<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR FISCAL YEAR ENDED JANUARY 28, 1995 OR
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-5179
---------------------
FAY'S INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF NEW YORK 16-0919350
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7245 HENRY CLAY BOULEVARD, 13088
LIVERPOOL, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (315) 451-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which
registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation 5-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of April 19, 1995 was $120,831,653.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 19, 1995
----- -----------------------------
<S> <C>
Common Stock, $.10 par value................. 20,535,760
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes.
<TABLE>
<S> <C>
PART I-- None.
PART II-- None.
PART III--Item 10. Pages 4, 5 and 14 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 26, 1995, under "Election of
Directors" and "Compliance with Section 16(a) of the Securities Act
of 1934."
--Item 11. Page 6 through 13 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 26, 1995, under "Executive
Compensation and Other Information," "Compensation of Directors,"
"Report of Compensation Committee on Executive Compensation,"
"Performance Graph Comparison of Cumulative Return for the Five
Years ended January 28, 1995" and "Compensation Committee
Interlocks and Insider Participation."
--Item 12. Pages 2 and 3 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 26, 1995, under "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of
Management."
--Item 13. Page 13 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 26, 1995, under "Certain Business
Relationships."
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS.
Fay's Incorporated (the "Company") was incorporated under the laws of the
State of New York on October 20, 1966 as Fay's Drug Company, Inc. The first
Fay's Drug Store was opened in 1958. The Company maintains its executive
offices at 7245 Henry Clay Boulevard, Liverpool, New York. In June 1989, the
Company changed its name to Fay's Incorporated.
The Company's principal business is the operation of a chain of super drug
stores under the name "Fay's Drugs." The Company also operates a chain of
discount automotive parts and supply stores under the name "Wheels Discount
Auto Supply Stores" and a chain of discount office supply, book, party supply
and greeting card stores under the name "The Paper Cutter."
The Company is organized into three retail operating divisions, each
responsible for the marketing, distribution and operations functions of one of
the Company's three retail concepts, and a mail order pharmacy services
division (PostScript Mail Order Pharmacy Services). A corporate support
services group provides central support services to the four divisions.
As of January 28, 1995, the Company's Fay's Drug Store Division was
responsible for the operation of 213 Fay's Drug Stores, of which 188 were
located in Upstate New York, 22 in Pennsylvania, two in Vermont and one in New
Hampshire. The Company's Fay's Drug Store Division is also responsible for the
operation of 64 traditional drug stores and a liquor store. All but two of the
Company's 64 traditional drug stores (which range in size from 864 to 16,653
square feet) were acquired from independent owners. Ten (10) of the traditional
drug stores are operated under the respective tradenames used by the previous
owners, and 54 are operated under the tradename "Fay's Cornerdrug." Fifty-seven
(57) of the Company's traditional drug stores are located in Upstate New York,
five in Pennsylvania and two in Vermont.
On August 4, 1994, the Company acquired all of the capital stock of Peterson
Drug Company of Western New York, Inc., which operated 12 Peterson Drug Stores
in Western New York State. Prior to the fiscal year end, the 12 Peterson Drug
Stores were operating under the tradename "Fay's Cornerdrug." In addition to
the Peterson Drug acquisition, during the fiscal year ended January 28, 1995,
the Company opened three Fay's Drug Stores and acquired two traditional drug
stores. In addition, two traditional drug store were converted into Fay's Drug
Stores and one Fay's Drug Store and one traditional drug store were closed.
Since the end of the fiscal year, the Company has converted one traditional
drug store into a Fay's Drug Store and closed one traditional drug store.
The Company acquired the common stock of Carls Drug Co., Inc. ("Carls") from
Victory Markets Inc. on April 29, 1991. Carls operated a chain of 48 drug
stores, of which five have been closed and one sold since the acquisition. In
July 1991, 43 of the former Carls Drug Stores were converted into Fay's Drug
Stores. On May 1, 1993, Carls was merged into the Company. On January 26, 1993,
the Company sold 10 Fay's Drug Store in southeastern Pennsylvania for $4.1
million in cash.
The Fay's Drug Store Division also provides pharmacy services to
institutional customers on a contract basis, including nursing homes, adult
homes and prison facilities. At fiscal year end, under contract were 336 long-
term care facilities housing approximately 22,000 residents and 55 New York
State prisons with over 43,000 inmates. Contract pharmacy services are provided
from 90 Fay's Drug Stores as well as from six dispensing facilities dedicated
solely to the servicing of Fay's contract pharmacy services customers. In
February 1994, the Company acquired two long-term care pharmacy services
businesses which, at the time of acquisition, were servicing 65 nursing and
adult homes. In April 1995, the Company acquired an additional long-term care
pharmacy services business which, at the time of acquisition, was servicing 75
nursing and adult homes.
3
<PAGE>
In October 1992 the Company established a mail order pharmacy services
division under the name "PostScript Mail Order Pharmacy Services." PostScript
was formed to market mail order prescription services to prescription benefit
programs. In May 1993 PostScript began filling prescriptions from its 5,000
square foot dispensing facility located in Aliquippa, Pennsylvania. At fiscal
year end, PostScript had contracted to provide mail order pharmacy services to
260 prescription benefit plans.
During fiscal 1995, the Company created a pharmacy benefits management group
under the name "Optium Pharmacy Services." Optium Pharmacy Services provides
management and administrative services to prescription drug benefit plans.
Their services include such things as plan design, implementation of procedures
to monitor drug utilization, spotting opportunities for the dispensing of
generic drugs and monitoring of plan participants for compliance with
prescribed drug therapies.
At fiscal year end, the Wheels Discount Auto Supply Store Division was
operating 68 Wheels Discount Auto Supply Stores, of which 60 were located in
Upstate New York and eight in Pennsylvania. At fiscal year end, The Paper
Cutter Division was operating 31 Paper Cutter stores, all of which were located
in Upstate New York.
On June 14, 1994, the Company acquired the assets of 26 National Auto Supply
Stores located in the State of New York and four Whitlock Auto Stores located
in Pennsylvania. Prior to the end of the fiscal year, the Company closed one of
the acquired National Auto Stores and converted the remaining National and
Whitlock Auto Stores into Wheels Discount Auto Supply Stores. In addition to
the National/Whitlock acquisition, during the fiscal year ended January 28,
1995, the Company opened eight Wheels Discount Auto Supply Stores and three
paper Cutter Stores. Since the end of the fiscal year, the Company has opened
four Wheels Discount Auto Supply Stores.
On April 14, 1993, the Company closed nine Paper Cutter Stores located in the
Philadelphia metropolitan area (see Note 9 to Consolidated Financial
Statements).
The Company's business is the retail sale of various products and is not
fractionalized into more than one industry segment. Major classifications of
products sold by the Company's drug stores include traditional drug store items
(such as prescription and proprietary drugs, health and beauty aids and tobacco
products), consumer hard goods (such as small appliances, electronics,
automotive supplies, housewares and hardware) and miscellaneous merchandise
(such as food and beverage items, seasonal merchandise, toys, photo-finishing
and greeting cards). The following table sets forth the approximate percentage
of drug store revenues attributable to each of these major categories for each
of the last three fiscal years:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------
YEAR ENDED
-----------------------
CATEGORIES 1/28/95 1/29/94 1/30/93
---------- ------- ------- -------
<S> <C> <C> <C>
Traditional Drug Store Items:
Prescription and Proprietary Drugs................ 51.8 48.7 47.3
Health and Beauty Aids............................ 9.8 10.6 11.3
Tobacco........................................... 5.8 6.6 7.0
Consumer Hard Goods................................. 6.6 7.4 7.8
Miscellaneous Merchandise........................... 26.0 26.7 26.6
</TABLE>
All but one Fay's Drug Store contain a prescription drug department. Each
carries a broad range of health related products and general consumer
merchandise. In addition to selling a full line of nationally advertised
products, the Company markets over 900 products under its own "Fay's" brand
label.
Each of the Company's pharmacies is equipped with a computerized pharmacy
system which the Company promotes under the tradename "AccuFays." The AccuFays
pharmacy system enables the Company to reduce the paperwork normally involved
in third party programs (governmental and
4
<PAGE>
private prescription drug plans) and significantly reduce the time it takes to
receive payment from these programs. The AccuFays pharmacy computer systems
provide prescription customers with an AccuFacts patient information leaflet
each time a prescription is dispensed. The AccuFacts leaflet describes the
proper usage of the patient's prescription medication, augmenting patient
counseling provided by Fay's pharmacists.
Currently, 170 of the Company's Fay's Drug Stores are equipped with point-of-
sale optical scanning cash register systems. These systems, by accurately
tracking item movement, assist in buying, marketing and merchandising
decisions, as well as reducing the time customers spend at the checkout
counter.
Merchandise sold in the Company's stores is purchased from a large number of
manufacturers, distributors and wholesalers. The Company did not experience any
difficulty during the fiscal year ended January 28, 1995 in obtaining needed
merchandise. No one supplier accounted for a significant portion of the
Company's purchases. No one supplier accounted for a significant portion of the
Company's purchases. Since the Company sells to the general public, it is not
dependent upon a single or few customers.
Merchandise for the Company's stores is primarily provided through the
Company's two distribution centers located in Liverpool, New York. Additional
merchandise is distributed directly to the stores by manufacturers,
distributors, publishers and jobbers.
The Company has numerous trademarks and service marks registered with the
U.S. Patent and Trademark Office, including: Fay's, Fay's Drugs, The Paper
Cutter, Wheels Discount Auto Supply, PostScript, AccuFays, AccuFacts and Senior
Savers. Said trademarks and service marks expire between the years 1999 and
2006. The Company believes that such trademarks and service marks are important
to the conduct of its operations. The Company also maintains appropriate
licensing for its pharmacy operations, licenses for the sale of beer in its
drugstores (where such sales are allowed by law), as well as other retail
business licenses. The Company holds a 10 year franchise granted by Ben
Franklin Crafts, Inc. to operate a Ben Franklin Crafts Store within its Fay's
Drug Store located in Watertown, New York and the right to open an additional
Ben Franklin Crafts Store anywhere within Jefferson County, St. Lawrence County
or Franklin County, New York prior to April 1, 1997. The Company does not
consider such franchises materially important to the conduct of its business.
The Company's business is seasonal, with the highest revenues and income
normally generated during the Christmas season and the lowest in the early
months of the calendar year. For the three fiscal years ended January 28, 1995,
January 29, 1994 and January 30, 1993, the fourth quarter accounted for
approximately 28%, 28% and 29%, respective, of the Company's revenues, and 47%,
58% and 47%, respectively, of the Company's earnings before accounting changes.
Working capital used to acquire merchandise inventory for resale and to equip
and fixture new stores is primarily internally generated, but may be augmented
by short term borrowings from several banks where the Company has lines of
credit.
The Company faces competition in all of its marketing areas. Due to the broad
merchandise mix in each Fay's Drug Store, the Company's super drug store
business competes with national chain drug stores, independent drug stores,
supermarkets, discount department stores and traditional department stores. The
main source of competition for the Company's Wheels Discount Auto Supply and
Paper Cutter Stores are retailers with specialized product lines similar to
those carried by the stores, as well as discount department stores and chain
drug stores. Many of the businesses with which the Company competes are
considerably larger, have been in business longer or have substantially greater
financial resources, marketing capabilities and experience than the Company.
However, due to factors such as price, product selection, merchandising,
advertising, customer service, convenience and number of store locations, the
Company believes that it is competitive in its major market areas.
5
<PAGE>
During fiscal 1995, compliance with Federal, state and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, did
not have a material affect upon capital expenditures, earnings or the Company's
competitive position. In this regard, there are no material capital
expenditures planned for environmental control facilities.
As of January 28, 1995, the Company employed approximately 9,000 persons,
consisting of full and part-time store, office, distribution and pharmacy
personnel.
ITEM 2. PROPERTIES
The majority of the Company's Fay's Drug Stores range in size from 12,000 to
16,000 square feet. The smallest Fay's Drug Store is 6,500 square feet and the
largest 58,450 square feet. The current Fay's Drug store prototype is 11,840
square feet. The Company's Wheels Discount Auto Supply Stores range in size
from 6,618 square feet to 20,000 square feet. The current Wheels Discount Auto
supply Store prototype is 8,050 square feet. The Company's Paper Cutter Store
range in size from 7,979 square feet to 19,283 square feet. The current Paper
Cutter prototype is 10,800 square feet.
Two of the Company's stores are owned in fee. The balance of the Company's
store locations are leased by the Company. The Company's policy of leasing
store locations is designed to permit it to retain capital for use in its
merchandising operation. The Company's leases provide for fixed rentals and, in
many instances, additional rentals based on store sales. The store leases have
terms expiring between 1995 and 2014 and typically include renewal options. See
Note 5 to Consolidated Financial Statements. As of January 28,1 995, five of
the Company's store locations were subject to ground leases.
The stores now in operation are primarily located in suburban shopping
centers with adjacent paved and lighted parking facilities. All stores are air-
conditioned and have modern fixtures and equipment. In seeking new locations,
the Company is dependent on the activities of real estate developers as to the
availability of sites, choice of locations and timing of openings. This, in
turn, is heavily dependent upon the ability of the real estate developer to
obtain financing. There can be no assurance that leases for any new locations
will be signed or that, once a lease is signed, a store will be constructed by
the developer.
The Company has given priority to the opening of new Fay's Drug Stores in
freestanding locations. Such locations will provide an enhanced level of
convenience to the Company's customers and will give the Company the
flexibility to locate stores in more densely populated areas not conducive to
large-scale development.
The Company's main distribution facility, located in Liverpool, New York,
contains approximately 580,000 square feet and is devoted almost exclusively to
servicing the Company's Fay's Drug Store Division. The Company's executive
offices, which house both cental corporate services personnel and Fay's Drug
Store Division personnel, contains approximately 45,000 square feet and is
located adjacent to the Company's main distribution center. The executive
office/main distribution center complex is owned in fee by the Company.
The Company's Wheels Discount Auto Supply and Paper Cutter stores are
serviced from a 172,000 square foot office/distribution center complex located
on a 27 3/4 acre parcel approximately two miles from the Company's executive
office/main distribution center. This complex, which is owned in fee, is
comprised of a 150,000 square foot distribution center and 22,000 square feet
of office space.
The Company leases, with an option to purchase, a 20,000 square foot office
building located in Liverpool, New York. Including renewal periods, the lease
expires in the year 2000. The option to purchase is exercisable at any time
during the lease term. This facility houses certain corporate services
personnel.
6
<PAGE>
As of January 28, 1995, the Company owned, in fee, an office/distribution
facility in Rome, New York which contains approximately 116,000 square feet.
Prior to the acquisition of Carls Drug Co., Inc. by the Company, this facility
served as Carls' distribution center and administrative offices. It was closed
subsequent to acquisition of Carls by the Company. On March 6, 1995, the
Company sold this facility for $1.2 million.
Loan agreements with an institutional lender contain a restriction on the
amount of fixed charges (which includes minimum rent) paid by the Company in
any fiscal year. During the fiscal year ended January 28, 1995, the Company was
in compliance with this restriction.
The Company also owns 33 1/2 acres of vacant land located adjacent to the
parcel of land on which Company's executive office/main distribution center
complex is situated. On March 1, 1995, the Company acquired an additional 3 1/2
acres of vacant land adjacent to the Company's executive office/main
distribution center complex.
Both the Company's main executive office/main distribution center complex and
the office/distribution center complex servicing the Company's Wheels Discount
Auto Supply and Paper Cutter Divisions are pledged as security for a mortgage
loan. See Note 3 to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
Other than routine litigation incidental to the business, there are no
material pending legal proceedings to which the Company is a party or of which
any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year to a
vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, $.10 par value, is traded on The New York Stock
Exchange. As of April 19, 1995, there were 9,328 holders of record of the
Company's Common Stock.
The price range of the Company's Common Stock and the dividends paid in
respect of such Common Stock during the last two fiscal years is shown in the
table below:
<TABLE>
<CAPTION>
CASH DIVIDEND
HIGH LOW PER SHARE
----- ----- -------------
<S> <C> <C> <C>
FISCAL 1995
Fourth quarter................................... 7 6 $.05
Third quarter.................................... 8 6 1/2 $.05
Second quarter................................... 7 3/8 6 1/4 $.05
First quarter.................................... 7 1/4 6 1/8 $.05
FISCAL 1994
Fourth quarter................................... 7 1/4 6 3/8 $.05
Third quarter.................................... 7 1/2 6 1/2 $.05
Second quarter................................... 7 6 1/8 $.05
First quarter.................................... 7 1/8 6 1/4 $.05
</TABLE>
Under certain long-term debt agreements, there are restrictions on the
Company's ability to pay cash dividends. Under the most restrictive terms, the
Company may declare and pay dividends of up to $19,734,000. See Note 3 to the
Consolidated Financial Statements.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Five Year Financial Summary
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- --------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales............... $ 1,038,110 $ 919,719 $ 902,643 $ 836,157 $ 672,638
Cost and expenses:
Cost of merchandise
sold................. 735,324 649,078 636,286 590,115 469,331
Selling, general and
administrative
expenses............. 255,976 225,837 222,968 208,145 166,629
Depreciation and amor-
tization expenses.... 16,264 16,180 15,309 14,429 11,105
Interest expense...... 8,493 7,893 8,383 7,853 4,959
Unusual charges....... -- 3,471 -- 1,064 --
----------- --------- --------- --------- ---------
Total cost and
expenses........... 1,016,057 902,459 882,946 821,606 652,024
----------- --------- --------- --------- ---------
Earnings before income
taxes.................. 22,053 17,260 19,697 14,551 20,614
Taxes on income......... 9,417 7,231 8,466 5,898 8,267
----------- --------- --------- --------- ---------
Earnings before
extraordinary charge... 12,636 10,029 11,231 8,653 12,347
Extraordinary charge,
net of tax (a)......... -- -- -- -- (1,238)
----------- --------- --------- --------- ---------
Earnings before
cumulative effect of
accounting change...... 12,636 10,029 11,231 8,653 11,109
Cumulative effect of
accounting change, net
of tax (b)............. -- (4,806) -- -- --
----------- --------- --------- --------- ---------
Net earnings............ $ 12,636 $ 5,223 $ 11,231 $ 8,653 $ 11,109
=========== ========= ========= ========= =========
Per Share Data (c)
Earnings per common
share:
Earnings before
extraordinary charge. $ .62 $ .50 $ .56 $ .44 $ .64
Extraordinary charge.. -- -- -- -- (.06)
----------- --------- --------- --------- ---------
Earnings before
cumulative effect of
accounting change.... .62 .50 .56 .44 .58
Cumulative effect of
accounting change.... -- (.24) -- -- --
----------- --------- --------- --------- ---------
Net earnings.......... $ .62 $ .26 $ .56 $ .44 $ .58
=========== ========= ========= ========= =========
Cash dividends per
common share .......... $ .20 $ .20 $ .19 $ .16 $ .16
=========== ========= ========= ========= =========
Financial Position:
Current assets.......... $ 213,346 $ 194,779 $ 174,054 $ 173,752 $ 138,681
Current liabilities..... 112,270 104,252 83,830 83,855 75,017
Working capital......... 101,076 90,527 90,224 89,897 63,664
Total assets............ 314,128 279,714 261,150 263,683 209,285
Long-term debt.......... 81,656 65,307 73,715 87,451 48,753
Obligation under leases. 1,587 2,106 2,825 3,709 3,127
Stockholders' equity.... 106,981 96,838 94,026 84,851 77,247
Return on average
stockholders' equity... 12.4% 5.5% 12.6% 10.7% 15.3%
----------- --------- --------- --------- ---------
Stores in Operation at
Year End............... 376 321 308 313 249
----------- --------- --------- --------- ---------
</TABLE>
- --------
(a) The extraordinary charge was the result of the Company's repurchase of
$27.3 million of its 13.75% subordinated debentures during fiscal 1991.
(b) In fiscal 1994, the Company changed its method of accounting for
postretirement benefits to conform with Statement of Financial Accounting
Standards No. 106.
(c) Per share data has been adjusted to reflect a five-for-four stock split on
June 19, 1992.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION.
Results of Operations.
The Company achieved record sales and earnings for fiscal 1995 as it exceeded
$1 billion in sales for the first time in its history. Earnings before the
effect of accounting charges increased to $12.6 million or $.62 per share
compared to $.50 per share last year and $.56 in 1993.
In fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" which resulted in a non-recurring charge of $4.8 million ($.24 per
share). After this accounting change, fiscal 1994 net earnings were $5.2
million or $.26 per share. Net earnings for fiscal 1994 also reflected an
unusual charge of $2 million, net of tax, pertaining to the closing of nine
Paper Cutter stores in the Philadelphia area.
Sales increased 12.9% to $1.038 billion in fiscal 1995 compared to 3.5% and
6.2% increases in fiscal 1994 and 1993, respectively (adjusted for an
additional week in fiscal 1993 which was a 53-week year). Sales gains have been
supported by continued growth in pharmacy sales as well as by further increases
in the number of stores being operated by the Company. Pharmacy sales continue
to outpace total sales increases and moved ahead by 18.8% in fiscal 1995.
Adjusted for the additional week in fiscal 1993, pharmacy sales increased 7.1%
in fiscal 1994 and 16.8% in fiscal 1993. Sales in comparable stores (those open
at least one year) were up 4.3% in 1995 as compared to 3.5% in 1994 and .8% in
1993 (adjusted for the additional week). On a comparable store basis,
prescription sales increased 8.4% in fiscal 1995, 6.2% in 1994 and 8.3% in
1993.
Sales gains were affected by growth in the number of stores being operated as
total stores increased from 321 at the end of fiscal 1994 to 376 in fiscal
1995. During the year, the Company opened or acquired 60 stores including the
purchase of 30 National Auto Supply stores and the 12 store Peterson Drug
chain.
The gross profit rate was 29.2% in 1995 compared to 29.4% in 1994 and 29.5%
in 1993. The decline in gross margins is largely attributable to continued
pressure on third party pharmacy margins, combined with the trend of third
party prescription sales accounting for a greater portion of total pharmacy
revenues. Third party pharmacy sales were 73.1% of total pharmacy sales in
fiscal 1995 compared to 66.4% in 1994 and 61.7% in 1993.
The Company principally uses the last-in, first-out (LIFO) method of
inventory valuation which states cost of sales at the most recent costs. The
Company has experienced deflation in the last two years resulting in a
reduction to its LIFO inventory reserve of $1.4 million in fiscal 1995 and $.7
million in fiscal 1994. In fiscal 1993, the effective LIFO inflation rate was
1.1% and resulted in a charge to cost of sales of $1.4 million.
Selling, general and administrative expenses, as a percentage of sales, were
24.7% in fiscal 1995, 24.6% in fiscal 1994 and 24.7% in fiscal 1993. Both
fiscal 1995 and fiscal 1994 reflect the favorable effect of efforts to control
expenses and to leverage sales increases, as well as the closure of the
Philadelphia Paper Cutter stores in fiscal 1994 and the sale of ten drug stores
at the end of fiscal 1993. As a percentage of sales, these expenses increased
slightly in fiscal 1995 due to cost incurred in connection with the
assimilation of the National Auto Supply stores.
Payroll and occupancy costs are major expenses of the Company, particularly
in the operation of its retail locations. Payroll costs for the Company's
stores were 11.5% in fiscal 1995 compared to 11.3% in 1994 and 11.2% in 1993.
These increases were reflective of wage inflation, the opening of new stores
and the assimilation of the acquired automotive stores. Occupancy costs
(including rent, common area maintenance and real estate taxes) were 3.5% of
sales in 1995 and 1994, and 3.8% in 1993. Reductions over the past two years
are primarily attributable to the sale or closure of underperforming locations.
9
<PAGE>
Administrative and distribution costs decreased to 5.0% of sales in fiscal
1995 and 5.2% in 1994 and 5.1% in 1993.
Net interest expense was $8.5 million in fiscal 1995, $7.9 million in 1994
and $8.4 million in 1993. The increase in fiscal 1995 was mostly due to
additional long-term debt which was required to fund acquisitions.
The Company's effective tax rates were 42.7%, 41.9% and 43%, respectively,
for fiscal 1995, 1994 and 1993. The increase in 1995 was due to a reduction in
tax credits. The fiscal 1994 rate included a 1% federal tax increase resulting
from the Omnibus Budget Reconciliation Act passed in 1993.
Liquidity and Capital Resources.
The Company's cash requirements arise primarily from the need to finance the
opening and equipping of new stores, the purchase of inventory, debt service
and the payment of dividends. Management believes that the Company is in sound
financial condition, and that is operations and capital resources will provide
sufficient cash availability to meet its liquidity needs and to finance
planned growth.
At January 28, 1995, the Company had $1.9 million in cash, compared to $1
million at January 29, 1994. Cash flow from operating activities was $22.7,
$6.1 and $10.2 million in fiscal 1995, 1994 and 1993, respectively. Cash flow
was further supplemented in fiscal 1995 by the proceeds of additional $25
million in debt, most of which was used to finance acquisitions which occurred
during the year.
Capital expenditures represent a major investment of cash and totaled $15.7
million in fiscal 1995, $9.5 million in fiscal 1994 and $7.0 million in fiscal
1993. These expenditures are principally for improvements to new and existing
leased store locations, store equipment and fixtures, and distribution and
office facilities. The Company anticipates capital expenditures of
approximately $21 million in fiscal 1996. The Company generally enters into
long-term lease arrangements for new stores. (For information regarding future
minimum rental payments, refer to Note 5 of the Notes to Consolidated
Financial Statements.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are included in this Report
on pages F-1 through F-14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to directors of the Company is incorporated herein by
reference to pages 4, 5 and 14 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 26, 1995 (see "Election of
Directors" and "Compliance with Section 16(a) of the Securities Act of
1934.").
The following lists the names and ages of all executive officers of the
Company, all persons chosen to become executive officers, all positions and
offices within the Company held by such persons and the business experience
during the past five years of such persons. Unless otherwise noted, each of
the persons listed below have served in various executive or managerial
capacities with the Company for
10
<PAGE>
the past five years. All officers were elected or re-elected to their present
positions for terms ending May 25, 1995 and until their respective successors
are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION AND BUSINESS EXPERIENCE
---- --- --------------------------------
<S> <C> <C>
Henry A. Panasci, Jr. .. 66 Chairman of the Board and Chief Executive Officer;
also served as President and Chief Operating
Officer of the Company between August 7, 1992 and
March 26, 1993
David H. Panasci........ 36 President and Chief Operating Officer since 1993;
previously served as Executive Vice President of
the Company and President--The Paper Cutter
Division of the Company
David B. Eilerman....... 47 Vice President and General Manager--PostScript Mail
Order Services Division of the Company since 1992;
previously Regional Vice President for America's
Pharmacy, a subsidiary of Systemed, Inc.
Gale T. Mitchell........ 45 President--Wheels Discount Auto Supply Division of
the Company since 1991; previously Vice President--
General Manager of the Wheels Discount Auto Supply
Division
James F. Poole, Jr. .... 40 Vice President--Finance and Chief Financial Officer
since 1989
Warren D. Wolfson....... 46 Senior Vice President, General Counsel and Secretary
since 1989
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is incorporated by reference
to pages 6 through 13 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held May 26, 1995 (see "Executive Compensation and Other
Information," "Report of Compensation Committee on Executive Compensation,"
"Preference Graph Comparison for the Five Years Ended January 28, 1995" and
"Compensation Committee Interlocks and Insider Participation").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the security holdings of more than five percent
holders and directors and executive officers of the Company is incorporated
herein by reference to pages 2 and 3 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 26, 1995 (see "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management").
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain transactions with directors and officers of
the Company is incorporated by reference to page 13 of the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 26, 1995 (see
"Certain Business Relationships").
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE NO.
----------
<S> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of January 28, 1995 and Janu-
ary 29, 1994............................................... F-2
Consolidated Statements of Net Earnings for each of the
three fiscal years in the period ended January 28, 1995.... F-3
Consolidated Statements of Stockholders' Equity for each of
the three fiscal years in the period ended January 28,
1995....................................................... F-4
Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended January 28, 1995 ......... F-5
Notes to Consolidated Financial Statements.................. F-6 - F-14
Selected Quarterly Financial Data........................... F-14
</TABLE>
2. Consolidated Financial Statement Schedules:
Individual financial statements of subsidiaries of the Company have been
omitted as the Company is primarily an operating company and all subsidiaries
included in the consolidated financial statements filed, in the aggregate, do
not have minority equity interests and/or indebtedness to any person other than
the Company or its consolidated subsidiaries in amounts which, together
(excepting indebtedness incurred in the ordinary course of business which is
not overdue and matures within one year from the date of its creation, whether
or not evidenced by securities, and indebtedness of subsidiaries which is
collateralized by the Company by guarantee, pledge, assignment or otherwise)
exceed 5 percent of the total assets as shown by the most recent year-end
consolidated balance sheet. There are no unconsolidated subsidiaries or 50% or
less owned persons accounted for by the equity method.
(b) No reports on Form 8-K were filed during the fourth quarter of fiscal
1995.
(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
(3) Articles of Incorporation and By-Laws.
(3.1) Restated Certificate of Incorporation filed November 9, 1990 with
the Department of State of the State of New York is incorporated by
reference to Annual Report on Form 10-K for the fiscal year ended
January 26, 1991.
(3.2) By-Laws of the Company, amended and restated on July 24, 1992, is
incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended January 30, 1993.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
(4.1) Restatement of Note Purchase Agreement, dated as of December 15,
1982, with Massachusetts Mutual Life Insurance Company, is incorporated
by reference to Annual Report on Form 10-K for the fiscal year ended
January 31, 1986.
(4.2) Restatement of Note Purchase Agreement, dated as of January 15,
1983, with Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors, is incorporated by reference to Annual Report on
Form 10-K for the fiscal year ended January 31, 1986.
(4.3) Note Agreement dated as of November 15, 1989 with Massachusetts
Mutual Life Insurance Company and MassMutual Participating Investors is
incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended January 27, 1990.
12
<PAGE>
(4.4) Note Agreement dated as of July 30, 1990 with Nationwide Life
Insurance Company and Employers Life Insurance Company of Wausau is
incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended January 26, 1991.
(4.5) Loan Agreement dated as of April 29, 1991 with Chemical Bank, as
Agent, and Chemical Bank is incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended July 27, 1991.
(4.6) Loan Agreement dated as of August 15, 1991 with Mutual of Omaha
Insurance Company, United of Omaha Life Insurance Company, American
Republic Insurance Company, Companion Life Insurance Company, The
Canada Life Assurance Company, General American Life Insurance Company
and The Manufacturers Life Insurance Company is incorporated by
reference to Quarterly Report on Form 10-Q for the quarter ended
October 26, 1991.
(4.7) Loan Agreement dated as of June 9, 1994 with Chemical Bank, as
Agent, and Chemical Bank accompanies this Report.
(10) Material Contracts.
(10.1) 1982 Stock Option Plan is incorporated by reference to Exhibit A
to Proxy Statement dated April 17, 1987.
(10.2) Dividend Reinvestment and Stock Purchase Plan of the Company is
incorporated by reference to Appendix B to Proxy Statement dated April
30, 1982.
(10.3) 1990 Fay's Incorporated Stock Option Plan for Non-Employee
Directors is incorporated by reference to Exhibit A to Proxy Statement
dated April 19, 1990.
(10.4) Stock Purchase Agreement dated as of April 29, 1991 by and among
Victory Markets Inc., Galoz Investments B.V. and Fay's Incorporated is
incorporated by reference to Current Report on Form 8-K dated May 10,
1991.
(10.5) The Fay's Incorporated Key Management Incentive Plan is
incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended January 29, 1994.
(10.6) The form of Agreement providing for the employment by the
Company of David H. Panasci, John A. Kogut, Warren D. Wolfson and James
F. Poole, Jr. is incorporated by reference to Annual Report on Form 10-
K for the fiscal year ended January 29, 1994.
(21) Subsidiaries of Registrant.
The Company's subsidiaries, all of which are wholly owned, considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary
as of January 28, 1995. Carls Drug Co., Inc. was merged into the Company on May
1, 1993. Peterson Drug Company of Western New York, Inc. was merged into the
Company on January 30, 1995.
13
<PAGE>
(27) Financial Data Schedule.
[TYPE] -- 27
[DESCRIPTION] -- Article 5 Financial Data Schedule for the year ended
January 28, 1995:
<TABLE>
<S> <C>
[MULTIPLIER].............................................. 1,000
[PERIOD-TYPE]............................................. 12 Months
[FISCAL-YEAR-END]......................................... January 28, 1995
[PERIOD-START]............................................ January 30, 1994
[PERIOD-END].............................................. January 28, 1995
[CASH].................................................... 1,941
[SECURITIES].............................................. 0
[RECEIVABLES]............................................. 35,992
[ALLOWANCES].............................................. 0
[INVENTORY]............................................... 166,956
[CURRENT-ASSETS].......................................... 213,346
[PP&E].................................................... 189,712
[DEPRECIATION]............................................ 119,317
[TOTAL-ASSETS]............................................ 314,128
[CURRENT-LIABILITIES]..................................... 112,270
[BONDS]................................................... 81,656
[PREFERRED-MANDATORY]..................................... 0
[PREFERRED]............................................... 0
[COMMON].................................................. 2,055
[OTHER-SE]................................................ 104,926
[TOTAL-LIABILITY-AND-EQUITY].............................. 314,128
[SALES]................................................... 1,038,110
[TOTAL-REVENUES].......................................... 1,038,110
[CGS]..................................................... 735,324
[TOTAL-COSTS]............................................. 1,016,057
[OTHER-EXPENSES].......................................... 0
[LOSS-PROVISION].......................................... 0
[INTEREST-EXPENSE]........................................ 8,493
[INCOME-PRETAX]........................................... 22,053
[INCOME-TAX].............................................. 9,417
[INCOME-CONTINUING]....................................... 12,636
[DISCONTINUED]............................................ 0
[EXTRAORDINARY]........................................... 0
[CHANGES]................................................. 0
[NET-INCOME].............................................. 12,636
[EPS-PRIMARY]............................................. .62
[EPS-DILUTED]............................................. .62
</TABLE>
14
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Fay's Incorporated
/s/ David H. Panasci
By: _________________________________
DAVID H. PANASCI PRESIDENT AND
CHIEF OPERATING OFFICER
DATED: APRIL 28, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE
/s/ Henry A. Panasci, Jr. Chairman of the
- ------------------------------------------ Board, Chief
HENRY A. PANASCI, JR. Executive Officer
and Director
/s/ James F. Poole, Jr. Vice President--
- ------------------------------------------ Finance and Chief
JAMES F. POOLE, JR. Financial Officer
/s/ Robert H. Altman Director
- ------------------------------------------
ROBERT H. ALTMAN
/s/ John D. Burke Director
- ------------------------------------------
JOHN D. BURKE
/s/ Robert J. Bennett Director
- ------------------------------------------
ROBERT J. BENNETT
/s/ Lee H. Flanagan Director
- ------------------------------------------
LEE H. FLANAGAN
15
<PAGE>
SIGNATURES TITLE
/s/ Tarky Lombardi, Jr. Director
- ------------------------------------------
TARKY LOMBARDI, JR.
/s/ Hyman M. Miller Director
- ------------------------------------------
HYMAN M. MILLER
- ------------------------------------------ Director
GARY L. MOREAU
/s/ David H. Panasci Director
- ------------------------------------------
DAVID H. PANASCI
Director
- ------------------------------------------
ALAIR A. TOWNSEND
/s/ Warren D. Wolfson Director
- ------------------------------------------
WARREN D. WOLFSON
Dated: April 28, 1995
16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Fay's Incorporated
Liverpool, New York
We have audited the accompanying consolidated balance sheets of Fay's
Incorporated and subsidiaries as of January 28, 1995 and January 29, 1994, and
the related consolidated statements of net earnings, stockholders' equity and
cash flows for each of the three fiscal years in the period ended January 28,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. A audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Fay's Incorporated and
subsidiaries at January 28, 1995 and January 29, 1994, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended January 28, 1995 in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, in fiscal
1994 the Company changed its method of accounting for postretirement benefits
other than pensions to conform with Statement of Financial Accounting Standards
No. 106 and also changed its method of accounting for income taxes to conform
with Statement of Financial Accounting Standards No. 109.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
March 7, 1995
F-1
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 28, 1995 AND JANUARY 29, 1994
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................. $ 1,941 $ 1,006
Accounts receivable.............................. 35,992 32,066
Merchandise inventories.......................... 166,956 153,627
Prepaid expenses................................. 8,457 8,080
------------ ------------
Total Current Assets........................... 213,346 194,779
Property and Equipment (Notes 3 and 5):
Land............................................. 3,837 3,837
Buildings........................................ 30,103 29,807
Leasehold improvements........................... 37,134 32,281
Furniture, fixtures and equipment................ 105,613 95,155
Property under capital leases.................... 13,025 12,473
------------ ------------
189,712 173,553
Less accumulated depreciation and amortization... 119,317 106,310
------------ ------------
70,395 67,243
Intangible and Other Assets, less accumulated amor-
tization of $14,285 in 1995 and $11,280 in 1994... 28,815 17,158
Deferred Income Taxes (Note 4)..................... 1,572 534
------------ ------------
Total Assets................................... $314,128 $279,714
============ ============
Current Liabilities:
NOTES PAYABLE (NOTE 2)........................... $ 13,100 $ 14,605
Accounts payable, trade.......................... 57,411 54,890
Accrued payroll and related taxes................ 9,423 8,102
Other accrued expenses........................... 20,176 15,901
Federal and state income taxes payable........... 1,866 1,758
Current portion of long-term debt and obligation
under leases.................................... 10,294 8,996
------------ ------------
Total Current Liabilities...................... 112,270 104,252
Long-Term Debt (Note 3)............................ 81,656 65,307
Obligation Under Leases (Note 5)................... 1,587 2,106
Deferred Gain and Other Liabilities................ 4,229 3,585
Accrued Postretirement Benefit Obligation (Note 7). 7,405 7,626
Commitments (Note 5)
Stockholders' Equity (Notes 3 and 8):
Preferred stock, par value $1 per share:
Authorized, 5,000,000 shares issued and out-
standing, no shares............................ -- --
Common stock, par value $.10 per share:
Authorized, 30,000,000 shares issued, 20,547,585
and 20,270,092 shares, respectively............ 2,055 2,027
Additional paid-in capital....................... 61,050 59,515
Retained earnings................................ 43,977 35,413
Less cost of common stock held in treasury....... (101) (117)
------------ ------------
106,981 96,838
============ ============
Total Liabilities and Stockholders' Equity..... $314,128 $279,714
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
YEARS ENDED JANUARY 28, 1995, JANUARY 29, 1994 AND JANUARY 30, 1993
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
-----------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $1,038,110 $919,719 $902,643
Cost and expenses:
Cost of merchandise sold....................... 735,324 649,078 636,286
Selling, general and administrative expenses... 255,976 225,837 222,968
Depreciation and amortization expenses......... 16,264 16,180 15,309
Interest expense............................... 8,493 7,893 8,383
Unusual charge (Note 9)........................ -- 3,471 --
---------- -------- --------
Total cost and expenses...................... 1,016,057 902,459 882,946
---------- -------- --------
Earnings before income taxes..................... 22,053 17,260 19,697
Taxes on income (Note 4)......................... 9,417 7,231 8,466
---------- -------- --------
Earnings before cumulative effect of accounting
change.......................................... 12,636 10,029 11,231
Cumulative effect of accounting change, net of
tax (Note 7).................................... -- (4,806) --
---------- -------- --------
Net earnings..................................... $ 12,636 $ 5,223 $ 11,231
========== ======== ========
Earnings per share:
Earnings before cumulative effect of accounting
change........................................ $ .62 $ .50 $ .56
Cumulative effect of accounting change......... -- (.24) --
---------- -------- --------
Net earnings................................... $ .62 $ .26 $ .56
========== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 28, 1995, JANUARY 29, 1994 AND JANUARY 30, 1993
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
----------------------------
COMMON ADDITIONAL
STOCK $.10 PAID-IN RETAINED TREASURY
PAR VALUE CAPITAL EARNINGS STOCK
------------ ------------- -------- --------
<S> <C> <C> <C> <C>
Balance January 25, 1992...... $ 1,578 $ 56,658 $26,758 $(143)
Net earnings for the year..... 11,231
Cash dividends paid ($.19 per
share)....................... (3,769)
Exercise of stock options..... 2 109
Issuance of stock pursuant to
5 for 4 stock split
(3,944,849 shares)........... 395 (394) (1)
Issuance of stock pursuant to
conversion of 10% convertible
note (95,602 shares)......... 10 490
Issuance of treasury stock for
employee service awards...... 4 (17) 13
Tax benefit from exercise and
early disposition of stock
options...................... 67
Sale of stock under stock pur-
chase plan................... 15 1,020
------------ ------------- ------- -----
Balance January 30, 1993...... 2,000 57,954 34,203 (131)
Net earnings for the year..... 5,223
Cash dividends paid ($.20 per
share)....................... (3,998)
Exercise of stock options..... 2 113
Issuance of stock pursuant to
conversion of 10% convertible
note (95,602 shares)......... 10 490
Issuance of treasury stock for
employee service awards...... 1 (15) 14
Tax benefit from exercise and
early disposition of stock
options...................... 24
Sale of stock under stock pur-
chase plan................... 15 933
------------ ------------- ------- -----
Balance January 29, 1994...... 2,027 59,515 35,413 (117)
Net earnings for the year..... 12,636
Cash dividends paid ($.20 per
share)....................... (4,054)
Exercise of stock options..... 2 117
Issuance of stock pursuant to
conversion of 10% convertible
note (95,602 shares)......... 10 490
Issuance of treasury stock for
employee service awards...... 2 (18) 16
Tax benefit from exercise and
early disposition of stock
options...................... 12
Sale of stock under stock pur-
chase plan................... 16 914
------------ ------------- ------- -----
Balance January 28, 1995...... $ 2,055 $ 61,050 $43,977 $(101)
============ ============= ======= =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 28, 1995, JANUARY 29, 1994 AND JANUARY 30, 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net earnings................................... $ 12,636 $ 5,223 $ 11,231
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Cumulative effect of accounting change....... -- 7,998 --
Depreciation and amortization................ 16,264 16,180 15,309
Increase in merchandise inventories.......... (9,558) (15,731) (10,674)
Increase in accounts receivable and prepaid
expenses.................................... (4,148) (4,905) (2,070)
Increase (decrease) in other liabilities..... 8,445 1,065 (705)
Increase (decrease) in federal and state in-
come taxes payable.......................... 108 1,684 (2,965)
(Decrease) increase in deferred income taxes
payable..................................... (1,038) (5,383) 76
-------- -------- --------
Net cash provided from operating activities...... 22,709 6,131 10,202
-------- -------- --------
Cash Flow For Investing Activities:
Expenditures for property and equipment........ (15,684) (9,502) (6,994)
Increase in intangible and other assets........ (11,352) (3,983) (527)
Purchase of Peterson Drug Company.............. (6,626) -- --
Proceeds from sale of assets................... -- -- 4,186
-------- -------- --------
Net cash used for investing activities........... (33,662) (13,485) (3,335)
-------- -------- --------
Cash Flow From Financing Activities:
(Decrease) increase in notes payable........... (1,505) 14,605 --
Proceeds from long-term debt................... 25,024 -- --
Repayment of long-term debt.................... (8,069) (3,217) (11,281)
Reductions in obligation under leases.......... (568) (1,034) (1,052)
Sale of common stock under option plans........ 1,060 1,087 1,214
Cash dividends paid............................ (4,054) (3,998) (3,769)
-------- -------- --------
Net cash provided from (used for) financing ac-
tivities........................................ 11,888 7,443 (14,888)
-------- -------- --------
Net increase (decrease) in cash.................. 935 89 (8,021)
Cash balance, beginning of year.................. 1,006 917 8,938
Cash balance, end of year........................ $ 1,941 $ 1,006 $ 917
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest....................................... $ 8,756 $ 7,809 $ 8,523
Income taxes................................... 10,435 7,815 10,019
</TABLE>
Supplemental disclosure of non-cash investing and financing activity: On
January 15 of 1995, 1994 and 1993, 95,602 shares of common stock were issued
upon conversion of $500,000 of unsecured 10% convertible notes.
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation--The Consolidated Financial Statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Fiscal Year--The Company's fiscal year ends on the last Saturday in January.
Fiscal years 1995 and 1994 had 52 weeks and 1993 had 53 weeks.
Inventories--Inventories are valued at the lower of cost or market. The cost
of inventory is determined primarily on a last-in, first-out (LIFO) basis.
Costs of seasonal merchandise, greeting cards, toys and inventories associated
with the Company's Paper Cutter stores are valued on a first-in first-out
(FIFO) basis. If all inventories had been valued at current replacement costs,
total inventory values would have been approximately $30,140,000, $32,138,000
and $32,792,000 higher at January 28, 1995, January 29, 1994 and January 30,
1993, respectively.
Pre-Opening Expenses--Employee costs, representing training, stocking and
equipping of new stores, as well as advertising and other expenditures of a
non-capital nature required to make ready new store locations, are expensed as
incurred.
Property and Equipment--Property and equipment are recorded at cost, or in
the case of property under capital leases, the present value of minimum lease
payments or fair value, whichever is lower. Depreciation is recorded
principally on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repairs are charged to expense as incurred. Major
expenditures for betterments and renewals are capitalized.
Intangible Assets--Intangible assets include values assigned to favorable
lease commitments, lease acquisition costs, customer lists, non-competitive
agreements and excess of purchase price over fair market value of net assets
acquired. Such assets are being amortized on a straight-line basis over their
estimated lives.
Income Taxes--The Company and its subsidiaries file a consolidated federal
income tax return. The Company adopted, on a retroactive basis, Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, in
fiscal 1994. The effect of the Statement on the fiscal 1993 statements of net
earnings and cash flows was immaterial. See Note 4 for a further discussion of
income taxes.
Postretirement Benefits--The Company adopted Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, in the first quarter of fiscal 1994. The Company elected
immediate recognition of the accumulated postretirement obligation which
resulted in a non-cash reduction of fiscal 1994 net earnings of $4,806,000, net
of tax.
Earnings per Share--Earnings per share are based on the average number of
shares of common stock and common stock equivalents (stock options) outstanding
during the respective periods, adjusted for stock dividends and splits, where
applicable. The average number of shares of common stock and dilutive common
stock equivalents outstanding were 20,356,910, 20,085,326 and 19,898,274 in
fiscal 1995, 1994 and 1993, respectively. Fully diluted earnings per share did
not differ materially from primary earnings per share.
Statements of Cash Flows--The Company considers that cash and equivalents
include all highly liquid investments with original maturities of three months
or less.
F-6
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SHORT-TERM DEBT
The Company maintains lines of credit with several banks to meet its short-
term borrowing requirements. At January 28, 1995 the Company had available
lines of credit amounting to $39 million. Maximum outstanding borrowings during
fiscal 1995 were $19.0 million and average borrowings were $9.3 million. The
weighted average interest rate on short-term borrowings was 5.4% in fiscal
1995, 4.20% in fiscal 1994 and 4.37% in fiscal 1993.
NOTE 3--LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Secured, 9.85% senior notes.................... $16,365 $18,000
Unsecured, 9.77% senior notes.................. 21,429 25,000
Unsecured, 9.59% senior notes.................. 25,000 25,000
Unsecured, 10% convertible notes............... 1,500 2,000
Mortgage note.................................. 1,038 1,234
Revolving term loan............................ 25,000 2,500
Other long-term debt........................... 1,099 --
------------ ------------
91,431 73,734
Less current portion........................... 9,775 8,427
------------ ------------
$81,656 $65,307
============ ============
</TABLE>
Repayments to be made over the next five fiscal years are as follows (in
thousands): 1996, $9,775; 1997, $9,734; 1998, $9,747; 1999, $9,191 and 2000,
$33,918.
The 9.85% senior notes are due November 15, 2004 and are payable in annual
principal installments of $1,635,000 through November 15, 2003, with the
remaining balance payable on November 15, 2004. Interest is payable semi-
annually on May 15 and November 15 of each year. The carrying value of
collateral for the notes, consisting primarily of real property and certain
equipment, amounted to $10,692,000 at January 28, 1995.
The 9.77% senior notes are due August 15, 2000 and are payable in equal
annual installments of $3,571,000. Interest is payable semi-annually on
February 15 and November 15 of each year.
The 9.59% senior notes are due September 15, 2001 and are payable in equal
annual installments commencing September 15, 1995. Interest is payable semi-
annually on September 15 and March 15 of each year.
The 10% convertible notes are due January 15, 1998 and are payable in annual
principal installments of $500,000 through 1998 and are convertible into common
stock at $5.23 per share. The notes may be converted at any time prior to
maturity, and 286,806 shares have been reserved for such conversion. The
conversion rate is subject to adjustment for subsequent sales of common stock,
rights or options to purchase common stock or other stock or obligations
convertible to common stock at prices less than the conversion rate, and for
stock dividends, stock splits and other specified transactions. On January 15,
1995, 95,602 shares of common stock were issued upon conversion of $500,000 of
the notes.
F-7
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The mortgage note bears interest at 9.25% and matures in 1998. The carrying
value of buildings pledged as collateral for the note was $2,584,000 at January
28, 1995.
The Company has entered into a five-year revolving term loan for $25 million.
The loan is non-cancelable and matures in June 1999 with interest payable
quarterly. At the Company's election, the interest rate is adjustable every 30
to 180 days and is tied to either prime, LIBOR or defined CD rates. The libor
and CD rates are subject to spreads ranging from .38% to 1% depending upon
certain specified ratios. At January 28, 1995 the interest rate on this loan
was 7.5%. In addition, there is a commitment fee of .25% on any unused portion
of the facility. The revolving term loan which was outstanding at January 28,
1994 was repaid during fiscal 1995.
The unsecured notes, the 9.85% senior notes and the revolving term loan
contain, among other terms, certain restrictions on the Company's consolidated
retained earnings. Under the most restrictive terms, $19,734,000 of retained
earnings was not restricted as to cash dividends and the acquisition or
retirement of the Company's stock as of January 28, 1995. Furthermore, the
Company may acquire an additional 221,613 shares of its stock plus such number
of shares, the aggregate price of which does not exceed $15,000,000. The
unsecured notes also require the Company to maintain a minimum amount of
consolidated working capital and require the maintenance of certain specified
ratios. At January 28, 1995 the Company was in compliance with these
requirements.
NOTE 4--INCOME TAXES
The Company adopted, on a retroactive basis, SFAS No. 109 at the beginning of
fiscal 1994. The effect of this Statement on the provision for income taxes and
net earnings in fiscal 1993 was not material.
The provisions for income taxes consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Currently payable:
Federal........................................ $ 7,769 $ 6,933 $ 5,637
State.......................................... 2,736 2,512 2,336
-------- -------- -------
................................................ 10,505 9,445 7,973
-------- -------- -------
Deferred:
Federal........................................ (818) (1,665) 382
State.......................................... (270) (549) 111
-------- -------- -------
(1,088) (2,214) 493
-------- -------- -------
$ 9,417 $ 7,231 $ 8,466
======== ======== =======
</TABLE>
Income taxes were computed at rates other than the statutory federal income
tax rates due the following items:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Tax expense at federal statutory
rate................................ $7,719 35.0 $6,041 35.0 $6,697 34.0
State taxes, net of federal benefit.. 1,603 7.3 1,276 7.3 1,616 8.2
Tax credits.......................... (153) (0.7) (334) (1.9) (71) (0.3)
Amortization of goodwill and other
deferred charges.................... 192 0.9 252 1.5 187 0.9
Dividends and interest exempt from
federal taxation.................... (8) (0.1) (4) -- (37) (0.2)
Other................................ 64 0.3 -- -- 74 0.4
------ ---- ------ ---- ------ ----
$9,417 42.7 $7,231 41.9 $8,466 43.0
====== ==== ====== ==== ====== ====
</TABLE>
F-8
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of the items comprising the Company's net deferred tax assets
and liabilities at January 28, 1995 and January 29, 1994 in the Company's
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current deferred taxes:
Deferred tax assets:
Allowance for doubtful accounts.......... $ 1,176 $ 1,354
Employee benefit accruals................ 1,129 1,561
Accruals for closed locations............ 549 576
Other.................................... 921 --
------------ ------------
3,775 3,491
Valuation allowance...................... -- --
------------ ------------
3,775 3,491
Deferred tax liabilities:
Inventory valuation differences.......... 3,811 3,306
Other.................................... (588) 169
------------ ------------
3,223 3,475
------------ ------------
Net current deferred tax asset............. $ 552 $ 16
============ ============
Long-term deferred taxes:
Deferred tax assets:
Accrued postretirement benefits.......... $ 3,127 $ 3,178
Recognition of rent expense.............. 1,489 1,172
Deferred gain on sale of assets.......... 1,219 1,296
Recognition of pension expense........... (157) 40
Other.................................... 104 122
------------ ------------
5,782 5,808
Valuation allowance...................... -- --
------------ ------------
5,782 5,808
Deferred tax liabilities:
Tax depreciation in excess of financial
statement depreciation.................. 3,424 4,345
Financial statement basis of acquired
long-term assets in excess of tax basis. 786 945
------------ ------------
4,210 5,290
------------ ------------
Net long-term deferred tax asset............. $ 1,572 $ 518
============ ============
</TABLE>
NOTE 5--OBLIGATION UNDER LEASES
The Company conducts primarily all retailing operations on leased premises.
Leases are for varying periods from one to thirty years and are generally
renewable at the option of the Company. Certain leases for store facilities are
classified as capital leases.
Usually the leases provide that the Company pay a portion of the taxes and
all insurance and maintenance costs associated with the leased premises.
Certain leases provide for additional rentals
F-9
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based upon a percentage of sales. In addition, the Company leases
transportation and other equipment under leases for periods of one to eight
years.
Property and equipment includes the following amounts for capital leases:
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Store facilities............................. $ 9,085 $ 9,085
Equipment.................................... 3,940 3,388
------------ ------------
13,025 12,473
Less accumulated amortization................ (11,264) (10,777)
------------ ------------
$ 1,761 $ 1,696
============ ============
</TABLE>
Future minimum rental payments due under leases consisted of the following at
January 28, 1995:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
----------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
1996............................................. $ 25,025 $ 970
1997............................................. 24,561 790
1998............................................. 23,928 633
1999............................................. 23,248 472
2000............................................. 21,990 287
2001 and thereafter.............................. 114,235 565
------------- ------------
Total minimum lease payments..................... $ 232,987 3,717
-------------
Less: Executory costs including profit thereon... (1,000)
Interest portion of payments.................. (611)
------------
Present value of net minimum lease payments...... $ 2,106
============
</TABLE>
The composition of total rental expense for the past three fiscal years was
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Minimum rentals--operating leases................ $ 23,903 $ 20,930 $ 21,580
Contingent rentals--operating and capital leases. 1,574 1,288 1,177
-------- -------- --------
$ 25,477 $ 22,218 $ 22,757
======== ======== ========
</TABLE>
NOTE 6--EMPLOYEE BENEFIT PLANS
Profit Sharing Retirement Plan--The Company maintains a Profit Sharing
Retirement Plan which covers substantially all full-time employees who qualify
as to age and length of service. All funds are held in trust for the exclusive
benefit of participating employees. Contributions of $772,000 in fiscal 1995,
$725,000 in fiscal 1994 and $700,000 in fiscal 1993 were charged to expense.
Pension Plan--The Company maintains a defined benefit Pension Plan which
covers substantially all full-time employees who qualify as to age and length
of service. Benefits are based upon years of service and employee compensation.
Annual contributions are made to the Plan sufficient to satisfy legal funding
requirements.
F-10
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense was comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service costs-benefits earned during the peri-
od............................................ $ 1,033 $ 938 $ 716
Interest on projected benefit obligation....... 935 837 681
Actual return on plan assets................... 178 (661) (958)
Net amortization and deferral of actuarial
gains and losses.............................. (1,238) (313) 168
--------- ------- -------
$ 908 $ 801 $ 607
========= ======= =======
</TABLE>
The funded status of the Pension Plan and the related amounts that are
recognized in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1995 1994
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated bene-
fit obligation:
Vested.................................... $ 9,374 $ 9,370
Non-vested................................ 457 566
------------ ------------
Total................................... $ 9,831 $ 9,936
============ ============
Projected benefit obligation................ $ 11,838 $ 12,133
Plan assets at fair market value, primarily
listed stocks and fixed income securities.. 12,312 11,403
------------ ------------
Plan assets in excess of (less than pro-
jected benefit obligation)................. 474 (730)
Unrecognized prior service cost............. 14 15
Unrecognized net asset in transition........ (203) (222)
Unrecognized net losses (gains)............. (398) 283
------------ ------------
Accrued pension expense..................... $ (113) $ (654)
============ ============
</TABLE>
The weighted average discount rates used in determining benefit obligations
were 8.75% at January 28, 1995, 7.75% at January 29, 1994 and 8.50% at January
30, 1993. The expected long-term rate of return on plan assets was 9% for
fiscal 1995 and 1994, and 8% for fiscal 1993. The rate of increase for future
compensation was 4.5% in fiscal 1995 and 1994, and 5% in fiscal 1993.
NOTE 7--POSTRETIREMENT BENEFITS
The Company provides certain health and life insurance benefits for
substantially all of its retired employees. As discussed in Note 1, the Company
adopted SFAS No. 106 effective February 1, 1993 which requires the Company to
accrue the cost of retiree benefits over the period employees provide service.
Prior to fiscal 1994, the Company expensed the cost of these benefits as
incurred and recognized an expense of $194,000 in fiscal 1993.
Effective during the first quarter of fiscal 1994, the Company amended its
retiree benefit plans to modify the eligibility and cost sharing provisions for
active employees. These changes resulted in a reduction in the accumulated
obligation of $4,413,000 which is being amortized as required by SFAS No. 106
over the average period to full eligibility for benefits.
F-11
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postretirement benefit expense (credit) for the years ended January 28, 1995
and January 29, 1994 was comprised of the following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Service cost--benefits earned during the year... $ 61 $ 81
Interest cost on accumulated benefit obligation. 339 313
Amortization of prior service cost.............. (502) (459)
Loss experience................................. 49 --
------------ ------------
$ (53) $ (65)
============ ============
</TABLE>
The amount included in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Accumulated benefit obligation:
Retirees....................................... $ 3,244 $ 3,645
Fully eligible active plan participants........ 379 318
Other active plan participants................. 814 675
------------ ------------
4,437 4,638
Unrecognized actuarial losses.................. (484) (971)
Unrecognized prior service cost................ 3,452 3,959
------------ ------------
Accrued postretirement benefit obligation...... $ 7,405 $ 7,626
============ ============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation at January 28, 1995 was 11.3% for fiscal 1996, gradually
declining to 6.5% in years 2006 through 2014, and 6% thereafter. A one
percentage point increase in the assumed health care cost trend rate for each
year would increase the accumulated benefit obligation at January 28, 1995 by
approximately 13.1% and the sum of the service cost and interest cost
components by approximately 16.3%. The assumed discount rate used in
determining the accumulated benefit obligation was 7.5% at both January 28,
1995 and January 29, 1994.
NOTE 8--STOCKHOLDERS' EQUITY
On January 27, 1995 the Board of Directors declared a $.05 per share
quarterly cash dividend payable on April 7, 1995 to shareholders of record on
March 24, 1995.
Employee Stock Purchase Plan--The Company's Employee Stock Purchase Plan
permits eligible employees to purchase common stock, through payroll deduction,
at a purchase price equal to 90% of the fair market value of such common stock,
in accordance with the terms of the Plan. At January 28, 1995, the Company had
897,833 additional shares of common stock available for issuance under this
Plan. In fiscal 1995, 1994 and 1993, employees purchased 160,603, 153,458 and
156,188 shares at average prices of $5.79 in 1995, $6.18 in 1994 and $6.63 in
1993.
Stock Option Plans--The Company maintains a stock option program for its
officers and key employees. This Plan provides for the granting of both non-
qualified and incentive stock options, and the issuance of up to an aggregate
of 4,000,000 shares of common stock. At January 28, 1995, 1,390,117 shares were
reserved for future grant.
F-12
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company has reserved 125,000 shares of common stock in
connection with a stock option plan for non-employee directors. On July 1 of
each year, eligible directors automatically receive an option to purchase 1,500
shares at a price equal to fair market value on the date of grant. At January
28, 1995, 79,250 shares were reserved for future grant.
A summary of option transactions for all option plans is presented below:
<TABLE>
<CAPTION>
INCENTIVE NON-QUALIFIED
STOCK OPTIONS STOCK OPTIONS
-------------- --------------
<S> <C> <C>
Year ended January 28, 1995:
Shares under option, beginning of year...... 1,242,323 153,981
Options granted............................. 428,800 9,000
Options exercised at prices ranging from
$.77 to $9.35.............................. (1,509) (21,686)
Options expired and cancelled............... (129,681) (14,313)
-------------- --------------
Shares under option, end of year............ 1,539,933 126,982
-------------- --------------
Shares exercisable.......................... 1,217,243 126,982
-------------- --------------
Exercise price of shares exercisable........ $4.79 to $9.35 $.73 to $6.40
============== ==============
<CAPTION>
INCENTIVE NON-QUALIFIED
STOCK OPTIONS STOCK OPTIONS
-------------- --------------
<S> <C> <C>
Year ended January 29, 1994:
Shares under option, beginning of year...... 881,156 174,497
Options granted............................. 412,750 10,500
Options exercised at prices ranging from
$1.32 to $8.65............................. (1,091) (23,060)
Options expired and cancelled............... (50,492) (7,956)
-------------- --------------
Shares under option, end of year............ 1,242,323 153,981
-------------- --------------
Shares exercisable.......................... 919,376 111,981
-------------- --------------
Exercise price of shares exercisable........ $4.79 to $9.35 $1.32 to $6.40
============== ==============
</TABLE>
NOTE 9--UNUSUAL CHARGE
During fiscal 1994, the Company closed nine Paper Cutter stores located in
the Philadelphia metropolitan area. As a result, the Company incurred a pretax
charge in 1994 of $3,471,000 pertaining to future rental obligations, abandoned
leasehold improvements and other related closing expenses.
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
At January 28, 1995, the Company's financial instruments consisted of long-
term debt, the carrying value of which (including current portion) was
$91,431,000. The estimated fair value of long-term debt at January 28, 1995,
based on quoted market prices fro similar debt or current rates offered to the
Company for debt with similar maturities, where applicable, was $94,425,000.
F-13
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 11--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for the years ended January 28,
1995 and January 29, 1994 was as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1995:
Net sales................... $ 239,061 $ 252,379 $ 260,593 $ 286,077
Gross profit................ 68,923 71,984 76,494 85,385
Income taxes................ 1,463 1,897 1,613 4,444
Net earnings................ 1,973 2,581 2,206 5,876
Earnings per share.......... $ .10 $ .13 $ .11 $ .29
Cash dividends paid per
share...................... $ .05 $ .05 $ .05 $ .05
Market price per share:
High...................... 7 1/4 7 3/8 8 7
Low....................... 6 1/8 6 1/4 6 1/2 6
Fiscal 1994:
Net sales................... $ 216,742 $ 221,925 $ 225,966 $ 255,086
Gross profit................ 64,488 65,371 66,480 74,302
Income taxes................ (779) 2,154 1,555 4,301
Earnings (loss) before cumu-
lative effect of accounting
change..................... (1,097) 3,066 2,194 5,866
Net earnings (loss)......... (5,903) 3,066 2,194 5,866
Earnings per share:
Earnings (loss) before
cumulative effect of
accounting change........ $ (.05) $ .15 $ .11 $ .29
Cumulative effect of ac-
counting change.......... (.24) -- -- --
Net earnings (loss)....... $ (.29) $ .15 $ .11 $ .29
Cash dividends paid per
share...................... $ .05 $ .05 $ .05 $ .05
Market price per share:
High...................... 7 1/8 7 7 1/2 7 1/4
Low....................... 6 1/4 6 1/8 6 1/2 6 3/8
</TABLE>
F-14
<PAGE>
- --------------------------------------------------------------------------------
LOAN AGREEMENT
BETWEEN
CHEMICAL BANK, AS AGENT,
CHEMICAL BANK,
AND
FAY'S INCORPORATED
$25,000,000 REVOLVING CREDIT LOAN
- --------------------------------------------------------------------------------
Dated As Of
June 9, 1994
LACY, KATZEN, RYEN & MITTLEMAN
Office and Post Office Address
The Granite Building
130 East Main Street
Rochester, New York 14604
Telephone: (716) 454-5650
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
DEFINITIONS
1.1 Definitions....................................... 2
1.2 Accounting Terms and Determinations............... 15
ARTICLE II
REVOLVING CREDIT
2.1 Revolving Credit Commitment....................... 17
2.2 Borrowings Against Credit......................... 17
2.3 Revolving Credit Notes............................ 17
2.4 Borrowing Certificate............................. 17
2.5 General Borrowing Provisions...................... 17
2.6 Commitment Fee.................................... 18
2.7 Optional Reduction of Credit...................... 18
2.8 Obligation of Banks............................... 18
2.9 Pro Rata Treatment................................ 18
ARTICLE III
ADDITIONAL TERMS GOVERNING
REVOLVING CREDIT LOAN
3.1 Late Payment Penalty.............................. 19
3.2 Capital Adequacy/Reserve Requirements............. 19
3.3 Security and Guaranties........................... 20
3.4 Loan Conversion Options........................... 20
3.5 Interest on Alternate Base Rate Loans............. 22
3.6 Interest on LIBO Rate Loans....................... 22
3.6A Interest on CD Rate Loans......................... 22
3.7 Default Rate...................................... 22
3.8 Principal Reductions; Borrowing Availability...... 23
3.9 Prepayment of Loans............................... 23
3.10 Payments.......................................... 24
3.11 Increased Cost.................................... 24
3.12 Maximum Rates..................................... 25
3.13 Expenses and Indemnity............................ 26
3.14 Competitive Bid Rate Loans........................ 28
i
<PAGE>
ARTICLE IV
CONDITIONS OF LENDING
4.1 Conditions Precedent.............................. 29
4.2 Conditions Precedent to Revolving Credit
Advances.......................................... 31
ARTICLE V
BANK AND AGENCY RELATIONSHIPS
5.1 Commitment........................................ 32
5.2 Authority......................................... 32
5.3 Action on Default................................. 33
5.4 Responsibility of Agent........................... 33
5.5 Expenses of Agent................................. 34
5.6 Independent Review................................ 34
5.7 Successor Agent................................... 35
5.8 Sharing of Setoffs................................ 35
5.9 Notice to Agent................................... 36
5.10 Assignments and Participations.................... 36
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.1 Corporate Existence and Power..................... 41
6.2 Corporate and Governmental Authorization;
Contravention.................................... 41
6.3 Binding Effect.................................... 41
6.4 Financial Information............................. 41
6.5 Litigation........................................ 42
6.6 Compliance with ERISA............................. 42
6.7 Taxes and Past Due Obligations.................... 42
6.8 Title to Assets................................... 42
6.9 Compliance with Laws and No Conflict.............. 42
6.10 [Intentionally omitted]........................... 43
6.11 Use of Proceeds................................... 43
6.12 Subsidiaries...................................... 43
6.13 Regulations G, T. U and X......................... 43
6.14 Hazardous Materials............................... 43
6.15 Solvency.......................................... 44
ii
<PAGE>
ARTICLE VII
COVENANTS
7.1 Affirmative Covenants............................. 45
7.2 Negative Covenants................................ 51
ARTICLE VIII
DEFAULT
8.1 Event of Default.................................. 60
ARTICLE IX
MISCELLANEOUS
9.1 Notices.......................................... 63
9.2 No Waivers....................................... 63
9.3 Survival......................................... 63
9.4 Amendments and Waivers........................... 64
9.5 Successors and Assigns........................... 64
9.6 Governing Law.................................... 64
9.7 Headings and Table of Contents................... 64
9.8 Severability..................................... 64
9.9 Submission to Jurisdiction....................... 64
9.10 Waiver of Trial by Jury......................... 65
9.11 Reinstatement; Certain Payments................. 65
9.12 Right to Setoff................................. 65
9.13 Taxes........................................... 65
EXHIBITS AND SCHEDULES
Exhibit A Assignment and Acceptance
Exhibit B Borrowing Certificate
Exhibit C Revolving Credit Note
Exhibit D Guaranty
Schedule A Litigation (Section 6.5)
Schedule B Subsidiaries (Section 6.12)
Schedule C Limitations on Liens (Section 7.2(b)(6))
iii
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Loan Agreement") dated as of June 9, 1994 between
FAY'S INCORPORATED, a New York corporation, with offices at 7245 Henry Clay
Boulevard, Liverpool, New York (the "Borrower"), Chemical Bank, a New York
banking corporation with offices at Bridgewater Place, 500 Plum Street,
Syracuse, New York ("Chemical"), and Chemical Bank, as agent for the Banks (as
herein defined) (the "Agent").
WHEREAS, the Borrower has applied to Chemical for a revolving credit loan
to finance acquisitions, working capital and capital investments;
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms as used herein! shall have the
-----------
following meanings:
Adjusted CD Rate shall mean, with respect to any CD Rate Loan, for any
----------------
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/100 of 1%) equal to the sum of (a) a rate per annum equal to the
product of (i) the Fixed CD Rate in effect for such Interest Period, and (ii)
Statutory Reserves, plus (b) the Assessment Rate. For purposes hereof, the term
"Fixed CD Rate" shall mean the arithmetic average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the prevailing rates per annum bid on or
about 10:00 a.m., New York City time or as soon thereafter as practicable, to
the Agent on the first Business Day of the Interest Period of such CD Rate Loan
by three New York City negotiable certificate of deposit dealers of recognized
standing selected by the Agent for the purchase at face value of negotiable
certificates of deposit of major United States money center banks in a principal
amount approximately comparable to the principal amount of such CD Rate Loan and
with a maturity comparable to such Interest Period.
Adjusted LIBO Rate means, with respect to any LIBO Rate Loan for any
------------------
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to the product of (a) the Fixed LIBO Rate applicable
to such Interest Period and (b) Statutory Reserves. The "Fixed LIBO Rate"
applicable to a particular Interest Period shall mean a rate per annum equal to
the rate of interest at which U.S. dollar deposits in an amount approximately
equal in principal amount to the amount of the LIBO Rate Loan to bear interest
at such rate during such Interest Period, and with maturities comparable to the
last day of such Interest Period, are offered in immediately available funds in
the London Interbank Market to the London office of the Bank by leading banks in
the Eurodollar market at 11:00 a.m., London time, two (2) Business Days prior to
the commencement of such Interest Period. Each determination of the Adjusted
LIBO Rate and the Fixed LIBO Rate applicable to a particular Interest Period
shall be made by the Agent and shall be conclusive and binding upon Borrower
absent manifest error.
Alternate Base Rate shall mean, for any day, a rate per annum (rounded
-------------------
upwards to the nearest 1/16 of 1%) equal to the greater of (a) the Prime Rate in
effect on such day, (b) the Base CD Rate in effect on such day plus 1%, and (c)
the Federal Funds Effective Rate in effect for such day plus 1/2 of 1%. For
purposes hereof, "Base CD Rate" shall mean the sum of (a) the product of (i) the
Three-Month Secondary CD Rate and (ii) Statutory Reserves,
2
<PAGE>
plus (b) the Assessment Rate. "Three-Month Secondary CD Rate" shall mean, for
any day, the secondary market rate for three-month certificates of deposit
reported as being in effect on such day(or, if such day shall not be a Business
Day, the next preceding Business Day) by the Board through the public
information telephone line of the Federal Reserve Bank of New York (which rate
will, under the current practices of the Board, be published in Federal Reserve
Statistical Release H.15(519) during the week following such day), or, if such
rate shall not be so reported on such day or such next preceding Business Day,
the average of the secondary market quotations for three-month certificates of
deposit of major money center banks in New York City received at approximately
10:00 a.m., New York City time, on such day (or, if such day shall not be a
Business Day, on the next preceding Business Day) by the Agent from three (3)
New York City negotiable certificate of deposit dealers of recognized standing
selected by it. "Federal Funds Effective Rate" shall mean, for any day, the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published on the succeeding Business Day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by the
Agent from three (3) Federal funds brokers of recognized standing selected by
it. If for any reason the Agent shall have determined (which determination shall
be conclusive absent manifest error) that it is unable to ascertain the Base CD
Rate or the Federal Funds Effective Rate, or both, for any reason, including,
without limitation, the inability or failure of the Agent to obtain sufficient
quotations in accordance with the terms hereof, the Alternate Base Rate shall be
determined without regard to clause (b) or (c), or both, of the first sentence
of this definition, as appropriate, until the circumstances giving rise to such
inability no longer exist. Any change in the Alternate Base Rate due to a change
in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds
Effective Rate shall be effective on the effective date of such change in the
Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective
Rate, respectively. Notwithstanding anything to the contrary contained in this
Loan Agreement, the Agent shall have the right in its sole and absolute
discretion to calculate interest on the portion of the Principal Balance from
time to time bearing interest at the Alternate Base Rate during any given period
of time for any given day during the term of this Loan Agreement at a rate per
annum based upon the Prime Rate notwithstanding the fact that a rate per annum
based upon the Alternate Base Rate may from time to time during such period of
time or for any such given day in fact be higher, it being agreed that no such
election by the Agent shall in any event or under any circumstances constitute a
waiver of the Agent's right at any time thereafter and without prior notice to
Borrower to charge interest on the portion of the Principal Balance bearing
interest at the Alternate Base Rate strictly in accordance with the foregoing
provisions.
3
<PAGE>
Alternate Base Rate Loan means a Loan bearing interest in accordance with
------------------------
Section 3.5 of this Loan Agreement.
Applicable Lending Office shall mean, with respect to each Bank, (i) in the
-------------------------
case of an Alternate Base Rate Loan, the office designated by such Bank for
Alternate Base Rate Loans, (ii) in the case of a LIBO Rate Loan, the office
designated by such Bank for LIBO Rate Loans, and (iii) in the case of a CD Rate
Loan, the office designated by such Bank for CD Rate Loans.
Applicable Margin, as in effect during any fiscal quarter, shall mean, with
-----------------
respect to the calculation of a LIBO Rate or a CD Rate, the basis points per
annum set forth below:
<TABLE>
<CAPTION>
Consolidated Funded Debt to
Fixed Charge Consolidated Total Capitalization
Coverage greater than 50% greater than 45% less than 50% less than 45%
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
>150% 87.5 100 75.0 87.5 62.5 75.0
>165% 75.0 87.5 62.5 75.0 50.0 62.5
>180% 62.5 75.0 50.0 62.5 37.5 50.0
================================================================================
LIBOR CD LIBOR CD LIBOR CD
</TABLE>
Applicable Margins
(basis points per annum)
The Fixed Charge Coverage and ratio of Consolidated Funded Debt to Consolidated
Total Capitalization as at the end of the preceding fiscal quarter shall be
calculated by the Agent prior to the end of each fiscal quarter to determine the
Applicable Margins to be in effect during the subsequent fiscal quarter (for
example, during the second quarter the Agent shall calculate the Applicable
Margins to be in effect during the third quarter based on the financial
information as at the end of the first quarter). In the event that quarterly
financial information is not received by the Agent within the time required
under Section 7.1(e)(1), the Applicable Margin to be in effect during the
subsequent fiscal quarter shall be 87.5 basis points per annum for LIBO Rates
and 100 basis points per annum for CD Rates.
Assessment Rate shall mean for any date the annual rate (rounded upwards,
---------------
if necessary, to the next 1/100 of 1%) most recently estimated by the Agent as
the then current net annual assessment rate that will be employed in determining
amounts payable by the Agent to the Federal Deposit Insurance Corporation (or
any successor) for insurance by such Corporation (or such successor) of time
deposits made in dollars at the Agent's domestic offices.
4
<PAGE>
Assignment and Acceptance means an assignment and acceptance entered into
-------------------------
by a Bank and an assignee, consented to by the Agent, in substantially the form
of Exhibit "A" hereto.
Bank and Banks shall refer individually and collectively, respectfully, to
--------------
Chemical and to any other bank or entity to which an interest in the Revolving
Credit Note and the Loans may be assigned from time to time pursuant to Section
5.10(c) of this Loan Agreement.
Board means the Board of Governors of the Federal Reserve System of the
-----
United States.
Borrowing Certificate means the certificate in the form attached as
---------------------
Exhibit B.
Business Day means any day (other than a day which is a Saturday, Sunday or
------------
legal holiday in the State of New York), on which banks are open for business in
New York City; provided however, that, when used in connection with LIBO Rate
Loans, the term "Business Day" shall also exclude any day on which banks are not
open for dealings in U.S. dollar deposits in the London Interbank Market.
CD Rate means the interest rate on CD Rate Loans as set forth in Section
-------
3.6A of this Loan Agreement
CD Rate Loan means a Loan bearing interest in accordance with Section 3.6A
------------
of this Loan Agreement.
Capitalized Lease means any lease the obligation for Rentals with respect
-----------------
to which is required to be capitalized on a balance sheet of the lessee in
accordance with GAAP.
Capitalized Rentals means as of the date of any determination the amount at
-------------------
which the aggregate Rentals due and to become due under all Capitalized Leases
under which the Borrower or any Restricted Subsidiary is a lessee would be
reflected as a liability on a consolidated balance sheet of the Borrower and its
Restricted Subsidiaries.
Closing Date means the date upon which this Loan Agreement is executed by
------------
the Borrower, Chemical and the Agent.
Code means the Internal Revenue Code of 1986, as amended, or any successor
----
Federal Tax Code, and any reference to any statutory provision shall be deemed
to be a reference to any successor provision or provisions.
Commitment means, for each Bank, its share of the Total Commitment, as
----------
provided in Section 5.1.
5
<PAGE>
Common Stock means the Borrower's $.10 par value common stock.
------------
Competitive Bid Rate Loan means a loan obtained by the Borrower from a
-------------------------
financial institution in accordance with Section 3.14 of this Loan Agreement.
Consolidated Current Assets means, at any date, the aggregate amount of
---------------------------
assets of the Borrower and its Restricted Subsidiaries which may properly be
classified as current assets on a consolidated basis in accordance with GAAP.
Consolidated Current Liabilities means the amount of all liabilities of the
--------------------------------
Borrower and its Restricted Subsidiaries which may properly be classified as
current liabilities on a consolidated basis in accordance with GAAP.
Consolidated Net Income for any period shall mean the gross revenues of the
-----------------------
Borrower and its Restricted Subsidiaries for such period less all expenses and
----
other proper charges (including taxes on income), determined on a consolidated
basis in accordance with GAAP consistently applied and after eliminating
earnings or losses attributable to outstanding Minority Interests, but excluding
in any event:
(a) any gains, net of taxes on such excluded gains, or losses, reduced
by any tax deductions or credits on account of any such excluded losses, on the
sale or other disposition of investments or fixed or capital assets;
(b) the proceeds of any life insurance policy;
(c) net earnings and losses of any Restricted Subsidiary accrued prior
to the date it became a Restricted Subsidiary;
(d) net earnings and losses of any corporation (other than a
Restricted Subsidiary), substantially all the assets of which have been acquired
in any manner, realized by such other corporation prior to the date of such
acquisition;
(e) net earnings and losses of any corporation (other than a
Restricted Subsidiary) with which the Borrower or a Restricted Subsidiary shall
have consolidated or which shall have merged into or with the Borrower or a
Restricted Subsidiary prior to the date of such consolidation or merger;
(f) net earnings of any business entity (other than a Restricted
Subsidiary) in which the Borrower or any Restricted Subsidiary has an ownership
interest unless such net earnings shall have actually been received by the
Borrower or such Subsidiary in the form of cash distributions;
6
<PAGE>
(g) any portion of the net earnings of any Restricted Subsidiary which
for any reason is unavailable for payment of dividends to the Borrower or any
other Restricted Subsidiary;
(h) earnings resulting from any reappraisal, revaluation or write-up
of assets;
(i) any deferred or other credit representing any excess of the equity
in any Subsidiary at the date of acquisition thereof over the amount invested in
such Subsidiary;
(j) any gain arising from the acquisition of any Securities of the
Borrower or any Restricted Subsidiary;
(k) any reversal of any contingency reserve, except to the extent that
provision for such contingency reserve shall have been made from income arising
during such period; and
(l) any income or non-cash charges against income resulting from the
recognition of liabilities associated with unfunded post-retirement benefits
recorded upon the adoption and implementation of Financial Accounting Standards
Board Statement No. 106, "Accounting for Post-Retirement Benefits Other Than
Pensions," provided that such exclusion shall not exceed $5,000,000 in any
fiscal year.
Consolidated Total Assets shall mean the aggregate amount of all
-------------------------
assets of the Borrower and its Restricted Subsidiaries as the same appears on a
consolidated balance sheet of the Borrower and its Subsidiaries prepared in
accordance with GAAP as of the date of determination, after eliminating all
intercompany items.
Consolidated Total Capitalization shall mean as of the date of any
---------------------------------
determination thereof, the sum of (a) the aggregate amount of capital stock
(less treasury stock), surplus and retained earnings of the Borrower and its
Restricted Subsidiaries plus (b) Consolidated Funded Debt less the sum of (i)
good
----
will, patents, patent applications, trade names, trademarks, copyrights,
experimental expense, organization expense, unamortized debt discount and
expense, deferred assets in any amount exceeding 5% of Consolidated Current
Assets, the excess of cost of shares acquired over book value of related assets
and such other assets as are properly classified as "intangible assets" in
accordance with GAAP, except any goodwill recognized by the Borrower and its
------
Restricted Subsidiaries associated with the acquisition of the capital stock of
Carls Drug Co., Inc. and resulting from the adoption and implementation of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes," shall not be deducted; and (ii) Minority Interests to the extent
included in the capital stock accounts of the Borrower, all as determined on a
consolidated basis by the Borrower and its Restricted Subsidiaries. For the
purposes of this calculation, retained earnings shall mean retained earnings
shown on the audited financial statements of the Borrower as cumulatively
adjusted to reflect the exclusions provided in the definition of Consolidated
Net Income.
7
<PAGE>
Corporate Guarantors means any Subsidiary of the Borrower now existing or
--------------------
hereafter created or acquired, except as provided in Section 3.3.
Corporate Guaranties means the guaranties of the Corporate Guarantors given
--------------------
for the benefit of the Banks as security for the obligations of the Borrower
under this Loan Agreement substantially in form and content attached as
Exhibit D.
Current Business of the Borrower and its Restricted Subsidiaries shall mean
----------------
the retail sale of merchandise.
Current Debt shall mean, as of the date of any determination thereof, (i)
------------
all Indebtedness for money borrowed other than Funded Debt and (ii) Guaranties
of Current Debt of others.
Default means any condition or event which constitutes an Event of Default
-------
or which with the giving of notice or lapse of time or both would become an
Event of Default.
Election Date has the meaning set forth in Section 3.4.
-------------
ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor provisions.
Event of Default has the meaning set forth in Section 8.1.
----------------
Fixed Charge Coverage means the percentage calculated in determining
---------------------
compliance with Section 7.2(h).
Fixed Charges for any period shall mean on a consolidated basis the sum of
-------------
(i) all Rentals (other than Rentals on Capitalized Leases) payable during such
period by the Borrower and its Restricted Subsidiaries, and (ii) all Interest
Charges on all Indebtedness (including the interest component of all Capitalized
Rentals) of the Borrower and its Restricted Subsidiaries.
Funded Debt of any Person shall mean (i) all Indebtedness for borrowed
-----------
money or which has been incurred in connection with the acquisition of assets in
each case having a final maturity of one or more than one year from the date of
origin thereof (or which is renewable or extendible at the option of the obligor
for a period or periods more than one year from the date of origin), including
all payments in respect thereof that are required to be made within one year
from the date of any determination of Funded Debt, whether or not included in
Consolidated Current Liabilities, (ii) all Capitalized Rentals and (iii) all
Guaranties of Funded Debt of others. "Consolidated" when used as a prefix to any
Funded Debt shall mean the aggregate amount of all such Funded Debt of the
8
<PAGE>
Borrower and its Restricted Subsidiaries on a consolidated basis eliminating
intercompany items.
GAAP means generally accepted accounting principles devised by the
----
Financial Accounting Standards Board and the Accounting Principles Board.
Guaranties by any Person shall mean all obligation (other than endorsements
----------
in the ordinary course of business of negotiable instruments for deposit or
collection) of such Person guaranteeing or in effect guaranteeing any
Indebtedness, dividend or other obligation of any other Person (the "primary
obligor" in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to
maintain working capital or other balance sheet condition or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, or (iii) to lease property or to purchase Securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations made under this Loan Agreement, a
Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be
indebtedness equal to the remaining principal amount of such Indebtedness for
borrowed money which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum remaining aggregate amount of such obligation, liability or
dividend.
Hazardous Materials means any flammable explosives, radioactive materials,
-------------------
hazardous materials, hazardous wastes, hazardous or toxic substances, or related
materials defined in the Comprehensive Environment Response, Compensation and
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et
seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Section
6901, et seq.), and in the regulations adopted and publications promulgated
pursuant thereto, or any other federal, state, or local environmental law,
ordinance, rule or regulation.
Indebtedness of any Person shall mean and include all obligations of such
------------
Person which in accordance with GAAP shall be classified upon a balance sheet of
such Person as liabilities of such Person, and in any event shall include all
(i) obligations of
9
<PAGE>
such Person for borrowed money or which has been incurred in
connection with the acquisition of property or assets, (ii) obligations secured
by any lien or other charge upon property or assets owned by such Person, even
though such Person has not assumed or become liable for the payment of such
obligations, (iii) obligations created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person, notwithstanding the fact that the rights and remedies of the seller,
lender or lessor under such agreement in the event of default are limited to
repossession or sale of property, and (iv) Capitalized Rentals under any
Capitalized Lease. For the purpose of computing the "Indebtedness" of any
Person, there shall be excluded (i) any particular Indebtedness to the extent
that, upon or prior to the maturity thereof, there shall have been deposited
with the proper depository in trust the necessary funds (or evidences of such
Indebtedness, if permitted by the instrument creating such Indebtedness) for the
payment, redemption or satisfaction of such Indebtedness; and thereafter such
funds and evidences of Indebtedness so deposited shall not be included in any
computation of the assets of such Person and (ii) any Guaranty of a particular
Indebtedness which Indebtedness is also shown as a liability on the consolidated
balance sheet of such Person.
Interest Charges for any period shall mean all interest and all
----------------
amortization of debt discount and expense on any particular Indebtedness for
which such calculations are being made. Computations of Interest Charges on a
pro forma basis for Indebtedness having a variable interest rate shall be
calculated at the rate in effect on the date of any determination.
Interest Payment Date means (a) with respect to any Alternate Base Rate
---------------------
Loan, CD Rate Loan or LIBO Rate Loan, the last day of each applicable Interest
Period; (b) with respect to any Competitive Bid Rate Loan, (i) each March 31,
June 30, September 30 and December 31 and (ii) the last day of each applicable
Interest Period; and (c) the Maturity Date.
Interest Period means:
---------------
(a) as to any Alternate Base Rate Loan, the period commencing on the
date of such Loan and ending on the earliest of (i) the next succeeding March
31, June 30, September 30 or December 31, (ii) the Maturity Date, or (iii) the
date such Loan is converted to a Loan of a different Type in accordance with
Section 3.4 hereof, and
(b) as to any LIBO Rate Loan, the period commencing on the date of
such Loan and ending on the numerically corresponding day (or if there is no
numerically corresponding day, the last day) of the calendar month that is one,
two or three months thereafter, as the Borrower may elect, and
10
<PAGE>
(c) as to any CD Rate Loan, the period commencing on the date of such
Loan and ending on the numerically corresponding day (or if there is no
numerically corresponding day, the last day) of the calendar month that is 30,
60 or 90 days thereafter, as the Borrower may elect, and
(d) as to any Competitive Bid Rate Loan, the period requested by the
Borrower and agreed to by the Agent, as available, in respect to such
Competitive Bid Rate Loan and indicating the period over which such Loan shall
be a Competitive Bid Rate Loan, subject to the limitations set forth in Section
3.14;
provided, however, that (i) if any Interest Period would end on a day
- -------- -------
which shall not be a Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless, with respect to LIBO Rate Loans only, such
next succeeding Business Day would fall in the next calendar month, in which
case (x) such Interest Period shall end on the first preceding Business Day
and (y) the Interest Period for any continuation of such LIBO Rate Loan shall
end on the last Business Day of a calendar month, and (ii) no Interest Period
may be selected for any CD Rate Loan, Competitive Bid Rate Loan or LIBO Rate
Loan which expires later than the Maturity Date.
LIBO Rate means the interest rate on LIBO Rate Loans as set forth in
---------
Section 3.6 of this Loan Agreement.
LIBO Rate Loan means a Loan bearing interest in accordance with
--------------
Section 3.6 of this Loan Agreement.
Loan means any loan made by the Banks to the Borrower pursuant to this
----
Loan Agreement and shall refer to a CD Rate Loan, a LIBO Rate Loan, a
Competitive Bid Rate Loan or an Alternate Base Rate Loan, each of which shall be
a "Type" of Loan.
Loan Documents means the Revolving Credit Notes, the Corporate
--------------
Guaranties, and all other documents entered into in connection with this Loan
Agreement.
Long-Term Lease shall mean any lease having a term (including all
---------------
renewal terms which are not at the option of the lessee, whether or not
exercised) extending more than three years from the date of its inception and
not cancellable at the option of the lessee without penalty within such three-
year period, including any Capitalized Lease.
Maturity Date means June 9, 1999.
-------------
Minority Interests shall mean any shares of stock of any class of a
------------------
Restricted Subsidiary (other than directors' qualifying shares as required by
law) that are not owned by the Borrower and/or one or more of its Restricted
Subsidiaries.
11
<PAGE>
Net Income Available for Fixed Charges for any period shall mean the sum of
--------------------------------------
(i) Consolidated Net Income during such period plus (to the extent deducted in
----
determining Consolidated Net Income), (ii) all provisions for any Federal, state
or other income taxes made by the Borrower and its Restricted Subsidiaries
during such period and (iii) Fixed Charges during such period.
Notice of Interest Election shall mean the notice from Borrower to Agent of
---------------------------
Type of Loan in accordance with Section 3.4.
Operating Income for any period shall mean the sum of (i) Consolidated Net
--------- ------
Income during such period plus (ii) Interest Charges during such period and
----
(iii) all Federal, state or other income taxes accrued by the Borrower and its
Restricted Subsidiaries during such period.
Person means an individual, a corporation, a partnership, an association,
------
a trust, or unincorporated organization, and a government or political
subdivision or an agency or instrumentality thereof.
Prime Rate means, for each Bank, the rate of interest publicly announced by
----------
the Agent, at its principal office from time to time, as its Prime Rate. For
purposes of this Loan Agreement, any change in Prime Rate shall be effective as
of the opening of business on the date such change is announced.
Rentals shall mean and include all fixed rents (including as such all
-------
payments which the lessee is obligated to make to the lessor on termination of
the lease or surrender of the property) payable by the Borrower or a Restricted
Subsidiary, as lessee or sublessee under a lease of real or personal property,
but shall be exclusive of any amounts required to be paid by the Borrower or a
Restricted Subsidiary (whether or not designated as rents or additional rents)
on account of maintenance, repairs, insurance, taxes and similar charges. Fixed
rents under any so-called "percentage leases" shall be computed solely on the
basis of the minimum rents, if any, required to be paid by the lessee regardless
of sales volume or gross revenues.
Reportable Event means any reportable event as such term is defined in
----------------
Section 4043 of ERISA or the regulations issued thereunder.
Required Banks means the Banks having 66 2/3% of the Total Commitment.
--------------
Restricted Investment shall mean any investment, other
---------------------
than:
(a) investment by the Borrower and its Restricted Subsidiaries in and
to Restricted Subsidiaries, including
12
<PAGE>
investment in a corporation which, after giving effect to such investment will
become a Restricted Subsidiary;
(b) investments made in the ordinary course of business in property
and assets to be used in the ordinary course of business of the Borrower and its
Restricted Subsidiaries;
(c) investments in current assets arising from the sale of goods and
services in the ordinary course of business of the Borrower and its Restricted
Subsidiaries;
(d) advances to and guaranties of loans to employees of the Borrower
and its Restricted Subsidiaries for expenses incurred in the ordinary course of
business provided that the aggregate of such advances and guaranties, when
combined with advances and Guaranties under Section 7.2(c)(1), shall not exceed
Six Hundred Fifty Thousand Dollars ($650,000) at any time outstanding;
(e) investments in direct obligations of the United States or any
agency thereof the payment or the guarantee of which constitutes a full faith
and credit obligation of the United States, provided that such obligations have
--------
a final maturity not in excess of one year from the date of acquisition thereof;
(f) investments in certificates of deposit maturing within one year
from the date of acquisition thereof issued by a bank or trust company organized
under the laws of the United States or any state thereof or the District of
Columbia, having capital, surplus and undivided profits aggregating at least One
Billion Dollars ($1,000,000,000);
(g) repurchase agreements maturing within one year from the date of
execution entered into with any bank organized under the laws of the United
States or any state thereof or the District of Columbia, having capital, surplus
and undivided profits of not less than One Billion Dollars ($1,000,000,000);
provided such agreements are fully collateralized by obligations of the United
- ---------
States or any agency thereof the payment or the guarantee of which constitutes a
full faith and credit obligation of the United States;
(h) commercial paper issued by any corporation organized under the
laws of the United States or any state thereof, rated in the highest category by
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") maturing not more than one year from the date of issuance thereof;
(i) investments in bond or brokerage house money market funds and tax-
exempt municipal bonds maturing not more than one year from the date of
acquisition and which bear at least a MIG 1 rating;
13
<PAGE>
(j) investments in tax-exempt municipal bonds maturing more than
one year from the date of acquisition and which are rated at least "A" by
Moody's or S&P; and
(k) Debt Securities and preferred stock (other than in connection
with the acquisition or purchase of another Person provided that such
acquisition or purchase does not violate Section 7.2(d) of this Loan Agreement)
having an aggregate purchase price to the Borrower or any Restricted Subsidiary
not exceeding Five Million Dollars ($5,000,000), of corporations organized under
the laws of the United States or any State thereof, which Securities are rated
"A" or better (or an equivalent) by Moody's or S&P. For the purposes hereof,
"aggregate purchase price" shall include all consideration paid or to be paid by
the Borrower or any Restricted Subsidiary to the seller of such Debt Securities
or preferred stock or to any affiliate of such seller in connection with or
related to such acquisition, whether the obligation to make such payment is
fixed or contingent, or direct or indirect.
Restricted Payments shall have the meaning specified in Section 7.2
-------------------
(e).
Restricted Subsidiary shall mean any Subsidiary (i) which is
---------------------
organized under the laws of the United States or any State thereof; (ii) which
conducts substantially all of its business and has substantially all of its
assets within the United States; and (iii) of which more than eighty percent
(80%) (by number of votes) of the Voting Stock is owned by the Borrower and/or
one or more Restricted Subsidiaries.
Revolving Credit means the credit established in favor of the
----------------
Borrower under Article II of this Loan Agreement.
Revolving Credit Note(s) means the promissory grid notes provided for
-----------------------
in Section 2.3 of this Loan Agreement, each of which shall be in form and
substance as contained in Exhibit "C" attached hereto.
Roll Over Date applicable to a particular Interest Period means the
--------------
last day of such Interest Period.
Sale/Leaseback Transaction shall mean any arrangement whereby the
--------------------------
Borrower or any Restricted Subsidiary shall sell or transfer any property owned
by the Borrower or any Restricted Subsidiary to any Person other than the
Borrower or a Restricted Subsidiary and thereupon the Borrower or any Restricted
Subsidiary shall lease or intend to lease, as lessee, the same property.
Security shall have the same meaning as in Section 2(1) of the
--------
Securities Act of 1933, as amended.
14
<PAGE>
Statutory Reserves shall mean a fraction (expressed as a decimal),
------------------
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board and any other banking authority to which the Agent is
subject (a) with respect to the Adjusted CD Rate or the Base CD Rate (as such
term is used in the definition of "Alternate Base Rate"), for new negotiable
nonpersonal time deposits in dollars of over $100,000 with maturities
approximately equal to (i) the applicable Interest Period, in the case of the
Adjusted CD Rate, and (ii) three months, in the case of the Base CD Rate (as
such term is used in the definition of "Alternate Base Rate"), and (b) with
respect to the Adjusted LIBO Rate, for Eurocurrency Liabilities (as defined in
Regulation D of the Board). Such reserve percentages shall include those imposed
pursuant to such Regulation D. LIBO Rate Loans shall be deemed to constitute
Eurocurrency Liabilities and to be subject to such reserve requirements without
benefit of or credit for proration, exemptions or offsets which may be available
from time to time to any Bank under such Regulation D. Statutory Reserves shall
be adjusted automatically on and as of the effective date of any change in such
percentage.
Subsidiary means any corporation of which the Borrower now or
----------
hereafter owns, directly or indirectly, collectively or singly more than 50%
of the Voting Stock.
Total Commitment means the credit extended to the Borrower under
----------------
Section 2.1 of this Loan Agreement as the same may be reduced from time to time
in accordance with Section 2.7.
Voting Stock shall mean Securities of any class or classes the
------------
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
Wholly-owned when used in connection with any Subsidiary shall mean a
------------
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) and all Indebtedness for
borrowed money shall be owned by the Borrower and/or one or more of its Wholly-
owned Subsidiaries.
360-Day Basis means the calculation of interest whereby the annual
-------------
interest rate is divided by 360 and the resulting daily rate is multiplied by
the outstanding principal amount and the actual number of days in the payment
period.
1.2 Accounting Terms and Determinations. Unless otherwise specified
------------------------------------
herein, all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder
15
<PAGE>
shall be prepared in accordance with GAAP as in effect from time to time
consistently applied.
16
<PAGE>
ARTICLE II
REVOLVING CREDIT
2.1 Revolving Credit Commitment. The Banks hereby establish the Total
----------------------------
Commitment in favor of the Borrower on the terms hereof in an aggregate
principal amount of $25,000,000.
2.2 Borrowings Against Credit. Subject to the provisions of this Loan
--------------------------
Agreement, including, but not limited to, Section 3.8 hereof, if no Default
exists, the Total Commitment may be availed of by the Borrower, in whole or in
part from time to time, and the amount of any borrowing may be repaid in whole
or in part and reborrowed until the Maturity Date, provided that reborrowings
under the Total Commitment shall be in amounts of not less than $500,000 each.
The Borrower may request an advance by irrevocable written notice to the Agent,
together with a Borrowing Certificate. If such notice is received by the Agent
prior to 11:00 A.M. on a Business Day, the advance shall be made on the same day
or, if received after 11:00 A.M., on the next Business Day.
2.3 Revolving Credit Notes. On the Closing Date, the Borrower shall
----------------------
execute and deliver to Chemical the Revolving Credit Note payable to the order
of Chemical and shall execute and deliver new Revolving Credit Notes from time
to time in accordance with Section 5.10(f). The Revolving Credit Notes shall
mature on the Maturity Date at which time all amounts owing under the Revolving
Credit will be due and payable together with accrued interest and all other sums
which may become due under this Loan Agreement. At the time of each subsequent
borrowing an appropriate entry shall be made on the grid of the Revolving Credit
Notes.
2.4 Borrowing Certificate. At the time of each borrowing and reborrowing
---------------------
under the Revolving Credit and in each Borrowing Certificate, the Borrower shall
certify to the Banks in writing, the following:
(a) all Representations and Warranties set forth in Article VI hereof
continue to be true as of the date of such borrowing;
(b) no Event of Default has occurred as of such date or would occur
upon giving effect to such borrowing and no condition exists which, but for the
giving of notice or the lapse of time, or both, would constitute an Event of
Default.
2.5 General Borrowing Provisions. All borrowings and reborrowings under
----------------------------
the Revolving Credit shall be subject to the following provisions:
17
<PAGE>
(a) upon the occurrence of an Event of Default, the Banks shall have
no obligation to make further loans under the Revolving Credit.
(b) The Banks shall not be obligated to disburse loan proceeds under
the Revolving Credit in the event that the Agent determines, in the exercise of
its reasonable good faith judgment, that any of the certifications set forth in
Section 2.4 hereof are untrue or cannot be substantiated by the Borrower.
2.6 Commitment Fee. The Borrower shall be obligated to the Banks for a
--------------
commitment fee (the "Commitment Fee") equal to 1/4 of 1% of the average daily
unused amount of the Total Commitment during the preceding quarter, calculated
on a 360-Day Basis, payable on the first day of each September, December, March
and June. The first payment hereunder shall be due on June 1, 1994 if the
Closing Date is on or before June 1, 1994 and shall be due on September 1, 1994
if the Closing Date is after June 1, 1994. Competitive Bid Rate Loans do not
constitute utilization of the Total Commitment for purposes of calculating the
Commitment Fee.
2.7 Optional Reduction of Credit. Upon at least three (3) Business Days'
----------------------------
prior written request of the Borrower, the Banks agree to reduce the amount of
the Total Commitment in increments of $500,000 without premium or penalty. All
such reductions shall be permanent and irrevocable.
2.8 Obligation of Banks. Each Bank shall be obligated to fund its share
-------------------
of any reborrowings under this Loan Agreement in the same proportion that its
Commitment bears to the Total Commitment, and Borrower shall not have the right
to look to any other Bank, including without limitation Chemical or the Agent,
for the funding of any such portion of reborrowings.
2.9 Pro Rata Treatment. Except as required under Section 3.11, each
------------------
borrowing, each reborrowing, each reduction of the Total Commitment, each
payment or prepayment of principal and interest of the Revolving Credit Notes
and each payment of the Commitment Fee and each conversion to or continuation of
any Loan as a Loan of any Type (except Competitive Bid Rate Loans) shall be
allocated pro rata by the Agent among the Banks in proportions that their
Commitments bear to the Total Commitment.
18
<PAGE>
ARTICLE III
ADDITIONAL TERMS GOVERNING
REVOLVING CREDIT LOAN
3.1 Late Payment Penalty. The Borrower shall pay a penalty on any
--------------------
principal and/or interest payments not received by the Agent when due in an
amount equal to the Prime Rate plus 2% per annum times the amount overdue times
the number of days such payments are past due calculated on a 360-Day Basis. The
late payment penalty shall not accrue during any time that the Agent is imposing
the provisions of Section 3.7.
3.2 Capital Adequacy/Reserve Requirements. If after the date of this Loan
-------------------------------------
Agreement, any Bank shall have determined that the applicability of any law,
rule, regulation, agreement or guideline adopted pursuant to or arising out of
the July 1988 report of the Basle Committee on Banking Regulations and
Supervisory Practices entitled "International Convergence of Capital Measurement
and Capital Standards", or the adoption after the date of this Loan Agreement of
any other law, rule, regulation, agreement or guideline regarding capital
adequacy, or any change in any of the foregoing or in the interpretation or
administration of any of the foregoing by any domestic or foreign governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or any lending office of a
Bank) or any Bank's holding company with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on a Bank's capital or on the capital of a Bank's holding
company, if any, as a consequence of this Loan Agreement or the Loans made by
such Bank pursuant hereto to a level below that which such Bank's or such Bank's
holding company could have achieved but for such applicability, adoption, change
or compliance (taking into consideration such Bank's policies or such Bank's
holding company's policies with respect to capital adequacy) by an amount deemed
by such Bank to be material, then from time to time, the Borrower shall pay to
such Bank such additional amount or amounts as will compensate such Bank or any
such Bank's holding company for such reduction. Any amount or amounts payable by
Borrower to a Bank in accordance with the provisions of this paragraph (which
amount or amounts shall be the result of each Bank's reasonable allocation to
the Loans of the amount to compensate such Bank for such adoption, change or
compliance) shall be paid by the Borrower to such Bank within thirty (30) days
of receipt by the Borrower from such Bank of a statement setting forth the
amount or amounts due and the basis for the determination from time to time of
such amount or amounts, which statement shall be conclusive and binding upon
Borrower absent manifest error. Any amount or amounts charged the Borrower
hereunder shall not be
19
<PAGE>
to duplicative of any amount or amounts charged to the Borrower under Section
3.11 or Section 3.13 of this Loan Agreement.
3.3 Security and Guaranties. As security for the Revolving Credit, the
-----------------------
Borrower shall cause the Corporate Guaranties to be executed and delivered to
the Agent. Upon the formation or acquisition of a Subsidiary, the Borrower shall
cause such Subsidiary to immediately execute and deliver a guaranty to the
Agent for the benefit of the Banks in form and content of the Corporate
Guaranties. The guaranty executed and delivered by the newly formed or acquired
Subsidiary shall be a guaranty of payment and shall create a joint and several
liability with the existing Corporate Guarantors. Notwithstanding the foregoing,
a Subsidiary which does not own any assets shall not be required to become a
Corporate Guarantor provided that such Subsidiary shall not have acquired and
shall not acquire any assets.
3.4 Loan Conversion Options. Subject to the terms of this Loan Agreement,
-----------------------
the Borrower may convert a Loan, or a portion thereof from one Type to another
Type upon written or telecopy notice (or telephone notice promptly confirmed by
telecopy) to the Agent, with such notice given (a) in the case of a LIBO Rate
Loan, not later than 10:00 a.m., New York City time, three Business Days prior
to the proposed Election Date, and (b) in the case of a CD Rate Loan, not later
than 10:00 a.m., New York City time, two Business Days prior to the proposed
Election Date. Such notice shall be irrevocable and shall specify (i) the
date of the proposed conversion (the "Election Date"), (ii) the existing Type of
such Loan, (iii) the Type into which the Borrower proposes to convert such Loan,
(iv) if applicable, the term of the initial Interest Period for each such Loan
upon such conversion and (v) if less than the entire outstanding amount of such
Loan made to the Borrower is to be so converted, the affected portion; provided,
however, that:
(a) the Election Date for any outstanding Loan which is a LIBO
Rate Loan, a Competitive Bid Rate Loan or a CD Rate Loan may not be any day
other than the last day of the Interest Period with respect thereto; and
(b) the amount to be converted to a LIBO Rate Loan or a CD Rate
Loan shall not be less than Five Hundred Thousand Dollars ($500,000) and, if
any amount remains as an Alternate Base Rate Loan or Loans, such amount shall
be not less than Five Hundred Thousand Dollars ($500,000); and
(c) no more than two (2) Interest Periods may be in effect at any
one (1) time provided that, if the total outstanding Loans are in LIBO Rate
Loans and/or CD Rate Loans, up to three Interest Periods may be in effect at one
time; and
(d) if the Borrower fails to give the Bank a timely Notice of
Interest Election at the end of an Interest Period with
20
<PAGE>
respect to any outstanding LIBO Rate Loan, CD Rate Loan or Competitive Bid Rate
Loan, then the Borrower shall be deemed to have given a Notice of Interest
Election to make such outstanding loan (unless repaid) an Alternate Base Rate
Loan on the last day the Interest Period the for and such outstanding Loan shall
become an Alternate Base Rate Loan on such day; and
(e) (1) In the event, and on each occasion, that on the day two
(2) Business Days prior to the commencement of any Interest at Period for a LIBO
Rate Loan, the Agent shall have determined that U.S. dollar deposits in the
principal amount approximately equal to such LIBO Rate Loan are not generally
available in the London interbank market, or that the rates at which such
deposits as being offered will not adequately and fairly reflect the cost to any
Bank of making or maintaining LIBO Rate Loans during such Interest Period, or
that reasonable means do not exist for ascertaining a LIBO Rate for such
particular Interest Period, the Agent shall, as soon as practicable thereafter,
give written or telecopy notice of such determination to the Borrower and the
Banks. In the event of any such determination, any request by the Borrower for a
LIBO Rate Loan shall, until the Agent shall have advised the Borrower and the
Banks that the circumstances giving rise to such notice no longer exist, be
deemed to be a request for an Alternate Base Rate Loan. If any change in any law
or regulation or in the interpretation thereof by any governmental authority
charged with the administration or interpretation thereof if shall make it
unlawful for any Bank to make or maintain LIBO Rates with respect to the
Revolving Credit Loan or any portion thereof or to fund the Revolving Credit
Loan or any portion thereof at LIBO Rates in the London interbank market or to
give effect to its obligations as contemplated by this Loan Agreement, then,
upon notice by the Agent to Borrower, the interest rate applicable to such
portion(s) of the Revolving Credit Loan bearing interest at a LIBO Rate or Rates
shall be automatically converted to the Alternate Base Rate, it being agreed
that any notice given by the Agent to Borrower pursuant to this sentence shall,
if lawful, be effective insofar as it pertains to any particular LIBO Rate loan
on the last day of the then existing Interest Period pertaining to such LIBO
Rate Loan, or if not lawful, shall be effective immediately upon being given by
the Agent to Borrower. If the interest rate applicable to any particular LIBO
Rate Loan is converted from a LIBO Rate to the Alternate Base Rate on a date
other than a Roll Over Date in accordance with the provisions of the preceding
sentence, Borrower shall not be liable for any payment under Section
3.13(b)(III) for such conversion.
(2) In the event, and on each occasion, that on or before the
day on which the Adjusted CD Rate for a CD Rate Loan is to be determined, the
Agent shall have determined that such Adjusted CD Rate cannot be determined for
any reason, including the inability of the Agent to obtain sufficient bids in
accordance with the terms of the definition of Fixed CD Rate, or the Agent
shall
21
<PAGE>
determine that the Adjusted CD Rate for such CD Rate Loan will not
adequately and fairly reflect the cost to any Bank of making or maintaining CD
Rate Loans during such Interest Period, the Agent shall, as soon as practicable
thereafter, give written or telecopy notice of such determination to the
Borrower and the Banks. In the event of any such determination, any request by
the Borrower for a CD Rate Loan shall, until the Agent shall have advised the
Borrower and the Banks that the circumstances giving rise to such notice no
longer exist, be deemed to be a request for an Alternate Base Rate Loan.
(3) Each determination by the Agent hereunder shall be
conclusive absent manifest error; and
(f) no Event of Default shall have occurred and be continuing on
the Election Date for a LIBO Rate Loan or CD Rate Loan.
Effective on the relevant Election Date such Loan, or
portions thereof as to which the election was made, shall commence to accrue
interest as provided herein for the Type selected by the Borrower.
All interest rate elections made hereunder shall apply ratably
among the Revolving Credit Notes such that the portion of each Alternate Base
Rate Loan, CD Rate Loan and LIBO Rate Loan held by each Bank shall be in the
same proportion that its Commitment t bears to the Total Commitment.
3.5 Interest on Alternate Base Rate Loans. The Borrower shall
-------------------------------------
pay interest on the unpaid principal amount of each Alternate Base Rate Loan
from the date of such Loan, payable on each Interest Payment Date for such Loan
at an interest rate per annum, calculated on a 360-Day Basis, equal to the
Alternate Base Rate.
3.6 Interest on LIBO Rate Loans. The Borrower shall pay interest
---------------------------
on the unpaid principal amount of each LIBO Rate Loan for each Interest Period
applicable to such Loan, payable on each Interest Payment Date for such Loan, at
an interest rate per annum calculated on a 360-Day Basis, equal to the Adjusted
LIBO Rate applicable to such Interest Period plus the Applicable Margin in
effect at the commencement of such Interest Period.
3.6A Interest on CD Rate Loans. The Borrower shall pay interest
-------------------------
on the unpaid principal amount of each CD Rate Loan for each Interest Period
applicable to such Loan, payable on each Interest Payment Date, at an interest
rate per annum calculated on a 360-Day Basis, equal to the Adjusted CD Rate
applicable to such Interest Period plus the Applicable Margin in effect at the
commencement of such Interest Period.
3.7 Default Rate. Upon the occurrence of any Default in the
------------
payment of any principal, interest, fees or other sums due
22
<PAGE>
hereunder or under the Revolving Credit Notes and thereafter, interest on the
outstanding principal balance of the Loans shall accrue, at the option of the
Agent, (i) at the rate at which an Alternate Base Rate Loan would accrue under
Section 3.5 plus 2% per annum, provided that (ii) LIBO Rate Loans and CD Rate
Loans shall accrue at the rate set forth in Section 3.6 and 3.6A, respectively,
plus 2% per annum until the applicable Roll Over Date, at which time such Loans
shall convert to Alternate Base Rate Loans and interest shall accrue at the rate
provided in clause (i) of this paragraph. Interest shall cease to accrue at the
Default Rate upon notice to the Borrower from the Agent that the Default has
been cured effective the date the Agent shall deem such default cured, and
interest shall thereafter accrue as provided in Sections 3.5, 3.6 and 3.6A. The
provisions of this Section shall continue to be in effect and may be imposed, at
the option of the Agent, from time to time upon the occurrence of subsequent
defaults.
3.8 Principal Reductions; Borrowing Availability. The aggregate
--------------------------------------------
outstanding principal under the Revolving Credit Notes shall not at any time
exceed the sum of (i) the Total Commitment, as it may be reduced hereunder from
time to time, and (ii) the aggregate outstanding principal of any Competitive
Bid Rate Loans. The Borrower shall make principal payments in such amounts and
at such times as are necessary to comply with this paragraph.
3.9 Prepayment of Loans.
-------------------
(a) The Borrower shall have the right, at any time and from time to
time, to prepay any Alternate Base Rate Loan, in whole or in part, without
premium or penalty, together with accrued interest on the principal amount being
prepaid to and including the date of such prepayment, upon at least three (3)
Business Days' prior irrevocable written notice to the Agent; provided, however,
that each partial prepayment shall be in the minimum principal amount of
$500,000.
(b) The Borrower shall have the right, subject to Section 3.13(b), at
any time and from time to time to prepay any LIBO Rate Loan, Competitive Bid
Rate Loan or CD Rate Loan in whole or in part, together with accrued interest on
the principal amount being prepaid to and including the date of such prepayment,
upon at least three (3) Business Days' prior irrevocable written notice to the
Agent; provided, however, that each partial prepayment shall be in the minimum
principal amount of Five Hundred Thousand Dollars ($500,000).
(c) All prepayments pursuant to this Section shall be applied to
prepay, in whole or in part, one or more Loans as directed by the Borrower. Each
notice of prepayment shall specify the prepayment date and the principal amount
Loan to prepaid, shall be irrevocable and shall commit the Borrower to
23
<PAGE>
prepay the Loan by the amount stated therein on the date stated therein.
3.10 Payments. All payments of principal, interest and other sums due from
--------
the Borrower under this Loan Agreement or on account of the principal of and
interest on the Revolving Credit Notes shall be made no later than 11:00 a.m.,
New York time, on the date on which payable, in immediately available funds to
the Agent at its office at Bridgewater Place, 500 Plum Street, Syracuse, New
York, and the Agent shall distribute to each Bank not later than 3:00 p.m. New
York time on that date its ratable portion of such payments.
3.11 Increased Cost.
--------------
(a) In the event that after the date hereof, any enactment of or
change in applicable law or regulation or in the administration or
interpretation thereof whether or not having the force of law and including,
without limitations, Regulation D promulgated by the Board as now and from time
to time hereafter in effect) by any authority charged with the administration or
interpretation thereof:
(i) subjects the Agent or any Bank to a tax with respect to any
amount paid or to be paid by either the Agent or any Bank with respect to any
LIBO Rate Loan, any CD Rate Loan, a Revolving Credit Note or its obligation to
make any Loan (other than (A) any tax imposed on the overall net income of the
Agent or such Bank and (B) franchise taxes imposed on the Agent or such Bank,
in either case by the jurisdiction in which such Bank or the Agent has its
principal office or its Applicable Lending Office or any political subdivision
or taxing authority therein); or
(ii) changes the basis of taxation of payment to any Bank or
the Agent of principal of or interest on any LIBO Rate Loan or CD Rate Loan, the
Revolving Credit Notes or any commitment hereunder or any other amounts payable
hereunder (other than changes in respect to taxes imposed on the overall net
income of such Bank or the Agent by the jurisdiction in which such Bank or the
Agent has its principal office or any political subdivision or taxing authority
therein); or
(iii) imposes, modifies or deems applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for the
account of, or credit extended by, such Bank (except any such reserve
requirement which is reflected in the Adjusted LIBO Rate or Adjusted CD Rate);
or
(iv) imposes upon any Bank or the London interbank market any
other condition affecting this Loan Agreement or LIBO Rate Loans or CD Rate
Loans made by such Bank; or
24
<PAGE>
(v) imposes upon any Bank any other condition with respect to any
amount paid or payable to or by such Bank pursuant to this Loan Agreement; and
the result of any of the foregoing is to increase the cost to any Bank of making
or maintaining any LIBO Rate Loan or CD Rate Loan or maintaining this Commitment
(which increase in cost shall be the result of each Bank's reasonable allocation
to the Loans of the aggregate of such cost increases resulting from such events)
or to reduce the amount of the payment (whether of principal, interest or
otherwise) receivable by any Bank hereunder or under the Revolving Credit Notes,
in each case by an amount which such Bank deems material, then in any such
event:
(A) the affected Bank(s) or the Agent shall notify the Borrower
in writing of the happening of such event with reasonable promptness after
becoming actually aware thereof and of the applicability thereof to the Loans
or this Loan Agreement;
(B) the affected Bank(s) or the Agent shall promptly deliver
to the Borrower a certificate stating the change which has occurred or the
reserve requirements or other condition which have been imposed on such Banks or
the Agent or the request, directive or requirement with which it has complied,
together with the date thereof, the amount of such increased cost, reduction at
payment and the way in which such amount has been calculated; and
(C) the Borrower shall pay to the Agent or the affected
Bank(s), within thirty (30) Business Days after delivery of the certificate
referred to in clause (B) above, such additional amount or amounts as will
compensate such Banks or the Agent for such additional cost, reduction or
payment, but without duplication for any amounts charged to the Borrower under
Section 3.2 or 3.13.
(b) No failure on the part of any Bank or the Agent to demand
compensation under paragraph (a) above on any one occasion or with respect to
any Interest Period shall constitute a waiver of its right to demand such
compensation for such Interest Period or any other Interest Period and no
failure on the part of the Agent or any Bank to deliver any certificate in a
timely manner shall in any way reduce any obligations of the Borrower to such
Bank or the Agent under this Section. The protection under this Section shall
be available to each Bank and the Agent regardless of any possible contention of
the invalidity or inapplicability of any law regulation or other condition which
shall give rise to any demand by such Bank or the Agent for compensation.
3.12 Maximum Rates. The Revolving Credit Notes and all obligations of the
-------------
Borrower under this Loan Agreement are subject to the express condition that at
no time shall the Borrower be obligated to pay interest at a rate which could
subject any Bank to either civil or criminal liability as a result of being in
excess
25
<PAGE>
of the maximum rate which the Borrower is permitted by law to agree to
pay. If by the terms hereunder or thereunder, the Borrower is at any time
required to pay interest at a rate in excess of such maximum rate, the rate of
interest shall be deemed to be immediately reduced to such maximum rate of
interest.
3.13 Expenses and Indemnity.
----------------------
(a) The Borrower shall reimburse and indemnify and hold the Agent and
the Banks and their respective directors, officers, employees and agents
harmless and defend them, at Borrower's sole cost and expense, against any loss
or liability, cost or expense (including, without limitation, reasonable
attorneys' fees and disbursements of Agent's and Banks' counsels, whether in-
house staff, retained firms or otherwise), and all claims, actions, procedures
and suits arising out of or in connection with (i) any ongoing matters arising
out of the transaction contemplated hereby, this Loan Agreement, the Revolving
Credit Notes and all other agreements or documents executed in connection with
this Loan Agreement, including but not limited to, all costs of appraisal or
reappraisal of assets, whether required by law, regulation, the Agent, the Banks
or any governmental or quasi-governmental authority, (ii) any waiver,
modification or amendment to, or restructuring of, the Loans, the Revolving
Credit Notes and any other Loan Documents, (iii) any and all lawful action that
may be taken by the Agent or any Bank in connection with the enforcement of the
provisions of this Loan Agreement or any of the other Loan Documents, whether or
not suit is filed in connection with the same, or in connection with the
Borrower, any Corporate Guarantor and/or any partner, joint venturer or
shareholder thereof becoming a party to a voluntary or involuntary federal or
state bankruptcy, insolvency or similar proceeding, (iv) the past, current
and/or future sale or offering for sale of equity interests in the Borrower,
including, without limitation, liabilities under any applicable securities or
blue sky laws, (v) the use of any of the proceeds of the Loans, (vi) breach of
any representation or warranty made by the Borrower or any Corporate Guarantor
in this Loan Agreement or any other certificate or writing furnished to the
Agent or any Bank, or (vii) any claim, litigation, investigation or proceedings
relating to or based upon any act or omission of the Borrower or any Corporate
Guarantor, whether or not the Agent, any Bank or any such person is a party
thereto; provided Borrower shall not be liable to reimburse Agent or any Bank
for any such costs and expenses, to the extent they result from the gross
negligence or willful misconduct of the Agent or any Bank. All sums expended by
the Agent or any Bank shall be payable within 30 Business Days after written
demand and, if not paid within such period of 30 Business Days, shall then
accrue interest at the Default Rate.
(b) The Borrower shall indemnify each Bank against any loss or expense
which such Bank may sustain or incur as a consequence of (i) any failure by the
Borrower to fulfill on the
26
<PAGE>
date of any borrowing hereunder the applicable conditions set forth in Article
IV, (ii) any failure by the Borrower to borrow or to refinance, convert or
continue any Loan hereunder after irrevocable notice of such borrowing,
refinancing, conversion or continuance has been given pursuant to Section 2.2 or
3.4, (iii) any payment, prepayment or conversion of a LIBO Rate Loan, a
Competitive Bond Rate Loan or CD Rate Loan required by any other provision of
this Agreement or otherwise made or deemed made on a date other than the last
day of the Interest Period applicable thereto, (iv) any default in payment or
prepayment of the principal amount of any Loan or any part thereof or interest
accrued thereon, as and when due and payable (at the due date thereof, whether
by scheduled maturity, acceleration, irrevocable notice of prepayment or
otherwise) or (v) the occurrence of any Event of Default, including, in each
such case, any loss or reasonable expense sustained or incurred or to be
sustained or incurred in liquidating or employing deposits from third parties
acquired to effect or maintain such Loan or any part thereof as a LIBO Rate Loan
or CD Rate Loan. Such loss or reasonable expense shall include an amount
equal to the excess, if any, as reasonably determined by such Bank, of (i) its
cost of obtaining the funds for the Loan being paid, prepaid, converted or not
borrowed, converted or continued (assumed to be the Adjusted LIBO Rate or
Adjusted CD Rate applicable thereto) for the period from the date of such
payment, prepayment, conversion or failure to borrow, convert or continue to the
last day of the Interest Period for such Loan (or, in the case of a failure to
borrow, convert or continue, the Interest Period for such Loan which would have
commenced on the date of such failure) over (ii) the amount of interest (as
reasonably determined by such Bank) that would be realized by such Bank in
reemploying the funds so paid, prepaid, converted or not borrowed, converted or
continued for such period or Interest Period, as the case may be. Any such Bank
shall provide to Borrower a statement, signed by an officer such Bank,
explaining any loss or expense and setting forth, if applicable, the computation
pursuant to the preceding sentence, and such statement shall be conclusive
unless Borrower challenges such statement in writing within ten (10) days after
receipt thereof. Borrower shall pay such Bank the amount shown as due on any
such statement within thirty (30) days after the receipt of same. The foregoing
indemnities shall not, as to the Agent or any Bank, apply to any such losses,
claims, damages, liabilities or related expenses to the extent that they result
from the gross negligence or willful misconduct of the Agent or any Bank.
(c) The provisions of this Section shall remain operative and in full
force and effect regardless of the expiration of the term of this Loan
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Loan Agreement or the Revolving Credit Notes, or any
investigation made by or on behalf of the Agent or any Bank.
27
<PAGE>
3.14 Competitive Bid Rate Loans.
--------------------------
(a) Upon at least one Business Day's prior written notice, the
Borrower may request the Agent to solicit competitive bids from the Banks
through an auction for short-term borrowings priced at a market rate (the
"Absolute Interest Rate"). Absolute Interest Rate bids may be requested for
periods from 30 days up to and including 180 days. Any Bank may bid, at its own
discretion, without regard to its Commitment, but no Bank shall be required to
submit a bid. The Absolute Interest Rate quoted by a Bank shall be determined in
the sole discretion of such Bank by reference to such factors and considerations
as such Bank may deem relevant. Competitive Bid Rate Loans shall be allotted to
the bidding Banks in order of effective cost, starting from the lowest cost and
rising to the highest cost acceptable to the Borrower. The Borrower shall be
under no obligation to accept any of the bids received. Each Competitive Bid
Rate Loan shall be in a minimum amount of $5,000,000 and increments of
$1,000,000 and shall be subject to the limitation of paragraph (b) hereof.
(b) Competitive Bid Rate Loans do not constitute utilization of the
Total Commitment or any Bank's Commitment; provided however that the aggregate
amount of Competitive Bid Rate Loans and all other Loans may not exceed the
Total Commitment. Each Competitive Bid Rate Loan shall be in a minimum amount of
$5,000,000 and increments of $1,000,000. Only one Competitive Bid Rate Loan may
be outstanding at any time.
(c) The Borrower shall pay interest on the unpaid principal amount of
each Competitive Bid Rate Loan from the date of such Loan, payable on each
Interest Payment Date for such Loan interest rate per annum, calculated on a
360-Day Basis, equal the Absolute Interest Rate applicable to such Loan.
28
<PAGE>
ARTICLE IV
CONDITIONS OF LENDING
4.1 Conditions Precedent. The obligation of the Banks to make the Loans
--------------------
hereunder is subject to the satisfaction of the following conditions precedent:
(a) receipt by the Agent of an opinion of counsel for the Borrower and
Corporate Guarantors, which counsel shall be satisfactory to the Agent, to
include but not be limited to the accuracy of the non-financial Representations
and Warranties contained herein, due execution and authorization of this Loan
Agreement, the Revolving Credit Notes, Corporate Guaranties, and other Loan
Documents and all other related documents, that such documents are valid and
binding obligations of the parties thereto, that the Borrower is not in material
violation of ERISA and neither the Borrower nor any Corporate Guarantor has
received notice that any Corporate Guarantor is in violation of ERISA, that no
suit, litigation, claims, or judgment exist against the Borrower or any
Corporate Guarantor by any other creditor or arising out of any bankruptcy
proceedings, and that no material litigation exists except as listed in Schedule
1 to this Loan Agreement.
(b) receipt by the Agent of certificates of good standing or
comparable documents of recent date for the Borrower and Corporate Guarantors
from the Secretaries of the jurisdictions of incorporation of the Borrower and
the Corporate Guarantors of all other jurisdictions where the Borrower and the
Corporate Guarantors conduct their business, copies of the certificates of
incorporation and by-laws of the Borrower and Corporate Guarantors certified by
the Secretaries or Assistant Secretaries of the Borrower and the Corporate
Guarantors, a certified copy of the resolutions of the Borrower's Board of
Directors authorizing the borrowings under this Loan Agreement and other Loan
Documents, and any and all other documents related thereto together with an
appropriate incumbency certificate as to the corporate officers of the Borrower
and certified copies of the resolutions of the Corporate Guarantors' Board of
Directors and shareholders authorizing execution of the Corporate Guaranties
together with appropriate incumbency certificates as to the corporate officers
of the Corporate Guarantors;
(c) receipt by the Agent of the executed Loan Agreement, Revolving
Credit Note and other Loan Documents and any and all related documents;
(d) receipt by the Agent of the executed Corporate Guaranties, to
the extent required, the form of which is annexed as Exhibit "D";
29
<PAGE>
(e) receipt by the Agent of a no-default certificate signed by an
authorized officer of the Borrower and Corporate Guarantors stating that the
representations and warranties made by the Borrower in this Loan Agreement and
the Corporate Guarantors in the Corporate Guaranties are true and correct and
that no Event of Default has occurred and that no event which, but for the
giving of notice or the lapse of time, or both, would constitute an Event of
Default hereunder has occurred as of the date thereof or would occur upon the
borrowing hereunder;
(f) receipt by the Agent of certificates satisfactory to the Agent of
policies of casualty and risk insurance in the form, amount and issued by
insurance companies rated "A" or better by A.M. Best Company or a comparable
rating company reasonably satisfactory to the Agent, covering all of the
insurable assets of the Borrower and the Corporate Guarantors including without
limitation, inventory, machinery and equipment, together with certificates
reasonably satisfactory to the Agent of policies of liability insurance in form
and amount satisfactory to the Agent including, without limitation, products
liability insurance;
(g) receipt by the Agent of such documents and other information
which the Agent may reasonably require in support of the Loan Documents;
(h) receipt, and satisfactory review, by the Agent and its counsel
of all significant contracts, financing documents, agreements, leases and any
other documents deemed material by the Agent relating to the Borrower or its
Subsidiaries;
(i) receipt by the Agent of the following, which must be satisfactory
to the Agent:
(1) Borrower's audited 1994 fiscal year financial statements;
(2) Borrower's five-year forecasts of income statements, balance
sheets and cash flow statements, together with all assumptions;
(j) receipt by the Agent of a certificate signed by counsel to the
Borrower satisfactory to the Agent's special counsel certifying that all
applicable Federal and State laws, rules and regulations governing the Borrower
or its Subsidiaries have been complied with;
(k) receipt by the Agent of (i) a certificate signed an officer of the
Borrower certifying the extent, if any, of any environmental violations, the
location thereof and the plan of remediation being pursued, if any, and (ii)
executed copies of any and all documentation concerning environmental issues in
possession of the Borrower as the Agent may request, including agreements
30
<PAGE>
regarding the disposal of any toxic waste or other environmental contaminants,
which documentation shall be satisfactory to the Agent and its counsel;
(l) receipt of 1994 management letter from the Borrower's auditors;
(m) receipt of (i) UCC (or local equivalent) and federal tax lien
searches of the Borrower and Corporate Guarantors in all jurisdictions material
to their businesses; and (ii) judgment and state tax lien searches of the
Borrower in Onondaga County; the results of which are satisfactory to the Agent
and its special counsel;
(n) receipt by the Agent of such other documents audits, certificates,
or other information as the Agent may reasonably request; and
(o) receipt by the Agent of such other executed documents as may be
required by special counsel to the Agent in support of the documents set forth
in subparagraphs (c) and (d) hereof.
4.2 Conditions Precedent to Revolving Credit Advances. Prior to all
--------------------------------------------------
subsequent borrowings under the Revolving Credit and subject to the terms of
Section 2.5, the Agent shall receive a Borrowing Certificate signed by the Chief
Financial Officer, President or Vice President--Treasurer of the Borrower
stating, among other things, that the Representation and Warranties contained in
this Loan Agreement are true on the date of such borrowing, that after giving
effect to the requested borrowing the aggregate of the total outstanding under
the Revolving Credit will be less than or equal to the Total Commitment and that
no Event of Default has occurred as of such date or would occur upon giving
effect to such borrowing.
31
<PAGE>
ARTICLE V
BANK AND AGENCY RELATIONSHIPS
5.1 Commitment. The Borrower acknowledges that Chemical may sell and
-----------
assign interests in the Revolving Credit Note and the Loans in accordance with
Section 5.10(c) of this Loan Agreement. By its acceptance of such an interest,
each of the assignee Banks and Chemical severally agree, on the terms and
conditions contained in this Loan Agreement, to extend credit to the Borrower
from time to time up to but not exceeding the amount of such Bank's Commitment
as then in effect. Each Bank's Commitment shall constitute its proportionate
share of the Total Commitment and the Loans.
5.2 Authority.
----------
(a) In order to expedite the transactions contemplated by this Loan
Agreement, Chemical Bank is hereby appointed to act as Agent on behalf of the
Banks. Each of the Banks by its acceptance of any interest in a Revolving Credit
Note irrevocably authorizes the Agent to take such action on its behalf and to
exercise such powers hereunder as are specifically delegated to or required of
the Agent by the terms hereof together with such powers as are reasonably
incidental thereto. Neither the Agent nor any of its directors, officers,
employees or agents shall be liable as such for any action taken or omitted to
be taken by it or them hereunder or in connection herewith (i) at the request or
with the approval of the Required Banks or (ii) in the absence of its or their
own gross negligence or willful misconduct.
(b) The Agent is hereby expressly authorized on behalf of the
Banks, without hereby limiting any implied authority, (i) to receive on behalf
of each of the Banks any payment of principal of or interest on the Revolving
Credit Notes outstanding hereunder and all other amounts accrued hereunder paid
to the Agent, and promptly to distribute to each Bank its proper share of all
payments so received, (ii) to distribute to each Bank copies of all notices,
agreements, and other material as provided for in this Loan Agreement as
received by such Agent, and (iii) to take all actions with respect to this Loan
Agreement as are specifically delegated to the Agent. The Agent shall not,
without the prior consent of each Bank (i) modify or amend in any respect
whatsoever the interest rate provisions set forth in the Loan Documents, (ii)
increase the maximum principal amount of the Total Commitment above Twenty-Five
Million Dollars ($25,000,000), or (iii) extend the Maturity Date. The Agent
shall not, without the consent of the Required Banks (i) make or consent to any
amendment, modification or waiver of any of the terms, covenants, provisions or
conditions of the Loan Documents, (ii) waive, compromise or settle any claim
against Borrower or any Corporate Guarantor in whole or in part for the
observance and performance by Borrower or any Corporate
32
<PAGE>
Guarantor of any of the terms, covenants, provisions and conditions of the Loan
Documents, or release Borrower or any Corporate Guarantor from any material
obligation or liability under the Loan Documents, or (iii) waive any default
under the Loan Documents.
5.3 Action on Default. In the event that (a) the Borrower fails
------------------
to pay when due the principal of or interest on the Revolving Credit Notes or
any fee payable hereunder or (b) the Agent receives written notice of the
occurrence of a Default or an Event of Default, the Agent within a reasonable
time shall give written notice thereof to the Banks, and shall take such
action with respect to such Event of Default or other condition or event as it
shall be directed to take by the Required Banks; provided, however, that,
-------- -------
unless and until the Agent shall have received such directions, the Agent may
take such action or refrain from taking such action hereunder with respect to an
Event of Default or an event which with the giving of notice or lapse of time
or both would constitute an Event of Default as it shall deem advisable in the
best interests of the Banks.
5.4 Responsibility of Agent.
------------------------
(a) The Agent shall not be responsible in any manner to any of the
Banks for the effectiveness, enforceability, perfection, value, genuineness,
validity or due execution of this Loan Agreement or the Revolving Credit Notes
or any other agreements or certificates, requests, financial statements, notices
or opinions of counsel or for any recitals, statements, warranties or
representations contained herein or be under any obligation to ascertain or
inquire as to the performance or observance of any of the terms, provisions,
covenants, conditions, agreements or obligations of this Loan Agreement or any
other agreement on the part of the Borrower and, without limiting the generality
of the foregoing, the Agent shall, in the absence of knowledge to the contrary,
be entitled to accept any certificate furnished pursuant to this Loan Agreement
as conclusive evidence of the facts stated therein and shall be entitled to rely
on any note, notice, consent certificate, affidavit, letter, telegram, teletype
message, telecopy, statement, order or other document which it believes in good
faith to be genuine and correct and to have been signed or sent by the proper
person or persons. It is understood and agreed to that the Agent may exercise
its rights and powers under other agreements and instruments to which it is or
may be a party, and engage in other transactions with the Borrower as though
it were not Agent of the Banks hereunder.
(b) The Agent shall promptly give notice to the Banks of the receipt
or sending of any notice, schedule, report, projection, financial statement or
other document or information pursuant to this Loan Agreement and shall promptly
forward a copy thereof to each Bank.
33
<PAGE>
(c) Neither the Agent nor any of its directors or officers, employees
or agents shall have any responsibility to the Borrower on account of the
failure or delay in performance or breach by any Bank other than the Agent of
any of its obligations hereunder or to any Bank on account of the failure of or
delay in performance or breach by any other Bank or the Borrower of any of their
respective obligations hereunder or in connection herewith.
(d) The Agent may consult with legal counsel selected by it in
connection with matters arising under this Loan Agreement and any action taken
or suffered in good faith by it in accordance with the opinion of such counsel
shall be full justification and protection to it. The Agent may exercise any of
its powers and rights and perform any duty under this Loan Agreement through
agents or attorneys.
(e) The Banks hereby acknowledge that the Agent shall be under no duty
to take any discretionary action permitted to be taken by the Agent pursuant to
the provisions of this Agreement unless it shall be requested in writing to do
so by the Required Banks.
5.5 Expenses of Agent. Each Bank agrees (i) to reimburse the Agent in the
-----------------
amount of such Bank's pro rata share (based on its Commitment) of any expenses
incurred for the benefit of the Banks by the Agent, including counsel fees and
compensation of agents and employees paid for services rendered on behalf of the
Banks not reimbursed by the Borrower, and (ii) to indemnify and hold harmless
the Agent and any of its directors, officers, employees or agents, on demand, in
the amount of its pro rata share, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by or asserted against it in its capacity as the Agent or any of
them in any way relating to or arising out of this Loan Agreement or any action
taken or omitted by it or any of them under this Loan Agreement, to the extent
not reimbursed by the Borrower; provided, however, that no Bank shall be liable
-------- -------
to the Agent for any portions of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the gross negligence or willful misconduct of the Agent or any of its
directors, officers, employees or agents.
5.6 Independent Review. Each of the Banks by its acceptance of any
------------------
interest in a Revolving Credit Note acknowledges that its has, independently and
without reliance upon the Agent or Chemical and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Loan Agreement. Each Bank, by its acceptance, also
acknowledges that it will, independently and without reliance upon the Agent or
Chemical and based on such documents and information as it shall deem
appropriate at the time, continue to make its own
34
<PAGE>
decisions in taking or not taking action under or based upon this Loan Agreement
or any document furnished hereunder.
5.7 Successor Agent. Subject to the appointment an acceptance of a
---------------
successor Agent as provided below, the Agent may resign at any time by notifying
the Banks and the Borrower. Upon any such resignation, and with the consent of
the Borrower (which shall be deemed to be granted if an Event of Default or
event that with the giving of notice or lapse of time or both would become an
Event of Default shall have occurred and be continuing), the Bank shall have the
right to appoint a successor Agent. If no successor Agent shall have been
appointed within thirty (30) days after the retiring Agent gives notice of its
resignation or the removal of the Agent, then the retiring Agent may, on behalf
of the Banks appoint a successor Agent which shall be a bank having combined
capital and surplus of at least Five Hundred Million Dollar ($500,000,000). Upon
the acceptance of any appointment as Agent hereunder by a successor bank, such
successor shall thereupon succeed to and become vested with all the rights,
powers, privileges and duties of the retiring Agent and the retiring Agent shall
be discharged from its duties and obligations hereunder. After any Agent's
resignation hereunder, the provisions of this Article shall continue in effect
for its benefit in respect of any actions taken or omitted to be taken by it
while it was acting as Agent.
5.8 Sharing of Setoffs. If a Bank shall, through the exercise of a right
------------------
of banker's lien, setoff or counterclaim against the Borrower or any Corporate
Guarantor, including, but no limited to, a secured claim under Section 506 of
Title 11 of United States Code or other security or interest arising from, or in
lieu of, such secured claim, received by such Bank under any applicable
bankruptcy, insolvency or other similar law or otherwise, obtain payment
(voluntary or involuntary) in respect of its Revolving Credit Note or portion
thereof held by it as a result of which the aggregate unpaid principal portion
of the interests in Revolving Credit Notes held by it shall be proportionately
less than the unpaid principal portion of the interests in Revolving Credit
Notes held by the other Banks, it shall be deemed to have simultaneously
purchased from such other Banks participations in the Revolving Credit Notes or
interests therein held by such other Banks, so that the aggregate unpaid
principal amount of the interests in Revolving Credit Notes and participations
in Revolving Credit Notes held by it shall be in the same proportion to the then
aggregate outstanding principal amount of all Revolving Credit Notes as its
Commitment bears to the Total Commitment; provided however, that if any such
purchase or purchases or adjustments shall be made and the payment giving rise
thereto shall thereafter be recovered, such purchase or purchases or adjustments
shall be rescinded to the extent of such recovery and the purchase price or
prices or adjustments restored without interest. The Borrower expressly consents
to the foregoing arrangements and agrees that
35
<PAGE>
any Bank may exercise any and all rights of banker's lien, setoff or
counterclaim with respect to any and all moneys owing by the Borrower to such
Bank.
5.9 Notice to Agent. Each of the Banks by its acceptance of any interest
---------------
in a Revolving Credit Note agrees to give prompt notice to the Agent of the
following:
(a) A Bank becomes aware of the occurrence of a Default or Event of
Default from a source other than the Agent or from a notice given by the
Borrower to all Banks.
(b) A Bank becomes aware of the need to convert a LIBO Rate Loan to an
Alternate Base Rate Loan under Section 3.4(e).
5.10 Assignments and Participations.
------------------------------
(a) Whenever in this Agreement any of the parties hereto or any Bank
is referred to, such reference shall be deemed to include the successors and
assigns of such party; and all covenants, promises and agreements by or on
behalf of the Borrower, the Corporate Guarantors, the Subsidiaries, the Agent or
the Banks that are contained in this Loan Agreement shall bind and inure to the
benefit of their respective successors and assigns. Neither the Borrower nor any
Corporate Guarantor may assign or transfer any of its rights or obligations
hereunder without the written consent of all the Banks.
(b) Each Bank, without the consent of the Borrower, may sell
participations to one or more banks or other entities in all or a portion of its
rights and obligations under this Loan Agreement (including, without limitation,
all or a portion of its Commitment and the Loans owing to it and interests in
Revolving Credit Notes held by it); provided, however, that (i) such Bank's
obligations under this Loan Agreement (including, without limitation, its
Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Bank
shall remain solely responsible to the other parties hereto for the performance
of such obligations, (iii) the banks or other entities buying participations
shall be entitled to the cost protection provisions contained in Sections 3.2
and 3.11 (except to the extent that application to such sections to such banks
and entities would cause the Borrower to make duplicate payments thereunder),
3.4(e) and 3.13, but only to the extent any of such sections would be available
to the Bank which sold such participation and (iv) the Borrower, the Agent and
the other Banks shall continue to deal solely and directly with such Bank in
connection with such Bank's rights and obligations under this Loan Agreement;
provided further, however, that each Bank shall retain the sole right and
responsibility to enforce the obligations of the Borrower and the Corporate
Guarantors relating to the Loans, including, without limitation, the rights to
approve any amendment, modification or waiver of any provision of this Loan
36
<PAGE>
Agreement, other than amendments, modifications or waivers with respect to any
fees payable hereunder or the amount of principal or the rate of interest
payable on, or the dates fixed for any payment of principal of or interest on,
the Loans.
(c) Chemical and each Bank may assign by novation, to any one or more
banks or other entities without the prior written consent of the Borrower and
with the prior written consent of the Agent, all or a portion of its interests,
rights and obligations under this Loan Agreement (including, without limitation,
all or a portion of its Commitment and the same portion of the Loans at the time
owing to it and the interests in Revolving Credit Notes held by it), provided,
however, that (i) each such assignment shall be of a constant, and not a
varying, percentage of all of the assigning Bank's rights and obligations under
this Loan Agreement, which shall include the same percentage interest in the
Loans and, Revolving Credit Notes, (ii) the amount of the Commitment of the
assigning Bank being assigned pursuant to each such assignment (determined as of
the date the Assignment and Acceptance with respect to such assignment is
delivered to the Agent) shall be in a minimum principal amount of $2,000,000 and
(iii) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance and recording in the Register (as defined below), an
Assignment and Acceptance, together with any Revolving Credit Note or Notes
subject to such assignment in the possession of the assigning Bank and a
processing and recordation fee of $5,000. Upon such execution, delivery,
acceptance and recording and after receipt of the written consent of the
Agent, from and after the effective date specified in each Assignment and
Acceptance, which effective date shall be at least five (5) Business Days after
the execution thereof, (x) the assignee thereunder shall be a party hereto and,
to the extent provided in such Assignment and Acceptance, have the rights and
obligations of a Bank hereunder and under the Loan Documents and (y) the
assignor thereunder shall, to the extent provided in such Assignment and
Acceptance, be released from its obligations under this Loan Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of an assigning Bank's rights and obligations under this Loan Agreement, such
Bank shall cease to be a party hereto). Notwithstanding the foregoing, if any
such assignment shall cause the Borrower to incur any increased costs in
connection with its Loans from any such assignee, the Borrower may, provided
that there shall exist no Event of Default or event or condition which, upon
notice or lapse of time or both, would constitute an Event of Default, upon at
least five (5) Business Days' prior written (or facsimile notice promptly
confirmed in writing) to such assignee and the Agent, but not more than fifteen
(15) Business Days after notification of any such assignment, identify to the
Agent a lending institution reasonably acceptable to the Agent which will
purchase the Commitment and the amount of outstanding Loans from such assignee
and such assignee shall thereupon assign its Commitment, any Loans owing to it
and the Revolving Credit Notes
37
<PAGE>
held by it to such replacement lending institution pursuant to subsection (c).
Such notice shall specify an effective date for such assignment and at the time
thereof, the Borrower shall pay all accrued interest, Commitment Fees and all
other amounts owing to such assignee as at such effective date for such
assignment.
In addition, in the event that there is a change in law that, when
effective, would give rise to an obligation on the part of Borrower to make a
payment with respect to United States withholding taxes to a Bank under Section
9.13(a), then Borrower, upon at least five (5) Business Days' notice to the
Bank and the Agent, may cause the Bank to assign its rights and obligations
under this Loan Agreement to an assignee identified by the Borrower and
acceptable to the Agent, provided, however, that the Bank will not be obligated
to make such assignment if, by the later of the date that is five Business Days
following receipt of the notice of assignment by the Borrower required under
this Section 5.10(c), the Bank gives written notice that it waives its right to
payments by the Borrower with respect to Taxes pursuant to Section 9.13(a) to
the extent that such payments would result from the particular change in law.
Any assignment pursuant to the immediately preceding sentence shall be subject
to the preceding provisions of this Section 5.10(c).
(d) By executing and delivering an Assignment and Acceptance, the Bank
assignor thereunder and the assignee thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) other than the representation
and warranty that it is the legal and beneficial owner of the interest being
assigned thereunder free and clear of any adverse claim, such Bank assignor
makes no representation or warranty and assumes no responsibility with respect
to any statements, warranties or representations made in or in connection with
the Agreement or the execution, legality, validity, enforceability, perfection,
genuineness, sufficiency or value of this Loan Agreement, the Loan Documents or
any other instrument or document furnished pursuant hereto; (ii) such Bank
assignor makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Borrower or any of the Corporate
Guarantors or the performance or observance by the Borrower or any of the
Corporate Guarantors of any of their respective obligations under this Loan
Agreement, any of the Loan Documents, or any other instrument or document
furnished pursuant hereto; (iii) such assignee confirms that it has received a
copy of this Loan Agreement and of the Loan Documents, together with copies of
financial statements and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such assignee will, independently and without
reliance upon the Agent, such Bank assignor or any other Bank and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this Loan
Agreement;
38
<PAGE>
(v) such assignee appoints and authorizes the Agent to take such action as the
Agent on its behalf and to exercise such powers under this Agreement as are
delegated to the Agent by the terms hereof, together with such powers as are
reasonably incidental thereto; and (vi) such assignee agrees that it will
perform in accordance with their terms all of the obligations which by the terms
of this Agreement are required to be performed by it as a Bank.
(e) The Agent shall maintain at its address referred to in Section
9.1 a copy of each Assignment and Acceptance delivered to it and a register for
the recordation of the names and addresses of the Banks and the Commitment of,
and principal amount of the Loans owing to, each Bank from time to time (the
"Register"). The entries in the Register shall be conclusive, in the absence of
manifest error, and the Borrower and the Corporate Guarantors, the Agent and the
Banks may treat each person whose name is recorded in the Register as a Bank
hereunder for all purposes of this Loan Agreement. The Register shall be
available for inspection by the Borrower, the Corporate Guarantors or any Bank
at any reasonable time and from time to time upon reasonable prior notice.
(f) Upon its receipt of an Assignment and Acceptance executed by an
assigning Bank and an assignee together with any Revolving Credit Note or Notes
subject to such assignment and the written consent to such assignment, the Agent
shall, if such Assignment and Acceptance has been completed and is substantially
in the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii)
record the information contained therein in the Register and (iii) give prompt
notice thereof to the Banks and the Borrower. At the option of the Agent, the
assignee Bank shall thereafter be a holder of an existing Revolving Credit Note
or Notes or of a direct participation interest therein or the Agent may include
in its notice, given in accordance with the preceding sentence a requirement
that the Borrower execute a new Revolving Credit Note or Notes. Within five (5)
Business Days after receipt of such notice, the Borrower, at its own expense,
shall execute and deliver to the Agent a new Revolving Credit Note or Notes to
the order of such assignee in an amount equal to its portion of the Total
Commitment assumed by it pursuant to such Assignment and Acceptance and, if the
assigning Bank has retained any Commitment hereunder, a new Revolving Credit
Note or Notes to the order of the assigning Bank in an amount equal to the Total
Commitment retained by it. Such new Revolving Credit Note or Notes shall be in
an aggregate principal amount equal to the aggregate principal amount of such
surrendered Revolving Credit Note or Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially the form
of Exhibit B hereto. Upon receipt of such new Revolving Credit Note or Notes
executed by the Borrower, the Agent shall deliver to the Borrower the Revolving
Credit Note or Notes surrendered by the assigning Bank. Revolving Credit Notes
surrendered to the Borrower shall be cancelled by Borrower.
39
<PAGE>
(g) Notwithstanding any other provision herein, any Bank may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this Section 5.10, disclose to the assignee or
participant or proposed assignee or participant, any financial and other
information concerning the Borrower and each Subsidiary and other pertinent
information with respect to Loans; provided, that prior to any such disclosure,
each such assignee or participant or proposed assignee or participant shall
agree to preserve the confidentiality of any confidential information relating
to the Borrower or any Subsidiary received from such Bank.
40
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
6.1 Corporate Existence and Power. The Borrower and Corporate Guarantors
-----------------------------
are corporations duly incorporated, validly existing and in good standing under
the laws of their respective jurisdictions of incorporation, are duly licensed
or qualified as foreign corporations in all jurisdictions where the failure to
qualify would have a material adverse effect on the financial condition,
business or operations of the Borrower or the Corporate Guarantors and have the
corporate power required to carry on their businesses as now conducted.
6.2 Corporate and Governmental Authorization; Contravention. The execution
-------------------------------------------------------
and delivery by the Borrower of this Loan Agreement; the Revolving Credit
Notes, other Loan Documents and all other documents contemplated hereby, the
performance by the Borrower of its obligations hereunder and thereunder and the
execution and performance of the Corporate Guaranties by the Corporate
Guarantors are within their corporate powers, have been duly authorized by all
necessary corporate action, do not and will not contravene, violate, result in
the breach of or constitute a default under, any provision of their
certificates of incorporation or by-laws or, in any material respect, any
agreement, judgment, injunction, order, decree or other instrument including
but not limited to any indenture or other loan, credit agreement, or lease to
which they are parties and by which they are bound or affected, result in the
creation or imposition of any mortgage, lien, encumbrance, security interest
or charge on any asset of the Borrower or the Corporate Guarantors, and does
not and will not require the consent or approval of employees, stockholders or
creditors of the Borrower or the Corporate Guarantors or any governmental body
or other regulatory authority or the same have been obtained.
6.3 Binding Effect. This Loan Agreement, the Revolving Credit Notes, and
--------------
other Loan Documents and the Corporate Guaranties constitute respectively the
legal, valid and binding agreements of the Borrower and the Corporate
Guarantors, enforceable in accordance with their terms, except as limited by
bankruptcy, insolvency or other laws of general application relating to or
affecting the enforcement of creditors' rights.
6.4 Financial Information. The consolidated financial statements of the
---------------------
Borrower furnished to the Agent fairly reflect the financial condition of the
Borrower as of January 29, 1994 and January 30, 1993, respectively, and no
material adverse changes, financial or otherwise, have occurred since those
dates.
41
<PAGE>
6.5 Litigation. There is no action, suit or proceeding pending against, or
----------
to the knowledge of the Borrower threatened against the Borrower or any of the
Corporate Guarantors before any court or arbitrator or any governmental body,
agency or official which will materially adversely affect their condition,
financial or otherwise, except such litigation as is included on Schedule A
attached hereto.
6.6 Compliance with ERISA. With respect to retirement and employee benefit
---------------------
plans maintained by the Borrower and the Corporate Guarantors, no Prohibited
Transaction (as such term is defined in ERISA) has occurred, and no material
violations of ERISA exist which would create a lien on the assets of the
Borrower or the Corporate Guarantors.
6.7 Taxes and Past Due Obligations.
------------------------------
(a) The Borrower has filed all federal income tax returns and all
other material tax returns which are required to be filed by it and has paid all
taxes due pursuant to such returns or pursuant to any assessment received by the
Borrower. No tax deficiencies and no past due obligations exist that materially
affect the operations or financial condition of the Borrower, or, if such
deficiencies or obligations exist, they are being contested in good faith by
appropriate proceedings, it has set aside on its books adequate reserves
therefor in accordance with GAAP.
(b) With respect to taxable periods beginning after April 29, 1988,
the Corporate Guarantors have filed all federal income tax returns and all
other material tax returns which are required to be filed by them and have
paid all taxes due pursuant to such returns or pursuant to any assessment
received by the Corporate Guarantors. No tax deficiencies and no past due
obligations exist that materially affect the operations or financial condition
of the Borrower or the Corporate Guarantors taken as a whole, or, if such
deficiencies or obligations exist, they are being contested in good faith by
appropriate proceedings and the Borrower or Corporate Guarantors have set aside
on their books adequate reserves therefor in accordance with GAAP.
6.8 Title to Assets. The Borrower and the Corporate Guarantors have good
---------------
and marketable title to, or valid leasehold interests in, all of their
properties and assets, real and personal, reflected on the balance sheets, and
the same are not subject to any liens, mortgages, pledges, security interests,
encumbrances or charges of any kind, other than those permitted in this Loan
Agreement.
6.9 Compliance with Laws and No Conflict. The Borrower and the Corporate
------------------------------------
Guarantors are not in default under any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any material indenture,
agreement, lease
42
<PAGE>
or instrument, (including but not limited to (a) those governing retail sale
of controlled substances and other pharmaceutical products and materials, (b)
those governing any other products which may be sold by the Borrower or any
Corporate Guarantor, (c) those governing reimbursement for providers of health
care products and services, and (d) those governing hazardous materials,
asbestos and other environmental matters) the noncompliance with which or the
breach of which would materially adversely affect the business, properties
prospects, profits, or condition (financial or otherwise) of the Borrower or
any Corporate Guarantor or materially adversely affect the ability of the
Borrower or any Corporate Guarantor to perform its obligations under this Loan
Agreement, the Revolving Credit Notes, other Loan Documents and all other
related documents. No authorization, consent, approval, license, exemption of
or filing or registration with any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, is
or will be necessary to the valid execution, delivery or performance of this
Loan Agreement or the Corporate Guaranties.
6.10 [Intentionally omitted.]
6.11 Use of Proceeds. Proceeds of the Revolving Credit shall be used
---------------
solely to fund acquisitions, working capital and capital investments as
permitted under the terms of this Loan Agreement.
6.12 Subsidiaries. The Borrower and Corporate Guarantors have no
------------
Subsidiaries except those set forth on Schedule B attached hereto. All of the
Subsidiaries set forth on Schedule B have not acquired any assets since
January 29, 1994.
6.13 Regulations G, T, U and X. The Borrower and Corporate Guarantors are
-------------------------
not engaged principally in, or have an important activity in, the business of
extending credit for the purpose of purchasing or carrying any "Margin Stock"
(as defined in Regulation U of the Board, nor will any part of the proceeds of
the Revolving Credit be used, now or ultimately, to purchase or carry such
stock or extend such credit or violate in any way Regulations G, T, U and X
promulgated by the Board, as the same are from time to time in effect, or any
official rulings or interpretations thereunder or thereof.
6.14 Hazardous Materials. The Borrower is not aware that the Borrower or
-------------------
any of the Corporate Guarantors have used Hazardous Materials on, from, or
affecting any of their properties or assets, including rental properties, in
any manner which violates Federal, state or local laws, ordinances, rules,
regulations or policies governing the use, storage, treatment, transportation,
manufacture, refinement, handling, production or disposal of Hazardous
Materials. The Borrower is not aware that any prior owner of such property or
asset or any tenant, subtenant, prior tenant or prior subtenant thereof have
used Hazardous Materials on, from or
43
<PAGE>
affecting such property or asset in any manner which violates Federal, state or
local laws, ordinances, rules, regulations or policies governing the use,
storage, treatment, transportation, manufacture, refinement, handling,
production or disposal of Hazardous Materials. For the purposes of this
Section, the Borrower shall not be deemed to be aware or have knowledge of any
fact unless such fact that is known a corporate officer of the Borrower.
6.15 Solvency. The Borrower is solvent immediately after execution of this
--------
Loan Agreement and upon the performance of its obligations hereunder. The
Corporate Guarantors are solvent, without giving effect to the Corporate
Guaranty, after execution of the Corporate Guaranties.
44
<PAGE>
ARTICLE VII
COVENANTS
7.1 Affirmative Covenants. The Borrower agrees that during the term of
this Loan Agreement, it shall do the following:
(a) Maintenance of Existence. The Borrower shall preserve and keep in
------------------------
force and effect, and cause each Restricted Subsidiary to preserve and keep in
force and effect, its corporate existence and all licenses and permits necessary
to the proper conduct of its business, provided that the foregoing shall not
prevent any transaction permitted by Section 7.2(d).
(b) Maintenance of Properties. The Borrower shall and shall cause each
-------------------------
Restricted Subsidiary (i) in the case of properties owned by it, to maintain,
keep, and preserve, and (ii) in the case of properties leased by the Borrower
or a Restricted Subsidiary, as lessee, shall, or shall cause the lessor to,
maintain, keep and preserve such leased properties, in each case which are used
or useful in the conduct of its business in repair and good working order and
from time to time shall make, or use its best efforts to cause the lessor to
make, all necessary repairs, replacements, renewals and additions so that at all
times the efficiency thereof shall be maintained.
(c) Maintenance of Insurance. The Borrower shall maintain, and cause
------------------------
each Restricted Subsidiary to maintain, insurance coverage by financially sound
and reputable insurers in such form and amounts and against such risks as are
customary for corporations of established reputation engaged in the same or a
similar business and owning and operating similar properties (the "Industry
Standard"); provided that the Borrower may elect, solely with respect to fire
and extended coverage insurance, to self-insure all or a portion of the
contents of those individual retail stores operated by the Borrower or any
Restricted Subsidiary which have, or may be reasonably expected to have, an
insurable value per store of less than two percent (2%) of Consolidated Tota1
Assets, as determined by the Borrower in the exercise of prudent business
judgment but in no event shall the Borrower self-insure in an amount greater
than the Industry Standard.
(d) Payment of Taxes and Claims. The Borrower shall duly and promptly
---------------------------
pay and discharge, and cause each Restricted Subsidiary to promptly pay and
discharge, as the same become due and payable, (i) all lawful taxes,
assessments and governmental charges, levies or claims levied or imposed upon
the Borrower or such Restricted Subsidiary, respectively, or upon or in respect
of all or any part of the property or business of the Borrower or such
Restricted Subsidiary, in an amount exceeding Ten Thousand Dollars ($10,000);
provided that the amount of such unpaid taxes,
45
<PAGE>
assessments and governmental charges or levies shall not exceed Fifty Thousand
Dollars ($50,000) in the aggregate; (ii) all trade accounts payable in
accordance with customary trade practices; and (iii) all claims for work, labor
or materials, which if unpaid might become a lien or charge upon any property
of the Borrower or such Restricted Subsidiary; provided the Borrower or such
Restricted Subsidiary shall not be required to pay any such tax, assessment,
charge, levy, account payable or claim if (A) the validity, applicability or
amount thereof is being contested in good faith by appropriate actions or
proceedings which will prevent the forfeiture or sale of any property of the
Borrower or such Restricted Subsidiary or any material interference with the
use thereof by the Borrower or such Restricted Subsidiary, and (B) the Borrower
or such Restricted Subsidiary shall set aside on its books adequate reserves
therefor in accordance with GAAP.
(e) Reports and Rights of Inspection. The Borrower will keep, and will
--------------------------------
cause each Subsidiary to keep a system of accounting established and
administered in accordance with GAAP consistently maintained (except for
changes disclosed in the financial statements furnished to the Agent pursuant to
this Section and concurred in by the independent public accountants referred to
in Section 7.1(e)(2) hereof), and will furnish to the Agent (in duplicate if
so specified below or otherwise requested):
(1) Quarterly Statements. (A) As soon as available and in any
--------------------
event within sixty (60) days after the end of each quarterly fiscal period
(except the last) of each fiscal year, duplicate copies of:
(i) consolidated balance sheets of the Borrower and its
Restricted Subsidiaries as of the close of such quarter setting forth in
comparative form the consolidated figures for the end of the preceding fiscal
year,
(ii) consolidated statements of net earnings of the Borrower
and its Restricted Subsidiaries for such quarterly period, setting forth in
comparative form the consolidated figures for the corresponding period of the
preceding fiscal year, and
(iii) consolidated statements of cash flows of the Borrower
and its Restricted Subsidiaries for the portion of the fiscal year ending with
such quarter, setting forth in comparative form the consolidated figures for the
corresponding period of the preceding fiscal year,
all in reasonable detail and certified as complete and correct, by an
authorized financial officer of the Borrower; provided that the furnishing by
the Borrower of its Quarterly Report to the Securities and Exchange Commission
on Form 10-Q shall satisfy the requirements of this Section so long as such
reports are no less
46
<PAGE>
detailed or comprehensive than the Form 10-Q for the quarter ended October 30,
1993;
(B) As soon as available and in any event within eighty-four (84) days
after the end of each fiscal year, duplicate copies of:
(i) consolidated balance sheets of the Borrower and its
Restricted Subsidiaries as of the close of the last fiscal quarter of such
year, and
(ii) consolidated statements of net earnings of the Borrower
and its Restricted Subsidiaries for the last fiscal quarter of such year,
all in reasonable detail and certified as complete and correct, by an
authorized financial officer of the Borrower, for the purposes of calculating
Applicable Margins to be in effect during the second fiscal quarter of the
next fiscal year.
(2) Annual Statements. As soon as available and in any event within
ninety (90) days after the close of each fiscal year of the Borrower, duplicate
copies of:
(i) consolidated balance sheets of the Borrower and its
Restricted Subsidiaries as of the close of such fiscal year, and
(ii) consolidated statements of net earnings and
stockholders' equity and cash flows of the Borrower and its Restricted
Subsidiaries for such fiscal year,
in each case setting forth in comparative form the consolidated figures for the
preceding fiscal year, all in reasonable detail and accompanied by a report
thereon of DeLoitte & Touche or such other firm of independent public
accountants of recognized national standing selected by the Borrower to the
effect that the consolidated financial statements have been prepared in
accordance with GAAP and present fairly, in all material respects, the
financial condition of the Borrower and its Restricted Subsidiaries and that the
examination of such accountants in connection with such financial statements
has been made in accordance with generally accepted auditing standards and
accordingly includes such tests of the accounting records and such other
auditing procedures as were considered necessary in the circumstances;
(3) Audit reports. Promptly upon receipt thereof, one copy of each
-------------
interim or special audit made by independent accountants of the books of the
Borrower or any Restricted Subsidiary; provided that the Borrower need not
provide a copy of any so-called "management's letter" unless requested by the
Agent;
47
<PAGE>
(4) SEC and Other reports. Promptly upon their becoming available,
---------------------
one copy of each financial statement, report, notice or proxy statement sent by
the Borrower to stockholders generally and of each regular or periodic report,
and any registration statement or prospectus filed by the Borrower or any
Subsidiary with any securities exchange or the Securities and Exchange
Commission or any successor agency, and copies of any material orders in any
material proceedings to which the Borrower or any of its Subsidiaries is a
party, issued by any government agency, Federal or state, having jurisdiction
over the Borrower or any of its Subsidiaries;
(5) Requested Information. With reasonable promptness, such other data
---------------------
and information as the Agent may reasonably request;
(6) Officer's Certificates. Within the periods provided in paragraphs
----------------------
(1) and (2) above, a certificate of an authorized financial officer of the
Borrower stating that such officer has reviewed the provisions of this Loan
Agreement and setting forth: (i) the information and computations (in
sufficient detail) required in order to establish whether the Borrower was in
compliance with the requirements of Section 7.2, inclusive, at the end of the
period covered by the financial statements then being furnished, and (ii)
whether there existed as of the date of such financial statements and whether,
to the best of such officer's knowledge, there exists on the date of the
certificate or existed at any time during the period covered by such financial
statements any Default or Event of Default and, if any such condition or event
exists on the date of the certificate, specifying the nature and period of
existence thereof and the action the Borrower is taking and proposes to take
with respect thereto; and
(7) Accountants' Certificates. Within the period provided in paragraph
-------------------------
(2) above, a certificate of the accountants who render an opinion with respect
to such financial statements, stating that they have reviewed this Loan
Agreement and stating further whether, in making their audit, such accountants
have become aware of any Event of Default under the terms or provisions of
Section 7.2 of this Loan Agreement insofar as any such terms or provisions
pertain to or involve accounting matters or determinations, and if any such
condition or event then exists, specifying the nature and period of existence
thereof.
(8) Updated Budgets and Forecasts. (i) Upon presentation to the Board
-----------------------------
of Directors of Borrower, but in no event later than the end of the first
quarter of each fiscal year, operating budgets for such fiscal year prepared by
the Borrower including projected balance sheets, income statements and cash flow
statements, together with all assumptions and rationales, all prepared on a
quarterly basis and on a consolidated basis and (to the extent prepared) by
division; (ii) upon approval by senior
48
<PAGE>
management of Borrower as part of Borrower's strategic planning process,
strategic plans of the Borrower or any revisions or updates of the same; (iii)
to the extent not provided in (ii above, upon presentation to the Board of
Directors of Borrower, strategic plans or any revisions or updates of the same.
(9) ERISA Reports. (i) As soon as practical, all reports and forms
-------------
filed with respect to all pension or other employee benefit plans under ERISA,
except as filed in the normal course of business and that would not result in
an adverse action to be taken by the Pension Benefit Guaranty Corporation
("PBGC"), and (ii) as soon as possible, and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event (as such term
is defined in ERISA) with respect to any benefit plan has occurred, a statement
of a financial officer of the Borrower setting forth details as to such
Reportable Event and the action which the Borrower proposes to take with
respect thereto, together with a copy of the notice, if any, of such Reportable
Event given to the PBGC.
Without limiting the foregoing, the Borrower will permit the Agent to
visit and inspect, in the presence of a Borrower' representative, any of the
properties of the Borrower or any Subsidiary, to examine all their books of
account, records, reports and other papers, to make copies and extracts
therefrom, and to discuss their respective affairs, finances and accounts with
their respective officers, employees, and independent public accountants (and by
this provision the Borrower authorizes said accountants to discuss with the
Agent the finances and affairs of the Borrower and its Subsidiaries) all at
such reasonable times and as often as may be reasonably requested. The Borrower
shall not be required to pay or reimburse the Agent for expenses which the Agent
may incur in connection with any such visitation or inspection.
(f) Notice of Default. The Borrower shall deliver to the Bank,
-----------------
promptly upon the occurrence of any Event of Default, written notice setting
forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto. The Borrower shall also promptly notify
the Agent of any default under the terms of any other agreement to which the
Borrower or any Corporate Guarantor is a party.
(g) Compliance with Laws. The Borrower will promptly comply and will
--------------------
cause each Subsidiary to comply with all laws, ordinances or governmental rules
and regulations to which it is subject including, without limitation, the
Occupational Safety and Health Act of 1970, ERISA, and all laws, ordinances,
governmental rules and regulations relating to environmental protection in all
applicable jurisdictions, the violation of which would materially and adversely
affect the properties, business, prospects, profits or condition of the Borrower
and its Subsidiaries or would result
49
<PAGE>
in any lien or charge upon any property of the Borrower or any Subsidiary.
(h) Formation or Acquisition of Subsidiaries or Change in Assets. The
------------------------------------------------------------
Borrower shall promptly notify the Agent in writing of the formation or
acquisition of any Subsidiary or affiliate and cause such Subsidiary or
affiliate to become a Corporate Guarantor hereunder and to be subject to all of
the terms and conditions herein required of the Borrower.
(i) Material Adverse Changes. The Borrower shall promptly notify the
------------------------
Agent of (i) any action, litigation, suit or proceeding at law or in equity or
by or before any governmental instrumentality or other agency that, if adversely
determined would materially impair the right of the Borrower or any Subsidiary
to carry on its business substantially as now conducted, or would materially
adversely affect the business, operations, properties, assets or condition,
financial or otherwise, of the Borrower or its Subsidiaries; and (ii) any other
matter, investigation, audit, business development or change in financial
condition, which has resulted in, or which the Borrower or its Subsidiaries
reasonably believes will result in, a materially adverse change in the
financial condition, operations or business of the Borrower or its Subsidiaries.
(j) Hazardous Materials. (A) In the event of any notice or citation to
-------------------
the Borrower or any of its Subsidiaries by the United States Environmental
Protection Agency or any other governmental agency of any violation or
deficiency relating to Hazardous Materials, the Borrower shall promptly notify
the Agent of such notice or citation and, together with such notice, shall
furnish to the Agent a certificate (i) stating the steps to be taken to cure
such violation or deficiency and the amount of time required to effect such cure
and (ii) certifying that related remediation costs will not adversely affect the
Borrower's financial condition. The Borrower shall thereafter proceed with due
diligence to cure within the stated time period.
(B) The Borrower shall, and shall cause it Subsidiaries to
defend, indemnify and hold harmless the Agent and the Banks, their employees,
agents, officers and directors, from and against any claims, demands, penalties,
fines, liabilities, settlements, damages, costs, or expenses of whatever kind or
nature, known or unknown, contingent or otherwise, arising out of or in any way
related to, (i) the presence, disposal, release, or threatened release of any
Hazardous Materials which are on, from or affecting the soil, water, vegetation,
buildings, personal property, persons, animals, or otherwise (ii) any personal
injury (including wrongful death) or property damage (real or personal arising
out of or related to such Hazardous Materials); (iii) any lawsuit brought or
threatened, settlement reached, or government order relating to such Hazardous
Materials, and/or (iv) any
50
<PAGE>
violation of laws, orders, regulations, requirements or demands of government
authorities, or any policies or requirements of the Banks, which are based upon
or in any way related to such Hazardous Materials including, without limitation,
attorney and consultant fees, investigation and laboratory fees, court costs,
and litigation expenses. Nothing in this paragraph is intended to prevent the
Borrower from possessing or using Hazardous Materials so long as such possession
or use is in strict accordance with all applicable federal, state, and local
laws, ordinances, rules, regulations and policies.
7.2 Negative Covenants. The Borrower agrees that during the term of this
------------------
Agreement it shall not, without the prior written consent of the Required Banks,
do any of the following:
(a) Funded Debt. (1) The Borrower will not and will not permit any
-----------
Restricted Subsidiary to create, assume or incur or in any manner become liable
after the date hereof in respect of any Funded Debt, unless at the time of
issuance thereof and after giving effect thereto and to the application of the
proceeds thereof, the Borrower would be able to incur at least One Dollar
($1.00) of additional Funded Debt under subparagraphs (2) and (3) of this
Section 7.2(a).
(2) The Borrower will not permit Consolidated Funded Debt to
exceed an amount equal to fifty-five percent (55%) of Consolidated Total
Capitalization at any time.
(3) The Borrower will not permit the amount of Consolidated
Funded Debt secured by liens described in Section 7.2(b)(7) and (8) to exceed
an amount equal to twenty percent (20%) of Consolidated Total Capitalization;
provided that for purposes of this Section 7.2(a), Consolidated Funded Debt
shall not include Funded Debt of Subsidiaries owing to or held by the Borrower
or any Wholly-owned Subsidiary; and provided further that Capitalized Leases
shall be excluded in calculating the amount of Consolidated Funded Debt
permitted to be incurred under the provisions of Section 7.2 (a)(3).
(b) Limitation on Liens. The Borrower will not, and will not permit
-------------------
any Restricted Subsidiary to, create or incur,or suffer to be incurred or to
exist, any mortgage, pledge, security interest, encumbrance, lien or charge of
any kind on its or their property or assets, whether now owned or hereafter
acquired, or upon any income or profits therefrom, or transfer any property for
the purpose of subjecting the same to the payment of obligations in priority to
the payment of its or their general creditors, or acquire or agree to acquire,
or permit any Restricted Subsidiary to acquire, any property or assets under
conditional sales agreements or other title retention devices without making or
causing to be made provision whereby the Revolving Credit Notes will be secured,
<PAGE>
to the full extent permitted by applicable law, equally and ratably with all
other obligations secured thereby, except:
(1) liens for property taxes and assessments or governmental
charges or levies and liens securing claims or demands of mechanics and
suppliers, provided that payment thereof is not at the time required by Section
7.1(d);
(2) liens of or resulting from any judgment or award, the time
for the appeal or petition for rehearing of which shall not have expired, or in
respect of which the Borrower or a Restricted Subsidiary shall at any time in
good faith be prosecuting an appeal or proceeding for a review and in respect
of which a stay of execution pending such appeal or proceeding for review shall
have been secured;
(3) liens, charges, encumbrances and priority claims incidental
to the conduct of business or the ownership of properties and assets (including
warehousemen's and attorneys' liens and statutory landlords' liens) and
deposits, pledges or liens to secure the performance of bids, tenders or trade
contracts, or to secure statutory obligations, surety or appeal bonds or other
liens of like general nature incurred in the ordinary course of business and not
in connection with the borrowing of money, provided in each case, the obligation
secured is not overdue or, if overdue is being contested in good faith by
appropriate actions or proceedings;
(4) minor survey exceptions or minor encumbrances, easements or
reservations, or rights of others for rights-of-way, utilities and other similar
purposes, or zoning or other restrictions as to the use of real properties,
which are necessary for the conduct of the activities of the Borrower and its
Restricted Subsidiaries or which customarily exist on properties of corporations
engaged in similar activities and similarly situated and which do not in any
event materially impair their use in the operation of the business of the
Borrower and its Restricted Subsidiaries;
(5) mortgages, liens or security interests securing Indebtedness
of a Restricted Subsidiary to the Borrower or to another Restricted Subsidiary
to the Borrower or to another Restricted Subsidiary;
(6) mortgages, liens, conditional sale contracts, security
interests or other arrangements for the retention of title (including
Capitalized Leases) existing as of the date hereof and set forth on Schedule C
annexed securing Funded Debt of the Borrower or any Restricted Subsidiary, which
mortgages, liens, conditional sale contracts, security interests, or other
arrangements may not be modified, amended or extended without first obtaining
the prior written approval of the Required Banks, provided however that such
approval shall not be required if
<PAGE>
(i) the lien or charge is attached and shall continue to attach solely to fixed
assets acquired or purchased with funds secured by such lien or charge, (ii)
such modification, amendment or extension shall not cause the aggregate amount
remaining unpaid on all Indebtedness secured by liens on such fixed assets to
exceed an amount equal to 100% of the lesser of the total purchase price or fair
market value at the time of acquisition of such fixed assets (as determined in
good faith by the Board of Directors of the Borrower), and (iii) after giving
effect to such modification, amendment or extension, the Borrower would be
permitted to incur at least One Dollar ($1.00) of additional Funded Debt under
the provisions of Section 7.2(a);
(7) mortgages, liens or security interests securing Indebtedness
for borrowed money issued by or on behalf of any State or political subdivision
of any State the debt service on which is payable directly or indirectly by the
Borrower or any Restricted Subsidiary; and
(8) mortgages, conditional sale contracts, security interests or
other arrangements for the retention of title (including Capitalized Leases)
incurred after the date hereof given to secure the payment of the purchase price
incurred in connection with the acquisition of fixed assets useful and intended
to be used in carrying on the business of the Borrower or a Restricted
Subsidiary, including liens existing on such fixed assets at the time of
acquisition thereof or at the time of acquisition by the Borrower or a
Restricted Subsidiary of any business entity then owning such fixed assets,
whether or not such existing liens were given to secure the payment of the
purchase price of the fixed assets to which they attach so long as they were not
incurred extended or renewed in contemplation of such acquisition, provided that
(i) the lien or charge shall attach solely to the property acquired or
purchased, (ii) at the time of acquisition of such fixed assets, the aggregate
amount remaining or not assumed by the Borrower or a Restricted Subsidiary shall
not exceed an amount equal to one hundred percent (100%) of the lesser of the
total purchase price or fair market value at the time of acquisition of such
fixed assets (as determined in good faith by the Board of Directors of the
Borrower), and (iii) all such Indebtedness shall have been incurred within the
applicable limitations provided in Section 7.2(a).
(c) Guaranties. The Borrower will not and will permit any Restricted
----------
Subsidiary to become or be liable in respect of any Guaranty except:
(1) advances to and Guaranties of loans to employees of the
Borrower and its Subsidiaries in respect of travel and moving expenses and to
facilitate the purchase of automobiles by such employees for use in the business
of the Borrower and its Subsidiaries in an aggregate amount not exceeding Six
Hundred Fifty
53
<PAGE>
Thousand Dollars ($650,000) at any time outstanding, which aggregate amount
shall include all such advances and guaranties which are deemed to be Restricted
Investments;
(2) Guaranties by the Borrower of obligations of Restricted
Subsidiaries in respect of Long-Term Leases of such Restricted Subsidiaries;
(3) Guaranties of the Borrower in addition to those permitted by
the foregoing paragraphs (a) and (b); provided that such Guaranties are limited
in amount to a stated maximum dollar exposure and included in Current Debt or
Consolidated Funded Debt and
(4) The Corporate Guaranties.
(d) Mergers, Consolidations, Sales of Assets, Sale/Leasebacks.
---------------------------------------------------------
(1) The Borrower will not, and will not permit any Restricted
Subsidiary to (i) consolidate with or be a party to a merger with any other
corporation or (ii) sell, lease or otherwise dispose of (including by way of any
Sale/Leaseback Transaction) all or any substantial part [as defined in
subparagraph (5) of this Section 7.2(d)] of the assets of the Borrower and its
Restricted Subsidiaries, (iii) acquire or be acquired by any other Person or
(iv) acquire assets (other than inventory) of any other Person outside the
ordinary course of business; provided, however, that:
(A) any Restricted Subsidiary may merge or consolidate with or
into the Borrower or any own Wholly-owned Restricted Subsidiary so long as in
any merger or consolidation involving the Borrower, the Borrower shall be the
surviving or continuing corporation;
(B) the Borrower may consolidate or merge with any other
corporation if the Borrower shall be the surviving or continuing corporation
and, in any case, at the time of such consolidation or merger and after giving
effect thereto (i) no Default or Event of Default shall have occurred and be
continuing and (ii) the Borrower would be permitted to incur at least One
Dollar ($1.00) of additional Funded Debt under the provisions of Section 7.2(a);
(C) any Restricted Subsidiary may sell, lease or otherwise
dispose of all or any substantial part of its assets to the Borrower or any
Wholly-owned Restricted Subsidiary;
(D) the Borrower may acquire another Person or assets of another
Person for an aggregate purchase price (including inventory) for such
acquisition of $5,000,000 or less, provided that (i) at the time of such
acquisition and after giving effect
54
<PAGE>
thereto no Default or Event of Default shall have occurred and be continuing,
(ii) the Borrower would be permitted to incur at least One Dollar ($1.00) of
additional Funded Debt under the provisions of Section 7.2(a), and (iii) prior
to any such acquisition in excess of $500,000 but less than $5,000,000, the
Borrower delivers to the Agent a certificate certifying as to compliance with
the foregoing clauses (i) and (ii); and
(E) the Borrower may acquire another Person or assets of another
Person for an aggregate purchase price (including inventory) for such
acquisition of greater than $5,000,000, but not more than $20,000,000 provided
that (i) at the time of such acquisition and after giving effect thereto no
Default or Event of Default shall have occurred and be continuing, (ii) the
Borrower would be permitted to incur at least One Dollar ($1.00) of additional
Funded Debt under the provisions of Section 7.2(a), and (iii) prior to any such
acquisition, the Borrower delivers to the Agent (x) a certificate certifying as
to compliance with the foregoing clauses (i) and (ii) and (y) such other
information as Agent may request regarding the subject acquisition and
compliance with this Loan Agreement;
For the purposes of the foregoing subparagraphs (D) and (E), "aggregate purchase
price" shall include all consideration paid or to be paid by the Borrower or any
Restricted Subsidiary to the seller in such transaction or to any affiliate of
such seller in connection with or related to such acquisition, whether the
obligation to make such payment is fixed or contingent, or direct or indirect.
(2) The Borrower will not permit any Restricted Subsidiary to issue or
sell any shares of stock of any class (including as "stock" for the purposes of
this Section 7.2(d), and warrants, rights or options to purchase or otherwise
acquire stock or other Securities exchangeable for or convertible into stock) of
such Restricted Subsidiary to any Person other than the Borrower or a
Wholly-owned Restricted Subsidiary, except for the purpose of qualifying
directors, or except in satisfaction of the validly pre-existing preemptive
rights of minority shareholders in connection with the simultaneous issuance of
stock to the Borrower and/or a Restricted Subsidiary whereby the Borrower
and/or such Restricted Subsidiary maintain their same proportionate interest in
such Restricted Subsidiary.
(3) The Borrower will not sell, transfer or otherwise dispose of any
shares of stock in any Restricted Subsidiary (except to qualify directors) or
any Indebtedness of any Restricted Subsidiary, and will not permit any
Restricted Subsidiary to sell, transfer or otherwise dispose of (except to the
Borrower or a Wholly-owned Restricted Subsidiary) any shares of stock or any
Indebtedness of any other Restricted Subsidiary, unless:
55
<PAGE>
(A) simultaneously with such sale, transfer or disposition, all
shares of stock of such Restricted Subsidiary at the time owned by the Borrower
and by every other Subsidiary shall be sold, transferred or disposed of as an
entirety;
(B) the Board of Directors of the Borrower shall have determined,
as evidenced by a resolution thereof, that the retention of such stock or
Indebtedness is no longer in the best interests of the Borrower;
(C) such stock or Indebtedness is sold, transferred or otherwise
disposed of to a Person, for a consideration and on terms reasonably deemed by
the Board of Directors to be adequate and satisfactory;
(D) the Restricted Subsidiary being disposed of shall not have
any continuing investment in the Borrower or any other Subsidiary not being
simultaneously disposed of; and
(E) such sale or other disposition does not involve a substantial
part (as hereinafter defined) of the assets of the Borrower and its Restricted
Subsidiaries.
(4) The Borrower will not, nor permit any Subsidiary to sell,
transfer, discount or otherwise dispose of notes, accounts receivable or other
rights to receive payment with or without recourse, except for collection in the
ordinary course of business.
(5) As used in Section 7.2(d)(1), (2) and (3), sale, lease or other
disposition of assets shall be deemed to be a "substantial part" of the assets
of the Borrower and its Restricted Subsidiaries only if (i) the book value of
such assets, when added to the book value of all other assets sold, leased or
otherwise disposed of by the Borrower and its Restricted Subsidiaries during the
same fiscal year, exceeds ten percent (10%) of Consolidated Total Assets as at
the last day of the preceding fiscal year, or (ii) the operation of the assets
sold, leased or disposed of produced, during the fiscal year of the Borrower
immediately preceding such sale, lease or other disposition, more than ten
percent (10%) of Operating Income in the fiscal year preceding the date of
disposition.
(6) Notwithstanding the restrictions contained in subparagraph (2),
(3) or (4) of Section 7.2(d), the Borrower shall not be prohibited from creating
one or more Subsidiaries to carry on the business of the Borrower's The Paper
Cutter or Wheels Discount Auto Supply divisions, or both, and thereafter (i)
selling, transferring or disposing of a portion of such Subsidiaries by
disposing of a portion of the assets or the capital stock of such Subsidiaries
and (ii) permitting such Subsidiaries to issue or sell any shares of their
capital stock of any class;
56
<PAGE>
provided that (i) such corporation remains a Subsidiary, (ii) the book value of
any such assets or capital stock so sold, transferred or disposed of shall not
exceed fifteen percent (15%) of Consolidated Total Assets during any period of
twelve (12) consecutive months, (iii) the operation of the assets so sold,
transferred or disposed of shall not have produced, during the fiscal year of
the Borrower immediately preceding such sale, lease or other disposition, more
than twenty percent (20%) of Operating Income; (iv) such sale or disposition
shall not create a breach default or Event of Default under any credit
agreement, loan agreement or other terms of Indebtedness with any other lender;
and (v) such Subsidiary is a Corporate Guarantor and has delivered to the Bank a
Corporate Guaranty.
For purposes of computations under this Section 7.2(d), there
shall be excluded from the computation of sales, leases or other dispositions of
assets (i) sale of products in the ordinary course of business and (ii) sales,
leases, transfers or other dispositions of assets generating net proceeds which
are reinvested in the Current Business of the Borrower and its Restricted
Subsidiaries within six months from the date such proceeds are received by the
Borrower or a Restricted Subsidiary.
(e) Dividends, Stock Purchases; Restricted Investments. The Borrower
--------------------------------------------------
will not, except as hereinafter provided:
(1) declare or pay any dividends, either in cash or property,
on any shares of its capital stock of any class (except dividends or other
distributions payable solely in shares of capital stock of the Borrower); or
(2) directly or indirectly, or through any Subsidiary, purchase,
redeem or retire any shares of its capital stock of any class or any warrants,
rights or options to purchase or acquire any shares of its capital stock (other
than in exchange for or out of the net cash proceeds to the Borrower from the
substantially concurrent issue or sale of other shares of capital stock of the
Borrower or warrants, rights or options to purchase or acquire any shares of its
capital stock); or
(3) make any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock; or
(4) make any Restricted Investment;
(such declarations or payments of dividends, purchases, redemptions or
retirements of capital stock and warrants, rights or options, Restricted
Investments and all such other distributions being herein collectively called
"Restricted Payments"), if after giving effect thereto and, in the case of any
Restricted Investment, prior to the liquidation thereof, the aggregate amount of
Restricted
57
<PAGE>
Payments made during the period from and after January 29, 1994 to and including
the date of the making of the Restricted Payment in question, would exceed the
sum of (i) Nineteen Million Five Hundred Sixty-Six Thousand Six Hundred Five
Dollars ($19,566,605) plus (ii) seventy-five percent (75%) of Consolidated Net
Income for such period, computed on a cumulative basis for said entire period
(or if such Consolidated Net Income is a deficit figure, then minus 100% of such
deficit), plus (iii) the net proceeds received by the Borrower from the sale of
Common Stock; provided, that nothing in this Section shall prohibit the
redemption, retirement, purchase or other acquisition by the Borrower of not
exceeding (y) 221,612 shares of the Borrower's Common Stock plus (z) Common
Stock the aggregate purchase price of which does not exceed $15,000,000, and no
such purchase under (y) or (z) shall constitute a Restricted Payment for
purposes of this Section 7.2(e).
Any Person which becomes a Restricted Subsidiary after the Closing Date
shall be deemed to have made, at the time that it becomes a Restricted
Subsidiary, all Restricted Investments of such Person existing immediately after
it becomes a Restricted Subsidiary. In the event any Restricted Subsidiary
ceases to be a Restricted Subsidiary subsequent to the Closing Date, all
investments of the Borrower and its Restricted Subsidiaries in such Person shall
be deemed to have been made at the time such Person ceased to be a Restricted
Subsidiary.
The Borrower will not declare any dividend which constitutes a Restricted
Payment payable more than one hundred five (105) days after the date of
declaration thereof.
For the purposes of this Section 7.2(e) the amount of any Restricted
Payment declared, paid or distributed in property of the Borrower shall be
deemed to be the greater of the book value or fair market value (as determined
in good faith by the Board of Directors of the Borrower) of such property at the
time of the making of the Restricted Payment in question.
(f) Use of Proceeds. The Borrower will not permit any of the proceeds
---------------
of the Revolving Credit to be used for purposes which might constitute
violations of Regulation U or Regulation X.
(g) Ratio of Consolidated Current Assets to Consolidated Current
------------------------------------------------------------
Liabilities. The Borrower will not permit the ratio of Consolidated Current
- -----------
Assets to Consolidated Current Liabilities to be less than 1.3:1.0 at the end of
any month.
(h) Fixed Charge Coverage. The Borrower will not permit the Net Income
---------------------
Available for Fixed Charges for the four (4) immediately preceding fiscal
quarters to be less than one hundred fifty percent (150%) of the Fixed Charges
for such four (4) fiscal quarters, determined at the last day of each quarterly
fiscal period in each fiscal year.
58
<PAGE>
(i) Fiscal Year. The Borrower will not change its fiscal year end date
-----------
from the last Saturday in January without the prior written consent of the
Required Banks.
(j) Conduct of Business. Neither the Borrower nor any Restricted
-------------------
Subsidiary will engage in any business if, as a result, the general nature of
the business taken on a consolidated basis, which would then be engaged in by
the Borrower and its Restricted Subsidiaries would be substantially changed from
their Current Business.
(k) Transfer to or Acquisition of Assets. The Borrower shall not (i)
------------------------------------
transfer any of its assets to, or permit any Corporate Guarantor to transfer
any of its assets to any Subsidiary of the Borrower or any Corporate Guarantor
or (ii) permit any Subsidiary to acquire any assets unless such Subsidiary is
or shall first become a Corporate Guarantor by execution of the guaranty
substantially in the form of Exhibit "D".
59
<PAGE>
ARTICLE VIII
DEFAULT
8.1 Event of Default. If one or more of the following events shall have
----------------
occurred:
(a) default shall occur in the payment of interest on the Revolving
Credit Notes within five (5) days after the same shall have become due; or
(b) default shall occur in the making of any payment of the principal
of the Revolving Credit Notes at the expressed or an accelerated maturity date
or at any date fixed for such payment; or
(c) default shall be made in the payment of the principal of or
interest on any Indebtedness of the Borrower or any Restricted Subsidiary for
borrowed money having an aggregate principal amount of $500,000 or more, as and
when the same shall become due and payable by the lapse of time, by declaration,
by call for redemption or otherwise, and such default shall continue beyond the
period of grace, if any, allowed with respect thereto and shall not have been
waived pursuant thereto; or
(d) default or the happening of any event shall occur under any
indenture, agreement, or other instrument under which any Indebtedness of the
Borrower or any Restricted Subsidiary for borrowed money having an aggregate
principal amount of $500,000 or more may be issued and such default or event
shall continue for a period of time sufficient to permit the acceleration of the
maturity of any Indebtedness of the Borrower or any Restricted Subsidiary
outstanding thereunder and shall not have been waived pursuant thereto; or
(e) default shall occur in the observance or performance of any
covenant or agreement contained in Section 7.1(c) Section 7.2(a) and in Section
7.2(g) and Section 7.2(h) hereof; or
(f) default shall occur in the observance or performance of any
covenant or agreement contained in Section 7.1(e) hereto which is not remedied
within ten (10) days after the occurrence of such default; or
(g) default shall occur in the observance or performance of any other
provision of this Loan Agreement which is not remedied within 30 days after the
occurrence of such default; or
(h) any representation or warranty made by the Borrower herein, or
made by the Borrower in any statement or certificate furnished by the Borrower
in connection with the consummation of the issuance and delivery of this Loan
Agreement or the Revolving
60
<PAGE>
Credit Notes or furnished by the Borrower pursuant hereto, is untrue in any
material respect as of the date of the issuance or making thereof; or
(i) final judgment or judgments for the payment of money aggregating
in excess of $400,000 is or are outstanding against the Borrower or any
Restricted Subsidiary or against any property or assets of either and any one of
such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or
otherwise for a period of 60 days from the date of its entry; or
(j) the Borrower or any Restricted Subsidiary becomes insolvent or
bankrupt, is generally not paying its debts as they become due or makes an
assignment for the benefit of creditors, or the Borrower or any Restricted
Subsidiary applies for or consents to the appointment of a custodian, trustee or
receiver for the Borrower or such Restricted Subsidiary or for the major part of
the property of either; or
(k) a custodian, trustee or receiver is appointed for the Borrower or
any Restricted Subsidiary or for the major part of the property of either and is
not discharged within 30 days after such appointment; or
(1) bankruptcy, reorganization, arrangement or insolvency proceedings,
or other proceedings for relief under any bankruptcy or similar law or laws for
the relief of debtors, are instituted by or against the Borrower or any
Restricted Subsidiary and, if instituted against the Borrower or any Restricted
Subsidiary, are consented to or are not dismissed within 60 days after such
institution; or
(m) (i) a Reportable Event shall have occurred under ERISA that in
the opinion of the Agent may have a material adverse effect on the operations,
properties or condition (financial or otherwise) of the Borrower and/or any
of the Corporate Guarantors or that is likely to lead to a termination of an
Employee Benefit Plan (as such term is defined in ERISA) provided that the
Borrower may cure such default by delivering to the Agent within fifteen (15)
days following the occurrence of such default a certificate (a) stating the
steps to be taken to cure such Reportable Event and (b) certifying as to the
plan of remediation the cost thereof and time to complete and if accepted by the
Agent the Borrower must proceed with due diligence to cure within the time
period set forth in the certificate or (ii) appointment of a trustee shall
occur with respect to any Employee Benefit Plan as a result of the occurrence
of a Reportable Event or Prohibited Transaction (as such term is defined in
ERISA); or
(n) if any breach, Default or Event of Default occurs under any other
Indebtedness or agreement with a Bank and such default shall continue beyond
the period of grace, if any, allowed
61
<PAGE>
with respect thereto and shall not have been waived pursuant thereto; or
(o) default shall occur in the observance or performance of any
covenant or agreement on the part of a Corporate Guarantor to be observed or
performed under the Corporate Guaranties;
then the Agent may or shall (upon the written request of the Required Banks), by
written notice to the Borrower (except that Events of Default (j), (k) and (l)
shall require no notice), terminate the Total Commitment, terminate or declare
the obligations hereunder and under the Revolving Credit Notes, together with
accrued interest, and any other amount then owing to the Banks hereunder to be
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived by the Borrower. Upon the
occurrence of any Event of Default under subsection (j), (k) or (l) above, all
obligations of the Borrower hereunder and under the Revolving Credit Notes shall
become automatically due and payable without notice or demand.
This Section is subject to the condition that if the principal and accrued
interest have been declared immediately due and payable by reason of any
Event of Default (i) one hundred percent (100%) of the Banks, in the case of any
Event of Default described in paragraphs (a), (b), (j), (k), and (l) of this
Section or (ii) the Required Banks in the case of any Event of Default not
included in the preceding clause (i), may, by written instrument filed with the
Borrower, rescind and annul such declaration and the consequence thereof,
provided that at the time such declaration is annulled and rescinded:
(a) no judgment or decree has been entered for the payment of any
monies due pursuant to the Revolving Credit Notes on this Loan Agreement;
(b) all arrears of interest upon the Revolving Credit Notes and all
other sums payable under the Revolving Credit Notes and under the Loan Agreement
(except any principal or interest on the Revolving Credit Notes which has become
due and payable solely by reason of such declaration under this Section 8.1)
shall have been paid in full; and
(c) each and every other breach, Default or Event of Default shall
have been cured or waived and provided further, that no such rescission and
annulment shall extend to or affect any subsequent breach, Default or Event of
Default or impair any right consequent thereto.
62
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1 Notices. All notices, requests and other communications to any party
-------
hereunder shall be in writing and shall be given such party at its address set
forth below:
if to the Borrower:
Fay's Incorporated
7245 Henry Clay Boulevard
Liverpool, New York 13088
Attention: General Counsel
if to Chemical:
Chemical Bank
Bridgewater Place
500 Plum Street
Syracuse, New York 13204
Attention: Credit Deputy
if to the Agent:
Chemical Bank
Bridgewater Place
500 Plum Street
Syracuse, New York 13204
Attention: Credit Deputy
or such other address as such party may hereafter specify for the purpose by
notice to the other parties hereto.
9.2 No Waivers. No failure or delay by a Bank or the Agent in exercising
----------
any right, power or privilege hereunder or under the Revolving Credit Notes or
any other Loan Documents or other relate document shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
9.3 Survival. Notwithstanding any investigation made by a Bank, all
--------
representations and warranties made by the Borrower herein or in any document
delivered in connection herewith shall survive the execution of this Agreement
and the making of the loan hereunder.
63
<PAGE>
9.4 Amendments and Waivers. Except as may be otherwise expressly provided
----------------------
herein, any provisions of this Agreement may be amended or waived if, but only
if, such amendment or waiver is in writing and is signed by the Borrower and the
Banks.
9.5 Successors and Assigns. The provisions of this Agreement shall be
----------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Borrower may not assign or otherwise
transfer any of its rights under this Agreement without the consent of the
Banks.
9.6 Governing Law. This Loan Agreement and all related documents shall be
-------------
construed in accordance with and governed by the laws of the State of New York
without regard to its principles conflicts of law.
9.7 Headings and Table of Contents. The Table of Contents and the
------------------------------
descriptive headings of the several Articles and Sections of this Loan Agreement
are inserted for convenience only, do not constitute a part of this Loan
Agreement, and shall not affect in any way the meaning or interpretation of this
Loan Agreement.
9.8 Severability. In the event one or more of the provisions contained in
------------
this Loan Agreement or related documents shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provisions.
9.9 Submission to Jurisdiction. The Borrower hereby irrevocably submits to
--------------------------
the nonexclusive jurisdiction of the Supreme Court of the State of New York,
Onondaga County, and to the nonexclusive jurisdiction of the United States
District Court for the Northern District of New York, for the purposes of any
suit, action or other proceeding brought by a Bank or its successors or assigns
arising out of any default in payment of any amount hereunder and hereby waives,
and agrees not to assert by way of motion, as a defense or otherwise, in any
such suit, action of proceeding, any claim that the Borrower is not personally
subject to the jurisdiction of the above-named courts, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Loan Agreement may not be enforced
in or by such courts. Nothing contained in this Section shall be deemed to
prohibit or in any manner limit the right of a Bank, its successors or assigns,
to use or take other action in any tribunal, wherever located, having
jurisdiction over the Borrower, the Corporate Guarantors, or any of their assets
or properties.
64
<PAGE>
9.10 Waiver of Trial by Jury. THE BORROWER AND THE BANK WAIVE TRIAL BY JURY
-----------------------
IN ANY LITIGATION OR PROCEEDING IN CONNECTION WITH OR ARISING OUT OF THE
TRANSACTION CONTEMPLATED HEREUNDER.
9.11 Reinstatement; Certain Payments. If claim is ever mad upon the Agent
-------------------------------
or the Banks for repayment or recovery of any amount or amounts received by the
Agent or the Banks in payment or on account of any of the obligations under this
Loan Agreement, the Agent or the Banks shall give prompt notice of such claim to
the Borrower, and if the Agent or the Banks repays all or part of said amount by
reason of (i) any judgment, decree or order of any court or administrative body
having jurisdiction over the Agent or the Banks or any of its property, or (ii)
any settlement or compromise of any such claim effected by the Agent or the
Banks with any such claimant, then and in such event the Borrower agrees that
any such judgment, decree, order, settlement or compromise shall be binding upon
the Borrower notwithstanding the cancellation of the Note or other instrument
evidencing the obligations under this Loan Agreement or the termination of this
Loan Agreement, and the Borrower shall be and remain liable to the Banks
hereunder for the amount so repaid or recovered to the same extent as if such
amount had never originally been received by the Banks.
9.12 Right to Setoff. If an Event of Default shall have occurred and be
---------------
continuing, each Bank is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held, and
other indebtedness at any time owing, by such Bank to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now and hereafter existing under this Loan Agreement and the Revolving Credit
Note held by such Bank irrespective of whether or not such Bank shall have made
any demand under this Loan Agreement or the Revolving Credit Notes and although
such obligations may be unmatured. Each Bank agree promptly to notify the Agent
and the Borrower after any such setoff and application made by such Bank, but
the failure to give such notice shall not affect the validity of such setoff and
application. The rights of each Bank under this Section are in addition to other
rights and remedies (including, without limitation, other rights to setoff)
which such Bank may have.
9.13 Taxes.
-----
(a) Any and all payments by Borrower hereunder shall be made, in
accordance with Section 3.10, free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges or
withholdings in any such case imposed by the United States or any political
subdivision thereof excluding:
65
<PAGE>
(i) In the case of the Agent and each Bank, taxes imposed or
based on its net income, and franchise or capital taxes imposed on it, (A) if
the Agent or such Bank is organized under the laws of the United States or any
political subdivision thereof and (B) if the Agent or such Bank is not organized
under the laws of the United States or any political subdivision thereof, and it
principal office or Applicable Lending Office is located in the United States,
and in the case of both (A) and (B), withholding taxes payable with respect to
payments to the Agent or such Bank at its principal office or Applicable Lending
Office under laws (including, without limitation, any treaty, ruling,
determination or regulation) in effect on the date hereof, but not any increase
in withholding tax resulting from any subsequent change in such laws (other
than withholding with respect to taxes imposed or based on its net income or
with respect to franchise or capital taxes), and
(ii) taxes (including withholding taxes) imposed by reason of the
failure of the Agent or any Bank, in either case that is organized outside the
United States, to comply with Section 9.13(f) (or the inaccuracy at any time of
the certificates, documents and other evidence delivered thereunder)
(all such nonexcluded taxes, levies, imposts, deductions, charges, withholding
and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Banks or the Agent, (x) the sum payable shall be increased by
the amount necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section) such Lender
or the Agent (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (y) Borrower shall make such
deductions and (z) Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law.
(b) In addition, Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Loan Agreement
(hereinafter referred to as "Other Taxes").
(c) Borrower will indemnify each Bank and the Agent for the full
amount of Taxes or Other Taxes [including, without limitation, any Taxes or
Other Taxes imposed by any jurisdiction (except as specified in clauses (a)(i),
(ii) and (iii)) on amounts payable under this Section] paid by such Bank or the
Agent, as the case may be, and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, but without duplication for
any amounts charged to the Borrower under
66
<PAGE>
Section 3.11 or 3.13 hereof. This indemnification shall be made within thirty
(30) days from the date such Bank or the Agent, as the case may be, makes
written demand therefor. If any Bank receives a refund in respect of any Taxes
or Other Taxes for which such Bank has received payment from Borrower
hereunder, such Bank shall promptly notify Borrower of such refund and such
Bank shall, within thirty (30) days of receipt of a request by Borrower, repay
such refund to Borrower, provided that Borrower, upon the request of such Bank,
agrees to return such refund (plus any penalties, interest or other charges) to
such Bank in the event such Bank is required to repay such refund.
(d) Within thirty (30) days after the date of any payment of Taxes or
Other Taxes withheld by a Borrower in respect of any payment to any Bank, the
Borrower will furnish to the Agent such certificates, receipts and other
documents as may be reasonably required to evidence payment thereof.
(e) Without prejudice to the survival of any other agreement
hereunder, the agreements and obligations contained in this Section shall
survive the payment in full of principal and interest hereunder.
(f) Each Bank that is organized outside of the United States shall
deliver to Borrower on the date hereof (or, in the case of an assignee, on the
date of the assignment) and from time to time as required for renewal under
applicable law duly completed copies of United States Internal Revenue Service
Form 1001 or 4224 (or any successor or additional forms), as appropriate,
indicating in each case that such Bank is entitled to receive payments under
this Loan Agreement without any deduction or withholding of any United States
federal income taxes. The Agent (if the Agent is an entity organized outside the
United States) and each Bank that is organized outside the United States shall
promptly notify Borrower and the Agent of any change in its Applicable
Lending Office and upon written request of Borrower such Bank shall, prior to
the immediately following due date of any payment by Borrower or any Corporate
Guarantor, deliver to Borrower or such Corporate Guarantor, as the case may be
(with copies to the Agent), such certificates, documents or other evidence, as
required by the Code, or treasury regulations issued pursuant thereto, including
without limitation Internal Revenue Service Form 4224, Form 1001 and any other
certificate or statement of exemption required by Treasury Regulation
Section 1.1441-4(a) or Section 1.1441-6(c) or any subsequent version thereof,
properly completed and duly executed by such Bank establishing that such payment
is (i) not subject to withholding under the Code because such payment is
effectively connected with the conduct by such Bank of a trade or business in
the United States or (ii) totally exempt from United States tax under a
provision of an applicable tax treaty. The Borrower shall be entitled to rely
on such forms in its possession until receipt of any revised or successor form
pursuant to this paragraph. If
67
<PAGE>
the Agent or a Bank fails to provide a certificate, document or other evidence
required pursuant to this paragraph, then (i) this Borrower shall be entitled
to deduct or withhold on payments to the Agent or such Bank as a result of
such failure, as required by law, and (ii) the Borrower shall not be required to
make payments of additional amounts with respect to such withheld Taxes pursuant
to clause (x) of Section 9.13(a) hereof to the extent such withholding is
required solely by reason of the failure of the Agent or such Bank to provide
the necessary certificate, document or other evidence.
(g) Each Bank and the Agent shall use reasonable effort to avoid or
minimize any amounts which might otherwise by payable pursuant to this Section
(including seeking refunds of any amount that are reasonably believed not to
have been correctly or legally asserted); provided, however, that such efforts
-------- -------
shall not in the taking of any actions by such Bank or Agent that would result
in any tax, costs or other expense to such Bank or Agent (other than a tax, cost
or other expense for which such Bank or Agent shall have been reimbursed or
indemnified by the Borrower pursuant to this Loan Agreement or otherwise) or any
action which would or might in the reasonable opinion of such Bank or Agent have
an adverse effect upon its business, operations or financial condition or
otherwise be disadvantageous to such Bank or Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
FAY'S INCORPORATED
By: /s/ James F. Poole, Jr.
--------------------------------
James F. Poole, Jr.
Vice President-Finance and
Chief Financial Officer
CHEMICAL BANK
By: /s/ William J. McPhail
--------------------------------
William J. McPhail
Vice President
68
<PAGE>
CHEMICAL BANK, AS AGENT
By: /s/ William J. McPhail
--------------------------------
William J. McPhail
Vice President
69
<PAGE>
Exhibit "A"
ASSIGNMENT AND ACCEPTANCE AGREEMENT
THIS AGREEMENT is by and between ______________________________________
a ___________________________________ banking corporation, having an office at
__________________________________________ _____________ ("Assignor Bank") and
__________________________________, a ___________________ banking corporation,
having an office at ________________________________________________ ("Assignee
Bank").
WHEREAS, Assignor Bank holds an interest in a certain revolving credit
loan to Fay's Incorporated, a New York corporation, having an office at 7245
Henry Clay Boulevard, Liverpool, New York (the "Borrower") the terms of which
are set forth in a certain loan agreement dated as of June 9, 1994 (the "Loan
Agreement") by and among Chemical Bank, as Agent (the "Agent"), Chemical Bank
and the Borrower; and
WHEREAS, Assignor Bank owns _______________________ percent (____ %) of
the Total Commitment and the Loans; and
WHEREAS, Assignor Bank desires to assign and Assignee Bank desires to
accept ________________ percent (____ %) of the Total Commitment and the Loans;
NOW, THEREFORE, in consideration of the premises, and other consideration
the receipt and sufficiency of which is hereby acknowledged, the parties agree
as follows:
1. Definitions. Except as otherwise defined herein, all capitalized terms
-----------
used in this Agreement shall have the same meaning as defined in the Loan
Agreement.
2. Assignment. Assignor Bank hereby assigns to Assignee Bank ___________
----------
percent (____%) interest in the Total Commitment, the Loans and the Corporate
Guaranties and other Loan Documents (the "Assigned Interests"). The assignment
and acceptance hereunder shall be effective on ________________ (the "Effective
Date").
3. Receipt of Loan Documents. Assignee Bank acknowledges and confirms
-------------------------
that it has received a copy of the Loan Agreement and of the Loan Documents,
together with copies of financial statements and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Agreement. Assignee Bank further acknowledges that
it is relying on its own credit analysis and not any such analysis made by
Assignor Bank or the Agent.
<PAGE>
4. Duties Under the Loan Agreement.
-------------------------------
(a) Assignee Bank acknowledges that its rights, duties and obligations
are governed by the Loan Agreement and that by accepting the Assigned Interest
it becomes a party to the Loan Agreement.
(b) Assignee Bank agrees that it will perform all of the obligations
which by the terms of the Loan Agreement are require to be performed by it as
a Bank.
5. Increased Costs to Borrower. Assignee Bank and Assignor Bank
---------------------------
acknowledge and consent that if this assignment of the Assigned Interest shall
cause the Borrower to incur any increased costs in connection with the Loan, the
Borrower may, in accordance with the terms of Section 5.10(c) of the Loan
Agreement, cause the Assignee Bank to assign the Assigned Interest to a
replacement lending institution.
6. Representations and Warranties of Assiqnor Bank.
-----------------------------------------------
(a) Assignor Bank represents and warrants that it is the legal and
beneficial owner of the Assigned Interest free and clear of any adverse claim.
(b) Assignor Bank represents and warrants that it has received the
prior written consent of the Agent to the assignment of the Assigned Interest.
(c) Assignor Bank makes no representation or warranty, and assumes no
responsibility with respect to any statements, warranties or representations
made in, or in connection with this Agreement or the Loan Agreement or the
execution, legality, validity, enforceability, perfection, genuineness,
sufficiency or value of the Loan Agreement, the Loan Documents or any other
instrument or document furnished pursuant thereto.
(d) Assignor Bank makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or any of
the Corporate Guarantors or the performance or observance by the Borrower or
any of the Corporate Guarantors of any of their respective obligations under the
Revolving Credit Notes, Loan Agreement, any of the Loan Documents, or any other
instrument or document furnished pursuant thereto found herewith.
7. Covenants of Assiqnee Bank. Subject to the relevant provisions of
---------------------------
the Loan Agreement, Assignee Bank covenants and agrees that it will,
independently and without reliance upon the Agent, Assignor Bank or any other
Bank and based on such document and information as it shall deem appropriate at
the time, continue
2
<PAGE>
to make its own credit decisions in taking or not taking action under the Loan
Agreement.
8. Authorization of Agent. Assignee Bank appoints and authorizes the
-----------------------
Agent to take such action as the Agent on its behalf and to exercise such powers
under the Loan Agreement as are delegated to the Agent by the terms of the Loan
Agreement, together with such powers as are reasonably incidental thereto.
9. Further Assurance. The Assignee Bank shall execute any documents,
------------------
agreement, certificates or instruments as are required by the Assignor Bank or
the Agent to give effect to the transaction contemplated herein.
10. Successors and Assigns. The provisions of this Agreement shall be
-----------------------
binding upon and inure to the benefit of the part hereto and their respective
successors and assigns.
11. Governing Law. This Agreement and all related documents shall be
--------------
construed in accordance with and governed by the laws of the State of New York
without regard to its principles of conflicts of law.
12. Severability. In the event one or more of the provisions contained
-------------
in this Agreement or related documents shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
effected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provisions.
13. Headings. The headings of the several paragraphs of this Agreement
--------
are inserted for convenience only, do not constitute a part of this Agreement,
and shall not affect in any way the meaning or interpretations of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the Effective Date.
ASSIGNOR BANK:
----------------------------------
By:
----------------------------------
Name:
Title:
3
<PAGE>
ASSIGNEE BANK:
----------------------------------
By:
----------------------------------
Name:
Title:
STATE OF NEW YORK)
SS .:
COUNTY OF _______)
On this ____ day of ________________________, 1994, before me personally
came _______________________________________________, to me known, who, being
by me duly sworn did depose and say that he resides in _____________________,
that he is the _____________________ of ________________________, the banking
institution described in and which executed the above instrument; and that he
signed his name thereto by order of the Board of Directors of said banking
institution.
----------------------------------
Notary Public
STATE OF NEW YORK)
SS .:
COUNTY OF _______)
On this ____ day of ________________________, 1994, before me personally
came ________________________________________________, to me known, who, being
by me duly sworn did depose and say that he resides in ______________________,
that he is the ______________________ of ____________________________, the
banking institution described in and which executed the above instrument; and
that he signed his name thereto by order of the Board of Directors of said
banking institution.
----------------------------------
Notary Public
4
<PAGE>
EXHIBIT "B"
BORROWING CERTIFICATE
I, ____________________________________, am the Chief Financial Officer of
Fay's Incorporated (the "Borrower"). On behalf of the Borrower I hereby certify
as follows:
l. The Borrower requests an advance under the Loan Agreement (as
hereinafter defined) in the principal amount of $ _______________ (the
"Requested Advance").
2. The Representations and Warranties contained in Article VII of that
certain Loan Agreement between the Borrower and Chemical Bank, as Agent and
Chemical Bank dated as of June 9, 1994 (the "Loan Agreement") are true as of
the date hereof and are hereby reaffirmed.
3. Before and after giving effect to the Requested Advance, no Event of
Default has occurred, and no event which, but for the giving of notice or lapse
of time, or both, would constitute such an Event of Default has occurred as of
the date hereof.
4. All defined terms herein shall have the definitions given them in the
Loan Agreement.
Dated: ________________, l99__
Fay's Incorporated
By:
________________________________
Chief Financial Officer
<PAGE>
EXHIBIT "C"
REVOLVING CREDIT NOTE
$25,000,000 June 9, 1994
Syracuse, New York
FOR VALUE RECEIVED, FAY'S INCORPORATED, a New York corporation (the
"Borrower") DOES HEREBY PROMISE to pay to the order of CHEMICAL BANK (the
"Bank") at the office of the Bank at Bridgewater Place, 500 Plum Street,
Syracuse, New York 13204, the principal sum of Twenty-Five Million Dollars
($25,000,000), or so much thereof a may be outstanding, in lawful money of the
United States of America, in immediately available funds on such dates and in
such amounts as provided for in the Loan Agreement (as hereinafter defined) and
to pay interest on the unpaid principal amount hereof, in like money, at such
office, on the dates and at the rates set forth in accordance with Article III
of the Loan Agreement dated as of June 9, 1994 (the "Loan Agreement"), between
the Borrower and the Bank, as Agent and the Bank, and with such late charges,
default interest rates and indemnifications as set forth in the Loan Agreement.
Capitalized Terms not otherwise defined herein shall have the same meaning as
defined in the Loan Agreement.
This Revolving Credit Note is one of the Revolving Credit Notes referred
to in the Loan Agreement, and is subject to principal repayment, prepayment and
acceleration of maturity and all other terms and conditions as set forth in the
Loan Agreement.
All Loans made by the Bank to the Borrower, the Type, Interest Period and
all payments made on account of principal thereof shall be recorded by the Bank,
and prior to any transfer hereof, endorsed by the Bank on the grid attached
hereto and made a part hereof provided that the failure of the Bank to make any
--------
such recordation or endorsement shall not affect the obligations of the Borrower
thereunder or under the Loan Agreement.
This Revolving Credit Note shall be governed by and constructed in
accordance with the laws of the State of New York and any applicable laws of
the United States of America.
FAY'S INCORPORATED
By:
------------------------------------
James F. Poole, Jr.
Vice President-Finance and
Chief Financial Officer
<PAGE>
SCHEDULE TO REVOLVING CREDIT NOTE
- -------------------------------------------------------------------------------
Aggregate
Amount of Amount of Name of
Date Revolving Revolving Principal Person
Credit Loan Interest Credit Loans Principal Balance Making
Made Rate Made Repaid of Note Notation
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT D
- -------------------------------------------------------------------------------
GUARANTY OF PAYMENT
WHEELS DISCOUNT AUTO SUPPLY, INC.
TO
CHEMICAL BANK
Dated: June 9, 1994
- -------------------------------------------------------------------------------
LACY, KATZEN, RYEN & MITTLEMAN
The Granite Building
130 East Main Street
Rochester, New York 14604-1686
Telephone: (716) 454-5650
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
REPRESENTATIONS AND WARRANTIES
Section 1.01 Acknowledgment ......................................... 1
Section 1.02 Subsidiaries ........................................... 2
ARTICLE II
COVENANTS AND AGREEMENTS
Section 2.01 Guaranty of Payment .................................... 2
Section 2.02 Nature of Obligation ................................... 3
Section 2.03 Service of Process ..................................... 5
Section 2.04 Waiver of Notice, Presentments, Etc. ................... 5
Section 2.05 No Right of Subrogation ................................ 5
ARTICLE III
AFFIRMATIVE COVENANTS
Section 3.01 Adoption of Covenants .................................. 6
ARTICLE IV
EVENTS OF DEFAULT
Section 4.01 Events of Default ...................................... 6
Section 4.02 Default Remedies ....................................... 7
Section 4.03 Remedy; Waiver and Notice .............................. 7
ARTICLE V
MISCELLANEOUS
Section 5.01 Survival ............................................... 8
Section 5.02 Successors and Assigns ................................. 8
Section 5.03 Notices ................................................ 8
Section 5.04 Counterparts ........................................... 9
Section 5.05 Amendment .............................................. 9
Section 5.06 Severability ........................................... 9
Section 5.07 Governing Law .......................................... 9
Section 5.08 Undersigned Definition ................................. 9
Section 5.09 No Waivers ............................................. 9
Section 5.10 Headings and Table of Contents ......................... 10
Section 5.11 Waiver of Trial by Jury ................................ 10
<PAGE>
GUARANTY OF PAYMENT
WHEREAS, FAY'S INCORPORATED, a New York corporation having an office and
principal place of business located at 7245 Clay Boulevard, Liverpool, New York
(the "Borrower"), has entered into a certain loan transaction with CHEMICAL
BANK, a New York banking corporation having an office at 90 Presidential Plaza,
Syracuse, New York (the "Bank") wherein the Bank has agreed to make a revolving
credit loan (the "Loan") to the Borrower in accordance with a Twenty-Five
Million Dollar ($25,000,000) revolving credit loan agreement (the "Loan
Agreement") between the Borrower and the Bank dated as of June 9, 1994.
WHEREAS, the Loan will be evidenced by revolving credit note(s) in the
aggregate principal amount of Twenty-Five Million Dollars ($25,000,000) (the
"Note(s)") from the Borrower to the Bank and to other lending participants as
set forth in the Loan Agreement (the "Participants"); and
WHEREAS, it is a condition of the Loan Agreement, and the Bank is
unwilling to extend or continue credit to the Borrower unless the Bank receives
the guaranty of the undersigned covering the Debt (as hereinafter defined) of
the Borrower to the Bank.
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration and in order to induce the Bank from time to time, in its
discretion, to extend or continue credit to the Borrower, the undersigned
covenants and agrees with the Bank as follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 1.01. Acknowledgment. The undersigned has read the
----------------------------
Representations and Warranties (the "Representations") contained in Article VI
of the Loan Agreement and does agree as follows:
(a) The Representations, to the extent the Representations apply to
the undersigned, are incorporated herein by reference to the same extent as if
fully set forth herein.
(b) The Representations are true and accurate as of the date hereof
and shall remain true and accurate for so long as the Debt remains outstanding
and the undersigned has any obligation to the Bank pursuant to this Guaranty.
(c) More than fifty percent (50%) of the undersigned's capital stock
is owned by the Borrower.
<PAGE>
Section 1.02. Subsidiaries. The undersigned has no subsidiaries other
--------------------------
than as listed on Schedule A attached hereto. All subsidiaries of the
undersigned now existing or hereafter acquired or existing shall be deemed
guarantors of payment of the Debt and shall be subject to the terms hereof. Such
subsidiaries shall sign any documentation required by the Bank to evidence such
guaranty.
ARTICLE II
COVENANTS AND AGREEMENTS
------------------------
Section 2.01. Guaranty of Payment.
----------------------------------
(a) The term "Debt" shall mean (i) the outstanding principal
(including borrowings and reborrowings) of, and any prepayment premium on, the
Note(s); (ii) any interest on the Note(s) when and as the same shall become due;
(iii) all other charges, fees, expenses and amounts incurred or owed in
connection with the Loan, the Note(s), or the Loan Agreement (the "Fees"); and
(iv) performance of all obligations in connection with the Loan and the Note(s)
or contemplated therein or in the Loan Agreement.
(b) The undersigned does hereby guarantee absolutely, irrevocably and
unconditionally, jointly and severally, to the Bank the full and prompt payment
of the Debt and any part thereof when and as the same shall become due, whether
at the stated maturity thereof, by acceleration or otherwise. This is a guaranty
of payment and not of collection and the undersigned waives any right to require
that any action brought against the Borrower or any other person or to require
that resort be had to any security or to any balance of any deposit account or
credit on the books of the Bank in favor of the Borrower or any other person.
(c) The undersigned does hereby irrevocably and unconditionally agree
that upon any default by the Borrower in the payment, when due, of the principal
of, any prepayment premium or interest on the Note(s), the Fees, or of any such
payable by the Borrower under the Loan Agreement or the Note(s) that, subject to
the terms hereof, the undersigned will, upon notice or demand, promptly pay such
amount due. In the event that any new guarantees are executed pursuant to the
Loan Agreement, the obligation of the Guarantor hereunder shall be joint and
several with any new guarantor(s).
(d) All payments of the undersigned shall be paid in immediately
available funds in lawful money of the United States of America.
(e) Each and every default of the payment of the principal of or
prepayment premium or interest on the Note(s) or
2
<PAGE>
the Fees due shall give rise to a separate cause of action hereunder, and
separate suits may be brought by the Bank as each cause of action arises.
(f) The undersigned shall, upon notice or demand, pay to the Bank all
reasonable charges, costs and expenses (including reasonable legal fees)
incurred by the Bank in connection with (i) the transactions contemplated
herein, the Loan Agreement or in the Note(s), (ii) the obtaining of any waivers
or modifications with regard to this Guaranty requested by the Borrower or the
undersigned, or (iii) the protection of any of the Bank's rights or in the
pursuant of any of the Bank's remedies in respect of the Loan Agreement
following a breach, default or Event of Default by Borrower or the
undersigned, the Note(s) or this Guaranty.
(g) As a condition of payment or performance by the undersigned, the Bank
is not required to enforce any remedies against the Borrower or any other party
liable to the Bank on account the Debt; nor is the Bank required to seek to
enforce or resort to any remedies with respect to any security interest, lien or
encumbrance to the Bank by the Borrower or any other party.
(h) The undersigned agrees that if, at any time, all or any part of any
payment previously applied by the Bank to any of the Debt must be returned by
the Bank for any reason, whether by court order, administrative order, or
settlement, the undersigned remains liable for the full amount returned as if
such amount had never been received by the Bank, notwithstanding any termination
this Guaranty or the cancellation of the Note(s) or other agreement evidencing
the obligation of the Borrower.
Section 2.02. Nature of Obligation
----------------------------------
(a) The obligation of the undersigned under the Guaranty shall be
absolute and unconditional and shall remain in full force and effect until the
entire Debt shall have been paid provided for. This Guaranty is a continuing
guaranty and shall remain in full force and effect irrespective of any
interruptions in the business relations of the Borrower with the Bank. The
undersigned acknowledges that the Bank may sell and assign interests in the
Loan and the Note(s) to Participants in accordance with Article V of the Loan
Agreement. The obligations of the undersigned under this Guaranty shall inure
to the benefit of each and every holder of such interests, including the Bank
and each of the Banks (as such term is defined in the Loan Agreement).
(b) Such obligations shall not be affected, modified or impaired by
any state of facts or the happening from time to time of any event, including
without limitation, any of the following, whether or not with notice to or the
consent of the undersigned:
3
<PAGE>
(i) The invalidity, irregularity, illegality or unenforceability of, or
any defects in, (1) the Loan Agreement, (2) the Note(s), or (3) this Guaranty;
(ii) The waiver, surrender, compromise, settlement, release or
termination of any or all of the obligations, covenants, or agreements of (1)
the Borrower under the Loan Agreement or to the Note(s) or (2) the undersigned
under this Guaranty (except payment in full of all obligations hereunder);
(iii) The release, sale, exchange, surrender or other change
in any security for the payment of the Note(s);
(iv) The change, alteration, renewal, extension, or continuation of
any obligation of the Borrower or any other party;
(v) The extension of the time for payment of any principal of or
prepayment premium or interest on the Note(s) any part thereof owing or payable
on the Note(s), under the Loan Agreement or under this Guaranty or of the time
for performance of any other obligations, covenants or agreements under or
arising out of the Loan Agreement, the Note(s) or this Guaranty, or the
extension or the renewal thereof;
(vi) The modification or amendment (whether material or otherwise) of
any obligation, covenant or agreement set forth in the Loan Agreement or the
Note(s) as modified or amended;
(vii) The taking of, or the omission to take, any of the actions
referred to in the Loan Agreement, the Note(s) or this Guaranty;
(viii) Any failure, omission or delay on the part of the Bank to
enforce, or assert or exercise any right, power or remedy conferred on the Bank
in the Loan Agreement, the Note(s) or this Guaranty;
(ix) The voluntary or involuntary liquidation, dissolution, sale or
other disposition of all or substantially all of the assets, marshalling of
assets and liabilities, receivership, insolvency, bankruptcy, assignment for
the benefit of creditors, reorganization, arrangement, composition with
creditors or readjustment of, or other similar proceedings affecting the
Borrower or any of the undersigned or any of the assets of the Borrower or the
undersigned, or any obligation or contest of the validity of the Loan Agreement,
the Note(s) or this Guaranty or the disaffirmance or attempted disaffirmance of
the Loan Agreement, the Note(s) or this Guaranty;
(x) The default or failure of the undersigned to fully
perform any of their obligations set forth in this Guaranty;
4
<PAGE>
(xi) The failure of the Bank to mitigate damages upon a breach,
default or an Event of Default under the Note(s) or the Loan Agreement;
(xii) To the extent permitted by law, any other event, action or
circumstance that would, in the absence of the paragraph, result in the release
or discharge of the undersigned from the performance or observance of any
obligation, covenant or agreement contained in this Guaranty or otherwise would
constitute a legal or equitable discharge of the undersigned.
(c) The Bank may pursue its rights and remedies under this Guaranty
notwithstanding (i) any other guaranty of or security for the Note(s) or the
obligations or liabilities of the Borrower under the Loan Agreement, and (ii)
any action taken or omitted to be taken by the Bank to enforce any of the
rights or remedies under such other guaranty or with respect to any other
security that the Bank might hold. This is a guaranty of payment and not a
guaranty of collection.
(d) All money available to the Bank for application in payment or
reduction of the Debt may be applied by the Bank in such manner and in such
amounts and at such time or times as it may see fit to the payment or reduction
of the Debt as the Bank may elect.
Section 2.03. Service of Process. The undersigned agrees to submit to
--------------------------------
personal jurisdiction in the State of New York in any action or proceedings
arising out of this Guaranty and, in furtherance of such agreement, the
undersigned hereby agrees and consents that without limiting other methods of
obtaining jurisdiction, personal jurisdiction over the undersigned in any such
action or proceedings may be obtained within or without the jurisdiction of any
court located in New York, and that any process or notice of motion or other
application to any such court connected with any such action or proceeding may
be served upon the undersigned, by registered or certified mail to, or by
personal service at, the last known address of the undersigned, whether such
address be within or without the jurisdiction of any such court.
Section 2.04. Waiver of Notice Presentments, Etc. The undersigned hereby
-------------------------------------------------
waives (a) notice of acceptance of this Guaranty and of extensions of credit by
the Bank to the Borrower; (b) presentment and demand for payment of the Debt;
(c) protest and notice of dishonor or default to the undersigned or to any other
party with respect to any of the Debt; (d) all other notices to which the
undersigned might otherwise be entitled except as required herein or in the Loan
Agreement; and (e) any demand for the payment under this Guaranty.
Section 2.05. No Right of Subrogation. Notwithstanding any payments made
--------------------------------------
by the undersigned pursuant to the provisions of this Guaranty, the undersigned
shall have no right of subrogation in and
5
<PAGE>
to any security held by or available to the Bank until all of the Debt has been
paid in full.
ARTICLE III
AFFIRMATIVE COVENANTS
---------------------
Section 3.01. Adoption of Covenants. The undersigned herein covenants and
------------------------------------
agrees that it shall observe and perform all of the Affirmative Covenants set
forth in Section 7.1 of the Loan Agreement on its part to be observed or
performed (other than those reports required by Section 7.1(e) of the Loan
Agreement to the extent such reports have been furnished by the Borrower).
ARTICLE IV
EVENTS OF DEFAULT
-----------------
Section 4.01. Events of Default. The occurrence of any of the following
--------------------------------
with respect to the undersigned shall constitute an Event of Default
hereunder:
(a) Any representation or warranty made herein, or any certificate,
financial statement or other instrument delivered hereunder by the undersigned
shall prove to be false or is in any material respect;
(b) A default by the Borrower in the payment of Debt;
(c) A breach or default under the Note(s) or an Event of Default
under the Loan Agreement;
(d) A default by the undersigned in the observance or performance of
any of the Affirmative Covenants set forth in Section 7.1 (except as limited by
Section 2.04 herein) of the Loan Agreement on the part of the undersigned to be
observed or performed;
(e) A default with respect to any other unrelated indebtedness or
guaranty of the undersigned when due or the performance of any other obligation
of the undersigned incurred in connection with any indebtedness for borrowed
money if the effect of such default is to accelerate the maturity of such
indebtedness or permit the holder thereof to cause such indebtedness to become
due prior to its stated date of maturity;
(f) If the undersigned shall (i) apply for or consent to the
appointment of a receiver, trustee or liquidator of any of its property or
assets, (ii) admit in writing its inability to pay its
6
<PAGE>
debts as they mature, (iii) make a general assignment for the benefit of
creditors, (iv) be adjudicated bankrupt, insolvent, or (v) file a voluntary
petition in bankruptcy, or a petition or an answer seeking reorganization or an
arrangement with creditors or to take advantage of any bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation by
law or statute, or any answer admitting the material allegations of the petition
filed against it in any proceeding under any such law or the filing of an
involuntary bankruptcy against any of the undersigned is not removed within
sixty (60) days or if any action shall be taken any of the undersigned for the
propose of affecting any of the foregoing;
(g) An order, judgment or decree shall be entered without the
application, approval or consent of the undersigned, by any court of competent
jurisdiction, approving the petition seeking reorganization of any of the
undersigned or appointing a receiver, trustee or liquidator of the undersigned
and such order, judgment or decree shall continue unstayed and in effect for a
period of sixty (60) days;
(h) Final judgment(s) for the payment of money in excess of Two
Hundred Fifty Thousand Dollars ($250,000) shall be rendered against the
undersigned and the same shall remain undischarged for a period of sixty (60)
days, unless the same is subject to an appeal and a bond is posted to stay
execution; and
(i) If the Borrower fails to own more than fifty percent (50%)
of the capital stock of the undersigned.
Section 4.02. Default Remedies. If an Event of Default occurs, the
------------------------------
Bank may proceed to enforce the provisions hereof and to exercise any other
rights, powers or remedies available to the Bank.
Section 4.03. Remedy Waiver and Notice.
--------------------------------------
(a) No remedy herein conferred upon or reserved to the Bank is
intended to be exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to every other
remedy given under this Guaranty or now or hereafter existing at law or in
equity or by statute.
(b) No delay or omission to exercise any right or power accruing upon
the occurrence of a default, breach or an Event of Default hereunder shall
impair any such right or power or shall be construed to be a waiver thereof, but
any such right or power may be exercised from time to time and as often as may
be deemed expedient.
7
<PAGE>
(c) In order to entitle the Bank to exercise any remedy reserved to
it in this Guaranty, it shall not be necessary to give any notice, other than
such notice as may be expressly required in this Guaranty.
(d) In the event any provision contained in this Guaranty should be
breached and thereafter duly waived by the Bank, such waiver shall be limited to
the particular breach so waived and shall not be deemed to waive any other
breach hereunder.
(e) No waiver, amendment, release or modification of this Guaranty
shall be established by conduct, customer, acquiescence or course of dealing.
ARTICLE V
MISCELLANEOUS
-------------
Section 5.01. Survival. All warranties, representations and covenants
-----------------------
made by the undersigned herein shall be deemed to have been relied upon by the
Bank and shall survive the payment in full of the Debt.
Section 5.02. Successors and Assiqns. This Guaranty shall
-------------------------------------
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto. The provisions of the Guaranty are intended to be for the
benefit of the Bank and to successors and assigns.
Section 5.03. Notices. All communications under this Guaranty shall be in
----------------------
writing and shall be deemed given when personally delivered or, if sent by
certified mail, on the third business day after the date on which mailed,
addressed is a follows:
To the undersigned:
Wheels Discount Auto Supply, Inc.
7245 Henry Clay Blvd.
Liverpool, New York 13088
Attention: General Counsel
To the Bank:
Chemical Bank
Bridgewater Place
500 Plum Street
Syracuse, New York 13204
Attention: Account Officer for Fay's Incorporated
8
<PAGE>
Each party may designate a change of address by notice to the other party,
given at least fifteen (15) days before such change of address is to become
effective.
Section 5.04. Counterparts. This Guaranty may be executed in several
---------------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 5.05. Amendment. No amendment, change, modification, alteration
------------------------
or termination of this Guaranty shall be made excess upon the written consent of
the undersigned and the Bank.
Section 5.06. Severability. In the event one or more of the provisions
---------------------------
contained in this Guaranty or related documents shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.
Section 5.07. Governing Law. This Guaranty shall be governed by, and
---------------------------
construed in accordance with, the laws of the State of New York without
reference to its principles of conflicts of laws.
Section 5.08. Undersigned Definition. The term "undersigned, as used
------------------------------------
herein shall, if this instrument is signed by more than one party, mean the
"undersigned and each of them" and each undertaking herein contained shall be
their joint and several undertaking. If any party hereto shall be a partnership,
the agreements and obligations on the part of the undersigned herein contained
shall remain in force and application notwithstanding any changes in the persons
composing the partnership and the term "undersigned" shall include any altered
or successive partnerships, but the predecesssor partnerships and their partners
shall not thereby be released from any obligations or liability hereunder. If
any party hereto is a corporation, the agreements and obligations on the part of
the undersigned herein contained shall remain in force and application
notwithstanding the merger, consolidation, reorganization absorption thereof,
and the term "undersigned" shall include such new entity, but the old entity
shall not thereby be released from any obligations or liability hereunder.
Section 5.09. No Waivers. No failure or delay by the Bank in exercising
------------------------
any right, power or privilege hereunder or under any other related document
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
9
<PAGE>
cumulative and not exclusive of any rights or remedies provided by law.
Section 5.10. Headings and Table of Contents. The Table of Contents and
-------------
the descriptive headings of the several Articles and Sections of this Guaranty
are inserted for convenience only, do to constitute a part of this Guaranty and
shall not affect in any way the meaning or interpretation of this Guaranty.
Section 5.11. Waiver of Trial by Jury. THE UNDERSIGNED AND THE BANK WAIVE
-------------------------------------
TRIAL BY JURY IN ANY LITIGATION OR PROCEEDING IN CONNECTION WITH OR ARISING OUT
OF THE TRANSACTION CONTEMPLATED HEREUNDER.
IN WITNESS WHEREOF, the undersigned have executed this Guaranty of
Payment as of June 9, 1994.
WHEELS DISCOUNT AUTO SUPPLY, INC.
By:
--------------------------------
James F. Poole, Jr.
Vice President - Finance and
Chief Financial Officer
Accepted by:
CHEMICAL BANK
By:
-------------------------------------
William J. McPhail
Vice President
10
<PAGE>
SCHEDULE A
Subsidiaries
None
11
<PAGE>
SCHEDULE A
----------
(Section 6.5)
Litigation:
- ----------
NONE
12
<PAGE>
SCHEDULE B
----------
(Section 6.5)
Borrower's Subsidiaries:
- -----------------------
Fay's Agency, Inc.
Economy Wholesale, Inc.
Wheels Discount Auto Supply, Inc.
The Paper Cutter Stores, Inc.
Carl's Drug Company of Vermont, Inc.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-START> JAN-30-1994
<PERIOD-END> JAN-28-1995
<CASH> 1,941
<SECURITIES> 0
<RECEIVABLES> 35,992
<ALLOWANCES> 0
<INVENTORY> 166,956
<CURRENT-ASSETS> 213,346
<PP&E> 189,712
<DEPRECIATION> 119,317
<TOTAL-ASSETS> 314,128
<CURRENT-LIABILITIES> 112,270
<BONDS> 81,656
<COMMON> 2,055
0
0
<OTHER-SE> 104,926
<TOTAL-LIABILITY-AND-EQUITY> 314,128
<SALES> 1,038,110
<TOTAL-REVENUES> 1,038,110
<CGS> 735,324
<TOTAL-COSTS> 1,016,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,493
<INCOME-PRETAX> 22,053
<INCOME-TAX> 9,417
<INCOME-CONTINUING> 12,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,636
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
</TABLE>
