B REVOLVING NOTE
EXHIBIT C NOTICE OF DEPOSITARY
EXHIBIT D OPINION OF BORROWERS' GENERAL COUNSEL
EXHIBIT E FORM OF APPLICATION AND AGREEMENT FOR COMMERCIAL LETTERS OF
CREDIT
EXHIBIT F ASSIGNMENT AND ACCEPTANCE
EXHIBIT G INVENTORY SECURITY AGREEMENT
EXHIBIT H NON-INVENTORY SECURITY AGREEMENT
EXHIBIT I STOCK PLEDGE SECURITY AGREEMENT
EXHIBIT J FINANCIAL COVENANT COMPLIANCE CERTIFICATE
</TABLE>
-vi-
<PAGE>
<TABLE>
<CAPTION>
Schedules
- ---------
<S> <C>
Schedule 1 Credit Banks
Schedule 1.1 Closed Store List
Schedule 1.2 Mortgaged Property Descriptions
Schedule 2.1 Banks' Revolving Commitments
Schedule 4.1(c)(11) Jurisdictions From Which Good Standing Certificates are
Required
Schedule 4.1(p) Permitted Pre-Bankruptcy Existing Liens
Schedule 5.12 Environmental Matters
Schedule 5.16 Subsidiaries and Investments
Schedule 6.17(a) Monthly Ending Cash Balances (II) After Permitted
Variances
Schedule 7.1 Certain Permitted Liens
Schedule 7.8 Certain Contingent Liabilities
</TABLE>
-vii-
<PAGE>
REVOLVING CREDIT AGREEMENT
This REVOLVING CREDIT AGREEMENT, dated as of March 31, 1995, is entered
into among HOUSE OF FABRICS, INC., a Delaware corporation, as Debtor and Debtor-
in-Possession (the "Company" or "HF"), FABRICLAND, INC., an Oregon corporation
and a Subsidiary of the Company, as Debtor and Debtor-in-Possession ("FL"),
HOUSE OF FABRICS OF SOUTH CAROLINA, INC., a South Carolina corporation and a
Subsidiary of the Company, as Debtor and Debtor-in-Possession ("HS"), SOFRO
FABRICS, INC., a Nevada corporation and a Subsidiary of the Company, as Debtor
and Debtor-in-Possession ("SF") and METROLINA EXPRESS, INC., a South Carolina
corporation and a Subsidiary of HS, as Debtor and Debtor-in-Possession ("ME";
HF, FL, HS, SF and ME being hereinafter collectively referred to as the
"Borrowers", and each individually as a "Borrower" or as a "Borrower Entity"),
jointly and severally, the several financial institutions party to this
Agreement (collectively, the "Banks"; individually, a "Bank"), BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, as the Bank issuing letters of credit
pursuant hereto (herein called the "Issuing Bank") and BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as agent for the Issuing Bank and the Banks (the
"Agent").
RECITALS
A. HF, FL, HS, SF, the Banks set forth on Schedule 1 (collectively, the
"Credit Banks") and the Agent, among others, are parties to that certain Amended
and Restated Revolving Credit Agreement, dated as of November 30, 1993, as
amended from time to time (the "Credit Agreement").
B. On November 2, 1994, the Borrowers filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court, Central District of California
(the "Bankruptcy Court"), No. SV 94-50060-KL (administratively consolidated with
cases No. SV 94-50065-KL, No. SV 94-50064-KL, No. SV 94-50062-KL and No. SV 94-
50061-KL).
C. The Borrowers have requested the Banks to make available to them a
credit facility in the aggregate principal amount of up to $20,000,000, which
includes a subfacility of $10,000,000 for the issuance of commercial letters of
credit for the purpose of financing the purchase of foreign goods and materials
as more specifically set forth herein, and the Banks are willing to do so,
subject to
-1-
<PAGE>
and upon the terms contained in this Agreement (as hereinafter defined).
D. The Issuing Bank and the Borrowers previously entered into a Prepaid
Letter of Credit Agreement dated as of February 10, 1995 (the "L/C Agreement")
pursuant to which the Issuing Bank agreed, with the consent of the Agent and the
banks party thereto, to issue up to $10,000,000 of commercial letters of credit
(collectively, the "Prior L/Cs") on a prepaid basis. As of the Closing Date (as
hereinafter defined), the outstanding Prior L/Cs shall be deemed issued
hereunder as part of the letter of credit subfacility created hereunder,
excluding the prepaid nature of such Prior L/Cs.
NOW, THEREFORE, in consideration of the premises and in order to induce the
Banks to make such revolving and letter of credit facilities available to the
Borrowers, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Defined Terms. In addition to the terms defined elsewhere in this
-------------
Agreement, the following terms have the following meanings:
"Affected Bank" has the meaning specified in Section 3.4.
-------------
"Affiliate" means, as to any Person, any other Person which, directly or
---------
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, by contract or otherwise. Without
limitation, any director, executive officer or beneficial owner of 5% or more of
the equity of a Person shall for the purposes of this Agreement, be deemed to
control the other Person. In no event shall any Bank be deemed an "Affiliate"
of the Company or of any direct or indirect Subsidiary of the Company.
"Agency Office" has the meaning specified in subsection 2.14(b).
-------------
"Agent" means BofA in its representative capacity as agent for the Banks
-----
hereunder, and any successor agent.
-2-
<PAGE>
"Agent-Related Persons" means BofA and any successor Agent under Section
---------------------
9.9, together with their respective Affiliates, and the officers, directors,
employees, agents and attorneys-in-fact of such Persons and Affiliates.
"Agent's Payment Office" means the address for payments set forth on the
----------------------
signature page hereto in relation to the Agent or such other address as the
Agent may from time to time specify in accordance with Section 10.2.
"Aggregate Revolving Commitment" means the combined Revolving Commitments
------------------------------
of the Banks, in the initial amount of $20,000,000, as such amount may or shall
be reduced from time to time pursuant to this Agreement, including without
limitation the provisions of Section 2.4 hereof.
"Agreement" means this Revolving Credit Agreement as amended, modified,
---------
supplemented, renewed, replaced, or restated from time to time in accordance
with the terms hereof.
"Applicable Margin" means 1.50% per annum.
-----------------
"Assignee" has the meaning specified in subsection 10.8(a).
--------
"Assignment and Acceptance" has the meaning specified in subsection
-------------------------
10.8(a).
"Attorney Costs" means and includes all fees and disbursements of any law
--------------
firm or other external counsel, including the cost of retaining consultants and
financial advisors, the allocated cost of internal legal services and all
disbursements of internal counsel.
"Available Aggregate Revolving Commitment" means, at any given time, the
----------------------------------------
Aggregate Revolving Commitment then in effect minus the aggregate Loans
outstanding (provided that for the purpose of determining the fee provided for
in subsection 2.9(a) hereof, Letter of Credit Usage shall be treated as Loans
outstanding).
"Bank" has the meaning specified in the introductory clause hereto.
----
Without limiting the generality of the foregoing, all references in the Loan
Documents to "Bank" or "Banks" includes the "Issuing Bank" acting in such
capacity unless the context clearly requires otherwise.
"Bank Affiliate" means a Person engaged primarily in the business of
--------------
commercial banking and which is a Subsidiary of a Bank or of a Person of which a
Bank is a Subsidiary.
-3-
<PAGE>
"Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended (11
---------------
U.S.C. (S) 101, et seq.).
"Bankruptcy Court" shall have the meaning ascribed to such term in the
----------------
Recitals to this Agreement.
"BofA" means Bank of America National Trust and Savings Association, a
----
national banking association.
"Borrower(s)" means HF, FL, HS, SF, ME and each of them, and any one or
-----------
more of them, collectively and individually, and jointly and severally.
"Borrower Entity" means each of HF, FL, HS, ME and SF.
---------------
"Borrowing" means a borrowing hereunder consisting of Loans made to the
---------
Borrowers by the Banks pursuant to Section 2.1.
"Business Day" means any day other than a Saturday, Sunday or other day on
------------
which commercial banks in Los Angeles are authorized or required by law to
close.
"Capital Adequacy Regulation" means any guideline, request or directive of
---------------------------
any central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
"Capital Expenditures" means, for any period and with respect to any
--------------------
Borrower Entity the aggregate of all expenditures for any acquisition and the
amount of any financing or leasing by such Borrower Entity and its Subsidiaries
for the acquisition, financing or leasing of fixed or capital assets or
additions to equipment (including replacements, capitalized repairs and
improvements during such period) which should be capitalized under GAAP on a
consolidated balance sheet of such Borrower Entity and its Subsidiaries.
"Capital Expenditures Account" has the meaning specified in subsection
----------------------------
6.14(b).
"Capital Lease" has the meaning specified in the definition of Capital
-------------
Lease Obligations.
"Capital Lease Obligations" means all monetary obligations of the Company
-------------------------
or any of its direct or indirect Subsidiaries under any leasing or similar
arrangement which, in accordance with GAAP, is classified as a Capital Lease.
-4-
<PAGE>
"Cash Collateral Stipulation" means the Stipulation for Use of Cash
---------------------------
Collateral; Order Thereon approved concurrently with the Bankruptcy Court's
approval of this Agreement.
"Cash Equivalents" means:
----------------
(a) securities issued or fully guaranteed or insured by the United States
Government or any agency thereof and backed by the full faith and credit of the
United States having maturities of not more than six months from the date of
acquisition;
(b) certificates of deposit, time deposits, Eurodollar time deposits,
repurchase agreements, reverse repurchase agreements, or bankers' acceptances,
having in each case a tenor of not more than six months, issued by any Bank, or
by any U.S. commercial bank or any branch or agency of a non-U.S. bank licensed
to conduct business in the U.S. having combined capital and surplus of not less
than $500,000,000 whose short term securities are rated at least A-1 by Standard
& Poor's Corporation and P-1 by Moody's Investors Service, Inc.; and
(c) commercial paper of an issuer rated at least A-1 by Standard & Poor's
Corporation and P-1 by Moody's Investors Service Inc. and in either case having
a tenor of not more than six months.
Notwithstanding the foregoing, amounts on deposit in the Performance Account may
not be invested in any of the foregoing which matures subsequent to January 31,
1996.
"CERCLA" has the meaning specified in the definition of "Environmental
------
Laws."
"Change of Control Event" means the direct or indirect acquisition by any
-----------------------
person or group (as such term is defined in Section 13(d)(3) of the Exchange
Act) (other than the existing control group), in one or a series of
transactions, of beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of 25% or more of the outstanding shares of
the Company's common stock.
"Closed Store List" means list prepared by the Borrowers attached as
-----------------
Schedule 1.1 hereto designating Stores to be closed, together with any
replacement list delivered to the Agent from time to time.
"Closing Date" means the date on which all conditions precedent set forth
------------
in Section 4.1 are satisfied or waived by all Banks.
-5-
<PAGE>
"Code" means the Internal Revenue Code of 1986 and regulations promulgated
----
thereunder.
"Collateral" means any property or assets of the Borrowers, whether
----------
tangible or intangible, that now or hereafter are subject to a security interest
pursuant to the Security Agreements.
"Commitment Percentage" means, as to any Bank, the percentage equivalent of
---------------------
such Bank's Revolving Commitment divided by the Aggregate Revolving Commitment.
"Company" means House of Fabrics, Inc., a Delaware corporation, as Debtor
-------
and Debtor-in-Possession.
"Contingent Obligation" means, as to any Borrower Entity (a) any Guaranty
---------------------
Obligation of that Borrower Entity; and (b) any direct or indirect obligation or
liability, contingent or otherwise, of that Borrower Entity, (i) in respect of
any letter of credit or similar instrument issued for the account of that
Borrower Entity or as to which that Borrower Entity is otherwise liable for
reimbursement of drawings or (ii) to purchase any materials, supplies or other
property from, or to obtain the services of, another Borrower Entity if the
relevant contract or other related document or obligation requires that payment
for such materials, supplies or other property, or for such services, shall be
made regardless of whether delivery of such materials, supplies or other
property is ever made or tendered. The amount of any Contingent Obligation
shall (subject, in the case of Guaranty Obligations, to the last sentence of the
definition of "Guaranty Obligation") be deemed equal to the maximum reasonably
anticipated liability in respect thereof, and shall, with respect to item
(b)(iii) of this definition, be marked to market on a current basis.
"Contractual Obligations" means, as to any Borrower Entity any provision of
-----------------------
any security issued by such Borrower Entity or of any agreement, undertaking,
contract, indenture, mortgage, deed of trust or other instrument, document or
agreement to which such Borrower Entity is a party or by which it or any of its
property is bound.
"Controlled Group" means the Company and all Persons (whether or not
----------------
incorporated) under common control or treated as a single employer with the
Company pursuant to Section 414(b), (c), (m) or (o) of the Code.
"Credit Agreement" shall have the meaning ascribed to such term in the
----------------
Recitals to this Agreement.
"Credit Banks" shall have the meaning ascribed to such term in the Recitals
------------
to this Agreement.
-6-
<PAGE>
"Creditors' Committee" shall mean the Official Committee of Unsecured
--------------------
Creditors' appointed by the United States Trustee in the bankruptcy cases
described in Recital B.
"Default" means any event or circumstance which, with the giving of notice,
-------
the lapse of time, or both, would (if not cured or otherwise remedied during
such time) constitute an Event of Default.
"DIP Financing Order" means the order of the Bankruptcy Court approving
-------------------
this Agreement.
"Disposition" means (a) the sale, lease, conveyance or other disposition of
-----------
Property, other than sales or other dispositions expressly permitted under
subsection 7.2(a) or 7.02(b), and (b) the sale or transfer by the Company or any
direct or indirect Subsidiary of the Company of any equity securities issued by
any direct or indirect Subsidiary of the Company and held by such transferor
Person.
"Dollars", "dollars" and "$" each mean lawful money of the United States.
------- ------- -
"Eligible Assignee" means (a) a commercial bank organized under the laws of
-----------------
the United States, or any state thereof, and having a combined capital and
surplus of at least $100,000,000; (b) a commercial bank organized under the laws
of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $100,000,000,
provided that such bank is acting through a branch or agency located in the
country in which it is organized or another country which is also a member of
the OECD; and (c) any Bank Affiliate or any Affiliate of a Credit Bank.
"Environmental Claims" means all claims, however asserted, by any
--------------------
Governmental Authority or other Person alleging potential liability or
responsibility for violation of any Environmental Law, or for release or injury
to the environment or threat to public health, personal injury (including
sickness, disease or death), property damage, natural resources damage, or
otherwise alleging liability or responsibility for damages (punitive or
otherwise), cleanup, removal, remedial or response costs, restitution, civil or
criminal penalties, injunctive relief, or other type of relief, resulting from
or based upon (a) the presence, placement, discharge, emission or release
(including intentional and unintentional, negligent and non-negligent, sudden or
non-sudden, accidental or non-accidental placement, spills, leaks, discharges,
emissions or releases)
-7-
<PAGE>
of any Hazardous Material at, in, or from Property, whether or not owned by the
Borrowers, or (b) any other circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
"Environmental Laws" means all federal, state or local laws, statutes,
------------------
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any Governmental Authorities, in each case
relating to environmental, health, safety and land use matters; including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972,
the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery
Act, the Toxic Substances Control Act, the Emergency Planning and Community
Right-to-Know Act, the California Hazardous Waste Control Law, the California
Solid Waste Management, Resource, Recovery and Recycling Act, the California
Water Code, the California Health and Safety Code and environmental laws in
effect from time to time in South Carolina.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and regulations promulgated thereunder.
"Estimated Remediation Cost" means all costs associated with performing
--------------------------
work to remediate contamination of real property or groundwater, including
engineering and other professional fees and expenses, costs to remove, transport
and dispose of contaminated soil, costs to "cap" or otherwise contain
contaminated soil, and costs to pump and treat water and monitor water quality.
"Event of Default" means any of the events or circumstances specified in
----------------
Section 8.1.
"Exchange Act" means the Securities and Exchange Act of 1934, and
------------
regulations promulgated thereunder.
"Federal Funds Rate" means, for any period, the rate set forth in the
------------------
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Board (including any such
successor, "H.15(519)" for such day opposite the caption "Federal Funds
(Effective)". If on any relevant day such rate is not yet published in
H.115(519), the rate for such day will be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for U.S.
Government Securities, or any successor publication, published by the Federal
Reserve Bank of New York (including any such
-8-
<PAGE>
successor, the "Composite 3:30 p.m. Quotation") for such day under the caption
"Federal Funds Effective Rate". If on any relevant day the appropriate rate for
such previous day is not yet published in either H.15(519) or the Composite 3:30
p.m. Quotations, the rate for such day will be the arithmetic mean of the rates
for the last transaction in overnight Federal funds arranged prior to 9:00 a.m.
(New York time) on that day by each of the three leading brokers of Federal
funds transactions in New York City selected by the Agent.
"Financing Statements" means the financing statements to be signed and
--------------------
delivered by the Borrowers to the Agent, at the Agent's option, to perfect the
security interest granted in the Security Agreements (to the extent that such
security interests may be perfected by the filing of financing statements), in
form and substance satisfactory to the Agent, as they may from time to time be
amended, modified, or continued.
"FL" means Fabricland, Inc., an Oregon corporation, as Debtor and Debtor-
--
in-Possession.
"Form 1001" has the meaning specified in subsection 3.1(f).
---------
"Form 4224" has the meaning specified in subsection 3.1(f).
---------
"GAAP" means generally accepted accounting principles set forth from time
----
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such other entity as may be in
general use by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"Governmental Authority" means any nation or government, any state or other
----------------------
political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" means, as applied to any Borrower Entity any direct
-------------------
or indirect liability of that Borrower
-9-
<PAGE>
Entity with respect to any Indebtedness, lease, dividend, letter of credit or
other obligation (the "primary obligations") of another Borrower Entity (the
"primary obligor"), including any obligation of that Borrower Entity whether or
not contingent, (a) to purchase, repurchase or otherwise acquire such primary
obligations or any property constituting direct or indirect security therefor,
or (b) to advance or provide funds (i) for the payment or discharge of any such
primary obligation, or (ii) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet item, level of income or financial condition of the primary
obligor, or (c) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (d) otherwise
to assure or hold harmless the holder of any such primary obligation against
loss in respect thereof. The amount of any Guaranty Obligation shall be deemed
equal to the stated or determinable amount of the primary obligation in respect
of which such Guaranty Obligation is made or, if not stated or if
indeterminable, the maximum reasonably anticipated liability in respect thereof.
"Hazardous Materials" means all those substances which are regulated by, or
-------------------
which may form the basis of liability under, any Environmental Law, including
all substances identified under any Environmental Law as a pollutant,
contaminant, hazardous waste, hazardous constituent, special waste, hazardous
substance, hazardous material, or toxic substance, or petroleum or petroleum
derived substance or waste.
"HF" means House of Fabrics, Inc., a Delaware corporation, as Debtor and
--
Debtor-in-Possession.
"HS" means House of Fabrics of South Carolina, Inc., a South Carolina
--
corporation, as Debtor and Debtor-in-Possession.
"Indebtedness" of any Person means, without duplication, (a) all
------------
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business pursuant to ordinary
terms); (c) all reimbursement obligations with respect to surety bonds, letters
of credit, bankers' acceptances and similar instruments (in each case, to the
extent material or non-contingent); (d) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or
-10-
<PAGE>
businesses; (e) all indebtedness created or arising under any conditional sale
or other title retention agreement, or incurred as financing, in either case
with respect to Property acquired by the Person (even though the rights and
remedies of the seller or bank under such agreement in the event of default are
limited to repossession or sale of such property); (f) all Capital Lease
Obligations; (g) all indebtedness referred to in clauses (a) through (f) above
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in Property
(including accounts and contracts rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness;
and (i) all Guaranty Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (a) through (f) above.
"Indemnified Person" has the meaning specified in Section 10.5.
------------------
"Indemnified Liabilities" has the meaning specified in Section 10.5.
-----------------------
"Interest Payment Date" means the last Business Day of each calendar month.
---------------------
"Inventory" means all present and future inventory in which any Borrower
---------
Entity has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of the Borrowers' 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.
"Inventory Security Agreement" means that certain Inventory Security
----------------------------
Agreement dated of even date herewith, entered into between the Borrowers and
the Agent, in the form of Exhibit G.
"Issuing Bank" means, with respect to a Letter of Credit, BofA or any
------------
successor agent.
"Joint Venture" means a single-purpose corporation, partnership, joint
-------------
venture or other similar legal arrangement (whether created pursuant to contract
or conducted through a separate legal entity) now or hereafter formed by the
Company or any of its direct or indirect Subsidiaries with another Person in
order to conduct a common venture or enterprise with such Person.
"L/C Agreement" shall have the meaning ascribed to such term in the
-------------
Recitals to this Agreement.
-11-
<PAGE>
"Lender" means the Agent and the Banks, and each of them, and any one or
------
more of them, individually and collectively.
"Lending Office" means, with respect to any Bank, the office or offices of
--------------
the Bank specified as its "Lending Office" opposite its name on the applicable
signature page hereto, or such other office or offices of the Bank as it may
from time to time specify to the Borrowers and the Agent.
"Letter of Credit" means any commercial letter of credit that is issued
----------------
pursuant to this Agreement at the request of and for the account of any Borrower
Entity by the Issuing Bank, for the purpose of providing the principal payment
mechanism in connection with the purchase of Inventory from an overseas
supplier, by a Borrower Entity, in the Ordinary Course of Business.
"Letter of Credit Usage" means, on any date of determination, the sum of
----------------------
(a) the maximum aggregate amount that is available for drawing under all Letters
of Credit then issued and outstanding, plus (b) the aggregate amount of all
drawings under Letters of Credit honored by the Issuing Bank and not theretofore
reimbursed by the Borrowers.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
----
assignment, charge or deposit arrangement, encumbrance, lien (statutory or
other) or preference, priority or other security interest or preferential
arrangement of any kind or nature whatsoever (including those created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a Capital Lease Obligation, any
financing lease having substantially the same economic effect as any of the
foregoing, or the filing of any financing statement naming the owner of the
asset to which such lien relates as debtor, under the UCC or any comparable law)
and any contingent or other agreement to provide any of the foregoing, but not
including the interest of a lessor under an Operating Lease.
"Loan" means an extension of credit by a Bank to or for the benefit of the
----
Borrowers pursuant to Section 2.1. Where a Bank has made a payment to the
Issuing Bank on account of its participation in a Letter of Credit following a
draw thereunder that has not been fully reimbursed by the Borrowers, the
extension of credit by such Bank to the Borrowers resulting from the making of
such payment shall be deemed a Loan for the purposes of all provisions of the
Loan Documents, unless the context clearly requires otherwise.
-12-
<PAGE>
"Loan Documents" means this Agreement, the Notes, the Security Agreements,
--------------
all documents, agreements, certificates, or instruments delivered to the Agent,
the Issuing Bank, or any Bank in connection therewith, all documents,
instruments, and/or agreements at any time entered into by any Borrower Entity
in favor of BofA in connection with any provision of cash management and/or cash
concentration services by BofA to any Borrower Entity, and any amendments,
supplements, modifications, renewals, or restatements of any thereof.
"Majority Banks" means, at any time, Banks then holding at least 66-2/3% of
--------------
the Aggregate Revolving Commitment, or, if the Aggregate Revolving Commitment is
zero, Banks then holding at least 66-2/3% of the combined (a) aggregate
outstanding Loans, and (b) aggregate outstanding Letter of Credit Usage (giving
effect to the participations therein provided for herein).
"Margin Stock" means "margin stock" as such term is defined in Regulations
------------
G, T, U or X of the Federal Reserve Board.
"Material Adverse Effect" means (a) a material adverse change in, or a
-----------------------
material adverse effect upon, any of the operations, business, properties,
condition (financial or otherwise) or prospects of the Company or the Company
and its direct or indirect Subsidiaries taken as a whole or as to any
Subsidiary; (b) a material impairment of the ability of the Borrowers to perform
under any Loan Document and avoid any Event of Default; or (c) a material
adverse effect upon the legality, validity, binding effect or enforceability of
any Loan Document.
"Mauldin Plan" means the written report by Arthur Andersen & Co. analyzing
------------
the Company's Mauldin Distribution Center, pursuant to that certain retention
letter dated February 10, 1995.
"ME" means Metrolina Express, Inc., a South Carolina corporation, as Debtor
--
and Debtor-in-Possession.
"Mortgages" means the deeds of trust, mortgages and other documents
---------
executed by the Borrowers in connection with encumbering in favor of the Agent,
on behalf of the Banks, the real property more specifically described in
Schedule 1.2 attached hereto.
"Net Proceeds" means proceeds in cash, checks or other cash equivalent
------------
financial instruments (including Cash Equivalents) as and when received by the
Borrower Entity making a Disposition, net of: (a) the direct costs relating to
such Disposition excluding amounts payable to the Company
-13-
<PAGE>
or any Affiliate of the Company, (b) sale, use or other transaction taxes paid
or payable as a result thereof, and (c) amounts required to be applied to repay
principal, interest and prepayment premiums and penalties on Indebtedness
secured by a Lien on the asset which is the subject of such Disposition.
"Net Spendable Cash" has the meaning specified in subsection 6.14(b).
------------------
"Non-Inventory Security Agreement" means that certain Non-Inventory
--------------------------------
Security Agreement dated of even date herewith, entered into between the
Borrowers and the Agent, in the form of Exhibit H.
"Note" means a Revolving Note, and "Notes" means the Revolving Notes.
----
"Notice of Borrowing" means a notice given by the Borrowers to the Agent
-------------------
pursuant to Section 2.3, in substantially the form of Exhibit A.
"Notice of Lien" means any notice of lien or similar document intended to
--------------
be filed or recorded with any court, registry, recorder's office, central filing
office or other Governmental Authority for the purpose of evidencing, creating,
perfecting or preserving the priority of a Lien securing obligations owing to a
Governmental Authority.
"Notice to Depositary Institution" means, with respect to each deposit
--------------------------------
account in which any Borrower Entity or Borrower Entities have an interest, a
notice signed by the relevant Borrower Entity or Borrower Entities and the
Agent, in the form of Exhibit C, to be given to the depositary institution where
such deposit account is maintained, for the purpose of notifying such depositary
institution of the security interest of the Agent in such deposit account, and
for the purpose of perfecting such security interest to the extent that it may
be perfected by the giving of such a notice.
"Obligations" means all Loans, and other Indebtedness, advances, debts,
-----------
liabilities, obligations, covenants and duties owing by the Borrowers to any
Bank, the Agent, any Issuing Bank, or any other Person required to be
indemnified under any Loan Document, of any kind or nature, present or future,
whether or not evidenced by any note, guaranty or other instrument, arising
under this Agreement or under any other Loan Document, whether or not for the
payment of money, whether arising by reason of an extension of credit, loan,
guaranty, indemnification, or the issuance of a Letter of Credit or the honoring
of a draw thereunder, or in any other manner, whether direct or indirect
(including those
-14-
<PAGE>
acquired by assignment), absolute or contingent, due or to become due, now
existing or hereafter arising and however acquired.
"Operating Lease" means, as applied to any Borrower Entity any lease of
---------------
Property which is not a Capital Lease.
"Ordinary Course of Business" means, in respect of any transaction
---------------------------
involving the Company or any direct or indirect Subsidiary of the Company, the
ordinary course of such Person's business, as conducted by any such Person in
accordance with past practice and undertaken by such Person in good faith and
not for purposes of evading any covenant or restriction in any Loan Document.
"Organization Documents" means, for any corporation, the certificate or
----------------------
articles of incorporation, the bylaws, any certificate of determination or
instrument relating to the rights of preferred shareholders of such corporation,
and all applicable resolutions of the board of directors (or any committee
thereof) of such corporation.
"Other Taxes" has the meaning specified in subsection 3.1(b)
-----------
"Participant" has the meaning specified in subsection 10.8(d).
-----------
"Permitted Liens" has the meaning specified in Section 7.1.
---------------
"Performance Account" shall have the meaning specified in subsection
-------------------
6.14(d)(i).
"Person" means an individual, partnership, corporation, business trust,
------
joint stock company, trust, trustee, debtor-in-possession, unincorporated
association, joint venture or Governmental Authority.
"Plan of Reorganization" means, collectively, any plan or plans of
----------------------
reorganization filed in any of the bankruptcy proceedings described in Recital
B.
"Postpetition Indebtedness" means Indebtedness incurred by any Borrower
-------------------------
Entity subsequent to the commencement of the bankruptcy proceedings described in
Recital B hereto.
"Prejudicial Bankruptcy Order" means an order of the Bankruptcy Court for
----------------------------
any of the following: (a) the appointment of a Chapter 11 trustee; (b) the
conversion of any of the existing Chapter 11 bankruptcy proceedings to a Chapter
7 proceeding; (c) the dismissal of the existing Chapter 11 bankruptcy case; or
(d) the appointment of a
-15-
<PAGE>
bankruptcy examiner with expanded powers similar to those of a Chapter 11
trustee.
"Prior L/Cs" shall have the meaning ascribed to such term in the Recitals
----------
to this Agreement.
"Projections" means Borrowers' Projection dated January 24, 1995 and the
-----------
Rolling Cash Flow/Sequestration Summary dated March 24, 1995.
"Pro Rata Share" means, with respect to each Bank, as of any time of
--------------
determination, the fraction obtained by dividing such Bank's Revolving
Commitment by the Aggregate Revolving Commitment; provided, however, if any
Bank's Revolving Commitment equals zero, such Bank's Pro Rata Share shall equal
zero.
"Property" means any estate or interest in any kind of property or asset,
--------
whether real, personal or mixed, and whether tangible or intangible including,
without limitation, all Capital Leases and Operating Leases.
"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 Code and which any
member of the Controlled Group sponsors, maintains, or to which it 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 (as defined in ERISA).
"Real Estate Account" shall have the meaning specified in subsection
-------------------
2.4(b).
"Reference Rate" means the rate of interest publicly announced from time to
--------------
time by BofA in San Francisco, California, as its "reference rate." It is a
rate set by BofA based upon various factors including BofA's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above, or below
such announced rate.
Any change in the reference rate announced by BofA shall take effect at the
opening of business on the day specified in the public announcement of such
change.
"Replacement Bank" has the meaning specified in Section 3.4.
----------------
-16-
<PAGE>
"Requirement of Law" means, as to any Person, any law (statutory or
------------------
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
"Responsible Officer" means the chief executive officer or the president of
-------------------
the Company or any other Borrower, respectively, or any other senior officer
having substantially the same authority and responsibility; or, with respect to
compliance with financial covenants, the chief financial officer, controller, or
the treasurer of the Company or any other Borrower, respectively, or any other
officer having substantially the same authority and responsibility.
"Revolving Commitment", with respect to each Bank, has the meaning
--------------------
specified in Section 2.1.
"Revolving Note" means a promissory note of the Borrowers payable to the
--------------
order of a Bank in substantially the form of Exhibit B, evidencing the aggregate
indebtedness of the Borrowers to such Bank resulting from Loans made by such
Bank which indebtedness constitutes the joint and several obligations of each of
the Company and its direct and indirect Subsidiaries.
"Revolving Termination Date" means the earliest to occur of:
--------------------------
(a) January 31, 1996;
(b) the date on which the Aggregate Revolving Commitment shall terminate,
or shall be reduced to zero, in accordance with the provisions of this
Agreement; and
(c) the effective date of a confirmed Plan of Reorganization relating to
the Borrowers.
"SEC" means the Securities and Exchange Commission, or any successor
---
thereto.
"Security Agreements" means the Inventory Security Agreement, the Non-
-------------------
Inventory Security Agreement, the Stock Pledge Security Agreement, the Mortgages
and any one or more of them.
"Sequestered Account" shall have the meaning specified in subsection
-------------------
6.14(c).
"SF" means Sofro Fabrics, Inc., a Nevada corporation.
--
-17-
<PAGE>
"62-Store Closing Plan" means the plan prepared by the Company for closing
---------------------
Stores during the period January 17-May 31, 1995, as provided by Michael Brown
and as amended from time to time.
"Stock Pledge Security Agreement" means that certain Stock Pledge Security
-------------------------------
Agreement dated of even date herewith, entered into among the Company, HS and
the Agent, in the form of Exhibit I.
"Stores" shall mean retail stores owned and operated from time to time by
------
the Borrowers.
"Subsidiary" of a Person means any corporation, association, partnership,
----------
joint venture or other business entity of which more than 50% of the voting
stock or other equity interests (in the case of Persons other than
corporations), is owned or controlled directly or indirectly by the Person, or
one or more of the Subsidiaries of the Person, or a combination thereof.
"Taxes" has the meaning specified in subsection 3.1(a).
-----
"Thrift Plan" means the Company's Qualified Profit Sharing Thrift Plan, as
-----------
in existence on the date hereof.
"Total Utilization of Revolving Commitments" means, on any date of
------------------------------------------
determination, the sum of (a) the aggregate principal amount of Loans
outstanding, plus (b) Letter of Credit Usage.
"Transferee" has the meaning specified in subsection 10.8(e).
----------
"Turnaround Plan" has the meaning specified in Section 6.15.
---------------
"UCC" means the Uniform Commercial Code as in effect in any applicable
---
jurisdiction.
"United States" and "U.S." each means the United States of America.
------------- ----
"Watchlist Stores" shall mean those Stores placed on a "watchlist" by the
----------------
Borrowers from time to time and, as of the Closing Date, such Watchlist to be
provided to the Banks prior to the Closing Date.
"Wholly-Owned Subsidiary" means any corporation in which (other than
-----------------------
directors' qualifying shares required by law) 100% of the capital stock of each
class having ordinary voting power, and 100% of the capital stock of every other
class, in each case, at the time as of which any
-18-
<PAGE>
determination is being made, is owned, beneficially and of record, by the
Company, or by one or more of the other direct or indirect Wholly-Owned
Subsidiaries, or both.
"Withdrawal Liabilities" means, as of any determination date, the aggregate
----------------------
amount of the liabilities, if any, pursuant to Section 4201 of ERISA if the
Controlled Group made a complete withdrawal from all Multiemployer Plans (as
defined in ERISA) and any increase in contributions pursuant to Section 4243 of
ERISA.
1.2 Other Interpretive Provisions.
-----------------------------
(a) Defined Terms. Unless otherwise specified herein or therein, all
-------------
terms defined in this Agreement shall have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto. The meaning of
defined terms shall be equally applicable to the singular and plural forms of
the defined terms. Terms (including uncapitalized terms) not otherwise defined
herein and that are defined in the California UCC shall have the meanings
therein described.
(b) The Agreement. The words "hereof", "herein", "hereunder" and
-------------
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement; and
subsection, section, schedule and exhibit references are to this Agreement
unless otherwise specified. All exhibits and schedules to this Agreement are
hereby deemed incorporated herein by this reference as a part of this Agreement.
(c) Certain Common Terms.
--------------------
(i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced;
(ii) The term "including" is not limiting and means "including
without limitation"; and
(iii) The term "or" is not exclusive and has the meaning commonly
associated with the phrase "and/or."
(d) Performance; Time. Whenever any performance obligation hereunder
-----------------
(other than a payment obligation) shall be stated to be due or required to be
satisfied on a day other than a Business Day, such performance shall be made or
satisfied on the next succeeding Business Day. In the computation of periods of
time from a specified date to a later specified date, the word "from" means
"from and
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including"; the words "to" and "until" each mean "to but excluding", and the
word "through" means "to and including." If any provision of this Agreement
refers to any action taken or to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be interpreted to encompass any and
all means, direct or indirect, of taking, or not taking, such action.
(e) Contracts. Unless otherwise expressly provided herein or
---------
therein, references in the Loan Documents to agreements and other contractual
instruments shall be deemed to include all subsequent amendments, modifications,
renewals, extensions, replacements, supplements to, and restatements thereof,
but only to the extent the same are not prohibited by the terms of any Loan
Document.
(f) Laws. References to any statute or regulation are to be
----
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(g) Captions. The captions and headings of this Agreement are for
--------
convenience of reference only and shall not affect the interpretation of this
Agreement.
(h) Independence of Provisions. The parties acknowledge that this
--------------------------
Agreement and other Loan Documents may use several different limitations, tests
or measurements to regulate the same or similar matters, and that such
limitations, tests and measurements are cumulative and must each be performed,
except as expressly stated to the contrary in this Agreement.
1.3 Accounting Principles.
---------------------
(a) Unless the context otherwise clearly requires, all accounting
terms not expressly defined herein shall be construed, and all financial
computations required under this Agreement shall be made, in accordance with
GAAP, consistently applied.
(b) References herein to "fiscal year" and "fiscal quarter" refer to
such fiscal periods of the Borrowers, for example, "Fiscal Year 1995" refers to
the fiscal year of the Borrowers ended January 31, 1995.
ARTICLE 2
THE REVOLVING CREDIT
--------------------
2.1 Amounts and Terms of Revolving Commitments. Each Bank severally
------------------------------------------
agrees, on the terms and conditions
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hereinafter set forth, to make Loans to the Borrowers from time to time on any
Business Day during the period from the Closing Date to the Revolving
Termination Date, in an aggregate amount not to exceed at any time the amount
set forth opposite the Bank's name in Schedule 2.1 under the heading "Revolving
Commitment" (such amount as the same may or shall be reduced pursuant to Section
2.4 or as a result of one or more assignments pursuant to Section 10.8, the
Bank's "Revolving Commitment"); provided, however, that, after giving effect to
any Borrowing of Loans under this Section, Total Utilization of Revolving
Commitments (including Letter of Credit Usage) shall not exceed the Aggregate
Revolving Commitment. The Banks hereby establish pursuant to Section 2.14 hereof
a $10,000,000 Letter of Credit sublimit of the Aggregate Revolving Commitment.
Within the limits of each Bank's Revolving Commitment, and subject to the
other terms, provisions, and conditions hereof, the Borrowers may borrow under
this Section 2.1, repay pursuant to Section 2.5, and reborrow pursuant to this
Section 2.1.
2.2 Notes. The Loans made by each Bank shall be evidenced by a Revolving
-----
Note payable to the order of that Bank in an amount equal to its Revolving
Commitment.
2.3 Procedure for Borrowing.
-----------------------
(a) Each Borrowing of Loans under Section 2.1 shall be made upon the
Borrowers' irrevocable written notice delivered to the Agent in accordance with
Section 10.2 in the form of a Notice of Borrowing (which notice, except as
otherwise set forth below with respect to the initial Borrowing of Loans to
become effective on the Closing Date, must be received by the Agent prior to
9:00 a.m. Los Angeles time) one Business Day prior to the requested Borrowing
date, specifying:
(A) the amount of the Borrowing; and
(B) the requested Borrowing date, which shall be a Business Day;
provided, however, that with respect to any Borrowing to become effective on the
- -------- -------
Closing Date, and notwithstanding anything to the contrary contained in the
foregoing provisions of subsection (a) of this Section 2.3, the Notice of
Borrowing to be delivered by the Borrowers with respect to the Closing Date
shall be delivered to the Agent not later than 12:00 Noon (Los Angeles time) one
Business Day before the Closing Date.
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<PAGE>
(b) Upon receipt of the Notice of Borrowing, the Agent will promptly
notify each Bank thereof and of the amount of such Bank's Commitment Percentage
of the Borrowing.
(c) Each Bank will make the amount of its Commitment Percentage of
the Borrowing available to the Agent for the account of the Borrowers at the
Agent's Payment Office by 11:00 a.m. (Los Angeles time) on the Borrowing date
requested by the Borrowers in funds immediately available to the Agent. The
proceeds of all such Loans will then be made available to the Borrowers by the
Agent at such office by crediting the account of the Borrowers on the books of
the Agent with the aggregate of the amounts made available to the Agent by the
Banks and in like funds as received by the Agent.
2.4 Voluntary or Mandatory Termination or Reduction of Revolving
------------------------------------------------------------
Commitments.
- -----------
(a) The Borrowers may, upon not less than five Business Days' prior
notice to the Agent, terminate the Aggregate Revolving Commitment or permanently
reduce all or a portion of the Aggregate Revolving Commitment; provided that no
--------
such reduction or termination shall be permitted if, after giving effect thereto
and to any prepayments of the Loans made on the effective date thereof, the then
Total Utilization of Revolving Commitments would exceed the amount of the
Aggregate Revolving Commitment then in effect and, provided, further, that once
reduced in accordance with this Section 2.4, the Banks shall have no obligation
to increase the Aggregate Revolving Commitment. Any reduction of the Aggregate
Revolving Commitment shall be applied to each Bank's Revolving Commitment in
accordance with such Bank's Commitment Percentage. All commitment fees
applicable to such reduced or terminated Revolving Commitment accrued to, but
not including the effective date of any reduction or termination of Revolving
Commitments, shall be paid on the effective date of such reduction or
termination.
(b) The Borrowers shall permanently reduce all or a portion of the
Aggregate Revolving Commitment by an amount equal to Net Proceeds (which Net
Proceeds must be paid to the Credit Banks) from Dispositions which occur out of
the Ordinary Course of Business (excluding going-out-of-business sales as set
forth in the Projections), provided, however, that Net Proceeds of any
going-out-of-business sales after the number of the Borrowers' Stores fall below
353 shall be applied as a permanent reduction of the Aggregate Revolving
Commitment in an amount equal to (i) 60% of the Inventory at cost located at
said closed Stores plus (ii) the Net Proceeds of all other assets located at
such closed Stores and, provided, further, that all Net Proceeds from the
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<PAGE>
Disposition of the Borrowers' real property assets shall be placed in a
segregated pledged account at the Agent (the "Real Estate Account") as cash
collateral for the Obligations hereunder and such amounts shall not reduce the
Aggregate Revolving Commitment. To the extent any such aggregate Revolving
Commitment reductions required by this Section would reduce the Aggregate
Revolving Commitment below the then Total Utilization of Revolving Commitments,
the Borrowers shall be required to make the mandatory prepayments set forth in
subsection 2.7(b).
2.5 Optional Prepayments. The Borrowers may, at any time or from time to
--------------------
time, upon at least one Business Day's notice to the Agent, given by 9:00 a.m.
(Los Angeles time) on such Business Day, ratably prepay Loans, in whole or in
part. Such notice of prepayment shall specify the date and amount of such
prepayment. Such notice shall not thereafter be revocable by the Borrowers and
the Agent will promptly notify each Bank thereof and of such Bank's Commitment
Percentage of such prepayment. If such notice is given by the Borrowers, the
Borrowers shall make such prepayment and the payment amount specified in such
notice shall be due and payable on the date specified therein, together with
accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 3.2.
2.6 Joint Borrower Provisions.
-------------------------
The Borrower Entities represent to the Banks that they are integral parts
of a consolidated enterprise, and that each Borrower Entity will receive direct
and indirect benefits from the availability of the joint credit facility
provided for herein, and from the ability to access the collective credit
resources of the consolidated enterprise that are the Borrowers. Each Borrower
Entity irrevocably authorizes each other Borrower Entity to act on its behalf in
requesting, authorizing, and using the proceeds of Loans made hereunder, and
each Borrower Entity agrees to be bound by the acts of each of the others in
connection with the Loan Documents.
The Borrower Entities each are, and at all times shall be, jointly and
severally liable for each and every one of the Obligations hereunder and under
the Loan Documents, regardless of which Borrower Entity or Borrower Entities
requested, received, used, or directly enjoyed the benefit of, the extensions of
credit hereunder. Unless otherwise expressly set forth to the contrary in any of
the Security Agreements, all of the Collateral provided under the Security
Agreements shall secure all of the Obligations. Each Borrower Entity's
Obligations under this Agreement are independent Obligations and are absolute
and unconditional. Each Borrower Entity, to the extent permitted by law, hereby
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<PAGE>
waives any defense to such Obligations that may arise by reason of the
disability or other defense or cessation of liability of any other Borrower
Entity for any reason other than payment in full. Each Borrower Entity also
waives any defense to such Obligations that it may have as a result of any
holder's election of or failure to exercise any right, power, or remedy,
including, without limitation, the failure to proceed first against such other
Borrower Entity or any security it holds for such other Borrower Entity's
Obligations under any Loan Document, if any. Without limiting the generality of
the foregoing, each Borrower Entity expressly waives all demands and notices
whatsoever (except for any demands or notices, if any, that such Borrower Entity
expressly is entitled to receive pursuant to the terms of any Loan Document),
and agrees that the Banks and the Agent may, without notice (except for such
notice, if any, as such Borrower Entity expressly is entitled to receive
pursuant to the terms of any Loan Document) and without releasing the liability
of such Borrower Entity, extend for the benefit of any other Borrower Entity the
time for making any payment, waive or extend the performance of any agreement or
make any settlement of any agreement for the benefit of any other Borrower
Entity, and may proceed against each Borrower Entity, directly and independently
of any other Borrower Entity, as such obligee may elect in accordance with this
Agreement.
Each Borrower Entity acknowledges that the Obligations of such Borrower
Entity undertaken herein or in the other Loan Documents, and the grants of
security interests and liens by such Borrower Entity to secure Obligations of
the other Borrower Entities, could be construed to consist, at least in part, of
the guaranty of Obligations of the other Borrower Entities and, in full
recognition of that fact, each Borrower Entity consents and agrees as
hereinafter set forth in the balance of this Section 2.6. The consents, waivers,
and agreements of the Borrower Entities that are contained in the balance of
this Section 2.6 are intended to deal with the suretyship aspects of the
transactions evidenced by the Loan Documents (to the extent that a Borrower
Entity may be deemed a guarantor or surety for the Obligations of another
Borrower Entity) and thus are intended to be effective and applicable only to
the extent that any Borrower Entity has agreed to answer for the Obligation of
another Borrower Entity or has granted a lien or security interest in Collateral
to secure the Obligation of another Borrower Entity; conversely, the consents,
waivers, and agreements of the Borrower Entities that are contained in the
balance of this Section 2.6 shall not be applicable to the direct Obligation of
a Borrower Entity with respect to credit extended directly to such Borrower
Entity, and shall not be applicable to security interests or liens on Collateral
of a Borrower Entity given to directly
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<PAGE>
secure direct Obligations of such Borrower Entity where no aspect of guaranty or
suretyship is involved. Each Borrower Entity consents and agrees that Lender
may, at any time and from time to time, without notice or demand, whether before
or after any actual or purported termination, repudiation or revocation of this
Agreement by any one or more Borrower Entities, and without affecting the
enforceability or continuing effectiveness hereof as to such Borrower Entity, in
accordance with the terms of the Loan Documents: (a) supplement, restate,
modify, amend, increase, decrease, extend, renew, accelerate or otherwise change
the time for payment or the terms of the Obligations or any part thereof,
including any increase or decrease of the rate(s) of interest thereon; (b)
supplement, restate, modify, amend, increase, decrease or waive, or enter into
or give any agreement, approval or consent with respect to, the Obligations or
any part thereof, or any of the Loan Documents or any security or guarantees
granted or entered into by any Person(s) other than such Borrower Entity, or any
condition, covenant, default, remedy, right, representation or term thereof or
thereunder; (c) accept new or additional instruments, documents or agreements in
exchange for or relative to any of the Loan Documents or the Obligations or any
part thereof; (d) accept partial payments on the Obligations; (e) receive and
hold additional security or guarantees for the Obligations or any part thereof;
(f) release, reconvey, terminate, waive, abandon, fail to perfect, subordinate,
exchange, substitute, transfer or enforce any security or guarantees, and apply
any security and direct the order or manner of sale thereof as Lender in its
sole and absolute discretion may determine; (g) release any other Person
(including, without limitation, any other Borrower Entity) from any personal
liability with respect to the Obligations or any part thereof; (h) with respect
to any Person other than such Borrower Entity (including, without limitation,
any other Borrower Entity), settle, release on terms satisfactory to Lender or
by operation of applicable laws or otherwise liquidate or enforce any
Obligations and any security therefor or guaranty thereof in any manner, consent
to the transfer of any security and bid and purchase at any sale; or (i) consent
to the merger, change or any other restructuring or termination of the corporate
or partnership existence of any other Borrower Entity or any other Person, and
correspondingly agree, in accordance with all applicable provisions of the Loan
Documents, to the restructure of the Obligations, and any such merger, change,
restructuring or termination shall not affect the liability of any Borrower
Entity or the continuing effectiveness hereof, or the enforceability hereof with
respect to all or any part of the Obligations.
Upon the occurrence and during the continuance of any Event of Default, the
Agent may enforce the Loan Documents
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<PAGE>
independently as to each Borrower Entity and independently of any other remedy
or the Agent at any time may have or hold in connection with the Obligations,
and, subject to the provisions of subsection 8.2(d), it shall not be necessary
for the Agent to marshal assets in favor of any Borrower Entity or any other
Person or to proceed upon or against or exhaust any security or remedy before
proceeding to enforce this Agreement. Each Borrower Entity expressly waives,
subject to the provisions of subsection 8.2(d), any right to require the Agent
to marshal assets in favor of any Borrower Entity or any other Person or to
proceed against any other Borrower Entity or any collateral provided by any
Person, and agrees that, subject to the provisions of subsection 8.2(d), the
Agent may proceed against Borrower Entities or any collateral in such order as
it shall determine in its sole and absolute discretion.
The Agent may file a separate action or actions against any Borrower
Entity, whether action is brought or prosecuted with respect to any security or
against any other Person, or whether any other Person is joined in any such
action or actions. Each Borrower Entity agrees, for itself, that the Agent and
any other Borrower Entity, or any Affiliate of any other Borrower Entity (other
than such Borrower Entity itself), may deal with each other in connection with
the Obligations or otherwise, or alter any contracts or agreements now or
hereafter existing between any of them, in any manner whatsoever, all without in
any way altering or affecting the continuing efficacy as to such Borrower Entity
of the Loan Documents. Each Borrower Entity expressly waives the benefit of any
statute of limitations affecting its liability hereunder or the enforcement of
the Obligations or any rights of the Agent created or granted herein.
The Agent's and the Banks' rights hereunder shall be reinstated and
revived, and the enforceability of this Agreement shall continue, with respect
to any amount at any time paid on account of the Obligations which thereafter
shall be required to be restored or returned by the Agent or the Banks
(including, without limitation, the restoration or return of any amount pursuant
to a court order or judgment (whether or not final or non-appealable), or
pursuant to a good faith settlement of a pending or threatened avoidance or
recovery action, or pursuant to good faith compliance with a demand made by a
Person believed to be entitled to pursue an avoidance or recovery action (such
as a bankruptcy trustee or a Person having the avoiding powers of a bankruptcy
trustee, or similar avoiding powers), and without requiring the Agent or the
Banks to oppose or litigate avoidance or recovery demands or actions that it
believes in good faith to be meritorious or worthy of settlement or compliance,
or pursue or exhaust appeals), all as though
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<PAGE>
such amount had not been paid. The rights of the Agent or the Banks created or
granted herein and the enforceability of the Loan Documents at all times shall
remain effective to cover the full amount of all the Obligations even though the
Obligations, including any part thereof or any other security or guaranty
therefor, may be or hereafter may become invalid or otherwise unenforceable as
against any other Borrower Entity and whether or not any other Borrower Entity
shall have any personal liability with respect thereto.
To the maximum extent permitted by applicable law, each Borrower Entity,
for itself, expressly waives any and all defenses now or hereafter arising or
that otherwise might be asserted by reason of (a) any disability or other
defense of any other Borrower Entity with respect to the Obligations, or with
respect to the enforceability of the Agent's security interest in or lien on any
collateral securing any of the Obligations (including, without limitation, the
Collateral), (b) the unenforceability or invalidity of any security or guaranty
for the Obligations or the lack of perfection or continuing perfection or
failure of priority of any security for the Obligations, (c) the cessation for
any cause whatsoever of the liability of any other Borrower Entity (other than
by reason of the full payment and performance of all Obligations), (d) any
failure of the Agent to give notice of sale or other disposition of Collateral
to any other Borrower Entity or any other Person other than such waiving
Borrower Entity, or any defect in any notice that may be given to any other
Borrower Entity or any other Person other than such waiving Borrower Entity, in
connection with any sale or disposition of any collateral securing the
Obligations or any of them (including, without limitation, the Collateral), (e)
any failure of the Agent to comply with applicable law in connection with the
sale or other disposition of any collateral or other security for any Obligation
that is owned by another Borrower Entity or by any other Person other than such
waiving Borrower Entity, including any failure of the Agent to conduct a
commercially reasonable sale or other disposition of any such collateral or
other security for any Obligation, (f) any act or omission of the Agent or
others that directly or indirectly results in or aids the discharge or release
of any other Borrower Entity, or the Obligations of any other Borrower Entity,
or any security or guaranty therefor, by operation of law or otherwise, or (g)
any law which provides that the obligation of a surety or guarantor must neither
be larger in amount nor in other respects more burdensome than that of the
principal or which reduces a surety's or guarantor's obligation in proportion to
the principal obligation. Until such time, if any, as all of the Obligations
have been paid and performed in full and no portion of any commitment of the
Banks to any Borrower Entity under any Loan Document
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remains in effect, no Borrower Entity shall have any right of subrogation,
contribution, reimbursement or indemnity, and each Borrower Entity expressly
waives any right to enforce any remedy that the Agent now has or hereafter may
have against any other Person and waives the benefit of, or any right to
participate in, any collateral now or hereafter held by the Agent. Except to the
extent expressly provided for in any Loan Document, each Borrower Entity
expressly waives, to the maximum extent permitted by applicable law, all rights
or entitlements to presentments, demands for payment or performance, notices of
nonpayment or nonperformance, protests, notices of protest, notices of dishonor
and all other notices or demands of any kind or nature whatsoever with respect
to the Obligations, and all notices of acceptance of the Loan Documents or of
the existence, creation or incurring of new or additional Obligations.
In the event that all or any part of the Obligations at any time should be
or become secured by any one or more deeds of trust or mortgages or other
instruments creating or granting liens on any interests in real property, each
Borrower Entity authorizes the Agent, upon the occurrence of and during the
continuance of any Event of Default, at its sole option, without notice or
demand except as is or may be expressly required by the terms of any Loan
Document or by the provisions of any applicable law, to foreclose any or all of
such deeds of trust or mortgages or other instruments by judicial or nonjudicial
sale, without affecting or diminishing, except to the extent of the effect of
the application of the proceeds realized therefrom, and except to the extent
mandated by any non-waivable provision of applicable law, the Obligations of any
Borrower Entity (other than the Obligations of a grantor of a foreclosed deed of
trust, mortgage, or other instrument, to the extent, if any, that applicable law
affects or diminishes the Obligations of such grantor), the enforceability of
this Agreement or any other Loan Document, or the validity or enforceability of
any remaining security interests or liens of, or for the benefit of, the Banks
on any Collateral.
To the fullest extent permitted by applicable law, each Borrower Entity
expressly waives any defenses to the enforcement of this Agreement, or to the
enforcement of any other Loan Document, or to any rights of the Banks created or
granted hereby or thereby, or to the recovery by the Banks against any Borrower
Entity or any other Person liable therefor of any deficiency after a judicial or
nonjudicial foreclosure or sale of any collateral, whether real or personal,
from time to time securing any of the Obligations, even though such a
foreclosure or sale may impair the subrogation rights of one or more of the
Borrower Entities and may preclude one or more of the Borrower Entities from
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obtaining reimbursement or contribution from other Borrower Entities. To the
fullest extent permitted by applicable law, each Borrower Entity expressly
waives any defenses or benefits that may be derived from California Code of
Civil Procedure (S)(S) 580a, 580b, 580d or 726, or comparable provisions of the
laws of any other jurisdiction, and all other suretyship defenses it otherwise
might or would have under California law or other applicable law. To the fullest
extent permitted by applicable law, each Borrower Entity, for itself, expressly
waives any right to receive notice of any judicial or nonjudicial foreclosure or
sale of any real property or interest therein of another Borrower Entity that is
subject to any such deeds of trust or mortgages or other instruments, and any
Borrower Entity's failure to receive any such notice shall not impair or affect
such Borrower Entity's obligations or the enforceability of the Loan Documents
or any rights of the Banks created or granted hereby or thereby.
Each Borrower Entity hereby agrees to keep each other Borrower Entity fully
apprised at all times as to the status of its business, affairs, finances, and
financial condition, and its ability to perform its Obligations under the Loan
Documents, and in particular as to any adverse developments with respect
thereto. Each Borrower Entity hereby agrees to undertake to keep itself apprised
at all times as to the status of the business, affairs, finances, and financial
condition of each other Borrower Entity, and of the ability of each other
Borrower Entity to perform its Obligations under the Loan Documents, and in
particular as to any adverse developments with respect to any thereof. Each
Borrower Entity hereby agrees, in light of the foregoing mutual covenants to
inform each other, and to keep themselves and each other informed as to such
matters, that the Banks shall have no duty to inform any Borrower Entity of any
information pertaining to the business, affairs, finances, or financial
condition of any other Borrower Entity, or pertaining to the ability of any
other Borrower Entity to perform its Obligations under the Loan Documents, even
if such information is adverse, and even if such information might influence the
decision of one or more of the Borrower Entities to continue to be jointly and
severally liable for, or to provide Collateral for, Obligations of one or more
of the other Borrower Entities. To the fullest extent permitted by applicable
law, each Borrower Entity hereby expressly waives any duty of the Banks to
inform any Borrower Entity of any such information.
Borrower Entities and each of them warrant and agree that each of the
waivers and consents set forth herein are made after consultation with legal
counsel and with full knowledge of their significance and consequences, with the
understanding that events giving rise to any defense or right waived may
diminish, destroy, or otherwise adversely
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<PAGE>
affect rights that Borrower Entities otherwise may have against other Borrower
Entities, Lender, or others, or against Collateral, and that, under the
circumstances, the waivers and consents herein given are reasonable and not
contrary to public policy or law. If any of the waivers or consents herein are
determined to be contrary to any applicable law or public policy, such waivers
and consents shall be effective to the maximum extent permitted by law.
Anything to the contrary in this Section 2.6 notwithstanding, nothing in
this Section 2.6 shall constitute a waiver or relinquishment by any Borrower
Entity (a) of any right to notice from the Agent or any Bank expressly provided
for in favor of such Borrower Entity in any Loan Document, or (b) of any duty or
obligation of the Agent or any Bank expressly provided for in favor of such
Borrower Entity in any Loan Document.
2.7 Repayment and Mandatory Prepayments.
-----------------------------------
(a) The Borrowers shall repay to the Banks in full on the Revolving
Termination Date the aggregate principal amount of the Loans outstanding on the
Revolving Termination Date.
(b) If Total Utilization of Revolving Commitments would exceed the
Aggregate Revolving Commitment, the Borrowers immediately (and in any event by
11:00 a.m. Los Angeles time) on the next Business Day shall repay Loans in an
amount sufficient to eliminate such excess. If no Loans are outstanding or are
fully prepaid and the Total Utilization of Revolving Commitments shall continue
to exceed the Aggregate Revolving Commitment due to outstanding Letters of
Credit, the Borrowers shall cash collateralize such outstanding Letters of
Credit in an amount necessary to provide that Total Utilization of Revolving
Commitments shall not exceed the then-reduced Aggregate Revolving Commitment.
Such cash collateral shall be deposited with the Agent, for the benefit of the
Banks and shall be made only from amounts on deposit in the Sequestered Account.
2.8 Interest.
--------
(a) Subject to subsections 2.8(c) and 2.8(d), each Loan shall bear
interest on the outstanding principal amount thereof from the date when made
until it becomes due at a rate per annum equal to the Reference Rate plus the
Applicable Margin.
(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of any prepayment of Loans
pursuant to Section 2.5 or Section 2.7 for the portion of the Loans so
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prepaid and upon payment (including prepayment) in full thereof and, during the
existence of any Event of Default, interest shall be paid on demand.
(c) While any Event of Default exists, subject to the following
paragraph of this subsection 2.8(c), the Borrowers shall pay interest (after as
well as before entry of judgment thereon to the extent permitted by law) on the
principal amount of all Loans outstanding, at a rate per annum which is
determined by adding 2% per annum to the Reference Rate plus the Applicable
Margin then in effect for such Loans.
The foregoing notwithstanding, if any amount of principal of or
interest on any Loan, or any other amount payable hereunder or under any of the
other Loan Documents is not paid in full when due (whether at stated maturity,
by acceleration, demand or otherwise), the Borrowers agree to pay interest on
such unpaid principal or other amount, from the date such amount becomes due
until the date such amount is paid in full, and after as well as before any
entry of judgment thereon to the extent permitted by law, payable on demand, at
a rate per annum which is determined by adding 2% per annum to the Reference
Rate plus the Applicable Margin then in effect.
(d) Anything herein to the contrary notwithstanding, the obligations
of the Borrowers hereunder shall be subject to the limitation that payments of
interest shall not be required, for any period for which interest is computed
hereunder, to the extent (but only to the extent) that contracting for or
receiving such payment by the respective Bank would be contrary to the
provisions of any law applicable to such Bank limiting the highest rate of
interest which may be lawfully contracted for, charged or received by such Bank,
and in such event the Borrowers shall pay such Bank interest at the highest rate
permitted by applicable law.
2.9 Fees.
----
(a) Commitment Fee. The Borrowers shall pay to the Agent for the
--------------
ratable account of each Bank, in accordance with its respective Commitment
Percentage, a commitment fee equal to 0.50% per annum of the average daily
balance of the Available Aggregate Revolving Commitment, computed on a quarterly
basis in arrears on the last Business Day of each calendar quarter, based on a
year of 360 days and actual days elapsed. Such commitment fee shall accrue from
the Closing Date to the Revolving Termination Date and shall be due and payable
quarterly in arrears on the last Business Day of each calendar quarter
commencing on June 30, 1995 through the Revolving Termination Date, with
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the final payment to be made on the Revolving Termination Date; provided that,
in connection with any reduction or termination of Revolving Commitments
pursuant to Section 2.4, the accrued commitment fee calculated for the period
ending on such date shall also be paid on the date of such reduction or
termination, with the next succeeding quarterly payment being calculated on the
basis of the period from the reduction or termination date to such quarterly
payment date.
(b) Facility Fee. The Borrowers shall pay to the Agent for the
------------
account of the Banks, ratably in accordance with their respective Commitment
Percentages, a facility fee in an amount equal to $200,000 ($50,000 having been
previously paid), which fee shall be due and payable on the Closing Date, and
which fee shall be fully earned and non-refundable when paid.
2.10 Computation of Fees and Interest.
--------------------------------
(a) All computations of interest, fees, and other amounts payable
under any Loan Document, and for all types of Loans, shall be made on the basis
of a 360-day year and actual days elapsed (including partial days), which
results in more fees and interest being paid than if computed on the basis of a
365-day or 366-day year. Interest and fees shall accrue during each period
during which interest or such fees are computed from the first day thereof to
the last day thereof.
(b) Each determination of an interest rate by the Agent pursuant
hereto shall be conclusive and binding on the Borrowers and the Banks in the
absence of manifest error.
2.11 Payments by the Borrowers.
-------------------------
(a) All payments (including prepayments) to be made by the Borrowers
on account of principal, interest, fees and other amounts required hereunder
shall be made without set-off, recoupment or counterclaim and shall, except as
otherwise expressly provided herein, be made to the Agent for the ratable
account of the Banks at the Agent's Payment Office, in dollars and in
immediately available funds, no later than 11:00 a.m. (Los Angeles time) on the
date specified herein. The Agent will promptly distribute to each Bank its
Commitment Percentage (or other applicable share as expressly provided herein)
of such principal, interest, fees or other amounts, in like funds as received.
Any payment which is received by the Agent later than 11:00 a.m. (Los Angeles
time) shall be deemed to have been received on the immediately succeeding
Business Day and any applicable interest or fee shall continue to accrue.
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(b) Whenever any payment hereunder shall be stated to be due on a day
other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of interest or fees, as the case may be.
(c) Unless the Agent shall have received notice from the Borrowers
prior to the date on which any payment is due to the Banks hereunder that the
Borrowers will not make such payment in full as and when required hereunder, the
Agent may assume that the Borrowers have made such payment in full to the Agent
on such date in immediately available funds and the Agent may (but shall not be
so required), in reliance upon such assumption, cause to be distributed to each
Bank on such due date an amount equal to the amount then due such Bank. If and
to the extent the Borrowers shall not have made such payment in full to the
Agent, each Bank shall repay to the Agent on demand such amount distributed to
such Bank, together with interest thereon for each day from the date such amount
is distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate as in effect for each such day.
2.12 Payments by the Banks to the Agent.
----------------------------------
(a) Unless the Agent shall have received notice from a Bank on the
Closing Date or, with respect to each Borrowing after the Closing Date, at least
one Business Day prior to the date of any proposed Borrowing, that such Bank
will not make available to the Agent as and when required hereunder for the
account of the Borrowers the amount of that Bank's Commitment Percentage of the
Borrowing, the Agent may assume that each Bank has made such amount available to
the Agent in immediately available funds on the Borrowing date and the Agent may
(but shall not be so required), in reliance upon such assumption, make available
to the Borrowers on such date a corresponding amount. If and to the extent any
Bank shall not have made its full amount available to the Agent in immediately
available funds and the Agent in such circumstances has made available to the
Borrowers such amount, that Bank shall on the next Business Day following the
date of such Borrowing make such amount available to the Agent, together with
interest at the Federal Funds Rate for and determined as of each day during such
period. A notice of the Agent submitted to any Bank with respect to amounts
owing under this subsection 2.12(a) shall be conclusive, absent manifest error.
If such amount is so made available, such payment to the Agent shall constitute
such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If
such amount is not made available to the Agent on the next Business Day
following the date of such Borrowing, the Agent shall notify the
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Borrowers of such failure to fund and, upon demand by the Agent, the Borrowers
shall pay such amount to the Agent for the Agent's account, together with
interest thereon for each day elapsed since the date of such Borrowing, at a
rate per annum equal to the interest rate applicable at the time to the Loans
comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any date of Borrowing
shall not relieve any other Bank of any obligation hereunder to make a Loan on
the date of such borrowing, but no Bank shall be responsible for the failure of
any other Bank to make the Loan to be made by such other Bank on the date of any
Borrowing.
2.13 Sharing of Payments, Etc. If, other than as expressly provided
-------------------------
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) in excess of its Commitment Percentage of payments on
account of the Loans obtained by all the Banks, such Bank shall forthwith (a)
notify the Agent of such fact, and (b) purchase from the other Banks such
participations in the Loans made by them as shall be necessary to cause such
purchasing Bank to share the excess payment ratably with each of them; provided,
however, that if all or any portion of such excess payment is thereafter
required to be restored or returned by the purchasing Bank (including, without
limitation, the restoration or return of any amount pursuant to a court order or
judgment (whether or not final or non-appealable), or pursuant to a good faith
settlement of a pending or threatened avoidance or recovery action, or pursuant
to good faith compliance with a demand made by a Person believed to be entitled
to pursue an avoidance or recovery action (such as a bankruptcy trustee or a
Person having the avoiding powers of a bankruptcy trustee, or similar avoiding
powers), and without requiring such purchasing Bank to oppose or litigate
avoidance or recovery demands or actions that it believes in good faith to be
meritorious or worthy of settlement or compliance, or pursue or exhaust
appeals), such purchase shall to that extent be rescinded and each other Bank
shall repay to the purchasing Bank the purchase price paid therefor, together
with an amount equal to such paying Bank's Commitment Percentage (according to
the proportion of (i) the amount of such paying Bank's required repayment to
(ii) the total amount so recovered from the purchasing Bank) of any interest or
other amount paid or payable by the purchasing Bank in respect of the total
amount so recovered. The Borrowers agree that any Bank so purchasing a
participation from another Bank pursuant to this Section 2.13 may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off, but subject to Section 10.9) with respect to such
participation as fully as
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if such Bank were the direct creditor of the Borrowers in the amount of such
participation. The Agent will keep records (which shall be conclusive and
binding in the absence of manifest error) of participations purchased pursuant
to this Section 2.13 and will in each case notify the Banks following any such
purchases or repayments.
2.14 Letters of Credit.
-----------------
(a) Commitment. The Borrowers may request the Issuing Bank, on the
----------
terms and conditions hereinafter set forth, to issue, and if so requested the
Issuing Bank shall issue, commercial letters of credit in form and substance
satisfactory to the Issuing Bank for the account of one or more Borrowers, from
time to time on any Business Day from the Closing Date until the Revolving
Termination Date, in an aggregate face amount not to exceed $10,000,000 at any
time outstanding. The Borrowers shall not request and the Issuing Bank shall not
issue any Letter of Credit if after giving effect to such issuance the Total
Utilization of Revolving Commitments would exceed the Aggregate Revolving
Commitment then available. No Letter of Credit shall have an expiration date
(including all extensions by amendment) later than 210 days after the date of
issuance of such Letter of Credit. The commitment to issue Letters of Credit is
revolving, and the issuance and amendment to increase the amount of each Letter
of Credit shall pro tanto reduce the amount of the sublimit hereunder. No
--- -----
Letter of Credit shall be issued or extended after the Revolving Termination
Date and no Letter of Credit shall in any event expire by its terms after the
Revolving Termination Date.
Immediately upon the issuance of each Letter of Credit by the Issuing Bank,
each Bank shall be deemed to, and hereby agrees to, have irrevocably purchased
from the Issuing Bank a participation in such Letter of Credit and drawings
thereunder in an amount equal to such Bank's Pro Rata Share of the maximum
amount that is or at any time may become available to be drawn thereunder.
Without limiting the generality of the foregoing, and subject to the terms,
provisions, and conditions contained herein, on the Closing Date the principal
amount of all Prior L/Cs outstanding under the L/C Agreement shall be converted
into, and shall be deemed to be, Letters of Credit issued and outstanding
hereunder. On the Closing Date, all remaining funds (excluding fees) previously
prepaid by the Borrowers under the L/C Agreement will be returned to the
Borrowers (subject to the provisions of Section 6.14).
The Letters of Credit shall be used by the Borrowers only for the purposes
set forth in Section 6.11.
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(b) Issuance of Letters of Credit. The Borrowers shall request the
-----------------------------
issuance of each Letter of Credit by delivering a Letter of Credit request and
completed Application and Agreement for Commercial Letter of Credit
substantially in the form of Exhibit E to the Agent not later than 11:00 a.m.,
Los Angeles time, at least 2 Business Days before the requested date of
issuance, to the following address and telecopier number (the "Agency Office"):
Bank of America, NT & SA, Agency Management Services, Department #5596, 1455
Market Street, San Francisco, California, 94104, Attention: Peggy Fujimoto,
telephone: (415) 622-4835, telecopier: (415) 622-4894. Any Letter of Credit
request received by the Agent after 11:00 a.m., Los Angeles time, on any
Business Day shall be deemed to have been received on the next Business Day.
Each Letter of Credit request shall be sent by telecopier (followed promptly
thereafter by the original), shall be irrevocable and shall be effective upon
receipt by the Agent. Provided that a valid Letter of Credit request has been
received by the Agent pursuant to this Section, and subject to the provisions of
Section 4.3, the Issuing Bank will issue the requested Letter of Credit on the
requested date of issuance from its office at: Bank of America, NT & SA,
International Trade Bank Division, Trade Operations Center, Department #6569,
333 South Beaudry Avenue, 19th Floor, Los Angeles, California 90017, Contact:
Roy Sanders, Vice President, telephone: (213) 345-6679, telecopier: (213) 345-
3387. The Issuing Bank shall promptly notify the Banks of the issuance of a
Letter of Credit.
(c) Amendment to Letters of Credit. Each issued Letter of Credit may
------------------------------
be amended by written request by the Borrowers to the Agent at the Agency Office
and subject to the limitations set forth in this Agreement; provided, that in no
--------
event may the Letter of Credit sublimit be exceeded or the amount of any Letter
of Credit be increased after the Revolving Termination Date and in no event may
the expiration date of any Letter of Credit be extended beyond October 15, 1995.
(d) Payment of Amounts Drawn Under Letters of Credit. In the event
------------------------------------------------
of any request for drawing under any Letter of Credit by the beneficiary
thereof, the Issuing Bank shall immediately (and in any event no later than one
Business Day prior to the date of payment under such Letter of Credit) notify
the Borrowers, and the Borrowers shall reimburse the Issuing Bank on the day on
which such drawing is honored in an amount in same day funds equal to the amount
of such drawing. If the Borrowers shall fail to reimburse the Issuing Bank on
the date of any payment under a Letter of Credit issued by it in an amount equal
to the amount of such payment, (i) the Borrowers shall be deemed to have given a
Notice of Borrowing to the Agent requesting the
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Banks to make Loans on the date on which such drawing is honored in an amount
equal to such drawing (unless the funding of such amount would cause Total
Utilization of Revolving Commitments to exceed the Aggregate Revolving
Commitment, in which event the requested amount of Loans shall be the maximum
amount that can be funded without causing Total Utilization of Revolving
Commitments to exceed the Aggregate Revolving Commitment), and (ii) subject to
the satisfaction or waiver of the applicable conditions specified herein for the
making of Loans (except that minimum dollar limitations on Borrowings shall not
be applicable), the Banks shall, on the Business Day next following the date of
such drawing, make Loans in such aggregate amount determined as set forth above,
which shall be applied directly by the Agent to reimburse the Issuing Bank for
the amount of such drawing together with such accrued interest thereon, with the
balance, if any, to the Borrowers; provided, that, if for any reason proceeds of
Loans are not received by the Issuing Bank on such date in an amount equal to
the amount of such drawing together with accrued interest thereon, the Borrowers
shall reimburse the Issuing Bank, within one Business Day of the date of such
drawing, in the amount of such drawing less the amount of such Loans, if any,
that are so received, plus accrued interest thereon. In such event, if the
Borrowers fail to reimburse Issuing Bank in such amount within one Business Day
of the date of such drawing, such failure shall be deemed to be an Event of
Default under subsection 8.1(a)(i) hereof. Interest on all amounts not
reimbursed to the Issuing Bank on the date of such drawing shall accrue at the
rates set forth herein for Base Rate Loans (including, if and as applicable,
past due or default rates).
(e) Payment by Banks. If the Borrowers shall fail to reimburse the
----------------
Issuing Bank as provided in subsection 2.14(d) in an amount equal to the amount
of any drawing honored by the Issuing Bank under a Letter of Credit issued by it
together with accrued interest thereon, the Issuing Bank shall promptly notify
the Banks by 3:00 p.m. (Los Angeles time) of the unreimbursed amount of such
drawing together with accrued interest thereon and of each Bank's respective
participation therein based on each Bank's Pro Rata Share of the Aggregate
Revolving Commitment. Each Bank shall make available to the Agent, for
distribution to the Issuing Bank, an amount equal to its respective
participation, in same day funds, at the office of the Agent specified in such
notice, not later than 10:00 A.M. (Los Angeles time) on the Business Day next
following the date notified by the Issuing Bank. The day of payment by each
Bank to the Agent, for distribution to the Issuing Bank, and the day of notice
by the Issuing Bank to each Bank each shall be both a Business Day and a
business day under the laws of the jurisdiction of each such Bank. If any Bank
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fails to make available to the Agent, for distribution to the Issuing Bank, the
amount of such Bank's participation in such Letter of Credit as provided in this
subsection, the Issuing Bank, or the Agent on its behalf, shall be entitled to
recover such amount on demand from such Bank, together with interest (to the
extent such interest is not received from the Borrower) until such amount is
recovered at the Federal Funds Rate. Nothing in this subsection shall be deemed
to prejudice the right of any Bank to recover from the Issuing Bank any amounts
made available by such Bank to the Issuing Bank pursuant to this subsection if
it is determined by a final judgment of a court of competent jurisdiction that
the payment with respect to a Letter of Credit by the Issuing Bank in respect of
which payment was made by the Bank constituted gross negligence or willful
misconduct on the part of the Issuing Bank. The Issuing Bank shall distribute
to the Agent, for distribution to each other Bank which has paid all amounts
payable by it under this subsection with respect to any Letter of Credit issued
by the Issuing Bank, such other Bank's Pro Rata Share of all payments received
by the Issuing Bank from any Borrower Entity in reimbursement of drawings
honored by the Issuing Bank under such Letter of Credit if and when such
payments are received. The Borrowers shall be liable to the Banks for all of
the principal and interest made available by the Banks to the Issuing Bank
pursuant to this subsection and interest on all amounts made available by Banks
to the Issuing Bank shall accrue at the rates set forth herein for Loans
(including, if and as applicable, past due or default rates). All such
principal and interest amounts shall be part of the Obligations.
(f) Compensation. The Borrowers agree to pay the following amounts
------------
with respect to each Letter of Credit issued on behalf of Borrower:
(1) to the Agent, monthly in arrears, for distribution as provided
below, a letter of credit fee equal to the greater of $125 or 0.25% per
annum (the calculation to start upon issuance of such Letter of Credit) of
the maximum amount available to be drawn under such Letter of Credit;
(2) to the Agent, for distribution as provided below, with respect to
drawings made under any Letter of Credit, interest, payable on demand, on
the amount paid by the Issuing Bank in respect of each such drawing from
the date of the drawing through the date such amount is reimbursed by the
Borrowers (including any such reimbursement out of the proceeds of Loans
pursuant to subsection 2.14(d)) at a rate equal to the rate applicable to
Loans as the same may vary from time
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to time (giving effect, if and as applicable, to past due or default rates
provided for herein); and
(3) to the Issuing Bank, issuance, opening, negotiation, amendment,
presentation, administrative, documentary, and processing charges and other
charges in accordance with the Issuing Bank's standard schedule for such
charges from time to time in effect or as otherwise mutually agreed.
On a monthly basis upon receipt by the Agent of any amount described in
clauses (1) and (2) of this subsection, the Agent shall distribute to each Bank
its Pro Rata Share of such amount. All amounts provided for by this subsection
are payable notwithstanding any cancellation or prepayment of any Letter of
Credit issued hereunder.
(g) Obligations Absolute. With respect to each Letter of Credit, the
--------------------
joint and several obligations of the Borrowers to reimburse the Issuing Bank for
payments made by the Issuing Bank with respect to drawings made under such
Letter of Credit, and, subject to the express provisions of subsection 2.14(d),
the obligations of the Banks under subsection 2.14(d), shall be unconditional
and irrevocable and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including, without limitation, the following
circumstances:
i) any lack of validity or enforceability of such Letter of Credit;
ii) the existence of any claim, set-off, recoupment, defense, or other
right that any Borrower Entity or any Bank may have at any time against any
beneficiary or any transferee of any Letter of Credit (or any persons or
entitles for whom any such transferee may be acting), any Bank or any other
Person, whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction (including any underlying
transaction between any Borrower Entity or any of its Subsidiaries and the
beneficiary for which the Letter of Credit was procured);
iii) any draft, demand, certificate, or any other document presented
under such Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
iv) payment by the Issuing Bank under such Letter of Credit against
presentation of a demand, draft, or certificate or other document that does
not comply with
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the terms of such Letter of Credit; provided that such payment does not
constitute gross negligence or willful misconduct of the Issuing Bank, as
determined by a final judgment of a court of competent jurisdiction;
v) the occurrence of any Material Adverse Effect or any default under
the Cash Collateral Stipulation;
vi) any breach of this Agreement or any other Loan Document by any
Borrower Entity, the Agent or any Bank, other than a breach involving the
wrongful issuance or honor of such Letter of Credit by the Issuing Bank
under circumstances where issuance or payment by the Issuing Bank
constituted gross negligence or willful misconduct, as determined by a
final judgment of a court of competent jurisdiction;
vii) the fact that an Event of Default shall have occurred and be
continuing; or
viii) any other circumstance or happening whatsoever that is similar to
any of the foregoing.
(h) Indemnification: Nature of Issuing Bank's Duties. In addition
-------------------------------------------------
to amounts payable as elsewhere provided in this Section 2.14, the Borrowers
hereby agree to protect, indemnify, pay, and hold each Issuing Bank harmless
from and against any and all claims, demands, liabilities, damages, losses,
costs, charges, and expenses (including reasonable out-of-pocket attorneys' fees
and costs) that the Issuing Bank may incur or be subject to as a consequence,
direct or indirect, of (i) the issuance of any Letter of Credit, or (ii) the
failure of the Issuing Bank to honor a drawing under any Letter of Credit as a
result of any act or omission, whether rightful or wrongful, of any present or
future de jure or de facto government or governmental authority (all such acts
or omissions are herein called "Government Acts").
As between the Borrowers and the Issuing Bank, the Borrowers assume all
risks of the acts and omissions of, or misuse of the Letters of Credit issued by
the Issuing Bank by, the respective beneficiaries of such Letters of Credit. In
furtherance and not in limitation of the foregoing, subject to the last
paragraph of this subsection 2.14(h), the Issuing Bank shall not be responsible:
(i) for the form, validity, sufficiency, accuracy, genuineness, or legal effect
of any document submitted by any Person in connection with the application for
and issuance of any Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent, or forged;
(ii) for the validity or sufficiency of any instrument transferring or assigning
or purporting to
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transfer or assign any such Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason, or for the identify of any purported
transferee or assignee of any beneficiary thereof; (iii) for failure of the
beneficiary of any such Letter of Credit to comply fully with conditions
required in order to draw upon such Letter of Credit; (iv) for errors,
omissions, interruptions, or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex, or otherwise, whether or not they be in
cipher; (v) for errors in interpretation of technical terms; (vi) for any loss
or delay in the transmission or otherwise of any document required in order to
make a drawing under any such Letter of Credit or of the proceeds thereof; (vii)
for the misapplication by the beneficiary of any such Letter of Credit of the
proceeds of any drawing under such Letter of Credit; and (viii) for any
consequences arising from causes beyond the control of the Issuing Bank,
including, without limitation, any Government Acts. None of the above shall
affect, impair, or prevent the vesting of any of the Issuing Bank's rights or
powers hereunder.
In furtherance and extension and not in limitation of the specific
provisions hereinabove set forth, any action taken or omitted to be taken by the
Issuing Bank under or in connection with the Letters of Credit issued by it or
the related certificates, if taken or omitted in good faith, and to the extent
not with gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction, shall not put such Issuing Bank
under any resulting liability to the Borrowers or any of their Subsidiaries.
Notwithstanding anything to the contrary contained in this subsection
2.14(h), the Borrowers shall have no obligation to indemnify the Issuing Bank in
respect of any liability incurred by the Issuing Bank arising-out of the gross
negligence or willful misconduct of the Issuing Bank, as determined by a final
judgment of a court of competent jurisdiction.
ARTICLE 3
TAXES AND YIELD PROTECTION
--------------------------
3.1 Taxes.
-----
(a) Subject to subsection 3.1(g), any and all payments by the
Borrowers to each Bank or the Agent under this Agreement shall be made free and
clear of, and without deduction or withholding for, any and all present or
future taxes, levies, imposts, deductions, charges or withholdings,
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and all liabilities with respect thereto, excluding, in the case of each Bank
and the Agent, such taxes (including income taxes or franchise taxes) as are
imposed on or measured by each Bank's net income by the jurisdiction under the
laws of which such Bank or the Agent, as the case may be, is organized or
maintains a Lending Office or any political subdivision thereof (all such non-
excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes").
(b) In addition, the Borrowers shall pay any present or future stamp
or documentary taxes or any other excise taxes, charges or similar levies which
arise from any payment made hereunder or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any other Loan
Documents (hereinafter referred to as "Other Taxes").
(c) Subject to subsection 3.1(g), the Borrowers shall indemnify and
hold harmless each Bank and the Agent for the full amount of Taxes or Other
Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 3.1) paid by the Bank or the Agent and any liability
(including penalties, interest, additions to tax and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted; provided, however, that any Person receiving from Borrowers
such an indemnification payment shall provide to Borrowers proof of payment of
such Taxes or Other Taxes, accompanied by a certificate stating that such Person
reasonably believes that such amount was properly due and payable, or, if
reasonable grounds exist on which to contest such payment, so notifying the
Borrowers thereof, so that appropriate remedies may be pursued. Payment under
this indemnification shall be made within 30 days from the date the Bank or the
Agent makes written demand therefor.
(d) If the Borrowers shall be required by law to deduct or withhold
any Taxes or Other Taxes from or in respect of any sum payable hereunder to any
Bank or the Agent, then, subject to subsection 3.1(g):
(i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section 3.1) such Bank or the Agent, as
the case may be, receives an amount equal to the sum it would have received
had no such deductions been made;
(ii) the Borrowers shall make such deductions; and
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(iii) the Borrowers shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with
applicable law.
(e) Within 30 days after the date of any payment by the Borrowers of
Taxes or Other Taxes, the Borrowers shall furnish to the Agent the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment satisfactory to the Agent.
(f) Each Bank which is a foreign person (i.e., a person other than a
United States person for United States Federal income tax purposes) agrees that:
(i) it shall, no later than the Closing Date (or, in the case of
a Bank which becomes a party hereto pursuant to Section 10.8 after the
Closing Date, the date upon which the Bank becomes a party hereto) deliver
to the Borrowers through the Agent two accurate and complete signed
originals of Internal Revenue Service Form 4224 or any successor thereto
("Form 4224"), or two accurate and complete signed originals of Internal
Revenue Service Form 1001 or any successor thereto ("Form 1001"), as
appropriate, in each case indicating that the Bank is on the date of
delivery thereof entitled to receive payments of principal, interest and
fees under this Agreement free from withholding of United States Federal
income tax;
(ii) if at any time the Bank makes any changes necessitating a
new Form 4224 or Form 1001, it shall with reasonable promptness deliver to
the Borrowers through the Agent in replacement for, or in addition to, the
forms previously delivered by it hereunder, two accurate and complete
signed originals of Form 4224; or two accurate and complete signed
originals of Form 1001, as appropriate, in each case indicating that the
Bank is on the date of delivery thereof entitled to receive payments of
principal, interest and fees under this Agreement free from withholding of
United States Federal income tax;
(iii) it shall, before or promptly after the occurrence of any
event (including the passing of time but excluding any event mentioned in
(ii) above) requiring a change in or renewal of the most recent Form 4224
or Form 1001 previously delivered by such Bank, deliver to the Borrowers
through the Agent two accurate and complete original signed copies of Form
4224 or Form 1001 in replacement for the forms previously delivered by the
Bank; and
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(iv) it shall, promptly upon the Borrowers' or the Agent's
reasonable request to that effect, deliver to the Borrowers or the Agent
(as the case may be) such other forms or similar documentation as may be
required from time to time by any applicable law, treaty, rule or
regulation in order to establish such Bank's tax status for withholding
purposes.
(g) The Borrowers will not be required to pay any additional amounts
in respect of United States Federal income tax pursuant to subsection 3.1(d) to
any Bank for the account of any Lending Office of such Bank:
(i) if the obligation to pay such additional amounts would not
have arisen but for a failure by such Bank to comply with its obligations
under subsection 3.1(f) in respect of such Lending Office;
(ii) if such Bank shall have delivered to the Borrowers a Form
4224 in respect of such Lending Office pursuant to subsection 3.1(f), and
such Bank shall not at any time be entitled to exemption from deduction or
withholding of United States Federal income tax in respect of payments by
the Borrowers hereunder for the account of such Lending Office for any
reason other than a change in United States law or regulations or in the
official interpretation of such law or regulations by any governmental
authority charged with the interpretation or administration thereof
(whether or not having the force of law) after the date of delivery of such
Form 4224; or
(iii) if the Bank shall have delivered to the Borrowers a Form
1001 in respect of such Lending Office pursuant to subsection 3.1(f), and
such Bank shall not at any time be entitled to exemption from deduction or
withholding of United States Federal income tax in respect of payments by
the Borrowers hereunder for the account of such Lending Office for any
reason other than a change in United States law or regulations or any
applicable tax treaty or regulations or in the official interpretation of
any such law, treaty or regulations by any governmental authority charged
with the interpretation or administration thereof (whether or not having
the force of law) after the date of delivery of such Form 1001.
(h) If, at any time, the Borrowers request any Bank to deliver any
forms or other documentation pursuant to subsection 3.1(f)(iv), then the
Borrowers shall, on demand of such Bank through the Agent, reimburse such Bank
for any costs and expenses (including Attorney Costs) reasonably
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<PAGE>
incurred by such Bank in the preparation or delivery of such forms or other
documentation.
(i) If the Borrowers are required to pay additional amounts to
any Bank or the Agent pursuant to subsection 3.1(d), then such Bank shall
use its reasonable best efforts (consistent with legal and regulatory
restrictions) to change the jurisdiction of its Lending Office so as to
eliminate any such additional payment by the Borrowers which may thereafter
accrue if such change in the judgment of such Bank is not otherwise
disadvantageous to such Bank.
3.2 Increased Costs and Reduction of Return.
---------------------------------------
(a) If any Bank or the Issuing Bank shall determine that, due to
either (i) the introduction of or any change in or in the interpretation of any
law or regulation or (ii) the compliance with any guideline or request from any
central bank or other Governmental Authority (whether or not having the force of
law), there shall be any increase in the cost to such Bank or the Issuing Bank
of agreeing to issue or honor letters of credit generally, then the Borrowers
shall be liable for, and shall from time to time, upon demand therefor by such
Bank (with a copy of such demand to the Agent), pay to such Bank, additional
amounts as are sufficient to compensate such Bank for such increased costs.
(b) If any Bank or the Issuing Bank shall have reasonably determined
that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in
any Capital Adequacy Regulation, (iii) any change in the interpretation or
administration of any Capital Adequacy Regulation by any central bank or other
Governmental Authority charged with the interpretation or administration
thereof, or (iv) compliance by the Bank or the Issuing Bank (or its Lending
Office) or any corporation controlling the Bank or the Issuing Bank, with any
Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or the Issuing Bank or any
corporation controlling the Bank or the Issuing Bank and (taking into
consideration such Bank's or the Issuing Bank's or such corporation's policies
with respect to capital adequacy and such Bank's or the Issuing Bank's desired
return on capital) determines that the amount of such capital is increased as a
consequence of its Revolving Commitment, Loans, Letters of Credit or
participations therein, or obligations under this Agreement, then, upon demand
of such Bank or the Issuing Bank (with a copy to the Agent), the Borrowers shall
upon demand pay to the Bank or the Issuing Bank, from time to time as specified
by the Bank
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<PAGE>
or the Issuing Bank, additional amounts sufficient to compensate the Bank or
Issuing Bank for such increase.
3.3 Certificates of Banks. Any Bank claiming reimbursement or
---------------------
compensation pursuant to this Article III shall deliver to the Borrowers (with a
copy to the Agent) a certificate setting forth in reasonable detail the amount
payable to the Bank hereunder and such certificate shall be conclusive and
binding on the Borrowers in the absence of manifest error.
3.4 Substitution of Banks. Upon the receipt by the Borrowers from any
---------------------
Bank (an "Affected Bank") of a claim for compensation pursuant to Section 3.2,
the Borrowers may: (a) request the Affected Bank to use its best efforts to
obtain a replacement bank or financial institution satisfactory to the Borrowers
to acquire and assume all or part of such Affected Bank's Loans and Revolving
Commitments (a "Replacement Bank"); (b) request one or more of the other Banks
to acquire and assume all or part of such Affected Bank's Loans and Revolving
Commitments (including the amount of any increased costs for which the Affected
Bank has requested payment); or (c) designate a Replacement Bank (which shall
purchase the Affected Bank's Loans and Revolving Commitment and reimburse the
Affected Bank in full for any increased costs). Any such designation of a
Replacement Bank under clause (a) or (c) shall be subject to the prior written
consent of the Agent (which consent shall not be unreasonably withheld).
3.5 Survival. The agreements and obligations of the Borrowers in this
--------
Article III shall survive the payment of all other Obligations and the
termination of the Loan Documents.
ARTICLE 4
CONDITIONS PRECEDENT
--------------------
4.1 Conditions of Initial Loans and Conversion of Prior L/Cs. The
--------------------------------------------------------
obligation of each Bank to make its initial Loan hereunder and to permit the
Prior L/Cs to be deemed Letters of Credit hereunder is subject to the condition
that the Agent shall have received on or before the Closing Date all of the
following, in form and substance satisfactory to the Agent and each Bank and,
with respect to original Loan Documents other than Notes, in sufficient copies
for each Bank:
(a) Agreement and Notes. This Agreement and the Notes executed by
-------------------
each of the Borrower Entities, the Agent and each of the Banks;
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<PAGE>
(b) Resolutions; Incumbency.
-----------------------
(i) Copies of the resolutions of the board of directors of each
of the Borrower Entities approving and authorizing the execution, delivery
and performance by such Person of this Agreement and the other Loan
Documents to be delivered hereunder, and authorizing the borrowing of the
Loans, certified as of the Closing Date by the Secretary or an Assistant
Secretary of such Person; and
(ii) A certificate of the Secretary or Assistant Secretary of
each of the Borrower Entities certifying the names and true signatures of
the officers of such Person authorized to execute and deliver and perform,
as applicable, this Agreement, and all other Loan Documents to be delivered
hereunder;
(c) Articles of Incorporation: By-laws and Good Standing. For each
-----------------------------------------------------
of the Borrower Entities, each of the following documents:
(i) the articles or certificate of incorporation of such Person
as in effect on the Closing Date, certified by the Secretary of State of
the state of incorporation of the Person as of a recent date and by the
Secretary or Assistant Secretary of the Person as of the Closing Date
(provided that, with respect to any Borrower Entity, if the articles or
certificate of incorporation of such Borrower Entity have not been amended,
altered, supplemented, restated, or otherwise modified from the version
thereof that was previously delivered to the banks and other financial
institutions that are parties to the Credit Agreement, the foregoing
requirement of this subsection 4.1(c)(i) may be satisfied by the delivery
of a copy of the same version of the articles or certificate of
incorporation of such Borrower Entity as was previously delivered,
accompanied by a certificate signed by the Secretary or Assistant Secretary
of such Borrower Entity certifying that same is a true and complete copy of
same as in effect on the Closing Date, and certifying that same have not
been amended, altered, supplemented, restated, or otherwise modified since
previously delivered; and in such event it shall not be necessary for such
Borrower Entity to obtain new or additional certified copies from the
Secretary of State of the state of incorporation of such Borrower Entity),
and the bylaws of the Person as in effect on the Closing Date, certified by
the Secretary or Assistant Secretary of the Person as of the Closing Date;
and
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<PAGE>
(ii) a good standing certificate from the Secretary of State or
equivalent officer with respect to each state specified with respect to
such Borrower Entity on Schedule 4.1(c)(ii);
(d) Legal Opinion. An opinion of Marvin S. Maltzman, General Counsel
-------------
of the Borrowers, addressed to the Agent and the Banks, substantially in the
form of Exhibit D.
(e) Payment of Fees. The Borrowers shall have paid (a) all accrued
---------------
and unpaid reasonable fees, costs and expenses due hereunder to the extent then
due and payable on the Closing Date, together with Attorney Costs to the extent
invoiced prior to or on the Closing Date, provided, however, such costs and
--------
expenses accrued and unpaid hereunder shall not exceed $150,000 in aggregate
amount; and (b) costs and expenses accrued and unpaid under the Credit Agreement
in an amount equal to $275,000.
(f) Certificate. A certificate signed by a Responsible Officer,
-----------
dated as of the Closing Date, stating that:
(i) the representations and warranties contained in Article V
and in the Security Agreements are true and correct on and as of such date,
as though made on and as of such date;
(ii) no Default or Event of Default exists or would result from
the initial Borrowing; and
(iii) there has not occurred, since January 31, 1995, any event or
circumstance that could reasonably be expected to result in a Material
Adverse Effect.
(g) The Projections. A copy of the Projections of the Borrowers.
---------------
(h) Cash Collateral Stipulation. A copy of the Cash Collateral
---------------------------
Stipulation, in form and substance satisfactory to the Banks, with no standing
motions to modify, rescind or stay such Cash Collateral Stipulation.
(i) Claim Certificate. A certificate of acknowledgement by the
-----------------
Borrowers and the Creditors' Committee regarding the validity and priority of
pre-petition claims and security interests in favor of the Credit Banks under
the Credit Agreement and acknowledgement by the Borrowers and the Creditors'
Committee that the Borrowers and the Creditors' Committee have no claims, cross-
claims, counter-claims, setoffs or defenses of any kind or nature which would
affect the pre-petition
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<PAGE>
obligations of the Borrowers under the Credit Agreement and the Banks' claims
and security interest under the Loan Documents.
(j) Release of Claims. A release of claims, in form and substance
-----------------
satisfactory to the Banks, executed by the Borrowers and the Creditors'
Committee.
(k) Credit Bank Consent. A consent, in form and substance
-------------------
satisfactory to the Agent, from every Credit Bank which is not a Bank hereunder
and the Creditors' Committee.
(l) Acknowledgement. An executed acknowledgement in form and
---------------
substance satisfactory to the Agent, by Borrowers and the Creditors' Committee
of the validity, priority and extent of the Credit Banks' pre-petition claim of
$126,770,658.00, less $104,675.29 in interest paid postpetition, together with
approximately $125,000 in pre-petition professional fees and costs and the
Credit Banks' security interests in the Borrowers' assets pledged as collateral
to the Credit Banks, as well as acknowledging that the Borrowers and Creditors'
Committee have no claims, counterclaims, set-offs and/or defenses of any kind or
nature which would affect the Credit Banks' and/or Agent's claims and security
interests in such pledged assets.
(m) DIP Financing Order. A final executed DIP Financing Order, in
-------------------
form and substance satisfactory to the Banks, approving the Loan and Letter of
Credit facilities hereunder, including findings of proper notice under Federal
Rule of Bankruptcy Procedure 4001 and good faith under Bankruptcy Code Section
364(e).
(n) Security Documents. The Security Agreements, signed by each
------------------
Borrower Entity and by the Agent, and such Financing Statements as the Agent may
require to be filed to perfect the security interests of the Agent in the
Collateral.
(o) Credit Agreement Prepayment. An amount equal to $6,000,000 shall
---------------------------
be repaid to the Credit Banks for indebtedness outstanding under the Credit
Agreement.
(p) First Priority Lien. The Agent, on behalf of the Banks shall
-------------------
have a first priority lien on all assets of the Borrowers, whether presently
existing or hereafter acquired including, but not limited to, other assets and
avoidance actions under Sections 544, 547, 548, 549 and 550 of the Bankruptcy
Code, with priority and superpriority over the Credit Banks pre-petition first
priority lien securing the Credit Banks' indebtedness outstanding under the
Credit Agreement, priority claims, administrative expenses or any other claim
against the Borrowers whatsoever, subject,
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<PAGE>
however, to any valid pre-bankruptcy existing liens on the Borrowers' real
property and personal property assets set forth on Schedule 4.1(p) hereto to the
best of the Borrowers' knowledge.
(q) Mauldin Plan. The Mauldin Plan shall be delivered on or before
------------
March 31, 1995.
(r) Real Property Documents. Receipt of appraisals (in form and
-----------------------
substance satisfactory to the Majority Banks) and Phase I environmental reports
(in form and substance satisfactory to the Majority Banks) with regard to the
Mauldin Distribution Center and Headquarters Building (as specified on Schedule
1.2).
(s) Insurance Certificates. Receipt of the following (in form and
----------------------
substance satisfactory to the Agent): (i) evidence that the Agent, on behalf of
the Banks, has been named lender loss payee for all insurance maintained by the
Borrowers relating to encumbered real property, contents (including, but not
limited to, inventory) earthquake and employee dishonesty, (ii) evidence of
business interruption insurance relating to the Mauldin Distribution Center and
(iii) evidence that 30 days cancellation notice will be sent to the Agent for
each insurance policy maintained by the Borrowers.
(t) Other Documents. Such other approvals, opinions, or documents as
---------------
the Agent or any Bank may reasonably request. Without limiting the generality
of the foregoing sentence, except to the extent, if any, that the Agent in its
discretion may have agreed that all or some of the following items may be
delivered within a specified interval of time after the Closing Date as
conditions subsequent to the obligations of the Agent and the Banks hereunder,
and only to such extent, if any, the Agent shall have received, with respect to
each deposit account identified on a schedule delivered to the Agent before the
Closing Date, a properly completed Notice to Depositary Institution signed by
the Borrower Entity or Borrower Entities having rights in or with respect to
such deposit account.
4.2 Conditions to All Borrowings. The obligation of each Bank to make any
----------------------------
Loan to be made by it hereunder (including its initial Loan) is subject to the
satisfaction of the following conditions precedent on the relevant borrowing,
continuation or conversion date:
(a) Notice of Borrowing. The Agent shall have received a Notice of
-------------------
Borrowing (with, in the case of the initial Loan only, a copy for each Bank);
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<PAGE>
(b) Continuation of Representations and Warranties. The
----------------------------------------------
representations and warranties made by the Borrowers contained in Article V or
contained in the Security Agreements shall be true and correct in all material
respects on and as of such borrowing, continuation or conversion date with the
same effect as if made on and as of such borrowing date (except to the extent
such representations and warranties expressly refer to an earlier date, in which
case they shall be true and correct as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall exist
-------------------
or shall result from such Borrowing and Borrowers shall not be in default under
the Code, any court order or other agreement with the Banks.
Each Notice of Borrowing submitted by the Borrowers hereunder shall be deemed to
constitute a representation and warranty by the Borrowers hereunder, as of the
date of each such notice or application and as of the date of each Borrowing
that the conditions in Section 4.2 are satisfied.
4.3 Conditions to All Letters of Credit. The issuance of any Letter of
-----------------------------------
Credit by the Issuing Bank hereunder is subject to prior or concurrent
satisfaction of all the following conditions:
(a) Notice. The Issuing Bank shall have received, in accordance with
------
the provisions of subsection 2.14(b), a notice requesting the issuance of such
Letter of Credit, an executed application for such Letter of Credit in the form
customarily required by the Issuing Bank for the issuance of letters of credit,
all other information specified in subsection 2.14(b), and such other documents
as the Issuing Bank reasonably may require in connection with the issuance of
such Letter of Credit.
(b) Continuation of Representations and Warranties. The
----------------------------------------------
representations and warranties made by the Borrowers contained in Article V or
contained in the Security Agreements shall be true and correct in all material
respects on and as of the date of such issuance of a Letter of Credit with the
same effect as if made on and as of such issuance of a Letter of Credit (except
to the extent such representations and warranties expressly refer to an earlier
date, in which case they shall be true and correct as of such earlier date);
(c) No Existing Default. No Default or Event of Default shall exist
-------------------
or shall result from such issuance of a Letter of Credit and Borrowers shall not
be in default under the Code, any court order or other agreement with the Banks;
and
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<PAGE>
(d) Satisfaction of Other Conditions. Any other applicable
--------------------------------
conditions to the issuance of such Letter of Credit contained in Section 2.14
shall have been satisfied.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrowers represent and warrant to the Agent and each Bank that:
5.1 Corporate Existence and Power. The Company and each of its direct and
-----------------------------
indirect Subsidiaries:
(a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation;
(b) has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its assets, carry on its business
and to execute, deliver, and perform its obligations under, the Loan Documents;
(c) is duly qualified as a foreign corporation, licensed and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification; and
(d) is in compliance with all Requirements of Law; except, in each
case referred to in clause (c) or this clause (d), to the extent that the
failure to do so could not reasonably be expected to have a Material Adverse
Effect.
5.2 Corporate Authorization: No Contravention. The execution, delivery
------------------------------------------
and performance by the Company and its Subsidiaries of this Agreement, and any
other Loan Document to which such Person is party, have been duly authorized by
all necessary corporate action, and do not and will not:
(a) contravene the terms of any of that Person's Organization
Documents;
(b) conflict with or result in any breach or contravention of, or the
creation of any Lien under, any document evidencing any Contractual Obligation
to which such Person is a party or any order, injunction, writ or decree of any
Governmental Authority to which such Person or its Property is subject; or
(c) violate any Requirement of Law.
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<PAGE>
5.3 Governmental Authorization. No approval, consent, exemption,
--------------------------
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company or
any of its direct or indirect Subsidiaries of the Agreement or any other Loan
Document.
5.4 Binding Effect. This Agreement and each other Loan Document to which
--------------
the Borrowers are a party constitute the legal, valid and binding obligations of
the Borrowers, enforceable against the Borrowers in accordance with their
respective terms.
5.5 Litigation. There are no actions, suits, proceedings, claims or
----------
disputes pending, or to the best knowledge of the Borrowers, threatened or
contemplated that are not stayed, at law, in equity, in arbitration or before
any Governmental Authority, against the Company, or its direct or indirect
Subsidiaries or any of their respective Properties which:
(a) purport to affect or pertain to this Agreement, or any other Loan
Document, or any of the transactions contemplated hereby or thereby; or
(b) if determined adversely to the Company or its direct or indirect
Subsidiaries, would reasonably be expected to have a Material Adverse Effect.
No injunction, writ, temporary restraining order or any order of any nature has
been issued by any court or other Governmental Authority purporting to enjoin or
restrain the execution, delivery and performance of this Agreement or any other
Loan Document, or directing that the transactions provided for herein or therein
not be consummated as herein or therein provided.
5.6 No Default. No Default or Event of Default exists or would result
----------
from the incurring of any Obligations by the Borrowers. Neither the Borrowers
nor any of their Subsidiaries is in default under or with respect to any
Contractual Obligation in any respect which, individually or together with all
such defaults, could reasonably be expected to have a Material Adverse Effect.
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<PAGE>
5.7 ERISA. The Company sponsors only one Thrift Plan subject to the
-----
provisions of ERISA. The Company represents that there are no excise taxes or
other taxes due or assessable in connection with any prohibited transactions, as
defined in Section 406 of ERISA and Section 4975 of the Code in connection with
said Thrift Plan. The Company further represents that there are no secured
claims against the Company for any failure to make matching contributions under
the Thrift Plan or a breach of fiduciary duty in connection with the operation
of the Thrift Plan. The Company represents that no other taxes or penalties
were assessed by and remain payable to any Governmental Authority in connection
with the Thrift Plan.
5.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are
-----------------------------------
intended to be and shall be used solely for the purposes set forth in and
permitted by Section 6.11, and are intended to be and shall be used in
compliance with Section 7.7. Each Borrower Entity acknowledges, agrees,
represents, and warrants for the benefit of the Agent and each Bank that any
restrictions on the use of Loan proceeds contained in the Loan Documents were
negotiated and agreed to in good faith and are commercially reasonable (within
the meaning and contemplation of the terms "good faith" and "commercially
reasonable" as used in Section 9102(4)-(8) of the California UCC).
5.9 Title to Properties. The Company and each of its Subsidiaries has
-------------------
good record and marketable title in fee simple to, or valid leasehold interests
in, all real Property necessary or used in the ordinary conduct of its business,
except for such defects in title as could not, individually or in the aggregate,
have a Material Adverse Effect. As of the Closing Date, the Property of the
Company and its direct or indirect Subsidiaries is not subject to any Liens,
other than Permitted Liens.
5.10 Taxes. The Company and its direct or indirect Subsidiaries have filed
-----
all Federal and other material tax returns and reports required to be filed, and
have paid all Federal and other material taxes, assessments, fees and other
governmental charges levied or imposed upon them or their Properties, income or
assets otherwise due and payable, except those which are being contested in good
faith by appropriate proceedings and for which adequate reserves have been
provided in accordance with GAAP and no Notice of Lien has been filed or
recorded. There is no proposed tax assessment against the Company or any of its
direct or indirect Subsidiaries which would, if the assessment were made, have a
Material Adverse Effect.
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<PAGE>
5.11 Continuing Collateral. The Company and its direct or indirect
---------------------
Subsidiaries represent and warrant that any Property acquired by the Borrowers
which are not financed through other sources during the term of this Agreement
shall become additional Collateral pledged in favor of the Agent, on behalf of
the Banks, and the Borrowers shall execute all necessary security documents to
implement such Lien.
5.12 Environmental Matters.
---------------------
(a) Except as specifically disclosed in Schedule 5.12, the on-going
operations of the Company and each of its direct or indirect Subsidiaries comply
in all respects with all Environmental Laws, except such non-compliance which
would not (if enforced in accordance with applicable law) result in liability in
excess of $1,000,000 in the aggregate.
(b) Except as specifically disclosed in Schedule 5.12, the Company
and each of its direct or indirect Subsidiaries has obtained all licenses,
permits, authorizations and registrations required under any Environmental Law
("Environmental Permits") and necessary for its ordinary course operations, all
such Environmental Permits are in good standing, and the Company and each of its
direct or indirect Subsidiaries is in compliance with all material terms and
conditions of such Environmental Permits.
(c) Except as specifically disclosed in Schedule 5.12, none of the
Company, any of its direct or indirect Subsidiaries or any of their respective
present Property or operations is subject to any outstanding written order from
or agreement with any Governmental Authority nor subject to any judicial or
docketed administrative proceeding, respecting any Environmental Law,
Environmental Claim or Hazardous Material.
(d) Except as specifically disclosed in Schedule 5.12, there are no
Hazardous Materials or other conditions or circumstances existing with respect
to any Property, or arising from operations prior to the Closing Date, of the
Company or any of its direct or indirect Subsidiaries that would reasonably be
expected to give rise to Environmental Claims with a potential liability of the
Company and its direct or indirect Subsidiaries in excess of $1,000,000 in the
aggregate for any such condition, circumstance or Property; provided, however,
that with respect to Property leased from an unrelated third party, the
foregoing representation is made to the best knowledge of the Borrowers. In
addition, (i) neither the Company nor any of its direct or indirect Subsidiaries
has any
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<PAGE>
underground storage tanks (x) that are not properly registered or permitted
under applicable Environmental Laws, or (y) that are leaking or disposing of
Hazardous Materials off-site, and (ii) the Company and its direct or indirect
Subsidiaries have notified all of their employees of the existence, if any, of
any health hazard arising from the conditions of their employment and have met
all notification requirements under Title III of CERCLA and all other
Environmental Laws.
5.13 Regulated Entities. None of the Company, any Person controlling the
------------------
Company, or any direct or indirect Subsidiary of the Company, is (a) an
"Investment Company" within the meaning of the Investment Company Act of 1940;
or (b) subject to regulation under the Public Utility Holding Company Act of
1935, the Federal Power Act, the Interstate Commerce Act, any state public
utilities code, or any other Federal or state statute or regulation limiting its
ability to incur Indebtedness.
5.14 Labor Relations. There are no strikes, lockouts or other labor
---------------
disputes against the Company or any of its direct or indirect Subsidiaries, or,
to the best of the Company's knowledge, threatened against or affecting the
Company or any of its direct or indirect Subsidiaries, and no significant unfair
labor practice complaint is pending against the Company or any of its direct or
indirect Subsidiaries or, to the best knowledge of the Company, threatened
against any of them before any Governmental Authority.
5.15 Copyrights, Patents, Trademarks and Licenses, etc. The Company or its
-------------------------------------------------
direct or indirect Subsidiaries own or are licensed or otherwise have the right
to use all of the patents, trademarks, service marks, trade names, copyrights,
franchises, authorizations and other rights that are reasonably necessary for
the operation of their respective businesses, without conflict with the rights
of any other Person. To the best knowledge of the Company, no slogan or other
advertising device, product, process, method, substance, part or other material
now employed, or now contemplated to be employed by the Company or any of its
direct or indirect Subsidiaries infringes upon any rights held by any other
Person; no claim or litigation that is not stayed regarding any of the foregoing
is pending or threatened, and no patent, invention, device, application,
principle or any statute, law, rule, regulation, standard or code is pending or,
to the knowledge of the Company, proposed, which, in either case, could
reasonably be expected to have a Material Adverse Effect.
5.16 Subsidiaries. The Company has no Subsidiaries other than those
------------
specifically disclosed in part (a) of
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<PAGE>
Schedule 5.16 hereto and has no equity investments in any other corporation or
Person other than those specifically disclosed in part (b) of Schedule 5.16.
5.17 Brokers; Transaction Fees. Neither the Company nor any of its direct
-------------------------
or indirect Subsidiaries has any obligation to any Person in respect of any
finder's, broker's or investment banker's fee in connection with the
transactions contemplated hereby.
5.18 Insurance. The Properties of the Company and its direct or indirect
---------
Subsidiaries are insured with financially sound and reputable insurance
companies, in such amounts, with such deductibles and covering such risks as are
customarily carried by companies engaged in similar businesses and owning
similar Properties in localities where the Company or such direct or indirect
Subsidiary operates and as required by Section 6.6.
5.19 Full Disclosure. None of the representations or warranties made by
---------------
the Company or any of its direct or indirect Subsidiaries in the Loan Documents
as of the date such representations and warranties are made or deemed made, and
none of the statements contained in each exhibit, report, statement or
certificate furnished by or on behalf of the Company or any of its direct or
indirect Subsidiaries in connection with the Loan Documents, contains any untrue
statement of a material fact or omits any material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading.
5.20 Locations of Collateral and Places of Business. Except for Inventory
----------------------------------------------
temporarily in transit between locations of the Borrowers specified in the
Security Documents and except for locations of the Borrowers that have changed
during a fiscal month of the Borrowers with respect to which the Borrowers are
not past due in delivering an updated Schedule of Collateral location to the
Agent pursuant to the penultimate sentence of Section 6.12, the Collateral
location schedule delivered to the Agent prior to the Closing Date contains a
complete disclosure of all locations at which any of the Collateral consisting
of tangible Property is located, or at which any of the Borrower Entities
maintains offices or a place of business. As to each such location, except for
the effect of any changes that may have occurred during a fiscal month of the
Borrowers with respect to which the Borrowers are not past due in delivering an
updated Schedule of Collateral location to the Agent pursuant to the penultimate
sentence of Section 6.12, the Collateral location schedule delivered to the
Agent prior to the Closing Date indicates which Borrower
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Entity or Borrower Entities own Collateral at such location or maintain offices
or a place of business at such location.
5.21 Locations of, and Information with Respect to, Deposit Accounts.
---------------------------------------------------------------
Except for the effect of changes that have occurred during a fiscal month of the
Borrowers with respect to which the Borrowers are not past due in delivering to
the Agent an updated schedule of deposit account locations pursuant to the
penultimate sentence of Section 6.12, the schedule of deposit locations
delivered to the Agent prior to the Closing Date contains a complete disclosure
of all deposit accounts of any type or nature in which any Borrower Entity has
any interest. With respect to each such deposit account, except for the effect
of changes that have occurred during a fiscal month of the Borrowers with
respect to which the Borrowers are not past due in delivering to the Agent an
updated schedule of deposit account locations pursuant to the penultimate
sentence of Section 6.12, the schedule of deposit locations delivered to the
Agent prior to the Closing Date accurately discloses the following information:
(a) The name in which such deposit account is maintained and the identity of
which Borrower Entity or Borrower Entities have any interest therein; (b) The
name of the depositary institution with which such account is maintained; (c)
The address of the branch or office of such depositary institution at which such
deposit account is maintained; (d) The telephone number of such branch or office
of such depositary institution; (e) The account number of such deposit account
and the related ABA routing number; and (f) A brief description of the nature
and purpose of such deposit account.
5.22 Bankruptcy Code Protections. The Company and its direct or indirect
---------------------------
Subsidiaries acknowledge that the Loans hereunder are extended by the Banks in
good faith and the Banks are entitled to the protections of Section 364(e) of
the Bankruptcy Code.
5.23 Unsecured Credit. The Company and its direct or indirect Subsidiaries
----------------
acknowledge that they were unable to obtain unsecured credit comparable in
amount and terms to the credit extended hereunder, under Section 364(a) or (b)
of the Bankruptcy Code.
5.24 Validity of Security Interest. The Company and its direct or indirect
-----------------------------
Subsidiaries represent and warrant that the security interests in and Liens on
the Collateral in favor of the Banks under the Loan Documents are valid,
effective, perfected and enforceable as set forth in the DIP Financing Order
without any other filing or recording necessary by the Agent or the Banks.
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5.25 Superpriority Lien Status. The Company and the direct or indirect
-------------------------
Subsidiaries represent and warrant that the Banks have been granted
superpriority lien status pursuant to the provisions of Section 364(d) of the
Bankruptcy Code.
ARTICLE 6
AFFIRMATIVE COVENANTS
---------------------
The Borrowers covenant and agree that, so long as any Bank shall have any
Revolving Commitment hereunder, or any Loan or other Obligation shall remain
unpaid or unsatisfied, unless the Majority Banks waive compliance in writing:
6.1 Financial Statements. The Borrowers shall deliver to the Agent in
--------------------
form and detail satisfactory to the Agent and the Majority Banks, with
sufficient copies for each Bank:
(a) as soon as available, but not later than 105 days after the end
of each fiscal year, a copy of the audited consolidated balance sheet of the
Borrowers as at the end of such year and the related consolidated statements of
income, shareholders' equity and cash flows for such fiscal year, setting forth
in each case in comparative form the figures for the previous year, and
accompanied by the opinion of Deloitte & Touche or another nationally recognized
independent public accounting firm which report shall state that such
consolidated financial statements present fairly the financial position for the
periods indicated in conformity with GAAP applied on a basis consistent with
prior years. Such opinion shall not be qualified or limited because of a
restricted or limited examination by such accountant of any material portion of
the Company's or any direct or indirect Subsidiary's records and shall be
delivered to the Agent and the Banks;
(b) as soon as available, but not later than 50 days after the end of
each of the first three fiscal quarters of each year, a copy of the unaudited
consolidated balance sheet of the Company and its consolidated Subsidiaries as
of the end of such quarter and the related consolidated statements of income and
cash flows for the period commencing on the first day and ending on the last day
of such quarter, with comparable statements for the preceding fiscal year, and
certified by an appropriate Responsible Officer as being complete and correct
and fairly presenting, in accordance with GAAP, the financial position and the
results of operations of the Company and its direct or indirect Subsidiaries.
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(c) no later than the close of business on the third Business Day
thereafter for each Business Day, a daily sales report, including daily sales,
week-to-date sales, month-to-date sales and year-to-date sales, for all Stores
including Stores going-out-of business;
(d) no later than the Friday of each week for the prior week and in
accordance with the Company's usual practice for delivery of monthly reports,
for the prior calendar month, reports on purchases of new Inventory by category,
paid and committed;
(e) in accordance with the Company's usual practice for delivery of
monthly reports, detailed monthly Inventory calculations and reconciliations of
going-out-of-business and continuing Store Inventory (in a format acceptable to
the Agent);
(f) no later than the Friday of each week for the prior week, a
weekly variance report showing weekly cash flow and comparing actual amounts
received against the amounts set forth in the Projections;
(g) in accordance with the Company's usual practice for delivery of
monthly reports by Store, financial statements (balance sheet and profit and
loss and including going-out-of-business Stores and Stores described in the 62-
Store Closing Plan, as well as continuing Stores) and a report on retail
Inventory levels; and
(h) no later than Friday of each week for the prior week, reports
indicating the amount of Inventory sold by the Borrowers in connection with the
62-Store Closing Plan and the Net Proceeds realized by the Borrowers on a weekly
and cumulative basis.
6.2 Certificates: Other Information. The Borrowers shall furnish to the
--------------------------------
Agent, with sufficient copies for each Bank:
(a) concurrently with the delivery of the financial statements
referred to in subsection 6.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in making
the examination necessary therefor no knowledge was obtained of any Default or
Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in subsections 6.1(a) and (b), a certificate (substantially in the
form of Exhibit J) of a Responsible Officer stating that, to the best of such
officer's knowledge, the Borrowers, during such period, have
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observed and performed all of their respective covenants and other agreements,
and satisfied every condition contained in this Agreement to be observed,
performed or satisfied by it, including, without limitation, Section 2.7, and
that such officer has obtained no knowledge of any Default or Event of Default
except as specified (by applicable subsection reference) in such certificate;
and
(c) promptly after the same are sent, and in any event within 15 days
of being sent, copies of all financial statements and reports which the
Borrowers send to their shareholders; and promptly after the same are filed, and
in any event within 15 days of being filed, copies of all financial statements
and regular, periodical or special reports which the Borrowers may make to, or
file with, the SEC under the Exchange Act, or any successor or similar
Governmental Authority.
6.3 Notices. The Borrowers shall promptly notify the Agent and each Bank:
-------
(a) of the occurrence of any Default or Event of Default, and of the
occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;
(b) of (i) any breach or non-performance of, or any default under,
any Contractual Obligation of the Company or any of its direct or indirect
Subsidiaries which could result in a Material Adverse Effect; and (ii) any
dispute, litigation, investigation, proceeding or suspension which may exist at
any time between the Company or any of its direct or indirect Subsidiaries and
any Governmental Authority;
(c) of the commencement of, or any material development in, any
litigation or proceeding that is not stayed affecting the Company or any direct
or indirect Subsidiary (i) in which the amount of damages claimed is $500,000
(or its equivalent in another currency or currencies) or more, (ii) in which
injunctive or similar relief is sought and which, if adversely determined, would
reasonably be expected to have a Material Adverse Effect or (iii) in which the
relief sought is an injunction or other stay of the performance of this
Agreement or any Loan Document;
(d) upon, but in no event later than 10 days after, becoming aware of
(i) any and all enforcement, cleanup, removal or other governmental or
regulatory actions instituted, completed or threatened against the Company or
any of its direct or indirect Subsidiaries or any of their respective Properties
pursuant to any applicable
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Environmental Laws, (ii) all other Environmental Claims and (iii) any
environmental or similar condition on any real property adjoining or in the
vicinity of the property of the Company or any direct or indirect Subsidiary
that could reasonably be anticipated to cause such property or any part thereof
to be subject to any restrictions on the ownership, occupancy, transferability
or use of such property under any Environmental Laws having a Material Adverse
Effect;
(e) of any other litigation or proceeding affecting the Company or
any of its direct or indirect Subsidiaries which the Company would be required
to report to the SEC pursuant to the Exchange Act, within four days after
reporting the same to the SEC;
(f) any Material Adverse Effect subsequent to the date of the most
recent audited financial statements of the Borrowers delivered to the Banks
pursuant to subsection 6.1(a);
(g) of any change in accounting policies or financial reporting
practices by the Company or any of its direct or indirect Subsidiaries;
(h) of any labor controversy resulting in or threatening to result in
any strike, work stoppage, boycott, shutdown or other labor disruption against
or involving the Company or any of its direct or indirect Subsidiaries that is
reasonably likely to result in a Material Adverse Effect; and
(i) of the direct or indirect acquisition by any person or group (as
such term is defined in Section 13(d)(3) of the Exchange Act), in one or a
series of transactions, of beneficial ownership (as such term is defined in Rule
13d-3 promulgated under the Exchange Act) of 5% or more of the outstanding
shares of the Company's common stock.
Each notice pursuant to this Section shall be accompanied by a written statement
by a Responsible Officer of the Borrowers setting forth details of the
occurrence referred to therein, and stating what action the Borrowers propose to
take with respect thereto and at what time. Each notice under subsection 6.3(a)
shall describe with particularity any and all clauses or provisions of this
Agreement or other Loan Document that have been breached or violated.
6.4 Preservation of Corporate Existence, Etc. The Company shall, and
-----------------------------------------
shall cause each of its direct or indirect Subsidiaries to:
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(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its state or jurisdiction of
incorporation;
(b) preserve and maintain in full force and effect all rights,
privileges, qualifications, permits, licenses and franchises necessary or
desirable in the normal conduct of its business;
(c) subject to Sections 6.15 and 6.16, the provisions of the 62-Store
Closing Plan and the Closed Store List, use its reasonable efforts, in the
Ordinary Course of Business, to preserve its business organization and preserve
the goodwill and business of the customers, suppliers and others having material
business relations with it; and
(d) preserve or renew all of its registered trademarks, trade names
and service marks, the non-preservation of which could reasonably be expected to
have a Material Adverse Effect.
6.5 Maintenance of Property. The Company shall, subject to the provisions
-----------------------
of Sections 6.15 and 6.16, the 62-Store Closing Plan and the Closed Store List,
maintain, and shall cause each of its direct or indirect Subsidiaries to
maintain, and preserve all its respective Property which is used or useful in
its business in good working order and condition, ordinary wear and tear
excepted. In addition, each Borrower Entity shall comply with all of their
Obligations and covenants contained in the Security Agreements.
6.6 Insurance. The Company shall maintain, and shall cause each of its
---------
direct and indirect Subsidiaries to maintain, with financially sound and
reputable independent insurers, insurance with respect to its Properties and
business against loss or damage of the kinds customarily insured against by
Persons engaged in the same or similar business (including, but not limited to,
comprehensive property and liability coverage, inventory coverage and general
umbrella coverage, including general liability and product liability), of such
types and in such amounts as are customarily carried under similar circumstances
by such other Persons, which insurance may not be cancelled except upon at least
30 days' written notice to the Agent and which policies name the Agent, on
behalf of the Banks, as lender loss payee and/or under a mortgagee endorsement,
as the Agent shall require, thereunder.
In addition, the Borrowers shall maintain business interruption insurance
for the Mauldin Distribution Center, in form and substance satisfactory to the
Agent, also naming
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the Agent, on behalf of the Banks, as lender loss payee thereunder.
6.7 Payment of Obligations. The Company shall, and shall cause its direct
----------------------
and indirect Subsidiaries to, pay and discharge as the same shall become due and
payable, all their respective obligations and liabilities, including:
(a) other than pre-petition claims, all tax liabilities, assessments
and governmental charges or levies upon it or its properties or assets, unless
the same are being contested in good faith by appropriate proceedings and
adequate reserves in accordance with GAAP are being maintained by the Company or
such direct or indirect Subsidiary;
(b) other than pre-petition claims, all lawful claims which, if
unpaid, would by law become a Lien upon its Property, except for Liens permitted
pursuant to subsection 7.1(d); and
(c) all Postpetition Indebtedness, as and when due and payable, but
subject to any subordination provisions contained in any instrument or agreement
evidencing such Indebtedness, excluding reclamation claims, except to the extent
than non-payment thereof is not reasonably expected to have a Material Adverse
Effect.
6.8 Compliance with Laws. The Company shall comply, and shall cause each
--------------------
of its direct or indirect Subsidiaries to comply, in all material respects with
all Requirements of Law of any Governmental Authority having jurisdiction over
it or its business (including the Federal Fair Labor Standards Act), except such
as may be contested in good faith or as to which a bona fide dispute may exist.
6.9 Inspection of Property and Books and Records. The Company shall
--------------------------------------------
maintain and shall cause each of its direct or indirect Subsidiaries to maintain
proper books of record and account, in which full, true and correct entries in
conformity with GAAP consistently applied shall be made of all financial
transactions and matters involving the assets and business of the Company and
such direct or indirect Subsidiaries. The Company shall permit, and shall cause
each of its direct or indirect Subsidiaries to permit, representatives and
independent contractors of the Agent or any Bank, upon reasonable request to
visit, inspect and have reasonable access to any of their respective Properties
and premises, to examine their respective corporate, financial and operating
records, and make copies thereof or abstracts therefrom, and to discuss their
respective affairs, finances and accounts with their respective directors,
officers, independent public accountants and other professional
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representatives, all at the expense of the Borrowers and at such reasonable
times during normal business hours and as often as may be reasonably desired,
upon reasonable advance notice to the Company including, without limitation,
semi-annual inspections to be conducted by a representative of the Banks;
provided, however, when an Event of Default exists the Agent or any Bank may do
any of the foregoing at the expense of the Borrowers at any time during normal
business hours and without advance notice. The Borrowers shall cooperate at all
times with representatives of the Agent and the Banks in connection with the
completion of a collateral audit to be completed on or before August 1, 1995.
Further, if the results of such Collateral audit are unsatisfactory to the Banks
and the Agent, the Borrowers shall assist in an additional quarterly audit on or
before December 1, 1995.
6.10 Environmental Laws.
------------------
(a) The Company shall, and shall cause each of its direct or indirect
Subsidiaries to, conduct its operations and keep and maintain its Property in
compliance with all Environmental Laws.
(b) Upon the written request of the Agent or any Bank, the Company
shall submit and cause each of its direct or indirect Subsidiaries to submit, to
the Agent and with sufficient copies for each Bank, at the Borrowers' sole cost
and expense, at reasonable intervals, a report providing an update of the status
of any environmental, health or safety compliance, hazard or liability issue
identified in any notice or report required pursuant to subsection 6.03(d), that
could, individually or in the aggregate, result in liability in excess of
$250,000.
6.11 Use of Proceeds. The Borrowers shall use the proceeds of the
---------------
extensions of credit provided for in the Loan Documents for working capital and
other general corporate purposes of the Borrowers in connection with existing
operations, and in all circumstances in such a way as to be not in contravention
of any Requirement of Law or the Cash Collateral Stipulation. Letters of Credit
issued hereunder are to be used solely for the purchase of foreign goods and
materials or to be utilized as a back-to-back Letter of Credit with a domestic
supplier, resulting in the purchase of foreign goods and materials, including
crafts and notions, for the Borrowers.
6.12 Update of Collateral and Deposit Account Schedules. Subject to the
--------------------------------------------------
penultimate sentence of this Section 6.12, the Borrowers shall at all times
ensure that schedules describing the location of Collateral and deposit accounts
delivered to the Agent prior to the Closing Date
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are accurate and up-to-date. Subject to the penultimate sentence of this
Section 6.12, if for any reason any of the information disclosed thereon becomes
out-of-date or inaccurate in any material respect, the Borrowers promptly will
cause such schedules to be updated and redistributed to the Agent at the
Borrowers' sole expense. Notwithstanding the foregoing, the Borrowers shall not
be required to update such schedules more than once with respect to any specific
fiscal month of the Borrowers (unless the Borrowers choose to update such
schedules more often), and the Borrowers may comply with their obligations under
this Section 6.12 by delivering to the Agent, with respect to any fiscal month
of the Borrowers during which any changes occurred relating to the information
required to be disclosed on such schedules, updated versions of such schedules
reflecting any such changes with respect thereto that occurred during such
fiscal month, which updated schedules shall be delivered to the Agent not later
than the eighteenth (18th) Business Day following the last day of the fiscal
month of the Borrowers to which such updated schedules relate. Each updated
schedule delivered to the Agent pursuant to this Section either shall (a) be
marked to show changes, additions, or deletions from the most recent prior
version provided to the Agent, or (b) be accompanied by a cover letter or
memorandum signed by an authorized officer of the Borrowers explaining the
nature of any changes, additions, or deletions from the most recent prior
version provided to the Agent.
6.13 Bankruptcy Court Order. The Borrowers shall comply, in all material
----------------------
respects, with Bankruptcy Court orders from time to time in effect, including,
but not limited to, the Cash Collateral Stipulation.
6.14 Sequestration/Remittance of Excess Cash. The Borrowers shall comply
---------------------------------------
with the following formula for sequestration and repayments of outstanding Loans
from excess cash, which repayments shall also result in a permanent reduction of
outstanding obligations under the Credit Agreement:
(a) On the Closing Date, the Borrowers shall repay $6,000,000
outstanding under the Credit Agreement.
(b) The Beginning Cash Balance of the Borrowers as of February 1,
1995 in the amount of $46,792,000 shall be adjusted downward by $8,908,000
(consisting of sales tax collected but not paid, earthquake insurance proceeds,
cash-in-store accounts and timing differences on receipts/disbursements - the
"Allowed Cash Deduction"). Thereafter, through September 30, 1995, the Borrowers
shall be entitled to retain all cash as reflected on the Ending Cash Balance
line (excluding accrued accounts payable) shown in the Weekly Variance Report
provided by the Borrowers, up
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to an aggregate amount not to exceed $10,500,000 (after deducting the Allowed
Cash Deduction) and an amount equal to 55% of each dollar by which actual
ongoing sales exceed the ongoing sales projections and, from October 1, 1995
through the Revolving Termination Date, up to $8,000,000 in aggregate amount
(after deducting the Allowed Cash Deduction) and an amount equal to 55% of each
dollar by which actual ongoing sales exceed the ongoing sales projections, plus
----
for each of the first six (6) months from the Closing Date, an amount equal to
the difference between the Borrowers' Capital Expenditures for each of such
months and $1,000,000 (the "Capital Expenditures Deduction") (the "Net Spendable
Cash"). The Borrowers shall deposit each month the Capital Expenditures
Deduction in a segregated money market interest-bearing collateral account at
BofA, to be used only for Permitted Capital Expenditures (the "Capital
Expenditures Account"). The Capital Expenditures Deduction for the first month
after the Closing Date shall be adjusted to reflect Capital Expenditures made by
the Borrowers from February 1, 1995 through the Closing Date. Notwithstanding
the foregoing, if the Borrowers finance or lease any Capital Expenditures, an
amount equal to the Capital Expenditures financed or leased shall be treated by
the Borrowers as cash flow in the Ordinary Course of Business for purposes of
this Section 6.14.
(c) After the Closing Date and on a monthly basis thereafter, no
later than the tenth day of each calendar month, the Borrowers shall sequester
cash in excess of all Net Spendable Cash as of the last day of the prior
calendar month and shall deposit such amounts into a segregated money market
interest-bearing collateral account at BofA (the "Sequestered Account"). The
Borrowers shall maintain the ability to trace the sequestered funds on deposit
in such Sequestered Account at all times and may not use the funds in such
Sequestered Account without the consent of all of the Banks or an order of the
Bankruptcy Court (obtained no sooner than after the lapse of five Business Days'
notice to the Agent), except to repay outstanding Obligations hereunder.
(d) On May 31, 1995, the Borrowers shall pay to the Agent, on behalf
of the Credit Banks, all cash in the Sequestered Account in excess of $4,500,000
or the amount of outstanding Letters of Credit, whichever is greater, as of
April 30, 1995, and, thereafter, on the tenth day of each calendar month, the
Borrowers shall pay to the Agent, on behalf of the Credit Banks, all cash in the
Sequestered Account in excess of (i) $4,500,000 or (ii) the amount of
outstanding Letters of Credit, whichever is greater, as of the last day of the
prior calendar month, as a payment on amounts outstanding under the Credit
Agreement; provided, however, that after the Credit Banks under the Credit
--------
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Agreement have received an aggregate amount equal to $28,000,000 as a permanent
paydown on amounts extended to the Borrowers under the Credit Agreement, then
all amounts on deposit in the Sequestered Account in excess of $4,500,000 or the
amount of outstanding Letters of Credit, whichever is greater, shall be placed
into a segregated, interest-bearing money market account at BofA (the
"Performance Account").
The cash balance in the Performance Account may increase or decrease on a
monthly basis in accordance with the foregoing formula. The Credit Banks under
the Credit Agreement shall have the right, after notifying the Borrowers and the
Creditors' Committee of the amount, to automatically debit the excess cash from
the Sequestered Account to permanently repay amounts outstanding under the
Credit Agreement and/or to place such amounts into or withdraw such amounts from
the Performance Account, as applicable, pursuant to the above formula, without
the necessity of a Bankruptcy Court order. The Borrowers may not utilize any
amount in the Performance Account without the prior consent of the Credit Banks
under the Credit Agreement or an order of the Bankruptcy Court (after at least
five Business Days' notice to the Agent), except to repay the outstanding
Obligations hereunder. The Net Spendable Cash, the Sequestered Account, the
Performance Account and the Capital Expenditures Account shall collateralize the
Obligations hereunder and the obligations of the Borrowers under the Credit
Agreement.
6.15 Turnaround Plan. On or before May 31, 1995, the Borrowers shall
---------------
provide to the Agent revised projections (in the same format as previously
provided), which revised projections shall include the delivery of a plan (the
"Turnaround Plan") which:
(a) Indicates that, over a prospective 18-month period commencing not
later than June 1, 1995, the Borrowers will generate a positive net profit
before tax from ongoing operations after elimination of any non-recurring or
extraordinary income items (including, but not limited to, income tax
refund/benefit, gains from any asset sales out of the ordinary course and prior
period adjustments, etc.) and non-recurring expenses (including, but not limited
to, professional fees and expenses relating to restructuring). Such net profit
before taxes from ongoing operations shall not benefit by any Inventory
writedown or restructuring reserve;
(b) Identifies the extent, nature and rationale for general and
administrative expense reductions or reallocations, reduced occupancy costs and
reduced payroll expenses;
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(c) Reflects improvement, if any, in distribution systems and
expenses emanating from the Mauldin Report;
(d) Describes the steps, costs and implementation timetable
associated with improved management information systems and point of sale
systems and the manner in which same are expected to impact the quality of
decision-making and operating results, as well as returns on investments;
(e) Describes changes in the Borrowers' management structure,
including what incentives management will receive and a discussion of methods by
which the Board of Directors may be changed; and
(f) Outlines the Borrowers' financial and operational goals and
assesses and rationalizes its marketing distribution and purchasing strategies
in relation to such goals and to the geographic distribution of its Store
locations. Such rationalization should also identify evaluation criteria for
individual Stores as well as districts and regions.
6.16 Revised Projections. In the event that the Borrowers' number of
-------------------
operating Stores are less than 353, the Borrowers shall provide revised
projections to the Banks and the Creditors' Committee indicating the impact of
Store closings and resulting going out-of-business sales on the Borrowers'
financial status. The Borrowers agree that thereafter they shall perform in
accordance with such revised projections, subject to variances permitted
hereunder (which shall be in form and substance satisfactory to the Majority
Banks).
If the Mauldin Plan alters the Projections negatively, the Borrowers shall
provide new revised projections, satisfactory in form and substance to the
Majority Banks.
6.17 Financial Covenants. The Borrowers shall generally operate their
-------------------
businesses at all times in accordance with the Projections (as they may be
modified in accordance with Section 6.16) and the most recent projections
delivered to the Agent (which have been approved by the Majority Banks), subject
to the following variances in the following categories or such other variances
approved by the Majority Banks:
(a) The monthly net Ending Cash Balance (II) based upon the Rolling
Cash Flow/Sequestration Summary dated March 24, 1995, adjusted for the monthly
effect of income tax refunds, restructuring expenses, capital expenditures and
payments ordered by the Bankruptcy Court but not reflected in the Projections,
with a monthly non-cumulative permitted variance, not to exceed the greater of
10% of the
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Projected Ending Cash Balance (II) (substantially as set forth in Schedule
6.17(a) attached hereto) or $2,000,000, provided, further, that the Borrowers
may not obtain Loans hereunder for the purpose of meeting this financial
covenant;
(b) The Borrowers' Quarterly Ending Inventory Balance, at cost,
including prepaid purchases, as reported in the Borrowers' Form 10Q report filed
with the SEC shall not be less than 90% of the Inventory Balance, at cost,
included in the Projections (as adjusted for the Fiscal year 1995 audit); and
(c) Cumulative Payments for Inventory not to exceed the Projections,
together with additional payments for Inventory equal to 55% of each dollar by
which actual ongoing sales exceed the ongoing sales as set forth in the
Projections.
6.18 Bankruptcy Proceedings. The Borrowers will provide:
----------------------
(a) a Plan of Reorganization term sheet to the Credit Banks under the
Credit Agreement and to the Creditors' Committee no later than July 1, 1995;
(b) A draft Disclosure Statement and Plan of Reorganization to the
Credit Banks under the Credit Agreement and to the Creditors' Committee no later
than August 1, 1995 and a filed Disclosure Statement and Plan of Reorganization
no later than August 31, 1995; and
(c) A confirmed Plan of Reorganization with an effective date of no
later than January 31, 1996.
6.19 Distribution/Warehouse Strategic Plan. The Borrowers shall deliver to
-------------------------------------
the Agent a preliminary written status report on Arthur Andersen & Co.'s
analysis and plan for addressing the Borrowers' distribution needs and the
Mauldin Distribution Center by March 7, 1995 and the Mauldin Plan (in form
satisfactory to the Majority Banks) no later than March 31, 1995.
6.20 Watchlist Stores. The Borrowers shall hold meetings, on a monthly
----------------
basis, to review in detail the Watchlist Stores and to meet on or before the day
after such monthly meetings with representatives of the Credit Banks, the Banks
hereunder, representatives and consultants selected by the Banks and Price
Waterhouse LLP., as consultants designated by the Creditors' Committee. The
Borrowers' Management Review Committee, which shall include an outside member of
the Borrowers' Board of Directors, shall conduct such monthly reviews.
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The Borrowers shall continue all existing practices and procedures with
regard to Watchlist Stores and the Borrowers agree that at a minimum any Store
which, based on actual results through July 31, 1995, together with projections
from August 1, 1995 through Fiscal Year 1996 show a cumulative Store-
contribution of less than $15,000 for fiscal year 1996 (calculated on the basis
that the Borrowers will receive credit for agreed upon permanent rent (for the
length of lease) reductions retroactive to February 1, 1995), shall be placed on
the Closed Store List no later than the August, 1995 Watchlist Meeting and
placed into a going-out-of-business program (of no more than four months
duration) as expeditiously as possible thereafter, but commencing no later than
October 15, 1995; provided, however, that the Borrowers, in their discretion,
may withhold up to ten Stores from the Closed Store List as long as each of said
Stores reflect a cumulative Store contribution of at least $1 for Fiscal Year
1996.
6.21 Cash Management System. The Borrowers shall maintain the existing
----------------------
cash management system and all Loans advanced hereunder shall remain in an
account of the Borrowers at BofA in accordance with the Cash Collateral
Stipulation.
6.22 Administrative Expenses. The Borrowers hereby waive the provisions of
-----------------------
Section 506(c) of the Bankruptcy Code to surcharge the Collateral hereunder or
under the Credit Agreement. The Borrowers agree that no costs or expenses of
administration of a Chapter 11 or a converted Chapter 7 bankruptcy case relating
to the Borrowers shall be imposed against the Agent, the Credit Banks under the
Credit Agreement or the Banks hereunder.
In no event will the Liens under the Loan Documents and the replacement
Collateral securing amounts outstanding under the Credit Agreement be
subordinated to administrative expenses in a superseding Chapter 7 bankruptcy
case relating to the Borrowers.
6.23 Termination of Exclusivity. The Borrowers hereby waive as to the
--------------------------
Banks and the Credit Banks any exclusive right to file a Plan of Reorganization
if any third party shall have received the right to file any such Plan of
Reorganization.
6.24 Priority Liens. The Company and its direct and indirect Subsidiaries
--------------
hereby waive any future right to provide to any other lenders other than the
Banks hereunder and the Credit Banks under the Credit Agreement, with any
priority Lien under Bankruptcy Code Section 364 or otherwise and also hereby
waive their rights and claims under the provisions of Bankruptcy Code Section
506(c); provided,
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however, that if all Obligations hereunder shall have been paid on or before the
Revolving Termination Date and no uncured Event of Default shall exist other
than the failure of a Plan of Reorganization to be effective by January 31,
1996, then the Borrowers may attempt to seek priority Lien status for other
lenders, including the Credit Banks under the Credit Agreement, in an amount not
to exceed $20,000,000.
ARTICLE 7
NEGATIVE COVENANTS
------------------
The Borrowers hereby covenant and agree that, so long as any Bank shall
have any Revolving Commitment hereunder, or any Loan or other Obligation shall
remain unpaid or unsatisfied, unless the Majority Banks waive compliance in
writing:
7.1 Limitation on Liens. The Company shall not, and shall not suffer or
-------------------
permit any of its direct or indirect Subsidiaries to, directly or indirectly,
make, create, incur, assume or suffer to exist any Lien upon or with respect to
any part of its Property, whether now owned or hereafter acquired, other than
the following permitted Liens ("Permitted Liens"):
(a) any Lien existing on the Property of the Company or its direct
and indirect Subsidiaries on the Closing Date and set forth in Schedule 7.1
securing Indebtedness outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, or to the extent
that non-payment thereof is permitted by Section 6.7, provided that no Notice of
Lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the Ordinary Course of Business
which are not delinquent or remain payable without penalty or which are being
contested in good faith and by appropriate proceedings, which proceedings have
the effect of preventing the forfeiture or sale of the Property subject thereto;
(e) Liens consisting of pledges or deposits required in the Ordinary
Course of Business in connection with workers' compensation, unemployment
insurance and other social security legislation;
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(f) Liens on the Property of the Company or any of its direct or
indirect Subsidiaries securing (i) the non-delinquent performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, (ii)
contingent obligations on surety and appeal bonds and (iii) other non-delinquent
obligations of a like nature; in each case, incurred in the Ordinary Courts of
Business, provided all such Liens in the aggregate would not (even if enforced)
cause a Material Adverse Effect;
(g) Liens consisting of judgment or judicial attachment liens,
provided that the enforcement of such Liens is effectively stayed and all such
Liens in the aggregate at any time outstanding for the Company and its direct or
indirect Subsidiaries do not exceed $1,000,000;
(h) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the Ordinary Course of Business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the Property subject thereto or interfere
with the ordinary conduct of the businesses of the Company and its direct or
indirect Subsidiaries;
(i) Liens on assets of corporations which become Subsidiaries after
the date of this Agreement, provided, however, that such Liens existed at the
time the respective corporations became Subsidiaries and were not created in
anticipation thereof;
(j) Purchase money security interests on any equipment acquired or
held by the Company or its direct or indirect Subsidiaries in the Ordinary
Course of Business securing Indebtedness incurred or assumed for the purpose of
financing all or any part of the cost of acquiring such equipment; provided that
(i) any such Lien attaches to such equipment concurrently with or within 20 days
after the acquisition thereof, (ii) such Lien attaches solely to the equipment
so acquired in such transaction, (iii) the principal amount of the Indebtedness
secured thereby does not exceed 100% of the cost of such equipment and (iv) the
principal amount of the Indebtedness secured by any and all such purchase money
security interests shall not at any time exceed, consistent with the provisions
of Section 7.13, together with Indebtedness permitted under subsection 7.11(c)
and subsection 7.5(d) and all expenditures for any acquisitions of equipment,
$6,000,000.
(k) Liens securing Capital Lease Obligations on assets subject to
such Capital Leases, provided that such Capital Leases are permitted under
subsection 7.11(c); and
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(l) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depositary institution; provided that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Borrowers in excess of those set forth by regulations promulgated
by the Federal Reserve Board, and (ii) such deposit account is not intended by
the Company or any of its direct or indirect Subsidiaries to provide collateral
to the depositary institution.
Notwithstanding the foregoing, the Borrowers shall not incur any Indebtedness,
out of the Ordinary Course of Business, which will be secured or otherwise be on
a parity with the Obligations hereunder, during the pendency of the bankruptcy
cases against the Borrowers.
7.2 Disposition of Assets. The Company shall not, and shall not suffer or
---------------------
permit any of its direct or indirect Subsidiaries to, directly or indirectly,
without the consent of the Majority Banks, sell, assign, lease, convey, transfer
or otherwise dispose of (whether in one or a series of transactions) any
Property (including accounts and notes receivable, with or without recourse) or
enter into any agreement to do any of the foregoing, except:
(a) dispositions of Inventory, or used, worn-out or surplus
equipment, all in the Ordinary Course of Business;
(b) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied to the
purchase price of such replacement equipment; and
(c) disposition of furniture, fixtures and equipment in connection
with going-out-of-business Stores.
7.3 Consolidations and Mergers. The Company shall not, and shall not
--------------------------
suffer or permit any of its Subsidiaries to, merge, consolidate with or into, or
convey, transfer, lease or otherwise dispose of (whether in one transaction or
in a series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to or in favor of any Person, except:
(a) any direct or indirect Subsidiary of the Company may merge with
the Company, provided that the Company shall be the continuing or surviving
corporation, or with any one or more direct or indirect Subsidiaries of the
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Company, provided that if any transaction shall be between a Wholly-Owned
Subsidiary and a Subsidiary, the Wholly-Owned Subsidiary shall be the continuing
or surviving corporation, and provided, further, that no Subsidiary that is a
Borrower Entity may merge into a Subsidiary that is not a Borrower Entity; and
(b) any direct or indirect Subsidiary of the Company may sell all or
substantially all of its assets (upon voluntary liquidation or otherwise), to
the Company or another Wholly-Owned Subsidiary of the Company, provided that, if
such Subsidiary is a Borrower Entity, such Subsidiary may not sell all or
substantially all of its assets to another Subsidiary that is not a Borrower
Entity.
7.4 Loans and Investments. The Company shall not purchase or acquire, or
---------------------
suffer or permit any of its Subsidiaries to purchase or acquire, or make any
commitment therefor, any capital stock, equity interest, all or substantially
all of the assets of, or any obligations or other securities of, or any interest
in, any Person, or make any advance, loan, extension of credit or capital
contribution to or any other investment in, any Person including any Affiliate
of the Company, except for:
(a) investments in Cash Equivalents;
(b) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
Ordinary Course of Business; or
(c) extensions of credit by one Borrower Entity to another Borrower.
Under no circumstances shall any Borrower extend any credit or make any loan to
an employee of any Borrower.
7.5 Limitation on Indebtedness. The Company shall not, and shall not
--------------------------
suffer or permit any of its direct or indirect Subsidiaries to, create, incur,
assume, suffer to exist, or otherwise become or remain directly or indirectly
liable with respect to, any Indebtedness, except:
(a) Indebtedness incurred pursuant to this Agreement;
(b) accounts payable to trade creditors for goods and services and
current operating liabilities (not the result of the borrowing of money)
incurred in the Ordinary Course of Business of the Company or such Subsidiary in
accordance with customary terms and paid within the specified time, unless
contested in good faith by
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<PAGE>
appropriate proceedings and reserved for in accordance with GAAP;
(c) Postpetition Indebtedness consisting of Contingent Obligations
permitted pursuant to Section 7.8;
(d) Postpetition Indebtedness secured by Liens permitted by
subsection 7.1(j) in an aggregate amount outstanding which, when aggregated with
Indebtedness permitted pursuant to Subsection 7.11(c) and all expenditures for
any acquisitions of equipment, does not, consistent with the provisions of
Section 7.13, exceed $6,000,000; and
(e) Indebtedness incurred in connection with leases permitted
pursuant to Sections 7.11 and 7.13;
Notwithstanding the foregoing, the Borrowers shall not incur any Postpetition
Indebtedness, out of the Ordinary Course of Business, which will be secured or
otherwise be on a parity with the Obligations hereunder, during the pendency of
the bankruptcy cases against the Borrowers.
7.6 Transactions with Affiliates. The Company shall not, and shall not
----------------------------
suffer or permit any of its direct and indirect Subsidiaries to, enter into any
transaction with any Affiliate of the Company or of any such Subsidiary, except
(a) as expressly permitted by the Loan Documents or (b) in the Ordinary Course
of Business and pursuant to the reasonable requirements of the business of the
Company or such Subsidiary; in each case (a) and (b), upon fair and reasonable
terms no less favorable to the Company or such Subsidiary than would obtain in a
comparable arm's-length transaction with a Person not an Affiliate of the
Company or such Subsidiary.
7.7 Use of Proceeds. The Company shall not and shall not suffer or permit
---------------
any of its direct and indirect Subsidiaries to use any portion of the Loan
proceeds, directly or indirectly, (a) to purchase or carry Margin Stock, (b) to
repay or otherwise refinance indebtedness of the Company or others incurred to
purchase or carry Margin Stock, (c) to extend credit for the purpose of
purchasing or carrying any Margin Stock, or (d) to acquire any security in any
transaction that is subject to Section 13 or 14 of the Exchange Act.
7.8 Contingent Obligations. The Company shall not, and shall not suffer
----------------------
or permit any of its direct and
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indirect Subsidiaries to, create, incur, assume or suffer to exist any
Contingent Obligations except:
(a) endorsements for collection or deposit in the Ordinary Course of
Business;
(b) Contingent Obligations of the Company and its direct and indirect
Subsidiaries existing as of the Closing Date and listed in Schedule 7.8.
7.9 Joint Ventures. The Company shall not, and shall not suffer or permit
--------------
any of its Subsidiaries to enter into any Joint Venture.
7.10 Subsidiaries. The Borrowers shall not, and shall not suffer or permit
------------
their Subsidiaries to, create any new Subsidiaries.
7.11 Lease Obligations. The Company shall not, and shall not suffer or
-----------------
permit any direct and indirect Subsidiary to, create or suffer to exist any
obligations for the payment of rent for any Property under lease or agreement to
lease, except for:
(a) Operating and Capital Leases of the Company and its direct and
indirect Subsidiaries in existence on the Closing Date and any renewal,
extension or refinancing thereof;
(b) leases entered into by the Company or any of its direct and
indirect Subsidiaries after the Closing Date; provided, that:
(i) immediately prior to giving effect to such lease, the
Property subject to such lease was sold by the Company or any such
Subsidiary to the lessor pursuant to a transaction permitted under Section
7.2; and
(ii) no Default or Event of Default exists or would occur as a
result of such sale and subsequent lease; and
(c) Capital Leases other than those permitted under clauses (a) and
(c) of this Section 7.11, entered into by the Company or any of its direct and
indirect Subsidiaries after the Closing Date to finance the acquisition of
equipment; provided that the aggregate amount of Indebtedness in respect of all
--------
such Capital Leases plus Indebtedness permitted to be incurred pursuant to
subsection 7.5(d) and subsection 7.1(j) and all expenditures for any
acquisitions of equipment, shall not, consistent
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with the provisions of Section 7.13, exceed $6,000,000 at any time outstanding.
7.12 Restricted Payments. The Company shall not, and shall not suffer or
-------------------
permit any of its direct and indirect Subsidiaries to, declare or make any
dividend payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of any shares of any class of its capital
stock, or purchase, redeem or otherwise acquire for value any shares of its
capital stock or any warrants, rights or options to acquire such shares, now or
hereafter outstanding.
7.13 Capital Expenditures. The Company and its direct and indirect
--------------------
Subsidiaries shall not make or commit to make Capital Expenditures in excess of
the $6,000,000 provided for in the Projections delivered to the Agent and
approved by the Majority Banks.
7.14 Change in Business. The Company shall not, and shall not permit any
------------------
of its direct and indirect Subsidiaries, to engage in any material line of
business substantially different from those lines of business carried on by it
on the date hereof.
7.15 Accounting Changes. The Company shall not, and shall not suffer or
------------------
permit any of its direct and indirect Subsidiaries to, make any significant
change in accounting treatment or reporting practices, except as required by
GAAP, or change the fiscal year of the Company or of any of its consolidated
Subsidiaries, without the prior approval of the Majority Banks.
7.16 Relocation of Collateral, Chief Executive Offices, or Deposit
-------------------------------------------------------------
Accounts. No Borrower Entity shall (a) relocate any of the Collateral to any
- --------
location not specified as a location where such Borrower Entity maintains
Collateral on a schedule delivered to the Agent, except for relocations during
any fiscal month of the Borrowers with respect to which the Borrowers are not
past due in delivering to the Agent an updated version of a Collateral location
schedule in accordance with the penultimate sentence of Section 6.12, (b)
relocate its chief executive office, or (c) establish any new deposit account or
modify any existing deposit account such that the schedule delivered to the
Agent prior to the Closing Date fails accurately to disclose the relevant
information with respect to same, except to the extent that such establishment
or modification occurs during any fiscal month of the Borrowers with respect to
which the Borrowers are not past due in delivering to the Agent an updated
version of a deposit account location schedule in accordance with the
penultimate sentence of Section 6.12.
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7.17 No Negative Pledges in Favor of Others. The Company shall not
--------------------------------------
agree to, and shall not permit or allow any of its direct and indirect
Subsidiaries to agree to, any contractual provision whereby the Company or any
direct and indirect Subsidiary of the Company restricts its ability to grant
Liens on its Property, except for negative pledges in favor of the Agent and the
Banks contained in the Loan Documents.
7.18 New Store Openings/Conversions. The Company shall not, and shall not
------------------------------
suffer or permit any of its direct or indirect Subsidiaries to, open any new
Stores or convert more than ten (10) existing Stores to Creative Center Stores,
unless such Stores are included in the Revised Projections delivered pursuant
to Section 6.16 or approved by the Majority Banks.
7.19 Bankruptcy Orders. The Company shall not, and shall not permit any
-----------------
of its Subsidiaries, to agree to any modification of the Bankruptcy Court's
final DIP Financing Order approving this Agreement and the provisions hereof
and/or the Cash Collateral Stipulation .
7.20 Cash Collateral. The Borrowers shall not use any cash collateral
---------------
securing the obligations of the Credit Banks under the Credit Agreement or the
proceeds of Loans hereunder to finance any avoidance action or other litigation
against the Agent, the Banks hereunder or the Credit Banks party to the Credit
Agreement.
7.21 Inventory Return. The Company shall not, and shall not permit any of
----------------
its direct or indirect Subsidiaries, to return any Inventory for credit against
prepetition Indebtedness under the Credit Agreement.
7.22 Exclusive Arrangements. The Company shall not, without court
----------------------
approval, and shall not suffer or permit any of its direct and indirect
Subsidiaries to enter into any exclusive financial arrangement with any Person
for the sale of any Borrower, the sale of the stock of any Borrower, the
purchase of any business for a Borrower, the retention of alternate financing or
similar transactions.
ARTICLE 8
EVENTS OF DEFAULT
-----------------
8.1 Event of Default. Any of the following shall constitute an "Event of
----------------
Default":
(a) Non-Payment. The Borrowers fail to pay, (i) when and as required
-----------
to be paid herein, any amount of
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principal of any Loan or any amount required hereunder to be paid under the
Credit Agreement or (ii) within 2 days after the same shall become due, any
interest, fee or any other amount payable hereunder or pursuant to any other
Loan Document or under the Cash Collateral Stipulation; or
(b) Representation or Warranty. Any representation or warranty by
--------------------------
the Company or any of its direct and indirect Subsidiaries made or deemed made
herein, in any Loan Document, or which is contained in any certificate, document
or financial or other statement by the Company, any of its direct and indirect
Subsidiaries, or their respective Responsible Officers, furnished at any time
under this Agreement, or in or under any Loan Document, shall prove to have been
incorrect in any material respect on or as of the date made or deemed made; or
(c) Specific Defaults. The Borrowers fail to perform or observe any
-----------------
term, covenant or agreement contained in Sections 6.1, 6.2, 6.3, 6.9, 6.11,
6.13, 6.14, 6.15, 6.16, 6.18, 6.19, 6.20, 6.21 or Article VII or the Borrowers
fail to perform or observe any term, covenant or agreement contained in
subsections 6.17(a) or (c) by the last Business Day of the succeeding month or
the Borrowers fail to perform or observe any term, covenant or agreement
contained in subsection 6.17(b) by the fifteenth day after the due date for
filing a Form 10-Q with the SEC; or
(d) Other Defaults. The Borrowers fail to perform or observe any
--------------
other term or covenant contained in this Agreement or any Loan Document, and
such default shall continue unremedied for a period of 10 days after the earlier
of (i) the date upon which a Responsible Officer of the Borrowers knew or should
have known of such failure or (ii) the date upon which written notice thereof is
given to the Borrowers by the Agent or any Bank; or
(e) Cross-Default. The Company or any of its direct or indirect
-------------
Subsidiaries (i) fails to make any payment in respect of any Postpetition
Indebtedness or Contingent Obligation having an aggregate principal amount
(including undrawn committed or available amounts and including amounts owing to
all creditors under any combined or syndicated credit arrangement) of more than
$100,000 when due (whether by scheduled maturity, required prepayment,
acceleration, demand, or otherwise) and such failure continues after the
applicable grace or notice period, if any, specified in the document relating
thereto on the date of such failure; or (ii) fails to perform or observe any
other condition or covenant, or any other event shall occur or condition exist,
(irrespective of whether such non-performance or non-observance shall be waived
or otherwise excused by the holder or holders of such
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Postpetition Indebtedness) under any agreement or instrument relating to any
such Postpetition Indebtedness or Contingent Obligation, if the effect of such
failure, event or condition is to cause, or to permit the holder or holders of
such Postpetition Indebtedness or beneficiary or beneficiaries of such
Postpetition Indebtedness (or a trustee or agent on behalf of such holder or
holders or beneficiary or beneficiaries) to cause such Postpetition Indebtedness
to be declared to be due and payable or require a mandatory prepayment,
redemption or offer to purchase, prior to its stated maturity, or such
Contingent Obligation to become payable or cash collateral in respect thereof to
be demanded; or
(f) Bankruptcy Orders. The Company or any of its direct or indirect
-----------------
Subsidiaries breaches, modifies, terminates, amends or seeks to vacate the Cash
Collateral Stipulation, the Cash Management Order or the DIP Financing Order or
the Company or any of its direct or indirect Subsidiaries or the Creditors'
Committee challenges or supports the challenge of any other party, of the pre-
petition claims of the Credit Banks under the Credit Agreement or the
postpetition claims and liens of the Banks hereunder and under the Loan
Documents.
(g) Bankruptcy Proceedings. (a) The Company or any of its direct or
----------------------
indirect Subsidiaries files a motion seeking a Prejudicial Bankruptcy Order or
(b) any other Person files a motion seeking a Prejudicial Bankruptcy Order, and
the Borrowers fail to timely and in good faith oppose such motion or (c) the
Bankruptcy Court enters any Prejudicial Bankruptcy Order.
(h) Plan of Reorganization. Any Plan of Reorganization is confirmed
----------------------
which fails to fully provide for the repayment and termination of all
Obligations of the Company and its Subsidiaries under this Agreement.
(i) Superpriority Administrative Claims. The Bankruptcy Court grants
-----------------------------------
a superpriority Administrative Claim to any party.
(j) Automatic Stay. An order of the Bankruptcy Court is entered which
--------------
terminates, vacates, annuls or modifies the automatic stay in favor of any
creditor which is in the reasonable opinion of the Majority Banks, material and
detrimental to the interests of the Banks hereunder.
(k) Non-Monetary Judgments. Any non-monetary judgment, order or
----------------------
decree is rendered against the Company or any of its direct and indirect
Subsidiaries which does or would reasonably be expected to have a Material
Adverse Effect, and there shall be any period of 10 consecutive days
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during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or
(l) Change in Control. A Change of Control Event shall occur; or
-----------------
(m) Loan Documents Cease to be in Effect. Any Loan Document shall
------------------------------------
cease to be in full force and effect for any reason other than the indefeasible
payment and satisfaction in full of the Obligations, the unanimous agreement of
the Banks, or the termination thereof in accordance with its terms, any court of
competent jurisdiction shall declare any Loan Document, or any material
provision thereof, to be void, ineffective, or unenforceable, any Lien on any
material type, item, or portion of Collateral provided for in any Loan Document
shall be set aside, avoided, or declared by a court of competent jurisdiction to
be void, ineffective, or unenforceable, or any Borrower Entity shall challenge,
dispute, or repudiate all or any material portion of its Obligations under any
material provision of any of the Loan Documents or the Banks shall cease to have
a first priority Lien on all Collateral (subject to Permitted Liens).
8.2 Remedies. If any Event of Default occurs, the Agent shall, at the
--------
request of, or may, with the consent of, the Majority Banks,
(a) declare the Revolving Commitment of each Bank to make Loans to be
terminated, whereupon such Revolving Commitments shall forthwith be terminated;
(b) (i) subject to subsection 8.2(d) below, apply cash or cash
equivalents on deposit in any account with BofA in an amount equal to the Letter
of Credit Usage and (ii) declare the unpaid principal amount of all outstanding
Loans, all interest accrued and unpaid thereon, an amount equal to Letter of
Credit Usage (whether or not any beneficiary under any Letter of Credit shall be
entitled at such time to present, the drafts and other documents required to
draw under such Letter of Credit, and which amount, if received from the
Borrowers, may be applied thereto or held as cash collateral therefor), and all
other amounts owing or payable hereunder or under any other Loan Document to be
immediately due and payable; without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by the Borrowers;
(c) subject to the next paragraph, apply any and all funds held by
the Agent, on behalf of the Banks, to the Obligations hereunder, without the
necessity of further Bankruptcy Court order;
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(d) perform all acts attendant to the Loans extended hereunder and to
exercise all remedies in the case of any Event of Default hereunder, without the
necessity of further Bankruptcy Court order or relief from the automatic stay,
provided, however, that the Banks shall be required first, to apply the proceeds
in the Sequestered Account, second, to apply the proceeds in the Performance
Account, third, to apply the proceeds in Capital Expenditures Account and,
fourth, to apply the Real Estate Account, before exercising any rights against
any other Collateral securing the Obligations hereunder; and
(e) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law.
In addition to the above, if any Event of Default occurs, there shall be an
automatic termination of the Borrower's exclusive right to file a Plan of
Reorganization as to the Credit Banks under the Credit Agreement and the
Creditors' Committee and any request for an injunction or temporary restraining
order by the Company or any of its direct and indirect Subsidiaries seeking to
enjoin, restrain or stay the Banks' exercise of their remedies under the Loan
Documents shall not be considered and shall not be effective.
The rights and remedies of the Banks hereunder shall be binding upon a
Chapter 11 or Chapter 7 Trustee in any Bankruptcy case relating to the
Borrowers.
8.3 Rights Not Exclusive. The rights provided for in this Agreement and
--------------------
the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE 9
THE AGENT
---------
9.1 Appointment and Authorization. Each Bank hereby irrevocably appoints,
-----------------------------
designates and authorizes the Agent to take such action on its behalf under the
provisions of this Agreement and each other Loan Document and to exercise such
powers and perform such duties as are expressly delegated to it by the terms of
this Agreement or any other Loan Document, including, without limitation,
pursuant to Section 6.9 hereof, together with such powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary contained
elsewhere in this Agreement or in any other Loan Document, the Agent shall not
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have any duties or responsibilities, except those expressly set forth herein,
nor shall the Agent have or be deemed to have any fiduciary relationship with
any Bank, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or any other Loan
Document or otherwise exist against the Agent.
9.2 Delegation of Duties. The Agent may execute any of its duties under
--------------------
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be
------------------
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document (except for their own
gross negligence or willful misconduct) or (ii) be responsible in any manner to
any of the Banks for any recital, statement, representation or warranty made by
the Company or any Subsidiary or Affiliate of the Company, or any officer
thereof, contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, this Agreement or any
other Loan Document, or the validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Loan Document, or for any failure
of the Company or any other party to any Loan Document (except the Agent) to
perform its obligations hereunder or thereunder. No Agent-Related Person shall
be under any obligation to any Bank to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, this Agreement or any other Loan Document, or to inspect the Properties,
books or records of the Company or any of the Company's direct and indirect
Subsidiaries or Affiliates.
9.4 Reliance by Agent.
-----------------
(a) The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any writing, resolution, notice, consent, certificate,
affidavit, letter, telegram, facsimile, telex or telephone message, statement or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the-proper Person or Persons, and upon advice
and statements of legal counsel (including counsel to the Borrowers),
independent accountants and other experts selected by the
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Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Majority Banks (or all of the Banks,
if the action contemplated requires the consent of all of the Banks pursuant to
Section 10.1 hereof) as it deems appropriate and, if it so requests, it shall
first be indemnified to its satisfaction by the Banks against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement or any
other Loan Document in accordance with a request or consent of the Majority
Banks (or all of the Banks, if the action contemplated requires the consent of
all of the Banks pursuant to Section 10.1 hereof) and such request and any
action taken or failure to act pursuant thereto, if taken in accordance with the
terms of this Agreement, shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Sections 4.1 and 4.2, each Bank that has executed this Agreement
shall be deemed to have consented to, approved or accepted, or to be satisfied
with, each document or other matter either sent by the Agent to such Bank for
consent, approval, acceptance, or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to such Bank, unless
an officer of the Agent responsible for the transactions contemplated by the
Loan Documents shall have received notice from such Bank prior to the initial
Borrowing specifying its objection thereto and either such objection shall not
have been withdrawn by notice to the Agent to that effect or the Bank shall not
have made available to the Agent such Bank's ratable portion of such Borrowing.
9.5 Notice of Default. The Agent shall not be deemed to have knowledge or
-----------------
notice of the occurrence of any Default or Event of Default, except with respect
to defaults in the payment of principal, interest and fees required to be paid
to the Agent for the account of the Banks, unless the Agent shall have received
written notice from a Bank (other than BofA) or the Borrowers referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default". In the event that the Agent receives such a
notice, the Agent shall give notice thereof to the Banks. The Agent shall take
such action with respect to such Default or Event of Default as shall be
requested by the Majority Banks in accordance with Article VIII; provided,
however, that unless and until the Agent shall have received any such request,
the Agent may (but shall not be obligated to) take such action, or refrain from
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taking such action, with respect to such Default or Event of Default as it shall
deem advisable or in the best interest of the Banks.
9.6 Credit Decision. Each Bank expressly acknowledges that none of the
---------------
Agent-Related Persons has made any representation or warranty to it and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Company and its direct and indirect Subsidiaries shall be deemed to constitute
any representation or warranty by the Agent to any Bank. Each Bank represents
to the Agent that it has, independently and without reliance upon the Agent and
based on such documents and information as it has deemed appropriate, made its
own appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of the Company and
its direct and indirect Subsidiaries, and all applicable bank regulatory laws
relating to the transactions contemplated thereby, and made its own decision to
enter into this Agreement and extend credit to the Borrowers hereunder. Each
Bank also represents that it will, independently and without reliance upon the
Agent and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit analysis, appraisals and decisions
in taking or not taking action under this Agreement and the other Loan
Documents, and to make such investigations as it deems necessary to inform
itself as to the business, prospects, operations, property, financial and other
condition and creditworthiness of the Borrowers. Except for notices, reports
and other documents expressly herein required to be furnished to the Banks by
the Agent, the Agent shall not have any duty or responsibility to provide any
Bank with any credit or other information concerning the business, prospects,
operations, property, financial and other condition or creditworthiness of the
Borrowers which may come into the possession of any of the Agent-Related
Persons.
9.7 Indemnification. Whether or not the transactions contemplated hereby
---------------
shall be consummated, the Banks shall indemnify upon demand the Agent-Related
Persons (to the extent not reimbursed by or on behalf of the Borrowers and
without limiting the obligation of the Borrowers to do so), ratably from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses and disbursements of any kind
whatsoever which may at any time (including at any time following the repayment
of the Loans and the termination or resignation of the related Agent) be imposed
on, incurred by or asserted against any such Person in any way relating to or
arising out of this Agreement or any document contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby or any
action
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taken or omitted by any such Person under or in connection with any of the
foregoing; provided, however, that no Bank shall be liable for the payment to
the Agent-Related Persons of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from such Person's gross negligence or willful
misconduct. Without limitation of the foregoing, each Bank shall reimburse the
Agent upon demand for its ratable share of any costs or out-of-pocket expenses
(including Attorney Costs) incurred by the Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document, or any document contemplated by or referred to herein
to the extent that the Agent is not reimbursed for such expenses by or on behalf
of the Borrowers. Without limiting the generality of the foregoing, if the
Internal Revenue Service or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not properly
withhold tax from amounts paid to or for the account of any Bank (because the
appropriate form was not delivered, was not properly executed, or because such
Bank failed to notify the Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any other
reason) such Bank shall indemnify the Agent fully for all amounts paid, directly
or indirectly, by the Agent as tax or otherwise, including penalties and
interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this Section, together with all costs and expenses
and attorneys' fees (including Attorney Costs). The obligation of the Banks in
this Section shall survive the payment of all Obligations hereunder.
9.8 Agent in Individual Capacity. BofA and its Affiliates may make loans
----------------------------
to, issue letters of credit for the account of, accept deposits from, acquire
equity interests in and generally engage in any kind of banking, trust,
financial advisory or other business with the Company and its direct and
indirect Subsidiaries and Affiliates as though BofA were not the Agent hereunder
or without notice to or consent of the Banks. With respect to its Loans, BofA
shall have the same rights and powers under this Agreement as any other Bank and
may exercise the same as though it were not the Agent, and the terms "Bank" and
"Banks" shall include BofA in its individual capacity.
9.9 Successor Agent. The Agent may, and at the request of the Majority
---------------
Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent
shall resign as Agent under this Agreement, the Majority Banks shall appoint
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from among the Banks a successor agent for the Banks which successor agent shall
be approved by the Borrowers (which approval shall not be unreasonably
withheld). If no successor agent is appointed prior to the effective date of
the resignation of the Agent, the Agent may appoint, after consulting with the
Banks and the Borrowers, a successor agent from among the Banks. Upon the
acceptance of its appointment as successor agent hereunder, such successor agent
shall succeed to all the appointment, powers and duties of the retiring Agent
and the term "Agent" shall mean such successor agent and the retiring Agent's
rights, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Article IX and
Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Agent under this Agreement. If no
successor agent has accepted appointment as Agent by the date which is 30 days
following a retiring Agent's notice of resignation, the retiring Agent's
resignation shall nevertheless thereupon become effective and the Banks shall
perform all of the duties of the Agent hereunder until such time, if any, as the
Majority Banks appoint a successor agent as provided for above.
ARTICLE 10
MISCELLANEOUS
-------------
10.1 Amendments and Waivers. No amendment or waiver of any provision of
----------------------
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Borrowers therefrom, shall be effective unless the same shall
be in writing and signed by, or consented to in writing by, the Majority Banks,
the Borrowers and the Agent, and then such waiver shall be effective only in the
specific instance and for the specific purpose for which given; provided,
however, that no such waiver, amendment, or consent shall, unless in writing and
signed by, or consented to in writing by, all the Banks, the Borrowers and the
Agent, do any of the following:
(a) increase or extend the Revolving Commitment of any Bank (or
reinstate any Revolving Commitment terminated pursuant to subsection 8.2(a)) or
subject any Bank to any additional obligations;
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts due to the Banks (or any of them) hereunder or
under any Loan Document;
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(c) reduce the principal of, or the rate of interest specified herein
on any Loan, or of any fees or other amounts payable hereunder or under any Loan
Document;
(d) change the percentage of the Revolving Commitments or of the
aggregate unpaid principal amount of the Loans which shall be required for the
Banks or any of them to take any action hereunder or change any requirement
hereunder which requires the Banks' consent, approval or satisfaction to require
less than all of the Banks' consent, approval or satisfaction, as the case may
be;
(e) amend the definition of "Majority Banks," this Section 10.1 or
Section 2.14; or
(f) release, or consent to or provide for the release of, all or any
substantial portion of the Collateral;
and, provided further, that no amendment, waiver or consent shall, unless in
writing and signed by, or consented to in writing by, the Agent, in addition to
the Majority Banks or all the Banks, as the case may be, affect the rights or
duties of the Agent under this Agreement or any other Loan Document.
10.2 Notices.
-------
(a) All notices, requests and other communications provided for
hereunder shall be in writing (which, unless the context expressly otherwise
provides, may be by facsimile transmission, provided that any matter transmitted
by the Borrowers by facsimile (i) shall be immediately confirmed by a telephone
call to the recipient at the number specified on the applicable signature page
hereof, and (ii) shall be followed promptly by a hard copy (original thereof)
sent by mail or delivery), and mailed or delivered, to the address specified for
notices on the applicable signature page hereof; or, as directed to the
Borrowers or the Agent, to such other address as shall be designated by such
party in a written notice to the other parties, and directed as to each other
party, at such other address as shall be designated by such party in a written
notice to the Borrowers and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted by facsimile machine,
respectively, or if delivered, upon deposit with the delivery company, except
that notices pursuant to Article II or VIII shall not be effective until
actually received by the Agent.
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(c) The Agent and the Banks shall be entitled to rely on the
authority of any Person purporting to be a Person authorized by the Borrowers to
give such notice and the Agent or the Banks shall not have any liability to the
Borrowers or other Person on account of any action taken or not taken by the
Agent and the Banks in reliance upon such facsimile notice. The obligation of
the Borrowers to repay the Loans shall not be affected in any way or to any
extent by any failure by the Agent and the Banks to receive written confirmation
of any facsimile notice or the receipt by the Agent and the Banks of a
confirmation which is at variance with the terms understood by the Agent and the
Banks to be contained in the facsimile notice.
10.3 No Waiver: Cumulative Remedies. No failure to exercise and no delay
-------------------------------
in exercising, on the part of the Agent or any Bank, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
10.4 Costs and Expenses. The Borrowers shall, whether or not the
------------------
transactions contemplated hereby shall be consummated:
(a) pay or reimburse, up to an aggregate amount equal to $150,000,
each Bank and the Agent within five Business Days after demand (subject to
subsection 4.1(e)) for all costs and expenses incurred by each Bank and the
Agent (including fees and expenses described in subsection (c) below) in
connection with the development, preparation, delivery and execution of this
Agreement, any Loan Document and any other documents prepared in connection
herewith or therewith, and the consummation of the transactions contemplated
hereby and thereby, including the reasonable Attorney Costs incurred by each
Bank and the Agent with respect thereto;
(b) pay or reimburse each Bank and the Agent within five Business
Days after demand (subject to subsection 4.1(e)) for all costs and expenses
incurred by them in connection with the negotiation, renegotiation, restructure,
workout, enforcement, attempted enforcement, or preservation of any rights or
remedies (including in connection with any "workout" or restructuring regarding
the Loans and including in any Insolvency Proceeding or appellate proceeding)
under this Agreement, any other Loan Document, and any such other documents,
including Attorney Costs incurred by the Agent and any Bank;
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(c) pay or reimburse BofA (including in its capacity as Agent) within
five Business Days after demand (subject to Subsection 4.1(e)) up to $20,000 in
fees and expenses for a Collateral audit to be completed on or before August 1,
1995 and, in addition, if such Collateral audit is unsatisfactory to the
Majority Banks, an additional $15,000 for an additional Collateral audit to be
performed on or before December 1, 1995; and
(d) pay or reimburse each Bank and the Agent within five Business
Days after demand (subject to Subsection 4.1(e)) for all costs and expenses
incurred by each Bank and the Agent (including the allocated costs and expenses
of internal counsel) subsequent to the Closing Date in connection with this
Agreement.
The agreements of the Borrowers set forth in this Section shall survive the
termination of this Agreement.
10.5 Indemnity. The Borrowers shall pay, indemnify, and hold each Bank,
---------
the Agent and each of their respective officers, directors, employees, counsel,
agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses or disbursements (including
reasonable Attorney Costs) of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance and administration of this
Agreement and any other Loan Documents, or the transactions contemplated hereby
and thereby, and with respect to any investigation, litigation or proceeding
(including any Insolvency Proceeding or appellate proceeding) related to this
Agreement, the Loan Documents, or the Loans or the use of the proceeds thereof,
whether or not any Indemnified Person is a party thereto (all the foregoing,
collectively, the "Indemnified Liabilities"); provided, that the Borrowers shall
have no obligation hereunder to any Indemnified Person with respect to
Indemnified Liabilities arising from the gross negligence or willful misconduct
of such Indemnified Person.
The Borrowers hereby agree to indemnify, defend and hold harmless each
Indemnified Person, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, charges, expenses
or disbursements (including reasonable Attorney Costs and the allocated cost of
internal environmental audit or review services), which may be incurred by or
asserted against such Indemnified Person in connection with or arising out of
any pending or threatened investigation, litigation or proceeding, or any action
taken by any Person, with respect to any Environmental Claim arising out of or
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related to any Property subject to a Mortgage in favor of the Agent or any Bank.
No action taken by legal counsel chosen by the Agent or any Bank in defending
against any such investigation, litigation or proceeding or requested remedial,
removal or response action shall vitiate or in any way impair the Borrowers'
obligation and duty hereunder to indemnify and hold harmless the Agent and each
Bank.
In no event shall any site visit, observation, or testing by the Agent or
any Bank (or any contractee of the Agent or any Bank) be deemed a representation
or warranty that Hazardous Materials are or are not present in, on, or under the
site, or that there has been or shall be compliance with any Environmental Law.
Neither the Borrowers nor any other Person is entitled to rely on any site
visit, observation, or testing by the Agent or any Bank. Neither the Agent nor
any Bank owes any duty of care to protect the Borrowers or any other Person
against, or to inform the Borrowers or any other party of, any Hazardous
Materials or any other adverse condition affecting any site or Property.
Neither the Agent nor any Bank shall be obligated to disclose to the Borrowers
or any other Person any report or findings made as a result of, or in connection
with, any site visit, observation, or testing by the Agent or any Bank.
At the election of any Indemnified Person, the Borrowers shall defend such
Indemnified Person using legal counsel satisfactory to such Indemnified Person
in such Person's sole discretion, at the sole cost and expense of the Borrowers.
All amounts owing under this Section 10.05 shall be paid within 30 days after
demand.
Without limiting the generality of the foregoing, any amount required to be
paid by any Bank to the Agent or any Agent-Related Person pursuant to Section
9.7 shall constitute an Indemnified Liability recoverable by such Bank from the
Borrowers, so long as such Indemnified Liability does not arise from the gross
negligence or willful misconduct of such Bank. The agreements in this Section
shall survive payment of all other Obligations.
10.6 Marshaling; Payments Set Aside. Except as set forth in Section 8.2(d)
------------------------------
hereof, neither the Agent nor the Banks shall be under any obligation to marshal
any assets in favor of the Borrowers or any other Person or against or in
payment of any or all of the Obligations. To the extent that the Borrowers make
a payment or payments to the Agent or the Banks, or the Agent or the Banks
enforce their Liens or exercise their rights of setoff, and such payment or
payments or the proceeds of such enforcement or set-off or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be
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repaid to a trustee, receiver or any other party in connection with any
Insolvency Proceeding, or otherwise, then to the extent of such recovery the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or set-off had not occurred.
10.7 Successors and Assigns. The provisions of this Agreement shall be
----------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Borrowers may not assign or transfer any
of their rights or obligations under this Agreement without the prior written
consent of the Agent and each Bank.
10.8 Assignments, Participations, etc.
---------------------------------
(a) Any Bank may, with the written consent of the Agent, which
consent shall not be unreasonably withheld or delayed, at any time assign and
delegate to one or more Eligible Assignees (provided that no written consent of
the Agent shall be required in connection with any assignment and delegation by
a Bank to a Bank Affiliate of such Bank) (each an "Assignee") all (but not less
than all) of the Loans, the Revolving Commitments and the other rights and
obligations of such Bank hereunder; provided, however, that (i) the Borrowers
and the Agent may continue to deal solely and directly with such Bank in
connection with the interest so assigned to an Assignee until (A) written notice
of such assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the Borrowers
and the Agent by such Bank and the Assignee; (B) such Bank and its Assignee
shall have delivered to the Borrowers and the Agent an Assignment and Acceptance
in the form of Exhibit F ("Assignment and Acceptance") together with any Note or
Notes subject to such Assignment and (C) the Assignee has paid to the Agent a
processing fee in the amount of $2,500 and (ii) the assigning Bank must also
assign a Pro Rata Share of its obligations under the Credit Agreement to such
Assignee, if the assigning Bank is a party thereto.
(b) From and after the date that the Agent notifies the assignor Bank
that it has received an executed Assignment and Acceptance and payment of the
above-referenced processing fee, (i) the Assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder and under the
Loan Documents have been assigned to it pursuant to such Assignment and
Acceptance, shall have the rights and obligations of a Bank under the Loan
Documents and (ii) the assignor Bank shall, to the extent that rights and
obligations hereunder and under the
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other Loan Documents have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Loan Documents.
(c) Within five Business Days after its receipt of notice by the
Agent that it has received an executed Assignment and Acceptance, which notice
shall also be sent by the Agent to each Bank, and payment of the processing fee,
the Borrowers shall execute and deliver to the Agent, new Notes evidencing such
Assignee's assigned Loans and Revolving Commitment and, if the assignor Bank has
retained a portion of its Loans and its Revolving Commitment, replacement Notes
in the principal amount of the Loans and Revolving Commitment retained by the
assignor Bank (such Notes to be in exchange for, but not in payment of, the
Notes held by such Bank). Immediately upon each Assignee's making its processing
fee payment under the Assignment and Acceptance, this Agreement, shall be deemed
to be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Revolving
Commitments arising therefrom. The Revolving Commitment allocated to each
Assignee shall reduce such Revolving Commitment of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial banks or
other Persons not affiliates of the Borrowers (a "Participant") participating
interests in any Loans, the Revolving Commitment of that Bank and the other
interests of that Bank (the "originating Bank") hereunder and under the other
Loan Documents; provided, however, that (i) the originating Bank's obligations
-------- -------
under this Agreement shall remain unchanged, (ii) the originating Bank shall
remain solely responsible for the performance of such obligations, (iii) the
Borrowers and the Agent shall continue to deal solely and directly with the
originating Bank in connection with the originating Bank's rights and
obligations under this Agreement and the other Loan Documents, (iv) no Bank
shall transfer or grant any participating interest under which the Participant
shall have rights to approve any amendment to, or any consent or waiver with
respect to, this Agreement or any other Loan Document, except to the extent such
amendment, consent or waiver would require unanimous consent of the Banks as
described in the first proviso to Section 10.1 and (v) the originating Bank must
also sell to the Participant a Pro Rata Share participation in its obligations
under the Credit Agreement, if the originating Bank is a party thereto. In the
case of any such participation, the Participant shall not have any rights under
this Agreement, or any of the other Loan Documents, and all amounts payable by
the Borrowers hereunder shall be determined as if such Bank had not sold such
participation; except that, if amounts outstanding under this Agreement are due
and unpaid, or
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shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall be deemed to have the
right of set-off in respect of its participating interest in amounts owing under
this Agreement to the same extent as if the amount of its participating interest
were owing directly to it as a Bank under this Agreement, and Section 2.14 of
this Agreement shall apply to such Participant as if it were a Bank party
hereto.
(e) Each Bank agrees to take normal and reasonable precautions and
exercise due care to maintain the confidentiality of all information identified
as "confidential" by the Borrowers and provided to it by the Borrowers or any
direct or indirect Subsidiary of the Company, or by the Agent on such Company's
or such Subsidiary's behalf, in connection with this Agreement or any other Loan
Document, and neither it nor any of its Affiliates shall use any such
information for any purpose or in any manner other than pursuant to the terms
contemplated by this Agreement; except to the extent such information (i) was or
becomes generally available to the public other than as a result of a disclosure
by the Bank or (ii) was or becomes available on a non-confidential basis from a
source other than the Borrowers, provided that such source is not bound by a
confidentiality agreement with the Borrowers known to the Bank; provided
further, however, that any Bank may disclose such information (A) at the request
or pursuant to any requirement of any Governmental Authority to which the Bank
is subject or in connection with an examination of such Bank by any such
authority; (B) pursuant to subpoena or other court process; (C) when required to
do so in accordance with the provisions of any applicable Requirement of Law;
and (D) to such Bank's independent auditors and other professional advisors.
Notwithstanding the foregoing, the Borrowers authorize each Bank to disclose to
any Participant or Assignee (each, a "Transferee") and to any prospective
Transferee, such financial and other information in such Bank's possession
concerning the Borrowers or their Subsidiaries which has been delivered to Agent
or the Banks pursuant to this Agreement or which has been delivered to the Agent
or the Banks by the Borrowers in connection with the Banks' credit evaluation of
the Borrowers prior to entering into this Agreement; provided that, unless
otherwise agreed by the Borrowers, such Transferee agrees in writing to such
Bank to keep such information confidential to the same extent required of the
Banks hereunder.
(f) Notwithstanding any other provision contained in this Agreement or
any other Loan Document to the contrary, any Bank may assign all or any portion
of the Loans or Notes held by it to any Federal Reserve Bank or the United
States Treasury as collateral security pursuant to
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Regulation A of the Board of Governors of the Federal Reserve System and any
Operating Circular issued by such Federal Reserve Bank, provided that any
payment in respect of such assigned Loans or Notes made by the Borrowers to or
for the account of the assigning and/or pledging Bank in accordance with the
terms of this Agreement shall satisfy the Borrowers' obligations hereunder in
respect to such assigned Loans or Notes to the extent of such payment. No such
assignment shall release the assigning Bank from its obligations hereunder.
10.9 Set-off. In addition to any rights and remedies of the Banks provided
-------
by law, if an Event of Default exists, each Bank is, subject to Section 8.2(d),
authorized at any time and from time to time, without prior notice to the
Borrowers, any such notice being waived by the Borrowers to the fullest extent
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held by, and other
indebtedness at any time owing to, such Bank to or for the credit or the account
of the Borrowers against any and all Obligations owing to such Bank, now or
hereafter existing, irrespective of whether or not the Agent or such Bank shall
have made demand under this Agreement or any Loan Document and although such
Obligations may be contingent or unmatured. Each Bank agrees promptly to notify
the Borrowers and the Agent after any such set-off and application made by such
Bank; provided, however, that the failure to give such notice shall not affect
the validity of such set-off and application. The rights of each Bank under
this Section 10.9 are in addition to the other rights and remedies (including
other rights of set-off) which the Bank may have.
10.10 Debits of Fees. With respect to any facility fee, or other fee, or
--------------
any other cost or expense (including Attorney Costs) due and payable to the
Agent, any Bank or BofA under the Loan Documents, the Borrowers may choose to
authorize BofA to debit any deposit account of the Borrowers with BofA in an
amount such that the aggregate amount debited from all such deposit accounts
does not exceed such fee or other cost or expense. If there are insufficient
funds in such deposit accounts to cover the amount of the fee or other cost or
expense then due, such debits will be reversed (in whole or in part, in BofA's
sole discretion) and such amount not debited shall be deemed to be unpaid. No
such debit under this Section 10.10 shall be deemed a setoff.
10.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall
------------------------------------------------
notify the Agent in writing of any changes in the address to which notices to
the Bank should be directed, of addresses of its Lending Office, of payment
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instructions in respect of all payments to be made to it hereunder and of such
other administrative information as the Agent shall reasonably request.
10.12 Counterparts. This Agreement may be executed by one or more of the
------------
parties to this Agreement in any number of separate counterparts, each of which,
when so executed, shall be deemed an original, and all of said counterparts
taken together shall be deemed to constitute but one and the same instrument. A
set of the copies of this Agreement signed by all the parties shall be lodged
with the Borrowers and the Agent.
10.13 Severability. The illegality or unenforceability of any provision of
------------
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
10.14 No Third Parties Benefited. This Agreement is made and entered into
--------------------------
for the sole protection and legal benefit of the Borrowers, the Banks and the
Agent, and their permitted successors and assigns, and no other Person shall be
a direct or indirect legal beneficiary of, or have any direct or indirect cause
of action or claim in connection with, this Agreement or any of the other Loan
Documents. Neither the Agent nor any Bank shall have any obligation to any
Person not a party to this Agreement or other Loan Documents.
10.15 Time. Time is of the essence as to each term or provision of this
----
Agreement and each of the other Loan Documents.
10.16 Governing Law and Jurisdiction.
------------------------------
(a) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY LOAN DOCUMENT, THIS
AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT
THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT AND
ANY OTHER LOAN DOCUMENTS MAY BE BROUGHT IN A BANKRUPTCY COURT FOR THE CENTRAL
DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF
THE BORROWERS, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF
ITS PROPERTY, TO THE EXCLUSIVE JURISDICTION OF THAT COURT. EACH OF THE
BORROWERS, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON
-97-
<PAGE>
THE GROUNDS OF FORUM NON CONVENIENS. WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE BORROWERS, THE AGENT, AND THE
BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS,
WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW.
10.17 Waiver of Right to Jury Trial. THE BORROWERS, THE BANKS AND THE
-----------------------------
AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY
ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES
AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS, OR OTHERWISE. THE BORROWERS, THE BANKS AND THE AGENT EACH AGREE
THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS Section AS TO
ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART,
TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS.
10.18 Entire Agreement. This Agreement, together with the other Loan
----------------
Documents, embodies the entire agreement and understanding among the Borrowers,
the Banks and the Agent, and, except as otherwise stated below, supersedes all
prior or contemporaneous Agreements and understandings of such Persons, verbal
or written, relating to the subject matter hereof and thereof. The foregoing
notwithstanding, this Agreement and the Loan Documents do not supersede any
provision of the Credit Agreement.
10.19 Interpretation. This Agreement is the result of negotiations between
--------------
and has been reviewed by counsel to the Agent, the Borrowers and other parties,
and is the product of all parties hereto. Accordingly, this Agreement and the
other Loan Documents shall not be construed against the Banks or the Agent
merely because of the Agent's or Banks' involvement in the preparation of such
documents and agreements.
10.20 Consultants. The Agent (or the Agent's counsel, acting upon the
-----------
instructions of the Agent) may at any time retain one or more consultants to
advise the Agent and the Banks regarding valuation, operational, capital
structure, and financial issues relating to the Borrowers. The
-98-
<PAGE>
Borrowers shall cooperate with such consultants, and provide them with full
access to information concerning the Borrowers, their Properties, their
operations, and their financial condition. The Borrowers promptly shall pay on
demand all reasonable fees and expenses of such consultants relating to this
Agreement. The work product of such consultants shall be privileged and
confidential and shall be available only to the Agent, its counsel, the Banks,
their counsel, and such other persons, if any, as the Agent and the Majority
Banks, in their discretion, may specify. The Borrowers, their counsel, and
third parties (including, without limitation, the accountants and investment
bankers of the Borrowers) shall have no right to receive such work product
unless the Agent and the Majority Banks, in their discretion, agree otherwise.
10.21 Further Assurances. At any time and from time to time, upon the
------------------
request of the Agent, the Borrowers shall execute, deliver and acknowledge or
cause to be executed, delivered or acknowledged, such further documents and
instruments and do such other acts and things as the Agent may reasonably
request in order to fully effect the purposes of the Loan Documents and any
other agreements, instruments and documents delivered pursuant to or in
connection with the Loans.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
HOUSE OF FABRICS, INC.
As Debtor and Debtor-in-Possession
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
13400 Riverside Drive
Sherman Oaks, CA 91423
FABRICLAND, INC.
As Debtor and Debtor-in-Possession
By__________________________
Name:_______________________
Title:______________________
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<PAGE>
Address for Notices:
13400 Riverside Drive
Sherman Oaks, CA 91423
SOFRO FABRICS, INC.
As Debtor and Debtor-in-Possession
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
13400 Riverside Drive
Sherman Oaks, CA 91423
HOUSE OF FABRICS OF SOUTH CAROLINA, INC.
As Debtor and Debtor-in-Possession
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
13400 Riverside Drive
Sherman Oaks, CA 91423
METROLINA EXPRESS, INC.
As Debtor and Debtor-in-Possession
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
13400 Riverside Drive
Sherman Oaks, CA 91423
-100-
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as the Agent
By__________________________
Name:_______________________
Title:______________________
Address for Payments:
1455 Market Street, 12th Floor
Dept. 5596
San Francisco, CA 94103
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
333 So. Beaudry Ave., 9th Floor
Dept. 3436
Los Angeles, CA 90017
FIRST INTERSTATE BANK OF CALIFORNIA
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
707 Wilshire Boulevard
Mail Sort W23-14
Los Angeles, CA 90017
-101-
<PAGE>
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
201 S. College Street, CP13
Charlotte, NC 28244-5031
NBD BANK, NATIONAL ASSOCIATION
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
701 First National Building
Detroit, MI 48226
SOCIETE GENERALE
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
1221 Avenue of the Americas
New York, NY 10020
-102-
<PAGE>
UNITED STATES NATIONAL BANK OF OREGON
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
111 S.W. 5th Avenue
Portland, OR 97204
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
Los Angeles Agency
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
350 So. Grand Ave., Suite 1500
Los Angeles, CA 90071
THE FUJI BANK, LIMITED
Los Angeles Agency
By__________________________
Name:_______________________
Title:______________________
Address for Notices:
333 So. Grand Ave., Suite 2500
Los Angeles, CA 90071-1504
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<PAGE>
EXHIBIT 22
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Registrant owns 100% of all of the outstanding voting securities of each of the
following corporations.
SUBSIDIARY STATE OF INCORPORATION
Fabricland, Inc. Oregon
House of Fabrics of South Carolina, Inc. South Carolina
Metrolina Express, Inc. South Carolina
Sofro Fabrics, Inc. Nevada
Yardage Fair, Inc. California
Registrant's consolidated financial statements include the accounts of the
foregoing subsidiaries.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 33-
39467, 33-21965 and 33-46308 of House of Fabrics, Inc. on Form S-8 of our report
dated May 5, 1995, appearing in the Annual Report on Form 10-K of House of
Fabrics, Inc. for the year ended January 31, 1995.
DELOITTE & TOUCHE LLP
Costa Mesa, California
May 12, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF HOUSE OF FABRICS, INC. AND SUBSIDIARIES (DEBTORS
IN POSSESSION) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> JAN-31-1995
<CASH> 47,381
<SECURITIES> 0
<RECEIVABLES> 12,877
<ALLOWANCES> 0
<INVENTORY> 132,963
<CURRENT-ASSETS> 236,936
<PP&E> 94,310
<DEPRECIATION> 47,695
<TOTAL-ASSETS> 327,597
<CURRENT-LIABILITIES> 57,240
<BONDS> 0
<COMMON> 1,370
0
0
<OTHER-SE> 53,654
<TOTAL-LIABILITY-AND-EQUITY> 327,597
<SALES> 416,276
<TOTAL-REVENUES> 416,276
<CGS> 256,383
<TOTAL-COSTS> 256,383
<OTHER-EXPENSES> 243,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,983
<INCOME-PRETAX> (97,710)
<INCOME-TAX> (2,325)
<INCOME-CONTINUING> (95,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (95,385)
<EPS-PRIMARY> (6.96)
<EPS-DILUTED> (6.96)
</TABLE>
<PAGE>
33-21965
33-39467
33-46308
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represents a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders of the registrant, at the time and in the
manner such material is sent to its stockholders, copies of all reports, proxy
statements and other communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
promptly, without charge, to any participant in the plan who makes a written
request, a copy of the then latest annual report of the plan filed pursuant to
section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report
is filed separately on Form 11-K, such form shall be delivered upon written
request. If such report is filed as a part of the registrant's annual report on
Form 10-K, that entire report (excluding exhibits) shall be delivered upon
written request. If such report is filed as a part of the registrant's annual
report to stockholders delivered pursuant to paragraph (1) or (2) of this
undertaking, additional delivery shall not be required.
(i) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Exhibit 28
