UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ....... to ........
Commission file number 0-15934
JAY JACOBS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-0698077
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1530 Fifth Avenue, Seattle, Washington 98101
(Address of principal executive offices) (Zip code)
(206) 622-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 549,220 shares as of September 11, 1998.
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JAY JACOBS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Balance Sheets
(In thousands)
(Unaudited)
August 1, Jan. 31,
1998 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,223 $ 1,567
Accounts receivable 530 336
Inventories 12,203 9,532
Prepaid expenses 789 562
-------- --------
Total current assets 14,745 11,997
-------- --------
Property and equipment, net 4,652 4,409
-------- --------
Total Assets $ 19,397 $ 16,406
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,829 $ 2,074
Accrued payroll 213 162
Accrued reorganization expenses 384 400
Other accrued expenses 851 988
Line of credit 10,158 5,687
Subordinated debt 2,000 0
-------- --------
Total current liabilities 15,435 9,311
-------- --------
Deferred rental credits 171 171
Federal income tax refund reserve 1,980 1,980
-------- --------
Total liabilities $ 17,586 $ 11,462
-------- --------
Series A preferred stock -- 46,000 shares issued
and outstanding each period - mandatorily redeemable $ 3,834 $ 3,874
Shareholders' equity:
Preferred stock: 5,000,000 shares authorized;
Series B preferred stock - 25,000 shares issued
and outstanding, each period 2,072 2,072
Common stock: 20,000,000 shares authorized;
549,220 shares issued and outstanding, each 16,164 13,257
period
Retained deficit (18,245) (14,259)
Unrecognized option compensation expense (2,014) 0
-------- --------
Total shareholders' equity $ (2,023) $ 1,070
-------- --------
Total liabilities and shareholders' equity $ 19,397 $ 16,406
-------- --------
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 2
<PAGE>
JAY JACOBS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
Aug. 1, Aug. 2, Aug. 1, Aug. 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $ 15,963 $ 15,657 $ 28,654 $ 29,123
-------- -------- -------- --------
Operating costs and expenses:
Cost of sales, buying and occupancy costs 11,520 11,610 21,967 22,563
Selling, general and administrative expenses 4,557 4,017 8,714 8,000
Interest expense 344 165 578 292
Option compensation expense 112 0 783 0
-------- -------- -------- --------
16,533 15,792 32,042 30,855
-------- -------- -------- --------
Loss before extraordinary item (570) (135) (3,388) (1,732)
Extraordinary charge
Debt extinguishment 0 0 522 0
-------- -------- -------- --------
Net loss $ (570) $ (135) $ (3,910) $ (1,732)
-------- -------- -------- --------
Basic earnings per share:
Loss before extraordinary item $ (1.29) $ (0.33) $ (6.67) $ (4.24)
-------- -------- -------- --------
Extraordinary charge 0 0 (0.95) 0
-------- -------- -------- --------
Net loss $ (1.29) $ (0.33) $ (7.62) $ (4.24)
-------- -------- -------- --------
Weighted average number of shares outstanding 549 408 549 408
The accompanying notes are an integral part of the financial statements.
(See Note 2 - Earnings (Loss) Per Share - for per share calculation)
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
JAY JACOBS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
Aug. 1, 1998 Aug. 2, 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,910) $ (1,732)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 642 574
Option compensation expense 783 0
Change in deferred rental credits 0 (47)
Change in assets and liabilities:
Accounts receivable (194) 7
Inventories (2,671) (1,419)
Prepaid expenses (277) (109)
Accounts payable (245) 839
Accrued payroll 51 (86)
Other accrued expenses (137) 45
Accrued reorganization expenses (16) (119)
Federal income tax refund reserve 0 25
------------ ------------
Net cash used for operations $ (5,974) $ (2,022)
------------ ------------
Cash flows from (to) investing activities:
Net increase in property and equipment (736) (54)
------------ ------------
Net cash used by investing activities (736) (54)
------------ ------------
Cash flows from (to) financing activities:
Net borrowing from line of credit 4,471 1,935
Proceeds from options exercised 10 0
Proceeds from subordinated debt 2,000 0
Preferred stock dividend (115) 0
------------ ------------
Net cash from financing activities 6,366 1,935
------------ ------------
Net increase (decrease) in cash and cash
equivalents $ (344) $ 141
Cash and cash equivalents - beginning of period 1,567 249
------------ ------------
Cash and cash equivalents - end of period $ 1,223 $ 108
------------ ------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 4
<PAGE>
JAY JACOBS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1. Financial Presentation
- ------------------------------
The attached condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
As a result, certain information and footnote disclosures normally included in
financial statements prepared in accordance with Generally Accepted Accounting
Principles have been condensed or omitted. Jay Jacobs, Inc. ("Jay Jacobs" or the
"Company") believes that the disclosures made are adequate to make the
information not misleading and that the information furnished reflects all
material adjustments which are, in the opinion of management, necessary to
present fairly its results for the interim periods reported and that all such
adjustments are of a normal recurring nature. The consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's Form 10-K/A filed with the Securities
and Exchange Commission on May 15, 1998. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.
The Company's fiscal year ends on the Saturday closest to January 31st of each
year. The current fiscal year ends on January 30, 1999. Each fiscal quarter
contains 13 weeks.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits" ("Statement No. 132"), which standardizes the disclosure requirements
for pensions and other postretirement benefits. Statement No. 132 is effective
for fiscal years beginning after December 15, 1997. While this statement may
result in additional financial disclosures, it will not impact the Company's
financial position or result of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. Statement No. 133 is effective for all
fiscal years beginning after June 15, 1999. The Company has not yet determined
the effect Statement No. 133 will have on its financial statements or the timing
of adoption.
Note 2. Earnings (Loss) Per Share
- ---------------------------------
Basic earnings (loss) per share is based on the weighted average number of
Common Shares outstanding during the period as adjusted to take into account the
effect of options outstanding under the 1998 Stock Incentive Plan (the "Plan")
and warrants to purchase Common Stock unless the effect of including such
options is anti-dilutive. The weighted average number of Common Shares and
equivalents outstanding were 549,000 and 408,000 for the quarters ended Aug. 1,
1998 and Aug. 2, 1997, respectively. All Common Shares and equivalents have been
adjusted for the reverse stock split noted below. The weighted average number of
shares outstanding do not reflect the impact of conversion feature of the Series
B Preferred Stock and the exercise of warrants attached to the subordinated
debt. If the Series B Preferred Stock were converted to Common Stock and the
warrants exercised, Common Shares outstanding would increase by
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<PAGE>
3,888,000 shares. The total Common Shares outstanding after the conversion and
exercise of warrants would be 4,437,000.
On March 24, 1998, the shareholders of the Company approved a 1-for-15 reverse
stock split and the Company's 1998 Stock Incentive Plan. Both items were
approved by the majority of the holders of both classes of the Company's stock.
The reverse stock split was effective on April 3, 1998. As such, all share and
per share amounts presented in the financial statements and related notes
thereto have been retroactively restated to reflect this stock split.
The following represents the reconciliation of numerators and denominators used
to calculate the basic and diluted earnings per share for all periods presented:
<TABLE>
<CAPTION>
Quarter Quarter Six Months Six Months
ended ended ended ended
Aug. 1, 1998 Aug. 2, 1997 Aug. 1, 1998 Aug. 2, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $ (570) $ (135) $ (3,388) $ (1,732)
Less: Accretion of Series A Preferred
Stock to redemption value (38) 0 (76) 0
Less: Series A Preferred Stock dividends (58) 0 (115) 0
Less: Series B Preferred Stock dividends (40) 0 (80) 0
------------ ------------ ------------ ------------
Loss available to common shareholders (706) (135) (3,659) (1,732)
Extraordinary charge
Debt extinguishment 0 0 522 0
------------ ------------ ------------ ------------
Total loss available to common shareholders $ (706) $ (135) $ (4,181) $ (1,732)
------------ ------------ ------------ ------------
Weighted average shares (basic and diluted) 549 408 549 408
------------ ------------ ------------ ------------
Basic earnings per share:
Loss before extraordinary item $ (1.29) $ (0.33) $ (6.67) $ (4.24)
Extraordinary loss 0 0 (0.95) 0
------------ ------------ ------------ ------------
Net loss $ (1.29) $ (0.33) $ (7.62) $ (4.24)
------------ ------------ ------------ ------------
</TABLE>
The discounts on the increasing rate Series A and Series B Preferred Stock are
equivalent to a prepayment of dividends by the Company, and accordingly are
being amortized using the effective interest method over the period until
January 1, 2003, when the dividend rates increase to 20%. For purposes of
calculating earnings per share, the current period amortization of these
discounts has been added to the stated dividends for the period.
Note 3. 1998 Stock Incentive Plan
- ---------------------------------
During March 1998, the shareholders approved the 1998 Stock Incentive Plan (the
"Plan") for the benefit of senior management and associates. The Plan reserved
1,094,467 shares of non-qualified stock options for issuance at the discretion
of the compensation committee of the board of directors. The options under the
Plan generally vest over five years and expire ten years from the date of grant.
In addition, the shares outstanding under the Company's previous plans were
rolled over into the Plan and all options were priced at an exercise price of
$1.95 per share.
The Company has elected to apply APB 25 and related interpretations in
accounting for the Plan. APB 25 requires that compensation expense be recorded
for the difference between the exercise price and the fair value of the shares,
as defined, on the date of grant. This non-cash compensation expense is charged
to operations 20% (the initial vesting percentage) as of the date of the Plan
approval with the balance charged to operations ratably using a straight line
method, subject to the vesting provisions of the Plan. For the quarter and six
months ended August 1, 1998, option related compensation expense of $112,000 and
$783,000, respectively, was charged to operations.
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Note 4. Subordinated Debt
- -------------------------
On March 11, 1998 the Company closed on a financing transaction with two members
of its investor group, Cahill, Warnock & Company, L.L.C. and affiliates, and T.
Rowe Price Recovery Fund II, L.P. The financing transaction provided for
subordinated debt in the amount of $2,000,000. The subordinated debt agreement
provides for interest at the rate of 14% per annum payable June 30, 1998 and
December 31, 1998, and warrants to purchase 2% of the Company, on a fully
diluted basis. The subordinated debt matures on December 31, 1998.
The warrants associated with the subordinated debt were issued at a redemption
price below the market price. As a result, the Company will incur $200,000 of
non-cash expense over the life of the debt as interest expense. During the
quarter ended August 1, 1998 warrant related interest expense amounted to
$60,000. During the six months ended August 1, 1998 warrant related interest
expense amounted to $100,000.
Note 5. Federal Income Tax Refund Reserve
- -----------------------------------------
During fiscal 1997, the Company filed a refund claim with the Internal Revenue
Service (the "IRS") resulting from the carry back of certain expenses of its
bankruptcy proceeding. The tentative refund of approximately $2,355,000, which
is net of fees and expenses, was received in October 1996. The tentative refund
is subject to audit by the IRS, which is currently in process. Should the IRS
ultimately determine that the carry back of some or all of the expenses was
inappropriate, the Company may be called upon to repay a portion of the
tentative refund, with interest. A reserve of $1,980,000 was established in the
Company's financial statements related to the tentative refund.
Note 6. Line of Credit
- ----------------------
On June 2, 1998 the Company entered into a new credit facility with FINOVA
Capital Corporation ("FINOVA") providing for borrowings up to $15,000,000. The
new credit facility provides for borrowing and letters of credit based on a
formula the aggregate of which cannot exceed the lesser of 100% of the net
appraised value of eligible inventory, as defined, and outstanding letters of
credit, or $15,000,000. Letters of credit are limited to a maximum of
$5,000,000. A first lien is granted to FINOVA on all the Company's assets. The
Company must maintain a scheduled minimum earnings before interest, taxes,
depreciation and amortization and a senior debt coverage ratio, and may not
declare or pay dividends or other distributions on account of any equity
interest in the Company, until payment or satisfaction in full of liabilities
under the FINOVA line of credit and termination of the financing agreement.
Excluded under certain circumstances are dividends to be paid on Series A and
Series B Preferred Stock. Interest is charged at FINOVA's prime rate plus 0.5%
which was 9% at August 1, 1998.
As a condition of closing this facility, the Company repaid the previous General
Electric Capital Corporation ("GECC") facility and incurred a $338,000
termination fee. This cost, together with remaining unamortized financing costs
related to the closing of the GECC facility of $184,000, are reflected as an
extraordinary charge for debt extinguishment during the first quarter of fiscal
1999.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
The information in this Report may contain "forward looking statements" within
the meaning of Section 27 A of the Securities Act of 1933, as amended, and
Section 21 E of the Securities Act of 1934, as amended. Such forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties related to the Company's operations. These risks and uncertainties
include, but are not limited to, matters discussed in Item 5 B 1 "Risk Factors"
from the Company's Report on Form 8-K, filed December 15, 1997.
General
- -------
All references herein to fiscal 1999 and fiscal 1998 relate to the twelve months
ending January 30, 1999 and January 31, 1998, respectively. References to the
second quarter of fiscal 1999 and fiscal 1998 relate to the three months ended
August 1, 1998 and August 2, 1997, respectively. References to the first half of
fiscal 1999 and fiscal 1998 relate to the six months ended August 1, 1998 and
August 2, 1997, respectively.
Overview and Recent Developments
- --------------------------------
Jay Jacobs was incorporated in 1941 and operates a chain of mall-based specialty
apparel stores offering contemporary men's and women's clothing and accessories
at reasonable prices. At the date of this report the Company operates 101 stores
in 19 states. The greatest concentration of stores is in the Pacific Northwest
and Alaska.
In March 1998 the Company closed on a financing transaction with two members of
its investor group, Cahill, Warnock & Company, L.L.C. and affiliates, and T.
Rowe Price Recovery Fund II, L.P. The financing transaction provided for
subordinated debt in the amount of $2,000,000 (See Note 4 - Subordinated Debt).
On June 2, 1998 the Company entered into a new credit facility with FINOVA
providing for borrowings up to $15,000,000 (See Note 6 - Line of Credit). The
facility provides for the ability to finance eligible inventory and to
facilitate the issuance of letters of credit. The Company had $10,158,000 of
short-term notes outstanding at the end of the second quarter of fiscal 1999. As
a condition of closing the new facility, the Company repaid the GECC facility
and incurred $338,000 in termination fees. This cost, together with remaining
unamortized financing costs related to the closing of the GECC facility of
$184,000, was expensed during the first quarter of fiscal 1999.
The Company is utilizing the additional capacity provided by the new credit
facility along with the new subordinated debt provided by its investor group to
fund its business plan for fiscal 1999, which includes opening up to 30 new
stores during fiscal 1999.
During the first quarter of fiscal 1999, the shareholders approved a 1-for-15
reverse stock split and the Company's 1998 Stock Incentive Plan (the "Plan").
The reverse stock split was effective on April 3, 1998. In order to more closely
align the interests of management and employees to those of the shareholders,
the board of directors approved the issuance of 932,000 non-qualified stock
options on March 24, 1998 to employees at an exercise price of $1.95 per share.
Twenty percent of the non-qualified stock options vested immediately and the
balance vest over a five-year period. The Company will incur option related
compensation expense amounting to the difference between the exercise price and
the market price on the date of grant. During the second quarter of fiscal 1999
option related compensation expense of $112,000 was charged to operations.
Option related compensation expense for the first half of fiscal 1999 amounted
to $783,000 (See Note 3 - 1998 Stock Incentive Plan). The Company will record a
charge of $112,000 in each of the next 18 quarters, which represents the
straight line amortization of option related compensation expense over the
vesting period of the stock options. The charges during the first half of fiscal
1999, as well as future quarters, represent non-cash expense.
Page 8
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The Company is planning to increase the net store count during the year,
reversing a three-year trend where the store count was significantly reduced, as
a result of the closure of unprofitable stores. Five new stores were opened
during the first half of 1999, and management has committed to opening an
additional 25 new stores in the second half of fiscal 1999. The majority of the
new locations will be opened in the combination store format, which features
both men's and women's clothing, and averages 4500 square feet. The combination
store format is the Company's most productive in generating an expected positive
cash flow in the first year of operation. Management expects that the new
locations will generate sufficient cash flow to return the initial investment
over a two-year period. The new stores will be located primarily in existing
markets, focusing generally in the Midwest and Southeastern areas of the United
States. The increase in store count should result in increased sales and
operating income. Annual capital requirements will also increase as a result of
the new store opening program and are estimated at $1,700,000 for fiscal 1999.
In April 1998 the Company signed a five-year contract with SPS Payment Systems
("SPS") to provide the Company with a private label credit card and related
marketing program. SPS will provide third party services for developing,
managing, and marketing the Company's private label credit card to its
customers. SPS will also purchase credit sales on a non-recourse basis. The
Company is responsible for marketing the program in conjunction with SPS and for
a service fee based on a percentage of credit sales. The private label credit
card program was launched in May 1998. The Company will use the private label
credit card program to provide its customers with an exclusive credit line for
use in Jay Jacobs stores. The program will provide for the ability to market
directly to private label credit card customers and provide incentives to them
for shopping frequently at its stores. Management believes that this program is
an important element in its strategic plan to improve the productivity of its
new and existing locations.
As a result of the fundamental changes instituted by management, including the
new financing and increased credit facility put in place during the first
quarter of fiscal 1999, management believes that the Company is well positioned
to be a successful competitor in its market. While management believes that it
will continue to be required to manage liquidity carefully, it believes that the
recent financings will enable it to fully implement its business plan, open new
stores, and improve operating efficiency in the future.
As a result of the financing described above, the Company expects that the
increase in interest expense reflected in the results for the second quarter and
first half of fiscal 1999 will continue in future quarters. In addition,
dividend obligations on the Preferred Stock, as well as the convertibility of
the Series B Preferred Stock, will affect earnings per share of Common Stock in
future periods.
Seasonality
- -----------
Historically, the Company's operations have been seasonal, with highest-sales
and net income occurring in the fourth fiscal quarter, reflecting increased
demand during the year-end holiday selling season and, to a lesser extent, the
third quarter, reflecting increased demand during the Fall selling season. The
Company has generally recognized net losses during its first and second fiscal
quarters.
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Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Aug. 1, Aug. 2, Aug. 1, Aug. 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy costs 72.2 74.2 76.7 77.5
Selling, general and administrative expenses 28.5 25.7 30.4 27.5
Interest expense 2.2 1.1 2.0 1.0
Option compensation expense 0.7 0.0 2.7 0.0
-------- -------- -------- --------
Loss before extraordinary items (3.6) (1.0) (11.8) (6.0)
Extraordinary charge
Debt extinguishment 0 0 1.8 0
Net loss (3.6)% (1.0)% (13.6)% (6.0)%
</TABLE>
Quarter Ended August 1, 1998 Compared to Quarter Ended August 2, 1997.
- ----------------------------------------------------------------------
Net sales increased by $306,000, or 2%, in the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998. This increase was primarily a
result of the 11% comparable store sales increase and opening three new
locations. This increase was partially offset by a decline in store count which
resulted in operating 14 fewer stores at the beginning of the second quarter of
fiscal 1999 compared to the beginning of the second quarter of fiscal 1998. The
increase in comparable stores sales coupled with the closure of low volume
stores resulted in an increase in average store volume during the quarter of 16%
over the same quarter last year. Comparable store sales increased primarily as a
result of the increasing acceptance by our target customers of our merchandise
concept. During the second quarter of fiscal 1999 the Company opened three
stores, closed four stores, and relocated two stores for a total of 101 stores
in operation at the end of the quarter.
Cost of sales, buying and occupancy costs decreased by 2% as a percentage of
sales. This decrease was primarily due to increased leverage on fixed occupancy
and buying costs as a result of the increase in average store sales volume. Cost
of sales related to merchandise improved by 0.1% compared to the same quarter
last year.
Selling, general and administrative expenses increased by 2.8% as a percentage
of sales. The increase primarily relates to an increase in staffing of key
positions in the buying and real estate areas of the business associated with
the Company's second half expansion program. In addition, the Company incurred
an increase in store payroll costs associated with training and implementation
of the new private label credit card program during the second quarter and the
Company's direct mail campaign instituted in the first half. The Company
believes that the additional expenses related to marketing will provide benefits
in future quarters.
The Company recorded option related compensation expense of $112,000 or 0.7% of
sales related to the issuance of 932,000 non-qualified stock options on March
24,1998 (See Note 3 - 1998 Stock Incentive Plan).
Interest expense as a percent of sales was 2.2% in the second quarter of fiscal
1999 compared to 1.1% of sales in the second quarter of fiscal 1998. This
increase resulted from greater capacity and borrowings under the line of credit
(See - Liquidity and Capital Resources) and interest incurred under the
subordinated debt transaction closed in March 1998.
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The Company had a loss of $570,000 for the second quarter of fiscal 1999 or
$1.29 per share compared to a loss of $135,000 in the second quarter of fiscal
1998 or $0.33 per share. The increase in expenses related to option compensation
expense, increased interest costs, and increased costs related to expansion of
the business accounted for the increased loss for the second quarter of fiscal
1999.
Six Months Ended August 1, 1998 Compared to August 2, 1997.
- -----------------------------------------------------------
Net sales decreased by $469,000, or 2%, in the first half of fiscal 1999
compared to the first half of fiscal 1998. This decrease was primarily a result
of operating 15 less stores at the beginning of the first half of fiscal 1999
compared to the first half of fiscal 1998. This decline was partially offset by
the 8% increase in comparable store sales and opening five new locations. The
increase in comparable store sales coupled with the closure of low volume stores
resulted in an increase in average store volume during the six-month period of
11% over the same six-month period last year. Comparable store sales increased
primarily as a result of the increasing acceptance by our customers of our
merchandise concept. During the first half of fiscal 1999 the Company opened
five stores, closed twelve stores and relocated fifteen stores for a total of
101 stores in operation at the end of the period.
Cost of sales, buying and occupancy costs decreased by 0.8% as a percentage of
sales. This decrease was primarily due to increased leverage on fixed occupancy
and buying costs as a result of the increase in average store sales volume. Cost
of sales related to merchandise improved by 0.2% compared to the same quarter
last year.
Selling, general, and administrative expenses increased by 2.9% as a percentage
of sales. The increase relates primarily to an increase in staffing of key
positions in the buying and real estate areas of the business associated with
the Company's second half expansion program. In addition, the Company incurred
an increase in store payroll costs associated with training and implementation
of the new private label credit card program during the second quarter. The
Company believes that the additional expenses related to marketing will provide
benefits in future quarters.
The Company recorded option related compensation expense of $783,000 or 2.7% of
sales related to the issuance of 932,000 non-qualified stock options on March
24, 1998 (See Note 3 - 1998 Stock Incentive Plan).
Interest expense as a percent of sales was 2.0% in the first half of fiscal 1999
compared to 1.0% of sales in the first half of fiscal 1998. This increase
resulted from greater capacity and borrowings under the line of credit (See -
Liquidity and Capital Resources) and interest incurred under the subordinated
debt transaction closed in March 1998.
The Company incurred an extraordinary charge during the first half of 1999
related to the extinguishment of debt of the former GECC facility in the amount
of $522,000. The charge includes termination fees of $338,000 and the write-off
of remaining unamortized financing costs of $184,000 related to the previous
GECC line of credit.
The Company incurred a loss before the extraordinary charge of $3,388,000 for
the first half of fiscal 1999 or $6.67 per share compared to a loss of
$1,732,000 in the first half of fiscal 1998 or $4.24 per share. The increase in
expenses related to option compensation expense, increased interest costs, and
increased costs related to expansion of the business accounted for the increased
loss for the first half of fiscal 1999.
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<PAGE>
The Company incurred a loss of $3,910,000 (or $7.62 per share) after the
extraordinary charge of $522,000 (or $0.95 per share) related to the
extinguishment of debt.
Liquidity and Capital Resources
- -------------------------------
General
- -------
The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, to fund operations and to fund the Company's expansion
plan.
During the first half of fiscal 1999 the Company's primary source of liquidity
was from borrowings under its $15,000,000 secured line of credit with FINOVA and
the $2,000,000 subordinated debt transaction closed in March 1998.
Net cash used for operations for the first half of fiscal 1999 was ($5,974,000).
This use of cash resulted primarily from an increase in inventory ($2,671,000),
the operating loss during the first six months of fiscal 1999 ($2,485,000, net
of non-cash expenses), increase in prepaid expenses ($217,000), and decrease in
accounts payable ($245,000). Property and equipment expenditures for the first
six months of fiscal 1999 were $736,000.
The Company had a working capital deficit of $690,000 at August 1, 1998 compared
to a working capital deficit of $4,200,000 at August 2, 1997. The working
capital deficit decreased $3,510,000 primarily due to the investment in the
Company of $5,900,000, net of related expenses, which occurred in December 1997.
The Company is currently planning to open 30 stores and has relocated 15 stores
during fiscal 1999. In addition, the Company is researching alternatives to its
existing management information system and expects to incur capital expenditures
to replace existing systems during fiscal 1999 and fiscal 2000. The estimated
capital expense during fiscal 1999 is $1,700,000. These forward-looking
statements will be influenced by the Company's financial position and the number
of advantageous mall store locations that become available.
At August 1, 1998 the Company had $1,223,000 in cash and cash equivalents. The
Company had drawn $10,158,000 and had approximately $1,200,000 of potential
availability under its line of credit based on its borrowing base formula. In
the opinion of management, the net proceeds of the subordinated debt transaction
along with increased availability under the new credit facility with FINOVA and
anticipated cash flow from operations are adequate to enable the Company to
accomplish its plans for fiscal 1999.
Depending on the ultimate success of its business strategy, the Company may
continue to incur future losses, which could negatively affect working capital,
the extension of credit by the Company's suppliers, the Company's ability to
maintain compliance with its debt covenants, and the ability to raise additional
capital as required in the future.
Year 2000
- ---------
The Company is currently conducting a comprehensive review of its options to
mitigate the risks associated with the Year 2000 compliance issue. This review
includes the inventory of all systems requiring conversion programming, the
coordination of internal personnel to identify all exposures, and the assessment
of implications of noncompliance in the organization. The Company believes its
mostly likely option is to replace the existing software with new software that
will improve productivity and is also Year 2000 compliant. The Company will be
making the final decision regarding the source of the new software during the
third quarter of fiscal 1999. It is planned that the software will be procured
and operational in sufficient time for the Company to be Year 2000 compliant.
Page 12
<PAGE>
While the Company is acting prudently in addressing the Year 2000 issue, the
failure of a third party to be compliant could potentially have an adverse
affect on the Company's ability to operate. Plans are in place to communicate to
our critical vendors and suppliers our expectations that they attain Year 2000
compliance in a timely manner. Contingency plans will be in place to provide
alternate solutions if the progress of certain significant vendors/suppliers is
questionable so as not to jeopardize our ability to service our customers.
The Company believes it has taken and will continue to take the appropriate
steps to minimize the threat of any material technical failure having a
significant impact on operations. However, it is impossible for any company to
ensure Year 2000 compliance.
The costs associated with this effort are expected to range between $800,000 to
$1,600,000. The Company will finance these costs out of existing credit lines
and/or lease financing, if available.
Page 13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to due notice, the Annual Meeting of Shareholders of Jay Jacobs, Inc.
was held on July 9, 1998 at the Company's corporate offices. The purpose of the
meeting was to elect the Company's 1998 Board of Directors as presented and no
other matter was voted upon at the meeting. The proposed Board of Directors was
approved by a majority of the shareholders. The votes were as follows:
<TABLE>
<CAPTION>
Item For Against Abstaining Broker non-votes
- ------------------------------ --------- ------- ---------- ----------------
<S> <C> <C> <C> <C>
Michael D. Sullivan 3,898,942 0 0 0
Edward L. Cahill 3,898,942 0 0 0
Kim Z. Golden 3,898,942 0 0 0
Rex Loren Steffey 3,898,942 0 0 0
William L. Lawrence, Jr. 3,898,942 0 0 0
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation (Incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1, Registration No.
33-13112, declared effective May 19, 1987 (the "Form S-1"))
3.2 Articles of Amendment to the Registrant's Restated Articles of
Incorporation (Incorporated by reference to Exhibit 3.2 to the Company's
Form 10-Q filed June 16, 1998 (the "Form 10-Q"))
3.3 Bylaws (Incorporated by reference to Exhibit 3.3 to the Form S-1)
4.1 Form of Warrant (Incorporated by reference to Exhibit 6 to the Schedule
13D Amendment Number 1 filed on behalf of Cahill, Warnock Strategic
Partners Fund, L.P.; Strategic Associates, L.P.; Cahill Warnock Strategic
Partners, L.P.; Cahill, Warnock & Co., L.L.C.; Edward L. Cahill and David
L. Warnock on March 23, 1998 (the "Schedule 13D")
4.2 Form of Debenture (Incorporated by reference to Exhibit 4.2 to the Form
10-Q)
4.3 Registration Rights Agreement (Incorporated by reference to Exhibit 5 to
the Schedule 13D)
Page 14
<PAGE>
10.1 Subordinated Debenture Agreement (Incorporated by reference to Exhibit 4.4
to the Company's Form 8-K filed on December 15, 1997)
10.2 FINOVA Line of Credit
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to 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.
JAY JACOBS, INC.
Sept. 11, 1998
/s/ WILLIAM L. LAWRENCE, JR.
William L. Lawrence, Jr.
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)
Page 15
[Logo]
LOAN AND SECURITY AGREEMENT
JAY JACOBS, INC.
as Borrower
1530 Fifth Avenue
Seattle, Washington 98101
Fed ID Tax No.: 91-0698077
$15,000,0000
May 29, 1998
================================================================================
CORPORATE FINANCE
================================================================================
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS.................................................................1
1.2 OTHER TERMS................................................................9
2. LOANS; INTEREST RATE AND OTHER CHARGES......................................9
2.1 Total Facility....................................................9
2.2 Loans.............................................................9
2.3 Overlines; Overadvances...........................................9
2.4 Letters of Credit.................................................9
2.5 Loan Account.....................................................10
2.6 Interest; Fees...................................................10
2.7 Default Interest Rate............................................10
2.8 Examination Fee..................................................10
2.9 Excess Interest..................................................10
2.10 Principal Payments; Proceeds of Collateral......................11
2.11 Application of Collateral........................................12
2.12 Application of Payments..........................................12
2.13 Notification of Closing..........................................13
3. SECURITY...................................................................13
3.1 Security Interest in the Collateral..............................13
3.2 Perfection and Protection of Security Interest...................13
3.3 Preservation of Collateral.......................................13
3.4 Insurance........................................................13
3.5 Collateral Reporting; Inventory..................................13
3.6 Inventory; Receivables...........................................14
3.7 Equipment........................................................14
3.8 Other Liens; No Disposition of Collateral.......................14
3.9 Collateral Security..............................................15
4. CONDITIONS OF CLOSING......................................................15
4.1 Initial Advance..................................................15
4.2 Subsequent Advances..............................................17
5. REPRESENTATIONS AND WARRANTIES.............................................17
5.1 Due Organization.................................................17
5.2 Other Names......................................................18
5.3 Due Authorization................................................18
5.4 Binding Obligation...............................................18
5.5 Intangible Property..............................................18
5.6 Capital..........................................................18
5.7 Material Litigation..............................................18
5.8 Title; Security Interests of FINOVA..............................18
<PAGE>
5.9 Restrictive Agreements; Labor Contracts..........................18
5.10 Laws.............................................................18
5.11 Consents.........................................................18
5.12 Defaults.........................................................18
5.13 Financial Condition..............................................18
5.14 ERISA............................................................19
5.15 Taxes............................................................19
5.16 Locations; Federal Tax ID No.....................................19
5.17 Business Relationships...........................................19
5.18 Reaffirmations...................................................19
5.19 Bank Accounts....................................................19
6. COVENANTS..................................................................19
6.1 Affirmative Covenants............................................19
6.1.1 Taxes............................................................19
6.1.2 Notice of Litigation.............................................19
6.1.3 ERISA............................................................19
6.1.4 Change in Location...............................................19
6.1.5 Corporate Existence..............................................19
6.1.6 Labor Disputes...................................................19
6.1.7 Violations of Law................................................19
6.1.8 Defaults.........................................................20
6.1.9 Capital Expenditures.............................................20
6.1.10 Books and Records................................................20
6.1.11 Leases; Warehouse Agreements.....................................20
6.1.12 Additional Documents.............................................20
6.1.13 Financial Covenants..............................................20
6.1.14 New MIS System...................................................20
6.1.15 Bank Direction Letters...........................................20
6.1.16 Change in Bank Accounts..........................................20
6.1.17 Blocked Account Direction........................................20
6.1.18 Customs, Duty and Freight........................................20
6.1.19 Qualifying Bills of Lading.......................................21
6.1.20 Booking of In-Transit Inventory and Related Liabilities..........21
6.1.18 Supplemental Disclosure..........................................21
6.2 Negative Covenants...............................................21
6.2.1 Mergers..........................................................21
6.2.2 Loans............................................................21
6.2.3 Dividends........................................................21
6.2.4 Adverse Transactions.............................................21
6.2.5 Indebtedness of Others...........................................21
6.2.6 Repurchase.......................................................21
6.2.7 Name.............................................................21
6.2.8 Prepayment.......................................................21
6.2.9 Capital Expenditure..............................................22
<PAGE>
6.2.10 Compensation.....................................................22
6.2.11 Indebtedness.....................................................22
6.2.12 Affiliate Transactions...........................................22
6.2.13 Nature of Business...............................................22
6.2.14 FINOVA's Name....................................................22
6.2.15 Margin Security..................................................22
6.2.16 Real Property....................................................22
6.2.17 Issuance of Stock................................................22
6.2.18 Change in Fiscal Year; Auditors..................................22
6.2.19 Preferred Stock..................................................22
7. DEFAULT AND REMEDIES.......................................................23
7.1 Events of Default................................................23
7.2 Remedies.........................................................24
7.3 Standards for Determining Commercial Reasonableness..............24
8. EXPENSES AND INDEMNITIES...................................................24
8.1 Expenses.........................................................24
8.2 Environmental Matters...........................................25
9. MISCELLANEOUS..............................................................25
9.1 Examination of Records; Financial Reporting......................25
9.2 Term; Termination................................................26
9.3 Recourse to Security; Certain Waivers............................26
9.4 No Waiver by FINOVA..............................................26
9.5 Binding on Successor and Assigns.................................26
9.6 Severability.....................................................26
9.7 Amendments; Assignments..........................................26
9.8 Integration......................................................26
9.9 Survival.........................................................26
9.10 Evidence of Obligations..........................................26
9.11 Loan Requests....................................................27
9.12 Notices..........................................................27
9.13 Brokerage Fees...................................................27
9.14 Disclosure.......................................................27
9.15 Publicity........................................................27
9.16 Captions.........................................................27
9.17 Injunctive Relief................................................27
9.18 Counterparts; Facsimile Execution................................27
9.19 Construction.....................................................27
9.20 Time of Essence..................................................27
9.21 Limitation of Actions............................................27
9.22 Liability........................................................28
9.23 Notice of Breach by FINOVA.......................................28
9.24 Application of Insurance Proceeds................................28
<PAGE>
9.25 Power of Attorney................................................28
9.26 Governing Law; Waivers...........................................28
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL.............................29
<PAGE>
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to Loan
Agreement (the "Schedule") attached hereto, the "Agreement") dated the date set
forth on the cover page, is entered into by and between the borrower named on
the cover page (jointly and severally, the "Borrower"), whose address is set
forth on the cover page and FINOVA Capital Corporation, for itself as a lender
and as agent for other lenders signatory hereto from time to time ("FINOVA"),
whose address is 355 South Grand Avenue, Los Angeles, California 90071.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
the definitions set forth below:
"ADA" has the meaning set forth in Section 4.1(w) hereof.
"Additional Equity" means an aggregate cash equity contribution (net of
customary investment banking fees of the Subordinating Creditors, reimbursable
expenses of the Subordinating Creditors, and out of pocket fees and expenses of
Borrower) previously received by Borrower of approximately $6,000,000.
"Additional Sums" has the meaning set forth in Section 2.9(a) hereof.
"Advance Rate" means a percentage rate, established on a monthly basis,
equal to the product of (i) the Net GOB Sale Value Rate of Borrower's Eligible
Inventory as of the date of the most recent monthly Appraisal Report and (ii) a
percentage equal to (A) from the Closing Date to and including August 15, 1999,
100% and (B) from August 16, 1999 thereafter, 95%. The Advance Rate so computed
will remain in effect until the next monthly Appraisal Report has been
delivered. In the event, for any reason, the next monthly Appraisal Report is
not timely delivered, FINOVA shall be entitled to adjust the Advance Rate or
impose such Loan Reserves as FINOVA may deem appropriate in its discretion until
such monthly Appraisal Report is received.
"Affiliate" means any Person controlling, controlled by or under common
control with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of any Person, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder, member or subsidiary of Borrower, and any other Person with whom or
which Borrower has common shareholders, officers or directors.
"Agreement" has the meaning set forth in the preamble.
"Applicable Usury Law" has the meaning set forth in Section 2.9(b) hereof.
"Appraisal Report" means, at any time, the most recent report specifying
the Net GOB Sale Value Rate of Borrower's Eligible Inventory performed by a
Liquidator (at Borrower's sole expense).
"Bank Direction Letter" has the meaning set forth in Section 6.1.15 hereof.
"Blocked Account" has the meaning set forth in Section 2.10(c) hereof.
"Business Day" means any day on which commercial banks in both Los Angeles,
California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred
for the acquisition of any fixed asset or improvement, replacement, substitution
or
1
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FINOVA Loan and Security Agreement
----------------------------------------------------------------------
addition thereto which has a useful life of more than one year and including,
without limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by Borrower that, in accordance
with GAAP, should be capitalized for financial reporting purposes and reflected
as a liability on the balance sheet of Borrower.
"Carrier Letter" means a letter agreement executed by a common carrier in
favor of and in form and substance acceptable to FINOVA prohibiting such carrier
from diverting such Inventory and waiving such carrier's offset rights against
such Inventory.
"Closing Date" means the date of the initial advance made by FINOVA
pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
"Collateral Monitoring Fee" has the meaning set forth in the Schedule.
"Deposit Accounts" has the meaning set forth in Section 9105 of the Code.
"Dominion Account" has the meaning set forth in Section 2.10(c) hereof.
"Earnings Before Interest, Taxes, Depreciation and Amortization" for any
fiscal period of Borrower means the net income of Borrower for such fiscal
period, plus interest expense, depreciation and amortization and provision for
income taxes for such fiscal period, and minus non-recurring miscellaneous
income and expenses, all calculated in accordance with GAAP.
"Eligible Inventory" means Inventory and such other inventory which FINOVA,
in its Permitted Discretion, deems Eligible Inventory, based on such
considerations as FINOVA may from time to time deem appropriate. Without
limiting the generality of the foregoing, no Inventory shall be Eligible
Inventory unless, in FINOVA's Permitted Discretion, such Inventory (i) consists
of In-Transit Inventory and finished goods, in good, new and salable condition
which are not obsolete, unmerchantable, slow moving, returned, damaged and/or
defective, (ii) are not comprised of work in process, packaging materials or
supplies; (iii) meets all standards imposed by any governmental agency or
authority; (iv) conforms in all respects to the warranties and representations
set forth herein; (v) are at all times subject to FINOVA's duly perfected, first
priority security interest; (vi) except for In-Transit Inventory, are situated
at a location in compliance with Section 5.16 hereof; (vii) are not consigned
Inventory; (viii) except for In-Transit Inventory, are situated at locations
with respect to which FINOVA has received landlord, bailee and/or mortgagee
waivers in accordance with Sections 4.1 (j) and 6.1.4, unless FINOVA has
established Loan Reserves therefor against the Revolving Credit Loans to the
extent permitted herein; (ix) are not of a class or type of Inventory that has
not turned-over within one year; and (x) are not produced in violation of the
Fair Labor Standards Act and subject to the "hot goods" provisions contained in
29 U.S.C. ss. 215 or any successor statute or section.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
2
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated
and whether or not foreign) which is or may hereafter become a member of a group
of which Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
"Examination Fee" has the meaning set forth in the Schedule.
"Excess Availability" means, as of the date of determination thereof, the
amount by which the average daily total principal balance of the Revolving
Credit Loans facility which Borrower would be permitted to have outstanding over
the prior 30 days, based on the formulas and reserves set forth in the Schedule,
exceeds the Revolving Credit Loans then actually outstanding, such excess then
being reduced by an amount necessary to provide for the payment of all accounts
payable of Borrower which are more than 60 days past due date and all book
overdrafts.
"Facility Fee" has the meaning set forth in the Schedule.
"FINOVA Affiliate" has the meaning set forth in Section 9.22 hereof.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time as set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to FINOVA
prior to the date hereof.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks, Licenses and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower to secure
payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Guarantor" has the meaning set forth in the Schedule.
"Guaranty" has the meaning set forth in the Schedule.
"Indebtedness" means all of Borrower's present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether
3
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FINOVA Loan and Security Agreement
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under written or oral agreement, operation of law or otherwise, and includes,
without limiting the foregoing (i) the Obligations, (ii) obligations and
liabilities of any Person secured by a lien, claim, encumbrance or security
interest upon property owned by Borrower, even though Borrower has not assumed
or become liable therefor, (iii) obligations and liabilities created or arising
under any lease (including Capital Leases) or conditional sales contract or
other title retention agreement with respect to property used or acquired by
Borrower, even though the rights and remedies of the lessor, seller or lender
are limited to repossession, (iv) all unfunded pension fund obligations and
liabilities and (v) deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"In-Transit Inventory" means Inventory which consisting of first quality
finished goods of the type normally held for sale in the ordinary course of
Borrower's business which are currently in-transit to Borrower from a supplier
thereof and (I) if located outside the United States, are (a) either evidenced
by a Qualifying Bill of Lading or to be acquired by Borrower from a supplier to
which a Letter of Credit has been issued for the full purchase price thereof
which contains as a condition to drawing thereunder the presentation of a
Qualifying Bill of Lading or (b) fully insured in-transit against such risks
(including war risks), pursuant to such terms and conditions and in such amounts
as FINOVA may deem appropriate which insurance shall name FINOVA loss payee
thereunder; or (II) if located in the United States, are under the control of a
common carrier which has executed a Carrier Letter.
"In-Transit Reserve" means a special Loan Reserve on an amount determined
by FINOVA in its Permitted Discretion to reflect the estimated costs relating to
unpaid freight charges, warehousing or storage charges, taxes, duties and other
similar unpaid costs associated with the acquisition or transportation of
In-Transit Inventory.
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or 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 Borrower's business or
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of such goods, merchandise or other personal property, and all
documents of title or other documents representing them.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"L/C Fee" has the meaning set forth in Section 2.4 hereof.
"Letters of Credit" has the meaning set forth in Section 2.4. hereof.
"Liquidator" means Hilco/Great American Group, L.L.C. or such other
nationally recognized liquidation appraiser acceptable to FINOVA in its sole
discretion.
"Loans" has the meaning set forth in Section 2.2 hereof.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to any
of the foregoing.
"Loan Party" means Borrower, the Guarantor, each Subordinating Creditor and
4
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FINOVA Loan and Security Agreement
----------------------------------------------------------------------
each other party (other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, the Unpaid Rent
Reserve, the In-Transit Reserve, and such other amounts as FINOVA may from time
to time establish and revise in good faith reducing the amount of Revolving
Credit Loans and Letters of Credit which would otherwise be available to
Borrower under the lending formula(s) provided in the Schedule: (a) to reflect
events, conditions, contingencies or risks which, as determined by FINOVA in
good faith, do or may affect either (i) the Collateral or any other property
which is security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of FINOVA in the Collateral (including the enforceability, perfection and
priority thereof) or (b) to reflect FINOVA's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to FINOVA is or may have been incomplete, inaccurate or
misleading in any material respect or (c) in respect of any state of facts which
FINOVA determines in good faith constitutes an Event of Default or may, with
notice or passage of time or both, constitute an Event of Default (provided,
that, so long as no Event of Default has occurred and is continuing, no Loan
Reserves for rental obligations will be imposed due to Borrower's failure to
deliver landlord waivers for leased locations so long as at least 50% of the
Borrower's Collateral locations situated in statutory lien states are covered by
an acceptable landlord waiver in favor of FINOVA).
"Loan Year" means each twelve month period commencing on the Closing Date.
"Maximum Interest Rate" has the meaning set forth in Section 2.9(c) hereof.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Net GOB Sale Value Rate" means a percentage of Borrower's Eligible
Inventory established by the Liquidator in the most recently received Appraisal
Report which reflects the net cash value to be derived from a sale or
disposition at a liquidation or going-out-of-business sale of Borrower's
Eligible Inventory after deducting all costs, expenses and fees attributable to
such liquidation, including, without limitation, all fees, costs and expenses of
any liquidator(s) engaged to conduct such sale.
"Obligations" means all present and future loans, advances, debts,
liabilities, obligations, covenants, duties and indebtedness at any time owing
by Borrower to FINOVA, whether evidenced by this Agreement, any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by FINOVA in Borrower's debts owing
to others), absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's fees, expert
witness fees, Examination Fee, letter of credit fees, Collateral Monitoring Fee,
Facility Fee, Termination Fee, and any other sums chargeable to Borrower
hereunder or under any other agreement with FINOVA.
"Operating Cash Flow/Actual" means, for any period, Borrower's net income
or loss (excluding the effect of any extraordinary gains or losses), determined
in accordance with GAAP, plus or minus each of the following items, to the
extent deducted from or added to the revenues of Borrower in the calculation of
net income or loss: (i) depreciation; (ii) amortization and other non-cash
charges; (iii)
5
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FINOVA Loan and Security Agreement
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interest expense paid or accrued; and (iv) total federal and state income tax
expense determined as the accrued liability of Borrower in respect of such
period, regardless of what portion of such expense has actually been paid by
Borrower during such period; and after deduction for each of (a) federal and
state income taxes, to the extent actually paid during such period; (b) any
non-cash income; and (c) all actual Capital Expenditures made during such period
and not financed.
"Overadvance" has the meaning set forth in Section 2.3.
"Overline" has the meaning set forth in Section 2.3.
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Discretion" means FINOVA's judgment exercised in good faith
based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could adversely affect the value of any Collateral, the
enforceability or priority of FINOVA's liens thereon or the amount which FINOVA
would be likely to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii) suggests that
any collateral report or financial information delivered to FINOVA by any Person
on behalf of the Borrower is incomplete, inaccurate or misleading in any
material respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the Borrower, any Loan
Party or any of the Collateral, or (iv) creates or reasonably could be expected
to create an Event of Default. In exercising such judgment, FINOVA may consider
such factors already included in or tested by the definition of Eligible
Inventory, as well as any of the following: (i) the financial and business
climate of the Borrower's industry and general macroeconomic conditions, (ii)
changes in demand for, and pricing of, Inventory, (iii) changes in any
concentration of risk with respect to Inventory, and (iv) any other factors that
change the credit risk of lending to the Borrower on the security of the
Inventory. The burden of establishing lack of good faith hereunder shall be on
the Borrower.
"Permitted Encumbrance" means each of the liens, mortgages and other
security interests set forth on the Schedule.
"Permitted Senior Indebtedness" has the meaning set forth in the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Preferred Stock" means Borrower's Series A Preferred Stock and Series B
Preferred Stock, in each case issued pursuant to the terms of the Statement of
Rights and Preferences.
"Prepared Financials" means the balance sheets of Borrower as of the date
set forth in the Schedule in the section entitled 'Reporting Requirements', and
as of each subsequent date on which audited balance sheets are delivered to
FINOVA from time to time hereunder, and the related statements of operations,
changes in stockholder's equity and changes in cash flow for the periods ended
on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
"Prohibited Transaction" means any transaction described in Section 406 of
ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction
described in Section 4975(c) of the IRC which is not exempt by reason of Section
4975(c)(2) of the IRC.
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FINOVA Loan and Security Agreement
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"Projected Debt Service Multiple" means _______________________.<F1>
"Qualified Carrier" see definition of "Trucking Report" infra.
<F2>["Qualifying Bill of Lading" means a negotiable bill of lading issued
by a common carrier in form and substance acceptable to FINOVA, specifying as
the consignee thereof (i) the issuer of the applicable Letter of Credit issued
to facilitate the payment of the goods represented by such negotiable bill of
lading or (ii) FINOVA if no Letter of Credit was required to be issued as a
condition to the issuance of such negotiable bill of lading.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), proceeds of any letters of
credit naming Borrower as beneficiary, contract rights, chattel paper,
instruments, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section 4043 of
ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4068(f)
of ERISA.
"Revolving Credit Loans" has the meaning set forth in the Schedule.
"Revolving Credit Limit" has the meaning set forth in the Schedule.
"Revolving Interest Rate" has the meaning set forth in the Schedule.
"Schedule" has the meaning set forth in the preamble.
"Senior Contractual Debt Service" means, for any period, the sum of
payments made or required to be made by Borrower during such period for interest
only payments due on the Revolving Credit Loans facility plus the L/C Fee, the
Collateral Monitoring Fee, the Facility Fee and any other fees payable by
Borrower under this Agreement from time to time.
"Start Date" has the meaning set forth in the Schedule.
"Statement of Rights and Preferences of Preferred Stock" means the
Statement of Rights and Preferences of Series A Preferred Stock and Series B
Preferred Stock of the Borrower, as in effect on December 3, 1997 and as amended
from time to time with the consent of FINOVA.
"Stock Pledge Agreement" has the meaning set forth in Section 4.1(y)
hereof.
"Subordinated Debt" means liabilities of Borrower the repayment of which is
subordinated, to the payment and performance of the Obligations, pursuant to a
subordination agreement acceptable to FINOVA in its sole discretion.
"Subordinating Creditors" has the meaning set forth in the Schedule.
"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
"Third Party Interactives" means all Persons with whom Borrower exchanges
data electronically in the ordinary course of business, including, without
limitation, customers, suppliers, third-party vendors, subcontractors,
- ------------------------
1 FINOVA to provide specific financial statements that will be used to
determine the Projected Debt Service Multiple to be used after July 31, 2000
2 FINOVA to confirm LOC/Bill of Lading Procedures
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FINOVA Loan and Security Agreement
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processors-converters, shippers and warehousemen.
"Total Contractual Debt Service" means, for any period, the sum of payments
made (or, as to clause (i) of this sentence, required to be made) by Borrower
during such period for (i) Senior Contractual Debt Service, (ii) interest and
scheduled principal payments due on any and all other Indebtedness of Borrower,
including without limitation the Subordinated Debt and (iii) all scheduled
dividends, distributions and redemptions in respect of any Preferred Stock of
Borrower.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
"Trademarks, Copyrights, Licenses and Patents" means all of Borrower's
right, title and interest in and to, whether now owned or hereafter acquired:
(i) trademarks, trademark registrations, trade names, trade name registrations,
and trademark or trade name applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, and (e) the goodwill of the business operated by Borrower connected with
and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto throughout the
world; (iii) license agreements, including without limitation such as are listed
on the Schedule attached hereto and made a part hereof, and the right to prepare
for sale, sell and advertise for sale any Inventory now or hereafter owned by
Borrower and now or hereafter covered by such licenses; and (iv) patents and
patent applications, registered or pending, including without limitation such as
are listed on the Schedule attached hereto, together with all income, royalties,
shop rights, damages and payments thereto, the right to sue for infringements
thereof, and all rights thereto throughout the world and all reissues,
divisions, continuations, renewals, extensions and continuations-in-part
thereof.
"Trucking Report" shall mean a monthly report listing the names of each
cartage company used by the Borrower to haul Inventory to any of its locations
during such month, whether such cartage company is a party to a Carrier Letter
in favor of FINOVA (a "Qualified Carrier"), the average value of Inventory which
was in transit with any domestic cartage company during such month and the
percentage of such in transit goods being hauled by a Qualified Carrier.
"Unpaid Rent Report" means, at any time, the most recent report prepared by
Borrower, in form and substance satisfactory to FINOVA, detailing the amounts of
rent and related promissory notes that are due and owing past 30 days with
respect to any of Borrower's leased locations for open stores.
"Unpaid Rent Reserve" means a special Loan Reserve in an amount determined
by FINOVA in its Permitted Discretion to reflect the aggregate amount of unpaid
rent and related promissory notes that are due and owing past 30 days with
respect to any of Borrower's leased locations. In establishing and revising such
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FINOVA Loan and Security Agreement
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special Loan Reserve, FINOVA shall refer to the most recently received Unpaid
Rent Report.
"Year 2000 Date-Sensitive System/Component" means as to any Person, any
system software, network software, applications software, data base, computer
file, embedded microchip, firmware or hardware that accepts, creates,
manipulates, sorts, sequences, calculates, compares or outputs calendar-related
data accurately; such systems and components shall include, without limitation,
mainframe computers, file server/client systems, computer workstations, routers,
hubs, other network-related hardware, and other computer-related software,
firmware or hardware and information processing and delivery systems of any kind
and telecommunications systems and other communications processors, security
systems, alarms, elevators and HVAC systems.
"Year 2000 Problems" means Borrower's limitations on the capacity or
readiness of its Year 2000 Date-Sensitive Systems/Components to accurately
accept, create, manipulate, sort, sequence, calculate, compare or output
calendar date information with respect to calendar year 1999 or any subsequent
calendar year beginning on or after January 1, 2000 (including leap year
computations), including, without limitation, exchanges of information among
Year 2000 Date-Sensitive Systems/Components of the Borrower and exchanges of
information among the Borrower and Year 2000 Date-Sensitive Systems/Components
of Third Party Interactives and functionality of peripheral interfaces, firmware
and embedded microchips.
1.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, FINOVA shall, upon Borrower's request, make advances
to Borrower from time to time in an aggregate outstanding principal amount not
to exceed the Total Facility amount (the "Total Facility") set forth on the
Schedule hereto, subject to deduction of reserves for accrued interest and such
other reserves as FINOVA deems proper from time to time, and less amounts FINOVA
may be obligated to pay in the future on behalf of Borrower. The Schedule is an
integral part of this Agreement and all references to "herein", "herewith" and
words of similar import shall for all purposes be deemed to include the
Schedule.
2.2 Loans. Advances under the Total Facility ("Loans" and individually, a
"Loan") shall be comprised of the amounts shown on the Schedule.
2.3 Overlines; Overadvances. If at any time or for any reason the
outstanding amount of advances (including all Letters of Credit) extended or
issued pursuant hereto exceeds any of the dollar limitations ("Overline") or
percentage limitations ("Overadvance") in the Schedule, then Borrower shall,
upon FINOVA's demand, immediately pay to FINOVA, in cash, the full amount of
such Overline or Overadvance which, at FINOVA's option, may be applied to reduce
the outstanding principal balance of the Loans and/or cash collateralize all or
any part of any outstanding Letters of Credit. Without limiting Borrower's
obligation to repay to FINOVA on demand the amount of any Overline or
Overadvance, Borrower agrees to pay FINOVA interest on the outstanding principal
amount of any Overline or Overadvance, on demand, at the rate set forth on the
Schedule and applicable to the Revolving Credit Loans.
2.4 Letters of Credit. At the request of Borrower, FINOVA may, in its
Permitted Discretion, arrange for the issuance of letters of credit for the
account of Borrower and guarantees of payment of such letters of credit, in each
case in form and substance satisfactory to FINOVA in its sole discretion
(collectively, "Letters of Credit"). The aggregate face amount of all
outstanding Letters of Credit from time to time shall not exceed the amount
shown on the Schedule, and shall be reserved against the availability of
Revolving Credit Loans. Borrower shall pay all bank charges for the issuance of
Letters of Credit, together with an additional fee to FINOVA equal to the
percentage set forth on the Schedule of the aggregate face amount of each Letter
of Credit outstanding from time to time during the term of this Agreement (the
"L/C Fee"). The L/C Fee shall be deemed to be fully earned upon the issuance of
each
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FINOVA Loan and Security Agreement
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Letter of Credit and shall be due and payable on the first Business Day of each
month following a month during which any Letter of Credit is outstanding. Any
advance by FINOVA under or in connection with a Letter of Credit shall
constitute an Obligation hereunder. Each Letter of Credit shall have an expiry
date no later than thirty (30) days prior to the last day of the Initial Term
or, if issued during any Renewal Term no later than thirty (30) days prior to
the last day of such Renewal Term. Immediately upon any termination of this
Agreement, Borrower shall either: (i) provide cash collateral to FINOVA in an
amount equal to 105% of the maximum amount of FINOVA's obligations under or in
connection with all then outstanding Letters of Credit, or (ii) cause to be
delivered to FINOVA releases of all FINOVA's obligations under outstanding
Letters of Credit. At FINOVA's discretion, any proceeds of Collateral received
by FINOVA may be held as the cash collateral required by this Section 2.4.
Borrower hereby agrees to indemnify, save, and hold FINOVA harmless from any
loss, cost, expense, or liability, including payments made by FINOVA, expenses,
and reasonable attorneys' fees incurred by FINOVA arising out of or in
connection with any Letters of Credit. Borrower agrees to be bound by the
issuing bank's regulations and interpretations of any Letters of Credit
guarantied by FINOVA and opened for Borrower's account or by FINOVA's
interpretations of any Letter of Credit issued by FINOVA for Borrower's account,
and Borrower understands and agrees that FINOVA shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that
FINOVA may indemnify the bank issuing a Letter of Credit for certain costs or
liabilities arising out of claims by Borrower against such issuing bank.
Borrower hereby agrees to indemnify and hold FINOVA harmless with respect to any
loss, cost, expense, or liability incurred by FINOVA under any such
indemnification by FINOVA to any issuing bank.
2.5 Loan Account. All advances made hereunder (including without limitation
all advances made by FINOVA under or in connection with any Letter of Credit)
shall be added to and deemed part of the Obligations when made. FINOVA may from
time to time charge all Obligations of Borrower to Borrower's loan account with
FINOVA.
2.6 Interest; Fees. Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations at the per annum rate set forth on the
Schedule. Borrower shall also pay FINOVA the fees set forth on the Schedule.
2.7 Default Interest Rate. Upon the occurrence and during the continuation
of an Event of Default, Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations and any L/C Fee at a rate per annum which
is two percent (2%) in excess of the rate which would otherwise be applicable
thereto pursuant to the Schedule.
2.8 Examination Fee. Borrower agrees to pay to FINOVA the Examination Fee
in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial Examination Fee in an amount equal to the amount set forth on the
Schedule. Such initial Examination Fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction, and shall
be deducted from any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
2.9 Excess Interest.
(a) The contracted for rate of interest of the loan contemplated hereby,
without limitation, shall consist of the following: (i) the interest rate set
forth on the Schedule, calculated and applied to the principal balance of the
Obligations in accordance with the provisions of this Agreement; (ii) interest
after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective contracted
for rate of interest which is the sum of the above-referenced elements. The
Examination Fee, attorneys fees, expert witness fees, L/C Fees, Collateral
Monitoring Fees, Facility Fees, Termination Fees, other charges, goods, things
in action or any other sums or things of value paid or payable by Borrower
(collectively, the "Additional Sums"), whether pursuant to this Agreement or any
other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction, shall
be payable by Borrower as, and shall be deemed to be, additional interest and
for such purposes only, the agreed upon and "contracted for rate of interest" of
this lending transaction shall be deemed to be increased by the rate of interest
resulting from the inclusion of the Additional Sums.
(b) It is the intent of the parties to comply with the usury laws of the
State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that
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FINOVA Loan and Security Agreement
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notwithstanding any provisions to the contrary in this Agreement, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, or (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other Person now or hereafter liable
for the payment of the Obligations shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Maximum Interest Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount of the Obligations or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, to the extent that interest paid to the date of
calculation does not exceed the Maximum Interest Rate, until the entire amount
of interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable Usury Law, then to the extent not
prohibited by the Applicable Usury Law, such increases shall apply to all
indebtedness evidenced hereby regardless of when incurred; but, again to the
extent not prohibited by the Applicable Usury Law, should the Maximum Interest
Rate be decreased because of a change in the Applicable Usury Law, such
decreases shall not apply to the indebtedness evidenced hereby regardless of
when incurred.
2.10 Principal Payments; Proceeds of Collateral.
(a) Principal Payments. Except where evidenced by notes or other
instruments issued or made by Borrower to FINOVA specifically containing payment
provisions which are in conflict with this Section 2.10 (in which event the
conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Loans shall be payable by Borrower to FINOVA immediately upon the
earliest of (i) the receipt by FINOVA or Borrower of any proceeds of any of the
Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of
Default in consequence of which FINOVA elects to accelerate the maturity and
payment of such loans, or (iii) any termination of this Agreement pursuant to
Section 9.2 hereof; provided, however, that any Overadvance or Overline shall be
payable on demand pursuant to the provisions of Section 2.3 hereof.
(b) Collections. Until FINOVA notifies Borrower to the contrary, Borrower
may make collection of all Receivables for FINOVA and shall receive all such
payments or sums as trustee of FINOVA and immediately deliver all such payments
or sums to FINOVA in their original form, duly endorsed in blank or cause the
same to be deposited into a Blocked Account or Dominion Account. FINOVA or its
designee may, at any time, notify account debtors that the Receivables have been
assigned to FINOVA and of FINOVA's security interest therein, and may collect
the Receivables directly and charge the collection costs and expenses to
Borrower's loan account. Borrower agrees that, in computing the charges under
this Agreement, all items of payment shall be deemed applied by FINOVA on
account of the Obligations two (2) Business Days after receipt by FINOVA of good
funds which have been finally credited to FINOVA's account, whether such funds
are received directly from Borrower or from the Blocked Account bank or the
Dominion Account bank, pursuant to Section 2.10(c) hereof, and this provision
shall apply regardless of the amount of the Obligations outstanding or whether
any Obligations are outstanding; provided, that if any such good funds are
received after 12:00 p.m. noon Los Angeles time on any Business Day or at any
time on any day not constituting a Business Day, such funds shall be deemed
received on the immediately following Business Day. FINOVA is not, however,
required to credit Borrower's account for the amount of any item of
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FINOVA Loan and Security Agreement
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payment which is unsatisfactory to FINOVA in its Permitted Discretion and FINOVA
may charge Borrower's loan account for the amount of any item of payment which
is returned to FINOVA unpaid.
(c) Establishment of a Blocked Account or Dominion Account. Unless Borrower
shall be otherwise directed by FINOVA in writing, Borrower shall cause all
proceeds of Collateral to be deposited into a "blocked account" (each, a
"Blocked Account") pursuant to an arrangement with such bank as may be selected
by Borrower and be acceptable to FINOVA which proceeds, unless otherwise
provided herein, shall be applied in payment of the Obligations in such order as
FINOVA determines in its sole discretion. Borrower shall issue to any such bank
an irrevocable letter of instruction directing said bank to transfer such funds
so deposited to FINOVA, either to any account maintained by FINOVA at said bank
or by wire transfer to appropriate account(s) of FINOVA. All funds deposited in
a Blocked Account shall immediately become the sole property of FINOVA and
Borrower shall obtain the agreement by such bank to waive any offset rights
against the funds so deposited. FINOVA assumes no responsibility for any Blocked
Account arrangement, including without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank
thereunder. Alternatively, FINOVA may establish depository accounts in the name
of FINOVA at a bank or banks for the deposit of such funds (each, a "Dominion
Account") and Borrower shall deposit all proceeds of Receivables and all cash
proceeds of any sale of Inventory or, to the extent permitted herein, Equipment
or cause same to be deposited, in kind, in such Dominion Accounts of FINOVA in
lieu of depositing same to Blocked Accounts, and, unless otherwise provided
herein, all such funds shall be applied by FINOVA to the Obligations in such
order as FINOVA determines in its sole discretion.
(d) Payments Without Deductions. Borrower shall pay principal, interest,
and all other amounts payable hereunder, or under any other Loan Document,
without any deduction whatsoever, including, but not limited to, any deduction
for any setoff or counterclaim.
(e) Collection Days Upon Repayment. In the event Borrower repays the
Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to Borrower's loan account two (2)
Business Days after FINOVA's receipt thereof.
(f) Monthly Accountings. FINOVA shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by FINOVA), unless Borrower
notifies FINOVA in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or admissions.
2.11 Application of Collateral. Except as otherwise provided herein, FINOVA
shall have the continuing and exclusive right to apply or reverse and re-apply
any and all payments to any portion of the Obligations in such order and manner
as FINOVA shall determine in its sole discretion. To the extent that Borrower
makes a payment or FINOVA receives any payment or proceeds of the Collateral for
Borrower's benefit which is subsequently invalidated, declared to be fraudulent
or preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or any other party under any bankruptcy law, common law or
equitable cause, or otherwise, then, to such extent, the Obligations or part
thereof intended to be satisfied shall be revived and continue as if such
payment or proceeds had not been received by FINOVA.
2.12 Application of Payments. The amount of all payments or amounts
received by FINOVA with respect to the Loan shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Default Interest; (ii) then, to any late fees,
overdue risk assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loan; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure Obligations relating to any Letters of Credit or other
contingent obligations arising under the Loan Documents and/or (y) applied to
amounts owed to FINOVA by Borrower as FINOVA in its sole discretion may
determine. In calculating interest and applying payments as set forth above: (a)
interest shall be calculated and collected through the date a payment is
actually applied by FINOVA under the terms of this Agreement; (b) interest on
the outstanding balance shall be charged during any grace period permitted
hereunder; (c) at the end of each month, all accrued and unpaid interest and
other charges provided for hereunder shall be added to the principal balance of
the Loan; and (d) to the extent that Borrower makes a payment or FINOVA receives
any payment or proceeds of the Collateral for Borrower's benefit that is
subsequently invalidated, set aside or required to be repaid to any other
Person, then, to such extent, the Obligations intended to be satisfied shall
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FINOVA Loan and Security Agreement
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be revived and continue as if such payment or proceeds had not been received by
FINOVA and FINOVA may adjust the Loan balances as FINOVA, in its sole
discretion, deems appropriate under the circumstances.
2.13 Notification of Closing. Borrower shall provide FINOVA with at least
forty-eight (48) hours prior written notice of the Closing Date, to enable
FINOVA to arrange for the availability of funds. In the event the closing does
not take place on the date specified in Borrower's notice to FINOVA, other than
through the fault of FINOVA, Borrower agrees to reimburse FINOVA for FINOVA's
costs to maintain the necessary funds available for the closing, at the
Revolving Interest Rate with respect to an amount equal to the initial advance
under the Revolving Credit Loans facility which is to be made on the Closing
Date, for the number of days which elapse between the date specified in
Borrower's notice and the date upon which the closing actually occurs (which
number of days shall not include the date specified in Borrower's notice, but
shall include the Closing Date).
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, Borrower hereby grants to FINOVA a
first priority security interest (subject only to Permitted Encumbrances) in all
of Borrower's now owned or hereafter acquired or arising Inventory, Equipment,
Receivables, life insurance policies and the proceeds thereof, Trademarks,
Copyrights, Licenses and Patents, Investment Property (as defined in Section
9-115 of the Code) and General Intangibles, including, without limitation, all
of Borrower's Deposit Accounts, money, any and all property now or at any time
hereafter in FINOVA's possession (including claims and credit balances), and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products and all books and records and
computer data related to any of the foregoing (all of the foregoing, together
with all other property in which FINOVA may be granted a lien or security
interest, is referred to herein, collectively, as the "Collateral").
3.2 Perfection and Protection of Security Interest. Borrower shall, at its
expense, take all actions requested by FINOVA at any time to perfect, maintain,
protect and enforce FINOVA's first priority security interest and other rights
in the Collateral and the priority thereof from time to time, including, without
limitation, (i) executing and filing financing or continuation statements and
amendments thereof and executing and delivering such documents and titles in
connection with motor vehicles as FINOVA shall require, all in form and
substance satisfactory to FINOVA, (ii) maintaining a perpetual inventory and
complete and accurate stock records, (iii) delivering to FINOVA warehouse
receipts covering any portion of the Collateral located in warehouses and for
which warehouse receipts are issued, and transferring Inventory to warehouses
designated by FINOVA, (iv) placing notations on Borrower's books of account to
disclose FINOVA's security interest therein and (v) delivering to FINOVA all
letters of credit on which Borrower is named beneficiary. FINOVA may file,
without Borrower's signature, one or more financing statements disclosing
FINOVA's security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
Borrower's agents or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request, instruct them
to hold all such Collateral for FINOVA's account subject to FINOVA's
instructions. From time to time, Borrower shall, upon FINOVA's request, execute
and deliver confirmatory written instruments pledging the Collateral to FINOVA,
but Borrower's failure to do so shall not affect or limit FINOVA's security
interest or other rights in and to the Collateral. Until the Obligations have
been fully satisfied and FINOVA's obligation to make further advances hereunder
has terminated, FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted Discretion, at
any time discharge any lien or encumbrance on the Collateral or bond the same,
pay any insurance, maintain guards, pay any service bureau, obtain any record or
take any other action to preserve the Collateral and charge the cost thereof to
Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee, additional insured, and other endorsements,
satisfactory to FINOVA. All premiums with respect to such insurance shall be
paid by Borrower as and when due. Accurate and certified copies of the policies
shall be delivered by Borrower to FINOVA. If Borrower fails to comply with this
Section, FINOVA may (but shall not be required to) procure such insurance and
endorsements at Borrower's expense and charge the cost thereof to Borrower's
loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
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FINOVA Loan and Security Agreement
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(a) Invoices. Borrower shall not re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes evidenced by a
promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to FINOVA
appropriately endorsed to FINOVA and, regardless of the form of any presentment,
demand, notice of dishonor, protest and notice of protest with respect thereto,
Borrower shall remain liable thereon until such instrument is paid in full.
(c) Physical Inventory. Borrower shall conduct a physical count of the
Inventory at such intervals as FINOVA requests and promptly supply FINOVA with a
copy of such accounts accompanied by a report of the value (calculated at the
lower of cost or market value on a first in, first out basis) of the Inventory
and such additional information with respect to the Inventory as FINOVA may
request from time to time.
(d) Returns. For so long as no Event of Default has occurred and is
continuing and subject to the provisions of Section 3.6(b), if any account
debtor returns any Inventory to Borrower in the ordinary course of its business,
Borrower shall promptly determine the reason for such return and promptly issue
a credit memorandum to the account debtor (sending a copy to FINOVA) in the
appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (i) hold the returned
Inventory in trust for FINOVA, (ii) segregate all returned Inventory from all of
Borrower's other property, (iii) conspicuously label the returned Inventory as
FINOVA's property, and (iv) immediately notify FINOVA of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on FINOVA's request deliver such returned Inventory
to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Inventory.
(a) Eligibility. FINOVA at any time shall be entitled to (i) establish and
increase or decrease reserves against Eligible Inventory; (ii) reduce the
Advance Rate or restore such Advance Rate to any level equal to or below the
Advance Rate initially established in accordance with the most recent Appraisal
Report or (iii) impose additional restrictions (or eliminate the same) to the
standards of eligibility set forth in the definition of "Eligible Inventory," in
the exercise of its Permitted Discretion. FINOVA may but shall not be required
to rely on the schedules and/or reports delivered to FINOVA in connection
herewith in determining the then eligibility of Inventory. Reliance thereon by
FINOVA from time to time shall not be deemed to limit the right of FINOVA to
revise the Advance Rate or standards of eligibility as provided above. FINOVA
agrees to give two days prior notice to Borrower of any change in eligibility
standards or the Advance Rate (other than any change in the Advance Rate made in
accordance with any monthly Appraisal Report).
(b) Disputes. Borrower shall notify FINOVA promptly of all disputes or
claims and settle or adjust such disputes or claims at no expense to FINOVA, but
no discount, credit or allowance shall be granted to any account debtor and no
returns of merchandise shall be accepted by Borrower without FINOVA's consent,
except for discounts, credits and allowances made or given in the ordinary
course of Borrower's business. FINOVA may, at any time after the occurrence of
an Event of Default, settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which FINOVA considers advisable in its
reasonable credit judgment and, in all cases, FINOVA shall credit Borrower's
loan account with only the net amounts received by FINOVA in payment of any
Receivables.
3.7 Equipment. Borrower shall keep and maintain the Equipment in good
operating condition and repair and make all necessary replacements thereto to
maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrower's past practice, ordinary wear and tear excepted.
Borrower shall not permit any item of Equipment to become a fixture (other than
a trade fixture) to real estate or an accession to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower represents,
warrants and covenants that except for FINOVA's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by FINOVA in its sole discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever and (b) Borrower shall not, without FINOVA's
prior written approval, sell, encumber or dispose of or permit the sale,
encumbrance or disposal of any Collateral or all or any substantial part of any
of its other assets (or any interest of Borrower therein), except for the sale
of
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FINOVA Loan and Security Agreement
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Inventory in the ordinary course of Borrower's business. In the event FINOVA
gives any such prior written approval with respect to any such sale of
Collateral, the same may be conditioned on the sale price being equal to, or
greater than, an amount acceptable to FINOVA. The proceeds of any such sales of
Collateral shall be remitted to FINOVA pursuant to this Agreement for
application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan secured
by the Collateral. FINOVA may, in its sole discretion, (i) exchange, enforce,
waive or release any of the Collateral, (ii) apply Collateral and direct the
order or manner of sale thereof as it may determine, and (iii) settle,
compromise, collect or otherwise liquidate any Collateral in any manner without
affecting its right to take any other action with respect to any other
Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial advance
hereunder or to issue or arrange for the issuance of the initial Letter of
Credit hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following Loan
Documents: (i) the Agreement fully and properly executed by Borrower; (ii) a
promissory note in such amount and on such terms and conditions as FINOVA shall
specify, executed by Borrower, (iii) the Guaranty executed by the Guarantor and
the Validity and Support Agreement executed by William Lawrence; (iv) such
security agreements, intellectual property assignments, pledge agreements,
mortgages and deeds of trust as FINOVA may require with respect to this
Agreement, executed by each of the parties thereto and, if applicable, duly
acknowledged for recording or filing in the appropriate governmental offices;
(v) Subordination Agreements in form and substance acceptable to FINOVA,
executed by each of the Subordinating Creditors, together with copies of all
instruments subject thereto showing a legend indicating such subordination; (vi)
such Blocked Account or Dominion Account agreements as it shall determine; and
(vii) such other documents, instruments and agreements in connection herewith as
FINOVA shall require, executed, certified and/or acknowledged by such parties as
FINOVA shall designate.
(b) Minimum Excess Availability. Borrower shall have Excess Availability
under the Revolving Credit Loans facility of not less than the amount specified
in the Schedule, after giving effect to the initial advance hereunder and after
giving effect to any applicable Loan Reserves against borrowing availability
under the Revolving Credit Loans.
(c) Terminations by Existing Lender. General Electric Capital Corporation
and any other applicable secured creditor shall have executed and delivered (i)
evidence satisfactory to FINOVA that all of the obligations to General Electric
Capital Corporation will be performed and paid in full from the proceeds of the
initial advance hereunder and (ii) UCC termination statements, termination of
blocked account letters, third party notification letters and other
documentation evidencing the termination of its liens and security interests in
the assets of Borrower.
(d) Charter Documents. FINOVA shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower.
(e) Good Standing. FINOVA shall have received a certificate of corporate
status with respect to Borrower, dated within ten (10) days of the Closing Date,
by the Secretary of State of the state of incorporation of Borrower, which
certificate shall indicate that Borrower is in good standing in such state.
(f) Foreign Qualification. FINOVA shall have received certificates of
corporate status with respect to Borrower and each other Loan Party, each dated
within ten (10) days of the Closing Date, issued by the Secretary of State of
each state in which such party's failure to be duly qualified or licensed would
have a material adverse effect on its financial condition or assets, indicating
that such party is in good standing.
(g) Authorizing Resolutions and Incumbency. FINOVA shall have received a
certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors, and shareholders or members if
necessary, authorizing the borrowing of money from FINOVA and execution and
delivery of this Agreement and the other Loan Documents to which Borrower is a
party, and authorizing specific officers of Borrower to execute same, and (ii)
the authenticity of original specimen signatures of such officers.
(h) Insurance. FINOVA shall have received the insurance certificates and
certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel, together with an additional
insured endorsement in favor of FINOVA with respect to all liability policies
and a lender's loss payable endorsement in favor of FINOVA with respect to all
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FINOVA Loan and Security Agreement
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casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel.
(i) Searches; Certificates of Title. FINOVA shall have received searches
reflecting the filing of its financing statements in such jurisdictions as it
shall determine, and shall have received certificates of title with respect to
the Collateral which shall have been duly executed in a manner sufficient to
perfect all of the security interests granted to FINOVA.
(j) Landlord, Bailee and Mortgagee Waivers. FINOVA shall have received
landlord, bailee and/or mortgagee waivers from the lessors, bailees and/or
mortgagees for at least 25% of Borrower's Collateral locations situated in
statutory lien states (i.e., states in which a landlord possesses lien rights
upon a tenant's property for lease obligations) at or prior to the Closing Date,
provided, that, where available, FINOVA will accept landlord waivers in the form
presently being used by General Electric Capital Corporation as the existing
lender to Borrower.
(k) Fees. Borrower shall have paid all fees payable by it on the Closing
Date pursuant to this Agreement.
(l) Opinion of Counsel. FINOVA shall have received an opinion of Borrower's
counsel covering such matters as FINOVA shall determine in its sole discretion.
(m) Officer Certificate. FINOVA shall have received a certificate of the
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder.
(n) Solvency Certificate. If requested, FINOVA shall have received a signed
certificate of the Borrower's duly elected Chief Financial Officer concerning
the solvency and financial condition of Borrower, on FINOVA's standard form.
(o) Blocked Account. The Blocked Account referred to in Section 2.10(c)
hereof shall have been established to the satisfaction of FINOVA in its sole
discretion.
(p) Environmental Assessment. If required by FINOVA, Borrower shall have
caused a Phase I Environmental Assessment to be conducted on the property or
properties owned or occupied by Borrower, all at Borrower's own expense and the
results of such assessment(s) shall have been in form and substance satisfactory
to FINOVA in its sole discretion. Such assessment(s) shall have included, in
FINOVA's discretion, core samplings, and shall have been conducted by an
environmental engineer acceptable to FINOVA.
(q) Environmental Certificate. FINOVA shall have received an Environmental
Certificate from Borrower, in form and substance satisfactory to FINOVA in its
discretion, with respect to all locations of Collateral.
(r) Search and References. FINOVA shall have received and approved the
results of UCC, tax lien, litigation, judgment, and bankruptcy searches
regarding Borrower.
(s) No Material Adverse Changes. Prior to the Closing Date, there shall
have occurred no material adverse change in the financial condition of Borrower
since January 31, 1998.
(t) Material Agreements. FINOVA shall have received, reviewed and approved
all material agreements to which Borrower is or shall be a party.
(u) Projections. Borrower shall submit cash flow projections and pro forma
balance sheet with adjusting entries (i) showing that the proposed financing
will provide sufficient funds for the Borrower's projected working capital
needs, and (ii) showing: (1) that the Borrower will have reasonably sufficient
capital for the conduct of its business following the initial funding, (2) that
the Borrower will not incur debts beyond its ability to pay such debts as they
mature, and (3) that the Borrower will have a tangible net worth in a minimum
amount to be considered solvent immediately following initial funding.
(u) Opinions. To the extent any Person other than Borrower shall be parties
to the Loan Documents, FINOVA reserves the right to require satisfactory
opinions of counsel for each such Person concerning the proper organization of
such Person and the due authorization, execution, delivery, enforceability,
validity and binding effect of the Loan Documents to which such Person is a
party. Each such opinion of counsel shall confirm, to the satisfaction of
FINOVA, that the opinion is being delivered to FINOVA at the instruction of the
party represented by such counsel, that FINOVA is entitled to rely on such
opinion and that for purposes of such reliance, FINOVA is deemed to be in
privity with the opining counsel.
(w) ADA Compliance. If necessary, as of the Closing Date, Borrower shall be
in compliance with the Americans with Disabilities Act of 1990 ("ADA"), or, if
any renovations of Borrower's facilities or modifications of Borrower's
employment practices shall be required to bring them into compliance with the
ADA, review and approval by FINOVA of Borrower's proposed plan to come into such
compliance. Borrower shall deliver representations and warranties to FINOVA
concerning
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FINOVA Loan and Security Agreement
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Borrower's compliance with the ADA, and no evidence shall have come to the
attention of FINOVA indicating that Borrower is not in compliance with the ADA
(except to the extent that FINOVA has reviewed and approved Borrower's plan to
come into compliance).
(x) Subordination and Intercreditor Agreements. FINOVA and each
Subordinating Creditor shall have entered into a Subordination Agreement, in
form and substance satisfactory to FINOVA.
(y) Stock Pledge. The Borrower as pledgor under the Stock Pledge Agreement
of even date herewith ("Stock Pledge Agreement") shall have executed and
delivered the Stock Pledge Agreement, pledging in favor of FINOVA all of the
issued and outstanding common capital stock of J.J. Distribution Co. FINOVA
shall be in possession on the Closing Date of original stock certificates
evidencing the shares of J.J. Distribution Co. stock so pledged to FINOVA, and
of undated stock Powers and Assignments Apart from Certificate, executed in
blank by Borrower with respect to all such shares.
(z) Asset Appraisal. Borrower shall have provided to FINOVA, a recent
Appraisal Report which must be acceptable to FINOVA in all respects.
(aa) Credit Card Processors. FINOVA shall have received notification
agreements in form and substance satisfactory to FINOVA with each of Borrower's
credit card processors directing such processors to remit payment directly to a
Blocked Account designated by FINOVA.
(bb) Transporter Agreements. If requested, FINOVA shall have received an
agreement with any of Borrower's custom agents, freight forwarders and principal
domestic common carriers, on terms and conditions acceptable to FINOVA.
(cc) Comfort Letter. FINOVA shall have received a comfort letter in favor
of and on terms acceptable to FINOVA, executed by each Subordinating Creditor
concerning the Borrower's tax refund of 1995 and addressing each Subordinated
Creditor's undertaking in the event all or some portion of such refund is
required to be remitted to the Internal Revenue Service.
(dd) Unpaid Rent Report. FINOVA shall have received an Unpaid Rent Report
for the most recent month which must be acceptable to FINOVA in all respects.
(ee) Additional Equity. Borrower shall have deposited all of the net
proceeds of the Additional Equity to a deposit account (the "Additional Equity
Account") with a bank or other financial institution acceptable to FINOVA that
shall enter into a tri-party blocked account agreement (the "Additional Equity
Account Agreement") with FINOVA and Borrower, in form and substance acceptable
to FINOVA. The Additional Equity Account Agreement shall provide, among other
things, that the bank or other financial institution shall have no rights of
setoff or recoupment or any other claim against the Additional Equity Account,
other than for payment of its service fees and other charges directly related to
the administration of such account. The Additional Equity Account shall be under
the sole dominion and control of FINOVA; provided, that, prior to the occurrence
of an Event of Default, Borrower may use funds in the Additional Equity Account
for any purpose permitted by this Agreement.
(ff) Schedule Conditions. Borrower shall have complied with all additional
conditions precedent as set forth in the Schedule attached hereto.
(gg) Other Matters. All other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance satisfactory to FINOVA
and its counsel including, without limitation, each of the items listed on the
Closing Checklist attached as Exhibit 4.1 hereto.
4.2 Subsequent Advances. The obligation of FINOVA to make any advance or
issue or cause any Letter of Credit to be issued hereunder (including the
initial advance or Letter of Credit) shall be subject to the further conditions
precedent that, on and as of the date of such advance or Letter of Credit
issuance: (a) the representations and warranties of Borrower set forth in this
Agreement shall be accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof; (b) no Event of Default
and no event which, with notice or passage of time or both, would constitute an
Event of Default has occurred and is continuing, or would result from such
advance or issuance or from the application of any proceeds thereof; (c) no
material adverse change has occurred in the Borrower's business, operations,
financial condition, in the condition of the Collateral or other assets of
Borrower or in the prospect of repayment of the Obligations; and (d) FINOVA
shall have received such other approvals, opinions or documents as FINOVA shall
reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly existing
and in good standing under the laws of the State set forth on the Schedule, is
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qualified and authorized to do business and is in good standing in all states in
which such qualification and good standing are necessary in order for it to
conduct its business and own its property, and has all requisite power and
authority to conduct its business as presently conducted, to own its property
and to execute and deliver each of the Loan Documents to which it is a party and
perform all of its Obligations thereunder, and has not taken any steps to
wind-up, dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years,
been known by or used any other corporate or fictitious name except as set forth
on the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person
during such time;
5.3 Due Authorization. The execution, delivery and performance by Borrower
of the Loan Documents to which it is a party have been authorized by all
necessary corporate action and do not and shall not constitute a violation of
any applicable law or of Borrower's Articles or Certificate of Incorporation or
By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is a
party is the legal, valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications and
trade names for the present and planned future conduct of its business without
any known conflict with the rights of others, and each is valid and has been
duly registered or filed with the appropriate governmental authorities; each of
Borrower's patents, patent applications, copyrights, trademarks and trademark
applications which have been registered or filed with any governmental authority
(including the U.S. Patent and Trademark Office and the Library of Congress) are
listed by name, date and filing number on the Schedule;
5.6 Capital. Borrower has capital sufficient to conduct its business, is
able to pay its debts as they mature, and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
5.7 Material Litigation. Borrower has no pending or overtly threatened
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. Borrower has good, indefeasible
and merchantable title to the Collateral and, upon the execution and delivery of
the Loan Documents, the filing of UCC-1 Financing Statements, delivery of the
certificate(s) evidencing any pledged securities, the filing of any collateral
assignments or security agreements regarding Borrower's Trademarks, Copyrights,
Licenses and/or Patents, if any, with the appropriate governmental offices, in
each case in the appropriate offices, this Agreement and such documents shall
create valid and perfected first priority liens in the Collateral, subject only
to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to any
labor dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA in writing prior
to the date hereof;
5.10 Laws. Borrower is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be obtained or issued any
required consent of a governmental agency or other Person in connection with the
financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly present Borrower's
financial condition and results of operations and those of such other Persons
described therein as of the date thereof in accordance with GAAP; there are no
material omissions from the Prepared Financials or other facts or circumstances
not reflected in the Prepared Financials; and there has been no material and
adverse change in such financial condition or
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FINOVA Loan and Security Agreement
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operations since the date of the initial Prepared Financials delivered to FINOVA
hereunder;
5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or has
been in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan. No lien upon the assets of Borrower has arisen with respect to a Plan. No
prohibited transaction or Reportable Event has occurred with respect to a Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability
with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have
made all contributions required to be made by them to any Plan or Multiemployer
Plan when due. There is no accumulated funding deficiency in any Plan, whether
or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports as it
is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
5.16 Locations; Federal Tax ID No. Borrower's chief executive office and
the offices and locations where it keeps the Collateral (except for Inventory in
transit) are at the locations set forth on the Schedule, except to the extent
that such locations may have been changed after notice to FINOVA in accordance
with Section 6.1.4 hereof; Borrower's federal tax identification number is as
shown on the Schedule;
5.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no present
condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by Borrower pursuant to
this Agreement shall constitute (i) an automatic representation and warranty by
Borrower to FINOVA that there does not then exist any Event of Default and (ii)
a reaffirmation as of the date of said request of all of the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents.
5.19 Bank Accounts. All of the deposit accounts, investment accounts, or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Exhibit 5.19 hereto.
6. COVENANTS.
6.1 Affirmative Covenants. Borrower covenants that, so long as any
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate provision
for the payment of all taxes, assessments and other charges on or prior to the
date when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of any
litigation, suit or administrative proceeding which may materially and adversely
affect the Collateral or Borrower's business, assets, operations, prospects or
condition, financial or otherwise, whether or not the claim is covered by
insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the occurrence
of any event described in Paragraph 4043 of ERISA, other than a termination,
partial termination or merger of a Plan or a transfer of a Plan's assets and
(ii) prior to any termination, partial termination or merger of a Plan or a
transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45)
days prior to any change in the location of Borrower's chief executive office or
the location of any Collateral, or Borrower's opening or closing of any other
place of business;
6.1.5 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any labor
dispute to which Borrower is or may become subject and the expiration of any
labor contract to which Borrower is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
violation of any law,
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FINOVA Loan and Security Agreement
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statute, regulation or ordinance of any governmental entity, or of any agency
thereof, applicable to Borrower which may materially and adversely affect the
Collateral or Borrower's business, assets, prospects, operations or condition,
financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business Days
of Borrower's default under any note, indenture, loan agreement, mortgage, lease
or other agreement to which Borrower is a party or by which Borrower is bound,
or of any other default under any Indebtedness of Borrower;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of the
making of any Capital Expenditure materially affecting Borrower's business,
assets, prospects, operations or condition, financial or otherwise, except to
the extent permitted in the Schedule;
6.1.10 Books and Records. Keep adequate records and books of account
with respect to its business activities in which proper entries are made in
accordance with GAAP, reflecting all of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide (i) landlord waivers in
form and substance acceptable to FINOVA accounting for at least 50% of
Borrower's Collateral locations situated in statutory lien states at or prior to
45 days following the Closing Date and (ii) landlord waivers in form and
substance acceptable to FINOVA for all remaining Collateral locations on such
dates as they are obtained by Borrower using reasonable efforts; provided, that,
where available, FINOVA will accept landlord waivers in the form presently being
used by General Electric Capital Corporation as the existing lender to Borrower.
In addition, Borrower shall provide FINOVA with (i) copies of all agreements
between Borrower and any landlord, warehouseman or bailee which owns any
premises at which any Collateral may hereafter be located (whether for
processing, storage or otherwise), and (ii) additional landlord, bailee and/or
mortgagee waivers in form acceptable to FINOVA with respect to all locations
where any Collateral is hereafter located;
6.1.12 Additional Documents. At FINOVA's request, promptly execute or
cause to be executed and delivered to FINOVA any and all documents, instruments
or agreements deemed necessary by FINOVA to facilitate the collection of the
Obligations or the Collateral or otherwise to give effect to or carry out the
terms or intent of this Agreement or any of the other Loan Documents. Without
limiting the generality of the foregoing, if any of the Receivables with a face
value in excess of $1,000 arises out of a contract with the United States of
America or any department, agency, subdivision or instrumentality thereof,
Borrower shall promptly notify FINOVA of such fact in writing and shall execute
any instruments and take any other action required or requested by FINOVA to
comply with the provisions of the Federal Assignment of Claims Act;
6.1.13 Financial Covenants. Comply with the financial covenants set
forth on the Schedule;
6.1.14 New MIS System. Prior to the first anniversary of the Closing
Date, acquire and have fully operational a new MIS system for its chief
executive office and the POS terminals at each of its store/locations which are
Year 2000 compliant and enhance the software and hardware components of its
existing computer inventory tracking and financial systems in a manner
reasonably acceptable to FINOVA;
6.1.15 Bank Direction Letters. Use its best efforts to cause each bank
or other financial institution at which any deposit account of a retail outlet
of Borrower is now or hereafter situated to execute and deliver to FINOVA a
letter agreement in form and substance acceptable to FINOVA confirming that such
bank shall implement daily sweeps, by wire and ACH transfer, of all amounts in
such account to the Blocked Account maintained pursuant to Section 2.10(c)
hereof (a "Bank Direction Letter");
6.1.16 Change in Bank Accounts. Promptly notify FINOVA in writing of
any additions to or deletions from Exhibit 5.19 with respect to Borrower's bank
accounts and, concurrent with opening any new account, cause to be delivered to
FINOVA a Bank Direction Letter from the bank or financial institution
maintaining such account;
6.1.17 Blocked Account Direction. Cause all appropriate officers and
other employees to deposit directly on a daily basis, all cash, checks, notes,
drafts or other similar items relating to or constituting proceeds of or
payments made in respect of any and all Collateral to (x) Borrower's Blocked
Account; or (y) in the case of sales receipts from any retail outlet of
Borrower, any other deposit account of Borrower listed on Exhibit 5.19 hereto
for which a standing direction is in effect causing all such funds deposited
therein to be remitted by wire or ACH Transfer to Borrower's Blocked Account;
6.1.18 Customs, Duty and Freight. Promptly, but in no event later than
three (3) Business Days after any Inventory ceases to be covered by a bill of
lading from the carrier transporting such goods to the applicable United States
port, (i) pay all applicable freight costs and duties, tariffs, taxes and any
other governmental assessments applicable to the importation and/or sale of
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FINOVA Loan and Security Agreement
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all such Inventory no longer constituting In-Transit Inventory and (ii) satisfy
all other requirements necessary for permitting all such Inventory to gain entry
into the United States through the United States Customs Service in compliance
with any applicable import quotas for immediate sale and/or distribution in the
United States;
6.1.19 Qualifying Bills of Lading. Cause all bills of lading and other
documents of title issued by any carrier of goods owned by Borrower being
transported to the United States or Canada from any other country to issue only
documents of title constituting a Qualifying Bill of Lading or, if such goods
are being transported other than by sea, any other negotiable document of title
which has been issued in a manner consistent with the requirements for a
Qualifying Bill of Lading;
6.1.20 Booking of In-Transit Inventory and Related Liabilities.
Reflect all purchases of Inventory and related liabilities resulting therefrom
in its financial books and records upon the issuance of a Qualifying Bill of
Lading in respect of such Inventory (or, if such goods are being transported
other than by sea, any other negotiable document of title which has been issued
in a manner consistent with the requirements for a Qualifying Bill of Lading);
6.1.21 Appraisal Report. Cooperate with the Liquidator in the timely
and accurate preparation of each Appraisal Report including, without limitation,
(i) making all necessary books, records and reports available for review, (ii)
allowing access to all Collateral locations designated by the Liquidator and
(iii) causing employees to assist the Liquidator in responding to requests for
information regarding the Collateral. Borrower shall also be obligated to
promptly pay for (or reimburse FINOVA for) all costs, fees and expenses of
liquidation in connection with the Appraisal Reports.
6.1.22 Year 2000 Problems. Eliminate all Year 2000 Problems by the
first anniversary of the Closing Date, except where the failure to correct the
same could not reasonably be expected to have a material adverse change in the
financial condition of Borrower.
6.1.23 Supplemental Disclosure.
To the extent not already provided for in this Section 6, promptly
notify FINOVA in writing of any information that should supplement the Schedule
and each applicable Exhibit hereto, or any representation herein or in any other
Loan Document, with respect to any matter hereafter arising which, if existing
or occurring at the date of this Agreement, would have been required to be set
forth or described in the Schedule or such Exhibit or as an exception to such
representation or which is necessary to correct any information in the Schedule,
such Exhibit or representation which has been rendered inaccurate thereby;
provided, that, (a) no such supplement shall be or be deemed a waiver of any
Event of Default resulting from the matters disclosed therein (other than an
Event of Default resulting from non-disclosure), except as consented to by
FINOVA in writing; and (b) no supplement shall be required as to representations
and warranties that relate solely to the Closing Date.
6.2 Negative Covenants. Without FINOVA's prior written consent, which
consent FINOVA may withhold in its sole discretion, so long as any Obligation
remains outstanding and this Agreement is in effect, Borrower shall not:
6.2.1 Mergers. Merge or consolidate with or acquire any other Person,
or make any other material change in its capital structure or in its business or
operations which might adversely affect the repayment of the Obligations;
6.2.2 Loans. Make advances, loans or extensions of credit to, or
invest in, any Person, except for loans or cash advances to employees which are
permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends upon any of its stock
or distribute any of its property or redeem, retire, purchase or acquire
directly or indirectly any of its stock unless otherwise permitted under the
Subordination Agreement;
6.2.4 Adverse Transactions. Enter into any transaction which
materially and adversely affects the Collateral or its ability to repay the
Obligations in full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
conditionally liable for the Indebtedness of any Person, except by endorsement
of instruments for deposit and except for the existing guarantees made by
Borrower prior to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis;
6.2.7 Name. Use any corporate or fictitious name other than its
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade payables
and other than the Obligations;
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FINOVA Loan and Security Agreement
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6.2.9 Capital Expenditure. Make or incur any Capital Expenditure if,
after giving effect thereto, the aggregate amount of all Capital Expenditures by
Borrower in any fiscal year would exceed the amount set forth on the Schedule;
6.2.10 Compensation. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year to
all of Borrower's executives, officers and directors (or any relative thereof)
in an amount in excess of the amount set forth on the Schedule;
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers and customers
incurred in the ordinary course of business, and (iii) other Indebtedness
existing on the date of this Agreement and reflected in the Prepared Financials
(except Indebtedness paid on the date of this Agreement from proceeds of the
initial advances hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth below, sell,
transfer, distribute or pay any money or property to any Affiliate, or invest in
(by capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may pay compensation permitted by
Section 6.2.10 to employees who are Affiliates and, if no Event of Default has
occurred, Borrower may (i) engage in transactions with Affiliates in the normal
course of business, in amounts and upon terms which are fully disclosed to
FINOVA and which are no less favorable to Borrower than would be obtainable in a
comparable arm's length transaction with a Person who is not an Affiliate, and
(ii) make payments to a Subordinating Creditor that is an Affiliate, subject to
and only to the extent expressly permitted in the Subordination Agreement
between such Subordinating Creditor and FINOVA;
6.2.13 Nature of Business. Enter into any new business or make any
material change in any of Borrower's business objectives, purposes or
operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with any of
Borrower's business or activities, except in connection with internal business
matters or as required in dealings with governmental agencies and financial
institutions or with trade creditors of Borrower, solely for credit reference
purposes;
6.2.15 Margin Security. Engage principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation G or Regulation U issued
by the Board of Governors of the Federal Reserve System), nor permit proceeds of
any Loan or other advance to be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying any margin
stock, or in any manner which might cause such Loan or other advance or the
application of such proceeds to violate (or require any regulatory filing under)
Regulation G, Regulation T, Regulation U, Regulation X or any other regulation
of the Board of Governors of the Federal Reserve System, in each case as in
effect on the date or dates of such Loan or other advance and such use of
proceeds. Further, no proceeds of any Loan or other advance will be used to
acquire any security of a class which is registered pursuant to Section 12 of
the Securities Exchange Act of 1934; or
6.2.16 Real Property. Purchase or acquire any real property without
FINOVA's prior written consent, a condition of which consent shall include
delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel;
6.2.17 Issuance of Stock. Issue or permit any subsidiary to issue any
capital stock after the Closing Date without the prior written approval of
FINOVA;
6.2.18 Change in Fiscal Year; Auditors. Change or permit any
subsidiary to change the commencement or ending date of its fiscal year or
retain the independent public auditors for purposes of preparing the Borrower's
audited financial statements which are different than those retained by Borrower
and its subsidiaries at the time of the Closing Date, in each case, without
receiving the prior written consent of FINOVA;
6.2.19 Preferred Stock. Amend the Statement of Rights and Preferences
of the Preferred Stock or issue any new preferred stock; or
6.2.20 Transporter Agreements. Enter into any arrangement or agreement
with any custom agents, freight forwarders, principal domestic common carriers,
or Brink's Incorporated or other similar cash receipts transporter, unless
FINOVA receives an agreement with such party on terms and conditions acceptable
to FINOVA.
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FINOVA Loan and Security Agreement
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7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
(b) Borrower or any other Loan Party fails or neglects to perform, keep, or
observe any Obligation including, but not limited to, any term, provision,
condition, covenant or agreement contained in any Loan Document to which
Borrower or such other Loan Party is a party;
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Any portion of Borrower's assets is seized, attached, subjected to a
writ or distress warrant, is levied upon or comes into the possession of any
judicial officer;
(f) Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by Borrower,
or any such proceeding is commenced against Borrower and remains undischarged or
unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with respect
to any of Borrower's assets;
(i) Any final judgment is rendered against Borrower or any Guarantor which
has not been bonded or stayed pending appeal and which (i) requires the payment
of more than $25,000 by Borrower or any Guarantor (after deducting therefrom all
amounts for which, in the reasonable opinion of FINOVA, applicable insurance
coverage is then payable) and is not satisfied in full within thirty (30) days
after entry, (ii) adversely affects the priority or value of FINOVA's liens on
the Collateral, or (iii) results in a material and adverse affect on Borrower's
or any Guarantor's business, assets, operations, prospects or condition,
financial or otherwise taken as a whole;
(j) Any default shall occur under (i) any material agreement between
Borrower and any third party including, without limitation, any default which
would result in a right by such third party to accelerate the maturity of any
Indebtedness of Borrower to such third party, or (ii) any Subordinated Debt;
(k) Any representation or warranty made or deemed to be made by Borrower,
any Affiliate or any other Loan Party in any Loan Document or any other
statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Any Guarantor dies, terminates or attempts to terminate its Guaranty or
any security therefor or becomes subject to any bankruptcy or other insolvency
proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with respect
to a Plan which could have a material adverse effect on the financial condition
of Borrower; any lien upon the assets of Borrower in connection with any Plan
shall arise; Borrower or any of its ERISA Affiliates shall fail to make full
payment when due of all amounts which Borrower or any of its ERISA Affiliates
may be required to pay to any Plan or any Multiemployer Plan as one or more
contributions thereto; Borrower or any of its ERISA Affiliates creates or
permits the creation of any accumulated funding deficiency, whether or not
waived;
(n) Any transfer of more than ten percent (10%) of the issued and
outstanding shares of common stock or other evidence of ownership of Borrower;
(o) Borrower becomes obligated to make payments to the Internal Revenue
Service in respect of its 1995 fiscal year tax return in an annual amount which
exceeds $350,000; or
(p) any material adverse change shall occur in the import quotas or duties,
tariffs, taxes or other governmental assessments applicable to any material
portion of goods imported by Borrower which has a material adverse effect on
Borrower's assets, business or prospects, or any embargo or other export/import
moratorium is declared with respect to any material portion of goods imported by
Borrower or Borrower shall be unable to obtain the approval of the United States
Customs Service or other applicable governmental approval to permit Borrower to
access and sell into the United States any material portion of Inventory
imported into the United States;
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FINOVA Loan and Security Agreement
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NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE RIGHT
TO CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND THEREAFTER IF
AN EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at
its option and in its sole discretion and in addition to all of its other rights
under the Loan Documents, cease making Loans, terminate this Agreement and/or
declare all of the Obligations to be immediately payable in full. Borrower
agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default Borrower hereby consents to the appointment of a receiver by FINOVA in
any action initiated by FINOVA pursuant to this Agreement and to the
jurisdiction and venue set forth in Section 9.26 hereof, and Borrower waives
notice and posting of a bond in connection therewith. Further, FINOVA may, at
any time, take possession of the Collateral and keep it on Borrower's premises,
at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA
may desire, or Borrower shall, upon FINOVA's demand, at Borrower's sole cost,
assemble the Collateral and make it available to FINOVA at a place reasonably
convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA
deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Borrower agrees that FINOVA has no
obligation to preserve rights to the Collateral or marshall any Collateral for
the benefit of any Person. FINOVA is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, name, trade
secrets, trade names, trademarks and advertising matter, or any similar
property, in completing production, advertising or selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
FINOVA's benefit. Any requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys fees
and other expenses of sale, and second, to the Obligations in such order as
FINOVA shall elect, in its sole discretion. FINOVA shall return any excess to
Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition: (i) as to which on no later than the fifth
calendar day prior thereto written notice thereof is mailed or personally
delivered to Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof describing in general
non-specific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be conducted
(provided that no notice of any public or private disposition need be given to
the Borrower or published if the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market); (ii) which is conducted at any place designated by FINOVA, with or
without the Collateral being present; and (iii) which commences at any time
between 8:00 a.m. and 5:00 p.m. Without limiting the generality of the
foregoing, Borrower expressly agrees that, with respect to any disposition of
accounts, instruments and general intangibles, it shall be commercially
reasonable for FINOVA to direct any prospective purchaser thereof to ascertain
directly from Borrower any and all information concerning the same, including,
but not limited to, the terms of payment, aging and delinquency, if any, the
financial condition of any obligor or account debtor thereon or guarantor
thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any Obligation remains
outstanding and this Agreement remains in effect, it shall promptly reimburse
FINOVA for all costs, fees and expenses incurred by FINOVA in connection with
the negotiation, preparation, execution, delivery, administration and
enforcement of each of the Loan Documents, including, but not limited to, the
attorneys' and paralegals' fees of in-house and outside counsel, expert witness
fees, lien, title search and insurance fees, appraisal fees, all charges and
expenses incurred in connection with any and all environmental reports and
environmental remediation activities, and all other costs, expenses, taxes and
filing or recording fees payable in connection with the transactions
contemplated by this Agreement, including without limitation all such costs,
fees and expenses as FINOVA shall incur or for
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FINOVA Loan and Security Agreement
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which FINOVA shall become obligated in connection with (i) any inspection or
verification of the Collateral, (ii) any proceeding relating to the Loan
Documents or the Collateral, (iii) actions taken with respect to the Collateral
and FINOVA's security interest therein, including, without limitation, the
defense or prosecution of any action involving FINOVA and Borrower or any third
party, (iv) enforcement of any of FINOVA's rights and remedies with respect to
the Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed or the
issues are peculiar to federal bankruptcy or state insolvency laws. Borrower
shall also pay all FINOVA charges in connection with bank wire transfers,
forwarding of loan proceeds, deposits of checks and other items of payment,
returned checks, establishment and maintenance of Blocked Accounts, and all
other bank and administrative matters, in accordance with FINOVA's schedule of
bank and administrative fees and charges in effect from time to time.
8.2 Environmental Matters.
The Environmental Certificate dated on or about the date of this Agreement
is incorporated herein for all purposes as if fully stated in this Agreement.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
(a) Examinations. FINOVA shall at all reasonable times have full access to
and the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents, instruments
and agreements relating to the Collateral and the right to check, test and
appraise the Collateral. Borrower shall deliver to FINOVA any instrument
necessary for FINOVA to obtain records from any service bureau maintaining
records for Borrower. All instruments and certificates prepared by Borrower
showing the value of any of the Collateral shall be accompanied, upon FINOVA's
request, by copies of related purchase orders and invoices. FINOVA may, at any
time after the occurrence of an Event of Default, remove from Borrower's
premises Borrower's books and records (or copies thereof) or require Borrower to
deliver such books and records or copies to FINOVA. FINOVA may, without expense
to FINOVA, use such of Borrower's personnel, supplies and premises as may be
reasonably necessary for maintaining or enforcing FINOVA's security interest.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon request,
such information and statements as FINOVA shall request from time to time
regarding Borrower's business affairs, financial condition and the results of
its operations. Without limiting the generality of the foregoing, Borrower shall
provide FINOVA with: (i) FINOVA's standard form collateral and loan report,
daily, and upon FINOVA's request, copies of sales journals, cash receipt
journals, and deposit slips; (ii) upon FINOVA's request, copies of sales
invoices, customer statements and credit memoranda issued, remittance advices
and reports; (iii) copies of shipping and delivery documents, upon request; (iv)
on or prior to the date set forth on the Schedule, monthly agings (aged from
invoice date) and reconciliations of Receivables (with listings of concentrated
accounts), payables reports, inventory reports, compliance certificates and
unaudited financial statements with respect to the prior month prepared on a
basis consistent with such statements prepared in prior months and otherwise in
accordance with GAAP; (v) audited annual consolidated and consolidating
financial statements, prepared in accordance with GAAP applied on a basis
consistent with the most recent Prepared Financials provided to FINOVA by
Borrower, including balance sheets, income and cash flow statements, accompanied
by the unqualified report thereon of independent certified public accountants
acceptable to FINOVA, as soon as available, and in any event, within ninety (90)
days after the end of each of Borrower's fiscal years; (vi) such certificates
relating to the foregoing as FINOVA may request, including, without limitation,
a monthly certificate from the president and the chief financial officer of
Borrower showing Borrower's compliance with each of the financial covenants set
forth in this Agreement, and stating whether any Event of Default has occurred
or event which, with giving of notice or the passage of time, or both, would
constitute an Event of Default, and if so, the steps being taken to prevent or
cure such Event of Default; and (vii) on or prior to the date set forth on the
Schedule, monthly Appraisal Reports, Trucking Reports and Unpaid Rent Reports.
All reports or financial statements submitted by Borrower shall be in reasonable
detail and shall be certified by the principal financial officer of Borrower as
being complete and correct.
(c) Guarantor's Financial Statements and Tax Returns. Borrower shall cause
the Guarantor to deliver to FINOVA such Guarantor's annual financial statement
(in form acceptable to FINOVA) and a copy of such Guarantor's federal income tax
return with respect to the corresponding year, in each case on the date when
such tax return is due or, if earlier, on the date when available.
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FINOVA Loan and Security Agreement
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9.2 Term; Termination.
(a) Term. The Initial Term of the Revolving Credit Loans facility and the
obligation of FINOVA to made advances with respect thereto in accordance with
this Agreement shall be as set forth on the Schedule, and the Revolving Credit
Loans facility and this Agreement shall be renewed for one or more Renewal
Term(s) at the discretion of FINOVA as set forth in the Schedule, unless earlier
terminated as provided herein.
(b) Prior Notice. Each party shall have the right to terminate this
Agreement effective at the end of the Initial Term or at the end of any Renewal
Term by giving the other party written notice not less than sixty (60) days
prior to the effective date of such termination, by registered or certified
mail.
(c) Payment in Full. Upon the effective date of termination, the
Obligations shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure set
forth in Section 9.2(b), Borrower may terminate this Agreement at any time but
only upon sixty (60) days' prior written notice and prepayment of the
Obligations. Upon any such early termination (or any voluntary prepayment of any
Term Loan) by Borrower or any termination of this Agreement by FINOVA upon the
occurrence of an Event of Default, then, and in any such event, Borrower shall
pay to FINOVA upon the effective date of such termination a fee (the
"Termination Fee") in an amount equal to the amount shown on the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be payable
by Borrower as provided for herein and, in full, at the termination of this
Agreement; recourse to security shall not be required at any time. Borrower
waives presentment and protest of any instrument and notice thereof, notice of
default and, to the extent permitted by applicable law, all other notices to
which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right,
remedy or option under this Agreement, any supplement, the Loan Documents or
other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. An Event of Default shall exist
or continue or be continuing until such Event of Default is waived in writing by
FINOVA as herein provided. No waiver by FINOVA shall be effective unless in
writing and then only to the extent stated. No waiver by FINOVA shall affect its
right to require strict performance of this Agreement. FINOVA's rights and
remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be prohibited or
invalid under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified, altered or
amended, except by an agreement in writing signed by Borrower and FINOVA.
Borrower may not sell, assign or transfer any interest in this Agreement or any
other Loan Document, or any portion thereof, including, without limitation, any
of Borrower's rights, title, interests, remedies, powers and duties hereunder or
thereunder. Borrower hereby consents to FINOVA's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, FINOVA's rights, title, interests,
remedies, powers and duties hereunder or thereunder. In connection therewith,
FINOVA may disclose all documents and information which FINOVA now or hereafter
may have relating to Borrower or Borrower's business. To the extent that FINOVA
assigns its rights and obligations hereunder to a third party, FINOVA shall
thereafter be released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such third party.
9.8 Integration. This Agreement, together with the Schedule (which is a
part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower
contained in this Agreement shall survive the execution, delivery and acceptance
of this Agreement by the parties. No termination of this Agreement or of any
guaranty of the Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the parties hereto
and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's discretion,
be evidenced by notes or other instruments issued or made by Borrower to FINOVA.
If not so evidenced, such Obligation shall be evidenced solely by entries upon
FINOVA's books and records.
26
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
9.11 Loan Requests. Each oral or written request for a loan by any Person
who purports to be any employee, officer or authorized agent of Borrower shall
be made to FINOVA on or prior to 11:00 a.m. Los Angeles time, on the Business
Day on which the proceeds thereof are requested to be paid to Borrower and shall
be conclusively presumed to be made by a Person authorized by Borrower to do so
and the crediting of a loan to Borrower's operating account shall conclusively
establish Borrower's obligation to repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to Borrower's
operating account set forth on the Schedule.
9.12 Notices. Any written notice, consent or other communication provided
for in this Agreement shall be delivered personally (effective upon delivery),
via facsimile (effective upon confirmation of transmission), via overnight
courier (effective the next business day after dispatch if instructed to deliver
on next business day) or via U.S. Mail (effective 3 days after mailing, postage
prepaid, first class) to each party at its address(es) and/or facsimile
number(s) set forth below its signature, or to such other address as either
party shall specify to the other in writing from time to time.
9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that, with
respect to the financing transaction herein contemplated, no Person is entitled
to any brokerage fee or other commission and Borrower agrees to indemnify and
hold FINOVA harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
or which reasonably should be known to Borrower which Borrower has not disclosed
to FINOVA in writing with respect to the transactions contemplated by this
Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are without
substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower
fails to perform, observe or discharge any of its Obligations under this
Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed in
one or more counterparts, each of which taken together shall constitute one and
the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall also
deliver a manually executed counterpart of this Agreement, but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 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 or
exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by
FINOVA's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by Borrower by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing of a complaint within one year after the
first act, occurrence or omission upon which such claim or cause of action, or
any part thereof, is based and service of a summons and complaint on an officer
of FINOVA or any other Person authorized to accept service of process on behalf
of FINOVA, within 30 days thereafter. Borrower agrees that such one-year period
of time is a reasonable
27
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
and sufficient time for Borrower to investigate and act upon any such claim or
cause of action. The one-year period provided herein shall not be waived,
tolled, or extended except by a specific written agreement of FINOVA. This
provision shall survive any termination of this Loan Agreement or any other
agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable for
any indirect, special, incidental or consequential damages in connection with
any breach of contract, tort or other wrong relating to this Agreement or the
Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the Borrower through the ordinary negligence of FINOVA,
or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors,
officers, employees, agents, attorneys or any other Person or entity affiliated
with or representing FINOVA.
9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written
notice of (i) any action or inaction by FINOVA or any attorney of FINOVA in
connection with any Loan Documents that may be actionable against FINOVA or any
attorney of FINOVA or (ii) any defense to the payment of the Obligations for any
reason, including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. Borrower agrees that unless such notice
is fully given as promptly as possible (and in any event within thirty (30)
days) after Borrower has knowledge, or with the exercise of reasonable diligence
should have had knowledge, of any such action, inaction or defense, Borrower
shall not assert, and Borrower shall be deemed to have waived, any claim or
defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of any casualty
insurance insuring the Collateral, after deducting all costs and expenses
(including attorneys' fees) of collection, shall be applied, at FINOVA's option,
either toward replacing or restoring the Collateral, in a manner and on terms
satisfactory to FINOVA, or toward payment of the Obligations. Any proceeds
applied to the payment of Obligations shall be applied in such manner as FINOVA
may elect. In no event shall such application relieve Borrower from payment in
full of all installments of principal and interest which thereafter become due
in the order of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as
Borrower's attorney, with the power to endorse Borrower's name on any checks,
notes, acceptances, money orders or other forms of payment or security that come
into FINOVA's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on assignments
of Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers or account
debtors; to send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to notify the
post office authorities to change the address for delivery of Borrower's mail to
an address designated by FINOVA and to open and dispose of all mail addressed to
Borrower; and to do all other things FINOVA deems necessary or desirable to
carry out the terms of this Agreement. Borrower hereby ratifies and approves all
acts of such attorney. Neither FINOVA nor any of its designees shall be liable
for any acts or omissions nor for any error of judgment or mistake of fact or
law while acting as Borrower's attorney. This power, being coupled with an
interest, is irrevocable until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder shall have terminated.
9.26 Governing Law; Waivers. THIS AGREEMENT, INCLUDING WITHOUT LIMITATION
ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA
GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER HEREBY
CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
WITHIN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE SOLE OPTION OF
FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE.
BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER, CERTIFIED MAIL
OR REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH BELOW ITS
SIGNATURE HERETO AND SERVICE SO MADE SHALL BE DEEMED TO
28
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME
SHALL HAVE BEEN POSTED TO BORROWER'S ADDRESS; BORROWER FURTHER WAIVES ANY RIGHT
IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT.
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH HEREBY
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii)
ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
FINOVA OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.
[SIGNATURE PAGE FOLLOWS]
29
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
[SIGNATURE PAGE TO LOAN AND SECURITY AGREEMENT]
BORROWER: FINOVA:
JAY JACOBS INC. FINOVA CAPITAL CORPORATION
Fed. Tax ID # 91-0698077
By /s/ WILLIAM L. LAWRENCE By /s/ PHILIP ISOM
------------------------------- -------------------------------
Executive Vice President/CFO Title Vice President
Borrower's address for notices: FINOVA's address for notices:
Jay Jacobs, Inc. FINOVA Capital Corporation
355 South Grand Avenue
1530 Fifth Avenue Suite 2400
Los Angeles, CA 90071
Seattle, Washington 98101 Attn: John Bonano and Account Officer
Facsimile: (213) 625-2486
Attn: William L. Lawrence
with a copy to:
Facsimile 206-621-9830 ---------------
FINOVA Capital Corporation
01/98 1850 North Central Avenue
Phoenix, AZ 85002
Attn: Joseph D'Amore, Esq.
Facsimile: (602) 207-5036
30
<PAGE>
Schedule to
Loan and Security Agreement
Borrower: JAY JACOBS, INC.
Address: 1530 Fifth Avenue
Seattle, WA 98101
Date: May 29, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
================================================================================
DEFINITIONS (SECTION 1):
"Guarantor" means J.J. Distribution Company, a Washington corporation.
"Subordinating Creditors" means each of Cahill, Warnock Strategic Partners
Fund, L.P., Strategic Associates, L.P. and T. Rowe Price Recovery Fund II, L.P.
================================================================================
TOTAL FACILITY (SECTION 2.1):
$15,000,000
================================================================================
LOANS (SECTION 2.2):
Revolving Credit Loans: A revolving line of credit consisting of
loans against Borrower's Eligible Inventory ("Revolving Credit
Loans") in an aggregate outstanding principal amount not to
exceed the lesser of (a) or (b) below:
(a) Fifteen Million Dollars ($15,000,000) (the "Revolving
Credit Limit"), less any Loan Reserves, or
(b) an amount not to exceed the product of (i) the
applicable Advance Rate and (b) the value of Borrower's
Eligible Inventory, calculated at the lower of cost or
market value and determined on a first-in, first-out basis,
less any Loan Reserves
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
================================================================================
LETTERS OF CREDIT (SECTION 2.4):
The aggregate face amount of all outstanding Letters of Credit
from time to time shall not exceed $5,000,000, and shall be
reserved against the availability of Revolving Credit Loans
pursuant to Section 2.4 hereof. The L/C Fee shall equal 1% per
annum of the aggregate face amount of each Letter of Credit
outstanding from time to time during the term of this Agreement.
The L/C Fee shall be deemed to be fully earned upon the issuance
of each Letter of Credit and shall be due and payable on the
first Business Day of each month following a month during which
any Letter of Credit is outstanding.
================================================================================
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay FINOVA interest on
the daily outstanding balance of Borrower's Revolving Credit
Loans at a per annum rate of one half percent (.50%) in excess of
the rate of interest announced publicly by Citibank, N.A., (or
any successor thereto), from time to time as its "prime rate"
(the " Prime Rate") which may not be such institution's lowest
rate. The interest rate chargeable hereunder in respect of the
Revolving Credit Loans (herein, the "Revolving Interest Rate")
shall be increased or decreased, as the case may be, without
notice or demand of any kind, upon the announcement of any change
in the Prime Rate. Each change in the Prime Rate shall be
effective hereunder on the first day following the announcement
of such change. Interest charges and all other fees and charges
herein shall be computed on the basis of a year of 360 days and
actual days elapsed and shall be payable to FINOVA in arrears on
the first day of each month.
Collateral Monitoring Fee. At the closing of this transaction and
on the first day of each calendar month thereafter, Borrower
shall pay FINOVA a collateral monitoring fee of $1,500
("Collateral Monitoring Fee"); provided however, that Borrower
agrees and acknowledges that each Loan Year a full year's fee
shall be deemed earned at the beginning of the respective Loan
Year.
Facility Fee. Borrower shall pay to FINOVA a facility fee equal
to $150,000 ("Facility Fee") which shall be deemed fully earned
on the Closing Date. One-half of the Facility Fee shall be due
and payable on the Closing Date and the other half of the
Facility Fee shall be due and payable or the earlier of (i)
December 1, 1998 or (ii) termination of the Agreement.
2
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
Examination Fee. Borrower agrees to pay to FINOVA an examination
fee in the amount of $600 per person per day in connection with
each audit or examination of Borrower performed by FINOVA prior
to or after the date hereof, plus all costs and expenses incurred
in connection therewith (the "Examination Fee"). Such examination
shall be performed no less frequently than on a quarterly basis.
Without limiting the generality of the foregoing, Borrower shall
pay to FINOVA an initial Examination Fee in an amount equal to
$600 per person per day, plus all costs and expenses incurred in
connection therewith. Such initial Examination Fee shall be
deemed fully earned at the time of payment and due and payable
upon the closing of this transaction, and shall be deducted from
any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
================================================================================
NOTIFICATION OF CLOSING (SECTION 2.13):
The amount for purposes of Section 2.13 shall be $12,000,000.
================================================================================
CONDITIONS OF CLOSING (SECTION 4.1):
The obligation of FINOVA to make the initial advance hereunder or
to issue or arrange for the issuance of the initial Letter of
Credit hereunder is subject to the fulfillment, to the
satisfaction of FINOVA and its counsel, of each of the following
conditions, in addition to the conditions set forth in Sections
4.1 and 4.2 above:
(a) Minimum Excess Availability (Section 4.1(b)). The minimum
Excess Availability shall not be less than $2,000,000 assuming
all accounts payable outstanding 60 days or more from their
original invoice date have been paid in full.
(b) No Material Adverse Change (Section 4.1(s)). No material
adverse change has occurred in the Borrower's business,
operations, financial condition, or assets or in the prospect of
repayment of the Obligations since January 31, 1998.
(c) Validity and Support Agreements. William Lawrence shall have
delivered a Validity and Support Agreement in favor of FINOVA,
and in form and substance satisfactory to FINOVA.
Borrower shall cause the conditions precedent set forth in
Section 4.1 of this Agreement and set forth above in this
Schedule to be satisfied, and shall provide evidence to FINOVA
that all such conditions precedent have been satisfied, on or
before June 15, 1998.
3
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
================================================================================
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 5.1):Washington
Borrower's copyrights, patents trademarks, and licenses (Section 5.5): See
Exhibit 5.5.
Fictitious Names/Prior Corporate Names (Section 5.2):
Prior Corporate Names: None.
Fictitious Names: None.
Borrower Locations (Section 5.16) See Exhibit 5.16.
Borrower's Federal Tax Identification Number (Section 5.16): 91-0698077
Borrower Bank Accounts (Section 5.19):
Permitted Encumbrances (Section 1.1): See Exhibit 1.1.
================================================================================
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the following covenants.
Compliance shall be determined as of the end of each month or
quarter (as determined by FINOVA in its sole discretion), except
as otherwise specifically provided below:
EBITDA: Borrower shall maintain Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") for the twelve month
period ending on the dates set forth below in the amounts set
forth opposite such dates:
12 Month Period Ending EBITDA
---------------------- ------
Senior Debt Service Coverage Ratio: As of the last day of each calendar
quarter ended March 31, June 30, September 30 or December 31,
Borrower's Operating Cash Flow/Actual for the consecutive
12-month period ending as of such last day must be at least (i)
from the Closing Date until January 31, 2000, 1.0 times the
amount necessary to meet Borrower's Senior Contractual Debt
Service for such 12-month period (ii) from February 1, 2000 until
July 31, 2000, 1.1 times the amount necessary to meet Borrower's
Senior Contractual Debt for such 12-month period and (iii) from
August 31, 2000 thereafter, the Projected Debt Service
Multiple<F3> times the amount
- ---------------------------
3 FINOVA to advise on Senior Debt Service Courage Ratio for August 31, 2000
to end of facility.
4
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
necessary to meet Borrower's Senior Contractual Debt Service for
such 12-month period; provided however, that, with respect to the
calculations set forth herein for the period from the Closing
Date through December 31, 1998, Borrower's Operating Cash
Flow/Actual and Senior Contractual Debt Service shall be
determined beginning as of April 1, 1998 (the "Start Date") and
be measured as follows: (x) the time period from the Start Date
through June 30, 1998, shall be for such amounts for such period,
(y) the time period from the Start Date through September 30,
1998, shall be for such amounts for such period, and (z) the time
period from the Start Date through December 31, 1998, shall be
for such amounts for such period; and, provided further, that all
such determinations shall be made on a consolidated basis.
================================================================================
NEGATIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or advances to
employees except in the ordinary course of business and
consistent with past practices of Borrower in an aggregate amount
not exceeding at any time [$________].<F4>
Existing Guaranties: See Exhibit 6.2.5 hereto.
Capital Expenditures: Borrower shall not make or incur any Capital
Expenditure if, after giving effect thereto, the aggregate amount
of all Capital Expenditures by Borrower in any fiscal year
(beginning with the 1998 fiscal year) would exceed $2,500,000.
Compensation: Borrower shall not pay total compensation, including
salaries, withdrawals, fees, bonuses, commissions, drawing
accounts and other payments, whether directly or indirectly, in
money or otherwise, during any fiscal year to all of Borrower's
executives, officers and directors (or any relative thereof) in
an amount in excess of $<F5>_______.
Indebtedness: Borrower shall not create, incur, assume or permit to exist
any Indebtedness (including Indebtedness in connection with
Capital Leases) in excess of [$______]<F6> other than (i) the
Obligations, (ii) trade payables and other contractual
obligations to suppliers and customers incurred in the ordinary
course of business and (iii) other Indebtedness existing on the
date of this Agreement and reflected in Exhibit 6.2.11 attached
hereto (other than Indebtedness paid on the date of this
Agreement from proceeds of the initial advances hereunder).
________________________
4 Borrower to propose acceptable dollar amount.
5 Borrower to propose acceptable dollar amount.
6 Borrower to propose acceptable dollar amount.
5
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
================================================================================
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly agings aged by
invoice date and reconciliations of Receivables within ten
(10) days after the end of each month.
2. Borrower shall provide FINOVA with monthly accounts payable
agings aged by invoice date, outstanding or held check
registers and inventory certificates within ten (10) days
after the end of each month.
3. Borrower shall provide FINOVA with monthly perpetual inventory
reports for the Inventory valued on a first-in, first-out
basis at the lower of cost or market (in accordance with GAAP)
or such other inventory reports as are reasonably requested by
FINOVA, all within ten (10) days after the end of each month.
4. Borrower shall provide FINOVA with monthly unaudited financial
statements within thirty (30) days after the end of each
month.
5. Borrower shall provide FINOVA with audited consolidated and
consolidating fiscal financial statements within one hundred
twenty (120) days after the end of each fiscal year, as more
specifically described in Section 9.1(b) hereof, and with an
opinion issued by a Certified Public Accountant which is
acceptable to FINOVA.
6. Borrower shall provide FINOVA with annual operating budgets
(including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower
within thirty (30) days prior to the end of each fiscal year
of Borrower.
7. Borrower's balance sheets for purposes of the definition of
Prepared Financials Shall be as of January 31, 1998.
8. Borrower shall provide FINOVA with monthly Appraisal Reports,
Unpaid Rent Reports and Trucking Reports within ten (10) days
after the end of each month.
================================================================================
TERM (SECTION 9.2):
The initial term of this Agreement shall be three year(s) from
the date hereof (the "Initial Term") and shall be renewed for
successive periods of one (1) year each (each, a "Renewal Term")
at the discretion of FINOVA, unless earlier terminated as
provided in Section 7 or 9.2 above or elsewhere in this
Agreement.
6
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
================================================================================
TERMINATION FEE (SECTION 9.2):
(A) Revolving Credit Loans Facility. The Termination Fee
applicable to the Revolving Credit Loans facility provided for in
Section 9.2(d) shall be an amount equal to the following
percentage of the average daily outstanding balance of the
Obligations for the 180-day period (or lesser period if
applicable) preceding the date of termination:
(i) three percent (3%), if such early termination occurs on or
prior to the first anniversary of the date of this Agreement;
(ii) two percent (2%), if such early termination occurs after the
first anniversary of the date of this Agreement but on or prior
to the second anniversary of the date of this Agreement; and
(iii) one percent (1%), if such early termination occurs after
the second anniversary of the date of this Agreement but prior to
the last day of the Initial Term or any Renewal Term.
================================================================================
DISBURSEMENT (SECTION 9.11):
Unless and until Borrower otherwise directs FINOVA in writing,
all loans shall be wired to Borrower's following operating
account:<F7>
--------------------------------------------------------
--------------------------------------------------------
================================================================================
[Signature Page Follows]
- ------------------------
7 Borrower provided applicable account information.
7
<PAGE>
FINOVA Loan and Security Agreement
----------------------------------------------------------------------
Borrower: FINOVA:
JAY JACOBS, INC. FINOVA CAPITAL
CORPORATION
By /s/ WILLIAM L. LAWRENCE By /s/ PHILIP ISOM
------------------------------- -------------------------------
Title Executive Vice President/CFO Title Vice President
---------------------------- ----------------------------
[Signature Page to Schedule to Loan and Security Agreement]
8
<PAGE>
STATE OF )
) ss.
COUNTY OF )
BEFORE ME, a Notary Public, in and for said county and state,
personally appeared the above-named Jay Jacobs, Inc., a Washington corporation,
by _______________________________, its _______________________, who
acknowledged that he/she did sign the foregoing agreement and that the same is
his/her free act and deed and the free act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal at
__________, __________ this ___ day of __________, 199___.
-----------------------------------
Notary Public
<PAGE>
Exhibit 1.1
PERMITTED ENCUMBRANCES
None
<PAGE>
Exhibit 5.5
INTELLECTUAL PROPERTY
Trademarks/Servicemarks Owned By Jay Jacobs, Inc.
<TABLE>
<CAPTION>
REGISTRATION REGISTRATION
TRADEMARK NO. DATE
--------- ------------ ------------
<S> <C> <C>
Authentic Gear 1,711,839 9/1/92
Private Edition 1,344,290 3/13/84
ECC 1,710,139 8/15/92
American Sportswear Exchange 1,216,849 11/16/82
D.D. Sloane 1,234,694 4/12/83
Fashion Direction* 1,444,613 6/23/87
*also registered in Idaho 13,694 7/13/92
SERVICEMARK
-----------
Jay Jacobs 1,263,288 1/3/84
JJ 1,230,516 3/8/83
</TABLE>
<PAGE>
Exhibit 5.16
LOCATIONS
See attached list
<PAGE>
Exhibit 5.19
BANK ACCOUNTS
See attached list
<PAGE>
Exhibit 6.2.5
EXISTING GUARANTIES
None
<PAGE>
Exhibit 6.2.11
INDEBTEDNESS
None
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Registrant's
unaudited consolidated financial statements as of and for the quarter ended
August 1, 1998, and is qualified in its entirety by reference to such financial
statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 1,223
<SECURITIES> 0
<RECEIVABLES> 530
<ALLOWANCES> 0
<INVENTORY> 12,203
<CURRENT-ASSETS> 14,745
<PP&E> 26,779
<DEPRECIATION> 22,148
<TOTAL-ASSETS> 19,397
<CURRENT-LIABILITIES> 15,435
<BONDS> 0
3,834
2,072
<COMMON> 16,164
<OTHER-SE> (18,245)
<TOTAL-LIABILITY-AND-EQUITY> 19,397
<SALES> 15,963
<TOTAL-REVENUES> 15,963
<CGS> 11,520
<TOTAL-COSTS> 16,189
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344
<INCOME-PRETAX> (570)
<INCOME-TAX> 0
<INCOME-CONTINUING> (570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (570)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> 0
</TABLE>
