<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the second quarterly period ended June 30, 1999
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16/th/ Floor, Los Angeles, California 90069
Registrant's telephone number: (310) 273-5678
Commission File Number: 1-4323
I.R.S. Employer Identification Number: 23-0622690
State of Incorporation: Delaware
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X
-
On August 12, 1999 the latest practicable date, there were 3,927,148 shares of
Common Stock outstanding.
<PAGE>
GIANT GROUP, LTD.
INDEX
PART I. FINANCIAL INFORMATION
- -------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations -
Three and Six-Month Periods Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signature 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six-month periods ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-months ended Six-months ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 17,630 $ $ 36,992 $
Cost of sales 13,881 - 28,558 -
---------- ---------- ---------- ----------
Gross profit 3,749 - 8,434 -
---------- ---------- ---------- ----------
Operating expenses:
Selling and shipping 2,051 - 3,967 -
General and administrative 1,943 910 3,401 1,809
Depreciation 100 47 195 188
Amortization of goodwill 171 - 343 -
Co-ownership program, net of
charter income of $346 and $496 - 72 - 494
---------- ---------- ---------- ----------
4,265 1,029 7,906 2,491
---------- ---------- ---------- ----------
Income (loss) from operations (516) (1,029) 528 (2,491)
---------- ---------- ---------- ----------
Other income (expense):
Factoring and financing costs (741) (1) (1,302) (2)
Investment and other income 528 739 1,068 1,339
Gain on sale of property - 2,845 269 2,845
---------- ---------- ---------- ----------
(213) 3,583 35 4,182
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes (729) 2,554 563 1,691
Provision (benefit) for income taxes (186) 697 402 697
---------- ---------- ---------- ----------
Net income (loss) $ (543) $ 1,857 $ 161 $ 994
========== ========== ========== ==========
Basic earnings (loss) per common share $ (0.14) $ 0.58 $ 0.04 $ 0.31
========== ========== ========== ==========
Diluted earnings (loss) per common share $ (0.14) $ 0.58 $ 0.04 $ 0.31
========== ========== ========== ==========
Weighted average shares - basic 3,927,000 3,181,000 3,927,000 3,181,000
========== ========== ========== ==========
Weighted average shares - diluted 3,927,000 3,181,000 4,028,000 3,181,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,920 $ 4,226
Marketable securities 11,551 7,797
Current portion of note receivable from related party 2,171 2,002
Note and other receivables 2,316 4,752
Inventories 14,701 12,438
Prepaid expenses and other assets 2,349 690
Deferred income taxes 993 892
----------- -----------
Total current assets 36,001 32,797
Note receivable from related party 543 499
Property and equipment, net 1,906 1,983
Deferred income taxes 1,748 1,748
Goodwill, net of amortization of $381 and $38 27,072 27,415
Other assets 94 118
----------- -----------
Total assets $ 67,364 $ 64,560
=========== ===========
LIABILITIES
Current liabilities:
Short-term loan $ 1,662 $ -
Due to factor 4,212 3,868
Accounts payable 7,855 7,134
Current portion of note payable to related party 400 400
Accrued expenses 1,199 1,297
Income taxes payable 692 554
----------- -----------
Total current liabilities 16,020 13,253
Capital lease obligations 221 252
Note payable to related party 1,287 1,227
Deferred income taxes 7 7
----------- -----------
Total liabilities 17,535 14,739
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,000,000 shares, none issued - -
Class A common stock, $.01 par value; authorized 5,000,000 shares, none issued - -
Common stock, $.01 par value; authorized 12,500,000 shares, 7,266,000 shares issued 73 73
Capital in excess of par value 35,196 35,196
Accumulated other comprehensive loss - unrealized losses on marketable securities, net (343) (190)
Retained earnings 43,744 43,583
----------- -----------
78,670 78,662
Less 3,339,000 shares of Common stock in treasury, at cost (28,841) (28,841)
----------- -----------
Total stockholders' equity 49,829 49,821
----------- -----------
Total liabilities and stockholders' equity $ 67,364 $ 64,560
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six-month periods ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six-months ended
June 30,
-----------------------------------
1999 1998
------- --------
<S> <C> <C>
Operating Activities:
Net income $ 161 $ 994
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation 573 188
Gain on sale of land and property and equipment (269) (2,845)
Gain on sale of marketable securities (419) (125)
Accretion of discounts on investments, net (310) (355)
Changes in assets and liabilities:
Decrease in income tax receivables - 1,100
Increase in inventories (2,263) -
Increase in receivables and prepaid expenses and other assets (1,928) (76)
Increase in due to factor 344 -
Increase (decrease) in accounts payable and accrued expenses 617 (305)
Increase in income taxes payable 138 1,911
------- --------
Net cash (used) provided by operating activities (3,356) 487
------- --------
Investing Activities:
Sales of marketable securities 4,445 5,055
Purchases of marketable securities (5,014) (25,506)
Net proceeds from sale of assets 284 19,726
Debt payment - 74
Purchase of assets held-for-sale and related costs - (49)
Purchases of property and equipment (133) (39)
------- --------
Net cash used by investing activities (418) (739)
------- --------
Financing Activities:
Proceeds from short-term loan 1,662 -
Principal payments on capital lease obligations (25) -
Increase in note receivable from related party (169) -
------- --------
Net cash provided by financing activities 1,468 -
------- --------
(Decrease) in cash and cash equivalents (2,306) (252)
Cash and cash equivalents:
Beginning of period 4,226 1,137
------- --------
End of period $ 1,920 $ 885
======= ========
Supplemental disclosure of cash (paid) received for:
Income taxes $ (323) $ 2,282
Interest (893) (2)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 30,
1999, the results of operations for the three and six-month periods ended June
30, 1999 and 1998 and cash flows for six-month periods ended June 30, 1999 and
1998. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in the
preparation of the Company's 1998 Annual Report on Form 10-K. However, for
interim periods, customer returns and allowances are accrued based on expected
annualized activity and cost of sales are computed using the gross profit
method. Certain 1998 amounts have been reclassified to conform to the 1999
presentation. Operating results for the three and six-month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the full year. It is suggested that the accompanying unaudited consolidated
financial statements be read in conjunction with the financial statements and
notes in the Company's 1998 Annual Report on Form 10-K.
2. Acquisition
-----------
On December 11, 1998 the Company acquired 100% of the outstanding common
stock of Periscope, which designs, sources and markets an extensive line of high
quality moderate priced, women and children's clothing to mass merchandisers and
major retailers, primarily for sale under private labels. Periscope uses only
outside manufacturers, primarily in Mexico, and then ships direct to its retail
customers. It also imports finished products primarily from China and Taiwan.
It only manufactures products based on firm orders and, once a product is
shipped to a customer, returns are not accepted unless the product is defective
or delivered late.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, Periscope's assets and liabilities have been recorded at their
fair value as of the date of acquisition. Periscope's results of operations are
included in the Company's consolidated statement of operations for the three and
six-month periods ended June 30, 1999. On December 11, 1998, prior to the
effective date of the acquisition, the Company made a gross advance of $28,500
in cash to Periscope, which Periscope used to reduce certain borrowings. On May
18, 1999, the Company's Board of Directors approved the capitalization of this
advance.
The cost of the acquisition included 953,093 shares of Company common
stock, which were held in treasury and valued at $6,493, 75,000 Company warrants
valued at $195 and exercisable at $7.25 over a five year period, and transaction
costs of $259. The excess of the cost over the estimated fair value of the net
assets acquired of $27,453, based on the Company's preliminary allocation of the
purchase price, was allocated to goodwill and is being amortized on a straight-
line basis over 40 years. The Company will finalize the allocation of the
purchase price in 1999.
The Company may issue up to an additional 225,000 shares of its common
stock to Periscope stockholders based on the level of Periscope pre-tax profits,
as defined in the merger agreement, exceeding $13 million dollars for the year
ended December 31, 1999.
On July 23, 1999, the Company's Board of Directors approved an election
given to the Periscope stockholders. The election gave the Periscope
stockholders a choice of receiving their pro-rata portion of 62,500 shares of
the Company's common stock, which would be issued after July 31, 1999 and also
their pro-rata portion of an additional 62,500 shares of the Company's common
stock should Periscope's pre-tax profits for the twelve months ended June 30,
2000 exceed $13 million, instead of receiving up to 225,000 shares of the
Company's common stock (as described in the previous paragraph). If accepted by
less than 100% of the Periscope stockholders, the Company will issue an adjusted
amount of shares of its common stock. The Company will issue the appropriate
amount of shares of its common stock upon receipt of notice from all Periscope
stockholders.
6
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Letter of Credit
----------------
On May 26, 1999, the Company signed an agreement with a new lender to
provide an additional letter of credit accommodation ("New LC") to collateralize
the Company's obligations to third parties for the purchase of goods and
inventory. The term of this agreement expires on January 31, 2000 and can be
terminated within 30 days of the Company receiving written notice from the
factor. The Company is subject to an interest rate equal to the greater of 6% or
prime plus one-quarter of one percent on any money paid in connection with the
New LC and other fees stated in the agreement. The Company provided a collateral
security deposit of $2,000 earning interest equal to prime rate less 3%. The
obligations under the New LC can never exceed the lesser of $4,000 or the
collateral security deposit times 200%. At June 30, 1999, the Company had
approximately $3,936 of open letters of credit outstanding.
On August 10, 1999, all outstanding obligations under the New LC agreement
were assumed by Periscope as part of the new factoring agreement entered into by
Periscope and a major factor (See Note 10 to these consolidated financial
statements). In connection with this assumption, all interest in the goods
shipped in connection with the New LC have been assigned to Periscope and the
factor. With the completion of the new factoring agreement, the $2,000
collateral security deposit, plus interest, was returned to the Company.
4. Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per common share ("Basic EPS") is computed by
dividing reported net earnings or loss available to common stockholders by the
weighted average shares outstanding. The computation of diluted earnings (loss)
per common share ("Diluted EPS") using the treasury stock method includes shares
to be issued upon the assumed exercise of those stock options and warrants for
which the average market price of the Company's common stock for the period
exceeds the exercise price of the options and warrants. The calculation of
Diluted EPS for the three months ended June 30, 1999 does not include 2,206,000
options and warrants, at a range of $5.44 to $8.25, because the effect would be
anti-dilutive as the Company recorded a loss for the period. The calculation of
Diluted EPS for the six months ended June 30, 1999 does not include an option to
purchase 200,000 shares of the Company's common stock at an exercise price of
$8.25 because the exercise price exceeds the average market price of the
Company's common stock for the period and the effect would be anti-dilutive.
Options to purchase 2,101,000 shares of the Company's common stock at a range of
$5.44 to $8.25 were outstanding during the prior year periods but were not
included in the computation of Diluted EPS because the options prices were
greater than the average market price of the Company's common stock and the
effect would be anti-dilutive.
The following shows the reconciliation of Basic EPS and Diluted EPS for the
six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
Basic Earnings per Share
- ------------------------
Income available to common stockholders $161 3,927,000 $0.04
Diluted Earnings per Share
- --------------------------
Effect of dilutive securities:
Options issued to employees and non-employee directors
and warrants issued in connection with the acquisition 101,000
----------- ------------- -----------
Income available to common stockholders $161 4,028,000 $0.04
=========== ============= ===========
</TABLE>
7
<PAGE>
GIANT GROUP, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Comprehensive Income
--------------------
The changes in components of comprehensive income (loss), net of benefit
for income taxes, for the six-month periods ended June 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- ---------------------------------
Pre-tax Tax Net Pre-tax Tax Net
Amount Benefit Amount Amount Benefit Amount
------- ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Other comprehensive loss:
Unrealized losses on
marketable securities, net $(255) $(102) $(153) $(1,658) $(663) $(995)
Net income 161 994
------- --------
Comprehensive income (loss) $ 8 $ (1)
======= =========
</TABLE>
6. Affiliates' Transactions
------------------------
In March 1999, KCC signed an agreement with Santa Barbara Restaurant Group,
Inc. ("SBRG"). In accordance with the agreement, KCC exchanged its remaining
$2,995 of Checkers 13% restructured debt for 998,377 shares of SBRG's $.08 par
value common stock at a market price of $3.00. The Company recorded investment
income of approximately $129 equal to the remaining unamortized discount of the
13% restructured debt. The SBRG shares are not currently registered, however,
KCC has the right to demand that SBRG register the shares with the Securities
and Exchange Commission within 60 days of receipt of notice. After two years,
the shares will be fully transferable under Rule 144 of the Securities Act of
1933. Currently, SBRG is in the process of registering the shares through a
registration statement, which should be filed in the near term.
On August 5, 1999, the stockholders of both Checkers and Rally's approved
the merger agreement pursuant to which the two companies merged in an all-stock
transaction, previously announced on January 29, 1999. The merger agreement
provides that each outstanding share of Rally's stock will be exchanged for 1.99
shares of Checkers stock. The Checkers common stock owned by Rally's
(approximately 26% of Checkers common stock) will be retired after the merger.
The effective date for the closing of the merger is August 9, 1999. In
addition, the Checkers stockholders approved a post-merger one-for-twelve
reverse stock split. Subsequent to the merger and reverse stock split, the
Company will own approximately 535,000 shares of Checkers common stock or 5.7%
of the outstanding shares of Checkers common stock and own warrants to purchase
approximately 237,000 shares of Checkers common stock. The new company will
continue to operate restaurants under both the Checkers and Rally's brand names
for the foreseeable future.
7. Information Concerning Business Segments
----------------------------------------
The Company's one reportable segment, the design, manufacture and sale of
women and children's clothing, was acquired through an acquisition, effective
December 11, 1998. The Company's current period consolidated statement of
operations reflects the segment's results of operations for the three and six
months ended June 30, 1999. Women and children's clothing sales made to three
major customers represented approximately 70% and 66% of net sales, respectively
for the three and six month periods ended June 30, 1999.
8
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
8. Recent Accounting Pronouncements
--------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has adopted this statement in the first quarter of 1999 and has
determined that the effect of this statement on the Company's current
consolidated financial position and consolidated results of operations is not
material.
In June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
9. Commitments and Contingencies
-----------------------------
The Company is involved in lawsuits as described in the Company's 1998
Annual Report on Form 10-K and as further described in the following paragraphs.
Mittman/Rally's. In January and February 1994, two putative class action
----------------
lawsuits were filed, purportedly on behalf of the shareholders of Rally's in the
United States District Court for the Western District of Kentucky, against
Rally's, certain of Rally's present and former officers, directors and
shareholders and its auditors and GIANT. The complaints allege defendants
violated the Securities Exchange Act of 1934, as amended, among other claims, by
issuing inaccurate public statements about Rally's in order to arbitrarily
inflate the price of Rally's common stock, and seek unspecified damages,
including punitive damages. On April 15, 1994, GIANT filed a motion to dismiss
and a motion to strike. On April 5, 1995, the Court struck certain provisions
of the complaint but otherwise denied GIANT's motion to dismiss. In addition,
the Court denied plaintiffs' motion for class certification. On July 31, 1995,
the plaintiffs renewed this motion, and on April 16, 1996, the Court certified
the class. Two settlement conferences have been conducted, most recently on
December 7, 1998, but have been unsuccessful. Fact discovery is anticipated to
be completed by summer 1999. Expert discovery will be completed by late fall or
early winter of 1999. No trial date has been yet to be scheduled. Management is
unable to predict the outcome of this matter at the present time. Rally's and
GIANT deny all wrongdoing and intend to defend themselves vigorously in this
matter.
Harbor. In February 1996, Harbor Finance Partners ("Harbor") commenced a
-------
derivative action, purportedly on behalf of Rally's, against Rally's officers
and directors and GIANT, David Gotterer, and Burt Sugarman before the Delaware
Chancery Courts. Harbor named Rally's as a nominal defendant. Harbor claims
that directors and officers of both Rally's and GIANT, along with GIANT breached
their fiduciary duties to the public shareholders of Rally's by causing Rally's
to repurchase certain Rally's Senior Notes at an inflated price. The NASDAQ
closing price of the Senior Notes as of August 5, 1999 was $89, approximately
31% higher than the repurchase price of $67 7/8. Harbor seeks "millions of
dollars in damages", along with rescission of the repurchase transaction. In the
fall of 1996, all defendants moved to dismiss this action. On April 3, 1997,
the Chancery Court denied defendants' motion. In the second quarter 1999 the
plaintiffs filed document requests and interrogatories. No trial date has been
set. Rally's and GIANT deny all wrongdoing and intend to vigorously defend this
action. It is not possible to predict the outcome of this action at this time.
9
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
KCC/Pike Santa Monica Action. In October 1996, KCC filed a complaint, in
-----------------------------
the Los Angeles County Superior Court, against NeoGen Investors, L.P., N.D.
Management, Inc., NeoGen Holdings, L.P., Danco Laboratories, Inc. and NeoGen
Pharmaceutical, Inc. (collectively the "NeoGen Entities") and Joseph Pike,
stating causes of action for fraud, breach of fiduciary duty, fraudulent
concealment, breach of contract, unfair business practices and permanent and
preliminary injunctive relief and against the licensors of Mifepristone, the
Population Council, Inc. and Advances in Health Technology, Inc., on a
declaratory relief claim. The complaint seeks damages for the breach by Joseph
Pike and the NeoGen Entities of a July 24, 1996 agreement by which KCC agreed to
contribute $6,000, in return for a 26% equity interest in the entity producing
the drug, Mifepristone, in the United States and other parts of the world
("NeoGen Agreement"). The $6,000 contribution was not funded. On February 19,
1997, Joseph Pike and the NeoGen Entities filed an answer to the complaint,
denying its material allegations and raising affirmative defenses. On that
date, the NeoGen Entities also filed a cross-complaint against KCC, the Company,
and certain of the Company's directors, Terry Christensen, David Malcolm and
Burt Sugarman, which alleged causes of action for fraud, breach of contract,
intentional interference with prospective economic advantage, negligent
interference with prospective economic advantage and unfair business practices.
In October 1997, KCC settled their action with the licensors, the Population
Council, Inc. and Advances in Health Technology, Inc., and in November 1997, KCC
settled their action with Joseph Pike. On May 1, 1998, the court granted the
NeoGen Entities summary adjudication on KCC's cause of action for breach of
contract. Discovery in this action is complete. On October 2, 1998, the court
entered an order, which, among other things, effectively eliminates NeoGen
Entities' ability to obtain any money judgement from KCC and the other cross-
defendants. On February 23, 1999, the court entered judgement pursuant to a
Stipulation for Judgement, by which the parties' respective claims are dismissed
with prejudice, save and except for the right to appeal certain issues. On or
about April 22, 1999, NeoGen filed a notice of appeal of that judgement. On or
about June 8, 1999, KCC filed a notice of cross-appeal.
Neogen/ Danco v. KCC. This complaint for damages for trade libel was filed
---------------------
on October 30, 1998 in the Superior Court for the State of California for the
County of Los Angeles. The complaint alleged one cause of action for trade
libel against all defendants KCC, GIANT, Terry Christensen and Does 1 through
20, regarding defendants' alleged statements to the media concerning plaintiffs
Neogen Investors, L.P., and Danco Laboratories, Inc. and Joseph Pike. The
complaint was never served. On August 3, 1999 Neogen filed a request for
dismissal of the entire action without prejudice and the dismissal of this
action was entered on that date by the court.
Since management does not believe that the previously mentioned lawsuits
and other claims and legal proceedings, in which the Company is a defendant,
contain meritorious claims, management believes that the ultimate resolution of
the lawsuits will not materially and adversely affect the Company's consolidated
financial position or results of operations.
On July 23, 1999, the Company amended the employment contract with the
President and Chief Executive Officer of Periscope by increasing his annual base
salary to $950 from $500 for the second and third year of his current employment
term.
10
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
10. Subsequent Event
----------------
On August 10, 1999, Periscope signed an agreement ("Factoring Agreement")
with a major factor, who was the same lender who issued the Company the New LC,
to obtain a new factoring line which permits, as defined in the Factoring
Agreement, daily working capital borrowing of 90.0% of eligible accounts
receivable (non-recourse), 50.0% of letters of credit outstanding issued by
Periscope and 50% of eligible inventory. The maximum borrowings under the
Factoring Agreement is $36 million. The outstanding debt is collateralized by
Periscope's receivables, inventory and other assets as defined in the Factoring
Agreement. In addition, $4 million dollars is guaranteed by the Company and
$1million dollars is personally guaranteed by Glenn Sands, Periscope's President
and Chief Executive Officer. Borrowings are subject to a processing charge equal
to 0.45% on factor credit approved accounts receivable and .30% on non-factor
credit approved accounts receivable. In addition, an interest charge is applied
to the total outstanding debt equal to the greater of 6% or the prime rate plus
one-quarter of one percent. On October 1, 1999 this interest rate is subject to
a 3% increase on certain borrowings as defined in the Factoring Agreement.
Periscope is required under the Factoring Agreement to maintain certain
financial ratios and places certain limitations on capital expenditures,
indebtedness and dividend payments. The factoring line shall continue until the
last day of the 24th month from the date the Factoring Agreement was signed and
thereafter automatically renews from year to year unless terminated at the
option of Periscope with 60 days of acceptable written notice given to the
factor or terminated by the factor by giving 5 days written notice to Periscope.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except per share amounts)
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope, a designer and manufacturer of women and children's apparel.
The acquisition has been accounted for by the purchase method of accounting.
Periscope's results of operations for the three and six-month periods ended June
30, 1999 are included in the Company's consolidated statement of operations for
the current period. Periscope's unaudited results of operations for the three
and six-month periods ended June 30, 1998 are not included in the Company's
consolidated statement of operations for the prior period; however, the prior
period's unaudited results of operations for the Company and Periscope have been
combined for proforma comparative purposes in the discussions that follow.
Results of Operations for the Three Months Ended June 30, 1999 Versus June 30,
- ------------------------------------------------------------------------------
1998
- ----
Net sales for the three-month period ended June 30, 1999 were $17,630. On
a comparable basis this was a decrease of $4,424 from net sales of $22,054 in
the prior period. The net sales decrease, including $4,386 in ladies' knit
sportswear, was due to a reduction of Periscope's available credit by the
company's factor which resulted in the company's inability to purchase raw
materials to produce goods and to ship orders.
Gross profit for the three-month period ended June 30, 1999 was $3,749 or
21.3% of net sales. On a comparable basis the prior period was $ 5,006 or 22.7%
of net sales. The decrease in gross profit resulted from a year-to-date
adjustment, recorded in the second quarter, relating to higher returns and
allowances and higher cost of sales as projected for the year. These results
were impacted by the same factors causing the decrease in sales.
Operating expenses for the three-month period ended June 30, 1999 increased
$3,236 to $4,265 from $1,029 in the prior period. The increase is primarily due
to the inclusion in the current year of the operating expenses of the apparel
operation of $3,088 and goodwill amortization of $171, partially offset by an
overall decrease in corporate expenses. In addition, the prior period included
Co-Ownership and charter expenses of $72, net of $346 of charter income related
to the yachts that were sold in April and October of 1998. On a comparable
basis, operating expenses increased $262 to $4,265 from $4,003 in the prior
period reflecting the goodwill amortization of $171 and higher selling expenses
of $282, offset by lower shipping costs of approximately $206 resulting from the
move of the apparel production and distribution facilities to Mexico.
Other income (expense) for the three-month period ended June 30, 1999
decreased $3,796 to an expense of $213 from income of $3,583 in the prior
period. The decrease is primarily related to the inclusion in the current
period of the factoring and financing costs of the apparel operations of $752.
In addition, the Company recorded lower investment income of $211 in the current
period primarily due to lower interest income from the Company's investment in
debt securities of $597, partially offset by higher gains in the current period
on the sales of marketable securities of $384. In the prior period, a gain of
$2,845 was recognized on the sale of the Company's plane. On a comparable basis,
other income decreased $2,449 to an expense of $213 from income of $2,236 in the
prior period reflecting the items previously discussed in this paragraph, offset
by the decrease in financing costs of $595 after the Company advanced funds in
December 1998 to the apparel operations to reduce certain borrowings.
Results of Operations for the Six Months Ended June 30, 1999 Versus June 30,
- ----------------------------------------------------------------------------
1998
- ----
Net sales for the six-month period ended June 30, 1999 were $36,992. On a
comparable basis this was a decrease of $1,510 from net sales of $38,502 in the
prior period. The net sales decrease, included a decrease of $7,797 in ladies'
knit sportswear and children's apparel, substantially offset by an increase of
$6,287 in wovens and imported apparel and was primarily due to a reduction of
Periscope's available credit by the company's factor which resulted in the
company's inability to purchase raw materials to produce goods and to ship
orders.
Gross profit for the six-month period ended June 30, 1999 was $8,434 or
22.8% of net sales. On a comparable basis the prior period was $8,740 or 22.7%
of net sales.
Operating expenses for the six-month period ended June 30, 1999 increased
$5,415 to $7,906 from $2,491 in the prior period. The increase is primarily due
to the inclusion in the current period of the operating expenses of the apparel
operations of $5,762 and goodwill amortization of $343, partially offset by an
overall decrease in corporate expenses in the current period. In addition, the
prior period included Co-Ownership and charter expenses of $494, net of $496 in
charter income earned prior to the sale of the yachts in April and October of
1998. On a
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
comparable basis, operating expenses decreased $129 to $7,906 from $8,035 in the
prior period reflecting the items previously discussed and higher selling
expenses of $559, offset by lower shipping costs of approximately $378 resulting
from the move of the apparel production and distribution facilities to Mexico.
Other income (expense) for the six-month period ended June 30, 1999
decreased $4,147 to $35 from $4,182 in the prior period. The decrease is
primarily related to the inclusion in the current period of the factoring and
financing costs of the apparel operations of $1,313. In addition, the Company
recorded lower investment income of $271 in the current period primarily due to
lower interest income from the Company's investment in debt securities of $569,
partially offset by higher gains on the sales of marketable securities of $294
in the current period. The Company also recognized a gain of $269 on the sale of
land not used in the Company's operations in the current period compared to a
gain of $2,845 on the sale of the Company's plane recorded in the prior period.
On a comparable basis, other income decreased $2,834 to $35 from income of
$2,869 in the prior period reflecting the items previously discussed in this
paragraph, partially offset by a decrease in financing costs of $1,172 after the
Company advanced funds in December 1998 to the apparel operations to reduce
certain borrowings.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents and marketable securities at June 30, 1999
totaled $13,471 compared with $12,023 at December 31, 1998. At June 30, 1999
and December 31, 1998, the Company had working capital of $19,981 and $19,544
with current ratios of 2.2 and 2.5 to 1, respectively.
The existing factoring line permits daily working capital borrowing of
90.0% of accounts receivable (non-recourse), plus 50.0% of letters of credits
outstanding issued by the Company not to exceed $10.0 million. At June 30,
1999, the Company had no obligations outstanding under this letter of credit
agreement. The outstanding debt is collateralized by the Company's inventory,
receivables and is partially personally guaranteed by Glenn Sands, Periscope's
President and Chief Executive Officer. The factoring line expires on May 31,
2000, is subject to annual renewal and may be terminated at the option of the
factor with 60 days written notice. Borrowings are subject to a monthly
processing charge equal to 0.7% on gross sales up to $25 million, 0.65% on gross
sales between $25 million and $75 million and 0.6% of gross sales over $75
million. The Company had a net outstanding balance of $4.2 and $3.9 million
under the factoring line at June 30, 1999 and December 31, 1998, respectively,
at an interest rate of prime plus 0.5% or 8.25%.
On May 26, 1999, the Company signed an agreement with a new lender to
provide an additional letter of credit accommodation ("New LC") to collateralize
the Company's obligations to third parties for the purchase of goods and
inventory. The term of this agreement expires on January 31, 2000 and can be
terminated within 30 days of the Company receiving written notice from the
factor. The Company is subject to an interest rate equal to the greater of 6%
or prime plus one-quarter of one percent on any money paid in connection with
the New LC and other fees stated in the agreement. The Company provided a
collateral security deposit of $2,000 earning interest equal to prime rate less
3%. The obligations under the New LC can never exceed the lesser of $4,000 or
the collateral security deposit times 200%. At June 30, 1999, the Company had
approximately $3,936 of open letters of credit outstanding.
On August 10, 1999, Periscope signed an agreement ("Factoring Agreement")
with a major factor, who was the same lender who issued the Company the New
LC, to obtain a new factoring line which permits, as defined in the Factoring
Agreement, daily working capital borrowing of 90.0% of eligible accounts
receivable (non-recourse), 50.0% of letters of credit outstanding issued by
Periscope and 50% of eligible inventory. The maximum borrowings under the
Factoring Agreement is $36 million. The outstanding debt is collateralized by
Periscope's receivables, inventory and other assets as defined in the Factoring
Agreement. In addition, $4 million dollars is guaranteed by the Company and
$1million dollars is personally guaranteed by Glenn Sands, Periscope's President
and Chief Executive Officer. Borrowings are subject to a processing charge equal
to 0.45% on factor credit approved accounts receivable and .30% on non-factor
credit approved accounts receivable. In addition, an interest charge is applied
to the total outstanding debt equal to the greater of 6% or the prime rate plus
one-quarter of one percent. On October 1, 1999 this interest rate is subject to
a 3% increase on certain borrowings as defined in the Factoring Agreement.
Periscope is required under the Factoring Agreement to maintain certain
financial ratios and places certain limitations on capital
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
expenditures, indebtedness and dividend payments. The factoring line shall
continue until the last day of the 24th month from the date the Factoring
Agreement was signed and thereafter automatically renews from year to year
unless terminated at the option of Periscope with 60 days of acceptable written
notice given to the factor or terminated by the factor by giving 5 days written
notice to Periscope. On August 10, 1999, all outstanding obligations under the
New LC agreement (disclosed on the previous page) were assumed by Periscope as
part of the new factoring agreement entered into by Periscope and a major
factor. In connection with this assumption, all interest in the goods shipped in
connection with the New LC has been assigned to Periscope and the factor. With
the completion of the new factoring agreement, the $2,000 collateral security
deposit, plus interest, was returned to the Company.
Net cash used by operating activities for the six months ended June 30,
1999 was $3,356 compared to cash provided by operating activities of $487 for
the prior period. This increase in cash used for operations resulted from a
decrease in net income of $833 to $161 compared to a net income of $994 in the
prior period and by higher liquidity requirements in the current period,
including a collateral security deposit of $2,000 for the Company's new letter
of credit agreement.
Net cash used by investing activities for the six months ended June 30,
1999 decreased $321 to $418 compared to $739 for the prior period. In the
current period, the Company purchased marketable securities, net of sales of
marketable securities of $569 compared to $20,451 in the prior period. This
higher use of cash of $19,882 was offset by proceeds of $19,726 from the sale of
one of the Company's luxury yachts and the sale of the corporate plane in the
prior period.
Net cash provided by financing activities for the six months ended June 30,
1999 was $1,468 compared with no financing activities for the prior period.
During the current period, net borrowings of $1,662, collateralized by
marketable securities, were reduced by advances of $169 to Periscope's President
and Chief Executive Officer and principal payments on capital lease obligations
of $25.
The Company's current liquidity is provided by cash and cash equivalents,
marketable securities, investment income, cash flow from operations, and
borrowings under the factoring line. Management believes that this liquidity,
plus the Company's capital resources and its ability to obtain financing at
favorable rates are sufficient for the Company to properly capitalize its
current and future business operations, as well as fund its on-going operating
expenses.
Year 2000
- ---------
The Company has completed its evaluation of its information technology for
Year 2000 compliance. The Company does not expect that the cost to modify its
information technology infrastructure to be Year 2000 compliant will be material
to its consolidated financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result of any
failure by the Company to be in compliance. The Company has purchased new
information technology platforms, which, among other things, are Year 2000
compliant. Hardware and software costs are capitalized by the Company and all
other costs associated with Year 2000 compliance are expensed as incurred. The
Company has had discussions with its customers and vendors and although the
Company believes that the information systems of its major customers and vendors
(insofar as they relate to the Company's business) comply with Year 2000
requirements, there can be no assurance that the Year 2000 issue will not affect
the information systems of such customers and vendors as they relate to the
Company's business, or that any such impact on such customers and vendors'
information systems would not have a material adverse effect on the Company's
business, consolidated financial condition or results of operations. The
remediation of Year 2000 issues involving the Company's information systems is
expected to be completed in time to prevent any material adverse consequences to
the Company's business, consolidated financial condition or results of
operations.
Personal Holding Company
- ------------------------
Under the Internal Revenue Code, in addition to the regular corporate
income tax, an additional tax may be levied upon an entity that is classified as
a Personal holding company. In general, this tax is imposed on corporations
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
which are more than 50% owned, directly or indirectly, by 5 or fewer individuals
(the Ownership Test) and which derive 60% or more of their income from Personal
holding company sources, generally defined to be passive income (the Income
Test). If a corporation falls within the Ownership Test and the Income Test, it
is classified as a personal holding company, and will be taxed on its
undistributed personal holding company income at a rate of 39.6%. The Company
currently meets the stock ownership test. The Company has not met the income
requirement in recent years and therefore has not been subject to this
additional tax; however, no assurance can be given that the Income Test will not
be satisfied in the future.
Recent Accounting Pronouncements
- --------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has adopted this statement in the first quarter of 1999 and has
determined that the effect of this statement on the Company's consolidated
financial position and consolidated results of operations is not material.
In June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------
The Company's primary financial instruments consist of money market funds
paying interest at varying interest rates and equity securities and bond
investments with fixed interest rates. The Company's market risk is the
potential decrease in the value of the Company's financial instruments resulting
from lower interest rates and lower market prices. The Company does not enter
into derivatives for trading or interest rate exposure. Rather, the Company
actively manages its investment portfolio to increase the returns on investment
and to ensure liquidity, invests in instruments with high credit quality
provided through major financial institutions. In addition, the Company attempts
to make prudent and informed business decisions before investing in equity
securities.
For the six-month period ended June 30, 1999, the Company believes there
was no material change in the Company's primary financial instruments and
related market risk as disclosed in the Company's 1998 Annual Report on
Form 10-K.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include
those previously mentioned under Periscope, as well as those relating to the
development and implementation of the Company's business plan, domestic and
global economic conditions, manufacturing in Mexico and other foreign countries,
changes in consumer trends for apparel, acquisition strategy, activities of
competitors, changes in federal or state tax laws and of the administration of
such laws.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
For information regarding legal matters, see Note 9 of the Notes to
Consolidated Financial Statements on page 9 of this Form 10-Q and Item
3 "Legal Proceedings" as reported in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
Item 4. Submission of Matters to a Vote of Security holders
---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 18, 1999.
The stockholders elected a Board of six directors, ratified the
appointment of Arthur Andersen LLP as the Company's independent
auditors and voted to amend the Company's 1996 Employee Stock Option
Plan.
Results of the voting in connection with each of the matters submitted
to the stockholders were as follows:
<TABLE>
<CAPTION>
Board of Directors For Against Abstain No Vote
- ------------------ --- ------- ------- -------
<S> <C> <C> <C> <C>
Terry Christensen 2,447,845 341,752 - -
David Gotterer 2,447,640 341,957 - -
David Malcolm 2,447,845 341,752 - -
Jeffery Rosenthal 2,447,845 341,752 - -
Glenn Sands 2,447,845 341,752 - -
Burt Sugarman 2,445,327 344,270 - -
To Amend the Company's 1996 Employee
Stock Option Plan 1,628,003 595,916 5,067 560,611
Ratify appointment of Arthur Anderson LLP
as Company's Independent auditors 2,743,178 44,610 1,809 -
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.1 Letter of Credit Security Agreement between the Company and
Century Business Credit Corporation, dated May 26, 1999.
10.2 Factor Agreement between Periscope Sportswear, Inc. and
Century Business Credit Corporation, dated August 10, 1999
10.3 Assignment and Assumption Agreement between the Company (as
assignor), Periscope Sportswear, Inc. (as assignee) and
Century Business Credit Corporation, dated August 10, 1999.
10.4 Limited Guaranty by the Company of up to $4 million dollars in
connection with the Factor Agreement between Periscope
Sportswear, Inc. and Century Business Credit Corporation,
dated August 10, 1999.
27 Financial Data Schedule
(b) During the quarter ended June 30, 1999, no reports on Form 8-K were
filed.
Items 2,3,4 and 5 are not applicable.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GIANT GROUP, LTD. - Registrant
By: /s/ William H. Pennington
----------------------------------------
William H. Pennington
Vice President, Chief Financial Officer,
Secretary and Treasurer
Date: August 12, 1999
17
<PAGE>
EXHIBIT 10.1
LETTER OF CREDIT SECURITY AGREEMENT
May 26, 1999
GIANT GROUP, LTD.
9000 Sunset Blvd., 16th Floor
Los Angeles, California 90069
Ladies and Gentlemen:
From time to time, upon your request but subject, in each instance, to our
approval thereof and the terms and conditions set forth in this Agreement, we
will obtain on your behalf letter of credit accommodations through our banks to
enable you to purchase goods and inventory. The letter of credit accommodations
shall be handled by us subject to the terms and conditions set forth below.
1. Definitions. As used herein, the following terms shall have the
-----------
following meanings:
"Collateral" shall have the meaning assigned to it in paragraph 15.
----------
"Contract Rate" shall mean an interest rate per annum equal to the
-------------
greater of (a) six percent (6%) or (b) the Prime Rate plus one-quarter of one
percent (0.25%).
"Event of Default" shall mean the occurrence of any of the events set
----------------
forth in paragraph 18.
"Issuing Bank" shall mean the bank which issues a Letter of Credit.
------------
"Letter of Credit" or "Letters of Credit" shall mean any letter of
---------------- -----------------
credit accommodation obtained by us on your behalf to enable you to purchase
goods and inventory.
"Obligations" shall mean any indebtedness, liability or obligation of
-----------
any sort whatsoever, however arising, whether present or future, fixed or
contingent, secured or unsecured, due or to become due, paid or incurred,
arising or incurred in connection with this Agreement, any Other Agreement or
any Transaction, including, without limitation, all obligations and
reimbursement obligations with respect to all amounts due or which may become
due under Letters of Credit, guarantees or any drafts or acceptances thereunder,
all amounts charged or chargeable to you or to us by the Issuing Bank, other
financial institution or correspondent bank which opens, issues or is involved
in any Transaction, any other bank charges, fees and commissions, any duties,
freight and taxes, costs of insurance, all attorney's fees, all communication
expenses and all such
<PAGE>
other charges, fees and expenses which may pertain either directly or indirectly
to any Transaction, and our charges, fee and expenses provided for in this
Agreement or any Other Agreement.
"Other Agreements" shall mean all agreements, instruments and
----------------
documents, including, without limitation, mortgages, pledges, powers of
attorney, consents, guarantees, assignments and security agreements whether
heretofore, concurrently or hereafter executed by or on behalf of you or
delivered to us relating to this Agreement or the transactions contemplated
hereto.
"Prime Rate" means the prime commercial lending rate of Wells Fargo &
----------
Co. as publicly announced in San Francisco, California to be in effect from time
to time as its "prime" or "base" rate of interest and is neither tied to any
external rate of interest or index nor does it necessarily reflect the lowest
rate of interest actually charged to any particular class or category of
customers. Such rate shall be increased or decreased as the case may be for
each increase or decrease in said rate in an amount equal to such increase or
decrease in said rate; each change to be effective as of the day of the change
in such rate.
"Transaction" shall mean and include any Letter of Credit and any
-----------
drafts and acceptances thereunder, all air releases, steamship guarantees or
other indemnities caused to be issued on your behalf in respect of Letters of
Credit to induce carriers to release to you shipments of goods or inventory
without presentation of the original bills of lading or other evidence of
shipment properly endorsed, all goods, inventory or both, which may be the
subject of any such Letter of Credit and all documents and instruments of every
kind relating thereto, including, without limitation, all documents of title,
transport, indebtedness and payment, or evidencing any thereof.
All terms used in this Agreement which are not defined herein but are
defined in the Uniform Commercial Code as adopted in the State of New York (the
"Uniform Commercial Code") as in effect from time to time shall have the
meanings given to them therein.
2. Issuance of Letters of Credit, Amount and Terms. (a) From time to
-----------------------------------------------
time, upon your request but subject in each instance to our approval and the
terms and conditions of this Agreement, we will cause Letters of Credit to be
opened for your benefit. In addition, from time to time upon your request but
subject in each instance to our approval and the terms and conditions of this
Agreement, we will cause to be issued air releases, steamship guarantees and
other such indemnities on your behalf in respect of Letters of Credit to induce
carriers to release to you shipments of goods or inventory without presentation
of the original bills of lading or other evidence of shipment properly endorsed.
(b) The amount and extent of the Transactions and the form,
terms, conditions and provisions thereof shall be in all respects determined
solely by us
2
<PAGE>
and shall be subject to change, modification and revision by us from time to
time.
(c) In no event shall the aggregate amount of outstanding
Transactions at any time exceed the lesser of (i) $4,000,000 or (ii) the amount
of funds held by us as cash collateral for the Obligations times 200%.
(d) All Letters of Credit shall be issued in your name and
shall provide for payment against sight drafts.
(e) In no event will we cause to be issued any air release,
steamship guarantee or other such indemnity with respect to any Letter of Credit
unless we have received cash collateral in an amount equal to 105% of the
aggregate maximum amount of such air release, steamship guarantee or other
indemnity.
(f) You shall, if we so elect in any Transaction, deposit
with us either cash or other collateral satisfactory to us, in such amounts as
we, in our sole discretion, may require from time to time, whether prior to any
Transaction or at any time or times thereafter.
3. Application. For each Letter of Credit you request, you will
-----------
execute a letter of credit application with us on the form of the Issuing Bank
requesting us to deliver the same to the Issuing Bank and to cause the Issuing
Bank to issue the Letter of Credit in conformity with such application. We will
be co-applicants with you with respect to each Letter of Credit and any rights,
remedies, duties or obligations granted or undertaken by you to any Issuing Bank
in any application for Letters of Credits, or any standing agreement relating to
Letters of Credit or otherwise, shall be deemed to have been granted to us and
apply in all respects to us and shall be in addition to any rights, remedies,
duties or obligations contained herein.
4. Reimbursement Obligations. Upon notice to you from us that we have
-------------------------
received notice of the negotiation of documents with respect to any Transaction,
you shall reimburse us for the full amount of any payment made or to be made on
or pursuant to such Transaction within two (2) business days of our notice to
you. Upon notice to you from us that we have received notice that there are
discrepancies in the documents presented with respect to any Transaction, you
shall pay to us for the full amount of any amount to be paid on or pursuant to
such Transaction prior to us agreeing to waive any such discrepancy. You shall
reimburse us on demand for any payments or amounts paid by us pursuant to any
Transaction. If you fail to reimburse us, as set forth herein, we shall have no
obligation to release, present or negotiate documents to you until we receive
reimbursement from you. If you fail to reimburse us any such unpaid amounts
shall bear interest at the Contract Rate until paid in full. Any amounts
payable to us hereunder shall be made prior to 12:00 noon New York time on the
due date thereof in immediately available funds. The foregoing shall not limit
our rights with respect to discrepancies set forth in paragraph 12.
3
<PAGE>
5. Obligation Absolute. (a) Your obligation to reimburse us for
-------------------
payments made with respect to any Letter of Credit or other Transaction shall be
absolute, unconditional and irrevocable, without necessity of presentment,
demand, protest or other formalities. Such obligations shall be paid strictly
in accordance with the terms hereof under all circumstances including the
following circumstances:
(i) any lack of validity or enforceability of any Letter of
Credit or this Agreement or the Other Agreement;
(ii) the existence of any claim, set-off, defense or other
right which you or your affiliate may at any time have against a
beneficiary or any transferee of any Letter of Credit (or any persons
or entities for whom any such transferee may be acting), us, or any
other Person, whether in connection with this Agreement, the Letter of
Credit, the transactions contemplated herein or therein or any
unrelated transaction (including any underlying transaction between
you or your affiliate and the beneficiary for which the Letter of
Credit was procured);
(iii) any draft, demand, certificate or any other document
presented under any Transaction proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being
untrue or inaccurate in any respect; or
(iv) payment by us or Issuing Bank under any Transaction
thereof against presentation of a demand, draft or certificate or
other document which does not comply with the terms of such Letter of
Credit;
6. Indemnity. In addition to the amounts payable to us under this
---------
Agreement, you shall indemnify us, any Issuing Bank, any other bank which issues
any drafts, acceptances, air release, steamship guarantee or other indemnity in
connection with any Transaction and any correspondent of any such Issuing Bank
or bank and hold us and them harmless against any and all claims, losses,
damages, costs, liabilities, demands, causes of action and expenses (including
reasonable attorney's fees) which may be made, asserted, or brought against us,
or any of them, arising on, under, in connection with, or by reason of, any
Transaction including, without limitation, the failure by us or any Issuing Bank
to honor a demand for payment under any Transaction.
7. Assignment. As security for the payment of the Obligations, you
----------
shall, in each Transaction, assign to us the purchase order, selling order,
letter of credit in your favor and all other instruments which we may require;
and all of the same shall be deemed to have been automatically assigned to us
and shall become our property immediately upon the issuance of our guaranty for
such Transaction and without any formal assignment thereof. All goods,
inventory invoices, cash, checks, drafts, notes,
4
<PAGE>
documents, bills of lading, warehouse, shipping and dock receipts, and other
title, payment, or other instruments pertaining to each Transaction shall be
deemed to be our sole property and in furtherance thereof, you shall instruct
all suppliers, shippers, carriers, forwarders, warehouses, banks and other
persons holding or receiving any of such goods, inventory documents or
instruments to deliver them to us or upon our order. If any of the same shall
come into your possession, you shall hold same in trust for us and shall
forthwith deliver the same to us in their original form. Unless we instruct
otherwise, you may dispose of goods and inventory imported by you in connection
with Transactions in the ordinary course of business.
8. Additional Agreements. You shall, on demand, execute and deliver, in
---------------------
writing, all applications, instructions and agreements with respect thereto
which may be required either by us or by any Issuing Bank.
9. Power of Attorney. In connection with all Transactions, you hereby
-----------------
appoint each of our officers as your attorney-in-fact, with full power and
authority in each of them (a) to sign and endorse your name upon all warehouse,
shipping, dock or other receipts, letters of credit, notes, acceptances, checks,
drafts, money orders and all other evidences of indebtedness, and all invoices,
trust receipts, bills of lading and other title documents; (b) in your name or
ours, to complete any Transaction, to obtain, execute and deliver all necessary
or proper documents in connection therewith and to collect the proceeds thereof;
(c) upon the occurrence of an Event of Default, to cancel, rescind, terminate,
modify, amend, or adjust in any other way, in whole or in part, any pending
Transaction; and (d) upon your refusal to do so following our request, in your
name and for your account, to do any and all other acts and things which may be
necessary or proper in connection with this Agreement or any Transaction, or
both, or to enable us to obtain payment of any monies owed to us, or for which
you may thereafter become liable to us, in any Transaction or otherwise
hereunder. This power and authority is coupled with an interest and shall be
irrevocable until all Obligations have been paid in full and this Agreement has
been irrevocably terminated.
10. No Liability. We shall not be liable or responsible, in any manner
------------
or to any extent, for any error, act or omission by us, or by any Issuing Bank
or any other party, in connection with or relating to any Transaction or any
part thereof, including, without limitation, any Letter of Credit or air
release, steamship indemnities or waivers of discrepancies issued hereunder and
any drafts or acceptances under any Letter of Credit, or any documents of title,
transport, payment, or indebtedness or any other instruments or documents,
whether or not transferred to us hereunder, or the completion of execution of
any Transaction; or for any loss or depreciation of, or damage to, any goods,
inventory, documents of title, transport, payment, or indebtedness of any other
documents or instruments, regardless of the cause of any thereof. All
Transactions hereunder shall be entirely without recourse against us in any
event.
11. Reliance. We and any Issuing Bank shall have the right to rely upon
--------
any oral, telecopy or other facsimile instruction or communication received from
you in connection
5
<PAGE>
with any proposed modifications, deviations, extensions or other actions
affecting a Transaction, including, without limitation, any Letter of Credit or
air release, steamship indemnity or waivers of discrepancies.
12. Discrepancies. We retain our independent right to refuse any
-------------
documents presented containing any discrepancies despite the fact that we have
contacted you and you have accepted such discrepancies. We shall have the sole
and absolute right and authority, all in our sole name: to clear and resolve
any questions of non-compliance of documents in connection with and relating to
any Transaction; to give any instructions as to acceptance or rejection of any
documents or goods; to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
Transaction; Any bank shall be entitled to comply with and honor any and all
such instructions, documents or instruments executed by or received solely from
us, all without any notice to or any consent from you. In furtherance thereof,
you hereby irrevocably and unconditionally waive any and all discrepancies,
incorrections, defects or omissions in any of the goods or any of the documents
presented or to be presented to any Issuing Bank for negotiation or acceptance
in connection with any Transaction and you expressly agree not to advise, clear
or resolve any questions of non-compliance of documents; to give any
instructions as to acceptance or rejection of any documents or goods to any
party; or to agree to any amendments, renewals, extensions, modifications,
changes or cancellations of any Transaction.
13. Insurance. You shall cause all goods and inventory which may be the
---------
subject of any Transaction to be fully insured, at your sole cost, but for our
account and benefit as our interest may appear, against loss or damage by fire,
theft and such other risks as we may designate and in amounts and by insurance
companies satisfactory to us and you shall deliver to us forthwith proof of full
payment of all premiums thereon. Upon your failure or refusal, for any reason,
to deliver any such prepaid policies to us, we shall have the right, but not the
obligation, to procure such policies and to pay the premiums thereon for your
account; and you shall pay to us, forthwith, the amount of such premiums so paid
by us with interest thereon at the Contract Rate. Your liability to us
hereunder shall not be affected, impaired, released, or discharged, in whole or
in part, by reason of any loss, theft, or destruction of, or depreciation or
damage to, any goods or inventory which is not fully covered by the proceeds of
insurance thereon actually received by us, regardless of the cause of any such
loss, theft, destruction, depreciation or damage, or absence or nonreceipt of
insurance proceeds and whether such nonreceipt of insurance proceeds is caused
by the failure of the insurer to pay claims or otherwise.
14. Licenses and Taxes. You agree that: any necessary import, export or
------------------
other licenses or certificates for the import or handling of the Collateral will
have been promptly procured; all foreign and domestic governmental laws and
regulations in regard to the shipment and importation of the Collateral, or the
financing thereof, will have been promptly and fully complied with; and any
certificates in that regard that we may at any time request will be promptly
furnished. In this connection, you warrant and represent that all shipments
made under any Letter of Credit are in accordance with the
6
<PAGE>
governmental laws and regulations of the countries in which the shipments
originate and terminate, and are not prohibited by any such laws and
regulations. You assume all risk, liability and responsibility for, and agree to
pay and discharge, all present and future local, state, federal or foreign
taxes, duties, or levies. Any embargo, restriction, law, custom or regulation of
any country, state, city, or other political subdivision, where the Collateral
is or may be located, or wherein payments are to be made, or wherein drafts may
be drawn, negotiated, accepted, or paid, shall be solely your risk, liability
and responsibility.
15. Security Interest. As security for the full payment, performance and
-----------------
discharge of any and all of the Obligations you hereby assign, pledge and grant
to us a lien upon and security interest in all of the following property,
whether now owned or existing or hereafter acquired or arising and wheresoever
located, whether in transit or not: (a) all warehouse receipts, bills of lading,
shipping documents, documents of title, chattel paper and instruments, whether
negotiable or not, accompanying or relating to any Letter of Credit; (b) all
merchandise, inventory and goods shipped under, pursuant to or in connection
with any Letter of Credit and all property and rights in any way related thereto
and all additions thereto, substitutions therefor and replacements thereof, in
all stages of manufacture, process or production from raw materials through
work-in-process to finished goods, together with all goods and materials used or
usable in manufacturing, processing, packaging or shipping same; and (c) cash
and non-cash proceeds of any and all of the foregoing (collectively, the
"Collateral"). You agree to comply with the requirements of any and all laws in
order to grant to us and maintain in our favor, a valid first lien upon and
security interest in the Collateral and to do whatever we may request from time
to time in order to effect the purposes of this Agreement, including, but
without limitation, filing financing statements, keeping records and making
reports on the Collateral to us, advising us of the location of all Collateral,
marking, labeling and segregating such Collateral and obtaining any necessary
agreements or waivers with regard to the Collateral. As further security for
the payment of the Obligations, you hereby grant us a security interest in all
of your property and securities of every kind and nature which have been or at
any time hereafter may be delivered to or otherwise come into our or any party
acting on our behalf's possession, custody or control and all proceeds of said
property and securities and every part thereof. We shall have the right, in our
discretion, to resort first to any part of said security and to apply any
proceeds thereof to the Obligations in such order and amounts as we may elect.
Recourse to security shall not be required.
16. Representations, Warranties and Covenants. To induce us to enter into
-----------------------------------------
any Transaction, you make the following representations and warranties and
covenants to us, each of which shall survive the execution and delivery of this
Agreement:
(a) you are a corporation duly organized and validly existing
under the law of your jurisdiction of incorporation and duly qualified and in
good standing in every other state or jurisdiction in which the nature of your
business requires such qualification;
7
<PAGE>
(b) the execution, delivery and performance of this Agreement
and the Other Agreements (i) have been duly authorized, (ii) are not in
contravention of your certificate of incorporation, by-laws or of any indenture,
agreement or undertaking to which you are a party or by which you are bound and
(iii) are within your corporate powers;
(c) this Agreement and the Other Agreements executed and
delivered by you are your legal, valid and binding obligations, enforceable in
accordance with their terms;
(d) you keep and will continue to keep all of your books and
records concerning the Collateral at your executive offices located at the
address set forth in this Agreement and will not move such books and records
without giving us at least thirty (30) days prior written notice;
(e) the operation of your business is and will continue to be
in compliance in all material respects with all applicable federal, state and
local laws, including, but not limited to all, applicable environmental laws and
regulations;
(f) you are solvent, able to pay your debts as they mature,
you have capital sufficient to carry on your business and all businesses in
which you are about to engage and the fair saleable value of your assets
(calculated on a going concern basis) is in excess of the amount of its
liabilities;
(g) there is no pending or threatened litigation, actions or
proceeding which involve the possibility of materially and adversely affecting
your business, assets, operations, prospects or condition (financial or
otherwise), or the Collateral or your ability to perform this Agreement or any
Other Agreement;
(h) all balance sheets and income statements which have been
delivered to us fairly, accurately and properly state your financial condition
on a basis consistent with that of previous financial statements and there has
been no material adverse change in your financial condition as reflected in such
statements since the date thereof and such statements do not fail to disclose
any fact or facts which might materially and adversely affect your financial
condition;
(i) you will pay or discharge when due all taxes, assessments
and governmental charges or levies imposed upon you;
(j) you will promptly inform us in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any of your properties, assets or business, which might singly or
in the aggregate, have a materially adverse effect on you; (ii) any amendment of
your certificate of incorporation or by-laws; and (iii) any Event of Default;
and (iv) any change in your corporate name;
8
<PAGE>
(k) all the Collateral (i) is owned by you free and clear of
all claims, liens, security interests and encumbrances (including without
limitation any claims of infringement) except those in our favor and (ii) is not
subject to any agreement prohibiting the granting of a security interest or
requiring notice of or consent to the granting of a security interest;
(l) you will not encumber, mortgage, pledge, assign or grant
any security interest in any Collateral or any of your other assets to anyone
other than us;
(m) you place notations upon your books of account and any
financial statement prepared by you to disclose our security interest in the
Collateral;
(n) you will perform all other steps requested by us to
create and maintain in our favor a valid perfected first security interest in
all Collateral;
(o) upon our request, you will execute and deliver to us any
trust receipts which we may require in connection with the release to you of any
goods, inventory or documents and any financing statements that we may, from
time to time, require;
(p) all letters of credit, invoices, receipts and other
documents and instruments of every kind which you present, display, or deliver
to us for any purpose will be genuine, correct and complete;
(q) as soon as available, but not later than five (5) days
after the completion thereof, copies of all proxy statements, financial
statements and reports which you send to your shareholders and the holders of
your indebtedness and all periodic and special reports, as well as all
registration statements which you file with the Securities and Exchange
Commission; and
(r) you shall furnish to us quarterly financial statements
within sixty (60) days after the end of each of your fiscal quarters, and annual
financial statements within ninety (90) days after the end of each of your
fiscal years, all in form and substance acceptable to us and in the case of
quarterly statements accompanied by a review report by an independent certified
public accountant acceptable to us and in the case of annual statements,
accompanied by an unqualified audit report issued by an independent certified
public account acceptable to you.
17. No Pledge of Credit. Nothing herein contained shall be deemed or
-------------------
construed to grant to you any right, power or authority to pledge our credit in
any manner or to any extent whatever
18. Events of Default. The occurrence of any of the following events
-----------------
shall constitute an Event of Default:
(a) you fail to pay any Obligation when due or upon demand;
9
<PAGE>
(b) you fail to perform, breach or default in the performance of any
of the warranties or covenants contained in this Agreement or any Other
Agreement (other than any provision embodied in or covered by any other clause
of this paragraph 18) and the same shall remain unremedied for five (5) days or
more;
(c) the occurrence of a default under any agreement to which you are
party with third parties which has a material adverse affect upon your business,
assets, operations, prospects or condition (financial or otherwise);
(d) any representation, warranty or statement made by you, or any
guarantor hereunder, in any Other Agreement, or any certificate, statement or
document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should at any time be false or
misleading in any material respect;
(e) any lien created hereunder or under any Other Agreement for any
reason ceases to be or is not a valid and perfected lien having a first priority
interest;
(f) if you shall (i) apply for, consent to or suffer to exist the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of you property, (ii)
make a general assignment for the benefit of creditors, (iii) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(g) you shall admit in writing your inability, or be generally unable
to pay, your debts as they become due or cease operations of your present
business;
(h) any guarantor, any surety or any other person liable upon the
Obligations (i) apply for, consent to or suffer to exist the appointment of, or
the taking possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property, (ii) admit in writing its
inability, or be generally unable, to pay its debts as they become due or cease
operations of its present business, (iii) make a general assignment for the
benefit of creditors, (iv) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt
or insolvent, (vi) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesce to, or fail to have
dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws or (viii) take any action for the
purpose of effecting any of the foregoing;
10
<PAGE>
(i) any guarantor, surety or other party liable upon any Obligations
shall die or shall terminate, attempt to terminate or challenge the validity of
or its liability under any guaranty in our favor;
(j) you shall be dissolved or be a party to any merger or
consolidation without our written consent;
(k) if there shall be issued or filed against you, any guarantor,
surety or other party liable upon any Obligation, any tax lien or any notice of
any levy, lien or Assessment by the United States or any instrumentality
thereof; or
(l) there shall be issued or filed against you any attachment,
injunction, execution, or judgment in excess of $10,000 which is not removed
within thirty (30) days after same was issued or filed.
19. Rights and Remedies. Upon the occurrence of an Event of Default
-------------------
pursuant to paragraph 18(f), all Obligations shall be immediately due and
payable and our obligations under this Agreement shall be terminated, and upon
the occurrence of any other Event of Default we shall have the right to demand
repayment in full of the Obligations, whether or not otherwise due. Until all
Obligations have been satisfied in full, we shall retain our security interest
in the Collateral. Upon payment if full in immediately available funds of the
Obligations and termination of this Agreement, we will upon your request and at
your expense release our security interest in the Collateral. We shall have all
the rights and remedies of a secured party under the Uniform Commercial Code and
other applicable laws with respect to all collateral in which we have a security
interest, such rights and remedies being in addition to all of our other rights
and remedies provided for herein. We may sell or cause to be sold any or all of
such collateral, in one or more sales or parcels, at such prices and upon such
terms as we may deem best, and for cash or on credit or for future delivery,
without our assumption of any credit risk, and at a public or private sale as we
may deem appropriate. Unless the collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, we will give you reasonable notice of the time and place of any public
sale thereof or of the time after which any private sale or any other intended
disposition thereof is to be made. The requirements of reasonable notice shall
be met if any such notice is mailed, postage prepaid, to your address shown
herein, at least five (5) days before the time of the sale or disposition
thereof. We may be the purchaser at any such public sale and thereafter hold
the property so sold at public sale, absolutely, free from any claim or right of
any kind, including any equity of redemption. The proceeds of sale shall be
applied first to all costs and expenses of and incident to such sale, including
attorneys' fees, and then to the payment (in such order as we may elect) of all
Obligations. We will return any excess to you and you shall remain liable for
any deficiency.
20. Reinstatement. To the extent we, or any beneficiary of a Transaction
-------------
to whom we may owe an obligation to reimburse, receive repayment on account of
the Obligations, which repayment is thereafter set aside or required to be
repaid by us in
11
<PAGE>
whole or in part, then, to the extent of any sum not finally retained by us or
such beneficiary (regardless of whether such sum is recovered from us by you,
your estate or trustee or any party acting for, on behalf of or through you or
as your representative), your obligations to us shall be reinstated and the
security interests created hereby shall remain in full force and effect (or be
reinstated) until you shall have made payment to us, which payment shall be due
on demand.
21. Waivers. You waive presentment, demand, protest, notice of nonpayment
-------
and notice of protest as to all instruments, as well as any and all other
notices to which you might otherwise be entitled. Our failure to enforce any
right or remedy hereunder or our waiver of any default hereunder shall not
constitute a waiver of any such right or remedy or of any subsequent default.
22. Term. This Agreement shall become effective on the date hereof and
----
continue until January 31, 2000. We shall have the right to terminate this
Agreement at any time upon thirty (30) days written notice to you.
Notwithstanding the foregoing, we may terminate this Agreement without notice
and all Obligations shall, unless and to the extent that we otherwise elect,
become immediately due and payable without notice or demand in the event of an
Event of Default. If upon termination of this Agreement any Transaction shall
for any reason be outstanding, you shall either cause (a) all such Transactions
to be canceled and returned or (b) pay to us cash in an amount equal to 105% of
the aggregate maximum amount then available to be drawn with respect to any
Transaction to be held as cash collateral for the Obligations.
23. Interest and Fees. In addition to any commissions, discount,
-----------------
interest, charges, fees or expenses charged to us for your account by any bank,
or by us under Schedule 1 attached hereto, in connection with any Transaction,
----------
you shall pay to us, as compensation for the issuance of Letters of Credit and
for all services which we may render hereunder, (a) an issuance (opening) charge
equal to 1/8 of 1% of the full face amount of the Letter of Credit (including
any increases in respect of any such Letter of Credit), (b) 1/8 of 1% of the
full face amount thereof (including increases in respect of any such Letter of
Credit) for each 30 day or part thereof from such date of issuance to the
expiration date and 1/8 of 1% of the then outstanding face amount thereof for
each 30 day extension or part thereof in excess of such expiration date, (c) 1/8
of 1% of the undrawn portion upon the closing or cancellation of each Letter of
Credit, (d) a charge equal to 1/8 of 1% on each negotiation under each Letter of
Credit, and (e) interest, to be computed at the Contract Rate in the Agreement
on all money actually paid by us to any Issuing Bank or other party on, under,
by reason of, or in connection with any Letter of Credit or any Transaction
covered thereby. Attached hereto as Schedule 1 are the standard commissions,
----------
charges, fees and expenses of our banks (including our standard processing
charge per item) as of the date hereof, which Schedule may be amended from time
to time upon written notice to you. Interest shall be computed on the basis of
actual days elapsed over a 360 day year
12
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24. Maximum Interest. In no event will we charge interest at a rate that
----------------
exceeds the highest rate of interest permissible under any law that a court of
competent jurisdiction shall, in a final determination, deem applicable.
25. Expenses. You shall reimburse us on demand for all reasonable out-of-
--------
pocket costs and expenses (including legal fees and disbursements) incurred by
us in connection with the execution and delivery of this Agreement, the Other
Agreement, any amendment, supplement or modification hereof or thereof and
perfection of our security interest in the Collateral, or to obtain or enforce
payment of any of the Obligations or in the prosecution or defense or any action
or proceeding concerning any matter growing out of or connected with this
Agreement, any Other Agreement, or any Transaction, any of the Obligations or
any of the Collateral.
26. Successors and Assigns. This Agreement shall be binding upon you and
----------------------
your successors and assigns and inure to the benefit of our successors and
assigns.
27. Entire Understanding. This Agreement and the Other Agreements contain
--------------------
our sole and entire understanding and agreement with respect to its entire
subject matter, and all prior negotiations, discussions, commitments, agreements
and understandings heretofore had between us with respect thereto are hereby
merged herein.
28. Amendments and Obligations. This Agreement cannot be changed or
--------------------------
terminated orally. Termination of this Agreement shall not affect Obligations
on Transactions having their inception prior thereto.
29. Notices. Any notice or request hereunder may be given to you or us at
-------
the respective addresses set forth below or as may hereafter be specified in a
notice designated as a change of address under this paragraph. Any notice or
request hereunder shall be given by registered or certified mail, return receipt
requested, hand delivery, overnight mail or telecopy (confirmed by mail).
Notices and requests shall be, in the case of those by hand delivery, deemed to
have been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have been
given when deposited in the mail or with the overnight mail carrier, and, in the
case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to the us: Century Business Credit Corporation
119 West 40th Street
New York, New York 10018
Attention: Andrew H. Tananbaum
Telephone: (212) 703-3500
Telecopier: (212) 703-3520
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with a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118
Attention: Miriam L. Cohen, Esq.
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
If to you: GIANT GROUP, LTD.
9000 Sunset Boulevard, 16th Floor
Los Angeles, California 90069
Attention: Burt Sugarman
Telephone: (310) 273-5678
Telecopier:(310) 273-5249
with a copy to: Thelen, Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Attention: Bruce Rich, Esq.
Telephone: (212) 603-6780
Telecopier: (212) 603-2001
30. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of New York applicable to contracts executed in and to be performed solely
within the State of New York. In any law suit or proceeding relating to this
Agreement, the parties mutually waive trial by jury. Each of the parties to this
agreement expressly submits and consents to the jurisdiction of the Supreme
Court of the State of New York in the County of New York, with respect to any
controversy arising out of or relating to this Agreement or any amendment or
supplement thereto or to any transactions in connection therewith and each of
the parties to this Agreement hereby waives personal service or any summons, or
complaint or other process or papers to be issued in any action or proceeding
involving any such controversy and hereby agrees that service of such summons,
complaint or other process may be made by registered or certified mail to the
other party at the address appearing herein; failure on the part of either party
to appear or answer within thirty (30) days after the mailing of such summons,
complaint or other process shall constitute a default entitling the other party
to enter a judgment or order as demanded or prayed for therein to the extent
that said Court or duly authorized officer thereof may authorize or permit.
31. Severability. Wherever possible each provision of this Agreement or
------------
the Other Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or the Other
Agreements shall be prohibited by or invalid under applicable law such provision
shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
thereof.
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32. Rules of Construction. For purposes of this Agreement, the following
---------------------
additional rules of construction shall apply, unless specifically indicated to
the contrary: (a) wherever from the context it appears appropriate, each term
stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter; (b) the term "or" is not
exclusive; (c) the term "including" (or any form thereof) shall not be limiting
or exclusive; (d) all references to statutes and related regulations shall
include any amendments of same and any successor statutes and regulations; (e)
all references in this Agreement to sections, schedules, disclosure schedules,
exhibits, and attachments shall refer to the corresponding sections, schedules,
disclosure schedules, exhibits, and attachments of or to this Agreement; and (f)
all references to any instruments or agreements, including references to this
Agreement, shall include any and all modifications or amendments thereto and any
and all extensions or renewals thereof.
33. Captions. All captions are and shall be without substantive meaning
--------
or content of any kind whatsoever.
34. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same instrument.
15
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35. Construction. The parties acknowledge that each party and its
------------
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
Very truly yours,
CENTURY BUSINESS CREDIT
CORPORATION
By: /s/ Andrew H. Tananbaum
-----------------------
Name: Andrew H. Tananbaum
Title: President
Accepted and Agreed to:
GIANT GROUP, LTD.
By: /s/ David Gotterer
------------------
Name: David Gotterer
Title: Vice-Chairman
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SCHEDULE 1
IMPORT LETTER OF CREDIT AGREEMENT
FEE SCHEDULE
AS OF JANUARY 1, 1999
Issuance (Opening) $100 Flat
Cable Notification $ 25 Per Page
Amendment Fee $ 75 Flat
Negotiation Commission 1/8% Flat
$100 Minimum
Acceptance Commission 1-1/2% p.a.
Minimum $125
Processing Fee $100 Per
Invoice Negotiated
Discrepancy Fee $150 Per Discrepancy
Document Against Payment 1/8% Flat
$100 Minimum
Transfer Fee 1/8% Flat
$100 Minimum
Unused/Cancellation 1/8% Flat
$100 Minimum
Authorization to Pay/ 1/8% Flat
Restatement of Expired Letter of Credit $100 Minimum
Letter of Indemnity $100 Flat to Issue and
(Steamship Guarantee) $ 50 Flat for Each 30 Days
Outstanding
Air Release $100 Flat to Issue and
$ 50 Flat for Each 30 Days
Outstanding
17
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EXHIBIT 10.2
CENTURY BUSINESS CREDIT CORPORATION
119 WEST 40TH STREET
NEW YORK, NEW YORK 10018
RE: PERISCOPE SPORTSWEAR, INC.
1407 BROADWAY, SUITE 620
NEW YORK, NEW YORK 10018
Gentlemen:
We hereby request you to act as our sole Factor upon the following terms
and conditions. Capitalized terms used herein shall have the meanings set forth
in Paragraph 23 hereof.
1. We hereby agree to assign and sell, and do hereby assign and sell, to
you, and you hereby agree to purchase from us all Receivables (other than
Receivables arising out of commissions payable to us solely from our sourcing of
foreign goods) acceptable to you whether now existing or hereafter arising.
2. We shall submit to you the principal terms of each of our Customers'
orders for your written credit approval. You may, in your discretion, approve
in writing all or a portion of our Customers' orders either by establishing a
credit line limited to a specific amount for a specific Customer, or by
approving all or a portion of a proposed purchase order submitted by us. No
credit approval shall be effective unless in writing and unless the goods are
shipped or the services rendered within the time specified in our written credit
approval or within 30 days after the approval is given, if no time is specified.
No written credit approval or terms of sale shall be changed without your
written approval. You shall have the right to withdraw your credit approval or
withdraw or adjust a credit line at any time before delivery of merchandise or
rendition of services. In the event you withdraw your credit approval with
respect to all or a portion of our Customer's orders, you shall promptly provide
us subsequent written notice thereof by telecopy transmission. You shall not be
liable to any Person or in any manner for refusing to approve the credit of any
Customer. We shall execute and deliver to you written schedules of all
Receivables sold or assigned to you hereunder in form satisfactory to you,
together with copies of Customer's invoices or the equivalent and upon your
request conclusive evidence of delivery for all goods sold and all other
information or documents you may require. All Customers' invoices shall be
marked payable to you in a manner satisfactory to you, and such marking of
invoices as payable to you, regardless of by whom done, and/or the delivery
thereof to you shall constitute an assignment thereof to you whether or not we
execute any specific instrument of assignment. All remittances, checks, bills
and accounts receivable and proceeds of sales shall be your property and we
agree to confirm your title thereto by the execution from time to time of
whatever evidence of title you may deem desirable, and we further authorize you
to endorse our name on any and all checks or other forms of remittances received
in payment of Receivables whenever you deem such endorsement to be necessary to
effect collection thereof. If any remittances are made directly to us, we shall
hold the same in trust for your benefit and your property and will immediately
deliver to you the identical checks, documents, instruments or moneys received
in the same form as received by us. We have been
<PAGE>
advised that you may employ and we consent to your use of a lockbox account for
the deposit of remittances received in payment of Receivables.
3. We represent and warrant that each and every Receivable now or
hereafter assigned to you will cover a bona fide sale and delivery of
merchandise usually dealt in by us or the rendition by us of services to
Customers in the ordinary course of our business; to the best of our knowledge,
will cover merchandise or services which have been received and accepted by our
Customers without dispute or claim of any kind or nature; will be for an amount
certain payable in United States funds in accordance with the terms of our
invoice covering said sale, which shall not be changed without your written
approval; except for your security interest therein, there are no Liens thereon
and it will at all times be kept free and clear of same except in your favor; we
have good title thereto and the legal rights to sell, assign, transfer and set
over the same to you; to the best of our knowledge, all documents to be
delivered to you in connection therewith will be genuine and be enforceable
against our Customers free and clear of any offset, deduction, counterclaim,
Lien or any other claim or dispute (real or claimed), including, without
limitation, claims or disputes as to price, terms, delivery, quantity or quality
and claims of release from liability or because of any act of God, or a public
enemy, or war, or because of the requirements of law or of rules, orders or
regulations having the force of law. We agree to indemnify you against any
liability, loss or expense caused by or arising out of the rejection of
merchandise or services or claims or deductions of every kind and nature by our
Customers, other than those resulting from financial inability of our Customer,
whose credit standing you have approved, to make payment. In the event (a) of
our breach of any of the foregoing representations and/or warranties, (b) any
Receivable now or hereafter assigned to you covers merchandise or services with
respect to which any of our Customers has a dispute or claim of any nature or
(c) any document to be delivered to you in connection with any Receivable now or
hereafter assigned to you fails to be genuine, enforceable against any of our
Customers or free and clear of any offset, deduction, counterclaim, Lien or any
other claim or dispute (real or claimed), including, without limitation, claims
or disputes as to price, terms, delivery, quantity or quality or claims of
release from liability or because of any act of God, or a public enemy, or war,
or because of the requirements of law or of rules, orders or regulations having
the force of law, then in each such case, you shall have, in addition to all
your other rights under this Agreement, the right to chargeback to us
immediately the full amount of Receivables affected thereby; provided, however,
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in the event such chargeback arises solely out of a Customer dispute as to
price, terms, delivery, quantity or quality of merchandise sold, then you shall
provide us sixty (60) days notice of the reasons for such chargeback, but in
each such case such chargeback shall not be deemed a reassignment thereof, and
you shall retain a security interest in such Receivable and in the merchandise
represented thereby until such Receivable is fully paid, settled or discharged
or all our Obligations to you are fully satisfied. You shall not, however, have
the right to chargeback to us any Receivable approved by you which is unpaid
solely because of such Customer's financial inability to pay. We agree that you
may limit your purchase of Receivables arising from our sales to any one
Customer, and in such event, and in any instance in which you do not approve the
credit standing of our Customer or the terms of sale, you nevertheless agree to
purchase such Receivables from us and we shall sell and assign the same to you
hereunder, but with full recourse to us in the event of nonpayment thereof for
any reason whatsoever. As to Receivables purchased by you with recourse to us,
you shall have the right to charge the same back to us at any time. Advances by
you on account of any Receivable purchased by you with recourse to us prior to
collection thereof shall be entirely in your discretion in each and every
instance. Upon the occurrence of any breach of any
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<PAGE>
representation or warranty or any chargeback by you, we shall promptly pay you
the full amount of the Receivable affected thereby. We further represent and
warrant that: to the best of our knowledge after diligent inquiry, we have
reviewed the areas within our business, including all computer systems and other
devices containing microchips, whether owned by us or supplied by others, which
could be adversely affected by an inability to perform date-sensitive functions
or to recognize dates either prior to or after December 31, 1999 ("Y2K Issues");
and we have developed a program and protocols which are designed to and which we
believe will redress completely on or before January 1, 2000 any Y2K Issues.
4. We shall provide you a written summary on Monday of each week (for the
immediately preceding week) detailing the return, rejection, loss of or damage
to merchandise represented by any Receivable, any request for extension of time
to pay or request for credit or adjustment, and any merchandise dispute or other
dispute or claim relating to any Receivable or to the merchandise or services
covered thereby or tending in any way to diminish the sum certain payable
thereon. If any such dispute, controversy or claim is not promptly settled by
us, if you so elect, following the occurrence and during the continuance of an
Event of Default, you may settle, compromise, adjust or otherwise enforce or
dispose of by litigation or otherwise, any such dispute, controversy or claim,
at our expense, and upon such terms and conditions as you in your sole
discretion shall deem proper, but you shall have no obligation to do so. Except
to the extent consistent with our historical business practices, we agree that,
after assignment of Receivables to you, we shall not grant any material
allowances, credits or adjustments to Customers, nor accept any return of
merchandise, without your prior written consent in each instance. All credit
memoranda, if any, to be issued to any Customer shall be furnished by us only to
you for transmission by you to our Customer who shall solely be entitled to the
benefit thereof; provided, however, so long as no Event of Default shall have
-------- -------
occurred and be continuing, we shall issue all such credit memoranda to our
Customers so long as we simultaneously provide you a copy thereof to the extent
any such credit memorandum is for an amount equal to or exceeding $25,000. If
any merchandise from the sale of which any Receivable arises shall be returned
by or recovered from our Customer or held subject to bill and hold invoices, we
shall forthwith pay you the full amount of such Receivable, either in cash or by
the assignment of new Receivables hereunder, and until such payment or
assignment, such merchandise shall, if directed by you in writing, be held by us
in trust for your benefit, shall be segregated and identified by us as property
held in trust for your benefit, and upon your request we shall, at our expense,
deliver the same to you or for your account or upon your order to such place or
places as you may designate. You may sell or cause the sale of any such
merchandise, at such prices and upon such terms as you may deem proper, and in
the event of any public sale thereof, you may be the purchaser. The proceeds of
any such sale or sales shall first be charged with the costs and expenses of any
incident to such sale, and the balance, if any, shall be credited to our
account.
5. (a) You will send us a monthly account current as of the end of each
month. Unless you receive our written objection to any account current rendered
by you within sixty (60) days after the mailing of such account current, it
shall be deemed accepted by us and shall become conclusive and binding upon us.
(b) On the last day of each month, you shall credit our account with
interest on the average daily balance of matured funds and cash collateral in
our account at the Prime Rate minus 3% per annum.
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<PAGE>
6. (a) The purchase price of Receivables sold and assigned to you shall be
the net amount thereof, as herein defined, less the amount of your commission on
the purchase of such Receivables as provided in Paragraph 9 hereof (the
"Purchase Price"). Such Purchase Price less any sums advanced, remitted or
otherwise paid to us or for our account or debited to our account hereunder
shall be payable by you to us two (2) business days after collection of the
Receivables purchased. However, if any Receivable as to which you have approved
the credit standing of the Customer shall not be paid by reason of the
Customer's bankruptcy, insolvency or financial inability to pay without dispute,
you will pay us the Purchase Price thereof on the first business day of the
month following such Customer's bankruptcy, insolvency or financial inability to
pay without dispute. You may, upon our request therefor, and in your sole
discretion, make advances ("Receivable Advances") to us in an amount up to the
Advance Percentage of the Purchase Price of our Eligible Receivables; provided,
--------
however, no such request for a Receivable Advance may be made (i) at a time when
- -------
an Event of Default shall have occurred and be continuing, (ii) at a time when
our actual results from operations for the fiscal quarter immediately preceding
the fiscal quarter during which such request is made materially adversely vary
(as determined by you in your reasonable discretion) from the Projections
submitted by us to you for such fiscal quarter in accordance with the provisions
of Paragraph 14(vii) hereof or (iii) if after giving effect to such requested
Receivable Advance, the sum of all outstanding Advances plus all outstanding
Letters of Credit would exceed the Maximum Amount. You may reserve out of the
Purchase Price of all Receivables sold and assigned to you an amount which, in
your reasonable judgment, is sufficient to protect you against possible returns,
claims, allowances, expenses and recourse to us on Receivables sold and assigned
to you and against other contingencies for which we may be chargeable hereunder
(collectively, "Reserves"). As used herein, the term "net amount" of
Receivables shall mean Eligible Receivables less (a) Reserves established by you
and (b) returns, allowances and discounts to Customers upon shortest or longest
selling terms, as you may elect.
(b) In addition to the Receivable Advances described in clause "(a)"
above you may, upon our request therefor, and in your sole discretion, make
loans ("Loans") to us up to an amount not to exceed the Borrowing Base;
provided, however, no such request for Loans may be made (i) at a time when an
- -------- -------
Event of Default shall have occurred and be continuing, (ii) at a time when our
actual results from operations for the fiscal quarter immediately preceding the
fiscal quarter during which such request is made materially adversely vary (as
determined by you in your sole reasonable discretion) from the Monthly
Projections submitted by us to you covering such fiscal quarter in accordance
with the provisions of Paragraph 14(vii) hereof or (iii) if after giving effect
to such requested Loan, the sum of all outstanding Advances plus all outstanding
Letters of Credit would exceed the Maximum Amount. Amounts borrowed under this
clause "(b)" may be repaid and reborrowed from time to time until such time as
this Agreement terminates.
(c) To the extent, at any time, the sum of the outstanding (i)
Advances plus (ii) Letters of Credit at any time exceeds the Maximum Amount, we
shall pay to you upon your demand any and all amounts necessary to reduce the
aggregate outstanding Advances and Letters of Credit to an amount not greater
than the Maximum Amount.
(d) From time to time we may request Advances from you in excess of
the Formula Amount (but not in excess of the Maximum Line) and you may in your
sole discretion agree to make such Advances (hereinafter called "Overadvances").
All Overadvances are discretionary by you, may be terminated at any time, and
are payable on demand. Nothing herein shall limit or restrict your right to
adjust advance formulas upward or downward based
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<PAGE>
upon your lending criteria which is established in your sole discretion and on
your own collateral evaluations.
7. On any business day when we desire to have an Advance made in
accordance with Paragraph 6 hereof, we shall give you written or telephonic
notice of the requested Advance by 12:00 noon New York time. You shall not
incur any liability to us for acting upon any telephonic notice that you believe
in good faith to have been given by any of our duly authorized officers or other
persons authorized to request Advances on our behalf or for otherwise acting in
good faith under this Paragraph. You reserve the right, at your option, to not
make any Advance pursuant to any written or telephonic notice unless you have
also received the most recently required weekly Borrowing Base Certificate
pursuant to the terms of Paragraph 14(vii) by 12:00 noon New York time.
8. We shall pay you interest on all outstanding (a) Overadvances at the
Overadvance Rate for each day they are outstanding; provided, however, we shall
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pay you interest at the Contract Rate on any Overadvances outstanding through
and including September 30, 1999; provided, further, we shall pay you interest
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at the Contract Rate on any Overadvances outstanding during the first twenty
(20) days of any month (the "Specified Period") so long as (i) the aggregate
amount of outstanding Overadvances for the Specified Period (the "Overadvance
Amount") does not exceed $1,500,000 at any time during the Specified Period and
(ii) the Overadvance Amount is reduced to zero ($0) on the last day of the
Specified Period, (b) Receivable Advances at the Contract Rate from the date of
advance to two (2) business days after the date of actual collection, or where
applicable, to the first business day following the month of the Customer's
bankruptcy or insolvency and (c) Loans at the Contract Rate for each day they
are outstanding. Interest shall be (a) computed on the basis of actual days
elapsed over a 360 day year, (b) calculated by you on a daily basis and charged
to our account monthly and (c) payable in arrears on the last day of each month.
Upon the occurrence and during the continuance of an Event of Default, interest
shall be payable at the Default Rate. Notwithstanding the foregoing, in no
event shall interest exceed the maximum rate permitted under any applicable law
or regulation, and if any provision of this Agreement is in contravention of
such law or regulation, such provision shall be deemed amended to provide for
interest at said maximum rate and any excess amount shall either be applied, at
your option, to outstanding Advances in such order as you determine or refunded
by you to us.
9. (a) For your services hereunder, (i) you shall receive a commission
equal to (1) .45% with respect to Receivables credit approved by you and (2)
.30% with respect to Receivables not credit approved by you; and (ii) in the
case of any Receivables from a Customer who is a debtor-in-possession, you shall
receive an additional commission equal to no less than one (1%) percent for 15
day selling terms and two (2%) percent for 30 day selling terms, other than with
respect to a Customer identified on Exhibit 9(a) for which the amount of
additional commission is stated thereon, of the gross invoice amount of each
Receivable, which commission shall be due and payable by us as of the date a
Receivable arises, and shall then be chargeable to our account with you.
(b) Your charge specified in Paragraph 9(a) hereof, is based upon
maximum selling terms of 75 days, and no more extended terms or additional
dating shall be granted by us to any Customer without your prior written
approval. When such approval is given by you, your charge with respect to the
Receivables covered thereby shall be increased by an additional one-
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<PAGE>
quarter of one (1/4%) percent for each additional thirty (30) days or portion
thereof of extended terms or additional dating.
(c) The minimum aggregate factoring commissions payable under this
Agreement for each contract year hereof shall be $250,000, which, to the extent
of any deficiency (after giving effect to commissions payable under subparagraph
(a)), shall be chargeable to our account with you yearly at the end of each
contract year.
(d) In the event the average closing daily unpaid balance of all
Advances hereunder during any calendar month is less than the Maximum Line, we
shall pay you a fee at a rate per annum equal to one-half of one percent (.50%)
on the amount by which the Maximum Line exceeds such average daily unpaid
balance. Such fee shall be calculated on the basis of a year of 360 days and
actual days elapsed; and shall be charged to our account with you on the first
day of each month with respect to the prior month.
(e) Upon your performance of any collateral monitoring - namely any
field examination, collateral analysis or other business analysis, the need for
which is to be determined by you and which monitoring is undertaken by you or
for your benefit, an amount equal to $600 per day, per person, for each person
employed to perform such monitoring shall be charged to our account with you;
provided, however, so long as (i) no Event of Default shall have occurred and be
- -------- -------
continuing and (ii) our actual results from operations for the fiscal quarter
immediately preceding the fiscal quarter during which such collateral monitoring
fees are incurred do not materially adversely vary (as determined by you in your
reasonable discretion) from the Monthly Projections submitted by us to you
covering such fiscal quarter in accordance with the provisions of Paragraph
14(vii) hereof, then the aggregate amount of all such collateral monitoring fees
shall not exceed $20,000 during any contract year. We shall also reimburse you
for all reasonable costs, disbursements and expenses incurred by you and the
person performing such collateral monitoring which such amounts shall be charged
to our account with you.
(f) Upon execution of this Agreement, we shall pay you a closing fee
in the amount of (i) $20,000 minus (ii) any unused portion of the $20,000
deposit previously paid by us to you, which may be charged by you to our account
with you.
10. If any tax by any governmental authority (other than for your income
and franchise taxes) is or may be imposed on or as a result of any transaction
between us, or in respect to sales or the merchandise affected by such sales,
which you are or may be required to withhold or pay, we agree to indemnify and
hold you harmless in respect of such taxes, and we will repay you the amount of
any such taxes, which shall be charged to our account, and until we shall
furnish you with indemnity therefor (or supply you with evidence satisfactory to
you that due provision for the payment thereof has been made), you may hold
without interest any balance standing to our credit and you shall retain your
security interest in the Collateral.
11. (a) To secure the prompt payment to you of the Obligations, we hereby
assign, pledge and grant to you a continuing security interest in and to the
Collateral, whether now owned or existing or hereafter acquired or arising and
wheresoever located, whether or not the same is subject to Article 9 of the UCC.
All of the our ledger sheets, files, records, books of account, business papers
and documents relating to the Collateral shall, until
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<PAGE>
delivered to or removed by you, be kept by us in trust for you until all
Obligations have been paid in full and this Agreement has been irrevocably
terminated. Each confirmatory assignment schedule or other form of assignment
hereafter executed by us shall be deemed to include the foregoing grant, whether
or not the same appears therein.
(b) You may file one or more financing statements disclosing your
security interest in the Collateral without our signature appearing thereon or
you may sign on our behalf as provided in Paragraph 15 hereof. We agree that a
carbon, photographic or other reproduction of this Agreement shall be sufficient
as a financing statement. We agree to execute such further instruments and
financing statements as may be required by any law in connection with the
transactions contemplated hereby and to cooperate with you in the filing or
recording and renewal thereof, and we hereby further authorize you (and appoint
any Person whom you designate as our attorney with power) to sign our name on
any such instrument and on financing statements under the UCC. Recourse to
security shall not be required and we shall at all times remain liable for the
repayment on demand of all Obligations.
12. During the term of this Agreement, we covenant that we shall:
(a) not dispose of any of the Collateral whether by sale, lease or
otherwise except for (i) the sale of Inventory in the ordinary course of
business, and (ii) the disposition or transfer in the ordinary course of
business during any fiscal year of obsolete and worn-out Equipment having an
aggregate fair market value of not more than $100,000 and only to the extent
that (x) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to your first priority security interest or (y) the
proceeds of which are remitted to you in reduction of the Obligations;
(b) not encumber, mortgage, pledge, assign or grant any security
interest in any Collateral or any of our other assets to anyone other than you
and except for Permitted Liens;
(c) place notations upon our books of account and any financial
statement prepared by us to disclose your security interest in the Collateral;
(d) keep and maintain the Equipment in good operating condition,
except for ordinary wear and tear, and make all necessary repairs and
replacements thereof so that the value and operating efficiency shall at all
times be maintained and preserved. We shall not permit any such items to become
a fixture to real estate or accessions to other personal property;
(e) perform all other steps requested by you to create and maintain in
your favor a valid perfected first security interest in all Collateral (except
for Permitted Liens); and
(f) defend the Collateral against the claims and demands of all
parties.
13. We represent, warrant (each of which such representations and
warranties shall be deemed repeated upon the making of a request for an Advance
and made as of the time of each Advance made hereunder), and covenant that:
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(a) we are a corporation duly organized and validly existing under the
laws of the State of Delaware and duly qualified and in good standing in every
other state or jurisdiction in which the nature of our business requires such
qualification;
(b) the execution, delivery and performance of this Agreement and the
other Factoring Documents (i) have been duly authorized, (ii) are not in
contravention of our certificate of incorporation, by-laws or of any indenture,
agreement or undertaking to which we are a party or by which we are bound and
(iii) are within our corporate powers;
(c) this Agreement and the other Factoring Documents executed and
delivered by us are our legal, valid and binding obligations, enforceable in
accordance with their terms;
(d) we keep and will continue to keep all of our books and records
concerning the Collateral at our offices located at 2075 91st Street, North
Bergen, New Jersey 07047 and will not move such books and records without giving
you at least thirty (30) days prior written notice;
(e) the operation of our business is and will continue to be in
compliance in all material respects with all applicable federal, state and local
laws, including but not limited to all applicable environmental laws and
regulations;
(f) based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i) we
have not engaged in any Prohibited Transactions as defined in paragraph 406 of
ERISA and paragraph 4975 of the Internal Revenue Code, as amended; (ii) we have
met all applicable minimum funding requirements under paragraph 302 of ERISA in
respect of our plans; (iii) we have no knowledge of any event or occurrence
which would cause the Pension Benefit Guaranty Corporation to institute
proceedings under Title IV of ERISA to terminate any employee benefit plan(s);
(iv) we have no fiduciary responsibility for investments with respect to any
plan existing for the benefit of persons other than our employees; and (v) we
have not withdrawn, completely or partially, from any multi-employer pension
plan so as to incur liability under the Multiemployer Pension Plan Amendments
Act of 1980;
(g) we are solvent, able to pay our debts as they mature, have capital
sufficient to carry on our business and all businesses in which we are about to
engage and the fair saleable value of our assets (calculated on a going concern
basis) is in excess of the amount of our liabilities;
(h) there is no pending or threatened litigation, actions or
proceeding which involve the possibility of materially and adversely affecting
our business, assets, operations, prospects or condition (financial or
otherwise), or the Collateral or our ability to perform this Agreement;
(i) all balance sheets and income statements which have been delivered
to you fairly, accurately and properly state our financial condition on a basis
consistent with that of previous financial statements and there has been no
material adverse change in our financial condition as reflected in such
statements since the date thereof and such statements do not fail to disclose
any fact or facts which might materially and adversely affect our financial
condition;
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(j) (x) we possess all of the licenses, patents, copyrights,
trademarks and tradenames necessary to conduct our business, (y) there has been
no assertion or claim of violation or infringement with respect thereof and (z)
all such licenses, patents, copyrights, trademarks and tradenames are listed on
Exhibit 13(j);
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(k) we will pay or discharge when due all taxes, assessments and
governmental charges or levies imposed upon us;
(l) we will promptly inform you in writing of: (i) the commencement of
all proceedings and investigations by or before and/or the receipt of any
notices from, any governmental or nongovernmental body and all actions and
proceedings in any court or before any arbitrator against or in any way
concerning any of our properties, assets or business, which might singly or in
the aggregate, have a materially adverse effect on us; (ii) any amendment of our
certificate of incorporation or by-laws; (iii) any change in our business,
assets, liabilities, condition (financial or otherwise), results of operations
or business prospects which has had or might have a materially adverse effect on
us; (iv) any Event of Default; (v) any default or any event which with the
passage of time or giving of notice or both would constitute a default under any
agreement for the payment of money to which we are a party or by which we or any
of our properties may be bound which would have a material adverse effect on our
business, assets, operations, prospects or condition (financial or otherwise) or
the Collateral; (vi) any change in the location of our executive offices or in
the office in which our records relating to Receivables are kept from the
locations listed on Exhibit 13(l)(vi) attached hereto (which notice shall be
-----------------
provided to you at least ten (10) days prior to any such change); (vii) any
change in the location of our Inventory or Equipment from the locations listed
on Exhibit 13(l)(vii) attached hereto (which notice shall be provided to you at
------------------
least thirty (30) days prior to any such change); (viii) any change in our
corporate name (which notice shall be provided to you at least thirty (30) days
prior to any such change); (ix) any material delay in our performance of any of
our obligations to any Customer and of any assertion of any material claims,
offsets or counterclaims by any Customer and of any allowances, credits and/or
other monies granted by us to any Customer; (x) and furnish to you all material
adverse information relating to the financial condition of any Customer; and
(xi) any material return of goods;
(m) we will not (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other than
our indebtedness to you and as set forth on Exhibit 13(m) attached hereto and
-------------
made a part hereof; (ii) declare, pay or make any dividend or distribution on
any shares of our common stock or preferred stock or apply any of our funds,
property or assets to the purchase, redemption or other retirement of any of our
common or preferred stock, except that so long as (a) no Event of Default shall
have occurred and be continuing at the time of or would occur immediately after
giving effect to the making of such dividend, (b) the amount of such dividend is
set forth in writing to you (the "Dividend Notice") not less than fifteen (15)
days prior to the making of such dividend, (c) at the time of and immediately
after giving effect to the making of such dividend, the outstanding Obligations
do not exceed an amount equal to the sum of (1) the Advance Percentage times our
then outstanding Eligible Receivables plus (2) the lesser of (i) the amount set
forth on the then applicable Monthly Projections under the heading "LC Use" and
(ii) fifty percent (50%) of the aggregate amount of outstanding documentary
Letters of Credit relating to finished goods Inventory and (d) you have received
our quarterly financial statements in accordance with Paragraph 14(ii) hereof
(and in the case of a fiscal quarter ending at the end of a fiscal year, our
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audited financial statements in accordance with Paragraph 14(iv) hereof) with
respect to the quarter immediately preceding the quarter in which such dividend
is to be made, then on the first day of the fiscal quarter immediately following
your receipt of the then applicable quarterly or annual financial statements, as
required by and referenced in the foregoing clause "(d)", we shall be permitted
to make a dividend to Parent in an amount not to exceed the amount specified in
the applicable Dividend Notice; (iii) directly or indirectly prepay any
indebtedness (other than to you), or repurchase, redeem, retire or otherwise
acquire any of our indebtedness; (iv) make advances, loans or extensions of
credit to any Person or make any investments in any Person; (v) become either
directly or contingently liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise; (vi) enter into any
merger, consolidation or other reorganization with or into any other Person or
acquire all or a portion of the assets or stock of any Person or permit any
other Person to consolidate with or merge with us; (vii) form any subsidiary or
enter into any partnership, joint venture, spin off or similar arrangement;
(viii) materially change the nature of the business in which we are presently
engaged; (ix) change our fiscal year or make any changes in accounting treatment
and reporting practices without prior written notice to you except as required
by GAAP or by law; (x) enter into any transaction with any affiliate, except in
ordinary course on arms-length terms; (xi) bill Receivables under any name
except our present name or (xii) directly or indirectly redeem, repurchase,
retire or otherwise acquire or make any payment or distribution with respect to
the Subordinated Debt except to the extent permitted pursuant to the
Subordination Agreement;
(n) we shall not at any time permit our Tangible Net Worth to be less
than $7,500,000;
(o) all financial projections of our performance prepared by us or at
our direction and delivered to you will represent, at the time of delivery to
you, our best estimate of our future financial performance and will be based
upon assumptions which are reasonable in light of our past performance and then
current business conditions;
(p) we will not make capital expenditures in any fiscal year an amount
in excess of $500,000;
(q) we shall not at any time permit our Working Capital to be less
than $5,500,000;
(r) we shall cause to be maintained at all times a ratio of Current
Assets to Current Liabilities of not less than the ratio of 1.40 to 1.00;
(s) none of the proceeds of any Advances hereunder will be used
directly or indirectly to "purchase" or "carry" "margin stock" or to repay
indebtedness incurred to "purchase" or "carry" "margin stock" within the
respective meanings of each of the quoted terms under Regulation G of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect;
(t) we will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. At our own cost and expense in
amounts and with carriers acceptable to you, we shall (i) keep all our insurable
properties and properties in which we have an interest insured against the
hazards of fire, flood, sprinkler leakage, those hazards covered by
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extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to ours
including, without limitation, business interruption insurance; (ii) maintain a
bond in such amounts as is customary in the case of companies engaged in
businesses similar to ours insuring against larceny, embezzlement or other
criminal misappropriation of insured's officers and employees who may either
singly or jointly with others at any time have access to our assets or funds
directly or through authority to draw upon such funds or to direct generally the
disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which we are
engaged in business; (v) furnish you with (x) copies of all policies and
evidence of the maintenance of such policies at least thirty (30) days before
any expiration date, (y) endorsements to such policies naming you as "co-
insured" or "additional insured" and appropriate loss payable endorsements in
form and substance satisfactory to you, naming you as loss payee, and (z)
evidence that as to you the insurance coverage shall not be impaired or
invalidated by any act or neglect of us and the insurer will provide you with at
least thirty (30) days notice prior to cancellation and (vi) maintain life
insurance covering the life of Glenn Sands in the amount of $1,000,000, the
proceeds of which shall be assigned to you pursuant to documentation acceptable
to you. We shall instruct the insurance carriers that in the event of any loss
thereunder, the carriers shall make payment for such loss to you and not to you
and us jointly. If any insurance losses are paid by check, draft or other
instrument payable to you and us jointly, you may endorse our name thereon and
do such other things as you may deem advisable to reduce the same to cash. You
are hereby authorized to adjust and compromise claims. All loss recoveries
received by you upon any such insurance may be applied to the Obligations, in
such order as you in your sole discretion shall determine. Any surplus shall be
paid by you to us or applied as may be otherwise required by law. Any deficiency
thereon shall be paid by us to you, on demand;
(u) we shall not be entitled to pledge your credit for any purpose
whatsoever; and
(v) the aggregate value of Inventory kept at (i) all locations in
Mexico shall not at any time exceed $200,000, except for Inventory located at a
Mexican Depositary and (ii) a Mexican Depositary shall not at any time exceed
the aggregate amount of Inventory covered by the applicable pledge agreement
constituting the Mexican Documentation for such location.
(w) we shall deliver to you on the fifteenth (15th) day of each month
a certificate signed by one of our authorized officers stating the value of
Inventory located at each location in Mexico as of the last day of the
immediately preceding month.
14. We will maintain a system of accounting established and administered
in accordance with sound business practices to permit preparation of financial
statements in conformity with GAAP. We will promptly furnish you with such
statements prepared by or for us showing our financial condition and the results
of our operations as you request. We will deliver to you the financial
statements, Projections and other reports described below:
(i) As soon as available and in any event within thirty (30)
days after the end of each month, our balance sheet as at the end of such month
and related statements of
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income, retained earnings and changes in cash flow for such month, which have
been internally prepared by us.
(ii) As soon as available and in any event within forty five
(45) days after the end of each of our fiscal quarters, our balance sheet as at
the end of such fiscal quarter and related statements of income, retained
earnings and changes in cash flow for such fiscal quarter, which have been
internally prepared by us.
(iii) As soon as available and in any event within ninety (90)
days after the end of each fiscal year of Parent, Parent's balance sheet on a
consolidating basis as at the end of such fiscal year and the related statements
of income, retained earnings and changes in cash flow for such fiscal year,
setting forth in comparative form the figures as at the end of and for the
previous fiscal year, which have been internally prepared by us.
(iv) As soon as available (i) and in any event within ninety
(90) days after the end of each of our fiscal years and at the end of each
fiscal year of Parent, our balance sheet and the balance sheet of Parent on a
consolidated basis in each case as at the end of such fiscal year and the
related statements of income, retained earnings and changes in cash flow for
such fiscal year, setting forth in comparative form the figures as at the end of
and for the previous fiscal year, each of which shall have been reported on by
Arthur Andersen LLP or such other independent certified public accountants who
shall be satisfactory to you (the "Accountants") and shall be accompanied by an
unqualified audit report issued by the Accountants and (ii) final drafts, if
any, of our balance sheet as at the end of each of our fiscal years and the
related statements of income, retained earnings and changes in cash flow for
such fiscal year, which have been internally prepared by us.
(v) Together with the financial statements furnished pursuant
to clause "(iv)" above, we shall deliver to you a certificate of our Accountants
addressed to you stating that (i) they have caused this Agreement to be reviewed
and (ii) in making the examination necessary for the issuance of such financial
statements, nothing has come to their attention to lead them to believe that any
Event of Default exists insofar as it relates to accounting matters and, in
particular, they have no knowledge of any Event of Default or, if such is not
the case, specifying such Event of Default and its nature, when it occurred and
whether its continuing.
(vi) At the times the financial statements are furnished
pursuant to clauses "(i)", "(ii)", "(iii)" and "(iv)" above, we shall provide
you a certificate of our President or Chief Financial Officer stating that,
based on an examination sufficient to enable him to make an informed statement,
no Event of Default exists, or, if such is not the case, specifying such Event
of Default and its nature, when it occurred, whether it is continuing and the
steps being taken by us with respect to such event.
(vii) On the date hereof as respects our fiscal quarter ended
June 30, 1999 and not later than fifteen (15) days prior to the beginning of
each of our fiscal quarters thereafter commencing with our fiscal quarter
beginning October 1, 1999, Projections for the immediately succeeding twelve
(12) month period, the first six (6) months of which shall be prepared on a
month by month basis (the "Monthly Projections") and the last six (6) months of
which shall be prepared on a quarter by quarter basis, which Projections shall
be reasonably acceptable to you and shall include our ability to comply with the
limits set forth in Paragraphs
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<PAGE>
6(a), (b) and (c) hereof. Such Projections shall be accompanied by a certificate
signed by our President or Chief Financial Officer to the effect that such
Projections have been prepared on the basis of sound financial planning practice
consistent with the past budgets and financial statements and that such officer
has no reason to question the reasonableness of any material assumptions on
which such Projections were prepared.
(viii) Concurrently with the delivery of the Projections
referenced in clause "(vii)" above, a written report summarizing all Material
Variances from the Projections most recently delivered to you and a discussion
and analysis by management with respect to any such Material Variances. For
purposes of this clause "(viii)", the term "Material Variance" means a variance
of ten percent (10%) or more from any line item referenced on the Projections
most recently delivered to you.
(ix) On the fifteenth (15th) day of each month, we shall
deliver to you a fully completed and executed Borrowing Base Certificate as of
the immediately preceding business day of such month; provided however, we shall
----------------
provide you with a Borrowing Base Certificate on a more current basis as you
shall request in the good faith exercise of your reasonable discretion.
(x) Promptly upon the filing thereof, copies of all
registration statements and annual, quarterly, monthly and other regular reports
which we or our Parent files with the Securities and Exchange Commission.
(xi) Together with the financial statements furnished pursuant
to clauses "(iii)" and "(iv)" above, we shall deliver to you a certificate
signed by an authorized officer of Parent stating that from the date hereof
through and including the date on which such financials are furnished to you,
Parent has maintained (free of all encumbrances, mortgages, pledges and security
interests) marketable securities, cash and other cash equivalents net of all
liabilities of Parent in an aggregate amount of not less than $4,000,000.
15. We hereby appoint you or any other Person whom you may designate as
our attorney, with power to: (i) endorse our name on any checks, notes,
acceptances, money orders, drafts or other forms of payment or security that may
come into your possession; (ii) sign our name on any invoice or bill of lading
relating to any Receivables, drafts against customers, schedules and assignments
of Receivables, notices of assignment, financing statements and other public
records, verifications of account and notices to or from Customers; (iii) verify
the validity, amount or any other matter relating to any Receivable by mail,
telephone, telegraph or otherwise with Customers; (iv) execute customs
declarations and such other documents as may be required to clear Inventory
through customs; and (v) on and after such time as you shall determine in the
exercise of your reasonable discretion and based on such evidence as you shall
reasonably deem reliable that one or more Customer invoices has not been marked
payable to you in a manner satisfactory to you, notify the post office
authorities to change the address for delivery of our mail to an address
designated by you, and to receive, open and dispose of all mail addressed to us.
We hereby ratify and approve all acts of the attorney. Neither you nor the
attorney will be liable for any acts or omissions or for any error of judgment
or mistake of fact or law, except in the event of your gross negligence or
willful misconduct. This power, being coupled with an interest, is irrevocable
so long as any Receivable which is sold and assigned to you or in which you have
a security interest remains unpaid and until the Obligations have been fully
satisfied.
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<PAGE>
16. We will pay you on demand all costs, expenses and liabilities
incurred, including a reasonable allowance for attorneys' fees, in connection
with (a) the execution and delivery of this Agreement and the other Factoring
Documents, (b) any waiver, amendment, supplement, consent or modification hereof
or thereof, (c) the filing or perfecting of any security interest in the
Collateral granted by us or by any of our affiliates, shareholders or
Guarantors, (d) obtaining or enforcing payment of any Obligation of us to you,
(e) the prosecution or defense of any action or proceeding concerning any matter
arising out of or connected with this Agreement, any other Factoring Document,
any of the Receivables assigned to you, any Obligations of us to you or any
Collateral therefor, including, without limitation, effecting collection of
Receivables whether by adjustments, litigation or otherwise, and realization
upon recovered or returned merchandise and defending in whole or in part any and
all actions or proceedings brought by us, (f) your obtaining performance of the
Obligations under this Agreement and any other Factoring Document, including,
but not limited to, the enforcement or defense of your security interests,
assignments of rights and Liens hereunder as valid perfected security interests,
(g) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, (h) any appraisals or re-appraisals of any
property (real or personal) pledged to you by us as Collateral for, or any other
Person as security for, our Obligations hereunder and (i) any consultations in
connection with any of the foregoing. We shall also pay your customary bank
charges for all bank services performed or caused to be performed by you for us
at our request or in connection with our account with you. All such costs and
expenses together with all filing, recording and search fees, taxes and interest
payable by us to you shall be payable on demand and shall be secured by the
Collateral.
17. We waive presentment and protest of any instruments and all notices
thereof, notice of default and all other notices to which we might otherwise be
entitled. We shall maintain, at our expense, proper books of account. You
shall have the right to inspect and make extracts from such books and all of our
files, records and correspondence at all reasonable times. All sales of
Receivables to you by us shall be deemed to include all of our right, title and
interest to all of our books, records and files and all other data and documents
relating to each Receivable. We shall furnish you with as many duplicate
Customer invoices as you may from time to time require. We certify to you that
1407 Broadway, Suite 620, New York, New York 10018 is our mailing address, our
chief place of business, and the address set forth in Paragraph 13(d) of this
Agreement is the address of the office at which our records relating to
Receivables are kept.
18. The term of this Agreement shall begin as of the effective date hereof
and continue until the last day of the twenty-fourth month hereafter and
thereafter shall be automatically renewed from year to year unless terminated on
such last day of such month or any anniversary thereof by our giving you at
least sixty (60) days prior written notice by registered or certified mail,
return receipt requested. You may terminate this Agreement upon five (5) days
prior written notice to us (other than in connection with an Event of Default
set forth in clause "(iv)" below where no such prior written notice shall be
required) and all Obligations shall, unless and to the extent that you otherwise
elect, become immediately due and payable upon the occurrence and during the
continuance of any one or more of the following events (each an "Event of
Default"): (i) we fail to pay any Obligation when due ; (ii) any
representation, warranty or statement made by us, any Guarantor, surety or other
party liable upon any Obligation under this Agreement, the LC Supplement or any
other Factoring Document or under any certificate, statement or document
delivered pursuant to the terms of any of the foregoing, or
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in connection with the transactions contemplated by any of the foregoing should
at any time be false or misleading in any material respect; (iii) (1) failure to
perform under and/or committing any breach of paragraphs 1, 2, 3, 4, 6(c), 6(d),
8, 12(a), 12(b), 12(c), 12(e), 13(d), 13(l), 13(m), 13(n), 13(p), 13(q), 13(r),
13(s), 13(t), 13(v), 14 or 20 of this Agreement or (2) failure to perform under
and/or committing any breach of this Agreement, the LC Supplement or any other
Factoring Document (other than those set forth in clause (i) immediately above
or any provision embodied in or covered by any other clause or this Paragraph
18) and such breach continues unremedied for a period of five (5) days after the
date on which you shall have notified us of such breach; (iv) we or any
Guarantor, surety or other party liable upon any Obligation become(s) unable to
pay our or its debts as they mature, make(s) a general assignment for the
benefit of creditors, suspend(s) the transaction of our or its usual business,
convene(s) or cause(s) to be convened a meeting of our or its creditors or
principal creditors or take(s) advantage of the insolvency laws of any State, or
a case is commenced or a petition in bankruptcy or for an arrangement or
reorganization under the Federal Bankruptcy Code is filed by or against us or
any such other party or a custodian or receiver (or other court designee
performing the functions of a receiver) is appointed for or takes possession of
our or any such other party's assets or affairs or an order for relief in a case
commenced under the Federal Bankruptcy Code is entered; (v) any Guarantor,
surety or other party liable upon any Obligations shall die; or we shall be
dissolved; (vi) if there shall be issued or filed against us, any Guarantor,
surety or other party liable upon any Obligations, any tax lien (which has not
been stayed) on any of our assets having an aggregate value in excess of
$50,000; (vii) other than in connection with a Permitted Guaranty Termination,
any Guarantor challenges the effectiveness of or seeks or purports to terminate
the effectiveness of the applicable Guaranty; (viii) any Guarantor fails to
comply with the provisions of the applicable Guaranty; (ix) there shall be
issued or filed against us any attachment, injunction, execution, or judgment
which is not removed or stayed within thirty (30) days after same was issued or
filed; (x) Glenn Sands or a successor acceptable in all respects to you who
becomes a Guarantor within forty-five (45) days after Glenn Sands leaves our
management fails to be involved in our senior management, or Parent or a
successor acceptable in all respects to you who becomes a Guarantor fails to own
one hundred percent (100%) of our capital stock; (xi) any lien created hereunder
or under any other Factoring Document for any reason ceases to be or is not a
valid and perfected lien having a first priority interest or (xii) a default has
occurred and is continuing under any of the Mexican Documentation.
Notwithstanding any termination of this Agreement, we shall continue to assign
Receivables to you and turn over all collections to you as herein provided until
all Obligations shall have been fully paid and satisfied, and until then this
Agreement shall remain in full force and effect as to and be binding upon us,
and you shall be entitled to retain your security interest in all Collateral.
19. Upon the occurrence of any Event of Default, you shall have all the
rights and remedies of a secured party under the UCC and other applicable laws
with respect to all Collateral in which you have a security interest, such
rights and remedies being in addition to all of your other rights and remedies
provided for herein. You may sell or cause to be sold any or all of such
Collateral, in one or more sales or parcels, at such prices and upon such terms
as you may deem best, and for cash or on credit or for future delivery, without
your assumption of any credit risk, and at a public or private sale as you may
deem appropriate. Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market, you
will give us reasonable notice of the time and place of any public sale thereof
or of the time after which any private sale or any other intended disposition
thereof is to be made. The requirements of reasonable notice shall be met if
any such notice is mailed,
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<PAGE>
postage prepaid, in accordance with the notice provisions of Paragraph 21
hereof, at least seven (7) business days before the time of the sale or
disposition thereof. You may invoice any such sale in your name or in our name,
as you may elect, as the seller, and in such latter event such invoice shall be
marked payable to you as provided in Paragraph 2 hereof. You may be the
purchaser at any such public sale and thereafter hold the property so sold at
public sale, absolutely, free from any claim or right of any kind, including any
equity of redemption. The proceeds of sale shall be applied first to all costs
and expenses of and incident to such sale, including reasonable attorneys' fees,
and then to the payment (in such order as you may elect) of all Obligations. You
will return any excess to us and we shall remain liable for any deficiency. In
connection with the exercise of the foregoing remedies, you are granted
permission to use all of our trademarks, tradenames, tradestyles, patents,
patent applications, licenses, franchises and other proprietary rights which are
used in connection with (a) Inventory for the purpose of disposing of such
Inventory and (b) Equipment for the purpose of completing the manufacture of
unfinished goods.
20. Except to the extent duplicative financial statements are required to
be delivered on behalf of Parent under and in accordance with the provisions of
Paragraph 14 hereof, in which case the provisions of Paragraph 14 shall control,
we shall cause all corporate Guarantors of the Obligations, if any, to furnish
quarterly financial statements to you within forty-five (45) days after the end
of each of such Guarantor's fiscal quarters, and annual financial statements
within ninety (90) days after the end of each of such Guarantor's fiscal years,
all in form and substance reasonably acceptable to you and reviewed, in the case
of quarterly statements, and audited, in the case of annual statements, by an
independent certified public accountant acceptable to you. We shall cause all
individual guarantors of the Obligations, if any, to furnish to you his/her
personal financial statement in form and substance acceptable to you within
thirty (30) days after each anniversary of the date on which he/she furnishes to
you the first such statement. We shall provide to you, upon request, a
Certificate of Good Standing from the Secretary of State of our state of
incorporation and from every state where we are qualified to do business.
21. Any notice or request hereunder may be given to us or you at the
respective addresses set forth below or as may hereafter be specified in a
notice designated as a change of address under this Paragraph. Any notice or
request hereunder shall be given by registered or certified mail, return receipt
requested, hand delivery, overnight mail or telecopy (confirmed by mail).
Notices and requests shall be, in the case of those by hand delivery, deemed to
have been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have been
given three (3) business days after deposit in the mail, in the case of those by
overnight mail, one (1) business day after deposit with the overnight mail
carrier, and, in the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to you: Century Business Credit Corporation
119 West 40th Street
New York, New York 10018
Attention: Andrew H. Tananbaum
Telephone: (212) 703-3500
Telecopier: (212) 703-3639
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With a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118
Attention: Miriam L. Cohen, Esq.
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
If to us: Periscope Sportswear, Inc.
1407 Broadway, Suite 620
New York, New York 10018
Attention: Glenn Sands
Telephone: (212) 382-3660
Telecopier: (212) 382-3828
With copies to: Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Attention: Bruce Rich, Esq.
Telephone: (212) 603-6780
Telecopier: (212) 603-2001
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103
Attention: Donald Kreindler, Esq.
Telephone: (212) 977-9700
Telecopier: (212) 262-5152
We acknowledge that you shall endeavor in good faith to provide copies of
all notices to all law firms referenced above, but your failure to so provide
such copies shall not impair in any manner whatsoever your rights and remedies
hereunder, under the LC Supplement or under any other Factoring Document.
22. This Agreement is made and is to be performed under the law of the
State of New York and shall be governed by and construed in accordance with said
law. Each of the parties to this Agreement expressly submits and consents to
the jurisdiction of the Supreme Court of the State of New York in the County of
New York, with respect to any controversy arising out of or relating to this
Agreement, any other Factoring Document or any amendment or supplement thereto
or to any transactions in connection therewith and each of the parties to this
Agreement hereby waives personal service of any summons or complaint or other
process or papers to be issued in any action or proceeding involving any such
controversy and hereby agrees that service of such summons or complaint or
process may be made by registered or certified mail to the other party in
accordance with the provisions of Paragraph 21 hereof; failure on the part of
either party to appear or answer within thirty (30) days after such mailing of
such summons, complaint or process shall constitute a default entitling the
other party to enter a judgment or order as demanded or prayed for therein to
the extent that said Court or duly authorized Officer thereof may authorize or
permit. You and we do hereby waive any and all right to a trial by jury in any
such action or proceeding. In the event you commence any action or proceeding
against us, we
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will not assert any offset or counterclaim, of whatever nature or description,
in any such action or proceeding; provided that the foregoing shall not prohibit
us from asserting a compulsory counterclaim in any judicial proceeding brought
by you against us. No failure or delay by you in exercising any of your powers
or rights hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any such power or right preclude other or further exercise
thereof or the exercise of any other right or power. Your rights, remedies and
benefits hereunder are cumulative and not exclusive of any other rights,
remedies or benefits which you may have. This Agreement may only be modified in
writing and no waiver by you will be effective unless in writing and then only
to the extent specifically stated. You shall have the right to assign this
Agreement and all of your rights hereunder shall inure to the benefit of your
successors and assigns upon prior notice to us of such assignee; and this
Agreement shall inure to the benefit of and shall bind our respective successors
and permitted assigns.
23. Reinstatement. To the extent you receive repayment on account of the
-------------
Obligations, which repayment is thereafter set aside or required to be repaid by
you in whole or in part, then, to the extent of any sum not finally retained by
you (regardless of whether such sum is recovered from you by us, our estate or
trustee or any party acting for, on behalf of or through us or as our
representative), our obligations to you shall be reinstated and the security
interests created hereby shall remain in full force and effect (or be
reinstated) until we shall have made payment to you, which payment shall be due
on demand.
24. Capitalized terms used in this Agreement shall have the following
meanings:
"Accountants" has the meaning set forth in Paragraph 14(iv).
-----------
"Advance Percentage" means 90%.
------------------
"Advances" means the aggregate amount of all Receivable Advances, Loans and
--------
Overadvances.
"Borrowing Base" means, as at any date of determination thereof, an amount
---------------
equal to the sum of, without duplication, up to (a) the lesser of (i) the amount
set forth on the Monthly Projections as in effect on such date of determination
under the heading "Eligible Inventory @ 50%" and (ii) fifty percent (50%) of
Eligible Inventory plus (b) the lesser of (i) the amount set forth on the
Monthly Projections as in effect on such date of determination under the heading
"LC Use" and (ii) fifty percent (50%) of the aggregate amount of outstanding
documentary Letters of Credit relating to finished goods Inventory plus (c) the
Guaranty Availability Amount; provided, however, on and after the date on which
-------- -------
the first dividend payment, if any, is made to Parent in accordance with the
provisions of Paragraph 13(m)(ii) hereof, the term "Borrowing Base" shall at all
times thereafter mean, as at any date of determination thereof, an amount equal
to up to the lesser of (a) the amount set forth on the Monthly Projections as in
effect on such date of determination under the heading "LC Use" and (b) fifty
percent (50%) of the aggregate amount of outstanding documentary Letters of
Credit relating to finished goods Inventory.
"Borrowing Base Certificate" means the borrowing base certificate in the
--------------------------
form of Exhibit 24(a) hereto required to be delivered by us to you pursuant to
-------------
Paragraph 14(vii).
"Collateral" means and includes:
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(A) all Inventory;
(B) all Equipment;
(C) all General Intangibles;
(D) all Receivables;
(E) all books, records, ledgercards, files, correspondence, computer
programs, tapes, disks and related data processing software (owned by us or in
which we have an interest) which at any time evidence or contain information
relating to (A), (B), (C) and (D) above or are otherwise necessary or helpful in
the collection thereof or realization thereupon;
(F) documents of title, policies and certificates of insurance,
securities, chattel paper, other documents or instruments evidencing or
pertaining to (A), (B), (C), (D) and (E) above;
(G) all guaranties, liens on real or personal property, leases, and other
agreements and property which in any way secure or relate to (A), (B), (C), (D),
(E) and (F) above, or are acquired for the purpose of securing and enforcing any
item thereof;
(H) (i) all cash held as cash collateral to the extent not otherwise
constituting Collateral, all other cash or property at any time on deposit with
or held by you for our account (whether for safekeeping, custody, pledge,
transmission or otherwise), (ii) all present or future deposit accounts (whether
time or demand or interest or non-interest bearing) of us with you or any other
Person including those to which any such cash may at any time and from time to
time be credited, (iii) all investments and reinvestments (however evidenced) of
amounts from time to time credited to such accounts, (iv) all interest,
dividends, distributions and other proceeds payable on or with respect to (x)
such investments and reinvestments and (y) such accounts, and (v) all investment
property; and
(I) all products and proceeds of (A), (B), (C), (D), (E), (F), (G) and (H)
above (including, but not limited to, all claims to items referred to in (A),
(B), (C), (D), (E), (F), (G) and (H) above) and all our claims against third
parties (x) for (i) loss of, damage to, or destruction of, and (ii) payments due
or to become due under leases, rentals and hires of any or all of (A), (B), (C),
(D), (E), (F), (G) and (H) above and (y) proceeds payable under, or unearned
premiums with respect to policies of insurance in whatever form.
"Contract Rate" means an interest rate per annum equal to the greater of
-------------
(A) six percent (6.00%) or (B) (i) the Prime Rate plus (ii) one-quarter of one
----
percent (.25%).
"Current Assets" at a particular date, means all of our cash, cash
--------------
equivalents, accounts and inventory and all other items which would, in
conformity with GAAP, be included under current assets on our balance sheet as
at such date; provided, however, that such amounts shall not include (a) any
amounts for any indebtedness owing by any of our affiliates, unless such
indebtedness arose in connection with the sale of goods or other property in the
ordinary course of business and would otherwise constitute current assets in
conformity with GAAP, (b) any shares of stock issued by any of our affiliates,
(c) the cash surrender value of any life insurance policy (d) any assets which
would be classified as intangible assets under GAAP, (e) any
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<PAGE>
amounts in respect of chargebacks, discounts or allowances relating to
Receivables or (f) any prepaid expenses, including, without limitation, in
respect of deposits made by us to third parties.
"Current Liabilities" at a particular date, means all amounts which would,
-------------------
in conformity with GAAP, be included under current liabilities on our balance
sheet as at such date, but in any event including, without limitation, the
amounts of (a) all indebtedness payable on demand, or, at the option of the
Person to whom such indebtedness is owed, not more than twelve (12) months after
such date, (b) any payments in respect of any indebtedness (whether installment,
serial maturity, sinking fund payment or otherwise) required to be made not more
than twelve (12) months after such date, (c) all reserves in respect of
liabilities or indebtedness payable on demand or, at the option of the Person to
whom such indebtedness is owed, not more than twelve (12) months after such
date, the validity of which is contested at such date, (d) all Obligations to
you hereunder and (e) all accruals for federal or other taxes measured by income
payable within a twelve (12) month period.
"Customer" means and includes the account debtor with respect to any of the
--------
Receivables and/or prospective purchaser of goods, services or both with respect
to any contract or contract right, and/or any party who enters into or proposes
to enter into any contract or other arrangement with us, pursuant to which we
are to deliver any personal property or perform any services.
"Default Rate" means a rate equal to three percent (3.0%) per annum in
------------
excess of the Contract Rate.
"Eligible Inventory" means, as at any date of determination, the value
------------------
(determined at the lower of cost or market on a first-in, first-out basis) of
all our raw materials and finished goods Inventory located in the United States
of America. You shall establish and may adjust, in your reasonable discretion
exercised in good faith, standards to determine whether Inventory is eligible
for a Revolving Loan. Without limiting the foregoing, the following are not
Eligible Inventory: (a) work-in-process that is not readily marketable in its
current form; (b) finished goods which do not meet the specifications of the
purchase order for such goods, off-quality goods and goods classified as
seconds; (c) Inventory which you determine to be unacceptable for borrowing
purposes due to age, quality, type, category, quantity, and/or any other reason;
(d) Inventory with respect to which you do not have a valid, first priority and
fully perfected security interest; (e) Inventory with respect to which there
exists any Lien in favor of any Person other than Permitted Liens; (f) Inventory
produced in violation of the Fair Labor Standards Act and subject to the so-
called "hot goods" provisions contained in Title 25 U.S.C. 215 (a) (i); (g)
Inventory located at any location other than those locations set forth on
Exhibit 13(l)(vii) hereto; (h) excess, non-active, discontinued, slow-moving and
prior season goods; (i) supplies and packaging materials; (j) goods subject to a
proprietary or private label restriction on disposition or covered by a license
or design agreement to which we are a party, except to the extent you have
received a fully executed licensor or designer consent letter, as applicable, in
favor of and acceptable to you and (k) goods located in Mexico or any other
location outside the United States of America.
"Eligible Receivables" means and includes, as at any date of determination,
--------------------
each Receivable which conforms to the following criteria: (a) shipment of the
merchandise or the rendition of services has been completed; (b) no return,
rejection or repossession of the merchandise has occurred; (c) merchandise or
services shall not have been rejected or disputed by the Customer and there
shall not have been asserted any offset, defense or counterclaim; (d)
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<PAGE>
continues to be in full conformity with the representations and warranties made
by us to you with respect thereto; (e) is documented by an invoice in a form
approved by you and shall not be unpaid more than the earlier of (i) 60 days
from due date and (ii) 120 days from invoice date; (f) is not evidenced by
chattel paper or an instrument of any kind with respect to or in payment of the
Receivable unless such instrument is duly endorsed to and in your possession or
represents a check in payment of a Receivable; (g) if the Customer is located
outside of the United States, the goods which gave rise to such Receivable were
shipped after receipt by us from or on behalf of the Customer of an irrevocable
letter of credit, assigned and delivered to you and confirmed by a financial
institution acceptable to you and is in form and substance acceptable to you,
payable in the full amount of the Receivable in United States dollars at a place
of payment located within the United States; (h) such Receivable is not subject
to any Lien, other than Permitted Liens; (i) does not arise out of transactions
with any of your employees, officers, agents, directors, stockholders or
affiliates; (j) does not arise out of a bill and hold sale prior to shipment
and, if the Receivable arises out of a sale to any Person to which you are
indebted, the amount of such indebtedness, and any anticipated indebtedness, is
deducted in determining the face amount of such Receivable; (k) is net of any
returns, discounts, claims, credits and allowances; (l) if the Receivable arises
out of contracts between us and the United States, any state, or any department,
agency or instrumentality of any of them, we have so notified you, in writing,
prior to the creation of such Receivable, and, if you so request, there has been
compliance with any governmental notice or approval requirements, including
without limitation, compliance with the Federal Assignment of Claims Act; (m) is
a good and valid account representing an undisputed bona fide indebtedness
incurred by the Customer therein named, for a fixed sum as set forth in the
invoice relating thereto with respect to an unconditional sale and delivery upon
the stated terms of goods sold by us, or work, labor and/or services rendered by
us; (n) the total unpaid Receivables from such Customer does not exceed forty
percent (40%) of all Eligible Receivables; (o) does not arise out of progress
billings prior to completion of the order; and (p) is a credit approved
Receivable.
"Equipment" means and includes all of our now owned or hereafter acquired
---------
equipment, machinery and goods (excluding Inventory), whether or not
constituting fixtures, including, without limitation: plant and office
equipment, tools, dies, parts, data processing equipment, furniture and trade
fixtures, trucks, trailers, loaders and other vehicles and all replacements and
substitutions therefor and all accessions thereto.
"ERISA" shall have the meaning set forth in Paragraph 13(f).
-----
"Event of Default" means the occurrence of any of the events set forth in
----------------
Paragraph 18.
"Factoring Documents" means collectively this Agreement, the LC Supplement,
-------------------
the Guaranties, the Subordination Agreement, the Mexican Documentation and all
other instruments, documents and agreements executed by or on behalf of us and
delivered concurrently herewith or at any time hereafter to you in connection
with the Advances, the Loans or any other transaction contemplated by this
Agreement, all as amended, restated, supplemented, or modified from time to
time.
"Formula Amount" means, as at any date of determination thereof, an amount
--------------
equal to (a) the Borrowing Base plus (b) the Advance Percentage multiplied by
the net amount of the Purchase Price of our Eligible Receivables.
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<PAGE>
"GAAP" means generally accepted accounting principles, practices and
----
procedures in effect from time to time.
"General Intangibles" means and includes all of our now owned or hereafter
-------------------
acquired general intangibles including, without limitation, trademarks,
tradenames, tradestyles, trade secrets, equipment formulations, manufacturing
procedures, quality control procedures, product specifications, patents, patent
applications, copyrights, registrations, contract rights, choses in action,
causes of action, corporate or other business records, inventions, designs,
goodwill, claims under guarantees, licenses, franchises, tax refunds, tax refund
claims, computer programs, computer data bases, computer program flow diagrams,
source codes, object codes and all other intangible property of every kind and
nature.
"Guarantor" means individually, Parent, Glenn Sands and any other Person
---------
who may hereafter guarantee payment or performance of the whole or any part of
the Obligations and "Guarantors" means collectively all such Persons.
----------
"Guaranty Agreements" means the Guaranty Agreements which are executed by
-------------------
each Guarantor in your favor.
"Guaranty Availability Amount" means the lesser of (a) the Projected
----------------------------
Overformula Amount and (b) the aggregate maximum principal amount of Obligations
guaranteed by the Guarantors to you pursuant to the Guaranty Agreements.
"Inventory" means and includes all of our now owned or hereafter acquired
---------
goods, merchandise and other personal property, wherever located, to be
furnished under any contract of service or held for sale or lease, all raw
materials, work in process, finished goods and materials and supplies of any
kind, nature or description which are or might be used or consumed in our
business or used in selling or furnishing such goods, merchandise and other
personal property, and all documents of title or other documents representing
them.
"LC Supplement" means the Supplement Letter of Credit Security Agreement
-------------
dated the date hereof by and between you and us, as the same may be amended,
modified and supplemented from time to time.
"Letter of Credit" means letters of credit opened or caused to be opened by
----------------
you or factor guaranties issued by you pursuant to the terms of the Supplement
Letter of Credit and Security Agreement between you and us dated as of the date
hereof, as amended, modified and supplemented from time to time.
"Lien" means any lien, mortgage, pledge, security interest, charge, or
----
encumbrance of any kind, whether voluntary or involuntary, (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest).
"Loans" means the loans extended to us by you pursuant to Paragraph 6(b).
-----
"Maximum Amount" means the lesser of (i) the Maximum Line and (ii) the
--------------
Formula Amount.
"Maximum Line" means $36,000,000.
------------
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<PAGE>
"Mexican Depositary" means any one or more of the following: (a) Growrich
------------------
Mexico S.A. de C.V., Cidros #46 Despacho 603, Bosque de las Lomas, Cuajimalpa,
Mexico D.F.Z.C. 05120, (b) International Sewing de Mexico S.A. de C.V., KM. 9
Carretera Arroyo Zarco, Col "Aculco de Espinoza", C.P. 50360 Aculco, Edode
Mexico or (c) Tlatlaqui Ropa S.A. de C.V., #2 Int 102 Independencia, Colonia
Centro, Tlatlauquitepec, Puebla, Mexico 73900.
"Mexican Documentation" means the Pledge Agreements executed by us in favor
---------------------
of you and any and all documents, agreements and instruments executed in
connection therewith, as the same may be amended, modified and supplemented from
time to time.
"Monthly Projections" has the meaning set forth in Paragraph 14(vii).
-------------------
"Obligations" means and includes all loans, advances, indebtedness,
-----------
liabilities, obligations, debit balances, covenants and duties owing by us or
any of our subsidiaries or affiliates to you or your parent, subsidiary or
affiliate of every kind and description (whether now or hereafter existing and
whether arising under this Agreement, the LC Supplement, any other Factoring
Document or otherwise, including in connection with responding to our requests
for and furnishing us with information hereunder), direct or indirect, absolute
or contingent, due or to become due, including, without limitation, any
indebtedness, liabilities or obligations owing by us to others which you have
acquired by assignment, participation or otherwise, and further including,
without limitation, all interest, fees, commissions, charges, expenses and
attorneys' fees for which we are obligated hereunder.
"Overadvance Rate" means an interest rate per annum equal to 3% in excess
----------------
of the Contract Rate.
"Overadvances" shall have the meaning set forth in Paragraph 6(d).
------------
"Parent" means Giant Group, Ltd., a Delaware corporation.
------
"Parent on a Consolidated Basis" means the consolidation in accordance with
------------------------------
GAAP of the accounts or other items of Parent and its subsidiaries.
"Permitted Guaranty Termination" means Parent's termination of its Guaranty
------------------------------
Agreement (the "Guaranty Termination") in accordance with and upon satisfaction
of any of the following conditions:
1. (a) no Event of Default shall have occurred and be continuing at
the time of such Guaranty Termination, (b) at the time of and immediately
giving effect to such Guaranty Termination, the outstanding Obligations
shall not exceed an amount equal to eighty percent (80%) of our then
outstanding Eligible Receivables, (c) you shall have received from Parent
by registered or certified mail or by hand delivery written notice of the
Guaranty Termination at least sixty (60) days prior to the proposed
termination date thereof and (d) you shall have received, not later than
thirty (30) days prior to such proposed termination date Projections
covering the six (6) month period commencing on such proposed termination
date, which Projections shall be prepared on a month by month basis, shall
be acceptable to you and shall evidence our ability to comply with the
limits set forth in clause "(b)" above at all times during such six (6)
month period; or
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<PAGE>
2. (a) no Event of Default shall have occurred and be continuing at
the time of such Guaranty Termination and (b) you shall have received
evidence reasonably satisfactory to you that not less than $4,000,000 in
cash equity shall have been contributed to our capital prior to the
effective date of such Guaranty Termination; or
3. (a) no Event of Default shall have occurred and be continuing at
the time of such Guaranty Termination and (b) you shall have received not
less than $4,000,000 in cash collateral as security for the Obligations
pursuant to a fully executed cash collateral deposit letter reasonably
satisfactory to you; or
4. (a) no Event of Default shall have occurred and be continuing at
the time of such Guaranty Termination and (b) you shall have been provided
with a replacement Guarantor reasonably acceptable to you who shall have
entered into a Guaranty Agreement in the form of Guaranty Agreement
executed by Parent; provided, however, in addition to covering transactions
-------- -------
between you and us having their inception after the Guaranty Termination,
the replacement Guarantor's Guaranty Agreement shall also cover
transactions between you and us having their inception prior to the
Guaranty Termination.
"Permitted Liens" means (i) Liens of carriers, warehousemen, mechanics and
---------------
materialmen incurred in the ordinary course of business securing sums not
overdue; (ii) Liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (a) not
overdue or (b) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of us in conformity
with GAAP, (iii) Liens in favor of you, (iv) Liens for taxes (a) not yet due or
(b) being diligently contested in good faith, provided that adequate reserves
with respect thereto are maintained on the books of us in conformity with GAAP;
provided, that, the Lien shall have no effect on the priority of Liens in favor
- -------- ----
of you or the value of the assets in which you have a Lien, (v) Liens arising in
connection with capitalized leases and (vi) Liens specified on Exhibit 1(A)
------------
hereto.
"Person" means an individual, partnership, corporation, limited liability
------
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Prime Rate" means the prime commercial lending rate of Wells Fargo & Co.
----------
as publicly announced in San Francisco, California to be in effect from time to
time as its "prime" or "base" rate of interest and is neither tied to any
external rate of interest or index nor does it necessarily reflect the lowest
rate of interest actually charged to any particular class or category of
customers. Such rate shall be increased or decreased as the case may be for
each increase or decrease in said rate in an amount equal to such increase or
decrease in said rate; each change to be effective as of the day of the change
in such rate.
"Projected Overformula Amount" means, as at any date of determination
----------------------------
thereof, the amount set forth on the Projections as in effect on such date of
determination under the heading "Overadvance".
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<PAGE>
"Projections" means our forecasted: (a) balance sheets; (b) profit and
-----------
loss statements; (c) cash flow statements; and (d) capitalization statements, in
the form of Projections attached hereto as Exhibit 24(b), all prepared on a GAAP
basis together with appropriate supporting details and a statement of underlying
assumptions which such Projections shall be acceptable to you and shall not
materially vary (as determined by you from the Projections submitted by us to
you for the immediately preceding fiscal quarter).
"Purchase Price" has the meaning set forth in Paragraph 6(a).
--------------
"Receivable Advances" has the meaning set forth in Paragraph 6(a).
-------------------
"Receivables" shall mean and include all accounts, contract rights, general
-----------
intangibles, chattel paper, instruments, documents and all forms of obligations
owing to us arising from or out of the sale of merchandise and/or the rendition
of services, all proceeds thereof, all of our rights to merchandise represented
thereby, all of our rights under insurance policies covering merchandise or
services, all of our rights against carriers of said merchandise, and all of our
right, title, security interests and guarantees with respect to each Receivable,
including all rights of replevin and reclamation and stoppage in transit and all
other rights of an unpaid seller of merchandise or services.
"Subordinated Debt" means the indebtedness evidenced by the Subordinated
-----------------
Note and the indebtedness evidenced by any other note, document, instrument or
agreement now or any time hereafter executed and/or delivered by us in
connection therewith or related thereto, as all of the foregoing may exist or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced from time to time.
"Subordinated Note" means the Promissory Note dated December 11, 1998 made
-----------------
by us in favor of Glenn Sands in the original principal amount of $2,000,000.
"Subordination Agreement" means the Subordination Agreement dated August
-----------------------
__, 1999 between you and Glenn Sands.
"Tangible Net Worth" at a particular date means (a) the aggregate amount of
------------------
all of our assets as may be properly classified as such in accordance with GAAP
consistently applied excluding such other assets as are properly classified as
intangible assets under GAAP, less (b) the aggregate amount of all of our
liabilities.
"UCC" shall mean the Uniform Commercial Code as adopted in the State of New
---
York as in effect from time to time.
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<PAGE>
"Working Capital" at a particular date, means the excess, if any, of
---------------
Current Assets over Current Liabilities at such date.
Very truly yours,
PERISCOPE SPORTSWEAR, INC.
By: /s/ Glenn Sands
---------------
Title: President
Accepted at New York, New York
On August 10, 1999
CENTURY BUSINESS CREDIT
CORPORATION
By: /s/ Andrew H. Tananbaum
-----------------------
Title: President
-26-
<PAGE>
EXHIBIT 10.3
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") dated as of
August __, 1999 by and between GIANT GROUP, LTD. ("Assignor"), having an address
at 9000 Sunset Blvd., Los Angeles, California 90069 and PERISCOPE SPORTSWEAR,
INC. ("Assignee"), having an address at 1407 Broadway, Suite 620, New York, New
York 10018.
BACKGROUND
----------
Assignor and Century Business Credit Corporation ("Century") are
parties to Letter of Credit Security Agreement dated May 26, 1999 (the "Letter
of Credit Agreement") pursuant to which Century caused the opening of letters of
credit on behalf of Assignor. The letters of credit opened by Century on behalf
of Assignor pursuant to the Letter of Credit Agreement covered goods to be
purchased for the benefit of Assignee, which is a wholly-owned subsidiary of
Assignor.
Assignee and Century are entering into a Factoring Agreement (the
"Factoring Agreement"), Supplement Letter of Credit Security Agreement and
related agreements, dated as of the date hereof (collectively, the "Assignee
Documents") pursuant to which Century is establishing a factoring arrangement
for the benefit of Assignee and providing for the issuance of letters of credit
on Assignee's behalf.
In connection with the transactions contemplated by the Assignee
Documents, Assignor has agreed to assign to Assignee all of Assignor's rights
and obligations under the Letter of Credit Agreement and Assignee has agreed to
assume all of Assignor's obligations to Century under the Letter of Credit
Agreement, in each case on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
A. Assignment
-----------
1. As of the date hereof, Assignor hereby assigns, transfers, sells,
conveys and sets over unto Assignee, without recourse, all of Assignor's rights
under the Letter of Credit Agreement and all of Assignor's right, title and
interest in and to all goods shipped under, pursuant to, or in connection with
each letter of credit issued under the Letter of Credit Agreement, the proceeds
thereof and all warehouse receipts, bills of lading, shipping documents,
documents of title, chattel paper and instruments accompanying or relating to
any such letter of credit.
2. Assignor hereby acknowledges that it will from time to time after
the date hereof, upon request of Assignee or Century, execute and deliver such
further documents, instruments and agreements and take such further action as
Assignee or Century may request to effectuate the assignment contemplated
hereby.
<PAGE>
B. Assumption and Adoption
-----------------------
1. Assignee hereby (a) assumes in full the payment and performance of
all of Assignor's obligations under the Letter of Credit Agreement and (b)
adopts all of the provisions, terms and conditions contained in the Letter of
Credit Agreement as if the Letter of Credit Agreement was entered into by and
between Assignee and Century.
2. Assignee hereby acknowledges that (a) it will from time to time
after the date hereof, upon request of Assignor or Century, execute and deliver
such further documents, instruments and agreements and take such further action
as Assignor or Century may request to effectuate the assumption and adoption
contemplated hereby and (b) all obligations of Assignor assumed by Assignee
hereunder shall be deemed Obligations under and as defined in the Factoring
Agreement and shall be secured by the Collateral (as such terms is defined in
the Factoring Agreement).
C. Miscellaneous
-------------
1. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to conflicts of law
principles.
2. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY.
3. On the effective date of this Agreement and upon consummation of
the transactions contemplated by the Factoring Agreement, Century shall and by
this letter hereby does (a) release Assignor from any and all liability under
the Letter of Credit Agreement and (b) terminate the Cash Collateral Deposit
Letter dated May 26, 1999 between Century and Assignor and shall return to
Assignor the cash collateral pledged thereunder.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
GIANT GROUP, LTD.
By: /s/ David Gotterer
-------------------
Name: David Gotterer
Title: Vice Chairman
PERISCOPE SPORTSWEAR, INC.
By: /s/ Glenn Sands
---------------
Name: Glenn Sands
Title: President
AGREED TO:
CENTURY BUSINESS CREDIT
CORPORATION
By: /s/ Andrew H. Tananbaum
-----------------------
Name: Andrew H. Tananbaum
Title: President
<PAGE>
EXHIBIT 10.4
(Giant Group, Ltd.)
LIMITED GUARANTY
August 10, 1999
Century Business Credit Corporation
119 West 40th Street
New York, New York 10018
Re: Periscope Sportswear, Inc.
Gentlemen:
In order to induce you to enter into a certain Factoring Agreement, dated
as of August 10, 1999 and all supplements and agreements related thereto, as
amended, modified and supplemented from time to time (the "Agreement") with
Periscope Sportswear, Inc. (the "Client") and/or to induce you to refrain at
this time from terminating said Agreement and/or in consideration of any loans,
advances, payment, extensions of credit, benefits or financial accommodations
heretofore or hereafter made, granted or extended by you or which you have or
will become obligated to make, grant or extend to or for the account of the
Client, the undersigned guarantees without deduction by reason of setoff,
defense, or counterclaim of any party, or loss of contribution from any co-
guarantor hereunder, the due performance of all of the Client's contracts and
agreements with you under the Agreement or otherwise, both present and future
and any and all subsequent renewals, extensions, continuations, modifications,
supplements and amendments thereof, and the prompt payment to you with interest
of any and all sums which may be presently due and owing or which shall in the
future become due and owing to you from the Client. This primary liability shall
include but not be limited to any and all existing and future obligations and
indebtedness of the Client, whether acquired by you by assignment, transfer, or
otherwise, and whether or not such obligations and indebtedness shall arise
under the Agreement or under any other contract or agreement or any renewal,
modification, supplement or amendment thereof, or shall be represented by or
payable under instruments of indebtedness or otherwise and whether or not such
obligations and indebtedness shall be acquired by you from any concern which is
your parent or subsidiary or the co-subsidiary of your parent or for which you
may now or in the future act as a factor and/or lender, and in addition, the
undersigned shall, subject to the limitations set forth in the last paragraph of
this guaranty, be liable to you for reasonable attorneys' fees, if any claim
hereunder is referred to an attorney for collection.
The undersigned hereby waives notice of acceptance hereof and of all
notices and demands of any kind to which the undersigned may be entitled,
including without limitation, notice of adverse change in Client's financial
condition or of any other fact which might materially increase the risk of the
undersigned; all demands of payment on, and notice of nonpayment, protest and
dishonor to the undersigned, or the Client, or the makers, or endorsers of any
notes and other instruments for which the undersigned is or may be liable
hereunder. All sums at any time to the credit of the undersigned and any
property of the undersigned in your possession shall
<PAGE>
be deemed held by you as security for any and all of the undersigned's
obligations to you, no matter how or when arising and whether under this or any
other instrument, agreement or otherwise. The undersigned shall at all times
maintain (free of all encumbrances, mortgages, pledges and security interests)
marketable securities, cash and other cash equivalents net of all liabilities of
the undersigned in an aggregate amount of not less than $4,000,000. The
undersigned further waives notice of and hereby consents to any agreement or
arrangements whatever with the Client or anyone else including, without
limitation, agreements and arrangements for payment extension, subordination,
composition, arrangement, discharge or release of the whole or any part of said
obligations or of said indebtedness, contracts or agreements or other
guarantors, or of the making of any election of rights or remedies you may deem
desirable under any bankruptcy code or act, or for the change or surrender of
any and all security, or for compromise, whether by way of acceptance of part
payment or of dividends or in any other way whatsoever, and the same shall in no
way impair the undersigned's liability hereunder. Nothing shall discharge or
satisfy the liability of the undersigned hereunder except the full performance
and payment of the said obligations and indebtedness with interest.
Notwithstanding any payment or payments made by the undersigned hereunder, or
any setoff or application of funds of the undersigned by you, the undersigned
shall not be entitled to be subrogated to any of your rights against the Client
or against any collateral or guarantee or right of offset held by you for the
payment of the said obligations or of said indebtedness, nor shall the
undersigned seek or be entitled to seek any contribution or reimbursement from
the Client in respect of payments made by the undersigned hereunder, until all
amounts owing to you by the Client on account of the said obligations or of said
indebtedness are paid in full and the Agreement has been terminated. If,
notwithstanding the foregoing, any amount shall be paid to the undersigned on
account of such subrogation rights at any time when all of the said obligations
or of said indebtedness shall not have been paid in full and the Agreement shall
not have been terminated, such amount shall be held by the undersigned in trust
for you, segregated from other funds of the undersigned, and shall, forthwith
upon (and in any event within two (2) business days of) receipt by the
undersigned, be turned over to you in the exact form received by the undersigned
(duly endorsed by the undersigned to you, if required), to be applied against
the said obligations or of said indebtedness, whether matured or unmatured, in
such order as you may determine, subject to the provisions of the Agreement, or
against or with respect to the Client's property (including, without limitation
property collateralizing its obligations and indebtedness to you), arising from
the existence and performance of this guaranty. Any and all future debts and
obligations of the Client to the undersigned are hereby postponed in favor of,
and subordinated until the full payment and performance of, all present and
future debts and obligations of the Client to you; provided that, the foregoing
subordination shall not apply with respect to the indebtedness owing by Client
to the undersigned in the principal amount of $1,008,000 plus interest thereon
outstanding on the date hereof. The undersigned agrees that if the Client or the
undersigned should at any time become insolvent, or make a general assignment,
or if a proceeding in bankruptcy or any insolvency or reorganization proceeding
shall be filed or commenced by, or in respect of the Client or the undersigned,
or if any notice of Lien, levy or assessment is filed of record with respect to
any assets of the undersigned by the United States or any department, agency or
instrumentality thereof, or if any taxes or debts owing at any time or times
hereafter to any one of them becomes a Lien or encumbrance upon any assets of
the undersigned in your possession or otherwise, any and all obligations of the
undersigned shall, at your option, forthwith become due and payable without
notice. If you receive any payment or payments on account of the liabilities
guaranteed hereby, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or
-2-
<PAGE>
preferential, set aside and/or required to be repaid to a trustee, receiver, or
any other party under any bankruptcy act or code, state or federal law, common
law or equitable doctrine, then to the extent of any sum not finally retained by
you, our obligations to you shall be reinstated and this guaranty shall remain
in full force and effect (or be reinstated) until we shall have made payment to
you, which payment shall be due on demand.
Your books and records showing the account between you and the Client shall
be admissible in evidence in any action or proceeding, shall be binding upon the
undersigned for the purpose of establishing the items therein set forth and
shall constitute prima facie proof thereof. This instrument is and shall be
construed to be an absolute, continuing, unconditional and unlimited guaranty of
payment, and shall continue in full force and effect until terminated by the
actual receipt by you from the undersigned by registered or certified mail or
hand delivery of not less than ninety (90) days prior written notice of
termination; such termination shall be applicable only to transactions having
their inception thereafter, and rights and obligations arising out of
transactions having their inception prior to such termination shall not be
affected; provided, however, in the event such termination arises out of a
-------- -------
Permitted Guaranty Termination (as defined in the Agreement), then such
termination shall be applicable to transactions having their inception prior to
and after the effective date of such termination. The undersigned acknowledges
that (i) no oral representations, including any oral representations to extend
credit or provide other financial accommodations to Client have been made by you
to induce the undersigned to enter into this guaranty; and (ii) any extension of
credit to the Client shall be governed solely by the provisions of the
Agreement.
This guaranty shall be enforceable before or after proceeding against the
Client or simultaneously therewith, and without recourse to any security, and
shall be effective regardless of the subsequent incorporation, merger or
consolidation of the Client, or any change in the composition, nature, personnel
or location of the Client. This guaranty shall inure to and shall be
enforceable by you, any concern which is or may at any time be your parent or
subsidiary or the co-subsidiary of your parent and your and their successors and
assigns and shall be binding upon the successors and assigns of the undersigned.
THE UNDERSIGNED DOES HEREBY WAIVE ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED HEREON. NO FAILURE OR DELAY BY YOU IN EXERCISING ANY
OF YOUR POWERS OR RIGHTS HEREUNDER SHALL OPERATE AS A WAIVER THEREOF NOR SHALL
ANY SINGLE OR PARTIAL EXERCISE OF ANY SUCH POWER OR RIGHT PRECLUDE OTHER OR
FURTHER EXERCISE THEREOF OR THE EXERCISE OF ANY OTHER RIGHT OR POWER. YOUR
RIGHTS, REMEDIES AND BENEFITS HEREUNDER ARE CUMULATIVE AND NOT EXCLUSIVE OF ANY
OTHER RIGHTS, REMEDIES OR BENEFITS WHICH YOU MAY HAVE. THIS INSTRUMENT CANNOT
BE CHANGED OR TERMINATED ORALLY, AND SHALL BE GOVERNED, CONSTRUED AND
INTERPRETED AS TO VALIDITY, ENFORCEMENT AND IN ALL OTHER RESPECTS IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK. THE UNDERSIGNED EXPRESSLY SUBMITS AND
CONSENTS TO THE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK, IN
THE COUNTY OF NEW YORK, WITH RESPECT TO ANY CLAIM OR DEMAND UPON THE UNDERSIGNED
BASED UPON THIS INSTRUMENT OF GUARANTY OR ANY AMENDMENT OR SUPPLEMENT THERETO,
AND THE UNDERSIGNED HEREBY WAIVES PERSONAL SERVICE OF ANY SUMMONS OR COMPLAINT
OR OTHER PROCESS OR PAPERS TO BE ISSUED IN ANY ACTION OR PROCEEDING BASED UPON
ANY SUCH CLAIM OR
-3-
<PAGE>
DEMAND, AND HEREBY AGREES THAT SUCH SUMMONS OR COMPLAINT OR PROCESS MAY BE MADE
BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE UNDERSIGNED AT
THE ADDRESS OF THE UNDERSIGNED APPEARING HEREIN OR SUCH DIFFERENT ADDRESS OF
WHICH THE UNDERSIGNED SHALL HAVE ADVISED YOU IN WRITING; FAILURE ON THE PART OF
THE UNDERSIGNED TO APPEAR OR ANSWER WITHIN THIRTY DAYS AFTER SUCH MAILING OF
SUCH SUMMONS, COMPLAINT OR PROCESS SHALL CONSTITUTE A DEFAULT ENTITLING YOU TO
ENTER A JUDGMENT OR ORDER AS DEMANDED OR PRAYED FOR THEREIN TO THE EXTENT THAT
SAID COURT OR DULY AUTHORIZED OFFICER THEREOF MAY AUTHORIZE OR PERMIT.
Notwithstanding anything to the contrary contained in this guaranty, the
liability of the undersigned hereunder shall in no event exceed the principal
sum $4,000,000 exclusive of interest on such principal sum and all fees, costs
and expenses relating, or incidental to the enforcement, protection collection
and prosecution of actions hereunder; provided, however, that, you shall only be
entitled to your attorney's fees and expenses in connection with any action
brought by you against the undersigned to the extent awarded by the court or
other tribunal deciding such action. Such limitation shall not be affected by
nor shall anything herein be deemed to be a limitation of the amount of credit
that may be extended to Client or the number of transactions with Client or the
nature or amount of the Obligations which may be incurred by client.
Very truly yours,
GIANT GROUP, LTD.
By: /s/ David Gotterer
------------------
Its: Vice Chairman
ATTEST:
/s/ Peter Fairley
- -----------------
Dated: August 10, 1999
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,920,000
<SECURITIES> 11,551,000
<RECEIVABLES> 4,487,000
<ALLOWANCES> 0
<INVENTORY> 14,701,000
<CURRENT-ASSETS> 36,001,000
<PP&E> 2,825,000
<DEPRECIATION> 919,000
<TOTAL-ASSETS> 67,364,000
<CURRENT-LIABILITIES> 16,020,000
<BONDS> 0
0
0
<COMMON> 73,000
<OTHER-SE> 49,756,000
<TOTAL-LIABILITY-AND-EQUITY> 67,364,000
<SALES> 36,992,000
<TOTAL-REVENUES> 36,992,000
<CGS> 28,558,000
<TOTAL-COSTS> 28,558,000
<OTHER-EXPENSES> 6,569,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,302,000
<INCOME-PRETAX> 563,000
<INCOME-TAX> 402,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,000
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
