FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal period ended January 29, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to__________
Commission File number 0-16309
FACTORY 2-U STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0299573
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
4000 Ruffin Road
San Diego, California 92123
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(Address of Principal Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (858) 627-1800
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- ------------------------------------------
Common Stock, $0.01 par value None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
(Title of Class)
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 fore such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to be best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 ___
At April 12, 2000 the aggregate market value of the voting stock of the
Registrant held by non-affiliates was approximately $235,345,514.
At April 12, 2000 the Registrant had outstanding 12,429,742 shares of
Common Stock, $0.01 par value per share.
<PAGE>
FORM 10-K INDEX
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 19
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PART I
Item 1. Business
THE COMPANY
We operate a chain of off-price retail apparel and housewares stores in Arizona,
California, Nevada, New Mexico, Oregon, Texas and Washington. We sell branded
casual apparel for the family, as well as selected domestics and household
merchandise at prices which generally are significantly lower than other
discount stores. At January 29, 2000, we operated substantially all of our 187
stores under the name Factory 2-U.
Prior to July 31, 1998, we operated through our wholly-owned subsidiaries,
General Textiles and Factory 2-U, Inc. We acquired General Textiles (which was
our principal operating subsidiary) in 1993. At that time, General Textiles was
operating only the Family Bargain Center chain. In November 1995, we acquired
Factory 2-U, Inc. and began to coordinate the purchasing, warehousing and
delivery operations for the Family Bargain Center and Factory 2-U chains.
In July 1998, we merged General Textiles and Factory 2-U, Inc. into a new
corporation, General Textiles, Inc. In November 1998, we merged General
Textiles, Inc. into ourselves, converted our previous three classes of stock
into a single class of Common Stock and changed our name from Family Bargain
Corporation to Factory 2-U Stores, Inc.
Our 187 stores average 14,300 total square feet and are located mostly in strip
centers. Our products include a broad range of family apparel, domestic goods
and housewares. Our typical customers are families with average household income
of approximately $35,000, who generally are profiled as discount store shoppers.
Our merchandising strategy is to offer first quality recognizable national and
discount store brands at a substantial discount, generally 20% to 50% below that
offered by the national discount chains. Our stores are well-lit and present the
merchandise primarily on hanging fixtures. We also use strategically placed
in-store signage to emphasize the savings and create increased customer
awareness.
OPERATIONS
Operating Strategy
We seek to be the leading off-price apparel, domestic goods and housewares
retailer to families with more than average number of children and whose
household incomes approximate $35,000 in the markets we serve. The major
elements of our operating strategy include:
Provide Value to Customers on National and Discount Brand Merchandise: We
emphasize providing value to our customers by selling merchandise found in
national discount chains at savings of 20% to 50% below prices offered by the
national discount chains. We buy excess inventory of recognized brands at
bargain prices and pass along the savings to our customers.
Target Under-Served Market Segments: Our stores target customers who are
under-served in their markets. Typical customers are young, large families with
a household income of approximately $35,000.
Maximize Inventory Turns: We emphasize rapid inventory turn in our merchandise
and marketing strategies because we believe it leads to increased profits and
efficient use of capital. Merchandise presentation, an everyday low price
strategy, frequent store deliveries and advertising programs all target rapid
inventory turn.
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Expansion Plans
Opening of New Stores: We plan to open 60 to 65 stores in the fiscal year ending
February 3, 2001 (fiscal 2000). The new stores are planned for states in which
we currently operate. During the fiscal year ended January 29, 2000 (fiscal
1999), we opened 38 new stores and closed 19 stores. During the period from
January 29, 2000 through April 12, 2000, we opened 18 new stores and closed 7
stores. The number of stores that we opened and closed each quarter during
fiscal 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------------------------
First Second Third Fourth
Fiscal Year Beginning Open Close Open Close Open Close Open Close Ending
- ----------- --------- -------- ------- -------- -------- -------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 150 10 (2) 11 (4) 9 (6) 1 (3) 166
1998 166 - (4) 3 (3) 6 - - - 168
1999 168 9 (8) 10 (1) 15 (6) 4 (4) 187
</TABLE>
Our average store opening costs for equipment, fixtures, leasehold improvements
and preopening expenses currently approximate $285,000. Our average initial
inventory for a new store currently approximates $160,000, net of trade credit.
Generally, during the two to three month grand opening period, our new stores
achieve sales in excess of sales of an average comparable mature store due to a
higher level of advertising and, within six months, generate sales consistent
with comparable mature store levels.
Renovation Program: We plan to continue the renovation of older stores. Our
store renovations generally include installing new fixtures, redesigning layouts
and refurbishing floors and walls. Our average cost to renovate a store
currently approximates $50,000. During fiscal 1999, we renovated 74 stores. In
many cases, our store renovations included a name change from Family Bargain
Center to Factory 2-U. In fiscal 1999, we converted 80 stores to our Factory 2-U
name. During fiscal 2000, we plan to renovate 12 to 14 stores and complete the
conversion to the Factory 2-U name.
Warehouses: In September 1999, we opened a new 150,000 square-foot warehouse and
distribution center in San Diego, California. We now have two distribution
centers in the San Diego area. The new facility was opened to accommodate
centralized ticketing of our merchandise, which had previously been done at our
stores, and to meet the increased demand resulting from the opening of our new
stores and growth at our existing stores. Generally, manufacturers ship goods
directly to our distribution centers or, in the case of certain east coast
vendors, to freight consolidators who then ship to our distribution centers. We
generally ship merchandise from our distribution centers to our stores within
two to three days of receipt utilizing the services of independent trucking
companies. We do not typically store merchandise at our distribution centers
from season to season. We plan to open a new distribution center by the fourth
quarter of fiscal 2000. This new distribution center will service the existing
Texas and New Mexico stores and our new stores that will be opened in those
states.
Buying and Distribution
We purchase merchandise from domestic manufacturers, jobbers, importers and
other vendors. Our payment terms are typically net 30 days. We continually add
new vendors and do not maintain long-term or exclusive purchase commitments or
agreements with any vendor. We believe that there are a substantial number of
additional sources of supply of first quality, national and discount brand
merchandise that will meet our increased inventory needs as we grow.
In-Season Goods: Unlike traditional department stores and discount retailers,
which primarily purchase merchandise in advance of the selling season (for
example, back-to-school clothing is purchased by March),
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we purchase approximately 80% of our merchandise in-season (i.e., during the
selling season). In-season purchases generally represent closeouts of vendors'
excess inventories remaining after the traditional wholesale selling season and
are often created by other retailers' order cancellations. Sometimes vendors
manufacture to meet anticipated demand rather than known demand, anticipating
that we are a potential buyer of the excess inventory, typically at prices below
wholesale. We believe that in-season buying practices are well suited to our
customers, who tend to make purchases on an as-needed basis later into a season.
Our in-season buying practice is facilitated by our ability to process and ship
merchandise through our distribution centers to our stores, usually within two
or three days of receipt from the vendor, and to process a large number of
relatively small purchase orders. We believe that we are a desirable customer
for vendors seeking to liquidate inventory because we can take immediate
delivery of large quantities of in-season goods. Furthermore, because we rarely
request markdown concessions, advertising allowances or special shipping and
packing procedures, insisting instead on the lowest possible price, we are able
to pass these low prices on to our customers.
Merchandising and Marketing
Our merchandise selection, pricing strategies and store formats are designed to
reinforce the concept of value and maximize customer enjoyment of the shopping
experience. Our stores offer customers a diverse selection of first quality,
in-season merchandise at prices which generally are lower than those of
competing discount and off-price stores in their local markets. Nearly all of
our stores carry brand name labels, including nationally recognized brands.
We deliver new merchandise to our stores at least weekly to encourage frequent
shopping trips by our customers and to maximize the rate of inventory turn. As a
result of our purchasing practices, store inventory may not always include a
full range of colors, sizes and styles in a particular item. We believe,
however, that price, quality and product mix are more important to our customers
than the availability of a specific item at a given time.
We emphasize inventory turn in our merchandising and marketing strategy. Our
merchandise presentation, pricing below discounters, frequent store deliveries,
staggered vendor shipments, promotional advertising, store-tailored distribution
and prompt price reductions on slow moving items are all designed to promote
rapid inventory turn. We believe that the pace of our inventory turn leads to
increased profits, reduced inventory markdowns, efficient use of capital and
customer urgency to make purchase decisions.
At our administrative headquarters we receive daily store sales and inventory
information from point-of-sale computers located at each of our stores. This
data is reported by stock keeping unit (the "SKU"), permitting us to tailor
purchasing and distribution decisions. Our chain-wide computer network also
facilitates communications between our administrative headquarters and our
stores, enabling corporate management to provide store management with immediate
pricing and distribution information.
Our stores are characterized by easily accessible merchandise displayed on
hanging fixtures and open shelves in well-lighted areas. Our prices are clearly
marked, usually in whole dollars, with the comparative retail-selling price
often noted on price tags. Our major advertising vehicle is the use of a
full-color print tab showing actual photos of our merchandise. Our print media
is principally delivered to consumers through marriage-mail drops and to a
lesser extent, newspaper inserts. Some of our other advertising programs include
radio and outdoor billboard promotional activities.
Our stores emphasize customer satisfaction to develop customer loyalty and
generate repeat sales. If a customer is not completely satisfied with any
purchase, we will make a full refund or exchange. Most of our sales are for
cash, although we accept checks, debit and credit cards. We do not issue credit
cards, but do offer a layaway program. Our layaway program is important to our
customers, many of whom do not possess credit cards, because it permits them to
pay for purchases over time.
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Approximately 60% of our sales occur in our third and fourth quarters, during
the back-to-school (August and September) and Holiday (November and December)
seasons. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Seasonality and Quarterly Fluctuations."
Our Stores
As of April 12, 2000, we operated 198 stores located in seven western states.
Our stores are primarily located in rural and lower income suburban communities
and, to a lesser extent, in metropolitan areas. Most of our stores are located
in strip shopping centers, where occupancy costs are more favorable. As of
January 29, 2000, our stores were located as follows:
Strip
State Center Metropolitan Other Total
----- ------ ------------ ----- -----
California 81 11 12 104
Arizona 26 4 0 30
Washington 13 2 1 16
New Mexico 9 0 1 10
Nevada 7 0 0 7
Oregon 7 0 3 10
Texas 8 1 1 10
--- --- --- ---
151 18 18 187
=== === === ===
Our stores typically range in size from 6,000 square feet to 34,800 square feet,
averaging 14,300 square feet.
We generally lease previously occupied store sites on terms that we believe are
more favorable than those available for newly constructed facilities. After we
sign a store lease, one of our store opening teams prepares the store for
opening by installing fixtures, signs, racks, dressing rooms, checkout counters,
cash register systems and other items. Our district manager and store manager
arrange the merchandise according to the standard store layout and train new
personnel before and after the store is opened. We select store sites based on
demographic analysis of the market area, sales potential, local competition,
occupancy expense, operational fit and proximity to existing store locations.
Once we take possession of a store site, it takes approximately eight weeks to
open a new store.
Our stores typically employ one store manager, two assistant store managers and
seven to ten sales associates, most of whom are part-time employees. We train
new store managers in all aspects of store operations through our
management-training program. Our other store personnel are trained on site. We
often promote experienced assistant store managers to fill open manager
positions.
Our store management team participates in a bonus plan in which they are awarded
bonuses upon achieving plan objectives. We believe that the bonus program is an
important incentive for our key employees, helps reduce employee turnover and
results in lower costs.
We continually review store performance and from time to time close stores that
do not meet performance criteria. The costs associated with closing stores,
which consist primarily of the recognition of remaining lease obligations,
provisions to write down assets to net realizable value and inventory
liquidation costs are charged to operations during the fiscal year in which the
commitment is made to close a store.
We maintain customary commercial liability, fire, theft, business interruption
and other insurance policies.
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Competition
We operate in a highly competitive marketplace. We compete with large discount
retail chains, such as Wal-Mart, K-Mart, Target and Mervyn's, and with regional
off-price chains, such as MacFrugal's, some of which have substantially greater
resources than ours. We also compete with independent and small chain retailers
and flea markets (also known as "swap meets") which serve the same low and
low-middle income market. We believe that we are well positioned to compete on
the basis of the principal competitive factors in our markets, which are price,
quality and site location.
Employees
As of April 12, 2000, we had 4,212 employees (2,253 of whom were part-time
employees). Of that total, 3,820 were store employees and store field
management, 252 were executives and administrative employees and 140 were
warehouse employees. None of our employees is subject to collective bargaining
agreements and we consider relations with our employees to be good.
Trademarks
Except for the trade names "Family Bargain Center" and "Factory 2-U", which are
federally registered trademarks, we do not have any material trademarks.
Government Regulation
Our operations are subject to various federal, state and local laws, regulations
and administrative practices affecting our business, including those relating to
equal employment and minimum wages. We believe we are in substantial compliance
with all federal, state and local laws and regulations governing operations and
we have obtained all material licenses and permits required for the operation of
our business. We believe that the compliance burdens and risks relating to these
laws and regulations do not have a material adverse effect on our business.
Item 2. Properties
As of April 12, 2000, we operated 198 retail stores located in Arizona,
California, Nevada, New Mexico, Oregon, Texas and Washington, under various
operating leases with third parties. Our store locations include malls, shopping
centers, strip centers, downtown business districts, and stand-alone sites. Our
store leases are separately negotiated. The typical lease for our stores is for
five years with renewal options in five year increments. Approximately 98% of
our leases are "triple net leases" under which we are required to reimburse
landlords for insurance, real estate taxes and common area maintenance costs;
however for many of those leases, we have negotiated reimbursement limitations
on common area costs. Some of our leases require us to pay a minimum monthly
rent and a percentage of sales in excess of a specified gross sales level. Our
annual rent expense for the 187 stores open at January 29, 2000 was
approximately $22.0 million.
Our headquarters are located in a 269,000 square-foot multi-use facility at 4000
Ruffin Road, San Diego, California. This facility consists of 37,000 square feet
of office space, an 8,000 square-foot retail store and a 224,000 square-foot
warehouse and distribution center. We currently sublease 60,000 square feet of
this facility to a third party. Our lease on this facility expires in September
2005. The lease provides for annual base rent at an average of approximately
$1.4 million over the lease term.
In September 1999, we leased a second warehouse facility at 7130 Miramar Road,
San Diego, California. This property consists of a 150,000 square-foot warehouse
and distribution center. Our lease expires in April 2002. The lease provides for
annual base rent at an average of approximately $783,000 over the lease term.
7
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Item 3. Legal Proceedings
We are at all times subject to pending and threatened legal actions that arise
in the normal course of business. In our opinion, based in part on the advice of
legal counsel, the ultimate disposition of current legal matters will not have a
material adverse effect on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended January 29, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As part of our recapitalization in November 1998, our previous three classes of
capital stock outstanding were converted into a single class of Common Stock. We
converted each share of common stock outstanding prior to the recapitalization
into .30133 shares of post-recapitalization Common Stock, each share of Series A
9-1/2% Cumulative Convertible Preferred Stock outstanding into one share of
post-recapitalization Common Stock and each share of Series B Junior
Convertible, Exchangeable Preferred Stock outstanding into 173.33 shares of
Post-Recapitalization Common Stock. Immediately following the recapitalization,
we had 11,306,000 shares of Common Stock outstanding.
Prior to our recapitalization, our Common Stock and Series A Preferred Stock
were quoted on the NASDAQ SmallCap Market. Our Common Stock is now traded on the
NASDAQ National Market under the symbol "FTUS." The following table sets forth
the high and low closing prices of our Common Stock, as reported on the NASDAQ
National Market since November 23, 1998, and the high and low bid prices of our
Common Stock prior thereto, all as adjusted to reflect the recapitalization.
COMMON STOCK
High Low
Fiscal 1998
First Quarter $10.58 $4.25
Second Quarter $11.10 $7.47
Third Quarter $9.54 $5.39
Fourth Quarter (to November 23, 1998) $7.16 $5.60
Fourth Quarter (after November 23, 1998) $12.63 $6.81
Fiscal 1999
First Quarter $18.75 $11.00
Second Quarter $27.25 $16.25
Third Quarter $34.13 $20.63
Fourth Quarter $30.00 $17.88
Fiscal Year Ending February 3, 2001
First Quarter (through April 12, 2000) $30.75 $21.75
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As of January 29, 2000, we had approximately 350 stockholders of record and
approximately 2,300 beneficial stockholders.
Until our recapitalization, we paid quarterly dividends of $0.2375 per share on
our Series A Preferred Stock (aggregating $2,593,000 for fiscal 1998). We have
never paid cash dividends on our Common Stock and do not anticipate paying cash
dividends in the foreseeable future. The declaration and payment of any cash
dividends on our Common Stock in the future will be determined by the Board of
Directors in light of conditions then existing, including our earnings,
financial condition, cash requirements and contractual, legal and regulatory
restrictions relating to the payments of dividends and any other factors that
our Board of Directors deems relevant. We are contractually prohibited from
paying cash dividends on our Common Stock under the terms of our existing
revolving credit facility without the consent of the lender. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Revolving Credit Facility."
We recorded non-cash dividends on our Series B Preferred Stock using the
effective interest method to recognize the dividend ratably over the estimated
period in which the Series B Preferred Stock was to be outstanding. For fiscal
1998, the accreted dividends totaled approximately $2.2 million. See Note 9 of
Notes to Financial Statements.
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Item 6. Selected Financial Data
The selected financial data set forth below, except for Operating Data, is
derived from our audited financial information and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Financial Statements, including the Notes, and Supplementary
Data included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------
January 29, January 30, January 31, February 1, January 27
2000 1999 1998 1997(1) 1996
------------ ----------- ----------- --------- ---------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $ 421,391 $ 338,223 $300,592 $ 252,165 $ 179,820
Operating income (loss) 22,753 10,464 5,097 (27,939) 5,153
Income (loss) from continuing 20,481 5,019 (129) (36,564) 1,478
operations
Net income (loss) 12,442 2,269 (129) (37,390) 978
Dividends on Series A Preferred Stock - 2,593 3,456 3,509 3,040
Dividends on Series B Preferred Stock - 2,210 2,661 - -
Inducement to convert preferred stock
to common stock - 2,804 - - -
Net income (loss) applicable to common 12,442 (5,338) (6,246) (40,899) (2,062)
stock
Weighted average shares outstanding
Basic 12,214 3,381 1,477 1,358 1,207
Diluted 12,864 3,381 1,477 1,358 1,207
Income (loss) before extraordinary item
and discontinued operations applicable
to common stock
Basic 1.02 (0.77) (4.23) (29.50) (1.29)
Diluted 0.97 (0.77) (4.23) (29.50) (1.29)
Net income (loss) per common share(2)
Basic 1.02 (1.58) (4.23) (30.12) (1.71)
Diluted 0.97 (1.58) (4.23) (30.12) (1.71)
Operating Data
Number of stores 187 168 166 150 131
Total selling square footage 2,169,000 1,804,000 1,788,000 1,567,000 1,367,000
Sales per average selling square foot $ 209 $ 192 $ 180 $ 172 $ 161
Comparable store sales growth 10.3% 10.9% 3.4% 5.3% 2.8%
Balance Sheet Data
Working capital (deficit) $ 1,241 $(9,179) $ (2,749) $ 248 $ 4,314
Total assets 108,466 90,167 84,817 80,669 87,152
Long-term debt and revolving credit
notes, including current portion 11,067 13,773 29,076 37,894 30,120
Stockholders' equity 46,430 27,765 17,218 11,208 27,717
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 53-week fiscal year.
(2) In December 1997, we adopted SFAS No. 128, "Earnings Per Share." The
statement specifies the computation, presentation, and disclosure requirements
for basic earnings per share and diluted earnings per share. The statement
requires retroactive adoption for all prior periods presented. Additionally, all
prior periods presented have been restated giving effect to the reverse stock
split that was effected during the fourth quarter of fiscal 1998.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with the
information set forth under "Selected Financial Data" and "Financial Statements
and Supplementary Data."
General
During the past three fiscal years, a number of events occurred which have had a
significant impact on our financial condition and that of our subsidiaries.
In January 1997, an investment group advised by Three Cities Research, Inc.
("TCR"), purchased a controlling equity interest in us by acquiring all of the
Common and Series A Preferred Stock held by our former chairman, vice chairman
and chief executive officer and purchasing from us shares of newly authorized
Series B Preferred Stock. Subsequent to the close of fiscal 1996, we sold
additional shares of the Series B Preferred Stock to these investors, our
directors and management.
In connection with the change in control, three former directors resigned from
the Board of Directors and three managing directors of TCR were appointed to
serve on the Board. In March 1998, we appointed Michael M. Searles as new
President and Chief Executive Officer of our operating subsidiaries. Mr. Searles
was elected a member of the Board of Directors in March 1998 and Chairman of the
Board in November 1998.
In July 1998, our two operating subsidiaries, General Textiles and Factory 2-U,
Inc., were merged to form General Textiles, Inc. In November 1998, we merged
General Textiles, Inc. into ourselves, converted our previous three classes of
stock into a single class of Common Stock and changed our name from Family
Bargain Corporation to Factory 2-U Stores, Inc. At that time, we had 11,306,000
shares of Common Stock outstanding. We undertook a rights offering and issued to
our stockholders transferable rights to purchase an additional 800,000 shares of
Common Stock for $13.00 per share. The TCR investors purchased approximately
798,000 shares.
During fiscal 1999 and 1998, our operational focus was on improving the
operating performance of existing stores and opening new stores. In fiscal 1999,
we opened 38 new stores, closed 19 stores and renovated 74 stores.
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Results of Operations
We define our fiscal year by the calendar year in which most of the activity
occurs (the year ended January 29, 2000 is referred to as fiscal 1999). The
following table sets forth selected statement of operations data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year 1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0 100.0 100.0
Cost of sales 64.3 65.7 67.7
-------------------------------------
Gross profit 35.7
34.3 32.3
Selling and administrative expenses 28.4
28.7 28.4
Pre-opening expenses 0.8 0.8 0.9
Amortization of intangibles 0.6 0.7 0.7
Stock based compensation expense 0.5 - -
Special charges - 0.7 0.6
Merger costs - 0.3 -
-------------------------------------
Operating income 5.4 1.7
3.1
Interest expense 0.5
1.2 1.7
------------------------------------
Income (loss) before income taxes and extraordinary
item 4.9 1.9 -
Income taxes 1.9 0.4 -
Extraordinary item, net of income tax benefit - 0.8 -
-------------------------------------
Net income (loss) 3.0 0.7 -
Inducement to convert preferred stock to common - 0.9 -
stock - 1.4 2.1
Preferred stock dividends
Net income (loss) applicable to common stock 3.0 (1.6) (2.1)
</TABLE>
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Fiscal 1999 Compared to Fiscal 1998
As of January 29, 2000, we operated 187 stores compared to 168 as of January 30,
1999. In fiscal 1999, we opened 38 new stores and closed 19 stores.
Net sales were $421.4 million for fiscal 1999 compared to $338.2 million for
fiscal 1998, an increase of $83.2 million or 24.6%. Comparable store sales
increased 10.3% in fiscal 1999 over the prior year. The increase in net sales
was related to new store growth and an increase in comparable store sales which
was due to an increased number of transactions and average purchase.
Gross profit was $150.4 million for fiscal 1999 compared to $115.9 million for
fiscal 1998, an increase of $34.5 million or 29.8%. As a percentage of net
sales, gross profit was 35.7% in fiscal 1999 compared to 34.3% in fiscal 1998.
The increase in gross profit as a percentage of net sales was primarily
attributable to a higher initial markup on purchases and lower inventory
shrinkage.
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Selling and administrative expenses were $119.8 million for fiscal 1999 compared
to $97.1 million for fiscal 1998, an increase of $22.6 million or 23.3%. As a
percentage of net sales, selling and administrative expenses were 28.4% for
fiscal 1999 compared to 28.7% for fiscal 1998. Approximately $18.5 million of
the increase was sales volume related. The increase in selling and
administrative expenses was also attributable to increased corporate employee
and field supervisor expenses and information systems expenses. Selling and
administrative expenses as a percentage of net sales decreased due to sales
volume growth.
We recorded non-cash stock based compensation expense during fiscal 1999 in the
amount of $2.3 million when certain stock options with a market price hurdle
became exercisable and approximately $170,000 related to the grant of stock and
stock options.
We recorded a special charge of $2.4 million in fiscal 1998 in connection with
hiring the current President and CEO.
Merger costs of $1.0 million recorded in fiscal 1998 represented the expenses
associated with the recapitalization, including the merger of Factory 2-U, Inc.
and General Textiles into General Textiles, Inc. and the merger of General
Textiles, Inc. into ourselves.
Interest expense was $2.3 million in fiscal 1999 compared to $4.2 million in
fiscal 1998, a decrease of $1.9 million. The decrease was attributable to lower
average borrowings under our revolving credit facility and the exchange of the
subordinated and junior subordinated notes for new notes which resulted in a
lower debt discount amortization. See "Liquidity and Capital Resources -
Subordinated Notes."
Federal and state income taxes were $8.0 million in fiscal 1999 compared to $1.3
million in fiscal 1998, an increase of $6.8 million. Income taxes increased as a
result of higher taxable income versus the same period a year ago.
We incurred an extraordinary charge of $2.8 million in fiscal 1998 because notes
payable associated with the General Textiles bankruptcy were extinguished early
and new subordinated notes were issued with more favorable terms. See "Liquidity
and Capital Resources - Subordinated Notes."
Net income was $12.4 million in fiscal 1999 compared to net income before
preferred stock dividends of $2.3 million in fiscal 1998. No dividends were paid
or accreted in fiscal 1999 as a result of the recapitalization discussed above.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations - General. Net income applicable to common stock was $12.4 million in
fiscal 1999 compared to a net loss applicable to common stock of $5.3 million in
fiscal 1998. Total preferred stock dividends in fiscal 1998 were $4.8 million,
which included non-cash dividends on the Series B Preferred Stock of $2.2
million. The increase in net income was a result of the operating and other
factors cited above.
Fiscal 1998 Compared to Fiscal 1997
As of January 30, 1999, we operated 168 stores compared to 166 as of January 31,
1998. We opened 9 new stores and closed 7 in fiscal 1998.
Net sales were $338.2 million for fiscal 1998 compared to $300.6 million for
fiscal 1997, an increase of $37.6 million or 12.5%. Comparable store sales
increased 10.9% in fiscal 1998 over the same period of the prior year. The
increase in net sales was related to new store growth and an increase in
comparable store sales which was due to an increased number of transactions and
average purchase.
Gross profit was $115.9 million for fiscal 1998 compared to $97.1 million for
fiscal 1997, an increase of $18.8 million. As a percentage of net sales, gross
profit was 34.3% in fiscal 1998 compared to 32.3% in fiscal 1997. The increase
in gross profit as a percentage of net sales was primarily attributable to
13
<PAGE>
higher initial markups and lower inventory shrinkage, partially offset by higher
markdowns in fiscal 1998 compared to fiscal 1997.
Selling and administrative expenses were $97.1 million for fiscal 1998 compared
to $85.3 million for fiscal 1997, an increase of $11.9 million. As a percentage
of net sales, selling and administrative expenses were 28.7% for fiscal 1998
compared to 28.4% for fiscal 1997. The increase in selling and administrative
expenses as a percentage of net sales was primarily a result of higher store
wage rates, due in part to an increase in the minimum wage, and increased
administrative support expenses.
Amortization of intangibles was $2.4 million for fiscal 1998 compared to $2.2
million for fiscal 1997, an increase of $120,000. The increase was attributable
to a non-compete agreement with our former president and CEO in fiscal 1998. The
non-compete agreement is being amortized over 41 months. In January 1997, our
principal executive officers, who were our largest stockholders, sold their
stock interest, resigned from their positions as officers and directors and,
among other things, entered into an agreement not to compete with us until June
2000 in return for $1.8 million in secured promissory notes, which were paid in
January 1998. In August 1997, the former President and CEO entered into an
agreement not to compete with us until January 2001 in return for payments
totaling $970,000.
We recorded a special charge of $2.4 million in fiscal 1998 in connection with
hiring the current President and CEO. In fiscal 1997, a charge of $1.8 million
was incurred when the former president and CEO resigned. At the end of fiscal
1998, future payments totaling $1.2 million related to these special charges
were included in accrued liabilities.
Merger costs of $1.0 million in fiscal 1998 represented the expenses associated
with the recapitalization, including the merger of Factory 2-U, Inc. and General
Textiles into General Textiles, Inc. and the merger of General Textiles, Inc.
into ourselves.
Interest expense was $4.2 million in fiscal 1998 compared to $5.2 million in
fiscal 1997, a decrease of $1.0 million. The decrease was attributable to
decreases in the amortization of debt discount related to the exchange of the
subordinated and junior subordinated notes for new notes. See "Liquidity and
Capital Resources - Subordinated Notes."
Federal and state income taxes were $1.3 million in fiscal 1998, an increase of
$1.3 million over prior year. Income taxes increased as a result of higher
taxable income versus the same period a year ago.
We incurred an extraordinary charge of $2.8 million in fiscal 1998 because notes
payable associated with the General Textiles bankruptcy were extinguished early
and new notes were issued with more favorable terms. See "Liquidity and Capital
Resources - Subordinated Notes."
Net income before preferred stock dividends was $2.3 million in fiscal 1998
compared to a net loss before preferred stock dividends of $129,000 in fiscal
1997. Total preferred stock dividends were $4.8 million in fiscal 1998 and $6.1
million in fiscal 1997. Preferred stock dividends in fiscal 1998 included
non-cash dividends on the Series B Preferred Stock of $2.2 million compared to
$2.7 million in fiscal 1997. Additionally, in fiscal 1998, we recognized an
inducement charge of $2.8 million in connection with conversion of Series A
Preferred Stock to post-recapitalization common stock. The lower preferred stock
dividends in fiscal 1998 were due to the recapitalization discussed above. The
net loss applicable to common stock was $5.3 million in fiscal 1998 compared to
a net loss applicable to common stock of $6.2 million in fiscal 1997. The
improvement in the net loss applicable to common stock was due to the operating
and other factors cited above.
14
<PAGE>
Liquidity and Capital Resources
General
As of January 29, 2000, we had outstanding indebtedness in the principal amount
of $11.1 million.
We finance our operations through credit provided by vendors and other
suppliers, amounts borrowed under our $50.0 million revolving credit facility
and internally generated cash flow. Credit terms provided by vendors and other
suppliers are usually net 30 days. Amounts which may be borrowed under the
revolving credit facility are based on a percentage of eligible inventories and
receivables, as defined, outstanding from time to time, as more fully described
below.
Revolving Credit Facility
At January 29, 2000, we had a revolving credit facility under which we could
borrow up to $50.0 million at the prime rate plus 0.75%, subject to limitations
based on inventory levels. At that time, we had no outstanding balance and
approximately $28.5 million of availability. We were not in compliance with the
current ratio covenant as of January 29, 2000.
Subsequent to year end, we entered into a new $50.0 million revolving credit
facility with another financial institution and terminated the prior revolving
credit facility. Under our new revolving credit facility we may borrow up to 70%
of our eligible inventory and 85% of our eligible receivables, as defined, not
to exceed $50.0 million. The new credit facility also provides a $5.0 million
subfacility for letters of credit. Interest on the credit facility is at the
prime rate, or at our election, LIBOR plus 2.0%. Under the terms of the new
credit facility, the interest rate may increase or decrease subject to earnings,
as defined, on a rolling four fiscal quarter basis. Accordingly, prime rate
borrowings could range from prime to prime plus 0.50 and LIBOR borrowing from
LIBOR plus 1.50 to LIBOR plus 2.50. At March 3, 2000, the prime interest rate
was 8.75%. The new credit facility expires on March 3, 2003, subject to
automatic one-year renewal periods, unless terminated earlier by either party.
We are obligated to pay fees equal to 0.125% per annum on the unused amount of
the new credit facility. The new credit facility is secured by a first lien on
accounts receivable and inventory and requires us to maintain specified levels
of tangible net worth in the event that our borrowing availability is less than
a specified amount.
Subordinated Notes
In fiscal 1998, we exchanged existing Subordinated Reorganization Notes and
Junior Subordinated Reorganization Notes for New Subordinated Notes and New
Junior Subordinated Notes that eliminated an estimated excess cash flow
calculation previously used to determine the timing and amount of payments and
provided a fixed debt payment schedule. In accordance with Emerging Issues Task
Force 96-19, we accounted for the exchange of the old notes as an extinguishment
of debt, and, in connection therewith, recorded an extraordinary loss, net of
tax benefit, of $2.8 million. This loss represented increases in the present
value of the principal amount of the old notes and fees paid to the lenders. The
fees included the issuance of 22,600 shares of pre-recapitalization common stock
and warrants to purchase 82,690 shares of pre-recapitalization common stock,
both stated at fair market value when they were issued. The New Subordinated
Notes totaled $3.3 million and were fully paid on December 8, 1998.
The New Junior Subordinated Notes are non-interest bearing and are reflected on
our balance sheets at the present value using a discount rate of 10%. As of
January 29, 2000, the New Junior Subordinated Notes had a face value of $16.3
million and a related unamortized discount of $5.3 million, resulting in a net
carrying value of $11.1 million. The discount is amortized to interest expense
as a non-cash charge until the notes are
15
<PAGE>
paid in full. We made a principal payment on the New Junior Subordinated Notes
of $1.0 million during fiscal 1999. Additional principal payments are scheduled
on December 31, 2000 ($1.0 million), on December 31, 2001 and December 31, 2002
($2.0 million), on December 31, 2003 and December 31, 2004 ($3.0 million) and a
final payment on May 28, 2005 ($5.3 million).
We believe that our sources of cash, including the new credit facility, will be
adequate to finance our operations, capital requirements and debt obligations as
they become due for at least the next twelve months.
Capital Expenditures
We anticipate capital expenditures of approximately $21.0 million in fiscal 2000
which includes costs to open new stores, to renovate and relocate existing
stores, to construct a new distribution center, to upgrade information systems
and to renovate and expand our administrative offices. We believe that future
capital expenditures will be financed from internal cash flow and borrowings
under our new credit facility.
Inflation
In general, we believe that inflation has had no recent material impact on our
operations and none is anticipated in the next fiscal year.
Minimum Wage Increases
We employ, both in our stores and in our corporate headquarters, a substantial
number of employees who earn hourly wages near or at the minimum wage. Actions
by both the federal and certain state governments have increased and may
continue to increase the hourly wages that we must pay to such employees.
Historically, we have mitigated such increases through policies to manage our
ratio of wages to sales. However, we can make no assurances that these measures
and other steps taken will be adequate to control the impact of any hourly wage
increases in the future and may have a negative impact on profitability in the
future.
Seasonality and Quarterly Fluctuations
We have historically realized our highest levels of sales and income during the
third and fourth quarters of our fiscal year (the quarters ending in October and
January) as a result of the "Back to School" (August and September) and Holiday
(November and December) seasons. The seasonally lower sales in our first two
quarters (February through July), can result in losses during those quarters,
even in years in which we will have full year profits.
Year 2000 Issue
The Year 2000 issue is the result of computer systems and software products
coded to accept only 2 digit entries in the date code field. This could have
resulted in system failure or the generation of erroneous data in systems that
do not properly recognize such information.
We diligently addressed the potential Year 2000 issue by utilizing both internal
and external resources as applicable, to identify, correct or reprogram our
internal systems for Year 2000 compliance. In fiscal 1999, we implemented a new
integrated software package to support future growth and to address the issues
associated with the year 2000 at a cost of approximately $2.8 million.
16
<PAGE>
To date, we have not experienced any significant business disruptions or system
failures as a result of the Year 2000 issue. None of our major vendors, service
providers and customers have reported substantial Year 2000 related problems.
Although the Year 2000 event has occurred, and while there can be no assurance
that there will be no problems related to the Year 2000 issue after January 1,
2000, we believe we will not be adversely impacted by the Year 2000 issue.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes the SEC's view in applying generally accepted
accounting principles to revenue recognition in financial statements. This SAB
was amended by SAB No. 101A, which defers the effective date for all registrants
with fiscal years that begin between December 16, 1999 and March 15, 2000, to
allow for the adoption of implementing during the second quarter of fiscal 2000.
We have reviewed the impact of SAB No. 101 on our financial statements, and do
not believe that its adoption will have a material impact on our financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities:, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This Statement was amended
by SFAS No. 137 which defers the effective date to all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS No. 133 is effective for our first
quarter in the fiscal year beginning February 4, 2001 and is not expected to
have a material effect on our financial position or results of operations.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
In December 1995, Congress enacted the Private Securities Litigation Reform Act
of 1995. The Act contains amendments to the Securities Act of 1933 and the
Securities Exchange Act of 1934 which provide protection from liability in
private lawsuits for "forward-looking" statements made by specified persons. We
desire to take advantage of the "safe harbor" provisions of the Act.
Certain statements in this Annual Report on Form 10-K, or in documents
incorporated by reference into this Annual Report on Form 10-K, are
forward-looking statements. Those forward-looking statements are subject to
uncertainties that may cause the actual results to differ from the results
anticipated by the forward-looking statements. Factors which may cause actual
results to differ from those anticipated by forward-looking statements include,
among others, general economic and business conditions (both nationally and in
the regions in which we operate); government regulations (including regulations
regarding temporary immigration of agricultural works and minimum wages of
agricultural and other workers); claims asserted against us; competition;
changes in our business strategy or development plans; difficulties attracting
and retaining qualified personnel; the inability to obtain adequate quantities
of merchandise at favorable prices; and the other factors described in this
Annual Report on Form 10-K and in our other filings with the Securities and
Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on our fixed rate debt obligations. At
January 29, 2000, fixed rate debt obligations totaled approximately $16.3
million. The fixed rate debt obligations are non-interest bearing and are
discounted at a rate of 10%, resulting in a net carrying value of $11.1 million.
17
<PAGE>
Maturities are $1.0 million, $2.0 million, $2.0 million, $3.0 million, $3.0
million and $5.3 million in fiscal year 2000, 2001, 2002, 2003, 2004 and 2005,
respectively. While generally an increase in market interest rates will decrease
the value of this debt, and decreases in rates will have the opposite effect, we
are unable to estimate the impact that interest rate changes will have on the
value of this debt as there is no active public market for the debt and we are
unable to determine the market interest rate at which alternate financing would
have been available at January 29, 2000.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page
FACTORY 2-U STORES, INC.
<S> <C>
Report of Independent Public Accountants F-1
Factory 2-U Stores, Inc. Balance Sheets as of January 29, 2000 and January 30, 1999 F-2
Factory 2-U Stores, Inc. Statements of Operations for fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 F-4
Factory 2-U Stores, Inc. Statements of Stockholders' Equity for fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 F-5
Factory 2-U Stores, Inc. Statements of Cash Flows for fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 F-6
Factory 2-U Stores, Inc. Notes to Financial Statements F-8
</TABLE>
All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is set forth in the
financial statements and notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference to the
Registrant's Definitive Proxy Statement pursuant to Regulation 14A in connection
with the 2000 Annual Meeting of Stockholders under the headings "Proposal 1 -
"Election of Directors" and "Executive Officers", which will be filed with the
SEC no later than 120 days after the close of the fiscal year ended January 29,
2000.
18
<PAGE>
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the
Registrant's Definitive Proxy Statement under the heading "Executive
Compensation", which will be filed with the SEC no later than 120 days after the
close of the fiscal year ended January 29, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Registrant's Definitive Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management", which will be filed with the SEC no
later than 120 days after the close of the fiscal year ended January 29, 2000.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Registrant's Definitive Proxy Statement under the heading "Certain Relationships
and Related Transactions", which will be filed with the SEC no later than 120
days after the close of the fiscal year ended January 29, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements. See Index to Financial Statements and
Supplementary Data contained in Item 8.
2. Financial Statement Schedules. See Index to Financial Statements and
Supplementary Data contained in Item 8.
3. Exhibits. See Item 14(c).
(b) Reports on Form 8-K. For the last quarter of the fiscal year ended
January 29, 2000, we filed the following reports on Form 8-K:
None.
(c) Exhibits. Reference is made to the Index to Exhibits immediately preceding
the exhibits thereto.
(d) Financial Statement Schedules. The required financial statement schedules
are entered on the Index to Financial Statements and Supplementary
Data contained in Item 8.
19
<PAGE>
Index to Exhibits
Exhibit
Number Document
- --------------------------------------------------------------------------------
2.1 Plan and Agreement of Merger dated June 18, 1998 between Family Bargain
Corporation and General
Textiles, Inc. (1)
3.1 (i) Certificate of Incorporation
(ii) Bylaws (2)
4.1 Junior Subordinated Note Agreement dated April 30, 1998 among General
Textiles, American Endeavour Fund Limited and London Pacific Life &
Annuity Company (1)
4.2 Form of Warrant dated April 30, 1998 (1)
10.1 Factory 2-U Stores, Inc. Employee Stock Purchase Plan (3)
10.2 Financing Agreement between The CIT Group/Business Credit, Inc.
(as Agent and a Lender) and Factory 2-U Stores, Inc. (as Borrower),
dated as of March 3, 2000
10.3 Amended Employment Agreement between Factory 2-U Stores, Inc. and
Michael M. Searles
11.1 Computation of per share earnings
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
27 Financial Data Schedule
- -----------------------------
(1) Incorporated by reference to Registration Statement on Form S-2,
No. 333-58797 filed with the SEC on October 14, 1998.
(2) Incorporated by reference to Registration Statement on Form S-1,
No. 33-77488, filed with the SEC on April 7, 1994.
(3) Incorporated by reference to Registration Statement on Form S-8,
No. 333-94123 filed with the SEC on January 5, 2000.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized.
FACTORY 2-U STORES, INC.
By: /s/ Michael M. Searles
---------------------------
Michael M. Searles
Chairman of the Board
Dated: April 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
this Company and in the capacities and on the date indicated.
Signature Title Date
/s/ Michael M. Searles President, Chief Executive Officer
- ----------------------- and Director
Michael M. Searles (Principal Executive Officer) April 21, 2000
/s/ Douglas C. Felderman Executive Vice President, April 21, 2000
- ------------------------- Chief Financial Officer
Douglas C. Felderman (Principal Financial
and Accounting Officer)
/s/ Peter V. Handal Director April 20, 2000
- -------------------------
Peter V. Handal
/s/ Ira Neimark Director April 21, 2000
- -------------------------
Ira Neimark
/s/ Ronald Rashkow Director April 19, 2000
- -------------------------
Ronald Rashkow
/s/ H. Whitney Wagner Director April 18, 2000
- -------------------------
H. Whitney Wagner
/s/ Wm Robert Wright II Director April 20, 2000
- -------------------------
Wm. Robert Wright II
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Factory 2-U Stores, Inc.:
We have audited the accompanying balance sheets of Factory 2-U Stores,
Inc. (a Delaware corporation) as of January 29, 2000 and January 30,
1999, and the related statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended January
29, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Factory 2-U
Stores, Inc. as of January 29, 2000 and January 30, 1999, and the
results of its operations and its cash flows for each of the three
years in the period ended January 29, 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
February 25, 2000
F-1
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 9,473 $ 3,124
Merchandise inventory 35,048 31,353
Prepaid expenses and other assets 2,291 1,137
Deferred income taxes 2,184 1,690
---------- -----------
Total current assets 48,996 37,304
Leasehold improvements and equipment,
net of accumulated depreciation and amortization 27,425 18,187
Deferred income taxes 1,032 1,149
Other assets 1,507 2,419
Excess of cost over net assets acquired,
less accumulated amortization of
$10,139 and $8,537, respectively 29,506 31,108
---------- -----------
Total assets $ 108,466 $ 90,167
========== ===========
</TABLE>
(continued)
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
FACTORY 2-U STORES, INC.
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt
and capital leases $ 1,251 $ 2,418
Accounts payable 19,994 21,258
Income taxes payable 4,235 2,656
Accrued expenses 22,275 20,151
--------- ----------
Total current liabilities 47,755 46,483
Revolving credit facility - 1,843
Long-term debt 10,067 9,930
Capital lease and other long-term obligations 1,658 2,257
Deferred rent 2,556 1,889
--------- ----------
Total liabilities 62,036 62,402
--------- ----------
Commitments and contingencies
Stockholders' equity:
Series A 9-1/2% cumulative convertible preferred stock,
$0.01 par value; 4,500,000 shares authorized, 0 shares
issued and outstanding - -
Series B junior convertible, exchangeable preferred stock,
$0.01 par value; 40,000 shares authorized,
0 shares issued and outstanding - -
Common stock, $0.01 par value, 35,000,000 shares and
80,000,000 shares authorized, respectively; and
12,390,817 shares and 12,106,175 shares issued and
outstanding, respectively 124 121
Stock subscription notes receivable (2,710) (4,087)
Additional paid-in capital 108,091 103,248
Accumulated deficit (59,075) (71,517)
---------- -----------
Total stockholders' equity 46,430 27,765
---------- -----------
Total liabilities and stockholders' equity $ 108,466 $ 90,167
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 421,391 $ 338,223 $ 300,592
Cost of sales 270,962 222,332 203,528
----------- ----------- -----------
Gross profit 150,429 115,891 97,064
Selling and administrative expenses
(exclusive of non-cash stock-based compensation
expense shown below) 119,781 97,140 85,276
Pre-opening expenses 3,273 2,579 2,703
Amortization of intangibles 2,358 2,358 2,238
Stock-based compensation expense 2,264 - -
Special charges - 2,350 1,750
Merger costs - 1,000 -
----------- ----------- -----------
Operating income 22,753 10,464 5,097
Interest expense, net 2,272 4,189 5,226
----------- ----------- ------------
Income (loss) before income taxes and
extraordinary item 20,481 6,275 (129)
Income taxes 8,039 1,256 -
----------- ----------- ------------
Income (loss) before extraordinary item 12,442 5,019 (129)
Extraordinary item - debt extinguishment, net
of income tax benefit - 2,750 -
----------- ----------- ------------
Net income (loss) 12,442 2,269 (129)
Inducement to convert preferred stock to
common stock - 2,804 -
Preferred stock dividends:
Series A - 2,593 3,456
Series B - 2,210 2,661
----------- ----------- -----------
Net income (loss) applicable to common stock $ 12,442 $ (5,338) $ (6,246)
=========== =========== ===========
Income (loss) per share:
Basic
Income (loss) before extraordinary item $ 1.02 $ (0.77) $ (4.23)
Net income (loss) $ 1.02 $ (1.58) $ (4.23)
Diluted
Income (loss) before extraordinary item $ 0.97 $ (0.77) $ (4.23)
Net income (loss) $ 0.97 $ (1.58) $ (4.23)
Weighted average common shares outstanding
Basic 12,214 3,381 1,477
Diluted 12,864 3,381 1,477
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------
Series A Series B Common Stock
------------------------ -------------------------- ------------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1997 3,727,415 $ 37 $ 22,000 $ - 1,414,242 $ 14
Series A preferred
stock dividends - - - - - -
Series B preferred
stock dividend accretion - - - - - -
Conversion of preferred
stock to common stock (88,725) (1) - - 71,049 1
Issuance of preferred
stock in a private placement - - 9,599 - - -
Issuance of preferred
stock to management for notes - - 2,115 - - -
Common stock rights redemption - - - - - -
Net loss - - - - - -
--------- -------- --------- ----- ---------- -------
Balance at January 31 1998 3,638,690 $ 36 33,714 $ - 1,485,291 $ 15
--------- -------- --------- ----- ---------- -------
Series A preferred
stock dividends - - - - - -
Series B preferred
stock dividend accretion - - - - - -
Issuance of preferred
stock to management for notes - - 1,824 - - -
Issuance of common
stock in debt restructuring - - - - 22,600 -
Issuance of common
stock in rights offering - - - - 800,000 8
Conversion of preferred
stock to common stock (3,638,690) (36) (35,538) - 9,798,468 98
Correction for unsplit units - - - - (184) -
Inducement to convert
preferred stock to common stock - - - - - -
Compensation expense - - - - - -
Net income - - - - - -
---------- -------- ---------- ------ ---------- --------
Balance at January 30, 1999 - $ - - $ - 12,106,175 $ 121
--------- -------- --------- ------ ---------- --------
for exercise of stock options
and warrants - - - - 294,798 3
Compensation expense related
to grant of stock options - - - - - -
Compensation expense related
to stock option performance - - - - - -
Tax effect related to
non-qualified stock options - - - - - -
Issuance of common
stock to Board members as
compensation - - - - 4,750 -
Correction of prior year conversion - - - - 173 -
Repurchase of warrants - - - - - -
Payments of notes receivable - - - - - -
Cancellation of stock
subscriptions receivable - - - - (15,079) -
Net income - - - - - -
--------- -------- ---------- ------ --------- --------
Balance at January 29, 2000 - $ - - $ - 12,390,817 $ 124
--------- -------- ---------- ------ ---------- --------
<CAPTION>
Stock
Subscription Additional
Notes paid-in Accumulated
Receivable capital deficit Total
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at February 1, 1997 $ - $ 71,090 $ (59,933) 11,208
Series A preferred
stock dividends - - (3,456) (3,456)
Series B preferred
stock dividend accretion - 2,661 (2,661) -
Conversion of preferred
stock to common stock - - - -
Issuance of preferred
stock in a private placement - 9,600 - 9,600
Issuance of preferred
stock to management for notes (2,115) 2,115 - -
Common stock rights redemption - (5) - (5)
Net loss - - (129) (129)
-------- ---------- ---------- -------
Balance at January 31 1998 $ (2,115) $ 85,461 $ (66,179) $17,218
-------- ---------- ---------- -------
Series A preferred
stock dividends - - (2,593) (2,593)
Series B preferred
stock dividend accretion - 2,210 (2,210) -
Issuance of preferred
stock to management for notes (1,972) 1,972 - -
Issuance of common
stock in debt restructuring - 789 - 789
Issuance of common
stock in rights offering - 9,992 - 10,000
Conversion of preferred
stock to common stock - (62) - -
Correction for unsplit units - - - -
Inducement to convert
preferred stock to common stock - 2,804 (2,804) -
Compensation expense - 82 - 82
Net income - - 2,269 2,269
--------- --------- --------- -------
Balance at January 30, 1999 $ (4,087) $ 103,248 $ (71,517) $27,765
--------- --------- ---------- -------
Issuance of common stock
for exercise of stock options
and warrants - 2,186 - 2,189
Compensation expense related
to grant of stock options - 83 - 83
Compensation expense related
to stock option performance - 2,094 - 2,094
Tax effect related to
non-qualified stock options - 972 - 972
Issuance of common
stock to Board members as
compensation - 87 - 87
Correction of prior year conversion - - - -
Repurchase of warrants - (457) - (457)
Payments of notes receivable 1,255 - - 1,255
Cancellation of stock
subscriptions receivable 122 (122) - -
Net income - - 12,442 12,442
---------- --------- -------- -------
Balance at January 29, 2000 $ (2,710) $ 108,091 $(59,075) $46,430
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from operating activities $ 12,442 $ 5,019 $ (129)
Adjustments to reconcile income (loss) to net cash
provided by operating activities
Depreciation 6,859 4,484 3,505
Amortization of intangibles 2,358 2,359 2,238
Amortization of debt discount 1,137 1,430 2,168
Loss on disposal of equipment 796 163 181
Deferred rent expense 364 (362) 153
Stock based compensation expense 2,264 - -
Changes in operating assets and liabilities:
Merchandise inventory (3,695) (1,533) (702)
Prepaid expenses and other assets (1,375) (4,117) (1,540)
Accounts payable (1,264) 2,255 1,512
Accrued expenses and other liabilities 4,638 10,120 4,089
---------- ---------- ---------
Net cash provided by operating activities 24,524 19,818 11,475
---------- ---------- ---------
Cash flows used in investing activities:
Purchase of leasehold improvements and equipment (16,893) (6,798) (5,865)
---------- ---------- ---------
Net cash used in investing activities: (16,893) (6,798) (5,865)
---------- ---------- ---------
</TABLE>
(continued)
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FACTORY 2-U STORES, INC.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows used in financing activities:
Borrowings on revolving credit facility 454,157 54,816 335,053
Payments on revolving credit facility (456,000) (365,630) (340,283)
Payments of long-term debt and capital lease obligations (2,426) (9,445) (6,218)
Cash payments of preferred stock dividends - (2,593) (3,456)
Proceeds from issuance of common stock, net - 10,000 -
Proceeds from issuance of Series B Preferred Stock - - 9,595
Payments of deferred debt issuance costs - (211) (320)
Repurchase of warrants (457) - (75)
Proceeds from exercise of stock options and warrants 2,189 - -
Payments of stock subscription notes receivable 1,255 - -
----------- ----------- -----------
Net cash used in financing activities (1,282) (13,063) (5,704)
----------- ----------- -----------
Net increase (decrease) in cash 6,349 (43) (94)
Cash at the beginning of the period 3,124 3,167 3,261
----------- ----------- -----------
Cash at the end of the period $ 9,473 $ 3,124 $ 3,167
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,295 $ 2,679 $ 2,948
Income taxes $ 6,011 $ 111 $ -
Supplemental disclosures of non-cash investing and
financing activities:
Acquisition of equipment financed by capital leases $ - $ 970 $ 2,173
Issuance of Series B preferred stock for notes $ - $ 1,972 $ 2,115
Series B preferred stock dividend accretion $ - $ 2,210 $ 2,661
Conversion of preferred stock to common stock
inducement charge $ - $ 2,804 $ -
Tax effect related to non-qualified stock options $ 972 $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FACTORY 2-U STORES, INC.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Factory 2-U Stores, Inc. (the "Company") operates a chain of off-price
retail apparel and housewares stores in Arizona, California, Nevada,
New Mexico, Oregon, Texas and Washington. The Company sells branded
casual apparel for the family, as well as selected domestics and
household merchandise at prices which generally are significantly lower
than other discount stores. At January 29, 2000, the Company operated
substantially all of its 187 stores under the name Factory 2-U.
Principles of Consolidation
Fiscal year ended January 31, 1998 reflects consolidated financial
statements which include the accounts of Family Bargain Corporation and
its wholly-owned subsidiaries, General Textiles and Factory 2-U, Inc.
All significant intercompany accounts were eliminated in consolidation.
In July 1998, General Textiles and Factory 2-U, Inc. merged to form a
new Delaware corporation named General Textiles, Inc. In November 1998,
General Textiles, Inc. merged into Family Bargain Corporation which
simultaneously changed its name to Factory 2-U Stores, Inc. The
financial statements as of and for the fiscal years ended January 29,
2000 and January 30, 1999, reflect the mergers (Note 3).
Fiscal Year
The Company's fiscal year is based on a 52/53 week year ending on the
Saturday nearest January 31. Fiscal years ended January 29, 2000,
January 30, 1999 and January 31, 1998 included 52 weeks. The Company
defines its fiscal year by the calendar year in which most of the
activity occurs (e.g. the fiscal year ended January 29, 2000 is
referred to as fiscal 1999).
Merchandise Inventory
Merchandise inventory is stated at the lower of cost or market
determined using the retail inventory method on a first-in, first-out
flow assumption. In addition, consistent with industry practice, the
Company capitalizes certain buying, warehousing, storage and
transportation costs. At both January 29, 2000 and January 30, 1999,
such costs included in inventory were $2.4 million.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are stated at cost. Equipment
under capital leases is stated at the present value of minimum lease
payments at the date of acquisition. Depreciation and amortization are
calculated using the straight-line method over the shorter of the
estimated useful lives of the related asset or the lease term,
generally five years.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired ("goodwill") is amortized on a
straight-line basis over 25 years. The Company assesses the
recoverability of goodwill by determining whether its balance can be
recovered from the future undiscounted operating cash flows. The
impairment, if any, is measured based on the excess of the carrying
value of the asset over the asset's fair value or discounted estimates
of future cash flows.
F-8
<PAGE>
Asset Impairment
The Company assesses potential asset impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of an asset to be held
and used is measured by comparing the carrying amount of the asset to
future net cash flows expected to be generated by the asset. If such
asset is considered to be impaired, the impairment to be recognized is
measured by the amount that the carrying value of the asset exceeds the
fair value of the asset.
Fair Value of Financial Instruments
The carrying amounts of all receivables, payables and accrued expenses
approximate fair value due to the short-term nature of such
instruments. The carrying amount of the revolving credit facility
approximates fair value due to the floating rate on such instrument.
The carrying value of long-term debt with fixed payment terms
approximates fair value.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the
fiscal years ended January 29, 2000, January 30, 1999 and January 31,
1998 were approximately $12.3 million, $9.9 million and $9.3 million,
respectively.
Deferred Rent
Rent expense under non-cancelable operating lease agreements is
recorded on a straight-line basis over the life of the respective
leases. The excess rent expense over rent paid is accounted for as
deferred rent (Note 8).
Store Preopening and Closing Costs
Preopening costs (costs of opening new stores including grand opening
promotions, training and store set-up costs) are expensed as incurred.
Costs associated with closing stores, consisting primarily of any
future net lease obligations, inventory liquidation costs and
nonrecoverable investment in fixed assets are recognized as operating
expense when the decision to close a store is made.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date
(Note 7).
Stock Based Compensation
The Company has elected under the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", to continue using the
intrinsic value method of accounting for employee stock based
compensation in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value
method, compensation expense is
F-9
<PAGE>
recognized only in the event that the
exercise price of options granted is less than the market price of the
underlying stock on the date of grant. The fair value method generally
requires entities to recognize compensation expense over the vesting
period of options based on the estimated fair value of the options
granted. The Company has disclosed the pro forma effect of using the
fair value based method to account for its stock based compensation as
required by SFAS No. 123 (Note 10).
Dividend Accretion
The Company's Series B Preferred Stock had an increasing rate dividend
feature (Note 9). Accordingly, dividends on Series B Preferred Stock
were recorded using the effective interest method to recognize the
dividends ratably over the estimated period in which the stock would
have been outstanding. The Series B Preferred Stock was converted to
common stock in November 1998 and, therefore, no additional dividends
have been accreted since fiscal 1998 (Note 3).
Earnings (Loss) per Common Share
The Company computes earnings (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share." Under the provisions of SFAS No. 128,
basic earnings (loss) per share is computed based on the weighted
average shares outstanding. Diluted earnings (loss) per share is
computed based on the weighted average shares outstanding and
potentially dilutive common equivalent shares. Common equivalent shares
are not included in the computation of diluted loss per share for the
fiscal years ended January 30, 1999 and January 31, 1998 because the
effect would be anti-dilutive.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform their
presentation to fiscal 1999 financial statements.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." This SAB summarizes the SEC's view in applying
generally accepted accounting principles to revenue recognition in
financial statements. This SAB was amended by SAB No. 101A, which
defers the effective date for all registrants with fiscal years that
begin between December 16, 1999 and March 15, 2000, to allow for the
adoption of implementing during the second quarter of fiscal 2000.
Management has reviewed the impact of SAB No. 101 on the company's
financial statements, and does not believe that its adoption will have
a material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This Statement was amended by SFAS No. 137 which defers the
effective date to all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS No. 133 is effective for the Company's first
quarter in the fiscal year beginning February 4, 2001 and is not
expected to have a material effect on the Company's financial position
or results of operations.
F-10
<PAGE>
2. SPECIAL CHARGES
During fiscal 1998, the Company recorded charges to operations in the
amount of $1.0 million for costs related to the merger of its
wholly-owned subsidiary, General Textiles, Inc. into the Company and
the Recapitalization (Note 3). In addition, the Company recorded
special charges in the amount of $2.4 million in connection with hiring
the current President and CEO of the Company. In fiscal 1997, the
Company recorded special charges to operations in the amount of $1.8
million pertaining to the separation from the Company of the former
President and CEO.
3. RECAPITALIZATION
In fiscal 1998, the Company initiated a multi-phased plan to
restructure its capitalization (the "Recapitalization"), which included
restructuring the subordinated and junior subordinated debt in a manner
that removed an estimated excess cash flow calculation previously used
to determine the timing and amounts of payments and replaced that term
with a fixed debt payments schedule. The debt restructuring resulted in
an extraordinary charge of $2.8 million, net of tax benefit, in the
first quarter ended April 30, 1998 (Note 6).
On July 31, 1998, the Company's two operating subsidiaries, General
Textiles and Factory 2-U, Inc., merged to form General Textiles, Inc.
(the "Subsidiary Merger").
On November 23, 1998, the Company carried out a Recapitalization in
which all of the Company's outstanding shares were converted into a
single class of Common Stock. Under the Plan of Recapitalization, each
outstanding share of Pre-Recapitalization Common Stock was converted
into .30133 shares of Common Stock, each outstanding share of Series A
9-1/2% Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") was converted into one share of Common Stock and each
outstanding share of Series B Junior Convertible, Exchangeable
Preferred Stock (the "Series B Preferred Stock") was converted into
173.33 shares of Common Stock. In connection with this conversion, the
Company recorded a reduction to net income applicable to common
stockholders in the amount of $2.8 million pertaining to the conversion
of Series A and Series B Preferred Stock to Common Stock pursuant to
the Plan of Recapitalization, in accordance with SFAS No. 84, "Induced
Conversions of Convertible Debt." The amount of the reduction
represents the fair value of Post-Recapitalization Common Stock
transferred in excess of the fair value of common stock issuable
pursuant to the original conversion terms of the Preferred Stock. In
conjunction with the Recapitalization, General Textiles, Inc. was
merged into Family Bargain Corporation (the "Family Bargain Merger")
and the Company's name was changed to Factory 2-U Stores, Inc.
The last phase of the Recapitalization was a rights offering in which
800,000 shares of Post-Recapitalization Common Stock were sold to
existing stockholders at $13 per share. The Company received proceeds
of $10.0 million, net of $400,000 of related expenses.
F-11
<PAGE>
4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of the following:
<TABLE>
<CAPTION>
January 29, January 30,
IN THOUSANDS 2000 1999
------------- -------------
<S> <C> <C>
Furniture, fixtures and equipment $ 35,609 $ 20,367
Leasehold improvements 7,891 5,820
Automobiles 748 460
Equipment under capital leases 1,047 3,800
-------- --------
45,295 30,447
Less accumulated depreciation and amortization (17,870) (12,260)
-------- --------
$ 27,425 $ 18,187
======== ========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
January 29, January 30,
IN THOUSANDS 2000 1999
------------- -------------
<S> <C> <C>
Accrued compensation and related costs $ 7,882 $ 5,925
Sales tax payable 5,128 4,094
Other accrued expenses 9,265 10,132
----- ------
$ 22,275 $ 20,151
======== ========
</TABLE>
6. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt and revolving credit facility consist of the following:
<TABLE>
<CAPTION>
January 29, January 30,
IN THOUSANDS 2000 1999
------------- -------------
<S> <C> <C>
Revolving credit facility, interest at prime
plus 0.75% (9.25% at January 29, 2000 and 8.50%
at January 30, 1999) payable monthly, principal due
in March 2000 $ - $ 1,843
Installment note payable to a finance company,
interest at prime plus 3% (10.75% at January 30, 1999)
payable monthly, principal payable monthly in
installments of $33,333, paid off in February 1999 - 1,000
Junior subordinated notes, discounted at a rate of 10.0%,
principal payments in annual installments ranging from
$1.0 million to $3.0 million, final balloon payment
of $5.3 million due May 2005 11,067 10,930
------ ------
Total long-term debt and revolving credit facility 11,067 13,773
Less current maturities (1,000) (2,000)
-------- -------
Long-term debt and revolving credit facility,
net of current maturities $ 10,067 $ 11,773
======== ========
</TABLE>
F-12
<PAGE>
Revolving Credit Facility
At January 29, 2000, the Company had a revolving credit facility under
which it could borrow up to $50.0 million at the prime rate plus 0.75%,
subject to limitations based on inventory levels. At that time, the
Company had no outstanding balance and approximately $28.5 million of
availability. The Company was not in compliance with the current ratio
covenant as of January 29, 2000.
Subsequent to year end, the Company entered into a new $50.0 million
revolving credit facility with another financial institution and
terminated the prior revolving credit facility. Under the new revolving
credit facility, the Company may borrow up to 70% of its eligible
inventory and 85% of its eligible receivables, as defined, not to
exceed $50.0 million. The new credit facility also provides a $5.0
million subfacility for letters of credit. Interest on the credit
facility is at the prime rate, or at the Company's election, LIBOR plus
2.0%. Under the terms of the new credit facility, the interest rate may
increase or decrease subject to earnings, as defined, on a rolling four
fiscal quarter basis. Accordingly, prime rate borrowings could range
from prime to prime plus 0.50 and LIBOR borrowing from LIBOR plus 1.50
to LIBOR plus 2.50. At March 3, 2000, the prime interest rate was
8.75%. The new credit facility expires on March 3, 2003, subject to
automatic one-year renewal periods, unless terminated earlier by either
party. The Company is obligated to pay fees equal to 0.125% per annum
on the unused amount of the new credit facility. The new credit
facility is secured by a first lien on accounts receivable and
inventory and requires the Company to maintain specified levels of
tangible net worth in the event that its borrowing availability is less
than a specified amount.
Subordinated Notes
In fiscal 1998, the Company exchanged existing Subordinated
Reorganization Notes and Junior Subordinated Reorganization Notes for
New Subordinated Notes and New Junior Subordinated Notes that
eliminated an estimated excess cash flow calculation previously used to
determine the timing and amount of payments and provided a fixed debt
payment schedule. In accordance with Emerging Issues Task Force 96-19,
the Company accounted for the exchange of the old notes as an
extinguishment of debt, and, in connection therewith, recorded an
extraordinary loss, net of tax benefit, of $2.8 million. This loss
represented increases in the present value of the principal amount of
the old notes and fees paid to the lenders. The fees included the
issuance of 22,600 shares of pre-recapitalization common stock and
warrants to purchase 82,690 shares of pre-recapitalization common
stock, both stated at fair market value when they were issued. The New
Subordinated Notes totaled $3.3 million and were fully paid on December
8, 1998.
The New Junior Subordinated Notes are non-interest bearing and are
reflected on the Company's balance sheets at the present value using a
discount rate of 10%. As of January 29, 2000, the New Junior
Subordinated Notes had a face value of $16.3 million and a related
unamortized discount of $5.3 million, resulting in a net carrying value
of $11.1 million. The discount is amortized to interest expense as a
non-cash charge until the notes are paid in full. The Company made a
principal payment on the New Junior Subordinated Notes of $1.0 million
during fiscal 1999. Additional principal payments are scheduled on
December 31, 2000 ($1.0 million), on December 31, 2001 and December 31,
2002 ($2.0 million), on December 31, 2003 and December 31, 2004 ($3.0
million) and a final payment on May 28, 2005 ($5.3 million).
Management believes that the Company's sources of cash, including the
new credit facility, will be adequate to finance its operations,
capital requirements and debt obligations as they become due for at
least the next twelve months.
F-13
<PAGE>
7. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
January 29, January 30, January 31,
IN THOUSANDS 2000 1999 1998
-------------- ------------ -----------
<S> <C> <C> <C>
Federal Income Tax Provision
Current $ 6,592 $ 2,857 $ -
Deferred (302) (1,914) -
----------- ---------- ---------
$ 6,290 $ 943 $ -
----------- ----------- ---------
State Income Tax Provision
Current $ 1,822 $ 698 $ -
Deferred (73) (385) -
---------- ---------- ----------
1,749 313 -
---------- ---------- ----------
$ 8,039 $ 1,256 $ -
========== ========= ===========
</TABLE>
The principal temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented
below:
<TABLE>
<CAPTION>
January 29, January 30,
IN THOUSANDS 2000 1999
------------- -------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 9,426 $ 11,495
Compensated absences and bonuses 1,227 463
Deferred rent 1,304 1,126
Closed store accrual 593 1,141
Excess of tax over book inventory 520 506
Other 346 330
Accrued expenses 1,285 73
-------- --------
Total gross deferred tax assets 14,701 15,134
Less valuation allowance (10,711) (11,495)
-------- --------
Net deferred tax assets 3,990 3,639
-------- --------
Deferred tax liabilities
Leasehold improvements and equipment,
principally due to differences in depreciation
recognized on fixed assets 774 800
-------- -------
Deferred tax liabilities 774 800
-------- -------
Net deferred tax asset $ 3,216 $ 2,839
======== ========
</TABLE>
The Company has established a valuation allowance due to lack of
historical earnings and annual limitations on the usage of net
operating loss carryforwards.
F-14
<PAGE>
The difference between the expected income tax expense (benefit)
computed by applying the U.S. federal income tax rate of 35%, 34% and
34% to net income from continuing operations for fiscal 1999, 1998 an
1997, respectively, and actual expense is a result of the following:
<TABLE>
<CAPTION>
January 29, January 30, January 31,
IN THOUSANDS 2000 1999 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit) $ 7,168 $ 2,180 $ (44)
Amortization of goodwill 657 658 638
Utilization of net operating losses (784) (2,017) (1,551)
Merger costs - 410 -
Business credits (52) (150) -
State income taxes, net of federal
income tax benefit 1,059 374 -
Other, net (9) (199) 957
--- ----- ---
$ 8,039 $ 1,256 $ -
========== ========= ========
</TABLE>
At January 29, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $26.4 million that
expire starting in fiscal year 2012 and for state income tax purposes
of approximately $4.0 million that start expiring in fiscal year 2002.
8. LEASE COMMITMENTS
The Company operates retail stores, warehouse facilities and
administrative offices under various operating leases. Total rent
expense was approximately $22.0 million, $18.0 million and $17.3
million, including contingent rent expense of approximately $447,000,
$240,000 and $128,000, for fiscal years ended January 29, 2000, January
30, 1999 and January 31, 1998, respectively.
Rent expense is recorded on a straight-line basis over the life of the
lease. For fiscal years 1999 and 1997, rent expense charged to
operations exceeded cash payment requirements by approximately $364,000
and $153,000, respectively, and resulted in an increase to the deferred
rent liability for the same amount. For fiscal 1998, cash payment
requirements exceeded rent expense charged to operations by
approximately $362,000, resulting in a decrease to the deferred rent
liability for the same amount.
The Company is also obligated under various capital leases for
leasehold improvements and equipment that expire at various dates
during the next two years. Leasehold improvements and equipment and
related accumulated amortization recorded under capital leases are as
follows:
<TABLE>
<CAPTION>
January 29, January 30,
IN THOUSANDS 2000 1999
------------- -------------
<S> <C> <C>
Leasehold improvements $ 81 $ 344
Equipment 966 3,456
--- -----
1,047 3,800
Less accumulated amortization (535) (1,172)
----- -------
$ 512 $ 2,628
======= ========
</TABLE>
F-15
<PAGE>
At January 29, 2000, the future minimum lease payments under capital
leases and operating leases with remaining noncancelable terms are as
follows:
<TABLE>
<CAPTION>
Capital Operating
IN THOUSANDS Leases Leases
------------- -------------
<S> <C> <C>
Fiscal year:
2000 $ 280 $ 18,784
2001 180 17,001
2002 20 13,709
2003 - 11,785
2004 - 8,940
Thereafter - 11,618
------ ------
Total minimum lease payments 480 $ 81,837
========
Less amount representing interest (rates ranging
from 9.0% to 14.8%) (37)
Present value of capital lease obligation 443
Less current maturities (251)
------
Long-term capital lease obligation $ 192
=======
</TABLE>
9. STOCKHOLDERS' EQUITY
Prior to the Recapitalization, the Company was authorized to issue
Series A Preferred Stock, Series B Preferred Stock and Common Stock. In
connection with the Recapitalization, the Company converted all shares
of its Series A and Series B Preferred Stock into Post-Recapitalization
Common Stock and effected a reverse stock split, which converted all
shares of its Pre-Recapitalization Common Stock into .30133 shares of
Post-Recapitalization Common Stock (Note 3). There were 12,390,817 and
12,106,175 shares of common stock outstanding at January 29, 2000 and
January 30, 1999, respectively.
Series A and Series B Preferred Stock
The Company has 7,500,000 shares of preferred stock authorized, of
which 4,500,000 are allocated to Series A Preferred Stock and 40,000
are allocated Series B Preferred Stock. At January 29, 2000 and January
30, 1999, no shares of preferred stock were outstanding.
Prior to the Recapitalization, the Series A Preferred Stock ranked
senior to the Series B Preferred Stock and the common stock with
respect to the payment of dividends and distribution of net assets upon
liquidation, dissolution or winding up. Cumulative dividends were
payable quarterly at the rate of $.95 per year on April 30, July 31,
October 31, and the last Friday in January if, as and when declared by
the Board of Directors. Series A Preferred Stock was convertible, prior
to redemption, at the option of the holder, into shares of common stock
at a conversion price subject to adjustment under certain circumstances
pursuant to anti-dilution provisions.
F-16
<PAGE>
The Series B Preferred Stock ranked junior to the Series A Preferred
Stock and senior to the common stock with respect to the payment of
dividends and the distribution of assets upon liquidation, dissolution
or winding up. The Series B Preferred Stock was convertible, at the
option of the holder, only after all the Series A Preferred Stock was
converted or redeemed. The conversion price per share was subject to
adjustment under certain circumstances pursuant to anti-dilution
provisions. Each share of Series B Preferred Stock was entitled to
voting rights equivalent to the number of common shares into which it
is convertible. The Series B Preferred Stock was to pay no dividend
until January 2002.
During fiscal 1998, the Company placed 1,824 shares of its Series B
Preferred Stock for notes receivable in the amount of $2.0 million from
management of the Company. The notes receivable from management of the
Company for the purchase of Series B Preferred Stock are due in 2002
and 2003, accrue interest at 8% per annum and require annual interest
and principal payments equivalent to 16.25% of the annual bonus of each
purchaser and a balloon payment of the unpaid principal and accrued
interest at maturity. All but one of the notes are full-recourse notes
and they were all secured by the Series B Preferred Stock issued in
return for the notes. The notes are now secured by the
Post-Recapitalization Common Stock into which the underlying Series B
Preferred Stock was converted. As of January 29, 2000, the total of
such notes receivable from management of the Company was $2.7 million.
10. STOCK OPTIONS AND WARRANTS
At January 29, 2000, warrants to purchase 82,690 common shares were
outstanding. These warrants have an exercise price of $19.91 and expire
in May 2005. During fiscal 1999, the Company repurchased 49,769
warrants which had an exercise price of $6.22 for $288,000.
Additionally, the Company repurchased 113,000 warrants which had an
exercise price of $16.50 at a purchase price of $169,000; holders of
108,000 warrants with an exercise price of $16.50 exercised those
warrants; and 99,000 warrants with an exercise price of $16.50 expired
on July 14, 1999.
In July 1999, the holder of a warrant to purchase 83,000 shares of
common stock for $16.50 per share exercised the warrant. The Company
issued to the warrant holder 12,316 shares of common stock, based on
the fair market value of 83,000 shares of common stock at the time of
exercise less the exercise price.
The Company has a stock option plan, the Amended and Restated Family
Bargain Corporation 1997 Stock Option Plan. Options may be granted as
incentive or nonqualified stock options. The Company may grant up to
1,807,980 options under this Plan. The options are issued at fair
market value with exercise prices equal to the Company's stock price at
the date of grant. Options vest over three to five years; are
exercisable in whole or in installments; and expire from five to ten
years from the date of grant.
F-17
<PAGE>
The Company's Board of Directors has granted stock options to members
of the Board and to Company management. A summary of the Company's
stock option activity and related information is as follows:
<TABLE>
<CAPTION>
Number of Weighted average
options * exercise prices *
----------------------------------------
<S> <C> <C>
Outstanding February 1, 1997 117,268 10.12
Granted 908,947 7.14
Exercised -- --
Canceled (95,798) 11.38
---------- -----
Outstanding January 31, 1998 930,417 7.07
Granted 452,147 6.88
Exercised -- --
Canceled (57,667) 7.27
----------- ----
Outstanding January 30, 1999 1,324,897 7.00
Granted 438,232 17.70
Exercised (257,482) 6.90
Canceled (141,209) 7.86
----------- ----
Outstanding January 29, 2000 1,364,438 10.37
Exercisable at January 29, 2000 531,659 7.05
Exercisable at January 30, 1999 352,115 6.45
</TABLE>
* Options for January 31, 1998 and February 1, 1997 have been converted
at .30133 per option under the Recapitalization.
The following table summarizes information about the stock options
outstanding at January 29, 2000:
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
average average average
Range of exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
--------------------- -------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.36 to $ 6.72 362,038 5.3 $ 6.22 286,121 $ 6.21
$ 6.72 to $10.08 579,635 2.3 $ 7.56 235,038 $ 7.55
$10.08 to $13.44 183,615 9.0 $12.08 2,500 $11.63
$13.44 to $16.81 63,000 9.1 $15.07 3,000 $16.38
$16.81 to $20.17 23,250 5.5 $18.48 - $ -
$20.17 to $23.53 8,500 8.3 $21.59 2,500 $20.75
$23.53 to $26.89 112,400 9.2 $24.99 - $ -
$26.89 to $30.25 29,000 9.2 $28.29 2,500 $27.38
$30.25 to $33.61 3,000 4.7 $33.61 - $ -
---------- --------
1,364,438 531,659
========== =========
</TABLE>
F-18
<PAGE>
During fiscal 1997 and 1998, the Company granted options which, subject
to time vesting conditions, originally were to become exercisable in
25% installments when the Common Stock price reached the following
market price hurdles and maintained those prices for 60 consecutive
trading days: $19.91, $24.89, $33.19 and $49.78. In December 1998, the
Board of Directors removed the first two market price hurdles for those
optionees that were employees, making one-half of those options granted
exercisable only subject to time vesting conditions. As a result, the
Company recorded compensation expense in the amount of $82,000.
During fiscal 1999, the market price of the Company's stock was $19.91
or greater for at least 60 consecutive trading days; therefore, all
92,960 options with a market price hurdle of $19.91 became exercisable.
The Company recorded a non-cash compensation charge of approximately
$2,094,000 in connection with this event.
There are 258,107 remaining stock options outstanding that are subject
to price hurdles. Once the remaining specified market price hurdles for
the Company's common stock have each been achieved and maintained for
60 consecutive trading days, subject to time vesting conditions, 92,961
options will become exercisable at a market price hurdle of $24.89;
82,573 will become exercisable at $33.19; and 82,573 will become
exercisable at $49.78. When the market price of the Company's common
stock reaches $24.89, $33.19 and $49.78 for the specified periods of
time, the Company will be required to record aggregate non-cash
compensation expense in the minimum amounts of $1.6 million, $2.1
million and $3.5 million, respectively.
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued by
the FASB in 1995 and, if fully adopted, changes the methods for
recognition of cost on plans similar to those of the Company. The
Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for stock options awarded under this plan been
determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have reflected the following pro forma
amounts:
<TABLE>
<CAPTION>
January 29, January 30, January 31,
2000 1999 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Net Income (Loss): As Reported $ 12,442 $ (5,338) $ (6,246)
Pro Forma $ 11,485 $ (6,249) $ (7,114)
Basic EPS: As Reported $ 1.02 $ (1.58) $ (1.27)
Pro Forma $ 0.94 $ (1.85) $ (1.45)
Diluted EPS: As Reported $ 0.97 $ (1.58) $ (1.27)
Pro Forma $ 0.89 $ (1.85) $ (1.45)
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Option valuation models also
require the input of highly subjective assumptions such as expected
option life and expected stock price volatility. Because the Company's
employee stock-based compensation plan has characteristics
significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the
fair value estimate, the Company believes that the existing option
valuation models do not necessarily provide a reliable single measure
of the fair value of awards from those plans.
The weighted-average fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model using
the following weighted-average assumptions: (i) expected dividend
yield of 0.00%, (ii) expected volatility of 103.33%, 106.89% and
1.388% for fiscal years 1999, 1998 and 1997, respectively,
(iii) expected life of three to five years, and (iv) risk-free
interest rate of 6.68%, 5.55% and a range from 5.45% to 6.88% for
fiscal years 1999, 1998 and 1997, respectively.
F-19
<PAGE>
11. EMPLOYEE BENEFITS
The Company sponsors a defined contribution plan, qualified under
Internal Revenue Code Section 401(k), for the benefit of employees who
have completed twelve months of service and who work a minimum of 1,000
hours during that twelve month period. The Company makes a matching
contribution equal to 20% of participating employees' voluntary
contributions. Participants may contribute from 1% to 15% of their
compensation annually, subject to IRS limitations. The Company
contributed approximately $170,000, $134,000 and $132,000 in fiscal
1999, 1998 and 1997, respectively.
In December 1999, the Company established the Factory 2-U Stores, Inc.
Employee Stock Purchase Plan which allows eligible employees to acquire
shares of the Company's Common Stock at a discount from market price,
at periodic intervals, paid for with accumulated payroll deductions.
The discount is 15% of the lower of the market price per share as
quoted on the NASDAQ National Market on the first and last day of an
offering period. The Plan was approved by the Company's Board of
Directors on December 8, 1999 and is expected to be approved by the
Company's stockholders at the annual meeting of stockholders in June
2000. The Plan will terminate when all 350,000 shares available for
issuance under the Plan are sold although the Plan may be terminated
earlier by the Company at any time.
12. COMMITMENTS AND CONTINGENCIES
The Company is at all times subject to pending and threatened legal
actions that arise in the normal course of business. In the opinion of
management, based in part on the advice of legal counsel, the ultimate
disposition of these current matters will not have a material adverse
effect on the financial position or results of operations of the
Company.
The Company has entered into an employment contract with its President
and CEO, which defines his duties, compensation and severance in the
event of his termination of employment with the Company.
13. RELATED PARTY TRANSACTIONS
In March 1997, the Company entered into an agreement with Three Cities
Research, Inc. ("TCR") engaging TCR to act as financial advisor to the
Company. Under this agreement, the Company pays TCR an annual fee of
$50,000 and reimburses TCR all of its out-of-pocket expenses incurred
for services rendered, up to an aggregate of $50,000 annually. The
Company reimbursed TCR for out-of-pocket expenses in the approximate
amounts of $46,000, $48,000 and $47,000 during fiscal year 1999, 1998
and 1997, respectively. TCR controls approximately 33% of the Company's
outstanding common stock and certain principals of TCR are members of
the Company's Board of Directors.
F-20
<PAGE>
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for fiscal 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
IN THOUSANDS, EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1999
Net Sales $85,099 $91,931 $104,551 $139,810
Gross profit 28,991 33,659 37,360 50,420
Operating income 1,105 2,715 3,514 15,418
Net income 334 1,211 1,706 9,191
Earnings per share:
Basic $ 0.03 $ 0.10 $ 0.14 $ 0.74
Diluted $ 0.03 $ 0.09 $ 0.13 $ 0.70
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
Fiscal 1998
Net Sales $66,495 $73,456 $84,978 $113,294
Gross profit 21,846 24,962 28,785 40,298
Operating income (loss) (1,437) 42 3,382 8,477
Income (loss) before extraordinary item (2,789) (1,077) 2,251 6,634
Extraordinary item (2,750) - - -
Net income (loss) (5,539) (1,077) 2,251 6,634
Net income (loss) applicable to common
stock (7,106) (2,669)
607 3,830
Basic earnings per share:
Income (loss) before extraordinary item $ (2.92) $ (1.77) $ 0.40 $ 0.42
Extraordinary item (1.86) - - -
Net income (loss) applicable to common
stock $ (4.78) $ (1.77) $ 0.40 $ 0.42
Diluted earnings per share:
Income (loss) before extraordinary item $ (2.92) $ (1.77) $ 0.23 $ 0.34
Extraordinary item (1.86) - - -
Net (income) loss applicable to common
stock $ (4.78) $ (1.77) $ 0.23 $ 0.34
</TABLE>
F-21
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
FACTORY 2-U STORES, INC.
FIRST: The name of the corporation is FACTORY 2-U STORES, INC.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is:
1013 Centre Road
Wilmington, Delaware 19805
New Castle County
THIRD: The name of the registered agent at such address is: The
Prentice-Hall Corporation System, Inc.
FOURTH: The purpose of the Corporation is to engage in any lawful act or
activity for which a Corporation may be organized under the General Corporation
Law of the State of Delaware.
FIFTH: The total number of shares of stock which the Corporation shall have
authority to issue is Eighty Million (80,000,000) shares of Common Stock, par
value $.01 per share ("Common Stock") and Seven Million Five Hundred Thousand
(7,500,000) shares of Preferred Stock, par value $.01 per share ("Preferred
Stock").
The Board of Directors is authorized, subject to the limitations prescribed
by law, to provide for the issuance of the shares of Preferred Stock in series,
by filing a certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each of such series and the qualifications, limitations and restrictions
thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends shall
be cumulative, and, it so, from which date of dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and the
relative rights of priority, if any, or payment of shares of that series;
(h) Any other relative rights, preferences and limitations of that series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the common shares with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
All the Preferred Stock of any one series shall be identical with each
other in all respects, except that the shares of any one series issued at
different times may differ as to the dates from which dividends thereon shall be
cumulative. Except as to the particulars fixed by the Board as hereinabove
provided or as provided in the description of the series, all Preferred Stock
shall otherwise be of equal rank, regardless of series, and shall be identical
in all respects.
SIXTH: The Board of Directors is authorized and empowered to make, alter
amend and rescind the By-laws of the corporation, but By-laws made by the Board
may be altered or repealed, and new By-laws made, by the stockholders.
SEVENTH: No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
Corporation. partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
board or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if:
The material facts as to his interest and as to the contract or transaction
are disclosed or are known to the Board of Directors or the committee, and the
Board or committee in good faith authorizes the contract or transaction by a
vote sufficient for such purpose without counting the vote of the interested
director or directors; or
The material facts as to his interest and as to the contract or transaction
are disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or
The contract or transaction is fair as to the Corporation as of the time it
is authorized, approved or ratified, by the Board of Directors, a committee
thereof, or the stockholders.
Interested directors may be counted in determining the presence of a quorum
at a meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
EIGHTH:INDEMNIFICATION AND INSURANCE:
(a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is
threatened to be made a party or is involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director or officer, of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another Corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director. officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof was authorized
by the Board of Directors of the Corporation. The right to indemnification
conferred in this Section shall be a contract right and shall include the right
to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition: provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses incurred
by a director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person
while a director or officer, including. without limitation, service to an
employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. The Corporation may, by action of
its Board of Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing indemnification of
directors and officers.
(b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) of this
Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and. if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking. if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) Notwithstanding any limitation to the contrary contained in sub-
paragraphs 8(a) and 8(b), the Corporation shall, to the fullest extent permitted
by Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnity under said section from and against any and all of
the expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
(d) INSURANCE. The Corporation may maintain insurance, at its expense. to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against such expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
NINTH: Under Section 102(b)(7) of the Delaware General Corporation Law, and
other provisions of the Delaware General Corporation Law, no director shall be
personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty by such director as a director. Notwithstanding
the foregoing sentence. a director shall be liable to the extent provided by
applicable law (i) for breach of the directors duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article 9 shall apply to or have any effect on
the liability or alleged liability of any director of the Corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment.
TENTH: Election of directors need not be by written ballot unless so
provided in the By-laws of the Corporation.
ELEVENTH: Except as otherwise required by statute, the books of the
Corporation may be kept outside of the State of Delaware, at such place or
places as provided in the By-laws of the Corporation or from time to time
designated by the Board of Directors.
TWELFTH: Any Director or the entire Board of Directors may be removed with
or without cause by the holders of a majority of the shares then entitled to
vote at an election of Directors.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FACTORY 2-U STORES, INC.
Factory 2-U Stores, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
FIRST: The Board of Directors of the Corporation approved, and declared
advisable, then proposed for adoption by the stockholders of the Corporation,
the following resolution to amend the Corporation's Certificate of Incorporation
(the "Amendment"):
RESOLVED, that the first paragraph of Article Fifth be deleted and
substitute in lieu thereof the following new first paragraph of Article Fifth:
"FIFTH: the total number of shares of stock which the Corporation shall
have authority to issue is Thirty-Five Million (35,000,000) shares of Common
Stock, par value $.01 per share ("Common Stock"), and Seven Million Five Hundred
Thousand (7,500,000) shares of Preferred Stock, par value $.01 per share
("Preferred Stock")."
SECOND: The foregoing amendment was approved, in accordance
with Section 242 of the General Corporation Law of the State of Delaware, by the
stockholders of the Corporation, at the Corporation's annual meeting of
stockholders held on June 23, 1999, by stockholders of the Corporation entitled
to vote thereon holding the requisite number of shares as prescribed by statute
and by the Certificate of Incorporation for the taking of such action.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by its President and Chief Executive Officer and
attested to by its Secretary this 22nd day of December, 1999.
/s/ Michael M. Searles
Name: Michael M. Searles
Title: President and Chief Executive Officer
Attest:
/s/ Wm. Robert Wright II
Name: Wm. Robert Wright II
Title: Secretary
EXHIBIT 10.2
FINANCING AGREEMENT
The CIT Group/Business Credit, Inc.
(as Agent and a Lender)
and
Factory 2-U Stores, Inc.
(as Borrower)
Dated: March 3, 2000
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. Definitions..................................................1
SECTION 2. Conditions Precedent........................................13
SECTION 3. Revolving Loans.............................................16
SECTION 4. Intentionally Left Blank....................................20
SECTION 5. Letters of Credit...........................................20
SECTION 6. Collateral..................................................23
SECTION 7. Representations, Warranties and Covenants...................25
SECTION 8. Interest, Fees and Expenses.................................32
SECTION 9. Powers......................................................36
SECTION 10. Events of Default and Remedies..............................37
SECTION 11. Term and Termination........................................40
SECTION 12. Miscellaneous...............................................41
SECTION 13. Agreement between the Lenders...............................43
SECTION 14. Agency......................................................46
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THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation,
(hereinafter "CITBC"), with offices located at 300 South Grand Avenue, Third
Floor, Los Angeles, California 90071 (CITBC and any other party hereafter
becoming a Lender hereunder pursuant to Section 13.9 hereof each individually
sometimes referred to as a "Lender" and collectively, the "Lenders"), and CITBC
as Agent for the Lenders (hereinafter the "Agent") are pleased to confirm the
terms and conditions under which the Lenders acting through the Agent shall make
revolving loans and other financial accommodations to FACTORY 2-U STORES, INC.,
a Delaware corporation (hereinafter the "Company"), with a principal place of
business at 4000 Ruffin Road, San Diego, California 92123.
SECTION 1 Definitions
For purposes of this Financing Agreement, the following terms shall be
defined in the following manner:
Accounts shall mean all of the Company's now existing and
future: (a) accounts (as defined in the U.C.C.), including, without limitation,
all accounts created by or arising from all of the Company's sales of goods or
rendition of services to its customers, and all accounts arising from sales or
rendition of services made under any of the Company's trade names or styles, or
through any of the Company's divisions, but the term Accounts shall not include
the Company's landlord receivables for tenant improvements and the Company's
employee stock subscription receivables; (b) Credit Card Receivables (whether or
not specifically listed on schedules furnished to the Agent); (c) any and all
instruments, documents, General Intangibles, payment intangibles, contract
rights and chattel paper (all as such terms are defined in the U.C.C.)
representing Accounts; (d) unpaid seller's rights (including rescission,
replevin, reclamation and stoppage in transit) relating to the foregoing or
arising therefrom; (e) rights to any goods represented by any of the foregoing,
including rights to returned or repossessed goods; (f) reserves and credit
balances arising hereunder; (g) guarantees or collateral for any of the
foregoing; (h) insurance policies or rights relating to any of the foregoing;
and (i) cash and non-cash proceeds of any and all the foregoing.
Agent Commitment Letter shall mean the commitment letter dated
February 10, 2000, issued by the Agent to, and accepted by, the Company.
Anniversary Date shall have the meaning set forth in Section
11.1 hereof.
Assignment and Transfer Agreement shall mean the Assignment
and Transfer Agreement in the form of Exhibit B hereto.
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Availability shall mean at any time the excess of the lesser
of (a) the Borrowing Base or (b) $50,000,000, over the sum of (x) the
outstanding aggregate amount of all Obligations, including without limitation,
all Obligations with respect to Revolving Loans and Letters of Credit and (y)
the Availability Reserve.
Availability Reserve shall mean an amount equal to any (a)
delinquent sales taxes, (b) delinquent rental payments for the Company's leased
premises, and (c) such other reserves as the Agent deems necessary in its
commercially reasonable judgment as a result of (i) negative forecasts and/or
trends in the Company's business, profits, operations or financial condition
that could reasonably be expected to have a material adverse effect on the
Company and its subsidiaries taken as a whole or (ii) other issues,
circumstances, or facts that could otherwise reasonably be expected to
negatively impact the Company, it's business, profits, operations, financial
condition or assets.
Borrowing Base shall mean the sum of (a) eighty-five percent
(85%) of the outstanding Eligible Accounts Receivable of the Company plus (b)
the aggregate value of Eligible Inventory (including Eligible In-Transit
Inventory) determined at the lower of cost or market on a first-in, first-out
basis multiplied by the Inventory Advance Percentage; provided that in no event
shall advances against Eligible In-Transit Inventory exceed the lesser of (A)
$5,000,000, or (B) forty percent (40%) of the aggregate value of Eligible
Inventory.
Business Day shall mean any day on which both the Agent and
The Chase Manhattan Bank are open for business.
Capital Lease shall mean any lease of property (whether real,
personal or mixed) which, in conformity with GAAP, is accounted for as a capital
lease on the balance sheet of the Company.
Chase Manhattan Rate shall mean the rate of interest per annum
announced by The Chase Manhattan Bank from time to time as its prime rate in
effect at its principal office in the City of New York. (The prime rate is not
intended to be the lowest rate of interest charged by The Chase Manhattan Bank
to its borrowers).
Closing Date shall mean March 3, 2000.
Collateral shall mean all present and future Accounts,
Inventory, and Other Collateral of the Company.
Collateral Management Fee shall mean, for the initial term of
this Financing Agreement, the sum of $105,000 which shall be paid to the Agent
in accordance with Section 8.8 hereof to offset the expenses and costs of the
Agent in connection with record keeping, analyzing and evaluating the
Collateral. Following
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the initial term of this Financing Agreement, an annual
Collateral Management Fee shall be established in an amount as agreed between
the Agent and the Company.
Consolidated Balance Sheet shall mean a consolidated balance
sheet for the Company, prepared in accordance with GAAP and in a form acceptable
to the Agent.
Contract Rate shall mean the applicable rate of interest
computed as set forth in Section 8.1 of this Financing Agreement.
Credit Card Acknowledgments shall mean, individually and
collectively, the agreements by Credit Card Issuers or Credit Card Processors
who are parties to Credit Card Agreements in favor of Agent acknowledging
Agent's first priority security interest in the monies due and to become due to
the Company (including, without limitation, credits and reserves) under the
Credit Card Agreements, and agreeing to transfer such amounts to the Depository
Account established for such purposes, as the same now exist or may hereafter by
amended, modified, supplemented, extended, renewed, restated or replaced.
Credit Card Agreements shall mean all agreements now or
hereafter entered into by the Company with any Credit Card Issuer or any Credit
Card Processor, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
Credit Card Issuer shall mean any person (including, without
limitation, a bank) (other than the Company) who issues or whose members issue
credit cards, including, without limitation, MasterCard or VISA bank credit or
debit cards or other bank credit or debit cards issued through MasterCard
International, Inc., Visa, U.S.A., Inc. or Visa International and American
Express, Discover, Diners Club, Carte Blanche and other bank or non-bank credit
or debit cards.
Credit Card Processor shall mean any servicing or processing
agent or any factor or financial intermediary who facilitates, services,
processes or manages the credit authorization, billing, transfer and/or payment
procedures with respect to sales transactions of the Company involving credit
cards or debit card purchases by customers using credit cards or debit cards
issued by any Credit Card Issuer.
Credit Card Receivables shall mean collectively, (a) all
present and future rights of the Company to payment from any Credit Card Issuer,
Credit Card Processor or other third party arising from sales of goods or
rendition of services to customers who have purchased such goods or services
using a credit or debit card and (b) all present and future rights of the
Company to payment from any Credit Card Issuer, Credit Card Processor or other
third party in connection with the sale or transfer of Accounts arising pursuant
to the sale of goods or rendition of services to
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customers who have purchased
such goods or services using a credit card or a debit card.
Customarily Permitted Liens shall mean:
(a) liens of local or state authorities for franchise or other
like taxes provided the aggregate amount of such liens shall not exceed $250,000
in the aggregate at any one time;
(b) statutory liens of landlords and liens of carriers,
warehousemen, mechanics, materialmen and other like liens imposed by law,
created in the ordinary course of business and for amounts not yet due (or which
are being contested in good faith by appropriate proceedings or other
appropriate actions which are sufficient to prevent imminent foreclosure of such
liens) and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP; and
(c) deposits made (and the liens thereon) in the ordinary
course of business (including, without limitation, security deposits for leases,
surety bonds and appeal bonds) in connection with workers' compensation,
unemployment insurance and other types of social security benefits or to secure
the performance of tenders, bids, contracts (other than for the repayment or
guarantee of borrowed money or purchase money obligations), statutory
obligations and other similar obligations arising as a result of progress
payments under government contracts.
Default shall mean any event specified in Section 10 hereof,
whether or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition, event or act, has been satisfied.
Default Rate of Interest shall mean a rate of interest per
annum equal to the lesser of (a) the Maximum Legal Rate or (b) the sum of (i)
two percent (2%) and (ii) the applicable Contract Rate based upon the applicable
increment over the Chase Manhattan Rate as determined under Section 8.1 hereof,
which the Agent on behalf of the Lenders shall be entitled to charge the Company
on all Obligations due the Agent on behalf of the Lenders by the Company to the
extent provided in Section 10.2 of this Financing Agreement. Agent on behalf of
Lenders acknowledges that no "breakage fee" will be charged to Borrower in the
event that Agent converts the interest rate on a Libor Loan to a rate of
interest based on the Chase Manhattan Rate as the result of an Event of Default.
Depository Accounts shall have the meaning specified in
Section 3.4 hereof.
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Documentation Fee shall mean the Agent's standard fees
relating to any and all modifications, waivers, releases, amendments or
additional collateral with respect to this Financing Agreement, the Collateral
and/or the Obligations.
Documents of Title shall mean all present and future documents
(as defined in the U.C.C.) including, without limitation all warehouse receipts,
bills of lading, shipping documents, chattel paper, instruments and similar
documents, all whether negotiable or not and all goods and Inventory relating
thereto and all cash and non-cash proceeds of the foregoing.
Early Termination Date shall mean any date (other than an
Anniversary Date) on which this Financing Agreement or the Line of Credit
(including the Letter of Credit Sub-Line) is terminated.
Early Termination Fee shall: (a) mean the fee the Agent is
entitled to charge the Company in the event the Line of Credit (including the
Letter of Credit Sub-Line) or this Financing Agreement is terminated on a date
prior to an Anniversary Date; and (b) be determined by multiplying the Line of
Credit (including the Letter of Credit Sub-Line) by (i) one percent (1.0%) if
the Early Termination Date occurs on or prior to one (1) year after the Closing
Date, and (ii) one-half percent (0.5%) if the Early Termination Date occurs
after one (1) year after the Closing Date but prior to two (2) years after the
Closing Date.
EBITDA shall mean, for any period, all earnings before all
interest, tax obligations, depreciation and amortization expense for said
period, all determined in accordance with GAAP on a basis consistent with the
latest audited financial statements of the Company but excluding noncash stock
option compensation charges and the effect of extraordinary and/or non-recurring
gains or losses for such period.
Eligible Accounts Receivable shall mean the gross amount of
the Company's Credit Card Receivables that are subject to a valid, first
priority and fully perfected security interest in favor of the Agent on behalf
of the Lenders, less, without duplication, the sum of (a) any returns,
discounts, claims, credits and allowances of any nature (whether issued, owing,
granted or outstanding), (b) accounts that remain unpaid for more than ten (10)
days from the date of the transaction, and (c) reserves for (i) amounts
representing historic returns, discounts, claims, credits and allowances, and
(ii) amounts as deemed necessary by the Agent in the exercise of reasonable
business judgment and which are customary in the commercial finance industry.
Eligible In-Transit Inventory shall mean the gross amount of
the Company's Eligible Inventory which is in transit to and/or from third
parties with respect to which the Company has title and that is subject to a
valid, first priority and fully perfected security interest in favor of the
Agent on behalf of the Lenders and which conforms to the warranties contained
herein and which at all times continues to
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be acceptable to the Agent in the
exercise of its reasonable business judgment, less, without duplication, (a)
goods in transit to and from third parties (other than the Company's agents or
warehouses) with respect to which there exists no proof of the Company's
ownership thereof reasonably acceptable to the Agent in conformity with
commercial finance industry standards, (b) Inventory in possession of a
warehouseman, bailee or other third party unless such warehouseman, bailee or
third party has executed a notice of security interest agreement (in form and
substance satisfactory to the Agent) and the Agent has taken all other action
required to perfect its security interest in such Inventory, (c) Inventory in
transit in excess of thirty (30) days, and (d) Inventory at vendors.
Eligible Inventory shall mean the gross amount of the
Company's Inventory that is subject to a valid, first priority and fully
perfected security interest in favor of the Agent on behalf of the Lenders and
which conforms to the warranties contained herein and which at all times
continues to be acceptable to the Agent in the exercise of its reasonable
business judgment, including the Eligible In-Transit Inventory, less, without
duplication, any (a) work-in-process, (b) supplies, (c) goods not present in the
United States of America, (d) goods returned or rejected by the Company's
customers other than goods that are undamaged and resaleable in the normal
course of business, (e) goods to be returned to the Company's suppliers, (f)
goods in transit to and from third parties (other than the Company's agents or
warehouses) with respect to which there exists no proof of the Company's
ownership thereof reasonably acceptable to the Agent in conformity with
commercial finance industry standards, (g) Inventory in possession of a
warehouseman, bailee or other third party unless such warehouseman, bailee or
third party has executed a notice of security interest agreement (in form and
substance satisfactory to the Agent) and the Agent has taken all other action
required to perfect its security interest in such Inventory, and (h) any
reserves required by the Agent in its reasonable discretion for special order
goods, market value declines, shrinkage, slow-moving, damaged or obsolete goods,
and bill and hold (deferred shipment) or consignment sales to the extent that
Company has not already taken reserves for such in its reports to Agent.
Equipment shall mean all present and hereafter acquired
equipment (as defined in the U.C.C.) including, without limitation, all
machinery, equipment, furnishings and fixtures, and all additions, substitutions
and replacements thereof, wherever located, together with all attachments,
components, parts, equipment and accessories installed thereon or affixed
thereto and all proceeds of whatever sort.
ERISA shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time and the rules and regulations promulgated
thereunder from time to time.
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Event(s) of Default shall have the meaning provided for
in Section 10 of this Financing Agreement.
Executive Officers shall mean the Chairman, President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Executive
Vice President(s), Senior Vice President(s), Treasurer, Controller and Secretary
of the Company.
Financing Agreement, hereof, hereto, hereunder and words of
similar meaning shall mean this Financing Agreement including any exhibits or
schedules, as such Financing Agreement may from time to time be amended,
modified or supplemented.
GAAP shall mean generally accepted accounting principles in
the United States of America as in effect from time to time and for the period
as to which such accounting principles are to apply.
General Intangibles shall have the meaning set forth in the
U.C.C. and shall include, without limitation, all present and future right,
title and interest in and to all trade names, Trademarks (together with the
goodwill associated therewith), Patents, licenses, customer lists, distribution
agreements, supply agreements, indemnification rights and tax refunds, together
with all monies and claims for monies now or hereafter due and payable in
connection with any of the foregoing or otherwise, and all cash and non-cash
proceeds thereof.
Indebtedness shall mean, without duplication, all liabilities,
contingent or otherwise, which are any of the following: (a) obligations in
respect of money (borrowed or otherwise) or for the deferred purchase price of
property, services or assets, other than Inventory, or (b) lease obligations
which, in accordance with GAAP, have been, or which should be capitalized.
Inventory shall mean all of the Company's present and
hereafter acquired inventory (as defined in the U.C.C.), and all additions,
substitutions and replacements thereof, wherever located, together with all
General Intangibles and materials used or usable in processing, packaging or
shipping same and all cash and noncash proceeds thereof.
Inventory Advance Percentage shall mean the lesser of (a)
seventy percent (70%) of the aggregate value of Eligible Inventory or (b) ninety
percent (90%) of the Net Orderly Liquidation Value of the Inventory as a
percentage of the total Inventory as determined by the most recent Inventory
appraisal, as provided for in Section 7.13 hereof.
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Investment Property shall mean all of the Company's present
and hereafter acquired securities, securities entitlements, securities accounts
and other investment property (as such terms are defined in the U.C.C.).
Issuing Bank shall mean the bank issuing Letters of Credit for
the account of the Company.
Letters of Credit shall mean all letters of credit issued
hereunder with the assistance of the Agent on behalf of the Lenders by the
Issuing Bank for or on behalf of the Company.
Letter of Credit Guaranty shall mean the guaranty delivered by
the Agent on behalf of the Lenders to the Issuing Bank of the Company's
reimbursement obligation under the Issuing Bank's reimbursement agreement,
application for letter of credit or other like document.
Letter of Credit Guaranty Fee shall mean the fee the Agent on
behalf of the Lenders may charge the Company under Section 8.3 of this Financing
Agreement for: (a) issuing the Letter of Credit Guaranty or (b) otherwise aiding
the Company in obtaining Letters of Credit.
Letter of Credit Sub-Line shall mean $5,000,000 in the
aggregate.
Libor shall mean at any time of determination, and subject to
availability, for each Libor Period, the highest of the applicable London
Interbank Offered rate paid in London on dollar deposits from other banks for
such Libor Period as (a) quoted by The Chase Manhattan Bank, (b) published under
"Money Rates" in the New York City edition of the Wall Street Journal or if
there is no such publication or statement therein as to Libor then in any
publication used in the New York City financial community or (c) determined by
the Agent based upon information presented on Telerate Systems at Page 3750 as
of 11:00 a.m. (London Time).
Libor Loan shall mean that portion of the Revolving Loans for
which the Company has elected to use Libor for interest rate computations.
Libor Period shall mean the Libor for one month, two month,
three month or six month U.S. dollar deposits, as selected by the Company.
Line of Credit shall mean the commitment of the Lenders to
make Revolving Loans pursuant to Section 3 of this Financing Agreement and to
assist the Company in opening Letters of Credit pursuant to Section 5 of this
Financing Agreement, in the aggregate amount of up to $50,000,000.
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Line of Credit Fee shall mean the fee due the Agent for the
benefit of the Lenders at the end of each month for the Line of Credit,
determined by multiplying the difference between (a) the Line of Credit and (b)
the sum of (i) the average daily balance of the Revolving Loans plus (ii) the
average daily balance of Letters of Credit for said month by one-eighth percent
(0.125%) per annum for the number of days in said month.
Loan Facility Fee shall mean the fee payable to the Agent for
the benefit of the Lenders in accordance with, and pursuant to, the provisions
of Section 8.7 of this Financing Agreement.
Maximum Legal Rate shall mean the highest maximum lawful
interest rate which may be contracted for, charged, taken, received or reserved
under this Financing Agreement by the Agent and/or the Lenders in accordance
with applicable state or federal law, taking into account all items contracted
for, charged or received in connection with the Obligations evidenced hereby
which are treated as interest under the applicable state or federal law, as such
rate may change from time to time.
Net Orderly Liquidation Value shall mean the orderly
liquidation value, as determined pursuant to Section 7.13 hereof, after
deduction of associated costs, fees and liquidation expenses.
Obligations shall mean all loans and advances made or to be
made by the Agent and/or the Lenders to the Company or to others for the
Company's account (including, without limitation, all Revolving Loans and
Letters of Credit); any and all indebtedness and obligations which may at any
time be owing by the Company to the Agent and/or the Lenders and that arise
under this Financing Agreement, as it may be amended, renewed, supplemented or
otherwise modified from time to time, whether now in existence or incurred by
the Company from time to time hereafter; whether secured by pledge, lien upon or
security interest in any of the Company's assets or property or the assets or
property of any other person, firm, entity or corporation; whether such
indebtedness is absolute or contingent, joint or several, matured or unmatured,
direct or indirect and whether the Company is liable to the Agent and/or the
Lenders for such indebtedness as principal, surety, endorser, guarantor or
otherwise. Obligations shall also include indebtedness owing to the Agent and/or
the Lenders by the Company under this Financing Agreement or under any other
agreement or arrangement now or hereafter entered into between the Company and
the Agent and/or the Lenders relating to this Financing Agreement; indebtedness
or obligations incurred by, or imposed on, the Agent and/or the Lenders as a
result of environmental claims (other than as a result of actions of the Agent
and/or the Lenders) arising out of the Company's operation, premises or waste
disposal practices or sites; the Company's liability to the Agent and/or the
Lenders as maker or endorser on any promissory note or other instrument for the
payment of money; the Company's
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liability to the Agent and/or the Lenders under
any instrument of guaranty or indemnity, or arising under any guaranty,
endorsement or undertaking which the Agent and/or the Lenders may make or issue
to others for the Company's account, including any accommodation extended with
respect to applications for Letters of Credit, the Agent's (on behalf of the
Lenders) acceptance of drafts or the Agent's (on behalf of the Lenders)
endorsement of notes or other instruments for the Company's account and benefit.
Other Collateral shall mean (a) all now owned and hereafter
acquired deposit accounts maintained by or on behalf of the Company with any
bank or financial institution in which any proceeds of the Accounts or Inventory
are deposited; (b) all of the Company's cash and other monies and property in
the possession or control of the Agent and/or the Lenders; (c) all of the
Company's books, records, ledger cards, disks and related data processing
software at any time evidencing or containing information relating to any of the
Collateral or otherwise necessary or helpful in the collection thereof or
realization thereon; and (d) all cash and non-cash proceeds of the foregoing.
Out-of-Pocket Expenses shall mean all of the Agent's present
and future expenses incurred relative to this Financing Agreement, whether
incurred heretofore or hereafter, which expenses shall include, without being
limited to, the cost of record searches, all appraisal fees, third party field
examination fees, all costs and expenses incurred by the Agent in opening bank
accounts, depositing checks, receiving and transferring funds, and any charges
imposed on the Agent and/or the Lenders due to "insufficient funds" of deposited
checks and the Agent's and/or the Lenders' standard fee relating thereto, any
amounts paid by the Agent on behalf of the Lenders, incurred by or charged to
the Agent on behalf of the Lenders by the Issuing Bank under the Letter of
Credit Guaranty or the Company's reimbursement agreement, application for letter
of credit or other like document which pertain either directly or indirectly to
such Letters of Credit, and the Agent's standard fees relating to the Letters of
Credit and any drafts thereunder, travel, lodging and similar expenses of the
Agent's personnel inspecting and monitoring the Collateral from time to time
hereunder, local counsel fees, fees and taxes relative to the filing of
financing statements, and all attorneys' fees, expenses, costs and fees set
forth in Section 10.3 of this Financing Agreement.
Patents shall mean all present and hereafter acquired patents
and/or patent rights of the Company and all cash and non-cash proceeds thereof.
Permitted Encumbrances shall mean: (a) liens existing on the
date hereof on specific items of Equipment and listed on Schedule 1 hereto (but
only to the extent such liens do not encumber the Collateral) and other liens
expressly permitted, or consented to, by the Agent; (b) Permitted Purchase Money
Liens; (c) Customarily Permitted Liens; (d) liens created in connection with
sale leasebacks or loans secured
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by the Company's equipment to the extent that
such transactions constitute Permitted Indebtedness hereunder; (e) liens granted
the Agent by the Company; (f) liens of judgment creditors provided such liens do
not exceed, in the aggregate, at any time, $200,000 (other than liens bonded or
insured to the reasonable satisfaction of the Agent); and (g) liens for taxes
not yet due and payable or which are being diligently contested in good faith by
the Company by appropriate proceedings for which the Company has posted a bond
in the required amount or otherwise has taken action necessary to stay
enforcement of such lien. In no event shall any Collateral be subject to
foreclosure proceedings or, in the Agent's discretion, subject to any loss of
perfection or priority in favor of the Agent and/or the Lenders.
Permitted Indebtedness shall mean (a) current indebtedness
maturing in less than one year and incurred in the ordinary course of business
for raw materials, supplies, equipment, services, taxes or labor; (b) the
indebtedness secured by the Permitted Purchase Money Liens; (c) indebtedness
arising under the Letters of Credit and this Financing Agreement; (d) deferred
taxes and other expenses incurred in the ordinary course of business; (e)
Subordinated Debt, if unsecured and subject to a subordination agreement in form
and substance satisfactory to the Agent; (f) indebtedness arising from sale
leaseback transactions or loans secured by the Company's equipment, but only if
(i) the Company gives prior written notice to the Agent of each such
transaction, (ii) an Event of Default has not occurred and is continuing at the
time any such transaction is entered into, (iii) such indebtedness does not
exceed the cost of the Company's equipment being given as collateral for such
indebtedness, and (iv) the transaction does not involve the Company's intangible
assets (including, but not limited to, trademarks, trade names and trade
styles); and (g) other indebtedness existing on the date of execution of this
Financing Agreement and listed in the most recent financial statement delivered
to the Agent and the Lenders or otherwise disclosed to the Agent in writing; and
(h) indebtedness secured by liens on real estate acquired after the date of this
Financing Agreement, provided that (i) each such lien shall attach only to the
real estate acquired, (ii) the aggregate amount of such real estate debt shall
not, at any time, exceed $10,000,000, (iii) the Company shall give the Agent
prior written notice before incurring any such real estate indebtedness, and
(iv) no Event of Default shall have occurred and be continuing at the time the
Company incurs any such indebtedness.
Permitted Purchase Money Liens shall mean liens on any item of
equipment acquired after the date of this Financing Agreement provided that (a)
each such lien shall attach only to the item(s) of equipment to be acquired, (b)
the Company shall give the Agent prior written notice before incurring any such
indebtedness, and (c) no Event of Default shall have occurred and be continuing
at the time the Company incurs any such indebtedness.
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Required Lenders shall mean Lenders holding more than fifty
percent (50%) of the outstanding loans, advances, extensions of credit and
commitments to the Company hereunder.
Revolving Loans shall mean the loans and advances made, from
time to time, to or for the account of the Company by the Agent on behalf of the
Lenders pursuant to Section 3 of this Financing Agreement.
Revolving Loan Account shall have the meaning specified in
Section 3.6 hereof.
Revolving Loan Promissory Note shall mean the promissory note
in the form of Exhibit A hereto executed by the Company to evidence the
Revolving Loans made by the Agent on behalf of the Lenders to the Company
pursuant to Section 3 hereof.
Settlement Date shall mean the date, weekly, and more
frequently, at the discretion of the Agent, upon the occurrence of an Event of
Default or a continuing decline or increase of the Revolving Loans that the
Agent and the Lenders shall settle amongst themselves so that (a) the Agent
shall not have, as Agent, any money at risk and (b) on such Settlement Date the
Lenders shall have a pro rata amount of all outstanding Revolving Loans and
Letters of Credit, provided that each Settlement Date for a Lender shall be a
Business Day on which such Lender and its bank are open for business.
Subordinated Debt shall mean unsecured debt due (and the notes
evidencing such) which has been subordinated, by a Subordination Agreement (in
form and substance reasonably satisfactory to the Agent), to the prior payment
and satisfaction of the Obligations of the Company to the Agent and/or the
Lenders, including without limitation the debt of the Company to American
Endeavour Fund Ltd. and Landmark Secondary Partners IX, L.P., or their permitted
assigns.
Subordination Agreement shall mean the agreement among the
Company, the then holder of Subordinated Debt and the Agent pursuant to which
Subordinated Debt of such holder is subordinated to the prior payment and
satisfaction of the Company's Obligations to the Agent and the Lenders (in form
and substance reasonably satisfactory to the Agent).
Tangible Net Worth shall mean, as determined in accordance
with GAAP, the difference between (i) the assets of the Company after deducting
adequate reserves in each case where, a reserve is proper and (ii) all
Indebtedness of the Company other than Subordinated Debt; provided, however,
that notwithstanding the foregoing in no event shall there be included as such
assets: intangibles, goodwill, patents, trademarks, trade names, copyrights,
licenses, goodwill, receivables from
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affiliates, directors, officers or
employees, deferred charges or treasury stock or any securities or Indebtedness
of the Company or any other securities unless the same are readily marketable in
the United States of America or entitled to be used as a credit against federal
income tax liabilities, and any other assets designated from time to time by the
Agent, in its reasonable credit judgment.
Trademarks shall mean all present and hereafter acquired
trademarks and/or trademark rights (together with the goodwill associated
therewith) and all cash and non-cash proceeds thereof.
U.C.C. shall mean the Uniform Commercial Code as in effect
from time to time in the State of California. Terms defined by reference to
the U.C.C. in this Financing Agreement shall be deemed amended without
any action of the parties hereto when the U.C.C. is amended, including
without limitation when revised Division 9 of the U.C.C. becomes
effective on July 1, 2001.
SECTION 2 Conditions Precedent
2.1 The obligation of the Agent and the Lenders to make loans hereunder is
subject to the satisfaction of, or waiver of, immediately prior to or
concurrently with the making of such loans, the following conditions precedent:
(a) Lien Searches - The Agent shall have received tax, judgment and Uniform
Commercial Code searches satisfactory to the Agent for all locations presently
occupied or used by the Company.
(b) Casualty Insurance - The Company shall have delivered to the Agent
evidence reasonably satisfactory to the Agent that casualty insurance policies
listing the Agent, for the benefit of the Lenders, as loss payee or mortgagee,
as the case may be, are in full force and effect, all as set forth in Section
7.5 of this Financing Agreement.
(c) UCC Filings - Any documents (including without limitation, financing
statements) required to be filed in order to create, in favor of the Agent for
the benefit of the Lenders a first and exclusive perfected security interest in
the Collateral (subject to Permitted Encumbrances) with respect to which a
security interest may be perfected by a filing under the U.C.C. shall have been
properly filed in each office in each jurisdiction required in order to create
in favor of the Agent for the benefit of the Lenders a perfected lien on the
Collateral. The Agent shall have received acknowledgment copies of all such
filings (or, in lieu thereof, the Agent shall have received other evidence
satisfactory to the Agent that all such filings have been made); and the Agent
shall have received evidence that all necessary filing fees and all taxes or
other expenses related to such filings have been paid in full.
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(d) Opinion - Counsel for the Company shall have delivered to the Agent an
opinion satisfactory to counsel for the Agent opining, inter alia, that, subject
to the (i) filing, priority and remedies provisions of the Uniform Commercial
Code, (ii) the provisions of the Bankruptcy Code, insolvency statutes or other
like laws, (iii) the equity powers of a court of law and (iv) such other matters
as may be agreed upon with the Agent: (A) this Financing Agreement and all other
loan documents of the Company are (1) valid, binding and enforceable according
to their terms, (2) are duly authorized and (3) do not violate any terms,
provisions, representations or covenants in the charter or by-laws of the
Company or, to the best knowledge of such counsel, of any loan agreement,
mortgage, deed of trust, note, security or pledge agreement or indenture to
which the Company is a signatory or by which the Company or its assets are
bound; and (B) the provisions of all federal and state securities laws and the
Hart-Scott-Rodino Anti-Trust Improvements Act have been fully complied with or
that compliance is not legally required.
(e) Additional Documents - The Company shall have executed and delivered to
the Agent all loan documents necessary to consummate the lending arrangement
contemplated hereunder.
(f) Subordination Agreements - American Endeavour Fund Ltd., Landmark
Secondary Partners IX, L.P. and any other holder of Subordinated Debt shall have
executed and delivered to the Agent a Subordination Agreement, in form and
substance satisfactory to the Agent, subordinating the debt due to each of them
by the Company to the prior payment and satisfaction of the Obligations of the
Company to the Agent and/or the Lenders.
(g) Landlord Waivers - The Agent shall have received satisfactory landlord
waivers from Ruffin San Diego Corporation and Pacific Gulf Properties.
(h) Bailee Agreements - The Agent shall have received satisfactory bailee
agreements from FMI International and Streamline Shippers Association.
(i) Board Resolution - The Agent shall have received a copy of the
resolutions of the Board of Directors of the Company authorizing the execution,
delivery and performance of this Financing Agreement any related agreements, in
each case certified by the Secretary or Assistant Secretary of the Company (as
the case may be) as of the date hereof, together with a certificate of the
Secretary or Assistant Secretary of the Company as to the incumbency and
signature of the officers of the Company executing such agreements and any
certificate or other documents to be delivered by them pursuant hereto, together
with evidence of the incumbency of such Secretary or Assistant Secretary.
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(j) Corporate Organization - The Agent shall have received (i) a copy of
the Certificate of Incorporation of the Company certified by the Secretary of
State of its incorporation, and (ii) a copy of the By-Laws (as amended through
the date hereof) of the Company certified by the Secretary or Assistant
Secretary of the Company.
(k) Officer's Certificate - The Agent shall have received an executed
Officer's Certificate of the Company, satisfactory in form and substance to the
Agent, certifying that (i) the representations and warranties contained herein
are true and correct in all material respects on and as of the date hereof; (ii)
the Company is in compliance with all of the terms and provisions set forth
herein; and (iii) no Default or Event of Default has occurred.
(l) Absence of Default and Material Adverse Change - No Default, Event of
Default or material adverse change in the financial condition, business,
prospects, profits, operations or assets of the Company shall have occurred.
(m) Legal Restraints/Litigation - At the date of execution of this
Financing Agreement, there shall be no (i) litigation, investigation or
proceeding (judicial or administrative) pending or threatened against the
Company or its assets, by any agency, division or department of any county,
city, state or federal government arising out of this Financing Agreement, (ii)
injunction, writ or restraining order restraining or prohibiting the
consummation of the financing arrangements contemplated under this Financing
Agreement or (iii) to the best knowledge of the Company, suit, action,
investigation or proceeding (judicial or administrative) pending or threatened
against the Company or its assets, which, in the opinion of the Agent if
adversely determined could have a material adverse effect on the business,
operation, assets, financial condition or Collateral of the Company.
(n) Disbursement Authorization - The Company shall have delivered to the
Agent all information necessary for the Agent to issue wire transfer
instructions on behalf of the Company for the initial and subsequent loans
and/or advances to be made under this Financing Agreement including, but not
limited to, disbursement authorizations in form acceptable to the Agent.
(o) Examination & Verification - The Agent shall have completed to the
satisfaction of the Agent an examination and verification of the Accounts,
Inventory, and books and records of the Company which examination shall indicate
that, after giving effect to all loans, advances and extensions of credit to be
made at closing, the Company shall have an opening additional Availability of
not less than $10,000,000 all as more fully required by the Agent Commitment
Letter. It is understood that such requirement contemplates that all debts,
obligations and payables are current.
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(p) Cash Budget Projections - The Agent shall have received, reviewed and
be satisfied with a 12 month cash budget projection prepared by the Company in
the form provided by the Agent.
(q) Depository Accounts - The Company shall have established a system of
bank accounts with respect to the collection of Accounts and the deposit of
proceeds of Inventory and other Collateral as shall be acceptable to the Agent
in all respects. In addition, the Company, the applicable financial institution
holding the Depositary Account, and the Agent shall (and any such future
financial institution shall in the future) enter into such blockage and control
agreements as may be acceptable to Agent.
(r) Existing Revolving Credit Agreement - (i) The Company's existing credit
agreement with FINOVA Capital Corporation shall be terminated, (ii) all loans
and obligations of the Company thereunder shall be paid or satisfied in full
utilizing the proceeds of the initial Revolving Loans to be made under this
Financing Agreement, and (iii) all liens upon or security interest in favor of
FINOVA Capital Corporation in connection therewith shall be terminated and/or
released upon such payment.
(s) The Agent Commitment Letter - The Company shall have fully complied, to
the satisfaction of the Agent, with all of the terms and conditions of the Agent
Commitment Letter.
(t) Credit Card Acknowledgments and Credit Card Agreements - The Agent
shall have received, in form and content acceptable to it, the Credit Card
Acknowledgments and the Credit Card Agreements.
2.2 Upon the execution of this Financing Agreement and the initial disbursement
of loans hereunder, all of the above Conditions Precedent set forth in Section
2.1 shall have been deemed satisfied except as the Company and the Agent shall
otherwise agree in a separate writing.
SECTION 3 Revolving Loans
3.1 The Lenders agree, subject to the terms and conditions of this Financing
Agreement from time to time, and within the Availability, but subject to the
Lenders' right to make "overadvances", to make loans and advances to the Company
on a revolving basis (i.e. subject to the limitations set forth herein, the
Company may borrow, repay and re-borrow Revolving Loans). Each request shall
constitute, unless otherwise disclosed in writing to the Agent and the Lenders a
representation and warranty by the Company that after giving effect to the
requested advance, no Default or Event of Default has occurred and such
requested Revolving Loan is within the Availability. All requests for loans and
advances must be received by an officer of the
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Agent no later than 1:00 p.m.,
New York time, of the Business Day on which such loans and advances are
required. Should the Agent for any reason honor requests for advances in excess
of the limitations set forth herein, such advances shall be considered
"overadvances" and shall be made in the Agent's sole discretion, subject to any
additional terms the Agent deems necessary.
3.2 In furtherance of the continuing assignment and security interest in the
Company's Accounts, the Company will, upon the creation of Accounts, execute and
deliver to the Agent in such form and manner as the Agent may reasonably
require, solely for the Agent's convenience in maintaining records of
Collateral, such confirmatory schedules of Accounts as the Agent may reasonably
request, and such other appropriate reports designating, identifying and
describing the Accounts as the Agent may reasonably require. In addition, upon
the Agent's request the Company shall provide the Agent with copies of
agreements (including Credit Card Agreements) and such other documentation and
information relating to said Accounts and other Collateral as the Agent may
reasonably require. Failure to provide the Agent with any of the foregoing shall
in no way affect, diminish, modify or otherwise limit the security interests
granted herein. The Company hereby authorizes the Agent to regard the Company's
printed name or rubber stamp signature on assignment schedules or invoices as
the equivalent of a manual signature by one of the Company's authorized officers
or agents.
3.3 The Company hereby represents and warrants that: (a) each Credit Card
Receivable is based on an actual and bona fide sale and delivery of goods or
rendition of services to customers, made by the Company in the ordinary course
of its business; (b) the Inventory being sold and the Credit Card Receivables
created are the exclusive property of the Company and are not and shall not be
subject to any lien, consignment arrangement, encumbrance, security interest or
financing statement whatsoever, other than the Permitted Encumbrances; (c) the
invoices evidencing such Credit Card Receivables are in the name of the Company;
and (d) the customers of the Company have accepted the goods or services, owe
and are obligated to pay the full amounts stated in the invoices according to
their terms, without dispute, offset, defense, counterclaim or contra, except
for disputes and other matters arising in the ordinary course of business. The
Company confirms to the Agent that any and all taxes or fees relating to its
business, its sales, the Accounts or goods relating thereto, are its sole
responsibility and that same will be paid by the Company when due and that none
of said taxes or fees represent a lien on or claim against the Accounts. The
Company also warrants and represents that it is a duly and validly existing
corporation and is qualified in all states where the failure to so qualify would
have a adverse effect on the business of the Company or the ability of the
Company to enforce collection of Accounts due from customers residing in that
state. The Company agrees to maintain such books and records regarding Accounts
as the Agent may reasonably require and agrees that the books and records of the
Company will reflect the Agent's interest in
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the Accounts. All of the books and
records of the Company will be available to the Agent upon reasonable advance
notice during normal business hours (except that no advance notice need be given
if an Event of Default or Default has occurred and has not been waived by the
Agent or cured as allowed hereunder), including any records handled or
maintained for the Company by any other company or entity.
3.4 All checks, cash, notes or other instruments or property received by the
Companies from collections on Accounts or from the sale or other disposition of
Inventory and Other Collateral shall be held by the Company in trust for the
benefit of the Agent and Lenders, separate from the Company's other property and
funds and shall immediately be deposited in the Depository Accounts. Such
Depository Accounts shall be subject to blockage and control agreements
satisfactory to Agent.
The Company may and will enforce, collect and receive all amounts owing
on the Accounts and/or received from sales or other dispositions of Inventory at
the Company's expense, and may manage and direct its Depository Accounts;
however, such privilege shall terminate automatically upon the institution by or
against the Company of any proceeding under any bankruptcy or insolvency law or,
at the election of the Agent in its sole discretion: (x) if the Availability
(computed without regard to the $50,000,000 Line of Credit maximum Availability)
is at any time less than $10,000,000 and at all times thereafter until such time
the Company maintains minimum Availability (computed without regard to the
$50,000,000 Line of Credit maximum Availability) of $10,000,000 for a period of
ninety (90) days, or (y) upon the occurrence of any other Event of Default and
until such Event of Default is waived in writing by the Agent or cured to the
Agent's satisfaction.
Upon the occurrence of an event under (x) or (y) immediately above,
Agent shall have the right, at its option, to notify the financial institutions
where such Depository Accounts are located and institute its blockage and
control rights with respect to such Depository Accounts. If the Company
thereafter maintains an Availability of more than $10,000,000 for a period of
not less than ninety (90) consecutive days or, if applicable, such Event of
default has been waived in writing by the Agent or cured to the Agent's
satisfaction, upon the Company's request, Agent will authorize the Company to
manage and direct such Depository Accounts.
All amounts received by the Agent in payment of Accounts
("Collections") will be credited to the Company's account upon the Agent's
receipt of "good funds" at the Agent's bank account in New York, New York on the
Business Day of receipt if received no later than 1:00 p.m. or on the next
succeeding Business Day if received after 1:00 p.m. No checks, drafts or other
instrument received by the Agent shall constitute final payment to the Agent
unless and until such instruments have actually been collected.
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3.5 The Company agrees to notify the Agent promptly of any matters materially
affecting the value, enforceability or collectibility of any Account and of all
material customer disputes, offsets, defenses, counterclaims, returns,
rejections and all reclaimed or repossessed merchandise or goods. The Company
agrees to issue credit memoranda promptly (with duplicates to the Agent upon
request after the occurrence of an Event of Default) upon accepting returns or
granting allowances, and may continue to do so until the Agent has notified the
Company that an Event of Default has occurred and that all future credits or
allowances are to be made only after the Agent's prior written approval.
3.6 The Agent shall maintain a separate account on its books in the Company's
name (the "Revolving Loan Account") in which the Company will be charged with
loans and advances made by the Agent to it or for its account, and with any
other Obligations, including any and all costs, expenses and reasonable
attorney's fees which the Agent may incur in connection with the exercise by or
for the Agent of any of the rights or powers herein conferred upon the Agent, or
in the prosecution or defense of any action or proceeding to enforce or protect
any rights of the Agent in connection with this Financing Agreement or the
Collateral assigned hereunder, or any Obligations owing to the Agent and the
Lenders by the Company. The Company will be credited with all amounts received
by the Agent and/or the Lenders from the Company or from others for the
Company's account, including, as set forth above, all amounts received by the
Agent in payment of assigned Accounts and such amounts will be applied to
payment of the Obligations. In no event shall prior recourse to any Accounts or
other security granted to or by the Company be a prerequisite to the Agent's
right to demand payment of any Obligation. Further, it is understood that the
Agent and/or the Lenders shall have no obligation whatsoever to perform in any
respect any of the Company's contracts or obligations relating to the Accounts.
3.7 After the end of each month, the Agent shall promptly send the Company a
statement showing in reasonable detail the accounting for the charges, loans,
advances and other transactions occurring between the Agent and the Company
during that month. The monthly statements shall be deemed correct and binding
upon the Company and shall constitute an account stated between the Company and
the Agent unless the Agent receives a written statement of the exceptions within
thirty (30) days of the date of the monthly statement.
3.8 In the event that the sum of (a) the outstanding balance of Revolving Loans
and (b) the outstanding balance of Letters of Credit exceeds the maximum amount
thereof available under Sections 3 and 5 hereof (herein the amount of any such
excess shall be referred to as the "Excess") such Excess shall be due and
payable to the Agent for the benefit of the Lenders immediately upon the Agent's
demand therefor.
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SECTION 4 Intentionally Left Blank
SECTION 5 Letters of Credit
In order to assist the Company in establishing or opening
documentary and/or standby Letters of Credit with an Issuing Bank to cover the
purchase of Inventory and for other purposes approved by the Agent, the Company
has requested the Agent on behalf of the Lenders to join in the applications for
such Letters of Credit, and/or guarantee payment or performance of such Letters
of Credit and any drafts or acceptances thereunder through the issuance of a
Letter of Credit Guaranty, thereby lending the Agent's and the Lenders' credit
to the Company and the Agent and the Lenders have agreed to do so. These
arrangements shall be handled by the Agent subject to the terms and conditions
set forth below.
5.1 Within the Line of Credit and Availability, the Agent and the Lenders shall
assist the Company in obtaining Letter(s) of Credit in an aggregate amount
outstanding at any one time equal to or less than the Letter of Credit Sub-Line.
The Agent's and the Lenders' assistance for amounts in excess of the limitation
set forth herein shall at all times and in all respects be in the Agent's sole
discretion. It is understood that the form and purpose of each Letter of Credit,
and any modifications thereof, must be acceptable to the Agent in its reasonable
business judgment. Any and all outstanding Letters of Credit shall be treated as
a Revolving Loan for Availability purposes. Notwithstanding anything herein to
the contrary, upon the occurrence of a Default and/or Event of Default, the
Agent's and Lenders' assistance in connection with any Letter of Credit Guaranty
shall be in the Agent's sole discretion unless such Default and/or Event of
Default is cured to the Agent's satisfaction or waived by the Agent in writing.
5.2 The Agent shall have the right, without notice to the Company, to charge the
Company's Revolving Loan Account on the Agent's books with the amount of any and
all indebtedness, liability or obligation of any kind incurred by the Agent
under any Letter of Credit Guaranty at the earlier of (a) payment by the Agent
under such Letter of Credit Guaranty, or (b) the occurrence of an Event of
Default that has not been waived in writing by the Agent or cured to the Agent's
satisfaction. Any amount charged to Company's Revolving Loan Account shall be
deemed a Revolving Loan hereunder and shall incur interest at the rate provided
in Section 8.1 of this Financing Agreement.
5.3 The Company unconditionally indemnifies the Agent and the Lenders and holds
the Agent and the Lenders harmless from any and all loss, claim or liability
incurred by the Agent and/or the Lenders arising from any transactions or
occurrences relating to Letters of Credit established or opened for the
Company's
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account, the collateral relating thereto and any drafts or acceptances
thereunder, and all Obligations thereunder, including any such loss or claim due
to any action taken by any Issuing Bank, other than for any such loss, claim or
liability arising out of the gross negligence or willful misconduct by the Agent
and/or the Lenders under the Letters of Credit Guaranty. The Company further
agrees to hold the Agent and the Lenders harmless from any errors or omission,
negligence or misconduct by the Issuing Bank. The Company's unconditional
obligation to the Agent and the Lenders hereunder shall not be modified or
diminished for any reason or in any manner whatsoever, other than as a result of
the Agent's and/or the Lenders' gross negligence or willful misconduct. Subject
to this Section 5.3, the Company agrees that any charges incurred by the Agent
and/or the Lenders for the Company's account by the Issuing Bank shall be
conclusive on the Company, the Agent and the Lenders and may be charged to the
Company's Revolving Loan Account.
5.4 In connection with the issuance of Letters of Credit, the Agent and/or the
Lenders shall not be responsible for: (a) the existence, character, quality,
quantity, condition, packing, value or delivery of the goods purporting to be
represented by any documents; (b) any difference or variation in the character,
quality, quantity, condition, packing, value or delivery of the goods from that
expressed in the Letter of Credit documents; (c) the validity, sufficiency or
genuineness of any documents or of any endorsements thereon, even if such
documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; (d) the time, place, manner or order in
which shipment is made; (e) partial or incomplete shipment, or failure or
omission to ship any or all of the goods referred to in the Letters of Credit or
documents; (f) any deviation from instructions; (g) delay, default, or fraud by
the shipper and/or anyone else in connection with the Collateral or the shipping
thereof; or (h) any breach of contract between the shipper or vendors and the
Company. Furthermore, without being limited by the foregoing, the Agent and/or
the Lenders shall not be responsible for any act or omission in connection with
the issuance of any Letter of Credit with respect to or in connection with any
Collateral.
5.5 Except as otherwise provided herein, the Company agrees that any action
taken by the Agent and/or the Lenders, if taken in good faith, or any action
taken by any Issuing Bank, under or in connection with the Letters of Credit,
the guarantees, the drafts or acceptances, or the Collateral, shall be binding
on the Company and shall not put the Agent and/or the Lenders in any resulting
liability to the Company. In furtherance thereof, but subject to Section 5.6,
the Agent shall have the full right and authority to clear and resolve any
questions of non-compliance of Letter of Credit documents; to give any
instructions as to acceptance or rejection of any Letter of Credit documents or
goods; to execute any and all steamship or airways guaranties (and applications
therefor), indemnities or delivery orders; to grant any extensions of the
maturity of, time of payment for, or time of presentation of, any drafts,
acceptances, or documents; and with the consent of the Company (such consent
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not
to be unreasonably withheld and being needed only if no Event of Default has
occurred and is continuing) to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances. Such actions may
be taken in the Agent's sole name, and the Issuing Bank shall be entitled to
comply with and honor any and all such documents or instruments executed by or
received solely from the Agent.
5.6 Without the Agent's express consent and endorsement in writing, the Company
agrees: (a) not to execute any applications for steamship or airway guaranties,
indemnities or delivery orders; to grant any extensions of the maturity of, time
of payment for, or time of presentation of, any drafts, acceptances or
documents; or to agree to any amendments, renewals, extensions, modifications,
changes or cancellations of any of the terms or conditions of any of the
applications, Letters of Credit, drafts or acceptances; and (b) after the
occurrence of an Event of Default which is not cured within any applicable grace
period, if any, or waived by the Agent, not to (i) clear and resolve any
questions of non-compliance of Letter of Credit documents, or (ii) give any
instructions as to acceptances or rejection of any Letter of Credit documents or
goods.
5.7 The Company agrees that any necessary import, export or other licenses or
certificates for the import or handling of the Collateral will have been
promptly procured; all foreign and domestic governmental laws and regulations in
regard to the shipment and importation of the Collateral, or the financing
thereof will have been promptly and fully complied with; and any certificates in
that regard that the Agent may at any time request will be promptly furnished.
In this connection, the Company warrants and represents that all shipments made
under any such Letters of Credit are in accordance with the laws and regulations
of the countries in which the shipments originate and terminate, and are not
prohibited by any such laws and regulations. The Company assumes all risk,
liability and responsibility for, and agrees to pay and discharge, all present
and future local, state, federal or foreign taxes, duties, or levies. Any
embargo, restriction, laws, customs or regulations of any country, state, city,
or other political subdivision, where the Collateral is or may be located, or
wherein payments are to be made, or wherein drafts may be drawn, negotiated,
accepted, or paid, shall be solely the Company's risk, liability and
responsibility.
5.8 Upon any payments made to the Issuing Bank under the Letter of Credit
Guaranty, the Agent for the benefit of the Lenders shall acquire by subrogation,
any rights, remedies, duties or obligations granted or undertaken by the Company
to the Issuing Bank in any application for Letters of Credit, any standing
agreement relating to Letters of Credit or otherwise, all of which shall be
deemed to have been granted to the Agent for the benefit of the Lenders and
apply in all respects to the
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Agent for the benefit of the Lenders and shall be
in addition to any rights, remedies, duties or obligations contained herein.
SECTION 6 Collateral
6.1 As security for the prompt payment in full of all loans and advances made
and to be made to the Company from time to time by the Agent and/or the Lenders
pursuant hereto, as well as to secure the payment in full of any other
Obligations, the Company hereby pledges and grants to the Agent for the benefit
of the Lenders a continuing general lien upon and security interest in all of
its:
(a) present and hereafter acquired Inventory;
(b) present and future Accounts; and
(c) present and future Other Collateral.
6.2 The security interests granted hereunder shall extend and attach to:
(a) All Collateral which is presently in existence and which is owned by
the Company or in which the Company has any interest, whether held by the
Company or others for its account; and
(b) All Inventory and any portion thereof which may be returned, rejected,
reclaimed or repossessed by either the Agent or the Company from the Company's
customers, as well as to all supplies, incidentals, packaging materials, labels,
trademarks and any other items which contribute to the finished goods, including
the sale, promotion or shipment thereof.
6.3 The Company agrees to safeguard, protect and hold all Inventory for the
Agent's account and make no disposition thereof except in the regular course of
the business of the Company as herein provided. Until the Agent has given the
Company notice to the contrary, as provided for below, any Inventory may be sold
and shipped by the Company to its customers in the ordinary course of the
Company's business, on open account and on terms currently being extended by the
Company to its customers, provided that, if required by Section 3.4 of this
Financing Agreement, all proceeds of all sales (including cash, accounts
receivable, checks, notes, Credit Card Receivables, instruments for the payment
of money and similar proceeds) shall be forthwith transferred, endorsed, and
turned over and delivered to the Agent for the benefit of the Lenders. The Agent
shall have the right to withdraw this permission at any time upon the occurrence
of an Event of Default and until such time as such Event of Default is waived or
cured to the Agent's satisfaction, in which event no further disposition shall
be made of the Inventory by the Company without the Agent's prior
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written
approval. Upon the sale, exchange, or other disposition of Inventory, as herein
provided, the security interest in the Company's Inventory provided for herein
shall, without break in continuity and without further formality or act,
continue in, and attach to, all proceeds, including any instruments for the
payment of money, accounts receivable, contract rights, documents of title,
shipping documents, chattel paper and all other cash and non-cash proceeds of
such sale, exchange or disposition. As to any such sale, exchange or other
disposition, the Agent shall have all of the rights of an unpaid seller,
including stoppage in transit, replevin, rescission and reclamation.
6.4 The Company agrees at its own cost and expense to keep its Equipment in as
good and substantial repair and condition, reasonable wear and tear excepted,
making any and all repairs and replacements when and where necessary. If an
Event of Default has occurred and is continuing, the Company also agrees to make
no disposition of Equipment unless the Company first obtains the prior written
approval of the Agent.
6.5 The rights and security interests granted to the Agent for the benefit of
the Lenders hereunder are to continue in full force and effect, notwithstanding
the termination of this Financing Agreement or the fact that the account
maintained in the Company's name on the books of the Agent may from time to time
be temporarily in a credit position, until the final payment in full to the
Agent and the Lenders of all Obligations and the termination of this Financing
Agreement. Any delay, or omission by the Agent and/or the Lenders to exercise
any right hereunder, shall not be deemed a waiver thereof, or be deemed a waiver
of any other right, unless such waiver be in writing and signed by the Agent. A
waiver on any one occasion shall not be construed as a bar to or waiver of any
right or remedy on any future occasion.
6.6 To the extent that the Obligations are hereafter secured by any assets or
property other than the Collateral or by the guarantee, endorsement, assets or
property of any other person, then the Agent shall have the right in its sole
discretion to determine which rights, security, liens, security interests or
remedies the Agent shall at any time pursue, foreclose upon, relinquish,
subordinate, modify or take any other action with respect to, without in any way
modifying or affecting any of them, or any of the Agent's or the Lenders' rights
hereunder.
6.7 Any reserves or balances to the credit of the Company and any other property
or assets of the Company in the possession of the Agent and/or the Lenders may
be held by the Agent as security for any Obligations and applied in whole or
partial satisfaction of such Obligations when due. The liens and security
interests granted herein and any other lien or security interest the Agent may
have in any other assets of the Company shall secure payment and performance of
all now
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existing and future Obligations. The Agent may in its discretion charge
any or all of the Obligations to the Revolving Loan Account when due.
SECTION 7 Representations, Warranties and Covenants
7.1 The Company hereby warrants and represents and/or covenants that: (a) the
fair value of the Company's assets exceeds the book value of the Company's
liabilities; (b) the Company is generally able to pay its debts as they become
due and payable; (c) the Company does not have unreasonably small capital to
carry on its business as it is currently conducted absent extraordinary and
unforeseen circumstances; (d) Schedule 2 hereto correctly and completely sets
forth the Company's chief executive office, all of the Company's Collateral
locations and all trade names of the Company; (e) except for the Permitted
Encumbrances, the security interests granted herein constitute and shall at all
times constitute the first and only liens on the assets of the Company; (f)
except for the Permitted Encumbrances, the Company is or will be at the time
additional Collateral is acquired by it, the absolute owner of the Collateral
with full right to pledge, sell, consign, transfer and create a security
interest therein, free and clear of any and all claims or liens in favor of
others; (g) the Company will at its expense forever warrant and, at the Agent's
request, defend the same from any and all claims and demands of any other person
other than the Permitted Encumbrances; and (h) the Company will not grant,
create or permit to exist, any lien upon or security interest in the Collateral,
or any proceeds thereof, or in any other assets of the Company, including
without limitation the Equipment, General Intangibles, Investment Property or
real estate, or any proceeds thereof, in favor of any other person other than
the holders of the Permitted Encumbrances.
7.2 The Company agrees to maintain books and records pertaining to the
Collateral in such detail, form and scope as the Agent shall reasonably require.
The Company agrees that the Agent or its agents may enter upon the Company's
premises with reasonable notice (such notice not being required if an Event of
Default has occurred and is continuing) at any time during normal business
hours, and from time to time, for the purpose of inspecting the Collateral, and
any and all records pertaining thereto. The Company agrees to afford the Agent
prior written notice of any change in the location of any Collateral, other than
to locations, that as of the date hereof, are known to the Agent and at which
the Agent has filed financing statements and otherwise fully perfected its liens
thereon. The Company is also to advise the Agent promptly, in sufficient detail,
of any material adverse change relating to the type, quantity or quality of the
Collateral or the security interests granted to the Agent therein.
7.3 The Company agrees to: execute and deliver to the Agent, from time to time,
solely for the Agent's convenience in maintaining a record of the Collateral,
the loans, the Borrowing Base, Accounts and Inventory, such written
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statements,
accounting reports, schedules and other information and documentation in the
form and with such frequency as the Agent may reasonably require.
Notwithstanding the foregoing, the Company shall deliver to Agent, on a weekly
basis (by Wednesday of the following week) during the months of November,
December and January, and on a monthly basis during the other months of the year
(by the fifteenth (15th) day of the following month), the reports described
below for the preceding week or month, as the case may be:
(a) a borrowing base report;
(b) a retail stock ledger report; and
(c) a report of Credit Card Receivables and Accounts.
Upon demand by the Agent, the Company shall provide the report listed above as
(c) on a weekly basis. At any time the Company's Availability is less than ten
million dollars ($10,000,000) (computed without regard to the $50,000,000 Line
of Credit maximum Availability) or upon the occurrence and during the
continuance of any Event of Default, the Company shall, upon demand by Agent,
provide the reports listed above as (a) and (b) on a weekly basis.
7.4 The Company agrees to comply with the requirements of all state and federal
laws in order to grant to the Agent valid and perfected first and only security
interests in the Collateral except as expressly provided herein. The Agent is
hereby authorized by the Company, to the extent permitted by applicable law, to
file any financing statements covering the Collateral whether or not the
Company's signature appears thereon. The Company agrees to do whatever the Agent
may reasonably request, from time to time, by way of: (a) filing notices of
liens, financing statements, amendments, renewals and continuations thereof; (b)
cooperating with the Agent's custodians; (c) keeping Collateral records; (d)
transferring proceeds of Collateral to the Agent's possession; and (e)
performing such further acts as the Agent may reasonably require in order to
effect the purposes of this Financing Agreement.
7.5 (a) The Company agrees to maintain insurance on the assets of the
Company, including the Inventory, under such policies of insurance, with such
insurance companies, in such reasonable amounts and covering such insurable
risks as are at all times reasonably satisfactory to the Agent. All policies
covering the Inventory are, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to the Agent, to be made payable to the Agent
for the benefit of the Lenders, in case of loss, under a standard
non-contributory "mortgagee", "lender" or "secured party" clause and are to
contain such other provisions as the Agent may require to fully protect the
Agent's interest in the Inventory and to any payments to be
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made under such policies. All original policies or true copies thereof are to be
delivered to the Agent, with the loss payable endorsement with respect to
Inventory in the Agent's favor for the benefit of the Lenders, and shall provide
for not less than thirty (30) days prior written notice to the Agent of the
exercise of any right of cancellation. At the Company's request, or if the
Company fails to maintain such insurance, the Agent may arrange for such
insurance, but at the Company's expense and without any responsibility on the
Agent's part for: obtaining the insurance, the solvency of the insurance
companies, the adequacy of the coverage, or the collection of claims. Upon the
occurrence of an Event of Default which is not waived or cured to the Agent's
satisfaction, the Agent shall, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to the Agent, have the sole right, in the
name of the Agent or the Company, to file claims under any insurance policies,
to receive, receipt and give acquittance for any payments that may be payable
thereunder, and to execute any and all endorsements, receipts, releases,
assignments, reassignments or other documents that may be necessary to effect
the collection, compromise or settlement of any claims under any such insurance
policies.
(b) (i) In the event of any loss or damage by fire or
other casualty, insurance proceeds relating to Inventory shall reduce
the Revolving Loans.
(ii) The Company agrees to pay any reasonable costs,
fees or expenses which the Agent may reasonably incur in connection with this
Section 7.5.
7.6 The Company agrees to pay, when due, all taxes, assessments, claims and
other charges (herein "taxes") lawfully levied or assessed upon the Company or
the Company's assets, including the Collateral, and if such taxes remain unpaid
after the date fixed for the payment thereof unless such taxes are being
diligently contested in good faith by the Company by appropriate proceedings or
if any lien shall be claimed thereunder (a) for taxes due the United States of
America or (b) which in the Agent's opinion might create a valid obligation
having priority over the rights granted to the Agent herein, then the Agent may,
on the Company's behalf, pay such taxes, and the amount thereof shall be an
Obligation secured hereby and due to the Agent on demand.
7.7 The Company: (a) agrees to comply with all acts, rules, regulations and
orders of any legislative, administrative or judicial body or official, which
the failure to comply with would have a material and adverse impact on the
Collateral, or any material part thereof, or on the operation of the Company's
business; provided that the Company may contest any acts, rules, regulations,
orders and directions of such bodies or officials in any reasonable manner which
will not, in the Agent's reasonable opinion, materially and adversely effect the
Agent's rights or priority in the Collateral; and (b) agrees to comply with all
environmental statutes,
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acts, rules, regulations or orders as presently existing
or as adopted or amended in the future, applicable to the ownership and/or use
of its real property and operation of its business, which the failure to comply
with would have a material and adverse impact on the Collateral, or any material
part thereof, or on the operation of the business of the Company. The Company
hereby indemnifies the Agent and the Lenders and agrees to defend and hold the
Agent and the Lenders harmless from and against any and all loss, damage, claim,
liability, injury or expense which the Agent and/or the Lenders may sustain or
incur (other than as a result of actions of the Agent and/or the Lenders) in
connection with: any claim or expense asserted against the Agent and/or the
Lenders as a result of any environmental pollution, hazardous material or
environmental clean-up of the Company's real property; or any claim or expense
which results from the Company's operations (including, but not limited to, the
Company's off-site disposal practices) and the Company further agrees that this
indemnification shall survive termination of this Financing Agreement as well as
the payment of all Obligations or amounts payable hereunder. The Company shall
not be deemed to have breached any provision of this Section 7.7 if (x) the
failure to comply with the requirements of this Section 7.7 resulted from good
faith error or innocent omission, (y) the Company promptly commences and
diligently pursues a cure of such breach and (z) such failure is cured within
thirty (30) days following the Company's receipt of notice of such failure.
7.8 Until termination of the Financing Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that, unless the Agent shall
have otherwise consented in writing, the Company will furnish to the Agent and
each Lender, within ninety (90) days after the end of each fiscal year of the
Company, an audited Consolidated Balance Sheet as at the close of such fiscal
year, and statements of profit and loss, cash flow and reconciliation of surplus
the Company for such fiscal year, audited by independent public accountants
selected by the Company and satisfactory to the Agent (the current auditor,
Arthur Andersen, is deemed satisfactory); within sixty (60) days after the end
of each fiscal quarter of the Company a Consolidated Balance Sheet as at the end
of such period and statements of profit and loss, cash flow and surplus of the
Company, certified by an authorized financial or accounting officer of the
Company; and within thirty (30) days after the end of each month a Consolidated
Balance Sheet as at the end of such period and statements of profit and loss,
cash flow and surplus of the Company and all subsidiaries for such period,
certified by an authorized financial or accounting officer of the Company; and
from time to time, such further information regarding the business affairs and
financial condition of the Company as the Agent may reasonably request,
including without limitation (a) the accountant's management practice letter and
(b) annual cash flow projections in form satisfactory to the Agent. Each
financial statement which the Company is required to submit hereunder must be
accompanied by an officer's certificate, signed by the President, Vice
President, Controller, or Treasurer of the Company, pursuant to which any one
such officer must certify that:
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(x) the financial statement(s) fairly and
accurately represent(s) the Company's financial condition at the end of the
particular accounting period, as well as the Company's operating results during
such accounting period, subject to year-end audit adjustments; (y) during the
particular accounting period: (i) there has been no Default or Event of Default
under this Financing Agreement, provided, however, that if any such officer has
knowledge that any such Default or Event of Default has occurred during such
period, the existence of and a detailed description of same shall be set forth
in such officer's certificate; and (ii) the Company has not received any notice
of cancellation with respect to its property insurance policies; and (z) the
exhibits attached to such financial statement(s) constitute detailed
calculations showing compliance with all financial covenants contained in this
Financing Agreement.
7.9 Until termination of the Financing Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that unless the Agent provides
its prior written consent, (which shall not be unreasonably withheld), or except
as otherwise herein provided, the Company will not:
(a) Mortgage, assign, pledge, transfer or otherwise permit any lien,
charge, security interest, encumbrance or judgment, (whether as a result of a
purchase money or title retention transaction, or other security interest, or
otherwise) to exist on any of its assets or goods, whether real, personal or
mixed, whether now owned or hereafter acquired, including without limitation the
Equipment, General Intangibles, the Documents of Title and/or Investment
Property, except for the Permitted Encumbrances;
(b) Incur or create any Indebtedness other than the Permitted Indebtedness
or Indebtedness incurred hereunder;
(c) Borrow any money on the security of the Company's Collateral from
sources other than the Agent and the Lenders;
(d) Sell, lease, assign, transfer or otherwise dispose of (i) Collateral,
except in the ordinary course of business, pursuant to sale leaseback
transactions meeting the requirements of Permitted Indebtedness or as otherwise
specifically permitted by this Financing Agreement, or (ii) either all or
substantially all of the Company's assets, which do not constitute Collateral;
(e) Merge or consolidate or otherwise alter or modify its corporate name,
principal place of business, structure, status or existence, or enter into or
engage in any operation or activity materially different from that presently
being conducted by the Company, except that the Company may change its corporate
name or address; provided that (i) the Company shall give the Agent thirty (30)
days prior written notice thereof and (ii) the Company shall execute and deliver
prior to or simultaneously with any such action any and all documents and
agreements requested
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by the Agent (including, without limitation, any and all
U.C.C. financing statements) to confirm the continuation and preservation of all
security interests and liens granted to the Agent for the benefit of the Lenders
hereunder;
(f) Assume, guarantee, endorse, or otherwise become liable upon the
obligations of any person, firm, entity or corporation, except by the
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business;
(g) Declare or pay any dividend of any kind on, or purchase, acquire,
redeem or retire, any of the capital stock or equity interest, of any class
whatsoever, whether now or hereafter outstanding, other than dividends paid in
capital stock of the Company;
(h) Make any advance or loan to, or any investment in, any firm, entity,
person or corporation, provided, however, that the Company may make noncash
Company stock loans to employees secured by such stock or other advances to
employees for expenses, travel and the like in the ordinary course of business;
(i) Prepay any Subordinated Debt, except to the following extent and
provided no Event of Default has occurred and is continuing: (1) if the Company
issues additional equity, the Company may prepay Subordinated Debt to the extent
of the net cash proceeds the Company receives from such issuance; (2) if the
Company issues additional Subordinated Debt, the Company may prepay existing
Subordinated Debt to the extent of the net cash proceeds the Company receives
from such issuance, provided such new Subordinated Debt is on more favorable
terms to the Company (in the opinion of Agent) than such existing Subordinated
Debt; and (3) notwithstanding clauses (1) and (2) above, the Company may prepay
Subordinated Debt to the extent Availability (computed without regard to the
$50,000,000 Line of Credit maximum Availability) after giving effect to such
prepayment exceeds $15,000,000, provided that (a) the Company has maintained a
trailing twelve (12) month EBITDA of not less than thirty million dollars
($30,000,000) and (b) the Company is in compliance with the Tangible Net Worth
requirements set forth in Section 7.10 below; or
(j) Amend, modify or otherwise alter the terms of any Subordinated Debt
without the prior written approval of the Agent.
7.10 Until termination of the Financing Agreement and payment and satisfaction
in full of all Obligations hereunder, at any time that the Availability
(computed without regard to the $50,000,000 Line of Credit maximum Availability)
is less than $7,500,000, the Company shall maintain at such time during the
periods below a Tangible Net Worth greater than:
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Period Tangible Net Worth
- -------------------------------- ----------------------------------------
March 3, 2000 (Closing Date) until $22,000,000 (at January 29, 2000)
April 3, 2000
April 4, 2000 until February 3, 2001 $22,000,000000 plus 80% of the Company's
cumulative income after January 29,
2000 computed on a monthly basis based
upon the most recent monthly financial
statements delivered pursuant
to Section 7.8 (in the event of a loss,
this amount shall not be decreased
below $22,000,000)
(such amount at February 3, 2001, the
"February 3, 2001 Amount")
February 4, 2001 until May 5, 2001 February 3, 2001 Amount plus $400,000
May 6, 2001 until August 4, 2001 February 3, 2001 Amount plus $1,400,000
August 5, 2001 until November 3, 2001 February 3, 2001 Amount plus $3,500,000
November 4, 2001 until February 3, 2001 Amount plus $10,000,000
February 2, 2002
February 3, 2002 until May 4, 2002 February 3, 2001 Amount plus $10,400,000
May 5, 2002 until August 3, 2002 February 3, 2001 Amount plus $11,400,000
August 4, 2002 until November 2, 2002 February 3, 2001 Amount plus $13,500,000
November 3, 2002 and thereafter February 3, 2001 Amount plus $20,000,000
7.11 The Company agrees to advise the Agent in writing of: (a) any expenditures
(actual or anticipated), or series of related expenditures, in excess of
$150,000 for (i) environmental clean-up, (ii) environmental compliance, and
(iii) environmental testing; and (b) any notices the Company receives from any
local, state or federal authority advising the Company of any environmental
liability (real or potential) stemming from the Company's operations, its
premises, its waste disposal practices, or waste disposal sites used by the
Company and to provide the Agent with copies of all such notices if so required,
to the extent permitted by applicable law.
7.12 Without the prior written consent of the Agent, the Company agrees that it
will not enter into any transaction, including, without limitation, any
purchase, sale, lease, loan or exchange of property with any subsidiary or
affiliate of the Company; provided that the Company may pay an aggregate amount
of not more
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than $250,000 in any fiscal year to Three Cities Research, Inc. and
its affiliates for payment or reimbursement of management fees and expenses
incurred in the Company's ordinary course of business.
7.13 The Company has provided to the Agent, and agrees to provide to the Agent
on an annual basis commencing with the first anniversary of the Closing Date, an
appraisal indicating the Net Orderly Liquidation Value of the Inventory,
provided, however, that if Availability (computed without regard to the
$50,000,000 Line of Credit maximum Availability) is less than $20,000,000 for a
period of sixty (60) days, such appraisals will be conducted on a semi-annual
basis. Such appraisals shall be performed by an appraiser reasonably acceptable
to and engaged by the Agent, but shall be paid for by the Company.
7.14 The Company has taken and shall continue to take all action reasonably
necessary to assure that its computer-based systems are able to effectively
process date-sensitive data functions. The Company represents and warrants that
the "Year 2000" problem (that is, the inability of certain computer applications
to recognize and properly perform date-sensitive functions involving certain
dates on or about or subsequent to December 31, 1999) has not resulted in a
material adverse effect on the Company's business, assets or operations. The
Company represents and warrants that all computer applications which are
material to its business were and shall be, on a timely basis, able to properly
perform date-sensitive functions for all dates on and after January 1, 2000.
Upon the Agent's request from time to time, the Company shall provide to the
Agent assurances that the Company's computer systems and software are or will be
Year 2000 compliant on a timely basis, all in form and substance reasonably
satisfactory to the Agent.
SECTION 8 Interest, Fees and Expenses
8.1 Interest on the outstanding balance of Revolving Loans shall be payable
monthly as of the end of each month and shall accrue at a rate per annum set
forth below, based on the Company's EBITDA, as determined on a rolling four
fiscal quarter basis for the most recent fiscal quarter of the Company;
provided, however, that Level III shall apply throughout the first ninety (90)
days following the Closing Date. Except for the change on the ninetieth (90th)
day after the Closing Date, which shall become effective on such day, any change
in the interest rate will be effective on the first day of the month following
the Agent's receipt of the quarterly financial statements delivered pursuant to
Section 7.8, on the average of the net balances owing by the Company to the
Agent and/or the Lenders in the Company's Revolving Loan Account at the close of
each day during such month. Failure of the Company to deliver the financial
statements pursuant to Section 7.8, shall result in the highest applicable
interest rate being charged on all Revolving Loans, provided, as of the first
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day of the month after which such failure is cured or waived, the interest rate
set forth below will be charged:
<TABLE>
<CAPTION>
Level EBITDA Libor Rate plus Or Chase Manhattan Rate plus
- ------ ----------------------------------- ----------------- ----- --------------------------
<S> <C> <C> <C> <C>
I Greater than $28,000,000 1.50% or 0.00%
II Greater than $20,000,000 but less
than or equal to $28,000,000 1.75% or 0.00%
III Greater than $15,000,000, but less
than or equal to $20,000,000 2.00% or 0.00%
IV Greater than $10,000,000, but less
than or equal to $15,000,000 2.25% or 0.25%
V Less than $10,000,000 2.50% or 0.50%
</TABLE>
In the event of any change in said Chase Manhattan Rate, the
rate provided for in the first sentence above shall change, as of the first of
the month following any change. The rate hereunder shall be calculated based on
a 360-day year. The Agent and the Lenders shall be entitled to charge the
Company's Revolving Loan Account for all interest provided for herein when due
until all Obligations have been paid in full. Notwithstanding anything to the
contrary contained herein, in no event shall the interest rate applicable
hereunder decrease by more than one-quarter percent (0.25%) within any six-month
period, except for the six-month period following the Closing Date, during which
the interest rate applicable hereunder shall not decrease in excess of one-half
percent (0.50%).
8.2 The Company may elect to use Libor as to any outstanding Revolving Loans
provided that there then exists no Default or Event of Default and the Company
has so advised the Agent of its election to use Libor and the Libor Period
selected no later than three (3) Business Days preceding the first day of a
Libor Period. The election of Libor shall be effective provided there then
exists no Default or Event of Default, on the fourth Business Day following said
notice. The Libor elections must be for $1,000,000 or whole multiples thereof
and there shall be no more than three (3) Libor Loans outstanding at one time.
If no such election is timely made or can be made, or if the Libor rate can not
be determined, then the Agent shall use the Chase Manhattan Rate, plus the
applicable margin as determined pursuant to Section 8.1 hereof, to compute
interest. In the event the Company requests any Libor election the Company shall
pay to the Agent a $500 processing fee upon the effective date of each such
Libor election hereunder. In addition, the Company shall pay to the Agent for
the benefit of the Lenders, upon the request of the Agent such amount or amounts
as shall compensate the Agent and/or the Lenders for any loss, costs or expenses
incurred by the Agent and/or the Lenders (as reasonably determined by the Agent
and the Lenders) as a result of: (a) any payment or prepayment on a date other
than the last day of a Libor Period for such Libor Loan, or (b) any failure of
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the Company to borrow a Libor Loan on the date for such borrowing specified in
the relevant notice; such compensation to include, without limitation, an amount
equal to any loss or expense suffered by the Agent and/or the Lenders during the
period from the date of receipt of such payment or prepayment or the date of
such failure to borrow to the last day of such Libor Period if the rate of
interest obtained by the Agent and/or the Lenders upon the reemployment of an
amount of funds equal to the amount of such payment, prepayment or failure to
borrow is less than the rate of interest applicable to such Libor Loan for such
Libor Period. The determination by the Agent and/or the Lenders of the amount of
any such loss or expense, when set forth in a written notice to the Company,
containing the Agent's and/or the Lenders' calculations thereof in reasonable
detail, shall be conclusive on the Company, in the absence of manifest error.
Calculation of all amounts payable to the Agent and/or the Lenders under this
Section 8.2 with regard to Libor Loans shall be made as though the Agent and the
Lenders had actually funded the Libor Loans through the purchase of deposits in
the relevant market and currency, as the case may be, bearing interest at the
rate applicable to such Libor Loans in an amount equal to the amount of the
Libor Loans and having a maturity comparable to the relevant interest period;
provided, however, that the Agent and the Lenders may fund each of the Libor
Loans in any manner the Agent and the Lenders see fit and the foregoing
assumption shall be used only for calculation of amounts payable under this
Section 8.2. In addition, notwithstanding anything to the contrary contained
herein, the Agent and the Lenders shall apply all proceeds of Collateral,
including the Accounts, and all other amounts received by it from or on behalf
of the Company, initially to the loans accruing interest at the Chase Manhattan
Rate and subsequently to Libor Loans; provided, however, that upon the
occurrence of an Event of Default or in the event the aggregate amount of
outstanding Libor Loans exceeds Availability or the applicable maximum levels
set forth therefor, the Agent and the Lenders may apply all such amounts
received by them to the payment of Obligations in such manner and in such order
as the Agent may elect in its reasonable business judgment.
8.3 In consideration of the Letter of Credit Guaranty of the Agent, the Company
shall pay the Agent for the benefit of the Lenders the Letter of Credit Guaranty
Fee which shall be an amount equal to one and one-half percent (1.50%) per
annum, payable monthly in arrears, on the face amount of each Letter of Credit
less the amount of any and all amounts previously drawn under the Letter of
Credit.
8.4 Any charges, fees, commissions, costs and expenses charged to the Agent
and/or the Lenders for the Company's account by any Issuing Bank in connection
with or arising out of Letters of Credit issued pursuant to this Financing
Agreement or out of transactions relating thereto will be charged to the
Company's account in full when charged to or paid by the Agent and when made by
any such Issuing Bank shall be conclusive on the Agent.
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8.5 The Company shall reimburse or pay the Agent, as the case may be, for all
Out-of-Pocket Expenses, which shall be invoiced in reasonable detail, and any
applicable Documentation Fee.
8.6 Upon the last Business Day of each month, commencing with the last day of
the month in which this Financing Agreement is executed, the Company shall pay
the Agent for the benefit of the Lenders the Line of Credit Fee.
8.7 To induce the Agent and the Lenders to enter into this Financing Agreement
and to extend to the Company the Revolving Loan and Letters of Credit, the
Company shall pay to the Agent for the benefit of the Lenders a Loan Facility
Fee in the amount $125,000, fully earned and payable upon the Closing Date.
8.8 On the dates and in the amounts set forth below, the Company shall pay to
the Agent the Collateral Management Fee for the initial term of this Financing
Agreement, which shall be fully earned on the Closing Date and not refundable or
rebateable:
Date of Payment Amount of Payment
------------------- -----------------------------
On the Closing Date $25,000
On the first and second
anniversaries of the Closing Date $40,000
Any unpaid balance of the Collateral Management Fee shall be immediately due and
payable upon a termination hereof or a Default hereunder and acceleration of the
balance owing hereunder. Following the initial term of this Financing Agreement,
an annual Collateral Management Fee shall be established in an amount as agreed
between the Agent and the Company.
8.9 In no event shall the rates of interest hereunder exceed the Maximum Legal
Rate. In the event that the Contract Rate computed under this Section 8 would
exceed the Maximum Legal Rate, the rates of interest under this Financing
Agreement for any such period shall be limited to the Maximum Legal Rate, but
any subsequent reductions in the Contract Rate shall not reduce the rates of
interest under the Financing Agreement below the Maximum Legal Rate until the
total amount of interest charged hereunder equals the amount of interest that
would have been charged had the Contract Rate been charged at all times.
8.10 After the occurrence and during the continuation of an Event of Default,
the Company shall pay the Agent's standard charges for, and the fees and
expenses of, the Agent's personnel used by the Agent for reviewing the books and
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records of the Company and for verifying, testing, protecting, safeguarding,
preserving or disposing of all or any part of the Collateral, which shall be in
addition to the Collateral Management Fee.
8.11 The Company hereby authorizes the Agent to charge the Company's Revolving
Loan Account with the Agent with the amount of all payments due hereunder as
such payments become due. The Company confirms that any charges which the Agent
may so make to the Company's Revolving Loan Account as herein provided will be
made as an accommodation to the Company and solely at the Agent's discretion.
SECTION 9 Powers
9.1 The Company hereby constitutes the Agent on behalf of the Lenders or any
person or agent the Agent may designate as its attorney-in-fact, at the
Company's cost and expense, to exercise all of the following powers, which being
coupled with an interest, shall be irrevocable until all of the Company's
Obligations to the Agent and the Lenders have been paid in full:
(a) To receive, take, endorse, sign, assign and deliver, all in the name of
the Agent or the Company, any and all checks, notes, drafts, and other documents
or instruments relating to the Collateral;
(b) To receive, open and dispose of all mail addressed to the Company which
Agent reasonably believes may represent payment of Accounts and to notify postal
authorities to change the address for delivery thereof to such address as the
Agent may designate;
(c) To request from customers indebted on Accounts at any time, in the name
of the Agent or the Company or that of the Agent's designee, information
concerning the amounts owing on the Accounts;
(d) To transmit to customers indebted on Accounts notice of the Agent's
interest therein and to notify customers indebted on Accounts to make payment
directly to the Agent for the Company's account;
(e) To take or bring, in the name of the Agent or the Company, all steps,
actions, suits or proceedings deemed by the Agent necessary or desirable to
enforce or effect collection of the Accounts; and
(f) To execute financing statements in the name of the Company as
attorney-in-fact at any time as the Agent may deem necessary to establish or
maintain perfection of the security interest in the Collateral.
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9.2 Notwithstanding anything hereinabove contained to the contrary, the powers
set forth in Section 9.1(b), (d) and (e) may only be exercised after the
occurrence of an Event of Default and until such time as such Event of Default
is waived in writing by the Agent or cured to the Agent's satisfaction. In
addition, the powers set forth in Section 9.1(c) above will only be exercised in
the name of the Company or a certified public accountant designated by the Agent
prior to the occurrence of such Event of Default.
SECTION 10 Events of Default and Remedies
10.1 Notwithstanding anything hereinabove to the contrary, the Lenders acting
through the Agent may terminate this Financing Agreement immediately upon the
occurrence of any of the following (herein "Events of Default"):
(a) failure of the Company to pay any of the Obligations within five (5)
Business Days of the due date thereof, provided that nothing contained herein
shall prohibit the Agent from charging such amounts to the Company's Revolving
Loan Account on the due date thereof;
(b) cessation of the business of the Company or the calling of a meeting of
the creditors of the Company for purposes of compromising the debts and
obligations of the Company;
(c) the failure of the Company to generally meet debts as they mature;
(d) the commencement by or against the Company of any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar proceedings
under any federal or state law, provided that in the event of any involuntary
proceeding commenced against the Company such proceeding is not dismissed or
discharged within thirty (30) days after commencement thereof;
(e) breach by the Company of any warranty, representation or covenant
contained herein (other than those referred to in sub-paragraph (f) below) or in
any other written agreement between the Company and the Lenders, provided that
such breach by the Company of any of the warranties, representations or
covenants referred in this sub-paragraph (e) shall not, unless otherwise
provided herein, be deemed to be an Event of Default unless and until such
breach shall remain unremedied to the Agent's satisfaction for a period of
twenty (20) days from the date of such breach;
(f) breach by the Company of any warranty, representation or covenant of
Section 3.3 (other than the third sentence of Section 3.3), Section 3.4,
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Section6.3, Section 7.1, Section 7.5, Section 7.6, and Section 7.9 through
Section 7.10 inclusive;
(g) the Company shall (i) engage in any "prohibited transaction" as defined
in ERISA, (ii) have any "accumulated funding deficiency" as defined in ERISA,
(iii) have any Reportable Event as defined in ERISA, (iv) terminate any Plan, as
defined in ERISA or (v) engage in any proceeding in which the Pension Benefit
Guaranty Corporation shall seek appointment, or is appointed, as trustee or
administrator of any Plan, as defined in ERISA, and with respect to this
sub-paragraph (h), such event or condition (x) remains uncured for a period of
thirty (30) days from date of occurrence and (y) could, in the reasonable
opinion of the Agent, subject the Company to any tax, penalty or other liability
material to the business, operations or financial condition of the Company;
(h) without the prior written consent of the Agent, the Company shall (i)
amend or modify the Subordinated Debt existing on the date of this Financing
Agreement, or (ii) make any payment on account of the Subordinated Debt except
as permitted herein or in the Subordination Agreements relating to such
Subordinated Debt; or
(i) any default or event of default (after giving effect to any applicable
grace or cure periods) under any instrument or agreement evidencing any
Indebtedness of the Company having a principal amount in excess of $750,000.
10.2 Upon the occurrence of a Default and/or an Event of Default, the Agent may
(at its option) and shall at the direction of the Required Lenders declare that
all loans, advances and extensions of credit provided for in Sections 3 and 5 of
this Financing Agreement shall be thereafter in the Agent's sole discretion and
the obligation of the Agent and/or the Lenders to make Revolving Loans and/or
arrange for the issuance of Letters of Credit shall cease unless such Default or
Event of Default is waived in writing by the Agent on behalf of the Lenders or
cured to the Agent's satisfaction, and upon the occurrence of an Event of
Default the Agent may (at its option) and shall at the direction of the Required
Lenders declare that: (a) all Obligations shall become immediately due and
payable; (b) the Default Rate of Interest shall be charged on all then
outstanding or thereafter incurred Obligations in lieu of the interest provided
for in Section 8 of this Financing Agreement provided that with respect to this
clause (b): (i) the Agent has given the Company written notice of the Event of
Default, provided, however, that no notice is required if the Event of Default
is the Event listed in Section 10.1(d); (ii) the Company has failed to cure the
Event of Default within ten (10) days after (A) the Agent deposited such notice
in the United States mail or (B) the occurrence of the Event of Default listed
in Section 10.1(d); and (iii) this Financing Agreement shall immediately
terminate upon notice to the Company, provided, however, that no notice of
termination is required if
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the Event of Default is the Event listed in Section
10.1(d). The exercise of any option is not exclusive of any other option which
may be exercised at any time by the Agent and/or the Lenders.
10.3 Immediately upon the occurrence of any Event of Default, the Agent may and
at the direction of the Required Lenders shall to the extent permitted by law:
(a) remove from any premises where same may be located any and all documents,
instruments, files and records, and any receptacles or cabinets containing same,
relating to the Accounts, or the Agent may use, at the Company's expense, such
of the Company's personnel, supplies or space at the Company's places of
business or otherwise, as may be necessary to properly administer and control
the Accounts or the handling of collections and realizations thereon; (b) bring
suit, in the name of the Company or the Agent on behalf of the Lenders, and
generally shall have all other rights respecting said Accounts, including
without limitation the right to: accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Company or the Agent; (c) sell,
assign and deliver the Collateral and any returned, reclaimed or repossessed
merchandise, with or without advertisement, at public or private sale, for cash,
on credit or otherwise, at the Agent's sole option and discretion, and the Agent
may bid or become a purchaser at any such sale, free from any right of
redemption, which right is hereby expressly waived by the Company; (d) foreclose
the security interests in the Collateral created herein by any available
judicial procedure, or to take possession of any or all of the Inventory and/or
Other Collateral without judicial process, and to enter any premises where any
Inventory and/or Other Collateral may be located for the purpose of taking
possession of or removing the same and (e) exercise any other rights and
remedies provided in law, in equity, by contract or otherwise. The Agent shall
have the right, without notice or advertisement, to sell, lease, or otherwise
dispose of all or any part of the Collateral, whether in its then condition or
after further preparation or processing, in the name of the Company or the
Agent, or in the name of such other party as the Agent may designate, either at
public or private sale or at any broker's board, in lots or in bulk, for cash or
for credit, with or without warranties or representations, and upon such other
terms and conditions as the Agent in its sole discretion may deem advisable, and
the Agent shall have the right to purchase at any such sale. If any Inventory
shall require rebuilding, repairing, maintenance or preparation, the Agent shall
have the right, at its option, to do such of the aforesaid as is necessary, for
the purpose of putting the Inventory in such saleable form as the Agent shall
deem appropriate. The Company agrees, at the request of the Agent, to assemble
the Inventory and to make it available to the Agent at premises of the Company
or elsewhere and to make available to the Agent the premises and facilities of
the Company for the purpose of the Agent's taking possession of, removing or
putting the Inventory in saleable form. However, if notice of intended
disposition of any Collateral is required by law, it is agreed that ten (10)
days notice shall constitute reasonable notification and full compliance with
the law. The net cash
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proceeds resulting from the Agent's exercise of any of the
foregoing rights (after deducting all charges, costs and expenses, including
reasonable attorneys' fees) shall be applied by the Agent to the payment of the
Company's Obligations, whether due or to become due, in such order as the Agent
may elect, and the Company shall remain liable to the Agent and the Lenders for
any deficiencies, and the Agent in turn agrees to remit to the Company or its
successors or assigns, any surplus resulting therefrom. The enumeration of the
foregoing rights is not intended to be exhaustive and the exercise of any right
shall not preclude the exercise of any other rights, all of which shall be
cumulative.
SECTION 11 Term and Termination
11.1 This Financing Agreement shall become effective as of the date set forth on
the first page hereof and shall continue in full force and effect for the
initial term ending three (3) years from the Closing Date (the "Anniversary
Date"), and from year to year thereafter (each, an "Anniversary Date"), unless
sooner terminated pursuant to the terms hereof.
11.2 Except as otherwise permitted herein, the Company or any Lender acting
through the Agent may terminate this Financing Agreement and the Line of Credit
only as of the initial or any subsequent Anniversary Date and then only by
giving the other at least sixty (60) days prior written notice of termination.
Notwithstanding the foregoing the Lenders acting through the Agent may terminate
the Financing Agreement immediately upon the occurrence of an Event of Default,
provided, however, that if the Event of Default is an event listed in Section
10.1(d) of this Financing Agreement, the Agent and the Lenders may regard the
Financing Agreement as terminated and notice to that effect is not required.
This Financing Agreement, unless terminated as herein provided, shall
automatically continue from Anniversary Date to Anniversary Date.
Notwithstanding the foregoing, the Company may terminate this Financing
Agreement and the Line of Credit prior to any applicable Anniversary Date upon
sixty (60) days' prior written notice to the Agent and the Lenders, provided
that the Company pays to the Agent for the benefit of the Lenders immediately on
demand, the Early Termination Fee, if applicable. Notwithstanding anything to
the contrary contained herein: (x) there shall be no Early Termination Fee if
the Early Termination Date occurs two (2) years after the Closing Date or at any
time thereafter, and (y) there shall be no Early Termination Fee if this
Financing Agreement terminates because a controlling interest in the Company is
acquired by some entity (the "purchaser") and CITBC participates in the credit
facility such purchaser enters into with another lender. This Financing
Agreement, unless terminated as herein provided, shall automatically continue
from Anniversary Date to Anniversary Date. All Obligations shall become due and
payable as of any termination hereunder or under Section 10 hereof and, pending
a final accounting, the Agent and the Lenders may withhold any balances in the
Company's loan account
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(unless supplied with an indemnity satisfactory to the
Agent) to cover all of the Company's Obligations, whether absolute or
contingent. All of the Agent's and Lenders' rights, liens and security interests
shall continue after any termination until all Obligations have been paid and
satisfied in full.
SECTION 12 Miscellaneous
12.1 The Company hereby waives diligence, demand, presentment and protest and
any notices thereof as well as notice of nonpayment, notice of dishonor, notice
of intent to accelerate and notice of acceleration. No delay or omission of the
Agent or the Lenders or the Company to exercise any right or remedy hereunder,
whether before or after the happening of any Event of Default, shall impair any
such right or shall operate as a waiver thereof or as a waiver of any such Event
of Default. No single or partial exercise by the Agent or the Lenders of any
right or remedy precludes any other or further exercise thereof, or precludes
any other right or remedy.
12.2 THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTS REFERENCED HEREIN OR
CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.
12.3 It is the intent of the Company, the Agent and the Lenders to
conform strictly to all applicable state and federal usury laws. All agreements
between the Company, the Agent and the Lenders whether now existing or hereafter
arising and whether written or oral, are hereby expressly limited so that in no
contingency or event whatsoever, whether by reason of acceleration of the
maturity hereof or otherwise, shall the amount contracted for, charged or
received by the Agent and/or the Lenders for the use, forbearance, or detention
of the money loaned hereunder or otherwise, or for the payment or performance of
any covenant or obligation contained herein or in any other document evidencing,
securing or pertaining to the Obligations evidenced hereby which may be legally
deemed to be for the use, forbearance or detention of money, exceed the maximum
amount which the Company is legally entitled to contract for, charge or collect
under applicable state or federal law. If from any circumstances whatsoever
fulfillment of any provision hereof or of such other documents, at the time
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by law, then the obligation to be fulfilled shall be
automatically reduced to the limit of such validity, and if from any such
circumstance the Agent and/or the Lenders shall ever receive as interest or
otherwise an amount in excess of the maximum that can be legally collected, then
such amount which would be excessive interest shall be applied to the reduction
of the principal
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indebtedness hereof and any other amounts due with respect to
the Obligations evidenced hereby, but not to the payment of interest and if such
amount which would be excess interest exceeds the Obligations and all other non
interest indebtedness described above, then such additional amount shall be
refunded to the Company. In determining whether or not all sums paid or agreed
to be paid by the Company for the use, forbearance or detention of the
Obligations of the Company to the Agent and/or the Lenders, under any specific
contingency, exceeds the maximum amount permitted by applicable law, the
Company, the Agent and the Lenders shall to the maximum extent permitted under
applicable law, (a) treat all Obligations as but a single extension of credit,
(b) characterize any nonprincipal payment as an expense, fee or premium rather
than as sums paid or agreed to be paid by the Company for the use, forbearance
or detention of the Obligations of the Company to the Agent and/or the Lenders,
(c) exclude voluntary prepayments and the effect thereof, and (d) amortize,
prorate, allocate and spread in equal parts, the total amount of such sums paid
or agreed to be paid by the Company for the use, forbearance or detention of the
Obligations of the Company to the Agent and the Lenders throughout the entire
contemplated term of the Obligations so that the interest rate is uniform
through the entire term of the Obligations. The terms and provisions of this
Section 12.3 shall control and supersede every other provision hereof and all
other agreements between the Company, the Agent and the Lenders.
12.4 If any provision hereof or of any other agreement made in connection
herewith is held to be illegal or unenforceable, such provision shall be fully
severable, and the remaining provisions of the applicable agreement shall remain
in full force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be added
automatically as a part of the applicable agreement a legal and enforceable
provision as similar in terms to the severed provision as may be possible.
12.5 TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY, THE AGENT AND THE
LENDERS EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT. THE COMPANY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF
PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.
12.6 Except as otherwise herein provided, any notice or other communication
required hereunder shall be in writing, and shall be deemed to have been validly
served, given or delivered when hand delivered or sent by facsimile, or three
Business Days after deposit in the United State mail, with proper first class
postage prepaid and addressed to the party to be notified as follows:
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(a) if to the Agent, at:
The CIT Group/Business Credit, Inc.
300 South Grand Avenue, Third Floor
Los Angeles, California 90071
Attn: Regional Credit Manager
Fax No.: (213) 613-2566
(b) if to any other party becoming a Lender hereunder,
at the address specified in the Assignment and Transfer Agreement
(c) if to the Company, at:
FACTORY 2-U STORES, INC.
4000 Ruffin Road
San Diego, California 92123
Attn: Chief Financial Officer
Fax No.: (858) 637-4180
copies of any notices of an Event of Default
shall also be provided to:
HUGHES HUBBARD & REED LLP
350 South Grand Avenue
Los Angeles, California 90071-3442
Attention: Theodore Latty, Esquire
Fax No.: (213) 613-2950;
provided that Agent's failure to send a
notice of an Event of Default shall not
result in any such notice to the Company not
being fully effective
or to such other address as any party may designate for itself by like notice.
12.7 THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
12.8 This Financing Agreement can be amended, modified or changed only by a
writing signed by the Company, the Agent and the Required Lenders (unless the
consent of all Lenders is required pursuant to Section 14.10 hereof).
SECTION 13 Agreement between the Lenders
13.1 (a) The Agent, for the account of the Lenders, shall disburse all
loans and advances to the Company and shall handle all collections of Collateral
and repayment of Obligations. It is understood that for purposes of advances to
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the Company and for purposes of this Section 13 the Agent is using the funds of
the Agent. The Company agrees that the Agent may allow up to two (2) Lenders to
participate as Lenders under this Financing Agreement without the prior consent
of the Company and that one (1) additional Lender may participate with the prior
consent of the Company which consent shall not be unreasonably withheld;
provided, however, that Agent shall, at all times, hold a greater percentage of
outstanding loans than any other Lender.
(b) Unless the Agent shall have been notified in writing by any Lender
prior to any advance to the Company that such Lender will not make the amount
which would constitute its share of the borrowing on such date available to the
Agent, the Agent may assume that such Lender shall make such amount available to
the Agent on a Settlement Date, and the Agent may, in reliance upon such
assumption, make available to the Company a corresponding amount. A certificate
of the Agent submitted to any Lender with respect to any amount owing under this
subsection shall be conclusive, absent manifest error. If such Lender's share of
such borrowing is not in fact made available to the Agent by such Lender on the
Settlement Date, the Agent shall be entitled to recover such amount with
interest thereon at the rate per annum applicable to Revolving Loans hereunder,
on demand, from the Company without prejudice to any rights which the Agent may
have against such Lender hereunder. Nothing contained in this subsection shall
relieve any Lender which has failed to make available its ratable portion of any
borrowing hereunder from its obligation to do so in accordance with the terms
hereof. Nothing contained herein shall be deemed to obligate the Agent to make
available to the Company the full amount of a requested advance when the Agent
has any notice (written or otherwise) that any of the Lenders will not advance
its ratable portion thereof.
13.2 On the Settlement Date, the Agent and the Lenders shall each remit to the
other, in immediately available funds, all amounts necessary so as to ensure
that, as of the Settlement Date, the Lenders shall have their proportionate
share of all outstanding Obligations.
13.3 The Agent shall forward to each Lender, at the end of each month, a copy of
the account statement rendered by the Agent to the Company.
13.4 The Agent shall, after receipt of any interest and fees earned under this
Financing Agreement, promptly remit to the Lenders: (a) their pro rata portion
of all fees, provided, however, that the Lenders (other than CITBC in its role
as the Agent) shall (i) not share in the Collateral Management Fee or
Documentation Fees or the fees provided for in Section 8.10; and (ii) receive
their share of the Loan Facility Fee in accordance with their respective
agreements with the Agent; and (b) interest computed at the rate and as provided
for in Section 8 of this Financing Agreement on all outstanding amounts advanced
by the Lenders on each Settlement
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Date, prior to adjustment, that are subsequent
to the last remittance by the Agent to the Lenders of the Company's interest.
13.5 The Company acknowledges that each of the Lenders may sell one or more
participations in the loans and extensions of credit made and to be made to the
Company hereunder to participants without the Company's prior consent, so long
as such participants are not granted rights that would require the participant's
consent to waivers, amendments and other actions with respect to the provisions
of this Financing Agreement. The Company authorizes each Lender to disclose to
any participant or purchasing lender (each, a "Transferee") and any prospective
Transferee any and all financial information in such Lender's possession
concerning the Company and their affiliates which has been delivered to such
Lender by or on behalf of the Company pursuant to this Financing Agreement or
which has been delivered to such Lender by or on behalf of the Company in
connection with such Lender's credit evaluation of the Company and its
affiliates prior to entering into this Financing Agreement.
13.6 The Company hereby agrees that each Lender is solely responsible for its
portion of the Line of Credit and that neither the Agent nor any Lender shall be
responsible for, nor assume any obligations for the failure of any Lender to
make available its portion of the Line of Credit. Further, should any Lender
refuse to make available its portion of the Line of Credit, then the other
Lender may, but without obligation to do so, increase, unilaterally, its portion
of the Line of Credit in which event the Company is so obligated to that other
Lender.
13.7 In the event that the Agent, the Lenders or any one of them is sued or
threatened with suit by the Company, or by any receiver, trustee, creditor or
any committee of creditors on account of any preference, voidable transfer or
lender liability issue, alleged to have occurred or been received as a result
of, or during the transactions contemplated under this Financing Agreement, then
in such event any money paid in satisfaction or compromise of such suit, action,
claim or demand and any expenses, costs and attorneys' fees paid or incurred in
connection therewith, whether by the Agent, the Lenders or any one of them,
shall be shared proportionately by the Lenders. In addition, any costs,
expenses, fees or disbursements incurred by outside agencies or attorneys
retained by the Agent to effect collection or enforcement of any rights in the
Collateral, including enforcing, preserving or maintaining rights under this
Financing Agreement shall be shared proportionately between and among the
Lenders to the extent not reimbursed by the Company or from the proceeds of
Collateral. The provisions of this paragraph shall not apply to any suits,
actions, proceedings or claims that (a) predate the date of this Financing
Agreement or (b) are based on transactions, actions or omissions that predate
the date of this Financing Agreement.
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13.8 Each of the Lenders agrees with each other Lender that any money or assets
of the Company held or received by such Lender, no matter how or when received,
shall be applied to the reduction of the Obligations (to the extent permitted
hereunder) after (a) the occurrence of an Event of Default and (b) the election
by the Required Lenders to accelerate the Obligations. In addition, the Company
authorizes, and the Lenders shall have the right, without notice, upon any
amount becoming due and payable hereunder, to set-off and apply against any and
all property held by, or in the possession of such Lender the Obligations due
such Lenders.
13.9 CITBC shall have the right at any time to assign to one or more commercial
banks, commercial finance lenders or other financial institutions all or a
portion of its rights and obligations under this Financing Agreement (including,
without limitation, its obligations under the Line of Credit, the Revolving
Loans and its rights and obligations with respect to Letters of Credit). Upon
execution of an Assignment and Transfer Agreement, (a) the assignee thereunder
shall be a party hereto and, to the extent that rights and obligations hereunder
have been assigned to it pursuant to such assignment, have the rights and
obligations of CITBC as the case may be hereunder and (b) CITBC shall, to the
extent that rights and obligations hereunder have been assigned by it pursuant
to such assignment, relinquish its rights and be released from its obligations
under this Financing Agreement. The Company shall, if necessary, execute any
documents reasonably required to effectuate the assignments. No other Lender may
assign its interest in the loans and advances and extensions of credit hereunder
without the prior written consent of the Agent. In the event of an assignment in
violation of this Section 13.9, the Company may, upon notice given to the Agent
within ten (10) days after the Company receives notice of such assignment and
within sixty (60) days of such notice, terminate this Financing Agreement and
the Line of Credit by payment in full of all Obligations, but without any
obligation to pay an Early Termination Fee.
SECTION 14 Agency
14.1 Each Lender hereby irrevocably designates and appoints CITBC as the Agent
for the Lenders under this Financing Agreement and any ancillary loan documents
and irrevocably authorizes CITBC as Agent for such Lender, to take such action
on its behalf under the provisions of the Financing Agreement and all ancillary
documents and to exercise such powers and perform such duties as are expressly
delegated to the Agent by the terms of this Financing Agreement and all
ancillary documents together with such other powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary elsewhere in this
Financing Agreement, the Agent shall not have any duties or responsibilities,
except those expressly set forth herein, or any fiduciary relationship with any
Lender and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this
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Financing Agreement and the
ancillary documents or otherwise exist against the Agent.
14.2 The Agent may execute any of its duties under this Financing Agreement and
all ancillary documents by or through agents or attorneys-in-fact and shall be
entitled to the advice of counsel concerning all matters pertaining to such
duties.
14.3 Neither the Agent nor any of its officers, directors, employees, agents, or
attorneys-in-fact shall be (a) liable to any Lender for any action lawfully
taken or omitted to be taken by it or such person under or in connection with
the Financing Agreement and all ancillary documents (except for its or such
person's own gross negligence or willful misconduct), or (b) responsible in any
manner to any of the Lenders for any recitals, statements, representations or
warranties made by the Company or any officer thereof contained in this
Financing Agreement and all ancillary documents or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Agent under or in connection with, this Financing Agreement and all ancillary
documents or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this Financing Agreement and all ancillary documents or for
any failure of the Company to perform its obligations thereunder. The Agent
shall not be under any obligation to any Lender to ascertain or to inquire as to
the observance or performance of any of the agreements contained in, or
conditions of, this Financing Agreement and all ancillary documents or to
inspect the properties, books or records of the Company.
14.4 The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper person or
persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Company), independent accountants and other experts
selected by the Agent. The Agent shall be fully justified in failing or refusing
to take any action under this Financing Agreement and all ancillary documents
unless it shall first receive such advice or concurrence of the Lenders, or the
Required Lenders, as the case may be, as it deems appropriate or it shall first
be indemnified to its satisfaction by the Lenders against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. The Agent shall in all cases be fully protected in acting,
or in refraining from acting, under this Financing Agreement and all ancillary
documents in accordance with a request of the Lenders, or the Required Lenders,
as the case may be, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Lenders.
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14.5 The Agent shall not be deemed to have knowledge or notice of the occurrence
of any Default or Event of Default hereunder unless the Agent has received
notice from a Lender or the Company describing such Default or Event of Default.
In the event that the Agent receives such a notice, the Agent shall promptly
give notice thereof to the Lenders. The Agent shall take such action with
respect to such Default or Event of Default as shall be reasonably directed by
the Lenders, or Required Lenders, as the case may be; provided that unless and
until the Agent shall have received such direction, the Agent may in the interim
(but shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Default or Event of Default as it shall deem
advisable and in the best interests of the Lenders.
14.6 Each Lender expressly acknowledges that neither the Agent nor any of its
officers, directors, employees, agents or attorneys-in-fact has made any
representations or warranties to it and that no act by the Agent hereinafter
taken, including any review of the affairs of the Company shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without reliance
upon the Agent or any other Lender and based on such documents and information
as it has deemed appropriate, made its own appraisal of and investigation into
the business, operations, property, financial and other condition and
creditworthiness of the Company and made its own decision to enter into this
Financing Agreement. Each Lender also represents that it will, independently and
without reliance upon the Agent or any other Lender and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under the Financing Agreement and to make such investigation as it deems
necessary to inform itself as to the business, operations, property, financial
and other condition or creditworthiness of the Company. The Agent, however,
shall provide the Lenders with copies of all financial statements, projections
and business plans which come into the possession of the Agent or any of its
officers, employees, agents or attorneys-in-fact.
14.7 The Lenders agree to indemnify the Agent in its capacity as such (to the
extent not reimbursed by the Company and without limiting the obligation of the
Company to do so), from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind whatsoever (including negligence on the part of the
agent) which may at any time be imposed on, incurred by or asserted against the
Agent in anyway relating to or arising out of this Financing Agreement or any
ancillary documents or any documents contemplated by or referred to herein or
the transactions contemplated hereby or any action taken or omitted by the Agent
under or in connection with any of the foregoing; provided that no Lender shall
be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting solely from the Agent's gross negligence or
-48-
<PAGE>
willful misconduct. The agreements in this paragraph shall survive the
payment of the obligations.
14.8 The Agent may make loans to, and generally engage in any kind of business
with the Company as though the Agent were not the Agent hereunder. With respect
to its loans made or renewed by it or loan obligations hereunder as Lender, the
Agent shall have the same rights and powers, duties and liabilities under this
Financing Agreement as any Lender and may exercise the same as though it was not
the Agent and the terms "Lender" and "Lenders" shall include the Agent in its
individual capacities.
14.9 The Agent may resign as the Agent upon 30 days' notice to the Lenders and
such resignation shall be effective upon the appointment of a successor Agent.
If the Agent shall resign as Agent, then the Lenders shall appoint a successor
Agent for the Lenders whereupon such successor Agent shall succeed to the
rights, powers and duties of the Agent and the term "Agent" shall mean such
successor Agent effective upon its appointment, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent or any of the parties to this Financing
Agreement. After any retiring Agent's resignation hereunder as the Agent the
provisions of this Section 14 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was the Agent. If CITBC resigns as Agent,
the Company may, upon notice given to the Agent within ten (10) days after the
Company receives notice of such appointment, terminate this Financing Agreement
and the Line of Credit by payment in full of all Obligations but without any
obligation to pay an Early Termination Fee, unless the Company consents to the
successor Agent, such consent not to be unreasonably withheld.
14.10 Notwithstanding anything contained in this Financing Agreement to the
contrary, the Agent will not, without the prior written consent of all Lenders:
(a) amend the Financing Agreement to (i) increase the Line of Credit; (ii)
reduce the interest rates; (iii) reduce or waive (A) any fees in which the
Lenders share hereunder; or (B) the repayment of any Obligations due the
Lenders; (b) extend the maturity of the Obligations; (c) alter or amend (i) this
Section 14.10 or (ii) the definitions of Borrowing Base, Eligible Accounts
Receivable, Eligible Inventory, Eligible In-Transit Inventory, Collateral or
Required Lenders, or the Agent's criteria for determining compliance with such
definitions of eligibility; (d) release Collateral in bulk without a
corresponding reduction in the Obligations to the Lenders, or (e) intentionally
make any Revolving Loan or assist in opening any Letter of Credit hereunder if
after giving effect thereto the total of Revolving Loans and Letters of Credit
hereunder for the Company would exceed one hundred and ten percent (110%) of the
maximum amount available under Section 3 hereof. In all other respects the Agent
is authorized to take such actions or fail to take such actions if the Agent, in
its reasonable discretion, deems such to be advisable and in the best interest
of the Lenders, including, but not
-49-
<PAGE>
limited to, the making of an overadvance or
the termination of the Financing Agreement upon the occurrence of an Event of
Default unless it is specifically instructed to the contrary by the Required
Lenders.
14.11 In the event any Lender's consent is required pursuant to the provisions
of this Financing Agreement and such Lender does not respond to any request by
the Agent for such consent within 10 days after such request is made to such
Lender, such failure to respond shall be deemed a consent. In addition, in the
event that any Lender declines to give its consent to any such request, it is
hereby mutually agreed that the Agent and/or any other Lender shall have the
right (but not the obligation) to purchase such Lender's share of the Loans for
the full amount thereof together with accrued interest thereon to the date of
such purchase.
14.12 Each Lender agrees that notwithstanding the provisions of Section 11 of
this Financing Agreement any Lender may terminate this Financing Agreement and
the Line of Credit only as of the initial or any subsequent Anniversary Date and
then only by giving the Agent 90 days prior written notice thereof. Within 30
days after receipt of any such termination notice, the Agent shall, at its
option, either (a) give notice of termination to the Company hereunder or (b)
purchase the Lender's share of the Obligations hereunder for the full amount
thereof plus accrued interest thereon. Unless so terminated this Financing
Agreement and the Line of Credit shall be automatically extended from
Anniversary Date to Anniversary Date.
IN WITNESS WHEREOF, the parties hereto have caused this
Financing Agreement to be executed, agreed to, accepted and delivered by their
proper and duly authorized officers as of the date set forth above.
FACTORY 2-U STORES, INC.,
a Delaware corporation
By: /s/ Douglas C. Felderman
Name:Douglas C. Felderman
Title: EVP - CFO
-50-
<PAGE>
Executed and Accepted at
Los Angeles, California,
March 3, 2000
THE CIT GROUP/BUSINESS CREDIT, INC., as Agent
and Lender
By: /s/ Frank Brown
Name: Frank Brown
Title: Vice President
-51-
<PAGE>
EXHIBIT A
REVOLVING LOAN PROMISSORY NOTE
$50,000,000.00 March 3, 2000
FOR VALUE RECEIVED, the undersigned, FACTORY 2-U STORES, INC.,
a Delaware corporation (the "Company"), promises to pay to the order of THE CIT
GROUP/BUSINESS CREDIT, INC. (herein "CITBC"), as Agent for the Lenders under a
certain Financing Agreement of even date herewith between CITBC as Agent and
Lender, other Lenders parties thereto and the Company (herein the "Financing
Agreement") at its office located at 300 South Grand Avenue, Third Floor, Los
Angeles, California 90071, in lawful money of the United States of America and
in immediately available funds, the principal amount of Fifty Million Dollars
($50,000,000.00), or such other principal amount advanced pursuant to Section
3.1 of the Financing Agreement. The balance of such Revolving Loan will
fluctuate as a result of the daily application of the proceeds of collections of
the Accounts and the making of additional Revolving Loans as described in
Section 3. The Revolving Loans may be borrowed, repaid and reborrowed by the
Company. A final payment in an amount equal to the outstanding aggregate balance
of principal and interest remaining unpaid, if any, under this Revolving Loan
Promissory Note as shown on the books and records of the Agent shall be due and
payable upon any termination of the Financing Agreement.
All capitalized terms used herein shall have the meaning
provided therefor in the Financing Agreement, unless otherwise defined herein.
The Company further promises to pay interest at such office,
in like money, on the unpaid principal amount owing hereunder from time to time
from the date hereof on the dates and at the rates specified in Section 8.1 of
the Financing Agreement.
If any payment on this Revolving Loan Promissory Note becomes
due and payable on a day other than a Business Day, the maturity thereof shall
be extended to the next succeeding Business Day, and with respect to payments of
principal, interest thereon shall be payable at the then applicable rate during
such extension.
This Revolving Loan Promissory Note is the Revolving Loan
Promissory Note referred to in the Financing Agreement, and is subject to, and
entitled to, all provisions and benefits thereof and is subject to optional and
mandatory prepayment, in whole or in part, as provided therein.
-52-
<PAGE>
The date and amount of the advance(s) made hereunder may be
recorded on the schedule which is attached hereto and hereby made part of this
Revolving Loan Promissory Note or the separate ledgers maintained by the Agent,
provided that any failure to record any such information on such schedule shall
not in any manner affect the obligation of the Company to make payments of
principal and interest in accordance with the terms of this Revolving Loan
Promissory Note. The aggregate unpaid principal amount of all advances made
pursuant hereto may be set forth in the balance column on said schedule or such
ledgers maintained by the Agent. All such advances, whether or not so recorded,
shall be due as part of this Revolving Loan Promissory Note.
The Company confirms that any amount received by or paid to
the Agent in connection with the Financing Agreement and/or any balances
standing to its credit on any of its accounts on the Agent's books under the
Financing Agreement may in accordance with the terms of the Financing Agreement
be applied in reduction of this Revolving Loan Promissory Note, but no balance
or amounts shall be deemed to effect payment in whole or in part of this
Revolving Loan Promissory Note unless the Agent shall have actually charged such
account or accounts for the purposes of such reduction or payment of this
Revolving Loan Promissory Note.
Upon the occurrence of any one or more of the Events of
Default specified in the Financing Agreement or upon termination of the
Financing Agreement, all amounts then remaining unpaid on this Revolving Loan
Promissory Note may become, or be declared to be, immediately due and payable as
provided in the Financing Agreement.
The Company and any and all guarantors, sureties and endorses
jointly and severally waive grace, demand, presentment for payment, notice of
dishonor or default, notice of intent to accelerate, notice of acceleration,
protest and diligence in collecting.
This Revolving Loan Promissory Note shall be governed by, and
construed in accordance with, the laws of the state of California and the
applicable federal laws of the United States.
FACTORY 2-U STORES, INC.,
a Delaware corporation
By:
Name:
Title:
-53-
<PAGE>
Attest:
Secretary
-54-
<PAGE>
SCHEDULE TO GRID
Date Loan Payment Balance
-55-
<PAGE>
EXHIBIT B
ASSIGNMENT AND TRANSFER AGREEMENT
Dated: _____________, 20__
Reference is made to the Financing Agreement dated as of March
3, 2000 (as amended, modified, supplemented and in effect from time to time, the
"Financing Agreement"), among Factory 2-U Stores, Inc., a Delaware corporation
(the "Company"), the Lenders named therein, and The CIT Group/Business Credit,
Inc., as Agent (the "Agent"). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to such terms in the Financing
Agreement. This Assignment and Transfer Agreement, between the Assignor (as
defined and set forth on Schedule 1 hereto and made a part hereof) and the
Assignee (as defined and set forth on Schedule 1 hereto and made a part hereof)
is dated as of the Effective Date (as set forth on Schedule 1 hereto and made a
part hereof).
1. The Assignor hereby irrevocably sells and assigns to the Assignee without
recourse to the Assignor, and the Assignee hereby irrevocably purchases and
assumes from the Assignor without recourse to the Assignor, as of the Effective
Date, an undivided interest (the "Assigned Interest") in and to all the
Assignor's rights and obligations under the Financing Agreement respecting
those, and only those, financing facilities contained in the Financing Agreement
as are set forth on Schedule 1 (collectively, the "Assigned Facilities" and
individually, an "Assigned Facility"), in a principal amount for each Assigned
Facility as set forth on Schedule 1.
2. The Assignor (a) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Financing Agreement or any other instrument,
document or agreement executed in conjunction therewith (collectively the
"Ancillary Documents") or the execution, legality, validity, enforceability,
genuiness, sufficiency or value of the Financing Agreement, any Collateral
thereunder or any of the Ancillary Documents furnished pursuant thereto, other
than that it is the legal and beneficial owner of the interest being assigned by
it hereunder and that such interest is free and clear of any adverse claim and
(b) makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Company or any guarantor or the
performance or observance by the Company or any guarantor of any of its
respective obligations under the Financing Agreement or any of the Ancillary
Documents furnished pursuant thereto.
3. The Assignee (a) represents and warrants that it is legally authorized to
enter into this Assignment and Transfer Agreement; (b) confirms that it has
received a copy of the Financing Agreement, together with the copies of the most
-56-
<PAGE>
recent financial statements of the Company, and such other documents and
information as it has deemed appropriate to make its own credit analysis; (c)
agrees that it will, independently and without reliance upon the Agent, the
Assignor or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under the Financing Agreement; (d) appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under the Financing Agreement as are delegated to the Agent by the
terms thereof, together with such powers as are reasonably incidental thereto;
(e) agrees that it will be bound by the provisions of the Financing Agreement
and will perform in accordance with its terms all the obligations which by the
terms of the Financing Agreement are required to be performed by it as Lender;
and (f) if the Assignee is organized under the laws of a jurisdiction outside
the United States, attaches the forms prescribed by the Internal Revenue Service
of the United States certifying as to the Assignee's exemption from United
States withholding taxes with respect to all payments to be made to the Assignee
under the Financing Agreement or such other documents as are necessary to
indicate that all such payments are subject to such tax at a rate reduced by an
applicable tax treaty.
4. Following the execution of this Assignment and Transfer Agreement, such
agreement will be delivered to the Agent for acceptance by it and the Company,
effective as of the Effective Date.
5. Upon such acceptance, from and after the Effective Date, the Agent shall make
all payments in respect of the assigned interest (including payments of
principal, interest, fees and other amounts) to the Assignee, whether such
amounts have accrued prior to the Effective Date or accrue subsequent to the
Effective Date. The Assignor and Assignee shall make all appropriate adjustments
in payments for periods prior to the Effective Date made by the Agent or with
respect to the making of this assignment directly between themselves.
6. From and after the Effective Date, (a) the Assignee shall be a party to the
Financing Agreement and, to the extent provided in this Assignment and Transfer
Agreement, have the rights and obligations of a Lender thereunder, and (b) the
Assignor shall, to the extent provided in this Assignment and Transfer
Agreement, relinquish its rights and be released from its obligations under the
Financing Agreement.
7. THIS ASSIGNMENT AND TRANSFER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
-57-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Assignment and Acceptance to be executed by their respective duly authorized
officers on Schedule 1 hereto.
-58-
<PAGE>
Schedule 1 to Assignment and Transfer Agreement
Name of Assignor:
Name of Assignee:
Effective Date of Assignment: ____________________, 20__
<TABLE>
<CAPTION>
Percentage Assigned of each facility (Shown as
Principal Amount (or, with a percentage of aggregate principal amount or,
respect to Letters of Credit with respect to Letters of Credit, fact amount
Assigned Facilities face amount Assigned of all Lenders)
<S> <C> <C>
Revolving Loans $______________ ______________%
Letter of Credit
participation interest $______________ ______________%
Total: $______________ ______________%
</TABLE>
THE CIT GROUP/BUSINESS CREDIT, INC., As Agent
As Assignee
By:
Name: By:
-----------------------------
Title: Name:
-----------------------------
Title:
Factory 2-U Stores, Inc.
(the "Company")
By:
Name:
Title:
-59-
<PAGE>
Schedule 1
Existing Liens
<TABLE>
<CAPTION>
ARIZONA
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
Factory 2-U Stores, Inc. 995040 11/28/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc. 718725 09/21/92 Metlife Capital Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc. 769305 12/21/93 Metlife Capital Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc. 946305 12/04/96 EUA Cogenex Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc. 980552 08/12/97 GTE Leasing Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center 504538 10/16/87 Easton Sports, Inc.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center 790999 06/20/94 Southern Pacific Thrift & Loan Assn.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center 790000 06/20/94 Southern Pacific Thrift & Loan Assn.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 930441 08/12/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 930442 08/12/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 941038 10/25/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 995041 11/28/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 1011591 04/08/98 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
Factory 2-U Stores, Inc. 0004060398 02/03/00 Crown Credit Company
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc. 9610660915 04/16/96 Metlife Capital Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp. 9521661048 08/03/95 Megabank of Arapahoe
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp. 9803660143 01/30/98 IBM Credit Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp. 9805860694 02/24/98 IBM Credit Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp. 9809060907 03/30/98 IBM Credit Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center 9533560109 11/28/95 Minnesota Mining and Manufacturing Co.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center 9612360424 05/01/96 EUA Cogenex Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc. 9516060024 06/07/95 IBM Credit Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc. 9621860629 08/02/96 EUA Cogenex Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc. 9702860482 01/27/97 EUA Cogenex Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc. 9706961264 03/10/97 EUA Cogenex Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc. 9724860177 09/04/97 EUA Cogenex Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9515260139 05/31/95 Graybar Financial Services
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9524060630 08/25/95 Leasetec Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9622260426 08/08/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9630360291 10/28/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9723061059 08/15/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9725160339 09/04/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9733560592 11/26/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9810060294 04/09/98 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9925060787 09/01/99 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 9928860025 10/12/99 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEVADA
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
General Textiles 96-12999 08/15/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 97-19857 12/01/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NEW MEXICO
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
Factory 2-U Stores, Inc. 971201074 12/01/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 960812011 08/12/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 960812012 08/12/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 971201073 12/01/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OREGON
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
General Textiles 418473 04/16/98 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 419356 04/22/98 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SAN DIEGO COUNTY, CA
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
Family Bargain Corp. 1995-0409158 09/14/95 Megabank of Arapahoe
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEXAS
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
Factory 2-U Stores, Inc. 242622 11/26/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 242623 11/26/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR FILING NUMBER FILING DATE SECURED PARTY
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
<S> <C> <C> <C>
General Textiles 96-222-0093 08/09/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 96-317-0185 11/12/96 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles 97-335-0893 12/01/97 Sensormatic Electronics Corp.
- ------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>
-62-
<PAGE>
Schedule 2
Collateral Locations, Chief Executive Office and Trade Names
Chief Executive Office
4000 Ruffin Road
San Diego, California 92123-1866
Collateral Locations
See Attached
Trade Names
Factory 2-U
Family Bargain Centers
-63-
NYB 1069844.3
EXHIBIT 10.3
AMENDED EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of March 30, 1998 and amended as of
August 31, 1999, by and between Factory 2-U Stores, Inc. ("Factory 2-U"), a
Delaware corporation, the name of which formerly was Family Bargain Corporation
and which is the successor by merger to General Textiles, and Michael Searles,
who currently resides in Rancho Santa Fe, California ("Executive").
W I T N E S S E T H
WHEREAS, on March 30, 1998, General Textiles, Factory 2-U and Executive
entered into an agreement setting forth the terms of Executive's employment by
General Textiles for a term beginning on March 30, 1998 (the "Effective Date");
and
WHEREAS, Factory 2-U and Executive desire to amend the agreement
entered into on March 30, 1998 (that agreement, as amended, being the
"Agreement") so the Agreement will be as set forth below.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Employment. Except upon earlier termination as provided in
Section 9 hereof, Executive's employment under this Agreement shall be for a
five year term commencing on the Effective Date and terminating on March 29,
2003 (the "Employment Term").
2. Positions. (a) Executive shall serve as President and Chief Executive
Officer of Factory 2-U. Executive shall report to the Board of Directors of
Factory 2-U (the "Board") and shall have such duties and authority, consistent
with his position as the Chief Executive Officer of Factory 2-U as shall be
assigned to him from time to time by the Board.
(b) During the Employment Term, Executive shall, without additional
compensation, also (i) serve on the Board of Directors of, and perform such
executive and consulting services for, or on behalf of, such subsidiaries or
affiliates of Factory 2-U as the Board may, from time to time, request. Factory
2-U and such subsidiaries and affiliates are hereinafter referred to,
collectively, as the "Company" and, individually, as a "Constituent
Corporation." For purposes of this Agreement, the term "Affiliate" shall have
the meaning ascribed thereto in the Securities Exchange Act of 1934, as amended
(the "Act").
(c) During the Employment Term, Executive shall devote substantially all of
his business time and efforts to the performance of his duties hereunder;
provided, however, that Executive shall be permitted, to the extent that such
activities do not materially interfere with the performance of his duties and
responsibilities hereunder, to manage his personal financial and legal affairs
and to serve on corporate, civic, or charitable boards or committees.
Notwithstanding the foregoing, the Executive shall not serve on any corporate
board of directors or similar body if such service would be inconsistent with
his fiduciary responsibilities to any
1
<PAGE>
Constituent Corporation and in no event shall Executive serve on any such
board or other body unless approved by the Board, which approval shall not be
unreasonably withheld.
3. Base Salary. During the Employment Term, Factory 2-U shall pay to the
Executive a base salary at the annual rate of not less than six hundred thousand
dollars ($600,000). Base salary shall be payable in accordance with the usual
payroll practices of Factory 2-U. Executive's base salary shall be subject to
annual review by the Board or its designee and may be increased, but not
decreased, from time to time. The base salary, as determined as aforesaid from
time to time, shall constitute "Base Salary" for purposes of this Agreement.
4. Annual Bonus. Executive's annual bonus will be targeted at 50% of the
Base Salary. The Board and the Executive will agree on annual targets, with
final discretion residing with the Board. If the targets are exceeded, the Board
may increase the bonus. If the targets are not met, the Board may reduce or
withhold the bonus entirely. The Board will annually review whether a merit
increase of the annual bonus is warranted.
5. Equity Compensation. (a) Factory 2-U has granted to Executive options
under its incentive stock option plan ("ISO Plan") entitling Executive to
acquire a total of 76,520 shares of Factory 2-U's common stock at $6.534 per
share (which is equal to the closing market price of such common stock on March
30, 1998, the date on which the Executive became an employee of the Company,
adjusted to take account of the recapitalization which caused each share of
common stock to become .30133 shares of common stock). Those incentive stock
options vest in increments of 15,304 shares on each of the first five
anniversaries of the Effective Date. In addition, Factory 2-U has granted to
Executive nonqualified stock options to acquire a total of 13,880 shares of
Factory 2-U's common stock at $5.2733 per share. Those nonqualified stock
options vest in increments of 2,776 shares on each of the first five
anniversaries of the Effective Date.
(b) Promptly following the Effective Date, the Executive purchased from
Factory 2-U, at a purchase price of $1,000 per share, one thousand four hundred
(1,400) shares of Factory 2-U's Series B preferred stock. Those shares have now
become 242,662 shares of Factory 2-U common stock (the "Executive Stock").
Factory 2-U loaned to Executive, upon the terms and subject to the conditions
set forth in Exhibit A hereto, an amount equal to the cost incurred by the
Executive for the acquisition of the Executive Stock. Whenever interest is due
with regard to that loan, Factory 2-U shall pay to the Executive, as additional
compensation, the amount which, after payment of taxes, is equal to the interest
payment minus any resulting tax deductions.
(c) Executive granted to Factory 2-U an option (the "Buy-back Option")
entitling Factory 2-U to acquire the Executive Stock from Executive in the event
that Executive's
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<PAGE>
employment under this Agreement is terminated for any reason other than pursuant
to Section 9(a)(i), (ii) or (iii) hereof. The price at which Factory 2-U will be
entitled to exercise the Buy-back Option shall be determined by reference to the
following table:
<TABLE>
<CAPTION>
Number of years elapsed from the 1 2 3 4 5
Effective Date
- ------------------------------------------ -------------- ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Percentage of Executive Stock subject to 80% 60% 40% 20% 0%
the Buy-back Option
Exercise Price of the Buy-back Option $5.808 $6.637 $7.467 $8.297 --
</TABLE>
The number of shares of Executive Stock subject to the Buy-Back Option and the
exercise price of the Buy-Back Option shall be determined by interpolation in
the event of any exercise of the Buy-Back Option on any date other than an
anniversary of the Effective Date.
(d) Factory 2-U granted to Executive, effective as of the Effective Date,
further options (the "Further Options") entitling Executive to acquire a total
of 271,197 shares of Factory 2-U's common stock at a price of $6.637 per share.
The Executive will be entitled to exercise the Further Options (i) prior to the
sixth anniversary of the Effective Date and (ii) during the period which begins
on the day which is 60 days before the ninth anniversary of the Effective Date
and ends on (and includes) the ninth anniversary of the Effective Date (the
"Fully Vested Period"), and the Further Options will expire at 5:00 p.m., San
Diego, California time, on the ninth anniversary of the Effective Date, provided
that:
(i) except during the Fully Vested Period, the Executive shall not be
entitled to exercise any of the Further Options until the closing market price
of Factory 2-U's common stock equals or exceeds $19.91 per share on sixty (60)
trading days during any twelve (12) month period commencing at any time after
the Effective Date and terminating prior to the termination, for any reason, of
Executive's employment by the Company;
(ii) except during the Fully Vested Period, the Executive shall be entitled
to exercise not more than 135,599 of the Further Options if the closing market
price of Factory 2-U's shares shall equal or exceed $19.91 per share on, but
shall fail to exceed $24.89 per share, on sixty (60) trading days during any
twelve (12) month period commencing at any time after the Effective Date and
terminating prior to the termination, for any reason, of Executive's employment
by the Company; and
(iii) the Executive shall be entitled to exercise all of the Further
Options if the closing market price of Factory 2-U's shares shall equal or
exceed $24.89 per share for sixty (60) trading days during any twelve (12) month
period commencing at any time after
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<PAGE>
the Effective Date and terminating prior to the termination, for any reason,
of Executive's employment by the Company.
(e) If the Executive is still employed by the Company during the Fully
Vested Period, during the Fully Vested Period, the Executive will be entitled to
exercise all the Further Options, without regard to what the closing market
price of Factory 2-U's common stock is or has been.
6. Employment Benefits and Vacation. (a) During the Employment Term,
Executive shall be entitled to participate in all pension, retirement, savings,
welfare and other pension and welfare employee benefit plans and arrangements
and fringe benefits and perquisites generally maintained by the Company from
time to time for the benefit of senior executives of the Company, in accordance
with their respective terms as in effect from time to time (other than any
special arrangement entered into by contract with an executive).
(b) During the Employment Term, Executive shall be entitled to vacation
each year in accordance with the Company's policies in effect from time to time,
but in no event less than four (4) weeks paid vacation per calendar year. The
Executive shall also be entitled to such sick leave as is customarily provided
by the Company for its senior executive employees.
7. Moving Expenses. The Executive has been reimbursed, on an after-tax
basis, for expenses incurred by the Executive in the relocation of his family to
San Diego for the purpose of commencing Executive's employment pursuant to this
Agreement.
8. Business Expenses. The Executive shall be reimbursed for the travel,
entertainment and other business expenses incurred by Executive in the
performance of his duties hereunder, in accordance with policies generally
applicable to senior executives of the Company as in effect from time to time.
9. Termination. (a) The employment of Executive under this Agreement shall
terminate upon the occurrence of any of the following events:
(i) the death of Executive;
(ii) the termination by Factory 2-U of Executive's employment due
to Executive's Disability pursuant to Section 9(b) hereof;
(iii) the termination by Executive of Executive's employment for
Good Reason pursuant to Section 9(c) hereof;
(iv) the termination by Factory 2-U of Executive's employment
without Cause;
(v) the termination by Executive of Executive's employment
without Good Reason upon sixty (60) days prior written notice; or
(vi) the termination by Factory 2-U of Executive's employment for
Cause pursuant to Section 9(e) hereof.
4
<PAGE>
(b) Disability. If, by reason of the same or related physical or mental
reasons, Executive is unable to carry out his material duties pursuant to this
Agreement for more than six (6) months in any twelve (12) consecutive month
period, Factory 2-U may terminate Executive's employment for Disability upon
thirty (30) days prior written notice, by a Notice of Disability Termination.
(c) Termination for Good Reason. A Termination for Good Reason means a
termination by Executive by written notice given within ninety (90) days after
the occurrence of the Good Reason event. For purposes of this Agreement, "Good
Reason" shall mean the occurrence or failure to cause the occurrence, as the
case may be, without Executive's express written consent, of any of the
following circumstances, unless such circumstances are fully corrected prior to
the date of termination specified in the Notice of Termination for Good Reason
(as defined in Section 9(d) hereof): (i) the material branch by the Company of
any of its obligations to Executive under this Agreement or the failure of
Factory 2-U to make timely payments of compensation or reimbursement pursuant to
Section 3, 4, 7 or 8 hereof; (ii) any material diminution, after the Effective
Date, of Executive's positions, duties or responsibilities hereunder, as of the
Effective Date (except in each case in connection with the termination of
Executive's employment for Cause or Disability or as a result of Executive's
death, or temporarily as a result of Executive's illness or other absence and
provided that a reduction in the size or number of the units reporting to
Executive as a result of dispositions, shall not be a material diminution), or
the assignment to Executive of duties or responsibilities that are inconsistent
with Executive's position as the Chief Executive Officer of Factory 2-U; (iii)
removal of, or the nonreelection of, the Executive from his position as the
Chief Executive Officer of Factory 2-U; or (iv) a relocation of the principal
executive offices of Factory 2-U to a location more than twenty-five (25) miles
from San Diego, California or a relocation of Executive away from such principal
executive office.
(d) Notice of Termination of Good Reason. A Notice of Termination for Good
Reason shall mean a notice that shall indicate the specific termination
provision in Section 9(c) relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for Termination for Good
Reason. The failure by Executive to set forth in the Notice of Termination for
Good Reason any fact or circumstance which contributes to the showing Good
Reason shall not waive any right of Executive hereunder or preclude Executive
from asserting such fact or circumstance in enforcing his rights hereunder. The
Notice of Termination for Good Reason shall provide for a date of termination
not less than ten (10) nor more than sixty (60) days after the date such Notice
of Termination for Good Reason is given, provided that in the case of the events
set forth in Section 9(c)(ii) or (iii) the date may be two (2) days after the
giving of such notice.
(e) Cause. Subject to the notification provisions of Section 9(f) below,
Executive's employment hereunder may be terminated by Factory 2-U for Cause. For
purposes of this Agreement, the term "Cause" shall be limited to (i) willful
misconduct by Executive with regard to the Company; (ii) the refusal of
Executive to follow the proper written direction of the Board; provided,
however, that the foregoing refusal shall not be "Cause" if Executive in good
faith believes that such direction is illegal, unethical or immoral and promptly
so notifies the entity or person giving the direction; (iii) Executive being
convicted of a felony; (iv) the willful breach by Executive of any fiduciary
duty owed by Executive to any Constituent Corporation
5
<PAGE>
which has a material adverse effect on the Company; or (v) Executive's
material fraud with regard to any Constituent Corporation.
(f) Notice of Termination for Cause. A Notice of Termination for Cause
shall mean a notice that shall indicate the specific termination provision in
Section 9(e) relied upon and shall set forth in reasonable detail the facts and
circumstances which provide a basis for Termination for Cause. Further, a
Notification for Cause shall include a copy of a resolution duty adopted by at
least a majority of the entire membership of the Board at a meeting of the Board
which was called for the purpose of considering such termination and which
Executive and his representative had the right to attend and address the Board,
finding that, in the good faith opinion of the Board, Executive engaged in
conduct set forth in the definition of Cause herein and specifying the
particulars thereof in reasonable detail. The date of termination for a
Termination for Cause shall be the date indicated in the Notice of Termination.
Any purported Termination for Cause which is held by a court not to have been
based on the grounds set forth in this Agreement or not to have followed the
procedures set forth in this Agreement shall be deemed a Termination without
Cause.
10. Consequences of Termination of Employment. (a) Death. If Executive's
employment is terminated during the Employment Term by reason of Executive's
death, the employment period under this Agreement shall terminate without
further obligations to the Executive's legal representatives under this
Agreement except for (i) any compensation earned but not yet paid, including and
without limitation, any declared but unpaid bonus, any amount of Base Salary or
deferred compensation accrued or earned but unpaid, any accrued vacation pay
payable pursuant to the Company's policies and any reimbursed business expenses
payable pursuant to Section 8, which amounts shall be promptly paid in a lump
sum to Executive's estate; (ii) the product of (x) the target annual bonus for
the fiscal year of Executive's death, multiplied by (y) a fraction, the
numerator of which is the number of days of the current fiscal year during which
Executive was employed by Factory 2-U, and the denominator of which is 365,
which bonus shall be paid when bonuses for such period are paid to the other
executives; (iii) full accelerated vesting, with a waiver of all performance
based targets, under all outstanding equity-based and long-term incentive plans
(with options remaining outstanding as provided under the applicable stock
option plan and a pro rata payment under any long term incentive plans based on
actual coverage under such plans at the time payments normally would be made
under such plans); (iv) subject to Section 11 hereof, any other amounts or
benefits owing to Executive under the then applicable employee benefit plans or
policies of the Company, which shall be paid in accordance with such plans or
policies; (v) payment on a monthly basis of twelve (12) months of Base Salary,
which shall be paid to Executive's spouse, or if she shall predecease him, then
to Executive's children (or their guardian if one is appointed) in equal shares;
and (vi) payment of the spouse's and dependent's COBRA coverage premiums to the
extent, and as long as, they remain eligible for COBRA coverage, but in no event
more than three (3) years.
(b) Disability. If Executive's employment is terminated by reason of
Executive's Disability, Executive shall be entitled to receive the payments and
benefits to which his representatives would be entitled in the event of a
termination of employment by reason of his death; provided that the payment of
Base Salary shall be reduced by the projected amount he would receive under any
long-term disability policy or program maintained by the Company during the
twelve (12) month period during which Base Salary is being paid.
6
<PAGE>
(c) Termination by Executive for Good Reason or for Change in Control. If
(i) Executive terminates his employment hereunder for Good Reason during the
Employment Term, or (ii) a Change in Control occurs and within 90 days
thereafter Executive terminates his employment for any reason, Executive shall
be entitled to receive the payments and benefits to which his representatives
would be entitled in the event of a termination of employment by reason of his
death.
(d) Termination with Cause or Voluntary Resignation without Good Reason. If
Executive's employment hereunder is terminated (i) by Factory 2-U for Cause or
(ii) by Executive without Good Reason except within 90 days following a Change
in Control, the Executive shall be entitled to receive only his Base Salary
through the date of termination, any earned but unpaid bonus, and any
unreimbursed business expenses payable pursuant to Section 8. All other benefits
(including without limitation rights to retain restricted stock and rights to
exercise options) due Executive shall terminate upon such termination of
employment.
(e) Termination by the Company Without Cause. If Executive's employment is
terminated by the Factory 2-U without cause, Executive shall be entitled to
receive the payment and benefits to which his representatives would be entitled
in the event of a termination of employment by reason of his death; provided,
however, that Executive shall not be entitled to receive the benefit set forth
in clause (iii) of Paragraph 10(a) hereof.
11. No Mitigation; No Set-Off. In the event of any termination of
employment under Section 9, Executive shall be under no obligation to seek other
employment and there shall be no offset against any amounts due Executive under
this Agreement on account of any remuneration attributable to any subsequent
employment that Executive may obtain. Any amounts due under Section 10 are in
the nature of severance payments, or liquidated damages, or both, and are not in
the nature of a penalty. Such amounts are inclusive and in lieu of any amounts
payable under any other salary continuation or cash severance arrangement of
Factory 2-U or any affiliate thereof and to the extent paid or provided under
any other such arrangement shall be offset from the amount due hereunder.
12. Change in Control. (a) Subject to the provisions of Section 12(b)
hereof, for purposes of this Agreement, the term "Change in Control" shall mean
(a) the sale of all or substantially all of the assets of the Company in the
aggregate, whether pursuant to a single transaction or pursuant to a series of
transactions and whether through an asset sale or stock sale, other than to an
affiliate; (b) any "person" (as defined in the Act) not an affiliate of Factory
2-U on the Effective Date becomes the "beneficial owner" (as defined in Rule
13d-3 under the Act), directly or indirectly, of securities of Factory 2-U
representing fifty (50%) or more of the combined voting power of Factory 2-U's
then outstanding securities; (c) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors, and any new director (other than a director designated by a person
who has entered into an agreement with Factory 2-U to effect a transaction
described in this paragraph) whose election by the Board of Directors of Factory
2-U or nomination for election by Factory 2-U's stockholders was approved by a
vote of at least two-thirds of the directors then still in office who either
were directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority of the Board of Directors; (d) the stockholders
of Factory 2-U approve a merger or consolidation of
7
<PAGE>
Factory 2-U with any other corporation, other than a merger or
consolidation which would result in the voting securities of Factory 2-U
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of Factory 2-U or such surviving entity outstanding
immediately after such merger or consolidation; or (e) the stockholders of
Factory 2-U approve a plan of complete liquidation of Factory 2-U or an
agreement for the sale or disposition by Factory 2-U of all or substantially all
of Factory 2-U's assets other than the sale of all or substantially all of the
assets of Factory 2-U to a person or persons who beneficially own, directly or
indirectly, at least fifty percent (50%) or more of the combined voting power of
the outstanding voting securities of Factory 2-U at the time of the sale.
(b) Factory 2-U and Searles acknowledge that Factory 2-U and General
Textiles effected a restructuring of such corporations. Notwithstanding anything
to the contrary set forth herein, it is agreed that no restructuring,
recapitalization, reorganization, merger, consolidation or similar transaction
involving General Textiles, Factory 2-U or any affiliate thereof (but not
involving any unaffiliated third party) shall be deemed to have constituted or
to constitute a Change of Control hereunder.
13. Confidential Information, Non-Competition and Non-Solicitation of the
Company. (a) (i) Executive acknowledges that, as a result of his employment
hereunder, Executive will obtain secret and confidential information of the
Company and the Company will suffer substantial damage, which would be difficult
to ascertain and in an amount which would be difficult to compute, if Executive
should use any of such confidential information and that because of the nature
of the information that will be known to Executive it is necessary for the
Company to be protected by the prohibition against Competition as set forth
herein, as well as the Confidentiality restrictions set forth herein.
(ii) Executive acknowledges that the retention of nonclerical employees of
the Company, in which the Company has invested training and on which the Company
depends for the operation of its business, is important to the businesses of the
Company; Executive will obtain unique information as to such employees as an
executive of the Company and will develop a unique relationship with such
persons as a result of being an executive of the Company; and, therefore, it is
necessary for the Company to be protected from Executive's Solicitation of such
employees as set forth below.
(iii) Executive acknowledges that the provisions of this Agreement are
reasonable and necessary for the protection of the business of the Company and
that part of the compensation paid under this Agreement and the agreement to pay
severance in certain instances is in consideration for the agreements in this
Section 13.
(b) As used herein, "Competition" shall mean: participating, directly or
indirectly, as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, consultant or in any
capacity whatsoever (within the United States of America, or in any other
country where any Constituent Corporation does business) in a business in
competition with any business conducted by any Constituent Corporation;
provided, however, that such participation shall not include (i) the ownership
of not more than one percent (1%) of
8
<PAGE>
the total outstanding stock of a publicly-held company; or any activity
engaged in with the prior written approval of the Board.
(c) As used herein, "Solicitation" shall mean recruiting, soliciting or
inducing any nonclerical employee of any Constituent Corporation to terminate
his or her employment with, or otherwise cease his or her relationship with,
such Constituent Corporation or hiring, or assisting another person or entity to
hire, any nonclerical employee of any Constituent Corporation or any person who,
within six (6) months before, had been a nonclerical employees of any
Constituent Corporation, unless the employment of such person by a Constituent
Corporation was terminated involuntarily and without cause.
(d) If any restriction set forth with regard to Competition or Solicitation
is found by any court of competent jurisdiction, or an arbitrator, to be
unenforceable because it extends for too long a period of time or over too great
a range of activities or in too broad a geographical area, it shall be
interpreted to extend over the maximum period of time, range of activities or
geographic area as to which it may be enforceable. If any provision of this
Section 13 shall be declared to be invalid or enforceable, in whole or in part,
as a result of the foregoing, as a result of public policy or for any other
reason, such invalidity shall not affect the remaining provisions of this
Section, which shall remain in full force and effect.
(e) During and after the Employment Term, Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company and its business,
including any confidential information as to suppliers (i) obtained by Executive
during his employment by the Company and (ii) not otherwise in the public
domain. Executive shall not, without prior written consent of the Company,
unless compelled pursuant to the order of a court or other government or legal
body having jurisdiction over such matter, communicate or divulge any such
information, knowledge or data to anyone other than the Company, and those
designated by it. In the event Executive is compelled by order of a court or
other governmental or legal body to communicate or divulge any such information,
knowledge or data to anyone other than the foregoing, he shall promptly notify
the Company of any such order and he shall cooperate fully with the Company in
protecting such information to the full extent possible under applicable law.
(f) Upon termination of his employment with the Company, or at any time
Factory 2-U may request, Executive will promptly deliver to Factory 2-U, as
requested, all documents (whether prepared by the Company, Executive or a third
party) relating to the company or any of its business or property which he may
possess or have under his direction or control, other than his personal
employment and personnel records.
(g) During the Employment Term and for one (1) year thereafter, Executive
will not enter into Competition with the Company. Furthermore, in the event of
any termination of Executive's employment for any reason whatsoever, whether by
the Company or by the Executive and whether or not for Cause, Good Reason or
expiration of the Employment Term, the Executive will not engage in Solicitation
for three (3) years thereafter.
(h) Executive acknowledges that in the event of a breach of this Section 13, the
Company will be cause irreparable injury and money damages may not be an
adequate
9
<PAGE>
remedy. Consequently, Executive agrees that the Company shall be
entitled to injunctive relief (in addition to its other remedies at law) to have
the provisions of this Section 13 enforced.
14. Indemnification. (a) The Company agrees that if Executive is made a
party to or threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that he is or was a director or officer of any Constituent
Corporation or is or was serving at the request of any Constituent Corporation
as a director, officer, member, employee, fiduciary or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including, without limitation, service with respect to employee benefit plans,
whether or not the basis of such Proceeding is alleged action in an official
capacity as a director, officer, member, employee, fiduciary or agent while
serving as a director, officer, member, employee, fiduciary or agent while
serving as a director, officer, member, employee, fiduciary or agent, he shall
be indemnified and held harmless by the applicable company to the fullest extent
authorized by applicable law against all Expenses incurred or suffered by
Executive in connection therewith, and such indemnification shall continue as to
Executive even if Executive has ceased to be an officer, director, member,
fiduciary or agent, or is no longer employed by such company, and shall inure to
the benefit of his heirs, executors and administrators.
(b) As used in this Agreement, the term "Expenses" shall include, without
limitation, damages, losses, judgments, liabilities, fines, penalties, excise
taxes, settlements and costs, attorneys' fees, accountants' fees, and
disbursements and costs of attachment or similar bonds, investigations, and any
expenses of establishing a right to indemnification under this Agreement.
(c) Expenses incurred by Executive in connection with any Proceeding shall
be paid in advance upon request of Executive and the giving by the Executive of
any undertakings required by applicable law.
(d) Executive shall give the Company notice of any claim made against him
for which indemnity will or could be sought under this Agreement. In addition,
Executive shall give the Company such information and cooperation as it may
reasonably require and as shall be within Executive's power and at such times
and places as are reasonably convenient for Executive.
(e) With respect to any Proceeding as to which Executive notifies the
Company of the commencement thereof:
(i) The Company will be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it may
wish, the Company will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to Executive, in which case Executive also
shall have the right to employ his own counsel in such action, suit or
proceeding, but only at his own cost and expense, provided that the Company
shall only be permitted to assume defense of a Proceeding if (1) the Proceeding
could not result in imposition of criminal penalties against Executive and
(2) the Company acknowledges that it
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<PAGE>
is liable to indemnify Executive with respect to al Expenses with respect to
such Proceedings, except as provided earlier in this sentence with
regard to Executive's own counsel.
(f) The Company shall not be liable to indemnify Executive under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim in
any manner which would impose any penalty on Executive (except a penalty in
respect of which Executive is fully indemnified hereunder) without Executive's
written consent. Neither the Company nor Executive will unreasonably withhold or
delay consent to any proposed settlement.
(g) The right to indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 14 shall not be exclusive of any other right which Executive may have or
hereafter may acquire under any statute, provision of the certificate of
incorporation or by-laws of the any company, agreements, vote of stockholders or
disinterested directors or otherwise.
(h) The Company shall obtain officer and director liability insurance
policies covering Executive in the same aggregate amount and under the same
terms as are maintained by the Company for senior officers and directors.
15. Miscellaneous.
(a) Entire Arrangement/Amendments. This Agreement and the instruments
contemplated herein, contain the entire understanding of the parties with
respect to the employment of Executive by the Company. There are no
restrictions, agreements, promises, warranties, covenants or undertakings
between the parties with respect to the subject matter hereof other than those
expressly set forth herein and therein. This Agreement may not be altered,
modified, or amended except by written instrument signed by the parties hereto.
(b) No Waiver. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver of
such party's rights or deprive such party of the right thereafter to insist upon
strict adherence to that term or any other term of this Agreement. Any such
waiver must be in writing and signed by Executive or an authorized officer of
Factory 2-U, as the case may be.
(c) Assignment. This Agreement shall not be assignable by Executive. This
Agreement shall be assignable by Factory 2-U, but only to another Constituent
Corporation and only if such Constituent Corporation promptly assumes all of the
obligations hereunder of Factory 2-U in a writing delivered to the Executive and
otherwise complies with the provisions hereof with regard to such assumption.
Upon such assignment and assumption, all obligations of Factory 2-U herein shall
be the obligations of the assignee entity or acquiror, as the case may be, but
Factory 2-U shall remain secondarily liable for the obligations hereunder.
(d) Successors; Binding Agreement. This Agreement shall inure to the
benefit or and be binding upon the personal or legal representatives, executors,
administrators, successor, heirs, distributees, devisees legatees and permitted
assignees of the parties hereto.
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<PAGE>
(e) Communications. For the purpose of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two
business days after mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed to the respective addresses set
forth on the initial page of this Agreement, provided that all notices to
Factory 2-U shall be directed to the Chairman of the Board of Directors of
Factory 2-U or to such other address as any party may have furnished to the
other in writing in accordance herewith. Notice of change of address shall be
effective only upon receipt.
(f) Withholding Taxes. The Company may withhold from any and all amounts
payable under this Agreement to Executive such Federal, state and local taxes as
may be required to be withheld pursuant to any applicable law or regulation.
(g) Survival. The respective rights and obligations of the parties
hereunder shall survive any termination of Executive's employment to the extent
necessary to the agreed preservation of such rights and obligations.
(h) Counterparts. This Agreement may be signed in counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
(i) Headings. The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written,
FACTORY 2-U STORES, INC.
By: /S/ H. Whitney Wagner
H. Whitney Wagner
Compensation Committee, Chairman
/s/ Michael M. Searles
Michael M. Searles
12
<PAGE>
EXHIBIT A
Terms of Loan
Principal Amount: $1,400,000
Interest Rate: 8%, to accrue and be paid at maturity.
Principal Amortization: Annual repayments of principal in an amount
equal to 16.25% of the annual bonus paid
to the borrower by Factory 2-U.
Maturity: Five years from the date of the loan.
Security and Recourse: The loan will be secured by a pledge of the
shares purchased with the proceeds of the
loan. Personal recourse against the borrower
will be limited to the amount of $600,000.
13
EXHIBIT 11.1
FACTORY 2-U STORES, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
January 29, January 30, January 31,
2000 1999 1998
---------------- --------------- -----------------
<S> <C> <C> <C>
The computation of net income (loss) available and
adjusted shares outstanding follows:
Income (loss) before extraordinary item $ 12,442 $ 5,019 $ (129)
Extraordinary item, net of income tax benefit
- 2,750 -
------ ----- -----
Net income (loss) 12,442 2,269 (129)
------ ----- -----
Less:
Inducement to convert preferred stock to common stock - 2,804 -
Series A preferred stock dividends - 2,593 3,456
Series B preferred stock dividends - 2,210 2,661
------ ----- -----
Net income (loss) applicable to common stock $ 12,442 $ (5,338) $ (6,246)
====== ====== =====
Weighted average number of common shares outstanding * 12,214 3,381 1,477
Add assumed exercise of:
Warrants that are common stock equivalents 18 - -
Options that are common stock equivalents 632 - -
------ ----- -----
Adjusted shares outstanding, used for diluted computation 12,864 3,381 1,477
====== ====== =====
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary item $ 1.02 $ (0.77) $ (4.23)
Extraordinary item $ - $ (0.81) $ -
Net income (loss) $ 1.02 $ (1.58) $ (4.23)
Diluted:
Income (loss) before extraordinary item $ 0.97 $ (0.77) $ (4.23)
Extraordinary item $ - $ (0.81) $ -
Net income (loss) $ 0.97 $ (1.58) $ (4.23)
</TABLE>
* The weighted average number of common shares outstanding for prior periods
have been restated for the reverse stock split (factor is .30133) which took
place on November 23, 1998.
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-76011, 333-89267 and 333-94123.
ARTHUR ANDERSEN LLP
San Diego, California
April 21, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and Statement of Operations as of and for the 52 weeks ended
January 29, 2000 and is qualified in its entirety by reference to such financial
statements as included in the Company's Annual Report on Form 10-K.
</LEGEND>
<CIK> 0000813775
<NAME> FACTORY 2-U STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jan-29-2000
<PERIOD-START> Jan-31-1999
<PERIOD-END> Jan-29-2000
<CASH> 9,473
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 35,048
<CURRENT-ASSETS> 48,996
<PP&E> 45,295
<DEPRECIATION> 17,870
<TOTAL-ASSETS> 108,466
<CURRENT-LIABILITIES> 47,755
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 46,306
<TOTAL-LIABILITY-AND-EQUITY> 108,466
<SALES> 421,391
<TOTAL-REVENUES> 421,391
<CGS> 270,962
<TOTAL-COSTS> 270,962
<OTHER-EXPENSES> 127,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,272
<INCOME-PRETAX> 20,481
<INCOME-TAX> 8,039
<INCOME-CONTINUING> 12,442
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,442
<EPS-BASIC> 1.02
<EPS-DILUTED> 0.97
</TABLE>
