<PAGE>
FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
__________________________
For Quarter Ended July 31, 1996 Commission File No. 1-7927
------------- ------
House of Fabrics, Inc.
---------------------
(Exact Name of Registrant as specified in its charter)
Delaware 95-3426136
- - ----------------------------------- ------------------------------
(State or other jurisdiction) (I.R.S. Employer I.D. Number)
13400 Riverside Drive, Sherman Oaks, CA 91423
- - --------------------------------------- -----
Post Office Box 9110, Van Nuys, CA 91409
- - ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 995-7000
--------------
No Change
- - --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities & Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been the subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 12, 1996
Common Stock, par value $.10 per share 3,645,006 Shares
<PAGE>
HOUSE OF FABRICS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1996
and January 31, 1996 2 - 3
Consolidated Statements of Operations
for the three months ended
July 31, 1996 and 1995 4
Consolidated Statements of Operations
for the six months ended
July 31, 1996 and 1995 5
Consolidated Statements of
Cash Flows for the six months
ended July 31, 1996 and 1995 6 - 7
Notes to Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 16-19
Part II. Other Information 20
Item 6. Exhibits
(a) Exhibits
10.1 Revolving Credit Agreement
27. Financial Data Schedule 22
Signature 21
</TABLE>
1
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JULY 31, 1996 JANUARY 31, 1996
<S> <C> <C>
CURRENT ASSETS
Cash $ 5,922,000 $ 16,634,000
Receivables, net 9,076,000 24,322,000
Merchandise Inventories, net 94,853,000 107,140,000
Prepaid Expenses and Other Current Assets 6,831,000 5,651,000
Refundable Income Taxes 377,000 377,000
Deferred Income Taxes 25,000 25,000
------------ ------------
Total Current Assets 117,084,000 154,149,000
Property
Land 1,011,000 1,011,000
Buildings 1,707,000 1,707,000
Furniture & Fixtures 39,546,000 39,333,000
Leasehold Improvements 16,918,000 21,255,000
------------ ------------
59,182,000 63,306,000
Less Accumulated Depreciation and Amortization (36,107,000) (36,198,000)
------------ ------------
Property, net 23,075,000 27,108,000
Deferred Income Taxes 254,000 254,000
Property Held for Sale 6,870,000 9,590,000
Other Assets 1,214,000 1,386,000
Goodwill, net 37,531,000 38,067,000
------------ ------------
$186,028,000 $230,554,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY JULY 31, 1996 JANUARY 31, 1996
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 12,370,000 $ 9,754,000
Notes Payable to Bank 47,300,000
Accrued Liabilities 19,740,000 32,297,000
Restructuring Reserve 12,949,000 12,949,000
------------ ------------
Total Current Liabilities 92,359,000 55,000,000
Deferred Income Taxes 279,000 279,000
Long Term Liabilities 21,513,000
Liabilities Subject to Compromise under
reorganization proceedings 98,216,000 190,618,000
------------ ------------
Total Liabilities 212,367,000 245,897,000
STOCKHOLDERS' DEFICIT
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 at July 31, 1996
and January 31, 1996 1,370,000 1,370,000
Paid-In Capital 46,880,000 46,880,000
Accumulated Deficit (74,589,000) (63,593,000)
------------ ------------
Stockholders' Deficit (26,339,000) (15,343,000)
------------ ------------
$186,028,000 $230,554,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, 1996 JULY 31, 1995
<S> <C> <C>
Sales $54,840,000 $ 71,909,000
Expenses:
Cost of Sales 30,826,000 41,056,000
Selling, General and Administrative 27,071,000 36,322,000
Interest 2,402,000 3,597,000
----------- ------------
Total Expenses 60,299,000 80,975,000
Loss Before Income Taxes
and Reorganization Costs (5,459,000) (9,066,000)
Reorganization Costs (458,000) 1,923,000
----------- ------------
Loss Before Income Taxes (5,001,000) (10,989,000)
Income Taxes 24,000 50,000
----------- ------------
Net Loss $(5,025,000) $(11,039,000)
=========== ============
Loss Per Share $ (0.37) $ (0.81)
Weighted Average Number of
Shares Outstanding 13,697,107 13,697,107
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31, 1996 JULY 31, 1995
<S> <C> <C>
Sales $111,355,000 $145,668,000
Expenses:
Cost of Sales 62,000,000 77,931,000
Selling, General and Administrative 53,952,000 73,690,000
Interest 4,911,000 7,525,000
------------ ------------
Total Expenses 120,863,000 159,146,000
Loss Before Income Taxes
and Reorganization Costs (9,508,000) (13,478,000)
Reorganization Costs 1,440,000) 5,445,000
------------ ------------
Loss Before Income Taxes (10,948,000) (18,923,000)
Income Taxes 48,000 100,000
------------ ------------
Net Loss $(10,996,000) $(19,023,000)
============ ============
Loss Per Share $ (0.80) $ (1.39)
Weighted Average Number of
Shares Outstanding 13,697,107 13,697,107
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31, 1996 JULY 31, 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (10,996,000) $(19,023,000)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used In) Operating Activities:
Depreciation and Amortization 2,895,000 3,333,000
(Gain) Loss on Disposal of Fixed Assets (3,191,000) 991,000
Changes in Assets and Liabilities
Receivables 15,246,000 (355,000)
Merchandise Inventories 12,287,000 (25,462,000)
Prepaid Expenses and Other Assets (1,008,000) 26,480,000
Account Payable and Accrued Liabilities (4,719,000) (8,001,000)
Restructuring Reserve (3,152,000)
Operating Payables subject to compromise
under reorganization proceedings 843,000 (454,000)
Long Term Liabilities 21,513,000
Refundable Income Taxes 18,000
------------- ------------
Total Adjustments 43,866,000 (6,602,000)
------------- ------------
Net Cash (Used In) Provided by Operating
Activities 32,870,000 (25,625,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (2,687,000) (1,923,000)
Proceeds from Sale of Property 5,050,000 734,000
------------- ------------
Net Cash (Used In) Provided by Investing
Activities 2,363,000 (1,189,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments Under Line
of Credit Agreements (105,245,000) (6,000,000)
Borrowings Under Line
of Credit Agreements 59,300,000
Repayment of Long Term Debt (28,000)
------------- ------------
Net Cash (Used In) Financing Activities (45,945,000) (6,028,000)
------------- ------------
NET INCREASE (DECREASE) IN CASH (10,712,000) (32,842,000)
CASH AT BEGINNING OF PERIOD 16,634,000 47,381,000
CASH AT END OF PERIOD $ 5,922,000 $ 14,539,000
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
________________________________________________________________________________
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1996 July 31,1995
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 4,933,000 $7,157,000
Income Taxes Paid (Refunded) $(21,285,000) $ 2,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES-
During the six months ended July 31, 1996 loss on disposal of property charged
to accrued reserves amounted to $5,222,000.
During the six months ended July 31, 1995, loss on disposal of property charged
to the restructuring reserve amounted to $3,344,000.
7
<PAGE>
See accompanying notes to consolidated financial statements.
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- - --------------------------------------------------------------------------------
NOTE 1: BASIS OF REPORTING
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. The plan of reorganization will
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, the ability to achieve satisfactory levels
of profitability and cash flow from operations and maintain compliance with
the financing agreement (see Note 4).
The consolidated financial statements included herein do not include all the
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting
principles, although the Company believes that disclosures are adequate to make
the information not misleading. Certain reclassifications have been made to
prior year amounts to conform to the current years reporting classification.
(Refer to the Notes to Consolidated Financial Statements contained in the
Company's 1996 Annual Report.) In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation for the interim periods have been included in the consolidated
financial statements.
The results of operations for the interim periods presented, are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
The accompanying consolidated financial statements have been presented in
accordance with Statement of Position 90-7 - Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code.
NOTE 2: REORGANIZATION AND RESTRUCTURING
Reorganization:
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 269 stores in 28 states as of July 31, 1996. 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.
As a result of certain events in fiscal 1995, the Company filed for protection
under Chapter 11 of the United States Bankruptcy Code (Chapter 11) on November
2, 1994. The Company has continued to conduct normal business operations as
Debtors-in-Possession subject to the jurisdiction of the Bankruptcy Court. 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
8
<PAGE>
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 estimates of liabilities as of July 31, 1996, and January 31,
1995, subject to adjustment in the reorganization process. The Company has
continued to pay interest on secured debt although principal payments have
generally been suspended.
In August 1995, the Company filed a Disclosure Statement and Plan of
Reorganization (the Plan) with the Bankruptcy Court which was amended in May
1996. The Plan was confirmed by the Bankruptcy Court on July 10, 1996, and
became effective on July 31, 1996.
Under the Plan, the Company will issue approximately 5,136,000 shares of newly
reorganized House of Fabrics, Inc. common stock ("New Common Stock") as well as
additional shares, as necessary , to satisfy the warrants, equity incentive
plans and additional bank group stock issuance as required by the Plan. The
secured bank group received $76,500,000 (discounted based on debt outstanding as
of May 1, 1996) plus approximately 257,000 shares (or 5%) of New Common Stock.
In addition, if the aggregate market value of the approximately 257,000 shares
of New Common Stock during a certain period after the effective date of the
Plan, as defined, is less than $2,000,000, the secured bank group will receive
additional stock or cash to bring the aggregate value up to $2,000,000.
Generally, defaults under other secured obligations will be cured and the
maturities reinstated or converted to longer term obligations at market rates of
interest. Reclamation claims will receive 25% in cash shortly after the
effective date of the Plan and will receive the balance in 12 equal monthly
installments. Holders of general unsecured claims that are not covered by
insurance will receive a pro rata distribution of approximately 4,777,000 shares
(or 93%) of New Common Stock. A portion of the approximately 4,777,000 shares of
New Common Stock to be issued to holders of unsecured claims will be placed in a
claims reserve based on the percentage of disputed claims to total claims (total
claims include both allowed claims and disputed claims). Holders of existing
House of Fabrics, Inc., common stock will receive a pro rata distribution of
approximately 103,000 shares (or 2%) of New Common Stock. (A copy of the Plan
was filed under Form 8-K on July 23, 1996)
On May 24, 1996, the New York Stock Exchange ("the Exchange") suspended trading
of the Company's common stock and subsequently delisted the issue. The
suspension and subsequent delisting of the Company resulted from the Company's
failure to meet certain financial standards established by the Exchange,
although the Company had failed to meet such standards for an extensive period
before action was taken by the Exchange. The Company is currently listed on the
NASDAQ stock exchange in addition to the Pacific Stock exchange. The symbol for
the new common stock is HFAB and the symbol for the warrants is HFABW.
On July 31, 1996, and effective August 1, 1996, the Company restructured its
organizational structure by merging Fabricland, Inc., Sofro Fabrics, Inc., House
of Fabrics of South Carolina, Inc., and Metrolina Express, Inc. into House of
Fabrics, Inc..
Upon emergence from its Chapter 11 proceedings, the Company adopted the
provisions of Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code ("Fresh-Start Reporting") as
promulgated by the American Institute of Certified Public Accountants in
November 1990. Accordingly, all assets and liabilities have been restated to
reflect their reorganization value, which approximates their fair value at the
Effective Date. In addition, the accumulated deficit of the Company was
eliminated and its capital structure was recast in conformity with the Plan, and
as such, the Company has recorded the effects of the Plan and Fresh-Start
Reporting as of August 1, 1996. The August 1, 1996, balance sheet is not
comparable to prior periods.
9
<PAGE>
The reorganization value of the Company's common equity of $40,150,000 was
determined by the Company with the assistance of financial advisors after
consideration of several factors and by reliance on various valuation methods,
including discounted projected cash flows, price/earnings ratios, and other
applicable ratios and economic and industry information relevant to the
operations of the Company.
While the estimated reorganization value of the Company has been preliminary
allocated to specific asset categories pursuant to Fresh-Start Reporting, the
effects of such are subject to further refinement or adjustment. Reorganization
value in Excess of Amounts Allocated to Net Assets reflects the difference in
the Company's stock valuation and the Company's net assets.
10
<PAGE>
The effect of the Plan on the Company's unaudited balance sheet at August 1,
1996 is as follows (in Thousands):
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
ASSETS
(1) (2)
July 31, 1996 Settlement Fresh Start Reorganized
of Claims Entries Balance Sheet
----------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 5,922 $ (3,968) $ 1,954
Receivables, net 9,076 (4,753) 4,323
Merchandise Inventories, net 94,853 598 95,451
Prepaid Expenses and Other Current Assets 6,831 (325) 6,506
Refundable Income Taxes 377 377
Deferred Income Taxes 25 25
----------------------------------------------------
Total Current Assets 117,084 (4,480) (3,968) 108,636
Property, Plant and Equipment 59,182 (36,107) 23,075
Less Accumulated Depreciation and
Amortization (36,107) 36,107 -
----------------------------------------------------
Property, net 23,075 - - 23,075
Deferred Income Taxes 254 254
Property Held for Sale 6,870 6,870
Other Assets 1,214 (125) 1,089
Reorganization Value in Excess of Amounts
Allocated to Net Assets 3,355 3,355
Goodwill, net 37,531 (37,531) -
----------------------------------------------------
$186,028 $(4,605) $(38,144) $143,279
====================================================
</TABLE>
(1) To record settlement of allowed prepetition claims and payment of related
expenses.
(2) To record assets and liabilities at their fair value pursuant to Fresh-
Start Reporting, and eliminate any retained earnings or deficit.
11
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (1) (2)
July 31, 1996 Settlement Fresh Start Reorganized
of Claims Entries Balance Sheet
<S> --------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 12,370 12,370
Notes Payable to Bank 47,300 47,300
Accrued Liabilities 19,740 987 20,727
Current Portion of Long Term Liabilities 24 24
Accrued Claims 3,968 (3,968)
Restructuring Reserve 12,949 (12,949) -
--------------------------------------------------
Total Current Liabilities 92,359 (7,970) (3,968) 80,421
Deferred Income Taxes 279 279
Long Term Liabilities 21,513 21,513
Notes Payable 916 916
Liabilities Subject to Compromise under
reorganization proceedings 98,216 (98,216) -
--------------------------------------------------
Total Liabilities 212,367 (105,270) (3,968) 103,129
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par Value 1,370 (857) 513
Paid-In-Capital 46,880 856 (8,099) 39,637
Retained Earnings (Deficit) (74,589) 100,666 (26,077) -
--------------------------------------------------
Stockholders' Equity (Deficit) (26,339) 100,665 (34,176) 40,150
--------------------------------------------------
$186,028 $ (4,605) $(38,144) $143,279
==================================================
</TABLE>
(1) To record settlement of allowed prepetition claims and payment of related
expenses.
(2) To record assets and liabilities at their fair value pursuant to Fresh-
Start Reporting, and eliminate any retained earnings or deficit.
12
<PAGE>
RESTRUCTURING PLANS:
In both fiscal 1994 and fiscal 1995, the Company implemented restructuring plans
that involved the closing of a significant number of stores and significant
revisions to the Company's marketing and merchandising strategies. At July 31,
1996, the restructuring reserve of $12,949,000 relates primarily to lease
terminations and occupancy costs for the fiscal 1994 and 1995 restructuring
plans. In fiscal 1996, the Company closed stores pursuant to its Debtors-in-
Possession financing agreement and to facilitate its ability to negotiate exit
financing prior to emerging from Chapter 11.
In anticipation of the Company filing the Plan of Reorganization to exit Chapter
11 with the Bankruptcy Court and to facilitate the Company's ability to
negotiate exit financing prior to emergence from Chapter 11, the Company agreed
to close 86 underperforming stores and use the proceeds to permanently reduce
the secured debt of the Company's prepetition bank loan. In January 1996, with
approval of the Bankruptcy Court, the Company entered into an agency agreement
with an unrelated partnership formed to liquidate the 86 stores. The partnership
assumed control of the 86 stores and assumed substantially all of the expenses
of operating the stores through liquidation. The liquidation was completed in
April 1996. In addition to the 86 stores, the Company's D.I.P. Financing
agreement covenants required the closing of 8 other stores, during fiscal 1996,
that did not meet certain profitability requirements.
NOTE 3: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following as of July 31, 1996
and January 31, 1995:
<TABLE>
<CAPTION>
July 31, 1996 January 31, 1996
------------- ----------------
<S> <C> <C>
Secured Liabilities:
Notes payable to banks $ 9,578,000 $102,823,000
Long term debt 940,000 941,000
Unsecured Liabilities:
Accounts payable, trade 71,244,000 71,309,000
Other payables and accrued expenses 16,309,000 15,400,000
Other 145,000 145,000
----------- ------------
$98,216,000 $190,618,000
=========== ============
</TABLE>
The plan of reorganization approved by the Company's impaired prepetition
creditors and stockholders and confirmed by the Bankruptcy Court will materially
change the amounts and terms of these prepetition liabilities. Such amounts were
estimated as of July 31, 1996, and January 31, 1996. The Company has reconciled
the majority of the claims filed with the Bankruptcy Court by the Company's
creditors and will continue the process until it is completed.
The Company had a credit agreement (Credit Agreement) for which Bank of America
NT & SA acted as agent bank. As a result of the Chapter 11 filing, all required
repayments of principal on the notes payable under the Credit Agreement were
suspended, except for certain principal repayments that were approved by the
Bankruptcy Court and were required by the Company's Debtors-in-Possession
financing agreement (see Note 4). Under such agreements $ 41,525,000 of
permanent reductions were made primarily from the proceeds of liquidating
underperforming stores and an additional $75,563,000 was repaid at July 31,
1996, primarily from the proceeds of a new financing agreement with CIT
Group/Business Credit, Inc. and proceeds from income tax refunds. The remaining
balance of $9,578,000 will be forgiven by the bank group under the approved Plan
of Reorganization.
13
<PAGE>
By authorization of the Bankruptcy Court, the Company has continued to pay
interest at the contractual rate on certain long term debt. Such obligations
have been classified as subject to compromise in the accompanying consolidated
balance sheets.
NOTE 4: FINANCING
At July 31, 1996, the Company entered into a Financing Agreement with CIT
Group/Business Credit, Inc. ("CITBC"), to provide a $60,000,000 line of credit
with a term of 3 years, with automatic annual renewals unless 90 days written
notice is provided prior to the anniversary date of the agreement. Cash
borrowings bear interest at prime (based on the Chase Manhattan Bank Rate) plus
1% or Libor plus 3 1/4% and a commitment fee of .5% per annum on unused
availability. Fees for letters of credit are generally 1 1/2% per annum based on
the amount of letters of credit issued. The Financing Agreement provides for a
combination of cash borrowings and the issuance of up to $20,000,000 in letters
of credit. The Financing Agreement is collateralized by a first priority lien on
generally all assets of the Company, as defined, excluding up to $10,000,000 for
Point of Sale equipment which may be secured by the purchased Point of Sale
equipment. Loan availability is determined by an advance rate on eligible
inventory as defined. The Financing Agreement includes certain restrictive
covenants that are computed quarterly and are principally related to, net worth
, fixed charge coverage ratio, operating leases and capital expenditures. As of
July 31, 1996, the Company had direct borrowings of $47,300,000 and letters of
credit of $3,531,000 outstanding. (See Exhibit 10.1 for a copy of the Financing
Agreement.)
Effective September 11, 1996, the Financing Agreement was increased to a
$65,000,000 line of credit with the same terms and conditions as previously
agreed.
In March 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 $20,000,000 line of credit (The
"D.I.P. Financing") that expired on January 31, 1996. The D.I.P. Financing
agreement provided for a combination of cash borrowings and the issuance of up
to $10,000,000 in letters of credit. Interest and fees were payable monthly.
Cash borrowings bore 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 were generally .25% per annum. This agreement was collateralized by a
first priority lien on generally all assets of the Company, as defined. The
Company was required to follow a formula for sequestration of excess cash, as
defined in the D.I.P. Financing agreement, and for permanent principal
reductions of notes payable under the Credit Agreement. The Company was 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.
On January 29, 1996, the D.I.P. Financing agreement was extended through April
30, 1996, with Bankruptcy Court approval. The amended and restated D.I.P.
agreement was reduced to a $17,3000,000 line of credit with a provision for up
to $10,000,000 in letters of credit and any unused portion of the loan available
for cash borrowings. The amended and restated D.I.P. Financing agreement
required the closure of at least 86 stores with the proceeds therefrom to be
used to permanently reduce the prepetition secured bank loan. On May 1, 1996,
the amended and restated D.I.P. Financing agreement was extended through June
28, 1996 and subsequently through July 31, 1996.
The D.I.P. Financing agreement included certain other restrictive covenants that
were computed monthly and related to, among other things, cash and inventory
level requirements in comparison to planned levels. At July 31, 1996, the
Company retired the D.I.P. Financing agreement and replaced it with a new
Financing Agreement with CITBC as explained above.
14
<PAGE>
NOTE 5: 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 during the six months ended July 31, 1996, consisted primarily of
professional fees and lease termination expenses offset by the gain on the sale
of the Sherman Oaks, California office building.
NOTE 6: STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning February 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair market value of the equity instrument
awarded. Companies are permitted, however, not required to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock based compensation awards to employees and will disclose the
required pro forma effect of net income and earnings per share.
NOTE 7: INCOME TAXES
In March 1996, and June 1996, the Company received approximately $9,300,000 and
$11,865,000, respectively, pursuant to claims for refund filed on Internal
Revenue Service Form 1139. Income tax refunds received on Form 1139 are subject
to later review and audit by the Internal Revenue Service. Although the Company
believes it will ultimately prevail on any Internal Revenue Service audit of
claims filed on Form 1139, it has reserved against amounts received and will
record the respective tax benefits upon successful completion of such audits.
In August 1996, the Company filed an additional Form 1139 with the Internal
Revenue Service requesting a refund of approximately $1,300,000.
NOTE 8: SUBSEQUENT EVENTS
In August 1996, the Company's Board of Directors approved a stock option plan
providing 669,375 shares for directors, officers and key employees. Stock option
grants of 617,736 have been issued to date.
15
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
________________________________________________________________________________
The Company is one of the largest home sewing/craft retailers in the United
States, operating 269 stores in 28 states as of July 31, 1996. The following
discussion explains material changes in the results of operations for the second
quarter of fiscal years 1997 and 1996 and significant developments affecting
financial condition since the end of fiscal 1996.
CHAPTER 11 REORGANIZATION
- - -------------------------
On November 2, 1994, the Company and subsidiaries filed voluntary petitions for
relief under Chapter 11 of the United States Code in the United States
Bankruptcy Court.
The consolidated financial statements have been presented on the basis that the
Company will continue as 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. The plan of reorganization will 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, the ability to achieve satisfactory levels of profitability and cash
flow from operations and maintain compliance with the financing agreement (see
Note 4 to consolidated financial statements).
In August 1995, the Company filed a Disclosure Statement and Plan of
Reorganization (the Plan) with the Bankruptcy Court which was amended in May
1996. The Plan was confirmed by the Bankruptcy Court on July 10, 1996, and
became effective on July 31, 1996.
Under the Plan, the Company will issue approximately 5,136,000 shares of newly
reorganized House of Fabrics, Inc. common stock ("New Common Stock") as well as
additional shares, as necessary , to satisfy the warrants, equity incentive
plans and additional bank group stock issuance as required by the Plan. The
secured bank group received $76,500,000 (discounted based on debt outstanding as
of May 1, 1996) plus approximately 257,000 shares (or 5%) of New Common Stock.
In addition, if the aggregate market value of the approximately 257,000 shares
of New Common Stock during a certain period after the effective date of the
Plan, as defined, is less than $2,000,000, the secured bank group will receive
additional stock or cash to bring the aggregate value up to $2,000,000.
Generally, defaults under other secured obligations will be cured and the
maturities reinstated or converted to longer term obligations at market rates of
interest. Reclamation claims will receive 25% in cash shortly after the
effective date of the Plan and will receive the balance in 12 equal monthly
installments. Holders of general unsecured claims that are not covered by
insurance will receive a pro rata distribution of approximately 4,777,000 shares
(or 93%) of New Common Stock. A portion of the approximately 4,777,000 shares of
New Common Stock to be issued to holders of unsecured claims will be placed in a
claims reserve based on the percentage of disputed claims to total claims (total
claims include both allowed claims and disputed claims). Holders of existing
House of Fabrics, Inc., common stock will receive a pro rata distribution of
approximately 103,000 shares (or 2%) of New Common Stock. (A copy of the Plan
was filed under Form 8-K on July 23, 1996)
On May 24, 1996, the New York Stock Exchange ("the Exchange") suspended trading
of the Company's common stock and subsequently delisted the issue. The
suspension and subsequent delisting of the Company resulted from the Company's
failure to meet certain financial standards established by the Exchange,
although the Company had failed to meet such standards for an extensive period
before action was taken by the Exchange. The Company is
16
<PAGE>
currently listed on the NASDAQ stock exchange in addition to the Pacific Stock
Exchange. The symbol for the new common stock is HFAB and the symbol for the
warrants is HFABW.
On July 31, 1996, and effective August 1, 1996, the Company restructured its
organizational structure by merging Fabricland, Inc., Sofro Fabrics, Inc., House
of Fabrics of South Carolina, Inc., and Metrolina Express, Inc. into House of
Fabrics, Inc.
Store Closures:
In both fiscal 1994 and fiscal 1995, the Company implemented restructuring plans
that involved the closing of a significant number of stores and significant
revisions to the Company's marketing and merchandising strategies. At July 31,
1996, the restructuring reserve of $12,949,000 relates primarily to lease
terminations and occupancy costs for the fiscal 1994 and 1995 restructuring
plans. In fiscal 1996, the Company closed stores pursuant to its Debtors-in-
Possession financing agreement and to facilitate its ability to negotiate exit
financing prior to emerging from Chapter 11.
In anticipation of the Company filing the Plan of Reorganization to exit Chapter
11 with the Bankruptcy Court and to facilitate the Company's ability to
negotiate exit financing prior to emergence from Chapter 11, the Company agreed
to close 86 underperforming stores and use the proceeds to permanently reduce
the secured debt of the Company's prepetition bank loan. In January 1996, with
approval of the Bankruptcy Court, the Company entered into an agency agreement
with an unrelated partnership formed to liquidate the 86 stores. The partnership
assumed control of the 86 stores and assumed substantially all of the expenses
of operating the stores through liquidation. The liquidation was completed in
April 1996. In addition to the 86 stores, the Company's D.I.P. Financing
agreement covenants required the closing of 8 other stores, during fiscal 1996,
that did not meet certain profitability requirements.
RESULTS OF OPERATIONS
- - ---------------------
THREE MONTHS ENDED
------------------
Sales for the quarter ended July 31, 1996 decreased 23.7% to $54,840,000 from
$71,909,000 for the quarter ended July 31, 1995. The decrease in sales of
$17,069,000 was primarily due to the closing of underperforming stores and also
a 1.5% decrease in store for store sales. The decrease in store for store sales
resulted from product delays caused by a lack of vendor credit due to their
concern over the Company's ability to exit bankruptcy and obtain long term
financing. During the quarter ended July 31, 1996, the Company did not close any
stores.
Gross profit as a percentage of sales increased to 43.8% for the quarter ended
July 31, 1996 from 42.9% for the quarter ended July 31, 1995. The increase is
primarily due to a reduction in promotional pricing. In accordance with the
Company's merchandising strategies, seasonal merchandise is marked down at the
end of the spring and fall seasons.
Selling, general and administrative expenses as a percent of sales decreased to
49.4% for the quarter ended July 31, 1996 from 50.5% for the quarter ended July
31, 1995. Expense reduction programs have been implemented to reduce total costs
and also reduce costs as a percentage of sales. The major areas of reduction are
in store staffing expenses and occupancy related expenses and in home office
general and administrative expenses.
Interest expense for the quarter ended July 31, 1996 decreased $1,195,000 from
$3,597,000 the quarter ended July 31, 1995, to $2,402,000 for the quarter ended
July 31, 1996, primarily as a result of a decrease in the Company's average loan
balance and a decrease in the Company's average effective borrowing rate from
11.5% in the quarter ended July 31, 1995 to 10.75% in the quarter ended July 31,
1996.
17
<PAGE>
Reorganization costs associated with the Company's Chapter 11 filing amounted to
($458,000) for the quarter ended July 31, 1996, which includes a gain on the
sale of the Sherman Oaks, California office building of approximately $3,400,000
offset by primarily lease termination expenses and asset write-offs of
approximately $1,300,000 and professional fees. The Company anticipates that
additional reorganization costs will be incurred throughout the completion of
the claims settlement process although at a substantially lower rate.
The Company recorded a tax expense of $24,000 for the three months ended July
31, 1996, for minimum state income taxes compared to a $50,000 expense for the
quarter ended July 31, 1995. No tax benefit was recognized for the net operating
loss generated in the three months ended July 31, 1996. The net loss incurred
during the quarter increased the net operating loss carryforward that existed as
of January 31, 1996.
RESULTS OF OPERATIONS
- - ---------------------
SIX MONTHS ENDED
----------------
Sales for the six months ended July 31, 1996, decreased 23.6% to $111,355,000
from $145,668,000 for the six months ended July 31, 1995. The decrease in sales
of $34,313,000 was primarily due to the closing of underperforming stores and
also a .6% decrease in store for store sales. The decrease in store for store
sales resulted from product shortages caused by a lack of vendor credit due to
their concern over the Company's ability to exit bankruptcy and obtain long term
financing. During the six months ended July 31, 1996, the Company did not close
any stores.
Gross profit as a percentage of sales decreased to 44.3% for the six months
ended July 31, 1996 from 46.5% for the six months ended July 31, 1995. The
decrease is primarily due to higher markdowns in the first quarter of 1996
compared to those generated in the first quarter of 1995. Markdowns were taken
to reduce inventory levels primarily in seasonal fabric and craft items in the
second quarter of the current fiscal year, as anticipated by the Company's
merchandising plan.
Selling, general and administrative expenses as a percent of sales decreased to
48.5% for the six months ended July 31, 1996 from 50.6% for the six months ended
July 31, 1995. Expense reduction programs have been implemented to reduce total
costs as well as costs as a percent of sales in the six months ended July 31,
1996. The major areas of cost reduction were store payroll and occupancy costs
and home office general and administrative expenses.
Interest expense for the six months ended July 31, 1996 decreased $2,614,000
from $7,525,00 for the six months ended July 31, 1995, to $4,911,000 for the six
months ended July 31, 1996, primarily as a result of a decrease in the Company's
average loan balance and a decrease in the Company's average effective borrowing
rate to 11.0% in the six months ended July 31, 1996 from 11.5% in the six months
ended July 31, 1995.
Reorganization costs associated with the Company's Chapter 11 filing amounted to
$1,440,000 for the six months ending July 31, 1996, which include primarily
lease termination and asset write-offs of approximately $1,300,000 and
professional fees offset by an approximately $3,400,000 gain on the sale of the
Sherman Oaks, California office building. The Company anticipates that
additional reorganization costs will be incurred throughout the completion of
the claims settlement process although at a substantially lower rate.
The Company recorded a tax expense of $48,000 for the six months ended July 31,
1996, for minimum state income taxes compared to a $100,000 expense for the six
months ended July 31, 1995. No tax benefit was recognized for the net operating
loss generated in the six months ended July 31, 1996. The net loss incurred
during the six months increased the net operating loss carryforward that existed
as of January 31, 1996.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Adjusting for Fresh-Start reporting (see Note 2 to consolidated financial
statements), the Company's working capital was approximately $28,215,000 as of
August 1, 1996, and its current ratio was approximately 1.4 to 1. Net cash
provided by operating activities was approximately $32,870,000 for the six
months ended July 31, 1996, compared to net cash used in operating activities of
approximately $25,625,000 for the six months ended July 31, 1995. The increase
in net cash provided by operating activities is due primarily to the decrease in
merchandise inventories from liquidating stores and from income tax refunds.
At July 31, 1996, the Company entered into a Financing Agreement with CIT
Group/Business Credit, Inc. ("CITBC"), to provide a $60,000,000 line of credit
with a term of 3 years, with automatic annual renewals unless 90 days written
notice is provided prior to the anniversary date of the agreement. Cash
borrowings bear interest at prime (based on the Chase Manhattan Bank Rate) plus
1% or Libor plus 3 1/4% and a commitment fee of .5% per annum on unused
availability. Fees for letters of credit are generally 1 1/2% per annum based on
the amount of letters of credit issued. The Financing Agreement provides for a
combination of cash borrowings and the issuance of up to $20,000,000 in letters
of credit. The Financing Agreement is collateralized by a first priority lien on
generally all assets of the Company, as defined, excluding up to $10,000,000 for
Point of Sale equipment which may be secured by the purchased Point of Sale
equipment. Loan availability is determined by an advance rate on eligible
inventory as defined. The Financing Agreement includes certain restrictive
covenants that are computed quarterly and are principally related to net worth ,
fixed charge coverage ratio, operating leases and capital expenditures. As of
July 31, 1996, the Company had direct borrowings of $47,300,000 and letters of
credit of $3,531,000 outstanding.
Effective September 11, 1996, the Financing Agreement was increased to a
$65,000,000 line of credit with the same terms and conditions as previously
agreed.
The Company's capital structure remains leveraged despite its recapitalization
and restructuring. The Company believes that its ongoing operating cash flow and
the CITBC Financing agreement should enable the Company to meet liquidity
requirements in fiscal 1997.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
- - ----------------------------------------------
The preceding Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements, including without limitation, those
associated with the ability of Company to reduce the current expense levels and
increase the sales volumes. In addition, these statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements, including without limitation, decline
in demand for the merchandise offered by the Company, the ability of the Company
to obtain adequate merchandise supply and hire and train employees, management's
ability to manage the Company's return to profitability and the effect of
economic conditions.
The foregoing discussion is designed to comply with interim reporting standards
and should be read in conjunction with the more detailed discussion in the
Company's 1996 Annual Report.
19
<PAGE>
Part II. OTHER INFORMATION
Item 6. EXHIBITS
(a) Exhibits.
10.1 Revolving Credit Agreement in the Amount of $60,000,000
between House of Fabrics, Inc. and The CIT Group/Business
Credit, Inc., as Agent and Lender, Dated July 23, 1996.
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated July 23, 1996, regarding the
United states Bankruptcy Courts approval of the Company's Plan of
Reorganization and included a copy of the Company's Plan of
Reorganization.
20
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
House of Fabrics, Inc.
----------------------
Registrant
Date: September 16, 1996 John E. Labbett
Executive Vice President-Chief Financial
Officer
21
<PAGE>
EXHIBIT 10.1
FINANCING AGREEMENT
-------------------
THE CIT GROUP/BUSINESS CREDIT, INC.
(AS AGENT AND AS LENDER)
AND
HOUSE OF FABRICS, INC.
(AS BORROWER)
DATED: JULY 23, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. Definitions.............................. 4
SECTION 2. Conditions Precedent..................... 18
SECTION 3. Revolving Loans.......................... 23
SECTION 4. Letters of Credit........................ 25
SECTION 5. Collateral............................... 29
SECTION 6. Representations, Warranties and Covenants 32
SECTION 7. Interest, Fees and Expenses.............. 40
SECTION 8. Powers................................... 44
SECTION 9. Events of Default and Remedies........... 45
SECTION 10. Termination.............................. 48
SECTION 11. Agreements between the Lenders........... 49
SECTION 12. Agency................................... 52
SECTION 13. Miscellaneous............................ 56
</TABLE>
-2-
<PAGE>
EXHIBITS
- - --------
EXHIBIT A - Assignment and Transfer Agreement
EXHIBIT B - Blocked Account Agreement
SCHEDULES
- - ---------
SCHEDULES 1 - Existing Liens
SCHEDULES 2 - Locations
-3-
<PAGE>
THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation (hereinafter
"CITBC") with offices located at 300 South Grand Avenue, Los Angeles, CA 90071,
and the other lenders that may, subsequent to the date hereof, purchase from
CITBC a portion of CITBC's rights and obligations under this Financing Agreement
(CITBC and such other lenders each individually sometimes referred to as a
"Lender" and collectively as the "Lenders") and CITBC as agent for the Lenders
(hereinafter the "Agent") are pleased to confirm the terms and conditions under
which the Lenders acting through the Agent shall make revolving loans, advances
and other financial accommodations to HOUSE OF FABRICS, INC., a Delaware
corporation (hereinafter referred to as the "Company") having a principal place
of business at 13400 Riverside Drive, Sherman Oaks, CA 91423.
SECTION 1. DEFINITIONS
-----------
ACCOUNTS shall mean all of the Company's now existing and future: (a) accounts
- - --------
receivable, including any Trade Accounts Receivable, all rights to payment under
bank or non-bank credit cards (whether or not specifically listed on schedules
furnished to the Agent) and any and all instruments, documents, contract rights,
chattel paper, created by or arising from the Company's sales of Inventory or
rendition of services to its customers, and all accounts arising from sales or
rendition of services made under any trade names or styles of the Company, or
through any divisions of the Company; (b) unpaid seller's rights (including
rescission, replevin, reclamation and stoppage in transit) relating to the
foregoing or arising therefrom; (c) rights to any Inventory represented by any
of the foregoing, including rights to returned or repossessed Inventory; (d)
credit balances arising hereunder; (e) guarantees or collateral for any of the
foregoing; (f) credit or property insurance policies or rights relating to any
of the foregoing; and (g) cash and non-cash proceeds of any and all the
foregoing.
AFFILIATE shall mean, as to any Person, any other Person (other than a
- - ---------
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, such Person and the term "control" shall have
the meaning set forth in respect thereof in Rule 105 promulgated under the
Securities Act of 1933, as amended.
ANNIVERSARY DATE shall mean the date occurring three (3) years from the Closing
- - ----------------
Date and the same date in every year thereafter, provided, however, that if the
Company gives notice, in accordance with Section 10 of this Financing Agreement,
to terminate on an Anniversary Date and such date is not a Business Day, then
the Anniversary Date shall be the next succeeding Business Day.
ASSIGNMENT AND TRANSFER AGREEMENT shall mean the Assignment and Transfer
- - ---------------------------------
Agreement in the form of Exhibit A hereto.
AVAILABILITY shall mean at any time of determination the amount by which the
- - ------------
lesser of a) the Line of Credit or b) the amount determined by multiplying the
then sum of Eligible Inventory by the percentage provided for in paragraph 1 of
Section 3 of this Financing Agreement exceeds the sum of x) the outstanding
aggregate amount of all Obligations
-4-
<PAGE>
(excluding all obligations in respect of the outstanding amounts of any Letters
of Credit) and y) the Availability Reserve.
AVAILABILITY RESERVE shall mean at any time of determination an amount equal to
- - --------------------
the sum of a) the then undrawn amount of all outstanding Letters of Credit, b)
commencing upon the earlier of (i) the occurrence of a Default or Event of
Default hereunder or (ii) the Agent ceasing to have, or not be granted on or
prior to the Closing Date, a first and fully perfected mortgage lien upon the
Specified Real Estate unless the Company has established and at all times
thereafter maintains a separate account into which the proceeds of the
collection of sales taxes are deposited and held in trust for the appropriate
tax authority, all in form and substance and on terms and provisions
satisfactory to the Agent, the amount of all unpaid sales taxes due any state
and which sales taxes have been collected by the Company; c) at the Agent's
reasonable discretion, a reserve for proceeds of Inventory on which the Agent
does not have a first and exclusive lien, including for any consigned Inventory;
and d) commencing 180 days after the date hereof, an amount equal to three times
the monthly rent for leased facilities in lieu of landlord waivers (in form and
substance satisfactory to the Agent) which have not been obtained in favor of
the Agent for leased locations at which Inventory is located, provided, however,
that such reserve required under this clause c shall cease upon receipt of
landlord's waivers (in form and substance satisfactory to the Agent) for the
distribution centers and other Collateral locations at which in the aggregate at
least fifty percent (50%) of the value of Inventory is, and continues to be,
located.
BANKRUPTCY COURT ORDER shall mean an order of the United States Bankruptcy Court
- - ----------------------
having jurisdiction over the Company's Chapter 11 Bankruptcy Proceedings
confirming the Plan of Reorganization and authorizing the Company to enter into
this Financing Agreement.
BLOCKED ACCOUNT shall mean any Concentration Account owned by the Company which
- - ---------------
is governed by a blocked account or similar agreement in form substantially
similar to Exhibit B attached hereto and which account is subject to written
instructions only from the Company unless and until the Agent shall give the
institution holding such Concentration Account written instructions to the
contrary in accordance with the terms of paragraph 4 of Section 3 of this
Financing Agreement.
BUSINESS DAY shall mean any date on which both the Agent and The Chase
- - ------------
Manhattan Bank are open for business.
CAPITAL EXPENDITURES for any period shall mean the aggregate of all expenditures
- - --------------------
of the Company during such period that in conformity with GAAP are required to
be included in or reflected by the property, plant or equipment or similar fixed
asset account reflected in the balance sheet of the Company.
CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed)
- - -------------
which, in conformity with GAAP, is accounted for as a capital lease or a Capital
Expenditure on the balance sheet of the Company.
-5-
<PAGE>
CHASE RATE shall mean the rate of interest per annum announced by The Chase
- - ----------
Manhattan Bank, or its successor in interest, from time to time as its prime
rate in effect at its principal office in the County, City and State of New
York. (The prime rate is not intended to be the lowest rate of interest charged
by The Chase Manhattan Bank to its borrowers).
CLOSING DATE shall mean the date upon which the Agent on behalf of the Lenders
- - ------------
makes the initial extension of credit hereunder (whether as a Revolving Loan or
Letter of Credit).
COLLATERAL shall mean all present and future Accounts, Inventory, Documents of
- - ----------
Title, General Intangibles, Equipment, Specified Real Estate and Other
Collateral of the Company.
COLLATERAL MANAGEMENT FEE shall mean the sum of $100,000.00 per annum which
- - -------------------------
shall be paid to the Agent in accordance with Section 7, Paragraph 7 of this
Financing Agreement to offset the expenses and costs of the Agent in connection
with record keeping, periodic examinations, analyzing and evaluating the
Collateral.
COMMITMENT LETTER shall mean the commitment letter, dated May 22, 1996, issued
- - -----------------
by CITBC to, and accepted by, the Company.
CONCENTRATION ACCOUNT shall mean any account owned by the Company which receives
- - ---------------------
funds from i) the Depository Accounts and ii) the credit card companies.
CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for the
- - --------------------------
Company and its Subsidiaries, if any, eliminating all inter-company transactions
and prepared, in the case of any such quarterly or annual balance sheet, in
accordance with GAAP consistently applied.
CUSTOMARILY PERMITTED LIENS shall mean
- - ---------------------------
(a) liens of local or state authorities for franchise or other like taxes
provided the aggregate amounts of such liens shall not exceed $150,000 in the
aggregate at any one time;
(b) statutory liens of landlords and liens of carriers, work-men,
repairmen, warehousemen, processors, mechanics, materialmen, vendors (other than
Inventory vendors or suppliers) and other like liens imposed by law, created in
the ordinary course of business and for amounts not yet due (or which are being
contested in good faith by appropriate proceedings or other appropriate actions
which are sufficient to prevent imminent foreclosure of such liens) and with
respect to which adequate reserves or other appropriate provisions are being
maintained in accordance with GAAP;
(c) deposits made (and the liens thereon) in the ordinary course of
business including, without limitation, security deposits for leases, surety
bonds and appeal bonds,
-6-
<PAGE>
deposits in connection with utilities, workers' compensation, unemployment
insurance and other types of social security benefits or to secure the
performance of tenders, bids, contracts (other than for the repayment or
guarantee of borrowed money or purchase money obligations), statutory
obligations and other similar obligations; and
(d) easements (including, without limitation, reciprocal easement
agreements and utility agreements), licenses, leases, restrictions, covenants,
rights of way, encroachments, minor defects or irregularities in title,
variation and other restrictions, liens, mortgages, charges or other
encumbrances (whether or not recorded) affecting the Company's Real Estate which
do not prohibit the use of the Real Estate for the retail sale of Inventory at
the Company's retail locations or the storage of Inventory at the Inventory
distribution centers.
DEFAULT shall mean any event specified in Section 9 hereof, whether or not any
- - -------
requirement for the giving of notice, the lapse of time, or both, or any other
condition, event or act, has been satisfied.
DEFAULT RATE OF INTEREST shall mean a rate of interest per annum equal to the
- - ------------------------
sum of: i) two percent (2%) and ii) the then applicable rate of interest, which
Default Rate of Interest Rate the Agent on behalf of the Lenders shall be
entitled to charge the Company on all Obligations due the Lenders by the Company
to the extent provided in Section 9, Paragraph 2 of this Financing Agreement.
DEPOSITORY ACCOUNTS shall mean those accounts (other than Concentration
- - -------------------
Accounts) owned by the Company and designated for the deposit of proceeds of
Collateral.
DOCUMENTATION FEE shall mean i) the amount which is included within the Loan
- - -----------------
Syndication Fee and is intended to compensate the Agent for the use of the
Agent's in-house Legal Department and facilities in documenting, in whole or in
part, the initial transaction solely on behalf of the Agent, exclusive of Out-
of-Pocket Expenses, and ii) the Agent's standard and reasonable fees relating to
any and all modifications, waivers, releases, amendments or additional
collateral with respect to this Financing Agreement, the Collateral and/or the
Obligations.
DOCUMENTS OF TITLE shall mean all present and future warehouse receipts, bills
- - ------------------
of lading, shipping documents, instruments and similar documents, all whether
negotiable or not, and all Inventory relating thereto and all cash and non-cash
proceeds of the foregoing.
EARLY TERMINATION DATE shall mean the date on which the Company terminates this
- - ----------------------
Financing Agreement or the Line of Credit which date is prior to an Anniversary
Date.
EARLY TERMINATION FEE shall: i) mean the fee the Agent for the account of the
- - ---------------------
Lenders is entitled to charge the Company in the event the Company terminates
the Line of Credit or this Financing Agreement on a date prior to an Anniversary
Date; and ii) be determined by calculating the sum of (a) the average daily
balance of the Revolving Loans for the period
-7-
<PAGE>
from the date of this Financing Agreement to the Early Termination Date and (b)
the average daily undrawn face amount of the Letters of Credit outstanding for
the period from the date of this Financing Agreement to the Early Termination
Date and multiplying that sum by one percent (1%) per annum for the number of
days from the Early Termination Date to the next Anniversary Date.
EBITDA shall mean, in any period, the net income (or net loss) of the Company
- - ------
and its Subsidiaries, on a consolidated basis plus all amounts deducted in
determining net income in respect of Interest Expense, income tax obligations
(paid or accrued), depreciation expense and amortization expense, and all other
non-cash items, each determined in accordance with GAAP consistently applied.
ELIGIBLE INVENTORY shall mean the gross value (determined at cost by the retail
- - ------------------
inventory method, using a valuation on a first in, first out basis in accordance
with GAAP) of the Company's finished goods Inventory (including, without
limitation, all such Inventory imported under Letters of Credit opened with the
assistance of the Agent hereunder provided that the documents under such Letters
of Credit are consigned to the Agent and such Inventory is covered by insurance
acceptable to the Agent, herein sometimes referred to as "Letter of Credit
Inventory") which is subject to a first and exclusive lien in favor of the Agent
for the benefit of the Lenders and that conforms to the warranties herein less
any i) supplies, ii) Inventory not present in the United States of America
(excluding Letter of Credit Inventory), iii) Inventory returned or rejected by
the Company's customers other than Inventory that is undamaged and resalable in
the normal course of business, iv) Inventory to be returned to the Company's
suppliers, v) Inventory in transit to third parties, vi) shrinkage, and vii)
reserves required by the Agent in accordance with the standard set forth below
and without duplication but only for the following: (a) Inventory specially
ordered for specific customers which Inventory is uniquely different in size,
shape, quality or color and which uniquely different Inventory is not
customarily sold by the Company; (b) market value declines, to the extent the
Inventory's value is below its cost; (c) bill and hold (deferred shipment or
consignment sales); (d) markdowns, to the extent the Inventory's value is below
its cost; (e) Inventory which is not located at the Company's retail store
locations or warehouses (other than Inventory in transit between the Company's
facilities and Letter of Credit Inventory); (f) demonstration items, to the
extent the Inventory's value is below its cost; (g) damaged or defective
Inventory; (h) obsolete Inventory (but not including undamaged Inventory which
is solely out-of-season); (i) Inventory at outlet locations not owned or
operated by the Company; and j) Inventory imported under letters of credit
issued without the assistance of the Letter of Credit Guaranty and then only
until the bank issuing such letters of credit has been reimbursed by the Company
for any drafts under such letters of credit. The amount of such reserves shall
be determined solely by the Agent in its reasonable discretion and in the
exercise of its reasonable business judgment using standards customarily applied
by the Agent to transactions involving retail clients and taking into account
the nature of the Company's business, consistently applied by the Agent. Such
standards shall take into consideration amounts representing, historically, the
Company's reserves, discounts, returns, claims, credits and allowances.
-8-
<PAGE>
EQUIPMENT shall mean all present and hereafter acquired machinery, equipment,
- - ---------
furnishings and fixtures, and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto and all proceeds
of whatever sort.
ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended
- - -----
from time to time and the rules and regulations promulgated thereunder from time
to time, as applicable.
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 9 of this
- - -------------------
Financing Agreement.
FIXED CHARGE COVERAGE RATIO shall mean a ratio determined as of the relevant
- - ---------------------------
calculation date by dividing EBITDA by the sum of i) Capital Expenditures, ii)
Interest Expense, iii) taxes and iv) principal amortization on all Indebtedness,
for the relevant period.
GAAP shall mean generally accepted accounting principles in the United States of
- - ----
America as in effect from time to time and for the period as to which such
accounting principles are to apply. Except as otherwise provided in this
Financing Agreement, all computations and determinations as to accounting or
financial matters and all quarterly and annual consolidated financial statements
to be delivered pursuant to this Financing Agreement shall be made and prepared
in accordance with GAAP (including principles of consolidation where
appropriate), and all accounting or financial terms shall have the meanings
ascribed to such terms by GAAP. If any change in accounting principles from
those effective December 31, 1995 and used in preparation of the financial
statements required hereunder occurs are hereafter occasioned by promulgation of
rules, regulations, pronouncements or opinions by or are otherwise required by
the Financial Accounting Standards Board or the American Institute of Certified
Public Accountants (or successors thereto or agencies with similar functions),
and any such changes results in a change of the method of calculation of, or
affect the results of such calculation of, any financial covenant, standard or
term found herein, then the parties shall amend such financial covenants,
financial standards or terms so as to equitably reflect such changes, with the
desired result that the criteria for evaluating the financial condition and
results of operations of the Company shall be the same after such changes as if
such changes had not been made.
GENERAL INTANGIBLES shall have the meaning set forth in the Uniform Commercial
- - -------------------
Code as in effect in the State of California and shall include, without
limitation, all present and future right, title and interest in and to all
tradenames, trademarks (together with the goodwill associated therewith),
patents, licenses, customer lists, distribution agreements, supply agreements
and tax refunds, together with all monies and claims for monies now or hereafter
due and payable in connection with any of the foregoing or otherwise, and all
cash and non-cash proceeds thereof.
-9-
<PAGE>
INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or
- - ------------
otherwise, which are any of the following: (a) obligations in respect of
borrowed money or for the deferred purchase price of property, services or
assets, other than Inventory, and (b) lease obligations which, in accordance
with GAAP, have been, or which should be capitalized.
INTEREST EXPENSE shall mean i) total cash interest obligations (paid or accrued)
- - ----------------
of the Company and its Subsidiaries, if any, determined in accordance with GAAP
on a basis consistent with the latest audited statements of the Company,
excluding amortization of financing fees related hereto and to other
Indebtedness of the Company and its Subsidiaries, if any, prepayment penalties,
fees or premiums related to the payment, in whole or in part, of Indebtedness of
the Company and its Subsidiaries, if any, and original issue discounts, if any,
minus ii) interest income, if any.
INVENTORY shall mean all of the Company's present and hereafter acquired
- - ---------
merchandise and inventory held for sale or lease and all additions,
substitutions and replacements thereof, wherever located, together with all
packaging or shipping materials and all proceeds thereof of whatever sort.
INVENTORY ADVANCE PERCENTAGE shall mean:
- - ----------------------------
(i) sixty percent (60%) from the date hereof through and including October 31,
1996; and
(ii) fifty-five percent (55%) at all times thereafter.
ISSUING BANK shall mean any bank issuing Letters of Credit for the Company.
- - ------------
LETTERS OF CREDIT shall mean all letters of credit issued with the assistance of
- - -----------------
the Lenders acting through the Agent by the Issuing Banks for or on behalf of
the Company.
LETTER OF CREDIT GUARANTY shall mean any guaranty delivered by the Agent to the
- - -------------------------
Issuing Bank of the Company's reimbursement obligations under the Issuing Bank's
reimbursement agreement, application for Letters of Credit or other like
documents.
LETTER OF CREDIT GUARANTY FEE shall mean the fee the Agent may charge under
- - -----------------------------
paragraph 2 of Section 7 of this Financing Agreement for: i) issuing the Letter
of Credit Guaranty or ii) otherwise aiding the Company in obtaining Letters of
Credit pursuant to Section 4.
LIBOR shall mean, at any time of determination, and subject to availability, the
- - -----
London Interbank Offered Rate paid in London by The Chase Manhattan Bank on one
month, two month, three
-10-
<PAGE>
month or six month dollar deposits and if such rates are not otherwise
available, then those rates as published, under "Money Rates", in the New York
City edition of the Wall Street Journal or if there is no such publication or
statement therein as to Libor, then in any publication used in the New York City
financial community.
LIBOR LOAN shall mean the loans for which the Company has elected to use Libor
- - ----------
for interest rate computations.
LIBOR PERIOD shall mean the Libor for one month, two month, three month, or six
- - ------------
month dollar deposits, as selected by the Company.
LIBOR PROCESSING FEE shall mean the sum of $500.00 which the Agent, for its own
- - --------------------
account, shall be entitled to charge the Company in accordance with, but subject
to, the provisions of Section 7 of this Financing Agreement upon the election of
a Libor Loan.
LINE OF CREDIT shall mean the commitment of the Lenders acting through the Agent
- - --------------
to make loans and advances and issue Letter of Credit Guaranties, all pursuant
to and in accordance with, but subject to, Sections 3 and 4 of this Financing
Agreement, in the aggregate amount of $60,000,000 or such lesser amount as the
Company may elect in accordance with Section 7 of this Financing Agreement.
LINE OF CREDIT FEE shall: i) mean the fee due to the Agent at the end of each
- - ------------------
month for the Line of Credit, and ii) be determined by multiplying x) the
difference between the Line of Credit less the sum of a) the average daily
Revolving Loans outstanding during such month and b) the average daily undrawn
face amount of all outstanding Letters of Credit, for said month by y) one half
of one percent (1/2 of 1%) per annum for the number of days in said month during
which this Financing Agreement was in effect.
LOAN FACILITY FEE shall mean the fee payable to the Agent in accordance with,
- - -----------------
and pursuant to, the provisions of Section 7 of this Financing Agreement.
LOAN SYNDICATION FEE shall mean the fee payable to CITBC and solely for the
- - --------------------
account of CITBC, in accordance with, and pursuant to, the provisions of Section
7 of this Financing Agreement.
MERGER shall mean the merger of Fabricland, Inc., Sofro Fabrics, Inc., House of
- - ------
Fabrics of South Carolina, Inc., and Metrolina Express, Inc., with and into the
Company.
NET WORTH shall mean Total Assets of the Company and its Subsidiaries, if any,
- - ---------
on a consolidated basis, in excess of Total Liabilities, and determined in
accordance with GAAP, on a consistent basis with the latest audited statements
of the Company and its Subsidiaries, if any.
-11-
<PAGE>
OBLIGATIONS shall mean all obligations of the Company to pay, as and when due
- - -----------
and payable, all amounts from time to time owing by and in respect of this
Financing Agreement or any of loan documents related to this Financing
Agreement, including, without limitation, all loans and advances made or to be
made by the Agent on behalf of the Lenders to the Company, or to others for the
Company's account under this Financing Agreement or any loan document related to
this Financing Agreement; any and all indebtedness and obligations which may at
any time be owing by the Company under this Financing Agreement or any other
loan document related to this Financing Agreement, whether now in existence or
incurred by the Company from time to time hereafter; whether secured by pledge,
lien upon or security interest in the Company's assets or property or the assets
or property of any other person, firm, entity or corporation; whether such
indebtedness is absolute or contingent, matured or unmatured, direct or indirect
and whether the Company is liable for such indebtedness as principal, surety,
endorser, guarantor or otherwise. Obligations shall also include, without
duplication of the foregoing, all indebtedness owing by the Company under this
Financing Agreement or under any other agreement or arrangement hereafter
entered into between the Company and the Agent on behalf of the Lenders,
including, but not limited to, obligations to the Agent on behalf of the Lenders
in respect of Letters of Credit issued with the assistance of the Letter of
Credit Guaranty, indebtedness or obligations incurred by, or imposed on, the
Agent or the Lenders as a result of environmental claims arising out of the
Company's operations, premises or waste disposal practices or sites, the
Company's liability to the Agent on behalf of the Lenders under any instrument
of guaranty or indemnity, or arising under any guaranty, endorsement or
undertaking which the Agent on behalf of the Lenders may make or issue to others
for the Company's accounts, all at the Company's request hereafter, but in no
event shall Obligations include any obligations due any affiliate of a Lender.
OPERATING LEASES shall mean all leases of property (whether real, personal or
- - ----------------
mixed) other than Capital Leases.
OTHER COLLATERAL shall mean all now owned and hereafter acquired deposits
- - ----------------
accounts maintained with any bank or financial institutions; all cash and other
monies and property in the possession or control of the Agent and/or the
Lenders; all books, records, ledger cards, disks and related data at any time
evidencing or containing information relating to any of the Collateral described
herein or otherwise necessary or helpful in the collection thereof or
realization thereon, and all cash and non-cash proceeds of the foregoing.
OUT-OF-POCKET EXPENSES shall mean all of the Agent's reasonable and documented
- - ----------------------
expenses incurred relative to the commitment letter or the closing of this
Financing Agreement and any amendment, modification or waiver thereof, whether
incurred heretofore or hereafter, and, in any case, at the Company's request,
with appropriate documentation delivered to the Company, which expenses shall
include, without being limited to, the cost of record searches, all costs and
expenses incurred by the Agent in opening bank accounts, depositing checks,
receiving and transferring funds, and any charges imposed on the Agent due to
"insufficient funds" of deposited checks the Agent's
-12-
<PAGE>
standard fee relating thereto, any amounts paid by the Agent on behalf of the
Lenders to an Issuing Bank or incurred by or charged to the Agent on behalf of
the Lenders by the Issuing Bank under the Letter of Credit Guaranty or the
Company's reimbursement agreement, application for letter of credit or other
like document which pertain either directly or indirectly to such Letters of
Credit, and the Agent's standard and reasonable fees relating to the Letters of
Credit and any drafts thereunder, local counsel fees, if any, fees and taxes
relative to the filing of financing statements, and all expenses, costs and fees
set forth in paragraph 3 of Section 9 of this Financing Agreement.
PERMITTED ENCUMBRANCES shall mean: i) liens existing on the date hereof and
- - ----------------------
listed on Schedule 1 hereto and other liens expressly permitted, or consented
to, by the Agent on behalf of the Lenders; ii) Customarily Permitted Liens; iii)
liens granted the Agent on behalf of the Lenders by the Company; iv) liens of
judgment creditors, provided such liens do not exceed, in the aggregate, at any
time, $500,000 (other than liens stayed, satisfied, bonded or insured to the
reasonable satisfaction of the Agent within a) fifteen (15) calendar days of the
date the Company acquired actual knowledge of such judgment lien or b) fifteen
(15) calendar days of the date such lien attached by levy, whichever first
occurs); or; v) liens for taxes, levies or assessments not yet due and payable
or which are being diligently contested in good faith by the Company by
appropriate proceedings, and which liens are not a) senior to the lien of the
Agent on behalf of the Lenders, or b) for taxes due the United States of
America; vi) liens, if any, given to an Issuing Bank in connection with a Letter
of Credit obtained with the assistance of the Letter of Credit Guaranty; vii)
liens securing Purchase Money Obligations; viii) liens given to secure Permitted
Term Loan Debt and/or the Permitted Point of Sale Debt; ix) liens on assets,
other than the Collateral, of the Company, to secure the Indebtedness referenced
in clause viii) of the definition of Permitted Indebtedness; and x) any
extension, renewal or replacement of any of the foregoing, provided that any
extension, renewal or replacement lien shall be limited to the property or
assets covered by the lien extended, renewed or replaced and the obligation
secured by such extension, renewal or replacement lien shall be in an amount not
greater than the obligations secured by the lien extended, renewed or replaced
plus the amount of all expenses, fees, premiums and penalties paid in connection
with such extension, renewals or replacement.
PERMITTED INDEBTEDNESS shall mean: i) Indebtedness incurred in the ordinary
- - ----------------------
course of business for Inventory, services, taxes or labor; ii) Indebtedness
arising in connection with Letters of Credit, this Financing Agreement and the
loan documents related to this Financing Agreement; iii) deferred taxes and
other expenses incurred in the ordinary course of business; iv) other
Indebtedness (A) existing on the date of execution of this Financing Agreement
and listed in the most recent financial statement delivered to the Agent, (B)
allowed by the Plan of Reorganization, or (C) otherwise disclosed to the Agent
in writing on or before the date hereof; v) Indebtedness arising in connection
with or secured by, the Permitted Encumbrances; vi) Permitted Term Loan Debt and
Permitted Point of Sale Debt; vii) Indebtedness incurred in the form of surety,
customs and appeal bonds and other obligations of a similar nature; viii) other
Indebtedness of the Company
-13-
<PAGE>
in an amount not to exceed $5,000,000 in the aggregate at any time outstanding,
provided, such Indebtedness is a) not secured by the Collateral and b) not due
any Subsidiaries of the Company and ix) any extension, renewal or replacement of
any of the foregoing, provided that any extension, renewal or replacement shall
be in an amount not greater than the Indebtedness so extended, renewed or
replaced (plus the amount of expenses, fees and any premium or penalty paid in
connection with such extension, renewal or replacement).
PERMITTED INVESTMENTS shall mean (i) commercial paper and municipal bonds, in
- - ---------------------
each case issued or guaranteed by a Person rated P-1 or better by Moody's
Investors Service, Inc. ("Moody's") or A-1 or MIG-1 or better by Standard &
Poor's Corporation ("S & P"), (ii) certificates of deposit, time deposits,
Eurodollar deposits or bankers' acceptances maturing not more than one year
after the date of issue, issued by any commercial banking institution, which is
a member of the Federal Reserve System and has a combined capital and surplus
and undivided profits of not less than $100,000,000, (iii) repurchase agreements
having maturities of not more than one year and which are secured by readily
marketable direct obligations of the Government of the United States of America
or any agency thereof, (iv) readily marketable obligations of the Government of
the United States of America or any agency thereof; (v) readily marketable
obligations issued by any state of the United States or any political
subdivision thereof having a rating by Moody's or S & P of "A" or its equivalent
or better; and (vi) mutual funds regularly traded in the United States of
America whose investments are limited to those described in clauses (i) through
(v) above.
PERMITTED POINT OF SALE DEBT shall mean Indebtedness not to exceed $10,000,000
- - ----------------------------
(on terms and conditions satisfactory to the Agent in the exercise of its
reasonable business judgment) incurred solely for the purchase, support and
installation of a Point of Sale inventory tracking system and/or a Management
Information System, which Indebtedness is or may be, secured by the assets so
purchased, supported or installed, provided that no Default or Event of Default
has occurred or would occur after giving effect thereto.
PERMITTED DISPOSITIONS OF SPECIFIED REAL ESTATE shall mean that the Company may
- - -----------------------------------------------
sell or obtain financing on the Specified Real Estate and the Agent shall
release its mortgage lien (if any) upon such Specified Real Estate, provided
that:
(i) no Default and/or Event of Default has occurred hereunder; and
(ii) after giving effect to such sale or financing and the Agent's establishment
of an Availability Reserve based upon the sales tax obligations and
liabilities of the Company, the Company's Availability hereunder
(determined on the basis of all of the Company's debts, obligations and
payables being current) would be $1,000,000 or more.
-14-
<PAGE>
PERMITTED TERM LOAN DEBT shall mean a term loan in the original principal amount
- - ------------------------
not to exceed $15,000,000 (on terms and conditions satisfactory to the Agent in
the exercise of its reasonable business judgement) secured by a first mortgage
on the Specified Real Estate and a junior, subordinated and passive lien upon
the Collateral, provided that (x) no Default or Event of Default has occurred or
would occur after giving effect thereto and (y) the Company has established and
maintains a separate account into which the proceeds of the collection of sales
taxes are deposited and held in trust for the appropriate tax authority, all in
form and substance and on terms and provisions satisfactory to the Agent and (z)
the lender extending such term loan executes and delivers to Agent an
intercreditor agreement (in form and substance satisfactory to Agent in its sole
discretion).
PERSON shall mean an individual, partnership, corporation, business trust, joint
- - ------
stock company, trust, unincorporated association, joint venture, governmental
authority or other entity of whatever nature.
PLAN OF REORGANIZATION shall mean the Company's Third Amended Joint Plan of
- - ----------------------
Reorganization dated May 23, 1996 (as Modified) in its Chapter 11 proceedings
under the United States Bankruptcy Code.
PURCHASE MONEY OBLIGATIONS shall mean the Indebtedness incurred to construct,
- - --------------------------
purchase or lease Equipment and/or Real Estate not to exceed $1,000,000
(exclusive of Permitted Point of Sale Debt) in the aggregate for any fiscal year
which is secured solely by a lien on such Equipment and/or Real Estate.
REAL ESTATE shall mean the Company's leasehold and fee interests in real
- - -----------
property.
REPORTING DATE shall mean any date on which the Company is to deliver to the
- - --------------
Agent any Collateral report pursuant to Paragraph 2 of Section 3 of this
Financing Agreement, any financial statement or any other information requested
of the Company pursuant to the terms of this Financing Agreement.
REQUIRED LENDERS shall mean Lenders holding more than fifty percent (50%) of the
- - ----------------
outstanding loans, advances, extensions of credit and commitments of the Company
hereunder.
RETAINED CASH shall mean an amount of cash sufficient to provide the Company
- - -------------
with cash in an amount necessary to stock the Company's cash registers at its
retail locations and consistent with the business practices of the Company plus
amounts not to exceed $500,000 in the aggregate at any time.
REVOLVING LOANS shall mean the loans and advances made, from time to time, to or
- - ---------------
for the account of the Company by the Lenders acting through the Agent pursuant
to Section 3 of this Financing Agreement.
-15-
<PAGE>
SETTLEMENT DATE shall mean the date, weekly, and more frequently, at the
- - ---------------
discretion of the Agent , upon the occurrence of an Event of Default or a
continuing decline or increase of the Revolving Loans that the Agent and the
Lenders shall settle amongst themselves so that x) the Agent shall not have, as
Agent, any money at risk and y) on such Settlement Date the Lenders shall have a
pro rata amount of all outstanding Revolving Loans and Letters of Credit,
provided that each Settlement Date for a Lender shall be a Business Day on which
such Lender and its bank are open for business.
SPECIFIED REAL ESTATE shall mean the Company's fee interest in the Real Estate
- - ---------------------
located in Mauldin, South Carolina.
SUBSIDIARY shall mean as to any Person, a corporation, partnership or other
- - ----------
entity of which shares of stock or other ownership interest having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to a "Subsidiary" or
to "Subsidiaries" in this Financing Agreement shall refer to a Subsidiary or
Subsidiaries of the Company.
TOTAL ASSETS shall mean total assets of the Company and its Subsidiaries, if
- - ------------
any, on a consolidated basis, determined in accordance with GAAP, on a basis
consistent with the latest audited statements of the Company and its
Subsidiaries.
TOTAL LIABILITIES shall mean total liabilities of the Company and its
- - -----------------
Subsidiaries, if any, on a consolidated basis, determined in accordance with
GAAP, on a basis consistent with the latest audited statements of the Company
and its Subsidiaries.
TRADE ACCOUNTS PAYABLE shall mean, at any time of determination, the amounts due
- - ----------------------
any supplier for Inventory sold to the Company.
TRADE ACCOUNTS RECEIVABLE shall mean, at any time of determination, the amounts
- - -------------------------
due the Company by any i) credit card issuer and ii) any customer obligated on
an invoice, in each instance due as a result of a sale of Inventory or the
rendition of services by the Company in the ordinary course of its business.
SECTION 2. CONDITIONS PRECEDENT
--------------------
-16-
<PAGE>
The obligation of the Lenders acting through the Agent to make loans
hereunder is subject to the satisfaction of, or waiver of, immediately prior to
or concurrently with the making of such loans, the following conditions
precedent:
a) LIEN SEARCHES - The Agent shall have received tax, judgment and Uniform
-------------
Commercial Code searches satisfactory to the Agent for all locations presently
occupied or used by the Company.
b) CASUALTY INSURANCE - The Company shall have delivered to the Agent
------------------
evidence satisfactory to the Agent that casualty insurance policies covering the
Inventory listing the Agent on behalf of the Lenders as loss payee are in full
force and effect, all as set forth in Section 6, paragraph 4 of this Financing
Agreement.
c) UCC FILINGS - Any documents (including without limitation, financing
-----------
statements) required to be filed in order to create, in favor of the Agent on
behalf of the Lenders, subject to the Permitted Encumbrances, a first and
exclusive perfected security interest in the Collateral with respect to which a
security interest may be perfected by a filing under the Uniform Commercial Code
shall have been properly filed in each office in each jurisdiction required in
order to create in favor of the Agent on behalf of the Lenders a perfected lien
on the Collateral. The Agent shall have received acknowledgement copies of all
such filings (or, in lieu thereof, CITBC shall have received other evidence
satisfactory to the Agent that all such filings have been made); and the Agent
shall have received evidence that all necessary filing fees and all taxes or
other expenses related to such filings have been paid in full.
d) EXAMINATION & VERIFICATION - The Agent, for the benefit of the Lenders,
--------------------------
shall have completed to its satisfaction an examination and verification of the
Accounts, Inventory, books and records of the Company. The Agent shall have
completed to the satisfaction of the Agent an examination and verification of
the Accounts, Inventory, books and records of the Company which examination
shall indicate that, after giving effect to all loans, advances and extensions
of credit to be made at closing, the Company shall have an opening additional
Availability of $5,000,000. It is understood that such requirement
contemplates that all debts, obligations and payables are current.
e) OPINIONS - Counsel for the Company shall have delivered to the Agent on
--------
behalf of the Lenders opinions satisfactory to the Agent opining, inter alia,
that, subject to the i) filing, priority and remedies provisions of the Uniform
Commercial Code, ii) the provisions of the Bankruptcy Code, insolvency statutes
or other like laws, iii) the equity powers of a court of law and iv) such other
matters as may be agreed upon with the Lenders, the Financing Agreement and all
related loan documents of the Company x) are valid, binding and enforceable
according to their terms, y) are duly authorized and z) do not violate any
terms, provisions, representations or covenants in the charter or by-laws of the
Company or, to the knowledge of such counsel, after reasonable inquiry, of any
loan agreement, mortgage, deed of trust, note, security or pledge agreement or
indenture,
-17-
<PAGE>
identified by the Company to such counsel as material, to which the Company is a
signatory or by which the Company or its assets are bound. In addition, counsel
for the Company shall opine that (i) the Merger has been effected and (ii) the
Bankruptcy Court Order confirming the Plan of Reorganization and authorizing the
Company's execution of this Financing Agreement (x) has been issued and entered,
and no appeal has been filed with respect thereto, (y) has become final and not
subject to any further appeal and (z) the effectiveness of such Order has not
been stayed. The opinion required under Clause (ii) above shall be rendered by
the Company's bankruptcy counsel, Stutman, Treister & Glatt, or other bankruptcy
counsel satisfactory to the Agent.
f) ADDITIONAL DOCUMENTS - The Company shall execute and deliver to the
--------------------
Agent for the benefit of the Lenders all loan documents necessary to consummate
the lending arrangement contemplated between the Company and the Lenders,
including without limitation the mortgage and/or deed of trust on its South
Carolina Real Estate and receipt of a pay-out letter from its present lenders.
g) BOARD RESOLUTION - The Agent for the benefit of the Lenders shall have
----------------
received a copy of the resolutions of the Board of Directors of the Company,
authorizing the execution, delivery and performance of (i) this Financing
Agreement, and (ii) any related agreements, certified by the Secretary or
Assistant Secretary of the Company, as of the date hereof, together with a
certificate of the Secretary or Assistant Secretary of the Company as to the
incumbency and signature of the officers of the Company executing this Financing
Agreement and any certificate or other documents to be delivered by it pursuant
hereto, together with evidence of the incumbency of such Secretary or Assistant
Secretary.
h) CORPORATE ORGANIZATION - The Agent for the benefit of the Lenders shall
----------------------
have received (i) a copy of the Certificate of Incorporation of the Company
certified by the Secretary of State of its incorporation, and (ii) a copy of the
By-Laws (as amended through the date hereof) of the Company and certified by the
Secretary or Assistant Secretary of the Company.
i) OFFICER'S CERTIFICATE - The Agent for the benefit of the Lenders shall
---------------------
have received an executed Officer's Certificate of the Company, satisfactory in
form and substance to the Agent, certifying that: (i) the representations and
warranties contained herein are true and correct in all material respects on and
as of the date hereof; (ii) the Company is in compliance with all of the terms
and provisions set forth herein; and (iii) no Event of Default or Default has
occurred.
j) ABSENCE OF DEFAULT - No material adverse change in the financial
------------------
condition, business, prospects, profits (after giving affect to the seasonal
nature of the Company's business), operations or assets of the Company shall
have occurred. No Default or Event of Default shall exist as of the date of
this Financing Agreement.
k) LEGAL RESTRAINTS/LITIGATION - At the Closing Date of this Financing
---------------------------
Agreement, there shall be, to the actual knowledge of the management of the
Company or to the actual knowledge of any Lender, no x) litigation,
investigation or proceeding
-18-
<PAGE>
(judicial or administrative) pending or threatened against the Company or its
assets, by any agency, division or department of any county, city, state,
province or federal government arising out of this Financing Agreement, or the
financing arrangement contemplated under this Financing Agreement, y)
injunction, writ or restraining order restraining or prohibiting the
consummation of the financing arrangements contemplated under this Financing
Agreement or z) suit, action, investigation or proceeding (judicial or
administrative) pending or threatened against the Company, or its assets, which,
is reasonably likely to result in a material adverse effect on the business,
operation, assets or financial condition of the Company or the Collateral.
l) DISBURSEMENT AUTHORIZATION - The Company shall have delivered to the
--------------------------
Agent all information necessary for the Lenders acting through the Agent to
issue wire transfer instructions on behalf of the Company for the initial and
subsequent loans and/or advances to be made under this Financing Agreement
including, but not limited to, disbursement authorizations in a form acceptable
to the Agent.
m) BANKING AND/OR CREDIT CARD ARRANGEMENTS - Within ten (10) days after
---------------------------------------
the Closing Date of this Financing Agreement the Company shall have converted
all of its Concentration Accounts (other than operating accounts) into Blocked
Accounts and will have required the credit card companies to remit balances,
when due, to a Blocked Account.
n) TITLE INSURANCE POLICIES - Unless (i) the Permitted Term Loan Debt
------------------------
has been funded prior to or simultaneously with the initial loan or advance
hereunder, (ii) the Company has requested that the Agent establish and maintain
an Availability Reserve for sales tax obligations and liabilities of the
Company, or (iii) the Company has established and maintains a separate account
into which the proceeds of the collection of sales taxes are deposited and held
in trust for the appropriate tax authority, the Agent shall have received, in
respect of each mortgage or deed of trust with respect to the Specified Real
Estate, a mortgagee's title policy or marked-up unconditional binder for such
insurance. Each such policy shall (i) be in an amount satisfactory to the Agent;
(ii) insure that the mortgage or deed of trust insured thereby creates a valid
first lien on the property covered by such mortgage or deed of trust, free and
clear of all defects and encumbrances except those acceptable to the Agent;
(iii) name the Agent as the insured thereunder; and (iv) contain such
endorsements and effective coverage as the Agent may reasonably request,
including without limitation the revolving line of credit endorsement. The Agent
shall also have received evidence that all premiums in respect of such policies
have been paid and that all charges for mortgage recording taxes, if any, shall
have been paid.
o) SURVEYS - Unless (i) the Permitted Term Loan Debt has been funded
-------
prior to or simultaneously with the initial loan or advance hereunder, (ii) the
Company has requested that the Agent establish and maintain an Availability
Reserve for sales tax obligations and liabilities of the Company or (iii) the
Company has established and maintains a separate account into which the proceeds
of the collection of sales taxes are deposited and held in
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<PAGE>
trust for the appropriate tax authority, the Agent and the title insurance
company issuing each policy referred to in the immediately preceding paragraph
(each, a "Title Insurance Company") shall have received maps or plats of a
-----------------------
perimeter or boundary of the site of the Specified Real Estate to be covered by
the mortgages or deeds of trust, dated a date satisfactory to the Agent and the
relevant Title Insurance Company prepared by an independent professional
licensed land surveyor satisfactory to the Agent and the relevant Title
Insurance Company, which maps or plats and the surveys on which they are based
shall be made in accordance with the Minimum Standard Detail Requirements for
Land Title Surveys jointly established and adopted by the American Land Title
Association and the American Congress on Surveying and Mapping; and, without
limiting the generality of the foregoing, there shall be surveyed and shown on
the maps or plats or surveys the following: (i) the locations on such sites of
all the buildings, structures and other improvements and the established
building setback lines insofar as the foregoing affect the perimeter or boundary
of such property; (ii) the lines of streets abutting the sites and width
thereof; (iii) all access and other easements appurtenant to the sites or
necessary or desirable to use the sites; (iv) all roadways, paths, driveways,
easements, encroachments and overhanging projections and similar encumbrances
affecting the sites, whether recorded, apparent from a physical inspection of
the sites or otherwise known to the surveyor; (v) any encroachments on any
adjoining property by the building structures and improvements on the sites; and
(vi) if the site is designated as being on a filed map, a legend relating the
survey to said map. Further, the survey shall x) be certified to the Agent and
the Title Insurance Company and y) contain a legend reciting as to whether or
not the site is located in a flood zone.
p) PLAN OF REORGANIZATION - The Agent shall have reviewed and be satisfied
----------------------
with all of the terms and provisions of the Company's Plan of Reorganization.
q) MERGER - The Merger shall have been effected.
------
r) BANKRUPTCY COURT ORDER - The Bankruptcy Court Order (i) shall have
----------------------
been issued and entered (in form and substance satisfactory to the Agent), and
no appeal shall have been filed with respect thereto, (ii) shall have become
final and not subject to any further appeal and (iii) shall be effective and not
subject to any stay.
s) COMMITMENT LETTER - The Company shall have fully complied, to the
-----------------
satisfaction of the Agent, with all of the material terms and conditions of the
Commitment letter. To the extent that any terms of the Commitment Letter
conflict with the terms of this Financing Agreement, the terms of this Financing
Agreement shall apply.
Upon the execution of this Financing Agreement and the initial disbursement
of loans hereunder, except as otherwise set forth herein, all of the above
Conditions Precedent shall have been deemed satisfied except as the Company and
the Agent shall otherwise agree herein or in a separate writing.
-20-
<PAGE>
Notwithstanding the foregoing, Conditions Precedent b,c,d,e,g,h,i,l,n,o,q,r
and s of this Section 2 have not been fulfilled to the Agent's satisfaction on
the date hereof (herein "Unfulfilled Conditions Precedent") and the Agent's
obligation to make the initial disbursement of Revolving Loans and/or Letters of
Credit hereunder is subject to the fulfillment of such Unfulfilled Conditions
Precedent to the Agent's satisfaction no later than the close of business on
July 31, 1996. It is specifically contemplated that: (i) the Company and its
subsidiaries shall merge and the Company shall be the survivor of said merger
(as contemplated herein); (ii) the Bankruptcy Court Order shall become final and
not otherwise amended, modified or subject to any stay; (iii) all of the
security documents and agreements executed in conjunction with this Financing
Agreement shall have been executed and delivered to the Agent, in form and
substance satisfactory to the Agent, including without limitation the mortgage
or deed of trust on the Company's Real Estate in South Carolina; (iv) the
Company's outstanding Indebtedness to its prior lenders, including Bank of
America as agent, shall be satisfied and the Agent shall have received
termination statements and pay-out documents satisfactory to the Agent; and (v)
the Agent and the Lenders shall receive an estimated opening balance sheet of
the Company as of August 1, 1996 (and a final thereof within forty-five days
thereof). Notwithstanding the Unfulfilled Conditions Precedent, the Loan
Facility Fee and the initial Collateral Management Fee shall be, and each hereby
is fully earned, and payable in full upon the Closing Date. In the event that
the foregoing Unfulfilled Conditions Precedent are not fulfilled to the Agent's
satisfaction by the close of business on July 31, 1996, the Agent shall have the
right (a) upon notice to the Company to declare this Financing Agreement to be
terminated, null and void and of no further force or effect, or (b) to extend
its commitment hereunder upon written notice from the Agent to the Company.
SECTION 3. REVOLVING LOANS
---------------
1. The Lenders, acting through the Agent, agree, subject to the terms and
conditions of this Financing Agreement from time to time, and within x) the
Availability and y) the Line of Credit, but subject to the Agent's and the
Lenders' (acting through the Agent) rights to make "Overadvances", to make loans
and advances to the Company on a revolving basis, and subject to the limitations
set forth herein, the Company may borrow, repay and re-borrow Revolving Loans.
Such loans and advances shall be in amounts up to an amount equal to the
aggregate value of the Company's Eligible Inventory multiplied by the Inventory
Advance Percentage. Each request for loans and advances hereunder shall
constitute a representation and warranty that the requested loan or advance is
within the Line of Credit and Availability and that no Default or Event of
Default has occurred hereunder. All requests for loans and advances (other than
LIBOR Loans) must be received by an officer of the Agent no later than 2:00 p.m.
New York time on the Business Day on which such loans and advances are required.
Should the Agent for any reason honor requests for advances in excess of the
limitations set forth herein, such advances shall be considered "Overadvances"
and shall be made in the Agent's sole discretion, subject to any additional
terms the Agent deems necessary.
2. In furtherance of the continuing collateral assignment and security
interest in the Company's Accounts and Inventory, the Company shall deliver to
the Agent not later than: 1) thirty (30) days after the end of each month an
aging of the Company's Trade Accounts Receivable in such form and manner as the
Agent may reasonably require but consistent with the current practices of the
Company (provided, however, that such aging reports shall not be required in any
month when the amount of the Trade Accounts Receivable are less than
$2,500,000); and 2) six (6) Business Days after the end of each week, a weekly
Inventory confirmation statement estimating the aggregate amount of Eligible
Inventory of the Company; and 3) thirty (30) days after the end of each month a
preliminary monthly Inventory Confirmation Statement stating the aggregate
amount of Eligible Inventory of the Company, followed by a final confirmation
statement within forty-five (45) days after the end of each such month. With
respect to all such reports, the Company will provide to the Agent such
additional information and material as the Agent may reasonably request to
effectively evaluate the Trade Accounts Receivable and the collectability
thereof and the mix of the Inventory and such other information as the Agent may
reasonably require to evaluate the Company's Trade Accounts Receivable and
Inventory, such as returns, claims, credits, allowances and information
identifying and describing the Trade Accounts Receivable. Failure to provide the
Agent with the foregoing information will in no way effect, diminish, modify, or
limit the security interest granted herein. Such reports are to be executed by a
responsible officer of the Company.
3. The Company hereby represents and warrants that: a) sales of Inventory
are, and shall be, based upon actual and bona fide sales and deliveries of
Inventory x) in the ordinary course of the Company's business, y) in connection
with the liquidation of an immaterial portion of the Inventory or z) after the
occurrence of a casualty loss, bulk sales
-21-
<PAGE>
of salvageable Inventory, and that, in any instance, the Inventory being sold
and the proceeds thereof are the exclusive property of the Company and are not
and shall not be subject to any lien, charge, arrangement, encumbrance, security
interest, or financing statement whatsoever other than the Permitted
Encumbrances; b) invoices representing Trade Accounts Receivable or credit card
receipts evidencing credit card sales are in the name of the Company and except
for disputes, offsets, defenses, counterclaims, contras, returns or credits, all
arising in the normal course of the Company's business or except as may be
promptly disclosed to the Agent, the purchasers of such Inventory owe and are
obligated to pay the amount stated in the invoices or credit card receipts; and
c) except for the Permitted Encumbrances, any and all taxes and fees relating to
its business are the Company's sole responsibility and that same will be paid
when due (except as otherwise provided in this Financing Agreement), and that
none of said taxes or fees represent a lien on or claim against the proceeds of
any sale of Inventory. The Company agrees to issue credit memoranda promptly.
The Company also warrants and represents that it is a duly and validly existing
corporation and is qualified to transact business in all states where the
failure to so qualify would have a material adverse effect on the business of
the Company or the ability of such Company to enforce collection of Trade
Accounts Receivable due from Persons residing in that state.
4. During the term of this Financing Agreement, the Company may and will,
at its expense, consistent with the Company's existing business practices,
enforce, collect and receive all amounts owing on the Accounts. Except for the
Retained Cash, all checks or cash from the sale of Inventory must be deposited
promptly to the Depository Accounts, and promptly thereafter and therefrom, to a
Blocked Account. The Company shall require that all amounts due under credit
card sales be remitted by the credit card companies to a Blocked Account. The
Company agrees that it will only direct the flow of funds from the Depository
Accounts and the credit card remitters to the Blocked Accounts. The institutions
holding such Blocked Accounts will be instructed that when it is satisfied that
such funds on deposit are "good funds", such institution will remit such "good
funds" to the Agent for the account of the Lenders. All amounts received by the
Agent for the account of the Lenders will be credited to the Obligations upon
the Agent's receipt of "good funds" at its bank account in New York, New York on
the Business Day of receipt if received no later than 2 p.m. New York time or on
the next succeeding Business Day if received after 2 p.m. New York time. No
checks, drafts or other instruments received by the Agent will constitute final
payment unless and until such instruments have actually been collected. If the
loan account reflects a zero Revolving Loan balance and there is then no Event
of Default, then the Agent shall promptly remit to the operating account of the
Company any credit balances in the loan account.
5. The Agent shall maintain a separate account on its books in the
Company's name in which the Company will be charged with loans, advances and
payments under the Letter of Credit Guaranty, made to the Company or for its
account, and with any other Obligations, including any and all reasonable costs,
expenses and reasonable and documented attorney's fees which the Agent may incur
in connection with the exercise of any of the rights or powers herein conferred
or in the prosecution or defense of any action
-22-
<PAGE>
or proceeding to enforce or protect any rights of the Agent or of any Lender in
connection with this Financing Agreement or the Collateral assigned hereunder,
or any Obligations owing by the Company. The Company will be credited with all
amounts received by the Agent from the Company or from others for the Company's
account, including, as above set forth, all amounts received by the Agent from
institutions holding Blocked Accounts and such amounts will be applied to
payment of the Obligations. In no event shall prior recourse to any Accounts or
other security granted to or by the Company be a prerequisite to the Agent's
right to demand payment of any Obligation. Further, it is understood that
neither the Agent nor any Lender shall have any obligation whatsoever to perform
in any respect any of the Company's contracts or obligations relating to the
Accounts.
6. After the end of each month, the Agent, on its own behalf and/or acting
on behalf of the Lenders, shall promptly send the Company a statement showing
the accounting for the charges, loans, advances, payments under the Letter of
Credit Guaranty, and other transactions occurring between the Agent, on its own
behalf, and/or on its own behalf or acting on behalf of the Lenders and the
Company during that month. The monthly statement shall be deemed correct and
binding upon the Company and shall constitute an account stated between the
Company, the Agent and the Lenders unless the Agent receives a written statement
of the exceptions within sixty (60) days of the date of the monthly statement.
7. In the event that the sum of (i) the outstanding balance of Revolving
Loans and (ii) outstanding balance of Letters of Credit exceeds (x) the maximum
amount thereof available under Sections 3 and 4 hereof or (y) the Line of Credit
(herein the amount of any such excess shall be referred to as the "Excess") such
Excess shall be due and payable to the Agent for the benefit of the Lenders
immediately upon the Agent's demand therefor.
SECTION 4. LETTERS OF CREDIT
-----------------
In order to assist the Company in establishing or opening i) documentary
Letters of Credit with an Issuing Bank to cover the purchase and importation of
inventory and ii) standby Letters of Credit with an Issuing Bank to cover such
other matters as the Company may so decide, other than for the purchase of
Inventory or to secure present or future Trade Accounts Payable, the Company has
requested the Agent, acting on behalf of the Lenders, to join in the
applications for such Letters of Credit, and/or guarantee payment or performance
of such Letters of Credit and any drafts or acceptances thereunder through the
issuance of the Letters of Credit Guaranty, thereby lending the Lenders' credit
to the Company and the Lenders, acting through the Agent, have agreed to do so.
These arrangements shall be handled by the Agent, acting on behalf of the
Lenders, subject to the terms and conditions set forth below.
1. Within the Line of Credit, the Lenders, acting through the Agent,
shall assist the Company in obtaining such Letters of Credit in an amount not to
exceed $20,000,000 in the aggregate outstanding at any one time. The Agent's
assistance with respect to Letters of
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<PAGE>
Credit for amounts in excess of the limitations set forth herein shall at all
times and in all respects be in the Agent's sole discretion. Notwithstanding
anything herein to the contrary, upon the occurrence of a Default and/or an
Event of Default, the Agent's assistance with respect to any Letters of Credit
shall be in the Agent's sole discretion unless such Event of Default is waived
in writing, or such Default is cured to the Agent's satisfaction in the exercise
of its reasonable business judgment during any applicable grace or cure period.
2. The Agent, acting on behalf of the Lenders, shall have the right,
without notice to the Company, to charge the loan account with the amount of any
and all indebtedness, liability or obligation of any kind paid or incurred under
the Letters of Credit Guaranty at the earlier of: a) payment by the Agent under
the Letters of Credit Guaranty, or b) termination of this Financing Agreement in
accordance with Section 10 of this Financing Agreement. Any amount so charged to
the loan account shall be charged against any credit balances then in the loan
account, and if there are then insufficient credit balances then to the extent
of such insufficiency such amount shall be deemed a Revolving Loan hereunder and
shall incur interest at the rate provided for in Section 7, Paragraph 1 of this
Financing Agreement.
3. The Company unconditionally indemnifies the Agent and each Lender and
holds the Agent and each Lender harmless from any and all loss, claim or
liability incurred by the Agent and/or any Lender arising from any transactions
or occurrences relating to Letters of Credit established or opened for the
Company's account, the collateral relating thereto and any drafts or acceptances
thereunder, and all Obligations thereunder, including any such loss or claim due
to any errors or actions taken by, or any omissions, negligence or misconduct
of, any Issuing Bank, other than for any such loss, claim or liability arising
out of the gross negligence or willful misconduct of the Agent and/or any
Lender. The Company's unconditional obligation to the Agent and each Lender
hereunder shall not be modified or diminished for any reason or in any manner
whatsoever, other than as a result of the gross negligence or willful misconduct
of the Agent and/or any Lender. The Company agrees that any charges of the
Issuing Bank incurred for the Company's account shall be conclusive on CITBC and
shall be charged to the loan account.
4. In connection with any Letter of Credit, neither the Agent nor any
Lender shall be responsible for: the existence, character, quality, quantity,
condition, packing, value or delivery of the goods purporting to be represented
by any documents; any difference or variation in the character, quality,
quantity, condition, packing, value or delivery of the goods from that expressed
in the documents; the validity, sufficiency or genuineness of any documents or
of any endorsements thereon, even if such documents should in fact prove to be
in any or all respects invalid, insufficient, fraudulent or forged, other than
as a result of the gross negligence of the Agent and/or any Lender; the time,
place, manner or order in which shipment is made; partial or incomplete
shipment, or failure or omission to ship any or all of the goods referred to in
the Letters of Credit or documents; any deviation from instructions; delay,
default, or fraud by the shipper and/or anyone else in connection with any
Inventory which is the subject of any Letter of Credit or the shipping thereof;
or any
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<PAGE>
breach of contract between the shipper or vendors and the Company. Furthermore,
without being limited by the foregoing, neither the Agent nor any Lender shall
be responsible for any act or omission with respect to or in connection with any
Inventory which is the subject of any Letter of Credit.
5. In connection with any Letter of Credit, the Company agrees that any
action taken by the Agent, if taken in good faith, or any action taken by any
Issuing Bank, under or in connection with the Letters of Credit, the guarantees,
the drafts or acceptances, or the Collateral, shall, as between the Company and
the Agent, be binding on the Company and shall not put the Agent or any Lender
in any resulting liability to the Company other than as a result of the gross
negligence or willful misconduct of the Agent or such Lender. After the
occurrence of an Event of Default which is not waived, the Agent shall have the
full right and authority to clear and resolve any questions of non-compliance of
documents; to give any instructions as to acceptance or rejection of any
documents or goods; to execute any and all steamship or airways guaranties (and
applications therefor), indemnities or delivery orders; to grant any extensions
of the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances, or documents; and to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances; all in the
Agent's sole name, and the Issuing Bank shall be entitled to comply with and
honor any and all such documents or instruments executed by or received solely
from the Agent, all without any notice to or any consent from the Company,
provided, however, that the Agent shall give the Company notice of the
acceptance or rejection of any goods.
6. In connection with any Letter of Credit, without the Agent's express
consent (which consent shall not be unreasonably withheld) and, where
applicable, endorsement in writing, the Company agrees: a) not to execute any
and all applications for steamship or airway guaranties, indemnities or delivery
orders; to grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances or documents; or to agree to any
amendments, renewals, extensions, modifications or changes of any of the terms
or conditions of any of the Letters of Credit, applications, drafts or
acceptances; and b) after the occurrence of an Event of Default which is not
waived, not to i) clear and resolve any questions of non-compliance of
documents, or ii) give any instructions as to acceptance or rejection of any
documents or goods.
7. In connection with any Letter of Credit, the Company agrees that any
necessary import, export or other licenses or certificates for the import or
handling of the Inventory will have been promptly procured, and all foreign and
domestic governmental laws and regulations in regard to the shipment and
importation of the Inventory, or the financing thereof will have been promptly
and fully complied with, except to the extent that any such non-procurement or
non-compliance will not have a material adverse effect on such Inventory; and
any certificates in that regard that the Agent, on behalf of the Lenders, may at
any time reasonably request will be promptly furnished. In this connection, the
Company warrants and represents that, to its actual knowledge, all shipments
made under any of the
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<PAGE>
Letters of Credit are in accordance with the laws and regulations of the
countries in which the shipments originate and terminate, and are not prohibited
by any such laws and regulations, except to the extent that any failure to so
comply will not have a material adverse effect on such shipments. The Company
assumes all risk, liability and responsibility for, and agrees to pay and
discharge, all present and future local, state, federal or foreign taxes,
duties, or levies in connection with any Inventory or goods purchased, imported
or acquired under the Letter of Credit. Any embargo, restriction, laws, customs
or regulations of any country, state, province, city, or other political
subdivision, where the Inventory is or may be located, or wherein payments are
to be made, or wherein drafts may be drawn, negotiated, accepted, or paid, shall
be solely the Company's risk, liability and responsibility.
8. Upon any payments made to the Issuing Bank under the Letter of Credit
Guaranty, the Agent, for the benefit of the Lenders, shall acquire by
subrogation, any rights, remedies, duties or obligations granted or undertaken
by the Company to the Issuing Bank in any application for Letters of Credit, any
standing agreement relating to Letters of Credit or otherwise, all of which
shall be deemed to have been granted to the Agent for the benefit of the Lenders
and apply in all respects to the Agent and the Lenders and shall be in addition
to any rights, remedies, duties or obligations contained herein.
9. Nothing in this Financing Agreement is intended to relieve any Issuing
Bank from any liability to any Person.
SECTION 5. COLLATERAL
----------
1. As security for the prompt payment in full of all loans and advances
made and to be made to the Company from time to time by the Agent on behalf of
the Lenders pursuant hereto, as well as to secure the payment in full of the
other Obligations, the Company hereby pledges and grants to the Agent for the
benefit of the Lenders a continuing general lien upon and security interest in
all of its:
(a) present and hereafter acquired Inventory;
(b) present and future Accounts;
(c) present and future Documents of Title;
(d) present and future General Intangibles;
(e) present and hereafter acquired Equipment;
(f) present and hereafter acquired Specified Real Estate; and
(g) present and future Other Collateral.
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<PAGE>
2. The security interests granted hereunder shall extend and attach to:
(a) All Collateral which is presently in existence and which is owned by
the Company or in which the Company has any interest, whether held by the
Company or others for its account, and, if any Collateral is Equipment, whether
the Company's interest in such Equipment is as owner or lessee or conditional
vendee;
(b) All Equipment whether the same constitutes personal property or
fixtures, including, but without limiting the generality of the foregoing, all
dies, jigs, tools, benches, tables, accretions, component parts thereof and
additions thereto, as well as all accessories, motors, engines and auxiliary
parts used in connection with or attached to the Equipment; and
(c) All Inventory and any portion thereof which may be returned, rejected,
reclaimed or repossessed by either CITBC or the Company from the Company's
customers, as well as to all supplies, goods, incidentals, packaging materials,
labels and any other items which contribute to the finished goods or products
manufactured or processed by the Company, or to the sale, promotion or shipment
thereof.
3. The Company agrees to take reasonable steps, consistent with current
business practices, to safeguard, protect and hold all Inventory and make no
disposition thereof except in the manner or for the purpose described in
paragraph 3 of Section 3 of this Financing Agreement. Inventory may be sold and
shipped by the Company to its customers in the ordinary course of the Company's
business, and, until an Event of Default (which has not been waived in writing
by the Agent or cured to the Agent's satisfaction) has occurred the Company may
give instructions to warehousemen, processors and other third parties as to the
disposition of all Inventory. With respect to all such sales or dispositions of
Inventory, the Company will collect all proceeds of such sales or dispositions,
consistent with reasonable business practices in existence on the date of
execution of this Financing Agreement or consistent with the business practices
of like companies in the retail industry, provided, however, that all proceeds
of all such sales or disposition (including cash, checks and instruments for the
payment of money), other than the Retained Cash, are promptly deposited in
accordance with paragraph 4 of Section 3 of this Financing Agreement. Upon the
sale, exchange, or other disposition of Inventory, as herein provided, the
security interest in the Inventory provided for herein shall, without break in
continuity and without further formality or act, continue in, and attach to, the
proceeds, including any instruments for the payment of money, accounts
receivable, contract rights, documents of title, shipping documents, chattel
paper and all other cash and non-cash proceeds of such sale, exchange or
disposition. As to any such sale, exchange or other disposition, the Agent on
behalf of the Lenders shall have a security interest in all of the rights of the
Company as an unpaid seller, including stoppage in transit, replevin, rescission
and reclamation.
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<PAGE>
4. The Company agrees at its own cost and expense to keep the Equipment in
as good and substantial repair and condition as the same is now or at the time
the lien and security interest granted herein shall attach thereto, reasonable
wear and tear excepted, making any and all repairs and replacements when and
where necessary. The Company also agrees to safeguard, protect and hold all
Equipment for Agent's account and make no disposition thereof unless the Company
first obtains the prior written approval of the Agent. Any sale, exchange or
other disposition of any Equipment shall only be made by the Company with the
prior written approval of the Agent, and the proceeds of any such sales shall
not be commingled with the Company's other property (prior to deposit to the
Depository Accounts as required hereby), but shall be segregated, held by the
Company in trust for the Agent as the Agent's exclusive property, and shall be
delivered immediately by the Company to Agent in the identical form received by
the Company by deposit to the Depository Accounts. Upon the sale, exchange, or
other disposition of the Equipment, as herein provided, the security interest
provided for herein shall, without break in continuity and without further
formality or act, continue in, and attach to, all proceeds, including any
instruments for the payment of money, accounts receivable, contract rights,
documents of title, shipping documents, chattel paper and all other cash and
non-cash proceeds of such sales, exchange or disposition. As to any such sale,
exchange or other disposition, the Agent shall have all of the rights of an
unpaid seller, including stoppage in transit, replevin, rescission and
reclamation. Notwithstanding anything hereinabove contained to the contrary, the
Company may sell, exchange or otherwise dispose of obsolete Equipment or
Equipment no longer needed in the Company's operations, provided, however, that
(a) the then net book value of the Equipment so disposed of does not exceed
$500,000 in the aggregate in any Fiscal Year and (b) the proceeds of such sales
or dispositions are delivered to the Agent in accordance with the foregoing
provisions of this paragraph, except that the Company may retain and use such
proceeds to purchase forthwith replacement Equipment which the Company
determines in its reasonable business judgment to have a collateral value at
least equal to the Equipment so disposed of or sold, provided, however, that the
aforesaid right shall automatically cease upon the occurrence of an Event of
Default which is not cured within any applicable grace period or waived.
5. The rights and security interests granted to the Agent for the benefit
of the Lenders hereunder are to continue in full force and effect,
notwithstanding the termination of this Financing Agreement or the fact that the
loan account on the books of the Agent may from time to time be temporarily in a
credit position, until the satisfaction in full of all Obligations and the
termination of this Financing Agreement. Any delay or omission by the Agent to
exercise any right hereunder, shall not be deemed a waiver thereof, or be deemed
a waiver of any other right, unless such waiver shall be in writing and signed
by the Agent. A waiver on any one occasion shall not be construed as a bar to or
waiver of any right or remedy on any future occasion. Upon satisfaction in full
of all Obligations and the termination of this Financing Agreement, the Agent
will take, at the Company's request and expense, all actions and do all things
reasonably
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<PAGE>
necessary to release the rights and security interests in the Collateral, and
upon any partial release of Collateral, the Agent will take, at the Company's
request and expense, all actions and do all things reasonably necessary to
release the rights and security interests in the Collateral that is the subject
of such partial release.
6. To the extent that the Obligations are now or hereafter secured by any
assets or property other than the Collateral or by the guarantee, endorsement,
assets or property of any other person, then the Agent shall have the right in
its sole discretion to determine which rights, security, liens, security
interests or remedies the Agent shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of the Agent's or
any Lenders' rights hereunder.
7. Any reserves or credit balances in the loan account and any other
property or assets of the Company in the possession of the Agent may be held by
the Agent as security for any Obligations and applied in whole or partial
satisfaction of such Obligations when due. The liens and security interests
granted herein and any other lien or security interest the Agent may have in any
other assets of the Company, shall secure payment and performance of all now
existing and future Obligations.
8. Unless (i) the Permitted Term Loan Debt has been funded prior to or
simultaneously with the initial loan or advance hereunder, (ii) the Company has
requested that the Agent establish and maintain an Availability Reserve for
sales tax obligations and liabilities of the Company or (iii) the Company has
established and maintains a separate account into which the proceeds of the
collection of sales taxes are deposited and held in trust for the appropriate
tax authority, the Obligations shall be further secured by a first mortgage lien
upon the Specified Real Estate and the Company shall execute and deliver to
Agent all documentation reasonably requested by Agent in connection therewith.
9. The Company shall execute and deliver to CITBC all pledge and/or
security agreements with respect to General Intangibles reasonably requested by
the Agent to obtain and maintain its lien upon, and security interest in, such
General Intangibles.
SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
1. The Company hereby warrants and represents that: i) the fair value of
its assets exceed the book value of its liabilities; ii) the Company is
generally able to pay its debts as they become due and payable; and iii) the
Company does not have unreasonably small capital to carry on its business as it
is currently conducted absent extraordinary and unforeseen circumstances. The
Company further warrants and represents that Schedule 2 hereto completely and
correctly sets forth the location of the Company's chief executive office and
all Collateral locations; and that, except for the Permitted Encumbrances each
of the security interests granted herein constitute and shall at all times
constitute the first and only liens on the Collateral. Further, that except for
the Permitted Encumbrances, the Company is or will be at the time additional
Collateral is acquired by it, the absolute owner of the Collateral with full
right to pledge, sell, consign, transfer and create a security interest
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<PAGE>
therein, free and clear of any and all claims, consignments, or liens in favor
of others, that the Company will, at its expense, defend the same from any and
all claims and demands (other than the Permitted Encumbrances) of any other
person.
2. The Company agrees to maintain accurate books and records pertaining to
the Collateral. Prior to the occurrence of an Event of Default, the Agent or its
agents may, from time to time (but no more than once per fiscal quarter of the
Company) upon reasonable notice, enter upon the Company's premises at any time
during normal business hours, or at such other times as the Agent and the
Company may agree upon, for the purpose of inspecting the Collateral and any and
all records pertaining thereto, all at the Agent's expense. During the
continuance of an Event of Default, the Agent or its agents may, at the
Company's expense, enter the Company's premises, upon reasonable notice and
during normal business hours, and as often as the Agent deems reasonably
necessary, to inspect the Collateral and the books and records of the Company.
The Company agrees to afford the Agent prior written notice of any change in the
location of any Collateral, other than to locations that are known to the Agent
and at which the Agent has filed financing statements and otherwise fully
perfected its liens thereon.
3. The Company agrees to comply with the requirements of all state and
federal laws in order to grant to the Agent for the benefit of the Lenders valid
and perfected first security interests in the Collateral, subject only to the
Permitted Encumbrances. The Agent is hereby authorized by the Company, to the
extent permitted by applicable law, to file any financing statements covering
the Collateral whether or not the Company's signature appears thereon and the
Agent agrees to provide the Company with copies of such financing statements.
The Company agrees to do whatever the Agent may reasonably request, from time to
time, by way of: filing notices of liens, financing statements, amendments,
renewals and continuations thereof; cooperating with the Agent's employees and
agents; keeping Inventory stock records; transferring proceeds of Collateral to
the Agent's possession in accordance with the terms of this Financing Agreement;
and performing such further acts as the Agent on behalf of the Lenders may
reasonably require in order to effect the purposes of this Financing Agreement.
4. The Company agrees to i) maintain on Collateral, insurance under such
policies of insurance, with such insurance companies, in such reasonable amounts
and covering such insurable risks on as is reasonably acceptable to the Agent
and ii) maintain or cause to maintain on Real Estate which is not Collateral
hereunder, insurance under such policies of insurance with such insurance
companies selected by the Company, on terms no less favorable than the insurance
coverage in place as of the date hereof. All policies covering the Collateral
are, subject to the rights of any holders of Permitted Encumbrances holding
claims senior to the Agent, to be made payable to the Agent on behalf of the
Lenders under a standard non-contributory "mortgagee", "lender" or "secured
party" clause and are to contain such other provisions as the Agent may
reasonably require to fully protect by insurance the Agent's interest in the
Collateral and to any payments to be made under such policies with respect to
the Collateral. All original policies or true copies thereof or
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<PAGE>
certificates thereof are to be delivered to the Agent, with all premiums current
with the loss payable endorsement in the Agent's favor, and shall provide for
not less than thirty (30) days prior written notice to the Agent of the exercise
of any right of cancellation. If the Company fails to maintain such insurance,
the Agent may arrange for such insurance, but at the Company's expense and
without any responsibility on the Agent's or any Lender's part for: obtaining
the insurance, the solvency of the insurance companies, the adequacy of the
coverage, or the collection of claims. Upon the occurrence of an Event of
Default which is not waived, the Agent shall, subject to the rights of any
holders of Permitted Encumbrances holding claims senior to the Agent, have the
sole right, in the name of the Agent or the Company, to file claims under any
insurance policies with respect to the Inventory, to receive, receipt and give
acquittance for any payments that may be payable thereunder with respect to the
Inventory, and to execute any and all endorsements, receipts, releases,
assignments, reassignments or other documents that may be necessary to effect
the collection, compromise or settlement of any claims with respect to the
Inventory under any such insurance policies. In the event of any loss or damage
by fire or other casualty, insurance proceeds relating to Collateral shall be
deposited in the Depository Accounts in accordance with paragraph 4 of Section 3
of this Financing Agreement.
5. The Company agrees to pay, when due, all local, domestic and foreign
(as applicable) taxes, assessments, and other charges (herein "taxes") lawfully
levied or assessed upon the Company or the Collateral, provided, however, that
such taxes need not be paid on or before the date fixed for payment thereof if:
i) such taxes are being diligently contested by the Company in good faith and by
appropriate proceedings; ii) the Company establishes such reserves as may be
required by GAAP; iii) such taxes are not secured by a filed lien which is
senior to the liens of the Agent on the Collateral and iv) such taxes secured by
a filed lien are not due the United States of America. To prevent the imminent
foreclosure of any tax liens (whether such liens are senior or junior to the
liens of the Agent) or in the event the Agent on behalf of the Lenders is
exercising its remedies as a secured creditor on Collateral, then the Agent may,
on the Company's behalf, pay any taxes then due and secured by a lien on the
Collateral and the amount thereof shall be an Obligation secured hereby.
6. Subject to the provisions of paragraph 5 above, the Company: (a) agrees
to comply with all acts, rules, regulations and orders of any legislative,
administrative or judicial body or official, including, but not limited to, the
Fair Labor Standards Act, as set forth in Section 201 through Section 219 of
Title 29 of the United States Code, which the failure to comply with would have
a materially adverse impact on the Collateral, or on the operation of the
business of the Company, provided that the Company may contest any acts, rules,
regulations, orders and directions of such bodies or officials in any reasonable
manner which will not materially adversely effect the Agent's liens or priority
in the Collateral; and (b) agrees to comply with all environmental statutes,
acts, rules, regulations or orders as presently existing or as adopted or
amended in the future, applicable to the ownership and/or use of its Real Estate
and operation of its business, which the failure to comply with would have a
materially adverse impact on any material part of the Collateral,
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<PAGE>
or on the operation of the business of the Company. The Company hereby
indemnifies the Agent and each Lender and agrees to defend and hold the Agent
and each Lender harmless from and against any and all loss, damage, claim,
liability, injury or expense which the Agent and each Lender may sustain or
incur in connection with: any claim or expense asserted against the Agent and
each Lender as a result of any environmental pollution, hazardous material or
environmental clean-up of the Company's Real Estate, or any claim or expense
which results from the Company's operations (including, but not limited to, the
Company's off-site disposal practices). The Company further agrees that this
indemnification as to environmental liability shall survive termination of this
Financing Agreement and the payment of all Obligations or amounts payable
hereunder. The Company shall not be deemed to have breached any provision of
this paragraph 6 if (i) the failure to comply with the requirements of this
paragraph 6 resulted from good faith error or innocent omission, (ii) the
Company promptly commences and diligently pursues a cure of such breach and such
cure is eventually, within a reasonable time frame based upon the circumstances
and the amount of work required, completed and (iii) such failure has not
resulted in a materially adverse effect on any material portion of the
Collateral or the business, financial condition or operations of the Company.
7. Until termination of this Financing Agreement and satisfaction in full
of all Obligations due hereunder, the Company agrees that, unless the Agent
shall have otherwise consented in writing, the Company will furnish, or cause to
be furnished, to the Agent, not later than: (a) one hundred and twenty (120)
days after the end of each fiscal year of the Company, an audited Consolidated
Balance Sheet as at the close of such year and consolidated statements of
operations, cash flows, shareholders' equity and reconciliation of surplus of
the Company and its Subsidiaries, if any, for such year, audited by independent
public accountants selected by the Company and satisfactory to the Agent; (b)
forty-five (45) days after the end of each month, other than a month that
constitutes a fiscal year end, a Consolidated Balance Sheet as at the end of
such period and consolidated statements of operations and cash flows of the
Company and its Subsidiaries, if any, for such period, certified by an
authorized financial or accounting officer of the Company; and (c) a reasonable
time after request, such further information regarding the business affairs and
financial condition of the Company as the Agent may reasonably request,
including, without limitation, annual cash flow projections in form reasonably
satisfactory to the Agent and the accountant's management practice letter. Each
financial statement required to be submitted under clauses a and b above must be
accompanied by an Officer's Certificate, signed by the President, Senior Vice
President, Vice President, Controller, or Treasurer, of the Company pursuant to
which such officer must certify that: (i) to the best of the Company's
knowledge, the financial statement(s) fairly and accurately represent(s) the
financial condition of the Company and their Subsidiaries, at the end of the
particular accounting period, as well as the operating results of the Company
and their Subsidiaries, during such accounting period, subject to year-end audit
adjustments; (ii) during the particular accounting period: (x) there has been no
Default or Event of Default under this Financing Agreement, provided, however,
------------------
that if any such officer has knowledge that any such Default or Event of Default
has occurred during such period, the existence of and a detailed description of
same shall be set forth in such Officer's Certificate; and (y)
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<PAGE>
a senior officer of the Company has not received any notice of cancellation with
respect to its property insurance policies or certifying as to replacement
policies therefor; and (iii) the exhibits attached to such monthly financial
statements at the end of each fiscal quarter and annual financial statement(s)
constitute detailed calculations showing compliance with all financial covenants
applicable for such period, if any, contained in this Financing Agreement.
8. The Company and its Subsidiaries shall have, at all times, on a
consolidated basis, a Net Worth, as defined herein, of not less than
$30,000,000.
9. Until termination of this Financing Agreement and satisfaction of all
Obligations due hereunder, the Company agrees that, without the prior written
consent of the Agent, except as otherwise herein provided, the Company will not:
A. Incur, create, assume or permit any lien, charge, security interest,
encumbrance or judgment, (whether as a result of a purchase money or
title retention transaction, or other security interest, or otherwise)
to exist on i) the Collateral, except for the Permitted Encumbrances
and ii) any of its other assets whether real, personal or mixed,
whether now owned or hereafter acquired, except for the Permitted
Encumbrances;
B. Incur or create any Indebtedness other than the Permitted Indebtedness;
C. Except for Permitted Indebtedness, borrow any money on the security of
the Collateral from sources other than the Agent acting on behalf of
the Lenders;
D. Sell (except the Permitted Sale of the Specified Real Estate), lease,
assign, transfer or otherwise dispose of i) Collateral, except as
otherwise specifically permitted by this Financing Agreement, or ii)
either all or substantially all of the other assets of the Company;
E. Merge, consolidate or otherwise alter or modify its corporate name,
principal place of business, structure or existence, or enter into or
engage in any operation or activity materially different from that
presently being conducted by the Company, provided, however, that on
thirty (30) days prior notice to the Agent, the Company may, without
obtaining the consent of the Agent or any Lender i) effect the Merger;
and ii) alter or modify its corporate name or principal place of
business; provided that with respect to clauses (i) and (ii) the
Company executes and delivers all documentation reasonably requested by
the Agent to preserve and maintain its lien upon and security interest
in the Collateral;
F. Assume, guarantee, endorse, or otherwise become liable upon the
obligations of any person, firm, entity or corporation, other than i)
by the endorsement of negotiable instruments for deposit or collection
or similar
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<PAGE>
transactions in the ordinary course of business, ii) pursuant to
obligations in effect on the date hereof, iii) in connection with
subleases pursuant to which the Company is the sub-lessor, iv) home
relocation loans to or on behalf of employees or v) in the ordinary
course of the Company's business or for purposes deemed reasonable by
the Company provided such obligations under this clause v shall not
exceed $500,000 in the aggregate at any one time;
G. Declare or pay any dividend of any kind on, or purchase, acquire,
redeem or retire, any of its capital stock or equity interest of any
class whatsoever, whether now or hereafter outstanding, provided
however, that the Company may issue or transfer any of its capital
stock in accordance with the Plan of Reorganization ; and
H. Make any advance or loan to, or any investment in, any Person, except
for i) advances, loans or investments in existence on the date of
execution of this Financing Agreement; ii) Permitted Investments; and
iii) loans and advances to employees in the ordinary course of business
for travel, entertainment and home relocation.
10. The Company and its Subsidiaries, shall have, on a consolidated basis,
a Fixed Charge Coverage Ratio (calculated at the end of each fiscal quarter
indicated below for the applicable period) of at least:
<TABLE>
<CAPTION>
PERIOD RATIO
------ -----
<S> <C>
For the one (1) Fiscal Quarter ending
October 31, 1996 2.10 to 1.0
For the two (2) Fiscal Quarters ending
January 31, 1997 2.32 to 1.0
For the three (3) Fiscal Quarters ending
April 30, 1997 1.01 to 1.0
For the four (4) Fiscal Quarters ending
July 31, 1997 and for the four (4)
fiscal quarters ending on each October 31,
January 31, April 30, and July 31 thereafter 1.0 to 1.0
</TABLE>
Notwithstanding any provision to the contrary contained herein, in the event
that the Company's average daily Availability for the thirty (30) day period
immediately preceding any such calculation date for this Fixed Charge Coverage
Ratio Covenant is $7,500,000 or more, such Fixed Charge Coverage Ratio Covenant
shall not be effective solely for any such calculation date and the Company
shall have no obligation hereunder to comply with such Fixed Charge Coverage
Ratio Covenant with respect to such calculation date.
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<PAGE>
11. Without the prior written consent of the Agent, the Company will not:
a) enter into any Operating Lease if after giving effect thereto the aggregate
obligations with respect to Operating Leases of the Company during any Fiscal
Year would exceed $35,000,000 or b) contract for, purchase, make expenditures
for, lease pursuant to a Capital Lease or otherwise incur obligations with
respect to Capital Expenditures (whether subject to a security interest or
otherwise) during any period below in the aggregate amount in excess of the
amount set forth for such period:
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<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
For the period from the Closing Date
through and including January 31, 1997 $3,000,000
For the fiscal year ending
January 31, 1998 $8,500,000
For the fiscal year ending
January 31, 1999 and each fiscal
year thereafter $6,250,000
</TABLE>
In the event that the Company does not utilize any amount of Capital
Expenditures permitted hereunder for any fiscal year, twenty-five percent (25%)
of any amount not so utilized shall be carried forward to the next succeeding
fiscal year (but not beyond such next fiscal year) and added to the amount of
permitted Capital Expenditures for such next fiscal year, provided that any
amount so carried forward shall be the last amount utilized in such next fiscal
year.
12. The Company agrees to advise the Agent, promptly, in writing of: a)
all quantifiable expenditures (actual or anticipated) in excess of $250,000
pertaining to the Real Estate and operations in any fiscal year for i)
environmental clean-up, ii) environmental compliance or iii) environmental
testing and the impact of said expenses on working capital; and b) any notices
the Company receives from any local, state or federal authority advising the
Company of any environmental liability (real or potential) stemming from any of
the Company's operations, premises, its waste disposal practices, or waste
disposal sites used by the Company and to provide the Agent with copies of all
such notices if so required.
13. Without the prior written consent of the Agent, the Company agrees
that it will not enter into any transaction, including, without limitation, any
purchase, sale, transfer, lease, loan or exchange of property with any
Subsidiary or Affiliate.
14. The Company shall cause to be conducted, not less than once in any
calendar year, an actual physical count of its Inventory at each store. Such
physical inventory count shall be conducted by an entity satisfactory to the
Agent that is not an Affiliate of the Company and which entity shall be
experienced in conducting or reviewing such a physical inventory, except that
with respect to all such Inventory counts for fiscal years commencing after
January 31, 1997, such inventory counts may be conducted by internal Company
personnel, provided that (x) no Default or Event of Default has occurred
hereunder, and (y) the Company's certified public accounting firm can issue an
unqualified audit opinion based upon such internal Inventory counts. The Company
shall, within ninety (90) days after the end of each month, provide to the Agent
for each Lender a schedule prepared by the Company of the results of the
Inventory counts completed at the Company's stores during that month.
Concurrently therewith, the Company shall provide the Agent for each Lender with
the results of the internally prepared cycle counts
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<PAGE>
completed at the Company's distribution centers during that month. Such cycle
counts shall be reviewed by the Company's independent public accountants in
their normal annual review process. Upon the Agent's reasonable request, the
Company will provide the Agent with further details of Inventory count and
review results, so long as the Agent's request is for information readily
available to the Company on existing internally or externally prepared Inventory
reports. In addition, the Agent may, in its sole discretion, at any time require
the Company to obtain an appraisal indicating the fair market value of the
Inventory, provided that prior to the occurrence of a Default or Event of
Default hereunder the Company shall not be required to obtain such appraisals
more frequently than once in any twelve (12) month period. Such appraisals shall
be performed by an appraiser acceptable to and engaged by the Agent, but shall
be paid for by the Company. In the event the Agent determines, in its sole
discretion, that based upon the appraisal the Inventory Advance Percentage is
too high, the Agent may, in its sole discretion, reduce such Inventory Advance
Percentage.
15. The Company shall remit any and all sales taxes when due to the
appropriate sales tax authorities when any such remittances are due, provided,
however, that such remittances need not be made on or before such due date if:
i) such sales taxes are being diligently contested by the Company in good faith
and by appropriate proceedings; ii) the Company establishes such reserves as may
be required by GAAP; and iii) the failure to remit such sales taxes does not
create a lien in favor of such sales tax authorities or impose upon the Agent or
any Lender any obligation to segregate proceeds.
16. The Company shall establish a Point of Sale Management Information
System (satisfactory to the Agent in the exercise of its reasonable business
judgment) at all of its retail locations no later than December 31, 1997.
SECTION 7. INTEREST, FEES AND EXPENSES
---------------------------
1. (a) Interest on the Revolving Loans (other than Libor Loans) shall be
payable monthly as of the end of each month and shall be an amount equal to the
sum of one percent (1%) and the Chase Rate, on a per annum basis, on the average
of the net balances (other than Libor Loans) owing by the Company in the
Company's account at the close of each day during such month. Interest on the
Revolving Loans which are Libor Loans shall be payable monthly as of the end of
each month and shall be an amount equal to the sum of three and one-quarter
percent (3 1/4%) and the applicable Libor on each then outstanding Revolving
Loan which is a Libor Loan, on a per annum basis, on the average of the net
balance owing by the Company on such Libor Loan at the close of each day during
such month. The Company may elect to use Libor as to any new or then outstanding
Revolving Loans provided x) there is then no unwaived Default or Event of
Default, and y) the Company has so advised the Agent of its election to use
Libor and the Libor Period selected no later than three (3) Business Days prior
to the proposed borrowing or, in the case of a Libor election with respect to a
then outstanding Revolving Loan, three (3) Business Days prior to the conversion
of any then outstanding Revolving Loans to Libor
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<PAGE>
Loans and z) the election and Libor shall be effective, provided, there is then
no unwaived Default or Event of Default, on the fourth Business Day following
said notice. The Libor elections must be for $100,000.00 or whole multiples
thereof and there shall be no more than five (5) Libor Loans outstanding at any
time. If no such election is timely made or can be made, then the Agent shall
use the Chase Rate to compute interest. In the event of any change in said Chase
Rate, the rate hereunder shall change, as of the first of the month following
any change, so as to remain one percent (1%) above the Chase Rate. The rates
hereunder shall be calculated based on a 360-day year. The Agent shall be
entitled to charge the Company's account at the rate provided for herein when
due until all Obligations have been paid in full.
(b) Subject to compliance with each of the conditions set forth below,
the Company will be entitled to interest rate concessions (each an "Interest
Rate Concession") as outlined below:
(x) if the Company maintains a Fixed Charge Coverage Ratio of more than
1.75 to 1 for any consecutive twelve (12) month period tested at the end of
each fiscal quarter, the interest rates set forth in subparagraph (a) above
will be reduced by one-quarter of one percent (1/4 of 1%) as of the
effective date indicated below and only after the Agent's receipt of the
Company's financial statements (as more fully provided in Section 6,
Paragraph 7 hereof) for such twelve (12) month period, provided that the
Company shall be entitled to only one (1) 1/4 of 1% Interest Rate
Concession under this clause (x), provided further that in the event that
the Company shall, at any time after the effective date of any Interest
Rate Concession hereunder, fail to maintain the Fixed Charge Coverage Ratio
(calculated and tested in accordance with the provisions hereof) required
to achieve any such Interest Rate Concession, the rate in subparagraph (a)
above shall be increased (as of the effective date determined below) by one
quarter of one percent (1/4 of 1%); and
(y) if the Company maintains a Fixed Charge Coverage Ratio of more than
2.25 to 1 for any consecutive twelve (12) month period tested at the end of
each fiscal quarter, the interest rates set forth in subparagraph (a) above
will be further reduced by one quarter of one percent (1/4 of 1%) as the
effective date indicated below and only after the Agent's receipt of the
Company's financial statements (as more fully provided in Section 6,
Paragraph 7 hereof) for such twelve (12) month period, provided that the
Company shall be entitled to only one (1) 1/4 of 1% Interest Rate
Concession under this clause (y), provided further that in the event that
the Company shall, at any time after the effective date of any Interest
Rate Concession hereunder, fail to maintain the Fixed Charge Coverage Ratio
(calculated and tested in accordance with the provisions hereof) required
to achieve any such Interest Rate Concession, the rate in subparagraph (a)
above shall be increased (as
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<PAGE>
of the effective date determined below) by one quarter of one percent (1/4
of 1%);.
In addition to the foregoing requirements, each Interest Rate Concession is
subject to the Company's compliance with each of the following conditions:
i) timely receipt of the Company's financial statements referred to
above;
ii) the absence of any Default or Event of Default on the date of receipt
of such financial statements and the absence of any Default or Event
of Default on the effective date of any Interest Rate Concession;
iii) as to the spread over the Chase Rate, the Interest Rate Concession
will be effective on the first day of the month occurring after
receipt of such financial statements;
iv) as to the spread over the Libor Rate, the Interest Rate Concession
will be effective on the first day of the next interest period
occurring after receipt of such financial statements; and
v) in no event may the total of all Interest Rate Concessions exceed one-
half of one percent (1/2 of 1%).
2. In consideration of the Letter of Credit Guaranty, the Company shall
pay to the Agent the Letter of Credit Guaranty Fee which shall be an amount
equal to one and one-half percent (1 1/2%) per annum, payable a) monthly, on the
face amount of each outstanding stand-by Letter of Credit less the amount of any
and all amounts previously drawn under such Letters of Credit and b) on the date
of issuance on the face amount of each outstanding documentary Letter of Credit.
3. Any charges, fees, commissions, costs and expenses charged to the Agent
for the Company's account by any Issuing Bank in connection with or arising out
of Letters of Credit issued pursuant to this Financing Agreement or out of
transactions relating thereto will be charged to the loan account in full when
charged to or paid by the Agent and when made by any such Issuing Bank shall be
conclusive on the Agent.
4. The Company shall reimburse or pay the Agent, as the case may be, for:
a) all Out-of-Pocket Expenses and b) any applicable Documentation Fees.
5. Upon the last Business Day of each month, commencing with the last day
of the month in which this Financing Agreement is executed, the Company shall
pay the Agent the Line of Credit Fee.
6. To induce CITBC, both as Lender and as Agent, to enter into this
Financing Agreement and to extend to the Company the Revolving Loans, the
Company hereby agrees to pay to CITBC a Loan Syndication Fee, in the amount set
forth in the Commitment Letter, which includes the Documentation Fee, payable
upon execution of this Financing Agreement.
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<PAGE>
7. Upon the date of execution of this Financing Agreement and on each
Anniversary Date thereafter so long as this Financing Agreement is in effect,
the Company shall pay to the Agent for the Agent's account only the Collateral
Management Fee. Such fee shall be fully earned when paid and shall not be
refundable or rebateable by reason of prepayment, acceleration upon an Event of
Default or any other circumstances and shall be retained notwithstanding any
termination of this Agreement.
8. To induce the Lenders (including CITBC) to enter into this Financing
Agreement and to extent to the Company the Revolving Loans, the Company hereby
agrees to pay to the Agent a Loan Facility Fee in the amount of $450,000 payable
upon execution of this Financing Agreement. Such fee shall be fully earned when
paid and shall not be refundable or rebateable by reason of prepayment,
acceleration upon an Event of Default or any other circumstances and shall be
retained notwithstanding any termination of this Agreement.
9. Immediately upon the advise to the Agent by the Company of the
Company's election of a Libor Loan, the Company shall pay to the Agent for the
Agent's account only the Libor Processing Fee which shall be non-refundable.
10. The Company shall pay to the Agent for the account of the Lenders such
amount or amounts as shall compensate the Agent, the Lenders or their
Participants (as defined below), if any, for any loss, costs or expenses
incurred by the Agent, the Lenders or their Participants if any, (as reasonably
determined by the Agent, the Lenders or their Participants if any) as a result
of: (i) any payment or prepayment on a date other than the last day of a Libor
Period for such Libor Loan, or (ii) any failure of the Company to borrow a Libor
Loan on the date for such borrowing specified in the relevant notice; such
compensation to include, without limitation, an amount equal to any loss or
expense suffered by the Agent, the Lenders or their Participants if any, during
the period from the date of receipt of such payment or prepayment or the date of
such failure to borrow to the last day of such Libor Period if the rate of
interest obtained by the Agent, the Lenders or their Participants if any, upon
the reemployment of an amount of funds equal to the amount of such payment,
prepayment or failure to borrow is less than the rate of interest applicable to
such Libor Loan for such Libor Period. The determination by the Agent, the
Lenders or their Participants, if any, of the amount of any such loss or
expense, when set forth in a written notice to the Company, containing the
calculations thereof in reasonable detail, shall constitute prima facie evidence
thereof.
11. The Company may at any time, on ten (10) Business Days prior written
notice to the Agent, reduce the Line of Credit provided that: i) any reduction
shall be permanent and irrevocable; ii) a reduction must be for at least
$5,000,000.00 or whole multiples thereof; and iii) the Company shall immediately
repay the Agent the amount by which the Obligations exceed Availability.
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12. The Company hereby confirms and authorizes the Agent, and the Agent
hereby agrees, to charge the loan account with the amount of all Obligations due
hereunder as such payment becomes due. In the unlikely event the Agent is unable
or unwilling to charge any such Obligation to the loan account, then the Agent
shall so notify the Company in writing and the amount so requested shall be due
and payable thirty (30) days after such demand.
SECTION 8. POWERS
------
Subject to the last paragraph in this Section 8, the Company hereby
constitutes the Agent on behalf the Lenders or any person or agent the Agent may
reasonably designate as its attorney-in-fact, at the Company's cost and expense,
to exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all Obligations to the Agent and the Lenders have
been satisfied and this Financing Agreement terminated:
(a) To receive, take, endorse, sign, assign and deliver, all in the name
of the Agent or the Company, any and all checks, notes, drafts, and
other documents or instruments relating to the Collateral for i)
deposit to a Blocked Account (consistent with the terms of paragraphs
4 of Section 3 of this Financing Agreement) or ii) after the
acceleration by the Agent of the Obligations for application to
satisfaction of the Obligations consistent with the terms of Paragraph
3 of Section 9 hereof;
(b) To request, not more frequently than two (2) times a fiscal year, from
customers indebted on Trade Accounts Receivable, in the name of the
Company or the Agent's designee, information concerning the amounts
owing on the Trade Accounts Receivable provided, however, that such
request made be made only if the then aggregate balance of the Trade
Accounts Receivable is in excess of $2,500,000.
(c) To request from customers indebted on Trade Accounts Receivable at any
time, in the name of the Agent, information concerning the amounts
owing on the Trade Accounts Receivable;
(d) To transmit to customers indebted on Trade Accounts Receivable notice
of the Agent's interest therein and to notify customers indebted on
Trade Accounts Receivable to make payment directly to the Agent for
the Company's account; and
(e) To take or bring, in the name of the Agent or the Company, all steps,
actions, suits or proceedings reasonably deemed by the Agent necessary
or desirable to enforce or effect collection of the Accounts.
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Notwithstanding anything hereinabove contained to the contrary, the powers
set forth in (a), (c), (d) and (e) above may only be exercised after the
occurrence of an Event of Default and until such time as such Event of Default
is waived.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES
------------------------------
1. Notwithstanding anything hereinabove to the contrary, the Agent acting
for the Lenders may terminate this Financing Agreement immediately upon the
occurrence of any of the following (herein "Events of Default"):
a) cessation of business of the Company or the calling of a general meeting of
the creditors of the Company for purposes of compromising the debts and
obligations of the Company;
b) the Company admits in writing its inability to generally pay its debts as
they mature;
c) the commencement by the Company of any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceedings under any federal or
state law;
d) the commencement against the Company of any bankruptcy, insolvency,
arrangement, reorganization, receivership or similar proceedings under any
federal or state law provided, however, that such Default shall not be
deemed an Event of Default if the proceeding, petition, case or arrangement
is dismissed within sixty (60) days of the filing of, or the commencement
of, such petition, case, proceeding or arrangement;
e) breach by the Company of any warranty, representation or covenant contained
herein (other than those referred to in sub-paragraph f below) or in any
other written agreement between the Company or and the Agent and/or the
Lenders, provided that such breach by the Company of any of the warranties,
representations or covenants referred in this clause e shall not be deemed
to be an Event of Default unless and until such breach shall remain
unremedied to CITBC's satisfaction for a period of thirty (30) days from
the date of such breach;
f) breach by the Company of any warranty, representation or covenant of
Section 3, Paragraphs 3 and 4; Section 5, Paragraphs 3 and 4; Section 6,
Paragraphs 1,4,5, and 8 through 11 and 15;
g) the Company shall i) engage in any "prohibited transaction" as defined in
ERISA, ii) have any "accumulated funding deficiency" as defined in ERISA,
iii) have any Reportable Event as defined in ERISA, iv) terminate any Plan,
as defined in ERISA or v) be engaged in any proceeding in which the Pension
Benefit Guaranty Corporation shall seek appointment, or is appointed, as
trustee or administrator of any Plan, as defined in ERISA, and with respect
to this sub-paragraph i) such event
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or condition x) remains uncured for a period of ninety (90) days from date
of occurrence and y) could reasonably be expected to subject that Company
to any tax, penalty or other liability materially adverse to the business,
operations or financial condition of the Company and its Subsidiaries taken
as a whole; or
h) the holder, trustee or beneficiary of any instrument referred to in this
subparagraph shall have a then current right to accelerate (whether or not
such right is actually exercised) pursuant to any instrument evidencing
outstanding recourse Indebtedness of the Company in excess of $2,500,000.
2. Upon the occurrence of a Default and/or an Event of Default, at the
option of the Agent, all loans and advances provided for in Section 3, Paragraph
1 of this Financing Agreement shall be made thereafter in the Agent's sole
discretion and the obligation of the Agent acting for the Lenders to make
Revolving Loans and/or assist the Company in obtaining Letters of Credit shall
cease until such time as the Default is timely cured to the Agent's reasonable
satisfaction or the Event of Default is waived. Further, at the option of the
Agent, or at the direction of the Required Lenders, upon the occurrence of an
Event of Default (unless waived): i) all Obligations shall upon notice
(provided, however, that no such notice is required if the Event of Default is
the Event of Default listed in paragraph 1(c) or 1(d) of this Section 9) become
immediately due and payable; ii) the Agent may thereafter charge the Company the
Default Rate of Interest on all then outstanding or thereafter incurred
Obligations in lieu of the interest provided for in paragraph 1 of Section 7 of
this Financing Agreement provided a) the Agent has given the Company written
notice of the Event of Default, provided, however, that no notice is required if
the Event of Default is the Event of Default listed in paragraph 1(c) or 1(d)of
this Section 9 and b) the Company has failed to cure the Event of Default within
fifteen (15) days after x) the Agent deposited such notice in the United States
mail or y) the occurrence of the Event of Default listed in paragraph 1(c) or
1(d) of this Section 9; and iii) the Agent may, and shall at the direction of
the Required Lenders, immediately terminate this Financing Agreement upon notice
to the Company, provided, however, that no notice of termination is required if
the Event of Default is the Event of Default listed in paragraph 1(c) or 1(d) of
this Section 9. Notwithstanding anything herein contained to the contrary, if
the Agent waives all Events of Default, then by written notice to the Company,
the acceleration of the Obligations will be rescinded and all remedies and
actions then being exercised by the Agent shall cease. The exercise of any
option is not exclusive of any other option which may be exercised at any time
by the Agent.
3. Upon the occurrence of any Event of Default which is not waived by the
Agent in writing or cured to the Agent's satisfaction, the Agent may, to the
extent permitted by law: (a) remove from any premises where same may be located
copies of any and all documents, instruments, files and records, relating to the
Accounts, or the Agent may use such of the Company's personnel, supplies or
space at the Company's places of business or otherwise, as may be necessary to
properly administer and control the Accounts or the
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handling of collections and realizations thereon; (b) bring suit, in the name of
the Company or the Agent, and generally shall have all other rights respecting
said Accounts, including without limitation the right to: accelerate or extend
the time of payment, settle, compromise, release in whole or in part, any
amounts owing on any Accounts and issue credits in the name of the Company or
the Agent; (c) sell, assign and deliver the Collateral and any returned,
reclaimed or repossessed merchandise, with or without advertisement, at public
or private sale, for cash, on credit or otherwise, at the Agent's sole option
and discretion, and, to the extent permitted by applicable law, the Agent may
bid or become a purchaser at any such sale, free from any right of redemption,
which right is hereby expressly waived by the Company; (d) foreclose the
security interests created herein by any available judicial procedure, or to
take possession of any or all of the Collateral without judicial process, and to
enter any premises where any Collateral may be located for the purpose of taking
possession of or removing the same; and (e) exercise any other rights and
remedies provided in law, in equity, by contract or otherwise. The Agent shall
have the right, without notice or advertisement, to sell, lease, or otherwise
dispose of all or any part of the Collateral whether in its then condition or
after further preparation or processing, in the name of the Company or the
Agent, or in the name of such other party as the Agent may designate, either at
public or private sale or at any broker's board, in lots or in bulk, for cash or
for credit, with or without warranties or representations, and upon such other
terms and conditions as the Agent in its sole discretion may deem advisable,
and, to the extent permitted by applicable law, the Agent shall have the right
to purchase at any such sale. If any Collateral shall require repairing,
maintenance or preparation, the Agent shall have the right, at its option, to do
such of the aforesaid as is necessary, for the purpose of putting the Inventory
in such saleable form as the Agent shall reasonably deem appropriate. The
Company agrees, at the request of the Agent, to assemble the Inventory and to
make it available to the Agent at premises of the Company or such other location
reasonably designated by the Agent for the purpose of the Agent's taking
possession of, removing or putting the Collateral in saleable form. However, if
notice of intended disposition of any Collateral is required by law, it is
agreed that ten (10) days notice shall constitute reasonable notification and
full compliance with the law. The net cash proceeds resulting from the Agent's
exercise of any of the foregoing rights, (after deducting all reasonable
charges, costs and expenses, including reasonable attorneys' fees) shall be
applied by the Agent to the payment of the Obligations, whether due or to become
due, and the Company shall remain liable to the Agent for any deficiencies, and
the Agent in turn agrees to remit to the Company or its successor or assign, any
surplus resulting therefrom. The enumeration of the foregoing rights is not
intended to be exhaustive and the exercise of any right shall not preclude the
exercise of any other rights, all of which shall be cumulative. The mortgage(s),
deed(s) of trust or assignment(s) on the Specified Real Estate shall govern the
rights and remedies of the Agent and the Lenders thereto.
SECTION 10. TERMINATION
-----------
Except as otherwise permitted herein, the Agent may, and shall at the
direction of the Required Lenders, terminate this Financing Agreement and the
Line of Credit only as
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of an Anniversary Date and then only by giving the Company at least ninety (90)
days prior written notice of termination. Notwithstanding the foregoing, the
Agent may terminate the Financing Agreement immediately upon the occurrence of
an Event of Default upon notice to the Company, provided, however, that if the
Event of Default is an event listed in paragraph 1(c) or 1(d) of Section 9 of
this Financing Agreement, the Agent may, and shall at the direction of the
Required Lenders, regard the Financing Agreement as terminated and notice to
that effect is not required. This Financing Agreement, unless terminated as
herein provided, shall automatically continue from Anniversary Date to
Anniversary Date. The Company may, at any time, terminate this Financing
Agreement and the Line of Credit upon at least thirty (30) days' prior written
notice to the Agent, provided that the Company pay to the Agent for the account
of the Lenders, concurrent with payment of the Obligations, the Early
Termination Fee. All Obligations shall become due and payable as of any
termination hereunder or under Section 9 hereof. All of the Agent's rights,
liens and security interests shall continue after any termination until all
Obligations have been satisfied in full. Pending payment in full of all
Obligations, the Agent can withhold any credit balances in the loan account
(unless supplied with an indemnity satisfactory to the Agent) to cover all of
the Obligations, whether absolute or contingent, provided, however, that if the
remaining unpaid Obligations arise solely out of the outstanding amounts of
Letters of Credit, the Agent will, at the Company's request, retain, solely as
collateral, credit balances in an amount equal to one hundred and five percent
(105%) of the then outstanding amounts of Letters of Credit unless the Company
provides the Agent with back-to-back letters of credit from a financial
institution reasonably acceptable to the Agent, on terms reasonably acceptable
to the Agent, in an amount equal to one hundred and five percent (105%) of the
then outstanding amounts of Letters of Credit. When this Financing Agreement has
been terminated and all Obligations (other than Letters of Credit) have been
indefeasibly paid in full and the outstanding amount of Letters of Credit have
been so secured by cash or by the back-to-back letter of credit, in either event
in an amount equal to one hundred and five percent (105%) of the then
outstanding amounts of Letters of Credit pursuant to a fully executed agreement
between the Agent and the Company and pursuant to which the Company agrees to
reimburse the Agent for any Letter of Credit claims that exceed the cash
collateral or the back to back letter of credit, then for all purposes of this
Financing Agreement, this Financing Agreement shall be treated by the parties
thereto as terminated and all other Collateral will be released.
SECTION 11. AGREEMENT BETWEEN THE LENDERS
- - ----------- -----------------------------
1. a) The Agent, for the account of the Lenders, shall disburse all loans
and advances to the Company and shall handle all collections of Collateral and
repayment of Obligations. It is understood that for purposes of advances to the
Company and for purposes of this Section 11 the Agent is using the funds of the
Agent.
b) Unless the Agent shall have been notified in writing by any Lender
prior to any advance to the Company that such Lender will not make the amount
which would
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constitute its share of the borrowing on such date available to the Agent, the
Agent may assume that such Lender shall make such amount available to the Agent
on a Settlement Date, and the Agent may, in reliance upon such assumption, make
available to the Company a corresponding amount. A certificate of the Agent
submitted to any Lender with respect to any amount owing under this subsection
shall be conclusive, absent manifest error. If such Lender's share of such
borrowing is not in fact made available to the Agent by such Lender on the
Settlement Date, the Agent shall be entitled to recover such amount with
interest thereon at the rate per annum applicable to Revolving Loans hereunder,
on demand, from the Company without prejudice to any rights which the Agent may
have against such Lender hereunder. Nothing contained in this subsection shall
relieve any Lender which has failed to make available its ratable portion of any
borrowing hereunder from its obligation to do so in accordance with the terms
hereof. Nothing contained herein shall be deemed to obligate Agent to make
available to the Company the full amount of a requested advance when the Agent
has any notice (written or otherwise) that any of the Lenders will not advance
its ratable portion thereof.
2. On the Settlement Date, the Agent and the Lenders shall each remit to
the other, in immediately available funds, all amounts necessary so as to ensure
that, as of the Settlement Date, the Lenders shall have their proportionate
share of all outstanding Obligations.
3. The Agent shall forward to each Lender, at the end of each month, a
copy of the account statement rendered by the Agent to the Company.
4. The Agent shall, after receipt of any interest and fees earned under
this Financing Agreement, promptly remit to the Lenders: a) their pro rata
portion of all fees, provided, however, that the Lenders (other than CITBC in
its role as Agent) shall x) not share in the Collateral Management Fee,
Documentation Fees, Loan Syndication Fee, or Libor Processing Fee; and y)
receive their share of the Loan Facility Fee and Letter of Credit Guaranty Fee
in accordance with their respective agreements with the Agent; and b) interest
computed at the rate provided for in the Assignment and Transfer Agreement on
all outstanding amounts advanced by the Lenders on each Settlement Date, prior
to adjustment, that are subsequent to the last remittance by the Agent to the
Lenders of the Company's interest.
5. (a) The Company acknowledges that the Lenders, with the consent of
the Agent, may sell participations in the loans and extensions of credit made
and to be made to the Company hereunder (the "Participants"). The Company
further acknowledges that in doing so, the Lenders may grant to such
Participants certain rights which would require the Participant's consent to
certain waivers, amendments and other actions with respect to the provisions of
this Financing Agreement, provided that the consent of any such Participant
shall not be required except for matters requiring the consent of all Lenders
hereunder as set forth in Section 12, Paragraph 10 hereof.
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(b) The Company authorizes each Lender to disclose to any Participant
or purchasing lender (each, a "Transferee") and any prospective Transferee any
----------
and all financial information in such Lender's possession concerning the Company
and their affiliates which has been delivered to such Lender by or on behalf of
the Company pursuant to this Agreement or which has been delivered to such
Lender by or on behalf of the Company in connection with such Lender's credit
evaluation of the Company and its affiliates prior to entering into this
Agreement, provided, however, that prior to such disclosure to a then or
potential Participant the Lender must first obtain from the then or potential
Participant a confidentiality agreement in form and substance similar to the
confidentiality paragraph of this Financing Agreement.
6. The Company has made and will, from time to time, make available to
the Agent and/or the Lenders certain financial and other business information
(the "Confidential Information") relating to its business. By their signatures
hereto or to the Assignment and Transfer Agreement, the Agent and each Lender
agree to maintain the confidentiality of all Confidential Information, and to
disclose such information only (a) to officers, directors or employees of such
Agent or Lender and their legal or financial advisors, in each case to the
extent necessary to carry out this Financing Agreement and in the case of CITBC,
to The CIT Group Holdings, Inc., The CIT Group, Inc., Chase Bank Corporation or
Dai-Ichi Kanygo Bank, but only, in the case of all of the foregoing Persons
referred to in this clause (a), after the Agent or the Lender, as the case may
be, has advised each such Person to maintain the confidentiality of the
Confidential Information, (b) to any other Person to the extent the disclosure
of such information to such Person is required in connection with the
examination of a Lender's records by appropriate authorities, pursuant to court
order, subpoena or other legal process or otherwise as required by law or
regulation, and (c) to Transferees or potential Transferees but only after such
Transferees or potential Transferees have executed a written confidentiality
agreement substantially in the form of this paragraph. The Lenders, the Agent,
Transferees and potential Transferees shall not be required to maintain the
confidentiality of any portion of the Confidential Information which (a) is
known by such Person or its agents, advisors or representatives prior to
disclosure or (b) becomes generally available to the public provided that the
disclosure of such Confidential Information does not violate a confidentiality
agreement of which the Transferees, potential Transferees, the Agent or the
Lender, as the case may be, has actual knowledge.
7. The Company hereby agrees that each Lender is solely responsible for
its portion of the Line of Credit and that neither the Agent nor any Lender
shall be responsible for, nor assume any obligations for, the failure of any
Lender to make available its portion of the Line of Credit. Further, should any
Lender refuse to make available its portion of the Line of Credit, then another
Lender may, but without obligation to do so, increase, unilaterally, its portion
of the Line of Credit in which event the Company is so obligated to that other
Lender.
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8. In the event that the Agent, the Lenders or any one of them is sued or
threatened with suit by the Company, or by any receiver, trustee, creditor or
any committee of creditors on account of any preference, voidable transfer or
lender liability issue, alleged to have occurred or been received as a result
of, or during the transactions contemplated under, this Financing Agreement,
then in such event any money paid in satisfaction or compromise of such suit,
action, claim or demand and any expenses, costs and attorneys' fees paid or
incurred in connection therewith, whether by the Agent, the Lenders or any one
of them, shall be shared proportionately by the Lenders. In addition, any costs,
expenses, fees or disbursements incurred by outside agencies or attorneys
retained by the Agent to effect collection or enforcement of any rights in the
Collateral, including enforcing, preserving or maintaining rights under this
Financing Agreement shall be shared proportionately between and among the
Lenders to the extent not reimbursed by the Company or from the proceeds of
Collateral. The provisions of this paragraph shall not apply to any (i) suits,
actions, proceedings or claims that are unrelated, directly or indirectly, to
this Financing Agreement, or (ii) costs, expenses, fees or disbursements
resulting solely from the gross negligence or willful misconduct of the Agent or
any Lender.
9. Each of the Lenders agrees with each other Lender that any money or
assets of the Company held or received by such Lender, no matter how or when
received, shall be applied to the reduction of the Obligations (to the extent
permitted hereunder) after x) the occurrence of an Event of Default and y) the
election by the Required Lenders to accelerate the Obligations. In addition, the
Company authorizes, and the Lenders shall have the right, without notice, upon
any amount becoming due and payable hereunder, to set-off and apply against any
and all property held by, or in the possession of such Lender the Obligations
due such Lenders.
10. (a) CITBC shall have the right at any time to assign to one or more
commercial banks, commercial finance lenders or other financial institutions
having total assets in excess of $500,000,000 (each herein an "Acceptable
"Transferee"). all or a portion of its rights and obligations under this
Financing Agreement (including, without limitation, its obligations under the
Line of Credit, the Revolving Loans and its rights and obligations with respect
to Letters of Credit). Upon execution of an Assignment and Transfer Agreement,
(i) the assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
assignment, have the rights and obligations of CITBC as the case may be
hereunder and (ii) CITBC shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such assignment, relinquish its
rights and be released from its obligations under this Financing Agreement. The
Company shall, if necessary, execute any documents reasonably required to
effectuate the assignments. No other Lender may assign its interest, in whole or
in part, in the loans and advances and extensions of credit hereunder without
(i) the prior written consent of the Agent (which consent shall not be
unreasonably withheld); (ii) the payment to the Agent (solely for the Agent's
account) by the current or prospective Lender of a $5,000.00 fee for processing
the assignment; (iii) if the Transferee is a Foreign Lender (as defined in
Section 13, Paragraph 5 hereof), such Foreign Lender first complies with the
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provisions of Section 13, Paragraph 5 hereof, and (iv) the Transferee thereof
being an Acceptable Transferee. Additionally, no other Lender shall assign such
Lender's interest in the loans and advances and extensions of credit hereunder
(or any portion thereof) unless the interest to be so assigned is not less than
$5,000,000 or all of the such Lender's entire interest in the loans and advances
and extensions of credit hereunder. Notwithstanding anything to the contrary
herein contained, prior to any such assignment and/or the disclosure of the
Confidential Information, such Transferee, actual or potential, shall execute a
confidentiality agreement in form and substance substantially similar to the
confidentiality paragraph of this Financing Agreement. Notwithstanding the
foregoing, CITBC agrees that so long as no Default or Event of Default has
occurred hereunder, its share of all loans, advances and extensions of credit
hereunder shall be at least equal to any other single Lender's share thereof.
(b) In the event any Lender requires that its loans hereunder shall be
evidenced by a promissory note, upon written advise thereof to the Agent, the
Agent shall prepare revolving loan promissory notes in the pro rata amount of
each Lender's commitment hereunder, and the Company shall execute any such notes
and deliver them to the Agent for distributions to the Lenders.
SECTION 12. AGENCY
------
1. Each Lender hereby irrevocably designates and appoints CITBC as the
Agent for the Lenders under this Financing Agreement and any ancillary loan
documents and irrevocably authorizes CITBC as Agent for such Lender, to take
such action on its behalf under the provisions of the Financing Agreement and
all ancillary documents and to exercise such powers and perform such duties as
are expressly delegated to the Agent by the terms of this Financing Agreement
and all ancillary documents together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Financing Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into
Financing Agreement and the ancillary documents or otherwise exist against the
Agent.
2. The Agent may execute any of its duties under this Financing Agreement
and all ancillary documents by or through agents or attorneys-in-fact and shall
be entitled to the advice of counsel concerning all matters pertaining to such
duties.
3. Neither the Agent nor any of its officers, directors, employees, agents,
or attorneys-in-fact shall be (i) liable to any Lender for any action lawfully
taken or omitted to be taken by it or such person under or in connection with
the Financing Agreement and all ancillary documents (except for its or such
person's own gross negligence or willful misconduct), or (ii) responsible in any
manner to any of the Lenders for any recitals, statements, representations or
warranties made by the Company or any officer thereof contained in the Financing
Agreement and all ancillary documents 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 the Financing Agreement and all ancillary documents
or for the value, validity, effectiveness, genuineness, enforceability or
sufficiency of the Financing
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Agreement and all ancillary documents or for any failure of the Company to
perform its obligations thereunder.
The Agent shall not be under any obligation to any Lender to ascertain or to
inquire as to the observance or performance of any of the agreements contained
in, or conditions of, the Financing Agreement and all ancillary documents or to
inspect the properties, books or records of the Company.
4. The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order 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, without
limitation, counsel to the Company), independent accountants and other experts
selected by the Agent. The Agent shall be fully justified in failing or refusing
to take any action under the Financing Agreement and all ancillary documents
unless it shall first receive such advice or concurrence from all of the
Lenders, or the Required Lenders, as the case may be, as it deems appropriate or
it shall first be indemnified to its satisfaction by the Lenders 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 the Financing Agreement
and all ancillary documents in accordance with a request from all of the
Lenders, or the Required Lenders, as the case may be, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders.
5. The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default hereunder unless the Agent has
received notice from a Lender or the Company describing such Default or Event of
Default. In the event that the Agent receives such a notice, the Agent shall
promptly give notice thereof to the Lenders. The Agent shall take such action
with respect to such Default or Event of Default as shall be reasonably directed
by the Required Lenders; provided that unless and until the Agent shall have
--------
received such direction, the Agent may in the interim (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable and in the best
interests of the Lenders.
6. Each Lender expressly acknowledges that neither the Agent nor any of
its officers, directors, employees, agents or attorneys-in-fact has made any
representations or warranties to it and that no act by the Agent hereinafter
taken, including any review of the affairs of the Company, shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without reliance
upon the Agent or any other Lender and based on such documents and information
as it has deemed appropriate, made its own appraisal of, and investigation into,
the business, operations, property, financial and other condition and
creditworthiness of the Company and made its own decision to enter into this
Financing Agreement. Each Lender also represents that it will, independently and
without reliance
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upon the Agent or any other Lender 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 the
Financing Agreement and to make such investigation as it deems necessary to
inform itself as to the business, operations, property, financial and other
condition or creditworthiness of the Company. The Agent, however, shall provide
the Lenders with copies of all financial statements, projections and business
plans which come into the possession of the Agent or any of its officers,
employees, agents or attorneys-in-fact.
7. The Lenders agree to indemnify the Agent in its capacity as such (to
the extent not reimbursed by the Company and without limiting the obligation of
the Company to do so), from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind whatsoever (including negligence on the part of the
agent) which may at any time be imposed on, incurred by or asserted against the
Agent in anyway relating to or arising out of this Financing Agreement on any
ancillary documents or any documents contemplated by or referred to herein or
the transactions contemplated hereby or any action taken or omitted by the Agent
under or in connection with any of the foregoing; provided that no Lender shall
--------
be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting solely from the Agent's gross negligence or willful
misconduct. The agreements in this paragraph shall survive the payment of the
obligations.
8. The Agent may make loans to, and generally engage in any kind of
business with the Company as though the Agent were not the Agent hereunder. With
respect to its loans made or renewed by it or loan obligations hereunder as
Lender, the Agent shall have the same rights and powers, duties and liabilities
under the Financing Agreement as any Lender and may exercise the same as though
they were not the Agent and the terms "Lender" and "Lenders" shall include the
Agent in its individual capacities.
9. The Agent may resign as Agent upon thirty (30) days' notice to the
Lenders and such resignation shall be effective upon the appointment of a
successor Agent. If the Agent shall resign as Agent, then the Lenders shall
appoint a successor agent for the Lenders whereupon such successor agent shall
succeed to the rights, powers and duties of the Agent and the term "Agent" shall
mean such successor agent effective upon its appointment, and the former Agent's
rights, powers and duties as Agent shall be terminated, without any other or
further act or deed on the part of such former Agent or any of the parties to
this Financing Agreement, provided, however, that the Lenders shall: a) notify
the Company of the successor Agent and b) request the consent of the Company to
such successor Agent, which consent shall not be unreasonably withheld. The
Company shall be deemed to have consented to the successor Agent if the Lenders
do not receive from the Company, within ten (10) days of the Lenders' notice to
the Company, a written statement of the Company's objection to the successor
Agent. Should the Company not consent and no acceptable successor Agent is
agreed upon within thirty (30) days of the
-51-
<PAGE>
date the Company advised the Lenders of its objection to the successor Agent,
then the Lenders may appoint (without the Company's consent) another successor
Agent. After any retiring Agent's resignation hereunder as Agent the provisions
of this Section 14 shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Agent.
10. Notwithstanding anything contained in this Financing Agreement to the
contrary, the Agent will not, without the prior written consent of all Lenders:
---
a) amend the Financing Agreement to v) increase the Line of Credit or the
Inventory Advance Percentage; w) reduce the interest rates; x) reduce or waive
i) any fees in which the Lenders share hereunder; or ii) the repayment of any
Obligations due the Lenders; y) extend the maturity of the Obligations; or z)
alter or amend 1) this Paragraph 10 or 2) the definitions of Eligible Inventory,
Collateral or Required Lenders, or the Agent's criteria for determining
compliance with such definitions of eligibility; b) release Collateral in bulk
without a corresponding reduction in the Obligations to the Lenders, or c)
intentionally make any Revolving Loan or assist in opening any Letter of Credit
hereunder if after giving effect thereto the total of Revolving Loans and
Letters of Credit hereunder for the Company would exceed one hundred and ten
percent (110%) of the maximum amount available under Sections 3 and 4 hereof. In
all other respects the Agent is authorized to take such actions or fail to take
such actions if the Agent, in its reasonable discretion, deems such to be
advisable and in the best interest of the Lenders, including, but not limited
to, the making of an overadvance or the termination of the Financing Agreement
upon the occurrence of an Event of Default unless it is specifically instructed
to the contrary by the Required Lenders.
11. Each Lender agrees that notwithstanding the provisions of Section 10
of this Financing Agreement any Lender may terminate this Financing Agreement or
the Line of Credit only as of an Anniversary Date and then only by giving the
Agent one hundred and twenty (120) days prior written notice thereof. Within
thirty (30) days after receipt of any such termination notice, the Agent shall,
at its option, either (i) give notice of termination to the Company hereunder or
(ii) purchase the Lender's share of the Obligations hereunder for the full
amount thereof plus accrued interest thereon. Unless so terminated this
Financing Agreement and the Line of Credit shall be automatically extended from
Anniversary Date to Anniversary Date.
SECTION 13. MISCELLANEOUS
-------------
1. Except as otherwise expressly provided, the Company hereby waives
diligence, demand, presentment and protest and any notices thereof as well as
notice of nonpayment, notice of dishonor, notice of intent to accelerate and
notice of acceleration. No delay or omission of the Agent or the Company to
exercise any right or remedy hereunder, whether before or after the happening of
any Event of Default, shall impair any such right or shall operate as a waiver
thereof or as a waiver of any such Event of Default. No single or
-52-
<PAGE>
partial exercise by the Agent of any right or remedy precludes any other or
further exercise thereof, or precludes any other right or remedy.
2. Neither this Financing Agreement nor any provision hereof may be
waived, amended or modified except as pursuant to an agreement or agreements in
writing entered into by the Company, the Agent, the Lenders or the Required
Lenders, as the case may be.
3. THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTS REFERENCED HEREIN OR
CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.
4. It is the intent of the Company, the Agent and the Lenders to conform
strictly to all applicable state and federal usury laws. All agreements between
the Company and the Agent, acting on behalf of the Lenders, whether now existing
or hereafter arising and whether written or oral, are hereby expressly limited
so that in no contingency or event whatsoever, whether by reason of acceleration
of the maturity hereof or otherwise, shall the amount contracted for, charged or
received by the Agent, acting on behalf of the Lenders, for the use,
forbearance, or detention of the money loaned hereunder or otherwise, or for the
payment or performance of any covenant or obligation contained herein or in any
other document evidencing, securing or pertaining to the Obligations evidenced
hereby which may be legally deemed to be for the use, forbearance or detention
of money, exceed the maximum amount which the Agent, acting on behalf of the
Lenders, is legally entitled to contract for, charge or collect under applicable
state or federal law. If from any circumstance whatsoever fulfillment of any
provisions hereof or of such other documents, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligations to be fulfilled shall be automatically
reduced to the limit of such validity, and if from any such circumstance the
Agent, acting on behalf of the Lenders, shall ever receive as interest or
otherwise an amount in excess of the maximum that can be legally collected, then
such amount which would be excessive interest shall be applied to the reduction
of the principal indebtedness hereof and any other amounts due with respect to
the Obligations evidenced hereby, but not to the payment of interest and if such
amount which would be excessive interest exceeds the Obligations and all other
non-interest indebtedness described above, then such additional amount shall be
refunded to the Company. In determining whether or not all sums paid or agreed
to be paid by the Company for the use, forbearance or detention of the
Obligations of the Company to the Agent, acting on behalf of the Lenders, under
any specific contingency, exceeds the maximum amount permitted by applicable
law, the Company and the Agent, acting on behalf of the Lenders, shall, to the
maximum extent permitted under applicable law, (a) characterize any non-
principal payment as an expense, fee or premium rather than as sums paid or
agreed to be paid by the Company for the use, forbearance or detention of the
Obligations of the Company to the Agent, acting on behalf
-53-
<PAGE>
of the Lenders, (b) exclude voluntary prepayments and the effect thereof, and
(c) to the extent not prohibited by applicable law, amortize, prorate, allocate
and spread in equal parts, the total amount of all sums paid or agreed to be
paid by the Company for the use, forbearance or detention of the Obligations of
the Company to the Agent, acting on behalf of the Lenders, throughout the entire
contemplated term of the Obligations so that the interest rate is uniform
throughout the entire term of the Obligations. The terms and provisions of this
paragraph shall control and supersede every other provision hereof and all other
agreements between the Company and the Agent, acting on behalf of the Lenders.
5. Any Lender organized under the laws of a jurisdiction outside of the
United States (a "Foreign Lender") shall deliver to Agent and the Company (i)
two valid, duly completed copies of IRS Form 1001 or 4224 or successor
applicable form, as the case may be, and any other required form, certifying in
each case that such Foreign Lender is entitled to receive payments under this
Financing Agreement without deduction or withholding of any United States
federal income taxes, or (ii) if such Foreign Lender is not a "bank" within the
meaning of Section 881(c) (3) (A) of the Internal Revenue Code and cannot
deliver either IRS Form 1001 or 4224 pursuant to clause (i) above, (A) a duly
completed certificate of non-withholding acceptable to the Company and the Agent
in their reasonable discretion (any such certificate, a "Tax Certificate") and
--------------- ---
(B) two valid, duly completed copies of IRS Form W-8 or successor applicable
form, as the case may be, to establish an exemption from United States backup
withholding tax. Each such Foreign Lender shall also deliver to Agent and the
Company two further copies of said Form 1001 or 4224 or Form W-8 and a Tax
Certificate, or successor applicable forms, or other manner of required
certification, as the case may be, on or before the date that any such form
expires or becomes obsolete or otherwise is required to be resubmitted as a
condition to obtaining an exemption from a required withholding of United States
of America federal income tax or after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Company and
Agent, and such extensions or renewals thereof as may reasonably be requested by
the Company and Agent, certifying (x) in the case of a Form 1001 or 4224 that
such Foreign Lender is entitled to receive payments under this Financing
Agreement without deduction or withholding of any United States federal income
taxes, or (y) in the case of a Form W-8 and a Tax Certificate, establishing an
exemption from United States backup withholding tax.
6. If any provision hereof or of any other agreement made in connection
herewith is held to be illegal or unenforceable, such provision shall be fully
severable, and the remaining provisions of the applicable agreement shall remain
in full force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be added
automatically as a part of the applicable agreement a legal and enforceable
provision as similar in terms to the severed provision as may be possible.
7. TO THE EXTENT PERMITTED BY LAW, THE COMPANY, THE LENDERS AND THE AGENT
HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING
OUT OF THIS FINANCING AGREEMENT. THE COMPANY
-54-
<PAGE>
HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF
PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED ADDRESSED TO
THE PRESIDENT, CHIEF FINANCIAL OFFICER OR GENERAL COUNSEL OF THE COMPANY. ANY
JUDICIAL PROCEEDING BROUGHT BY OR AGAINST THE COMPANY WITH RESPECT TO ANY OF THE
OBLIGATIONS, THIS FINANCING AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN
ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA AND COUNTY OF LOS
ANGELES, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS
FINANCING AGREEMENT, THE COMPANY ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL, NON-
APPEALABLE JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS FINANCING
AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER
PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE AGENT TO BRING PROCEEDINGS
AGAINST THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION. THE COMPANY WAIVES
ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND
SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OF VENUE OR BASED
UPON FORUM NON CONVENIENS.
----- --- ----------
8. Except as otherwise herein provided, any notice or other communication
required hereunder shall be in writing, and shall be deemed to have been validly
served, given or delivered when hand delivered, including overnight delivery by
a courier service or sent by facsimile, or five days after deposit in the United
States mails, with proper first class postage prepaid and addressed to the party
to be notified as follows:
(A) if to CITBC or the Agent, at:
The CIT Group/Business Credit, Inc.
300 South Grand Avenue
Los Angeles, CA 90071
Attn: Regional Manager
Facsimile Number: (213) 613-2588
(B) if to the Company at:
House of Fabrics, Inc.
13400 Riverside Drive
Sherman Oaks, California 91423
Attn: Chief Financial Officer
Facsimile Number: (818) 385-2390
(C) if to any other Lender, at the address specified in the
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<PAGE>
Assignment and Transfer Agreements
or to such other address as any party may designate for itself by like notice.
9. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
10. This Financing Agreement may be executed in counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute but one agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement
to be executed and delivered in Los Angeles, California by their proper and duly
authorized officers as of the date set forth above.
THE CIT GROUP/BUSINESS
CREDIT, INC., AS AGENT AND LENDER
By: /s/ Guy Fuchs
-------------------------------
Vice President
HOUSE OF FABRICS, INC.
By: /s/ John E. Labbett
-------------------------------
Title EVP - CFO
-57-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 5,922
<SECURITIES> 0
<RECEIVABLES> 9,076
<ALLOWANCES> 0
<INVENTORY> 94,853
<CURRENT-ASSETS> 117,084
<PP&E> 59,182
<DEPRECIATION> 36,107
<TOTAL-ASSETS> 186,028
<CURRENT-LIABILITIES> 92,359
<BONDS> 0
0
0
<COMMON> 1,370
<OTHER-SE> 46,880
<TOTAL-LIABILITY-AND-EQUITY> 186,028
<SALES> 111,355
<TOTAL-REVENUES> 111,355
<CGS> 62,000
<TOTAL-COSTS> 62,000
<OTHER-EXPENSES> 55,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,911
<INCOME-PRETAX> (10,948)
<INCOME-TAX> 48
<INCOME-CONTINUING> (10,996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,996)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
