SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-10823
HI-LO AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0232254
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2575 W. BELLFORT
HOUSTON, TEXAS
77054
(Address of principal executive offices)
(Zip Code)
(713) 663-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 10,756,350 shares outstanding of the issuer's only class of
common stock as of November 13, 1996.
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
SEPTEMBER 30, 1996
Part I - FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements and Notes.................... 3
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................10
Part II - OTHER INFORMATION
Item 1.Not Applicable
Item 2.Not Applicable
Item 3.Not Applicable
Item 4.Not Applicable
Item 5.Not Applicable
Item 6.Exhibits and Reports on Form 8-K...............................15
SIGNATURE PAGE...............................................................16
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................ $ 374 $ 1,800
Accounts receivable -
Trade, net of allowance for doubtful accounts of $930 and $1,459.. 7,013 5,685
Other............................................................. 2,526 4,118
Inventories......................................................... 99,766 96,900
Prepaids and other assets........................................... 7,182 3,532
------- --------
Total current assets......................................... 116,861 112,035
PROPERTY AND EQUIPMENT, net.......................................... 33,310 47,823
INTANGIBLE ASSETS AND OTHER.......................................... 1,189 39,115
------- --------
$151,360 $198,973
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................................ 748 742
Accounts payable and accrued liabilities............................ 40,071 32,901
------- --------
Total current liabilities.................................. 40,819 33,643
LONG-TERM DEBT, net of current maturities........................... 45,569 44,132
DEFERRED INCOME TAXES PAYABLE AND OTHER.............................. 3,899 8,220
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued...................................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 10,756,350 and
10,756,350 shares issued and outstanding......................... 108 108
Additional paid-in capital......................................... 68,277 68,277
Retained earnings.................................................. (7,312) 44,593
-------- --------
Total stockholders' equity.................................... 61,073 112,978
------- --------
$151,360 $198,973
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales........................................ $ 64,396 $ 72,198 $192,323 $ 203,430
Costs and expenses:
Cost of goods sold, buying and
distribution................................ 44,665 44,557 122,822 122,856
Operating, selling,
general and administrative.................. 28,406 24,950 75,690 71,882
Provision for asset impairment and
store closings.............................. 51,352 -- 51,352 --
--------- --------- -------- ---------
Operating income (loss)....................... (60,027) 2,691 (57,541) 8,692
Interest expense............................. 1,085 1,157 3,161 3,060
Other expense, net........................... 184 374 714 911
--------- --------- -------- ---------
Income (loss) before taxes (benefit) on income
(loss)...................................... (61,296) 1,160 (61,416) 4,721
Taxes (benefit) on income (loss)............. (9,637) 524 (9,511) 1,847
---------- --------- --------- ---------
Net income (loss)............................. $ (51,659) $ 636 $(51,905) $ 2,874
========== ========= ========= =========
Net income (loss) per common and common
equivalent share............................. $ (4.80) $ .06 $ (4.83) $ .27
========== ========= ========= =========
Weighted average common and common
equivalent shares outstanding................ 10,756,000 10,753,000 10,756,000 10,755,000
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
Balance, December 31, 1994... 10,732,606 $ 107 $68,164 $42,905
Issuance of common stock..... 23,744 1 113 --
Net income................... -- -- -- 1,688
--------- ----- ------ ------
Balance, December 31, 1995... 10,756,350 $ 108 $68,277 $44,593
Net (loss)................... -- -- -- (51,905)
--------- ----- ------ --------
Balance, September 30, 1996.. 10,756,350 $ 108 $68,277 $(7,312)
========== ===== ======= ========
See Notes to Consolidated Financial Statements
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<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $(51,905) $ 2,874
-------- --------
Adjustments to reconcile net income (loss) to cash provided by
operating activities -
Depreciation and amortization ................................ 5,272 4,992
Cost in excess of assets acquired ............................ 37,668 --
Provision for impairment of assets and other ................. 21,774 --
Deferred tax provision ....................................... (7,932) 719
Gain on sale of fixed assets ................................. (17) (27)
Changes in assets and liabilities -
Accounts receivable, net of allowances for doubtful accounts (525) (1,459)
Inventories ................................................ (5,671) (15,982)
Prepaids and other assets .................................. 540 (245)
Accounts payable and other accrued liabilities ............. 3,559 14,400
Income taxes payable (receivable) .......................... (2,032) 145
-------- --------
Total adjustments ........................................ 52,636 2,543
-------- --------
Net cash provided by operating activities .............. 731 5,417
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (3,551) (12,014)
Proceeds from sale and lease back of real estate ................. -- 9,071
Proceeds from the sale of fixed assets ........................... 20 36
Payments for acquisitions, net of cash acquired .................. -- (2,575)
-------- --------
Net cash used in investing activities .................. (3,531) (5,482)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from indebtedness ....................................... 1,374 645
Proceeds from issuance of stock .................................. -- 16
-------- --------
Net cash provided by financing activities .............. 1,374 661
-------- --------
INCREASE (DECREASE) IN CASH ........................................ (1,426) 596
CASH AT BEGINNING OF PERIOD ........................................ 1,800 1,034
-------- --------
CASH AT END OF PERIOD .............................................. $ 374 $ 1,630
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the current quarter
and year to date periods ending September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, reference should be made to the annual
consolidated financial statements and notes thereto for the year ending December
31, 1995.
Balance sheet information for December 31, 1995, has been derived from
the 1995 annual audited financial statements.
The Company costs its inventory on the last-in, first-out (LIFO) method.
Had the first in, first out (FIFO) inventory costing method been used,
inventories would have been equal to the LIFO balance at December 31, 1995 and
1994; and March 31, 1996 and 1995; and June 30, 1996 and 1995; and September 30,
1996 and 1995.
B. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the
weighted average number of common shares outstanding and assumes exercise of
outstanding options for Common Stock which are dilutive, using the treasury
stock method.
C. DEBT
BORROWINGS
Debt consisted of the following (in thousands):
SEPTEMBER 30,
1996
---------
Note payable to a bank....................................... $ 44,000
Long-term debt............................................... 2,053
Capital lease obligations.................................... 264
---------
46,317
Less - Current maturities.................................... 748
---------
$ 45,569
At September 30, 1996, the weighted average interest rate on the note payable to
a bank was 7.7%.
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<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's $60.0 million Credit Agreement provides for a revolving
credit facility maturing on July 1, 1997 with annual renewals at the option of
the Company and the lenders. The borrowings may be priced at the Company's
option, at the lenders' Prime Rate, London Interbank Offered Rates (LIBOR) plus
2.25%, or Certificates of Deposit Rates plus 2.375%, subject in each case to
adjustment under certain circumstances. The Company pays a commitment fee of 3/8
of 1% per annum (also subject to adjustment under certain circumstances) on all
unused portions of the credit facility. Loan covenants relate to the Company's
working capital, net worth, leverage, liquidity and acquisitions and restrict
capital expenditures to $5.0 to $6.2 million for 1996 (depending on the
Company's ratio of Debt Service Cash Flow to Total Debt Service as those terms
are defined in the Credit Agreement) and $2.5 million for the six months ended
June 30, 1997.
At September 30, 1996, the Company had $44.0 million outstanding under
its $60.0 million credit agreement with certain commercial banks and total
unutilized bank credit facilities of approximately $14.7 million.
On October 23, 1996, the Company entered into a new financing agreement
with a new lender. Initial funding under this financing agreement was used to
repay amounts made under the Company's prior credit facility. The new financing
agreement provides for a borrowing base of up to $60.0 million of availability
under a revolving credit facility, which matures October 22, 1999, with annual
renewals at the option of the Company and the lender. Additionally, the credit
availability is limited to 60% of the value of saleable inventory and 85% of
accounts receivable and is secured by all inventories, receivables and fixed
assets. The borrowings may be priced, at the Company's option, at the lenders'
prime rate, plus 1/4 of 1% or London Interbank Offered Rates (LIBOR) plus 2.25%.
The Company pays a commitment fee of 3/8 of 1% per annum on all unused portions
of the credit facility. Loan covenants relate to the Company's net worth, cash
flow, and restrict capital expenditures to $6.0 million for 1996, $5.9 million
for 1997, and $5.0 million for 1998 and 1999; and restricts operating lease
payments to $16.0 million per annum through 1999. The Company is in compliance
with this new loan agreement as of September 30, 1996.
D. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
Cash paid during the period for:
Interest............................ $3,067 $3,048
Income taxes........................ $ -- $1,039
E. STOCKHOLDERS' EQUITY
The Board of Directors and the Company's Stockholders approved the Hi-Lo
Automotive, Inc. 1990 Stock Option and 1991 Associate Stock Purchase Plans, as
amended. The Stock Option Plan reserves 1,400,000 shares of the Company's Common
Stock for issuance to directors, officers and employees. At September 30, 1996,
options for 1,193,266 shares were outstanding, 39,723 shares had been exercised,
514,577 shares had been canceled and 167,011 shares were available for issuance.
Under the Stock Purchase Plan, each eligible employee has the right to
purchase shares as determined by the Plan formula. As of September 30, 1996, of
the 175,000 shares of the Company's Common Stock reserved for issuance under
this Plan, 113,511 shares had been issued and 61,489 shares of the Company's
Common Stock remained reserved for issuance.
Preferred Share Purchase Rights
On August 23, 1996, the Company's Board of Directors adopted a
Stockholder Rights Plan to help assure that all of the Company's stockholders
receive fair and equal treatment in the event of a proposed take over of the
Company. The Rights Plan was effected by issuing one preferred share purchase
right for each outstanding share of common stock. These rights are not currently
exercisable and will become exercisable only upon the occurrence of specified
events related to a change in control of the Company. When exercisable, each
right will entitle the holder to purchase 1/1000 of a share of the Company's
Series A Junior Participating Preferred Stock at an initial exercise price of
$14.00 per right.
The rights expire on September 2, 2006, unless extended or redeemed.
-8-
<PAGE>
F. IMPAIRMENT OF ASSETS
In the Third Quarter of 1996, the Company recognized an impairment
charge of $37.7 million, with no associated tax benefit, related to goodwill
from acquisitions since 1987. Additionally, the Company recognized a charge of
$13.7 million for future store closings, the impairment of certain assets in
under performing stores and of certain assets at the Company's distribution
center, and liquidation of real estate previously held for future expansion. The
Company has experienced intense competition for its products which has resulted
in a decline in sales and in operating losses through the first nine months of
1996. In the Third Quarter 1996, after continued erosion of its sales, the
Company concluded that no short term recovery would be made in sales volume or
operating profits without significant changes in the marketplace. Based on
current industry trends and the Company's operating environment, the Company
does not anticipate significant changes to this trend. Hence, the Company
recorded a write off of all goodwill, a reserve for costs to close certain
stores and write downs of the cost of real estate held for future expansion,
certain store assets and certain assets at the Company's distribution center.
In determining the amount of the asset write offs and impairment
charges, the Company developed its best estimate of future operating cash flows.
Future cash flows, excluding interest charges, were discounted using an
estimated 8.0% discount rate. Sales were estimated to increase 2.0% annually,
and operating expenses were held constant as a percent of sales. These
projections resulted in discounted cash flows which support the amounts
recorded.
Undiscounted cash flows were compared to the carrying value of the
assets to determine if an impairment has occurred. Based upon the 8.0% discount
rate, 2.0% sales growth and other appropriate estimates in determining cash
flows, the Company was able to value certain store fixed assets and certain
assets at the distribution center at their estimated market values. Store
closing reserves represent estimated costs to be incurred as a result of closing
approximately 11 stores. The store costs are for future occupancy costs and
leasehold improvements. The real estate held for future expansion was written
down to its estimated market value.
These analyses contain forward-looking information that involve a number
of risks, uncertainties and assumptions, including, but not limited to customer
demand and trends in the auto parts, products and accessories industry, related
inventory risks due to shifts in customer demand, the effect of economic
conditions, the impact of competitors' locations and pricing, difficulties with
respect to new technologies such as point of sales systems, parts catalogs,
supply constraints or difficulties and the results of financing efforts. Should
one or more of these or other risks or uncertainties materialize or should the
underlying assumptions prove incorrect, actual outcomes could vary materially.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Certain statements contained in this section which are not historical
facts are forward-looking statements that involve risks, uncertainties, and
assumptions including, but not limited to, customer demand and trends in the
auto parts, products and accessories industry, related inventory risks due to
shifts in customer demand, the effect of economic conditions, the impact of
competitors' locations and pricing, difficulties with respect to new
technologies such as point-of-sale systems, parts catalogs, supply constraints
or difficulties, and the results of financing efforts. Should one or more of
these or other risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual outcomes could vary materially.
Store openings by the Company and certain competitors of the Company
have contributed to the decline in the Company's operating results. The
Company's new store openings during the past several years were generally in
markets where existing national competitors already have and/or are opening
stores. Certain national competitors have also continued to open new stores in
Hi/LO's existing markets. Management believes that the markets in which it
operates will continue to see increasing competition for the foreseeable future.
New store competition may have a significant impact on sales of the Company's
nearby stores. Future successful financial results are dependent upon the
Company's ability to compete effectively with these national competitors.
Primarily, as a result of the continuing increase in competition, the
Company has reported declining quarterly net income since the Fourth Quarter of
1994. A net loss was reported by the Company in two of the four quarters
included in the twelve month period ended June 30, 1996 and for the nine months
ended September 30, 1996. The Company also incurred a net loss in the Third
Quarter of 1996 before recording expected one time charges in the pre-tax amount
$59.4 million.
In the Third Quarter of 1996, the Company recorded a $37.7 million
charge to write off its goodwill. Cash flow projections prepared by the Company
indicate that it will not be able to realize its goodwill through future
operations due to the factors discussed above. In addition, the Company has
recorded $13.7 in charges for future store closings, the impairment of certain
fixed assets in under performing stores and of certain assets at the Company's
distribution center, and the liquidation of real estate held for future store
expansion.
In addition, the Company recorded to cost of goods sold, buying and
distribution, $3.8 million in write downs of certain inventory items and $4.3
million to operating, selling, general and administrative expenses.
To respond to increased competition, the Company is remodeling older
stores located near recently opened competitor stores, improving customer
service, reducing operating, selling, and general and administrative costs when
appropriate, and continues to improve distribution efficiencies. The Company
also identified 11 under performing stores which it will close within one year.
These initiatives are being supported by changes in product assortment,
including more high quality product offerings and increased sales and marketing
efforts in the commercial markets. Additionally, the Company has no plans to
open new stores during 1996, but will focus on the performance of its existing
stores and avoid the near term adverse impact on profitability associated with
new stores, due to the fact that they are generally unprofitable during their
first year of operation. The commercial program is also being streamlined and
consolidated including the outsourcing of commercial delivery in many locations.
The Company sells automotive aftermarket parts, products and accessories
to retail and commercial customers in Texas, Louisiana and California. During
the Third Quarter of 1996, the Company closed two stores, reducing its total
store count to 192.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included in Part I, Item 1.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the income statement data of the Company
expressed as a percentage of sales and the percentage change in such income
statement data from period to period.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED PERCENTAGE CHANGE
SEPTEMBER 30, SEPTEMBER 30, QUARTER NINE MONTHS
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales ................................ 100.0% 100.0% 100.0% 100.0% (10.8)% (5.5)%
Cost of sales ........................ 69.4 61.7 63.9 60.4 0.2 --
------- ------- ------- -------
Gross profit ......................... 30.6 38.3 36.1 39.6 (28.6) (13.7)
Operating, selling, general
and administrative expenses ......... 44.1 34.6 39.3 35.3 (13.9) 5.3
Provision for asset impairment
and store closings ................. 79.7 -- 26.7 -- (100.0) (100.0)
------- ------- ------- -------
Operating income ..................... (93.2) 3.7 (29.9) 4.3 * *
Interest expense ..................... 1.7 1.6 1.6 1.5 (6.2) 3.3
Other expense, net ................... 0.3 0.5 0.4 0.5 (50.8) (21.6)
------- ------- ------- -------
Income (loss) before taxes
(benefit) ......................... (95.2) 1.6 (31.9) 2.3 * *
Taxes (benefit) on income (loss) (15.0) 0.7 (4.9) 0.9 * *
------- ------- ------- -------
Net income (loss) .................... (80.2)% 0.9% (27.0)% 1.4% * *
======= ======= ======= =======
</TABLE>
* NOT MEANINGFUL
THREE MONTHS ENDED SEPTEMBER 30, 1996 (THIRD QUARTER) COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1995
Sales decreased by $7.8 million, or 10.8%, from the comparable 1995
quarter. The decrease was due primarily to same store sales decreases of $7.9
million, or 11.5% of sales, partially offset by new and acquired store sales
increases of $0.2 million. Same store sales represent a comparison of store
sales between corresponding full periods. At the end of the Third Quarter of
1996, the Company had 192 stores in operation compared to 194 at the end of the
Third Quarter of 1995.
Gross profit was $19.7 million, or 30.6% of sales, compared with $27.6
million, or 38.3% of sales, for the Third Quarter of 1995. The 28.6% decrease in
gross profit dollars was attributable to lower sales together with lower
purchase volumes compared to 1995, resulting in reduced product volume growth
incentives from the Company's suppliers because the Company has curtailed its
store growth and in distribution costs increasing as a percent of sales due to
declining sales volume. In addition, the Company recorded an expense of $3.8
million related to specific items in inventory that were discontinued, obsolete
or previously stated at cost, cost is in excess of the current net realizable
value of these inventory items.
Operating, selling, general and administrative expenses for the period
increased by $3.5 million, or 9.5% as a percent of sales, over the 1995 period,
primarily due to a $4.3 million charge related to store costs and higher costs
associated with the Company's continued investment in information technology.
The lower sales volume resulted in these costs increasing as a percent of sales.
Operating, selling, general and administrative expenses increased as a percent
of sales to 44.1% in the period from 34.6% in the 1995 period.
A provision for asset impairment and store closings of $51.4 million was
recorded in the quarter. The $51.4 million provision for asset impairment and
store closings includes $37.7 million of intangibles, primarily cost in excess
of net assets acquired (goodwill), and a $13.7 million charge for store
closings, write off of certain store fixed assets and of certain assets of the
Company's distribution center, and liquidation of real estate previously
acquired for future expansion.
The Operating loss for the quarter was $60.0 million compared to
operating income of $2.7 million, or 3.7% of sales, in the Third Quarter of 1995
as a result of the factors discussed above.
Interest expense was $1.1 million, or 1.7% of sales, compared to $1.2
million, or 1.6% of sales, for the Third Quarter of 1995.
The Company's effective income tax (benefit) rate was (15.7)% of the
pre-tax loss compared to a provision of 45.2% of pre-tax income for the Third
Quarter of 1995. The relatively small tax benefit as a percent of pre-tax income
-11-
<PAGE>
is a result of $37.7 million of the provision for asset impairment being related
to costs in excess of assets acquired. The Company will not receive a tax
benefit from writing off these costs in excess of assets acquired as they are
not deductible for Federal income taxes. The 45.2% expense as a percent of
pre-tax income in the Third Quarter of 1995 was primarily as a result of
decrease in pre-tax income that increased the impact of the amortization of
costs in excess of net assets acquired, which is a permanent book-tax
difference.
Net loss of $51.7 million compares to net income of $0.6 million, or
0.9% of sales, in the Third Quarter of 1995, due to the reasons previously
discussed.
NINE MONTHS ENDED SEPTEMBER 30, 1996 (PERIOD) COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Sales for the 1996 period of $192.3 million decreased by $11.1 million,
or 5.5%,from the $203.4 million for the comparable period in 1995. The decrease
resulted from same store sales decreases of 7.5% of sales and was partially
offset by new and acquired store sales increases. Same store sales represent a
comparison of store sales between corresponding full periods.
Gross profit for the 1996 period was $69.5 million, or 36.1% of sales,
compared with $80.6 million, or 39.6% of sales, for the 1995 period. The 13.7%
decrease in gross profit was attributable primarily to lower sales, together
with reduced purchasing incentives received from suppliers due to the
curtailment of new store openings, and distribution costs increasing as a
percent of sales due to the decline in sales volumes. Additionally, the Company
recorded a charge of $3.8 million to cost of goods sold as a result of valuing
certain inventories at their realizable values which are less than original
costs.
Operating, selling, general and administrative expenses for the period
increased by $3.8 million, or 4.0% as a percent of sales, over the 1995 period,
primarily due to a $4.3 million charge related to store costs and increased
expenses associated with the Company's continued investment in information
technology and lower sales, resulting in these costs increasing as a percent of
sales. Operating, selling, general and administrative expenses increased as a
percent of sales to 39.3% in the 1996 period from 35.3% in the 1995 period.
A provision for asset impairment and store closings of $51.4 million was
recorded in the quarter. The $51.4 million provision for asset impairment and
store closings includes $37.7 million of intangibles, primarily cost in excess
of net assets acquired (goodwill), and a $13.7 million charge for store
closings, write off of certain store fixed assets and of certain assets of the
Company's distribution center, and liquidation of real estate previously
acquired for future expansion.
The operating loss in the 1996 period of $57.5 million compared to
operating income of $8.7 million, or 4.3% of sales during the 1995 period due to
the factors discussed previously.
Interest expense was $3.2 million, or 1.6% of sales compared to $3.1
million or 1.5% of sales for 1995 because of higher interest rates during the
period.
The Company's effective income tax (benefit) was (15.5)% of the pre-tax
loss, as compared to a provision of 39.1% of pre-tax income for the 1995 period.
The relatively small tax benefit as a percent of the pre-tax loss is a result of
$37.7 million of the provision for asset impairment being related to costs in
excess of assets acquired. The Company will not receive a tax benefit from
writing off these costs in excess of assets acquired as they are not deductible
for Federal income tax purposes. The 39.1% expense as a percent of pre-tax
income for the 1995 period resulted from a decrease in pre-tax income that
increases the impact of the amortization of cost in excess of net assets
acquired, which is a permanent book-tax difference.
The net loss of $51.9 million, was less than 1995 net income of $2.9
million, or 1.4% of sales, due to the factors previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities during 1996 provided net cash of $0.7
million. Investing activities utilized $3.5 million of cash, principally related
to the Company's capital expenditures. Financing activities provided $1.4
million of cash, principally resulting from net borrowings under the Company's
credit agreement(s).
Inventories have increased $5.7 million since December 31, 1995. This is
primarily a result of an increase in existing store and distribution center
inventories to allow for seasonal buildups. Average Company inventories per
store,
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including distribution center inventories, at the end of September 30, 1996,
were approximately $520,000 compared to approximately $499,000 at December 31,
1995.
The Company's primarily capital requirements during 1996 have been for
store remodelings, relocations and to improve the reliability of the Company's
business systems. Capital expenditures which principally related to store
remodelings, were $3.6 million in 1996 compared to $12.0 million for the same
period of 1995. The Company has remodeled four stores during the nine months
ended September 30, 1996. The Company has financed its growth through a
combination of internally generated funds, bank borrowings, sale and lease back
transactions, and issuance of common stock. Most of the Company's store sites
are leased.
At September 30, 1996, the Company had $44.0 million outstanding under
its $60.0 million credit agreement with certain commercial banks and total
unutilized bank credit facilities of approximately $14.7 million.
On October 23, 1996, the Company entered into a new financing agreement
with a new lender. Initial funding under this financing agreement was used to
repay amounts made under the Company's prior credit facility. The new financing
agreement provides for a borrowing base of up to $60.0 million of availability
under a revolving credit facility, which matures October 22, 1999, with annual
renewals at the option of the Company and the lender. Additionally, the credit
availability is limited to 60% of the value of saleable inventory and 85% of
accounts receivable and is secured by all inventories, receivables and fixed
assets. The borrowings may be priced, at the Company's option, at the lenders'
prime rate, plus 1/4 of 1% or London Interbank Offered Rates (LIBOR) plus 2.25%.
The Company pays a commitment fee of 3/8 of 1% per annum on all unused portions
of the credit facility. Loan covenants relate to the Company's net worth, cash
flow, and restrict capital expenditures to $6.0 million for 1996, $5.9 million
for 1997, and $5.0 million for 1998 and 1999; and restricts operating lease
payments to $16.0 million per annum through 1999. The Company is in compliance
with this new loan agreement as of September 30, 1996.
The Company evaluates all capital expenditures on a case by case basis
to determine whether such expenditures are prudent under current market
conditions. The Company does not expect to open any stores during 1996. The
Company does plan to remodel or relocate approximately two additional stores
prior to the end of 1996. Planned capital expenditures for the remainder of
1996, including those associated with remodels, relocations and conversions will
be approximately $1.5 to $2.5 million before sale and lease back and direct
lease transactions.
The Company believes that existing working capital, cash flows from
operations, bank borrowings, sale lease back of retail properties and the
issuance of Common Stock for selected acquisitions will be sufficient to fund
both capital and liquidity needs of the Company for the foreseeable future.
The book values of cash, trade accounts receivables and accounts payable
approximate their fair values principally because of the short-term maturities
of these instruments. The estimated fair value of long-term debt approximates
the book value as the financing is priced based upon a floating rate.
The Company accepts payment for sales by cash, including checks and
major credit cards, and offers accounts to commercial customers.
SEASONALITY
The Company's business is seasonal in nature, with store sales and
profits historically running higher in the second and third quarters (April
through September) of each year than in the Company's first and fourth quarters.
Sales and net income for the combined second and third quarters of 1995 were
54.6% and 130.0% of annual sales and net income, respectively. The Company's
business is also influenced by weather conditions. Weather extremes tend to
enhance sales by causing a higher incidence of parts failure, and thus
increasing sales of seasonal products. Rainy weather, however, tends to reduce
sales by causing deferral of elective maintenance.
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INSURANCE
The Company maintains insurance for on the job injuries to its
associates and other coverages for normal business risks. A substantial portion
of the Company's current and prior year insurance coverages are "high
deductible" policies in which the Company, in many cases, is responsible for the
payment of incurred claims up to specified individual and aggregate limits, over
which a third party insurer is contractually liable for any additional payment
of such claims. Accordingly, the Company bears certain economic risks related to
these coverages. On a continual basis, and as of each balance sheet date, the
Company records an accrual equal to the estimated costs expected to result from
incurred claims plus an estimate of claims incurred but not reported as of such
date based on the best available information at such date. However, the nature
of these claims is such that actual development of the claims may vary from the
estimated accruals. All changes in the accrual estimates are accounted for on a
prospective basis and can have a significant impact on the Company's financial
position or results of operations.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Financing Agreement among Registrant's
operating Subsidiary, Hi-Lo Auto Supply, L.P., and
the lender named therein, dated as of October 23,
1996, and Registrant's Guaranty relating thereto
dated as of October 23, 1996.
Exhibit 11.1 Schedule of Computation of Earnings Per Share
(b) Reports on Form 8-K
A Current Report dated August 30, 1996, was filed with the
Commission to report under Item 5 "Other Events" that on August
23, 1996, the Board of Directors of the Registrant declared a
dividend, payable to the Registrant's stockholders of record on
September 3, 1996, of a preferred share purchase right (a
"Right") for each outstanding share of the Registrant's Common
Stock. The terms of the Right were also described therein.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hi-Lo Automotive, Inc.
Date:
November 14, 1996 /s/ T. Michael Young
T. Michael Young
Chairman of the Board,
President and
Chief Executive Officer
Date:
November 14, 1996 /s/ Gary D. Walther
Gary D. Walther
Vice President-Finance and
Chief Financial Officer
Date:
November 14, 1996 /s/ Dale F. Bridges
Dale F. Bridges
Controller and
Chief Accounting Officer
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EXHIBIT 10.1
FINANCING AGREEMENT
THE CIT GROUP/BUSINESS CREDIT, INC.
AS AGENT AND LENDER
AND
HI-LO AUTO SUPPLY, L.P.
(AS BORROWER)
DATED: OCTOBER 23, 1996
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TABLE OF CONTENTS
SECTION 1. DEFINITIONS......................................................3
SECTION 2. CONDITIONS PRECEDENT............................................15
SECTION 3. REVOLVING LOANS.................................................20
SECTION 4. Intentionally Omitted...........................................23
SECTION 5. LETTERS OF CREDIT...............................................23
SECTION 6. COLLATERAL......................................................26
SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS.......................29
SECTION 8. INTEREST, FEES AND EXPENSES.....................................38
SECTION 9. POWERS..........................................................40
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................41
SECTION 11. TERMINATION.....................................................44
SECTION 12. MISCELLANEOUS..................................................45
SECTION 13. AGREEMENT BETWEEN THE LENDERS..................................48
SECTION 14. AGENCY.........................................................51
EXHIBITS
Exhibit A - Form of Revolving Loan Promissory Note
Exhibit B - Form of Assignment and Transfer Agreement
SCHEDULES
Schedule 1 - Existing Liens
Schedule 2 - Collateral Locations and Chief Executive Office
Schedule 3 - Existing Indebtedness
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THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, (hereinafter
"CITBC") with offices located at 5420 LBJ Freeway, Suite 200, Dallas, Texas
75240 (CITBC, and any other party hereafter becoming a Lender hereunder pursuant
to Section 13, Paragraph 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 Hi-Lo Auto Supply, L.P. (herein the "Company"), a
Texas limited partnership with a principal place of business at 2575 W.
Bellfort, Houston, Texas 77054.
SECTION 1. DEFINITIONS
ACCOUNTS shall mean all of the Company's now existing and future: (A) accounts
(as defined in the U.C.C.) and any and all other receivables including any Trade
Accounts Receivable, all rights to payment under bank or non-bank credit cards
(whether or not specifically listed on schedules furnished to the Agent),
including, without limitation, all accounts created by or arising from all of
the Company's sales of Inventory or rendition of services to its customers, and
all accounts arising from sales or rendition of services made under any of the
Company's trade names or styles, or through any of the Company's divisions; (B)
any and all instruments (as defined in the U.C.C.), documents (as defined in the
U.C.C.), contract rights (as defined in the U.C.C.) and chattel paper (as
defined in the U.C.C.); (C) unpaid seller's rights (including rescission,
replevin, reclamation and stoppage in transit) relating to the foregoing or
arising therefrom; (D) rights to any Inventory represented by any of the
foregoing, including rights to returned or repossessed Inventory; (E) reserves
and credit balances arising hereunder; (F) guarantees or collateral for any of
the foregoing; (G) insurance policies or rights relating to any of the
foregoing; and (H) cash and non-cash proceeds of any and all the foregoing.
ACCOUNTS RECEIVABLE ADVANCE PERCENTAGE shall mean eighty-five percent (85%).
AGENT COMMITMENT LETTER shall mean the commitment letter dated October 6, 1996,
issued by the Agent to, and accepted by, the Company.
AGENT FEE shall mean the fee payable to the Agent, and solely for the account of
the Agent, in accordance with, and pursuant to, the provisions of Section 8,
Paragraph 7 of this Financing Agreement.
ANNIVERSARY DATE shall mean the date occurring three (3) years from the date
hereof and the same date in every year thereafter.
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 sum of a) Eligible
Accounts Receivable multiplied by the Accounts Receivable Advance Percentage and
b) Eligible Inventory multiplied by the Inventory Advance Percentage less 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 of the Company) and y) the Availability Reserve.
AVAILABILITY RESERVE shall mean at any time of determination an amount equal to
(a) at the option of the Agent, in its sole discretion, the sum of two (2)
months rental payments on all of the Company's leased premises determined in
accordance with Schedule 1 hereto for which the Company has not delivered to the
Agent a landlord's waiver in form and substance satisfactory to the Agent in the
exercise of its reasonable business judgment, provided that such amount shall be
adjusted from time to time hereafter upon (i) delivery to the Agent of any such
acceptable waiver, (ii) the opening or closing of a Collateral location and/or
(iii) and change in rental payment; (b) upon the occurrence of a Default or an
Event of Default, the amount of all unpaid sales taxes due any state and which
sales taxes have been collected by the Company; and (c) subject to the
provisions of Section 7, Paragraph 10 of this Financing Agreement, such other
reserves as the Agent deems necessary in its sole discretion as a result of i)
negative forecasts and/or trends in the Company's business, industry, prospects,
profits, operations or financial condition or ii) other issues, circumstances or
facts that could otherwise negatively impact the Company, its business,
prospects, profits, operations, industry, financial condition or assets;
provided, however, that the aggregate amount of reserves pursuant to this clause
(c) and such other reserves referenced in the definition of "Special Reserve
Component" shall not exceed $5,000,000.00 in the aggregate at any one time.
BLOCKED ACCOUNT shall mean any Depository Account owned by the Company which is
governed by a Blocked Account Agreement in form and substance satisfactory to
the Agent.
BLOCKED ACCOUNT AGREEMENT shall mean an agreement among a Depository Bank, the
Agent and the Company in form and substance satisfactory to the Agent.
BUSINESS DAY shall mean any day that the Agent is open for business in New York,
New York, which is not (i) a Saturday, Sunday or legal holiday in the state of
New York or (ii) a day on which banking institution chartered by the state of
New York or the United States are legally required to close.
CAPITAL EXPENDITURES for any period shall (a) mean the aggregate of all
expenditures of the Company during such period that in conformity with GAAP are
required to be included in or reflected by the property, plant or equipment or
similar fixed asset account reflected in the balance sheet of the Company, and
shall (b) be based on the Consolidated Financial Statements.
CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed)
which, in conformity with GAAP, is accounted for as a capital lease or a Capital
Expenditure on the balance sheet of the Company.
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CHASE MANHATTAN BANK RATE shall mean the rate of interest per annum announced by
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 Chase Manhattan Bank to its borrowers).
CLOSING DATE shall mean the date on or after the date hereof upon which the
Agent in behalf of the Lenders makes the initial extension of credit hereunder
whether in the form of Revolving Loans, or Letters of Credit.
COLLATERAL shall mean all present and future Accounts, Equipment, Inventory,
Documents of Title, General Intangibles, Real Estate and Other Collateral of the
Company.
COLLATERAL MANAGEMENT FEE shall mean the sum of $50,000.00 which shall be paid
to the Agent in accordance with Section 8, Paragraph 8 hereof to offset the
expenses and costs of CITBC in connection with record keeping, periodic
examinations, analyzing and evaluating the Collateral.
CONCENTRATION ACCOUNT shall mean any account owned by the Agent which receives
funds from i) the Depository Accounts and ii) the credit card companies.
CONSOLIDATED FINANCIAL STATEMENTS shall mean a consolidated balance sheet for
Parent, the Company and the consolidated subsidiaries of each eliminating all
inter-company transactions and prepared in accordance with GAAP, and statements
of profit and loss, cash flow and reconciliation of surplus of Parent, the
Company and all subsidiaries, each eliminating all inter-company transactions
and prepared in accordance with GAAP.
CONSOLIDATING FINANCIAL STATEMENTS shall mean a Consolidated Balance Sheet plus
individual balance sheets for Parent, the Company, and the subsidiaries of each
showing all eliminations of inter-company transactions in form satisfactory to
Agent in its sole discretion, and including a balance sheet for the Company
exclusively, and statements of profit and loss, cash flow and reconciliation of
surplus of Parent, the Company and all subsidiaries, each eliminating all
inter-company transactions in form satisfactory to Agent in its sole discretion.
CONTRACT RATE shall mean the applicable rate of interest computed as set forth
in Section 8, Paragraph 1 of this Financing Agreement.
CURRENT ASSETS shall mean, wherever used throughout this Financing Agreement,
those assets of the Company which in accordance with GAAP are classified as
current.
CURRENT LIABILITIES shall mean, wherever used through out this Financing
Agreement, those liabilities of the Company which in accordance with GAAP, are
classified as "current", provided, however, that notwithstanding GAAP, the
Revolving Loans and the current portion of Permitted Indebtedness shall be
considered "current liabilities".
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CUSTOMARILY PERMITTED LIENS shall mean:
(a) liens of local or state authorities for franchise or other like taxes
provided the aggregate amounts of such liens shall not exceed $100,000.00 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;
(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; and
(d) easements (including, without limitation, reciprocal easement
agreements and utility agreements), encroachments, minor defects or
irregularities in title, variation and other restrictions, charges or
encumbrances (whether or not recorded) affecting the Real Estate and which (i)
are listed in Schedule B of the title insurance policy on the Distribution
Center which is delivered to the Agent herewith or (ii) in the aggregate (x) do
not materially interfere with the occupation, use or enjoyment by the Company in
its business of the property so encumbered and (y) in the reasonable business
judgment of the Agent do not materially and adversely affect the value of such
Distribution Center.
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 of interest based upon the applicable
increment over the Chase Manhattan Bank Rate as determined under Section 8
hereof, which the Agent in behalf of the Lenders shall be entitled to charge the
Company on all Obligations due the Agent in behalf of the Lenders by the Company
to the extent provided in Section 10, Paragraph 2 of this Financing Agreement.
DEPOSITORY ACCOUNTS shall mean those accounts (other than the Concentration
Account) owned by the Company and subject to a Blocked Account Agreement and
designated for the deposit of proceeds of Collateral.
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DISTRIBUTION CENTER shall mean the Company's Real Estate located at 8601
Tavernor Lane, Houston, Texas 77075.
DOCUMENTATION FEE shall mean I) the sum included in the Loan Facility Fee
intended to compensate the Agent for the use of the Agent's in-house Legal
Department and facilities in documenting, in whole or in part, the initial
transaction solely on behalf of the Agent, exclusive of Out-of-Pocket Expenses,
and II) the Agent's standard 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 the date on which the Company terminates this
Financing Agreement or the Line of Credit which date is prior to an Anniversary
Date.
EARLY TERMINATION FEE shall: I) mean the fee the Agent in behalf of the Lenders
is entitled to charge the Company in the event the Company terminates the Line
of Credit or this Financing Agreement on a date prior to one year from the date
hereof; and II) be determined by calculating the average daily (x) loan balance
under the Revolving Loan plus (y) balance of Letters of Credit for the period
from the date of this Financing Agreement to the Early Termination Date and
multiplying that number by (a) one percent (1%) if the Early Termination Date
occurs on or before the expiration of one year from the date hereof; (b) one
half of one percent (0.5%) if the Early Termination Date occurs after the
expiration of one year from the date hereof and on or prior to two years from
the date hereof; and (c) zero percent (0%) if the Early Termination Date occurs
after two years from the date hereof.
EBITDA shall (a) mean, in any period, all earnings before all (i) interest and
tax obligations, (ii) depreciation and (iii) amortization for said period, all
determined in accordance with GAAP on a basis consistent with the latest audited
financial statements of the Company but excluding the effect of extraordinary
and/or non-reoccurring gains or losses for such period; and (b) be calculated
based on the Consolidated Financial Statements.
ELIGIBLE ACCOUNTS RECEIVABLE shall mean the gross amount of the Company's Trade
Accounts Receivable, other than such accounts that arise from credit card sales,
that are subject to a valid, first priority and fully perfected security
interest in favor of the Agent in behalf of the Lenders and which conform to the
warranties contained herein and at all times continue to be acceptable to the
Agent in the exercise of its reasonable business judgment, less, without
duplication, the sum of a) any returns, discounts, claims, credits and
allowances of any nature (whether issued, owing, granted or outstanding) and b)
reserves for: i) sales to the United States of America or to any agency,
department or division thereof; ii) foreign sales other than sales x) secured by
stand-by letters of credit (in form and substance satisfactory to the Agent)
issued or confirmed
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by, and payable at, banks having a place of business in the United States of
America and payable in United States currency, or y) to customers residing in
Canada provided such sales otherwise comply with all of the other criteria for
eligibility hereunder, are payable in United States currency iii) accounts that
remain unpaid more than ninety (90) days from invoice date; iv) contras; v)
sales to Parent, any subsidiary, or to any company affiliated with the Company
or Parent in any way; vi) bill and hold (deferred shipment) or consignment
sales; vii) sales to any customer which is a) insolvent, b) the debtor in any
bankruptcy, insolvency, arrangement, reorganization, receivership or similar
proceedings under any federal or state law, c) negotiating, or has called a
meeting of its creditors for purposes of negotiating, a compromise of its debts
or d) financially unacceptable to the Agent or has a credit rating unacceptable
to the Agent; viii) all sales to any customer if fifty percent (50%) or more of
either x) all outstanding invoices or y) the aggregate dollar amount of all
outstanding invoices, are unpaid more than ninety (90) days from invoice date;
ix) any other reasons deemed necessary by the Agent in its reasonable business
judgment and which are customary either in the commercial finance industry or in
the lending practices of the Agent and/or the Lenders; and x) an amount
representing, historically, returns, discounts, claims, credits and allowances,
and c) subject to the provisions of Section 7, Paragraph 10 of this Financing
Agreement, such other reserves as the Agent, in its sole discretion may deem
appropriate; provided, however, that the aggregate reserves pursuant to this
clause c) and such other reserves referenced in the definition of "Special
Reserve Component" shall not exceed $5,000,000.00 in the aggregate at any one
time.
ELIGIBLE INVENTORY shall mean the gross cost 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 herein less any i) supplies, ii) Inventory not present in the United
States of America, iii) Inventory returned or rejected by the Company's
customers other than Inventory that is undamaged and resalable in the normal
course of business, iv) Inventory to be returned to the Company's suppliers, v)
Inventory in transit to third parties, vi) shrinkage, and vii) reserves required
by the Agent in accordance with the standard set forth below and without
duplication but only for the following: (a) Inventory specially ordered for
specific customers which Inventory is uniquely different in size, shape, quality
or color and which uniquely different Inventory is not customarily sold by the
Company; (b) market value declines, to the extent the Inventory's value is below
its cost; (c) bill and hold (deferred shipment or consignment sales); (d)
markdowns, to the extent the Inventory's value is below its cost; (e) Inventory
which is not located at the Company's retail store locations or warehouses
(other than Inventory in transit between the Company's facilities); (f)
demonstration items, to the extent the Inventory's value is below its cost; (g)
damaged or defective Inventory; (h) obsolete Inventory (but not including
undamaged Inventory which is solely out-of-season); (i) Inventory at outlet
locations not owned or operated by the Company; (j) Inventory held for lease;
and k) Inventory imported under letters of credit issued without the assistance
of the Letter of Credit Guaranty and then only until the bank issuing such
letters of credit has been reimbursed by the Company for any drafts under such
letters of credit; (with respect to all of the foregoing, such standards shall
take into consideration amounts representing, historically, the Company's
reserves, discounts, returns, claims, credits and allowances) and viii) subject
to the provisions of Section 7, Paragraph 10 of this Financing Agreement, such
reserves as the Agent, in its sole
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discretion, may deem appropriate; provided, however, that the aggregate reserves
pursuant to this clause viii) and such other reserves referenced in the
definition of "Special Reserve Component" shall not exceed $5,000,000.00 in the
aggregate at any one time. 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 or 1974, as amended
from time to time and the rules and regulations promulgated thereunder from time
to time.
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 10 of this
Financing Agreement.
EXCESS AVAILABILITY shall mean the amount by which Availability on any date of
determination exceeds all past due or then due debts, obligations and payables
of the Company.
FISCAL QUARTER shall mean each three (3) month period ending on March 31, June
30, September 30, and December 31 of each year.
FISCAL YEAR shall mean each twelve (12) month period commencing on January 1st
of each year and ending on the following December 31st.
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 tradenames, Trademarks (together with the goodwill associated
therewith), Patents, licenses, customer lists, distribution agreements, supply
agreements and tax refunds, together with all monies and claims for monies now
or hereafter due and payable in connection with any of the foregoing or
otherwise, and all cash and non-cash proceeds thereof.
GUARANTORS shall mean ( i) Parent, ii) Hi-Lo Management Company, (iii) Hi-Lo
Investment Company, (iv) First Call Management Company, and (v) First Call Auto
Supply, L.P.
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.
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INVENTORY shall mean all of the Company's present and hereafter acquired
inventory (as defined in the U.C.C.) including, without limitation all
merchandise, inventory and goods, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and materials
used or usable in manufacturing, processing, packaging or shipping same; in all
stages of production- from raw materials through work-in-process to finished
goods - and all proceeds thereof of whatever sort.
INVENTORY ADVANCE PERCENTAGE shall mean sixty percent (60%).
ISSUING BANK shall mean the bank issuing Letters of Credit for the Company.
LANDLORD AGREEMENT shall have the meaning specified in Section 2, Paragraph y
hereof.
LETTERS OF CREDIT shall mean all letters of credit issued with the assistance of
the Agent in 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 in 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 in behalf of the
Lenders may charge the Company under Section 8, Paragraph 3 of this Financing
Agreement for: i) issuing the Letter of Credit Guaranty or ii) otherwise aiding
the Company in obtaining Letters of Credit.
LETTER OF CREDIT SUB-LINE shall mean $5,000,000.00 in the aggregate.
LEVERAGE RATIO shall mean the ratio determined by dividing Total Liabilities by
Tangible Net Worth.
LIBOR shall mean at any time of determination, and subject to availability, for
each interest period the higher of the applicable London Interbank Offered rate
paid in London on dollar deposits from other banks as (x) quoted by Chase
Manhattan Bank, (y) 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 (z) 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 those 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, or three month U.S.
dollar deposits, as selected by the Company.
LIMITED PARTNERSHIP AGREEMENT shall mean the limited partnership agreement of
the Company, as amended.
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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 equal to $60,000,000.00.
LINE OF CREDIT FEE shall: I) mean the fee due the Agent for the benefit of the
Lenders at the end of each month for the Line of Credit, and II) be determined
by multiplying the difference between the the Line of Credit and the sum of (x)
the average daily balance of Revolving Loans of the Company plus (y) the average
daily balance of Letters of Credit for said month by three hundred seventy five
thousandths of one percent (.375%) 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,
Paragraph 7 of this Financing Agreement.
MAXIMUM LEGAL RATE shall mean the 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 (whichever provides for the highest permitted rate), 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. For purposes of
determining the Maximum Legal Rate under the applicable law of the State of
Texas, the applicable rate ceiling shall be (a) the indicated rate ceiling
described in and computed in accordance with the provisions of Section (a) (1)
of Art. 5069-1.04, Title 79, Revised Civil Statutes of Texas, 1925, as amended
or (b) provided notice is given as required by Section (h)(1) of said Art.
5069-1.04, the quarterly ceiling or the annualized ceiling computed pursuant to
Section (d) of said Art. 5069-1.04; provided, however, that at any time the
indicated rate ceiling, the quarterly ceiling or the annualized ceiling shall be
less than 18% per annum or more than 24% per annum, the provisions of Sections
(b) (1) and (2) of said Art. 5069-1.04 shall control for purposes of such
determination, as applicable.
NET WORTH shall mean assets in excess of liabilities, and shall be determined in
accordance with GAAP , on a consistent basis with the latest audited statements
.
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 howsoever arising, 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
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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;
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 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 (in
behalf of the Lenders) acceptance of drafts or the Agent's (in behalf of the
Lenders) endorsement of notes or other instruments for the Company's account and
benefit.
OPERATING LEASES shall mean all leases of property (whether real, personal or
mixed) other than Capital Leases.
OTHER COLLATERAL shall mean all now owned and hereafter acquired deposits
accounts maintained with any bank or financial institutions; all cash and other
monies and property in the possession or control of the Agent and/or the
Lenders; all books, records, ledger cards, disks and related data processing
software at any time evidencing or containing information relating to any of the
Collateral described herein or otherwise necessary or helpful in the collection
thereof or realization thereon, and all cash and non-cash proceeds of the
foregoing.
OUT-OF-POCKET EXPENSES shall mean all of the Agent's and/or the Lenders' 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 costs and expenses incurred by the
Agent and/or the Lenders 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 in behalf
of the Lenders, incurred by or charged to the Agent in 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 and/or the Lenders' standard fees relating to the Letters of Credit and
any drafts thereunder, reasonable local counsel fees, title insurance premiums,
real estate survey costs, appraisal fees, field examination expenses and fees
and taxes relative to the filing of financing statements, costs of preparing and
recording mortgages/deeds of trust against the Real Estate and all expenses,
costs and fees set forth in Section 10, Paragraph 3 of this Financing Agreement.
PARENT shall mean Hi-Lo Automotive, Inc.
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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: I) liens existing on the date hereof on
specific items of Equipment and listed on Schedule 1 hereto and other liens
expressly permitted, or consented to, by the Agent; II) Purchase Money Liens;
III) Customarily Permitted Liens; IV) liens granted the Agent by the Company; V)
liens of judgment creditors provided such liens do not exceed, in the aggregate,
at any time, $50,000.00 (other than liens bonded or insured to the reasonable
satisfaction of the Agent); and VI) liens for taxes not yet due and payable or
which are being diligently contested in good faith by the Company by appropriate
proceedings or the Company establishes such reserves as may be required by GAAP
and which liens are not x) other than with respect to Real Estate, senior to the
liens of the Agent or y) for taxes due the United States of America.
PERMITTED INDEBTEDNESS shall mean: I) 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; II) the indebtedness secured by
the Purchase Money Liens; III) indebtedness arising under the Letters of Credit
and this Financing Agreement; IV) deferred taxes and other expenses incurred in
the ordinary course of business; V) 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, or set forth on Schedule 3 attached hereto; VI) other
Indebtedness of the Company in an amount not to exceed $250,000.00, in the
aggregate at any time outstanding, provided, such Indebtedness is a) not secured
by the Collateral and b) not due the Parent or any subsidiaries of the Company
or the Parent; VII) any extension, renewal or replacement of any of the
foregoing, provided that any extension, renewal or replacement shall be in an
amount not greater than the Indebtedness so extended, renewed or replaced (plus
the amount of expenses, fees and any premium or penalty paid in connection with
such extension, renewal or replacement; and VIII) Capital Leases having an
aggregate indebtedness of not more than $2,000,000.00.
PERSON shall mean an individual, partnership, corporation, business trust, joint
stock company, trust, unincorporated association, joint venture, governmental
authority or other entity of whatever nature.
PURCHASE MONEY LIENS shall mean liens on any item of equipment acquired after
the date of this Financing Agreement provided that I) each such lien shall
attach only to the property to be acquired, II) a description of the property so
acquired is furnished to the Agent, and III) the debt incurred in connection
with such acquisitions shall not exceed in the aggregate $250,000.00 in any
Fiscal Year.
REAL ESTATE shall mean the Company's fee and/or leasehold interests in the real
property which has been, or will be, encumbered, mortgaged, pledged or assigned
to the Agent or its designee.
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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.
RETAINED CASH shall mean an amount of cash sufficient to provide the Company
with cash in an amount necessary to stock the Company's cash registers at its
retail locations and consistent with the business practices of the Company which
amount shall also include any and all amounts delivered to the Company from its
Depository Accounts as provided in the Block Account Agreements.
REVOLVING LOANS shall mean the loans and advances made, from time to time, to or
for the account of the Company by the Agent in behalf of the Lenders pursuant to
Section 3 of this Financing Agreement.
REVOLVING LOAN ACCOUNT shall have the meaning specified in Section 3, Paragraph
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 in 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 x) the Agent shall not have, as
Agent, any money at risk and y) on such Settlement Date the Lenders shall have a
pro rata amount of all outstanding Revolving Loans and Letters of Credit,
provided that each Settlement Date for a Lender shall be a Business Day on which
such Lender and its bank are open for business.
SPECIAL RESERVE COMPONENT shall mean (i) clause (c) in the definition of
"Availability Reserve;" (ii) clause c) in the definition of Eligible Accounts
Receivable; and (iii) clause viii) appearing at the end of the definition of
"Eligible Inventory."
STANDARD RESERVE COMPONENT shall mean the following language to be inserted
immediately preceding the parenthetical phrase at the end of the definition of
"Eligible Inventory": "The amount of such reserves shall be determined solely by
the Agent in its reasonable discretion and in the exercise of its reasonable
business discretion using standards customarily applied by the Agent to
transactions involving retail clients and taking into account the nature of the
Company's business, consistently applied by the Agent".
TANGIBLE NET WORTH shall mean Net Worth less all assets which in accordance with
GAAP would be classified as intangibles, including without limitation, all
patents, trademarks, copyrights and goodwill.
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TOTAL LIABILITIES shall mean total liabilities of the Company determined in
accordance with GAAP, on a basis consistent with the latest audited statements
of the Company.
TRADE ACCOUNTS PAYABLE shall mean, at any time of determination, the amounts due
any supplier for Inventory sold to the Company.
TRADE ACCOUNTS RECEIVABLE shall mean at any time of determination, the amounts
due the Company by any i) credit card issuer and ii) any customer obligated on
an invoice in each instance due as a result of a sale of Inventory or the
rendition of services by the Company.
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 Texas.
WORKING CAPITAL shall mean Current Assets in excess of Current Liabilities.
SECTION 2. CONDITIONS PRECEDENT
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 satisfactory to the Agent that casualty insurance policies listing
CITBC as loss payee or mortgagee, as the case may be, are in full force and
effect, all as set forth in Section 7, paragraph 5 of this Financing Agreement.
C) MORTGAGES/DEEDS OF TRUST - The Company shall have executed and
delivered to either the Agent or an agent of the Agent or of a title insurance
company acceptable to the Agent such mortgages and deeds of trust as the Agent
may reasonably require to obtain first liens on the Distribution Center.
D) 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 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
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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.
E) TITLE INSURANCE POLICIES - The Agent shall have received, in respect of
the mortgage or deed of trust relating to the Distribution Center, a mortgagee's
title policy or marked-up unconditional binder for such insurance. Such policy
shall (i) be in an amount satisfactory to the Agent, and not less than
$6,000,000.00; (ii) insure that the mortgage or deed of trust insured thereby
creates a valid first lien on the property covered by such mortgage or deed of
trust, free and clear of all defects and encumbrances except those acceptable to
the Agent ; (iii) name the Agent as the insured thereunder; and (iv) contain
such endorsements and effective coverage as the Agent may reasonably request,
including without limitation the revolving line of credit endorsement. The Agent
shall also have received evidence that all premiums in respect of such policy
has been paid and that all charges for mortgage recording taxes, if any, shall
have been paid.
F) SURVEYS - The Agent and the title insurance company issuing each policy
referred to in the immediately preceding paragraph (each, a "TITLE INSURANCE
COMPANY") shall have received maps or plats of a perimeter or boundary of the
site of each of the properties covered by the mortgages or deeds of trust, dated
a date satisfactory to the Agent and the relevant Title Insurance Company
prepared by an independent professional licensed land surveyor satisfactory to
the Agent and the relevant Title Insurance Company, which maps or plats and the
surveys on which they are based shall be made in accordance with the Minimum
Standard Detail Requirements for Land Title Surveys jointly established and
adopted by the American Land Title Association and the American Congress on
Surveying and Mapping; and, without limiting the generality of the foregoing,
there shall be surveyed and shown on the maps or plats or surveys the following:
(i) the locations on such sites of all the buildings, structures and other
improvements and the established building setback lines insofar as the foregoing
affect the perimeter or boundary of such property; (ii) the lines of streets
abutting the sites and width thereof; (iii) all access and other easements
appurtenant to the sites or necessary or desirable to use the sites; (iv) all
roadways, paths, driveways, easements, encroachments and overhanging projections
and similar encumbrances affecting the sites, whether recorded, apparent from a
physical inspection of the sites or otherwise known to the surveyor; (v) any
encroachments on any adjoining property by the building structures and
improvements on the sites; and (vi) if the site is designated as being on a
filed map, a legend relating the survey to said map. Further, the survey shall
x) be certified to the Agent and the Title Insurance Company and y) contain a
legend reciting as to whether or not the site is located in a flood zone.
G) GUARANTIES - The Guarantors shall have executed and delivered to the
Agent guaranties, in form acceptable to the Agent, guaranteeing all present and
future Obligations of the Company to the Agent and/or the Lenders.
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H) OPINIONS - Counsel for the Company and the Guarantors shall have
delivered to the Agent opinions satisfactory to the Agent opining, inter alia,
that, subject to the i) filing, priority and remedies provisions of the Uniform
Commercial Code, ii) the provisions of the Bankruptcy Code, insolvency statutes
or other like laws, iii) the equity powers of a court of law and iv) such other
matters as may be agreed upon with the Agent: (a) this Financing Agreement, (b)
the Guaranty of the Guarantors, and (c) all other loan documents of the Company
and the Guarantors are x) valid, binding and enforceable according to their
terms, y) are duly authorized and z) do not violate any terms, provisions,
representations or covenants in the Limited Partnership Agreement of the Company
or of the limited partnership agreement of First Call Auto Supply, L.P., or the
charter or by-laws of the corporate Guarantors or, to the knowledge of such
counsel, of any loan agreement, mortgage, deed of trust, note, security or
pledge agreement or indenture, after reasonable inquiry, to which the Company or
the Guarantors is a signatory or by which the Company or the Guarantors or their
assets are bound;
I) ADDITIONAL DOCUMENTS - The Company shall have executed and delivered to
the Agent all loan documents necessary to consummate the lending arrangement,
including but not limited to this Financing Agreement, contemplated between the
Company, the Agent and the Lenders.
J) PARTNERSHIP CERTIFICATE - The Agent shall have received (i) a
partnership certificate executed by the sole general partner of the Company
certifying the authority of sole general partner to act on behalf of the
Company; (ii) a certificate of the Secretary of the sole general partner
certifying the resolutions of the sole general partner on behalf of the Company
authorizing the execution, delivery and performance of this Financing Agreement
and any ancillary documents executed in conjunction herewith; and (iii) a
certificate of the Secretary of the sole general partner of the Company as to
the incumbency and signature of the officers of the sole general partner of the
Company authorized to execute and deliver this Financing Agreement and
certificate or other document to be delivered on behalf of the Company pursuant
to the terms of this Financing Agreement.
K) PARTNERSHIP ORGANIZATION - The Agent shall have received (i) a copy of
the Certificate of Limited Partnership of the Company certified by the Secretary
of State of Texas, and (ii) a copy of any amendments, agreements and any other
documents executed in connection therewith (as amended through the date hereof)
of the Company and certified by the sole general partner of the Company.
L) GENERAL PARTNER'S CERTIFICATE/OFFICER'S CERTIFICATE - The Agent shall
have received (a) an executed Partnership Certificate and (b) an executed
General Partner's Certificate and/or Officer's Certificate of the Company,
satisfactory in form and substance to the Agent, certifying that to the
knowledge of such partner and/or officer after due inquiry; (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 in all material respects with all of the terms and provisions set
forth herein, except as the Company may otherwise notify the Agent in writing;
and (iii) no Event of Default, or any event which, with the giving of notice or
the passage of
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time or both would constitute an Event of Default or a material adverse change
has occurred.
M) BOARD RESOLUTION - The Agent shall have received a copy of the
resolutions of the Board of Directors of the corporate Guarantors (as the case
may be) authorizing the execution, delivery and performance of (i) the corporate
Guaranties and (ii) any related agreements, in each case certified by the
Secretary or Assistant Secretary of the corporate Guarantors (as the case may
be) as of the date hereof, together with a certificate of the Secretary or
Assistant Secretary of the Guarantors (as the case may be) as to the incumbency
and signature of the officers of the Guarantors 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.
N) CORPORATE ORGANIZATION - The Agent shall have received (i) a copy of
the Certificate of Incorporation of the corporate Guarantors certified by the
Secretary of State of its incorporation, (ii) a copy of the By-Laws (as amended
through the date hereof) of the corporate Guarantors certified by the Secretary
or Assistant Secretary thereof.
O) CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED
SEPTEMBER 30, 1996 - The Agent shall have received from the Company a copy of
the foregoing financial statements which must be satisfactory in form and
substance to the Agent.
P) 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 .
Q) EXCESS AVAILABILITY - On the date of the initial disbursement of
Revolving Loans, the Company must have, after giving effect to all Revolving
Loans and disbursements, an Excess Availability of $10,000,000.00. This
requirement contemplates that all debts, obligations and payables of the Company
are then current in accordance with its usual business practices.
R) LEGAL RESTRAINTS/LITIGATION - At the date of execution of this
Financing Agreement, there shall be no x) litigation, investigation or
proceeding (judicial or administrative) pending or threatened against the
Company or the Guarantors or their assets, by any agency, division or department
of any county, city, state or federal government arising out of this Financing
Agreement; or the financing arrangement contemplated under this Financing
Agreement, y) injunction, writ or restraining order restraining or prohibiting
the consummation of the financing arrangements contemplated under this Financing
Agreement or z) to the best knowledge of the Company, suit, action,
investigation or proceeding (judicial or administrative) pending or threatened
against the Company or the Guarantors or their 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
and/or the Guarantors
S) 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
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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.
T) EXAMINATION & VERIFICATION - The Agent shall have completed to the
satisfaction of the Agent an examination and verification of the Accounts,
Inventory, books and records of the Company and the Guarantors 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 $10,000,000.00, 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 in accordance with its normal
business procedures.
U) 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 .
V) BANKING AND/OR CREDIT CARD ARRANGEMENTS - As of the Closing Date, the
Company shall have i) delivered to the Agent executed Blocked Account Agreements
for all Depository Accounts (other than the operating accounts of the Company
which Depository Accounts shall be Blocked Accounts; ii) established a
Concentration Account; iii) required the credit card companies with which it
transacts business to remit balances to a Concentration Account; and iv)
delivered to the Agent executed instruction letter(s), all in form and substance
satisfactory to the Agent, confirming all of the foregoing items which shall be
acceptable to the Agent in all respects.
W) EXISTING REVOLVING CREDIT AGREEMENT - The Company's existing credit
agreement with NationsBank of Texas N.A. shall be (x) terminated, (y) all loans
and obligations of the Company and/or the Guarantors thereunder shall be paid or
satisfied in full utilizing the proceeds of the initial Revolving Loans to be
made under this Financing Agreement and (z) all liens upon or security interest
in favor of NationsBank of Texas, N.A. in connection therewith shall be
terminated and/or released upon such payment.
X) 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.
Y) LANDLORDS' AGREEMENTS - The Agent shall have received from each
landlord of any premises occupied by the Company, a landlord's waiver waiving
any such landlord's lien on the Company's Inventory and Equipment pursuant to an
agreement as shall be reasonably satisfactory in form and substance to the Agent
("Landlord's Agreement").
Upon the execution of this Financing Agreement and the initial disbursement of
loans hereunder, all of the above Conditions Precedent shall have been deemed
satisfied except as the Company and the Agent shall otherwise agree herein or in
a separate writing, or except as set forth in the next sentence. Notwithstanding
the foregoing, upon the Closing Date the Company and the Agent agree that the
Company shall have satisfied (i) the Condition Precedent set forth in
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paragraph y) above by delivering to the Agent on or before thirty (30) days from
the Closing Date one hundred percent (100%) of the Landlords' Agreements
pursuant to the terms of paragraph y above; (ii) the Condition Precedent set
forth in paragraphs c), e) and f) above by delivering same to the Agent on or
before thirty (30) days from the Closing Date; (iii) the Condition Precedent set
forth in paragraph v) with respect to Blocked Accounts only, provided that upon
the Closing Date not less than eighty percent (80%) of all Depository Accounts
have become Blocked Accounts, and the remaining twenty percent (20%) of such
Depository Accounts have become Blocked Accounts within ten (10) days from the
Closing Date (and the Company has delivered to the Agent executed Blocked
Account Agreements within such ten (10) day period). After thirty (30) days from
the Closing Date, until such requirement in paragraph y) above has been fully
met to the Agent's satisfaction, the Agent may, at its sole option, continue to
reserve an amount against the Company's Availability equal to twice the monthly
rent on each of the premises for which a Landlord's Agreement has not been
received by the Agent but the failure to provide such Landlords' Agreements
shall not be deemed by the Agent to be an Event of Default hereunder. However,
the failure of the Company to satisfy the Conditions Precedent set forth in
paragraphs c), e), f) and v) above shall be deemed by the Agent to be an Event
of Default hereunder.
SECTION 3. REVOLVING LOANS
1. Upon the Agent's receipt of an executed Revolving Loan Promissory Note
in the form of Exhibit A hereto, the Lenders agree, subject to the terms and
conditions of this Financing Agreement from time to time, and within x) the
Availability and y) the Line of Credit, but subject to 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). Such loans and advances shall be in amounts up
to the sum of: A) outstanding Eligible Accounts Receivable of the Company
multiplied by the Accounts Receivable Advance Percentage, plus B) the aggregate
value of Eligible Inventory of the Company as determined at the lower of cost or
market multiplied by the Inventory Advance Percentage. Each request shall
constitute, unless otherwise disclosed in writing to the Agent and the Lenders a
representation and warranty by the Company that (i) after giving effect to the
requested advance, no Default or Event of Default has occurred and (ii) such
requested Revolving Loan is within the Line of Credit and Availability. All
requests for loans and advances must be received by an officer of the Agent no
later than 1:00 p.m., New York time, of the day on which such loans and advances
are required. Should the Agent for any reason honor requests for advances in
excess of the limitations set forth herein, such advances shall be considered
"overadvances" and shall be made in the Agent's sole discretion, subject to any
additional terms the Agent deems necessary.
2. In furtherance of the continuing assignment and security interest in
the Company's Accounts and Inventory, the Company will, 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 agings of
the Company's Trade Accounts Receivable in such form, frequency and manner as
the Agent may require, and such other information as the
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Agent may reasonably request to effectively evaluate the Trade Account
Receivable and the collectibility thereof and the mix of the Inventory and such
other information as the Agent may reasonably require such as returns, claims,
credits, allowances, and information identifying and describing the Trade
Accounts Receivable, 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 with, or purchase orders from, the Company's customers, and copies of
invoices to customers, proof of shipment or delivery 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. Such reports are to be executed by a
responsible officer of the Company. 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. The Company hereby represents and warrants that: each Trade Account
Receivable is based on an actual and bona fide sale and delivery of Inventory or
rendition of services to customers, made by the Company in the ordinary course
of its business; the goods and Inventory being sold and the Trade Accounts
Receivable 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; the invoices evidencing such Trade Accounts Receivable or credit
card receipts evidencing credit card sales are in the name of the Company; and
the customers of the Company have accepted the goods or services, owe and are
obligated to pay the full amounts stated in the invoices or credit card receipts
according to their terms, without dispute, offset, defense, counterclaim or
contra, except for disputes and other matters arising in the ordinary course of
business with respect to which the Company has complied with the notification
requirements of Paragraph 5 of this Section 3. 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 (except as otherwise provided in paragraph 6 of
Section 7 of this Financing Agreement) 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 limited partnership and is
qualified in all states where the failure to so qualify would have an 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 the Accounts. All of the books and records of
the Company will be available to the Agent at normal business hours, including
any records handled or maintained for the Company by any other company or
entity.
4. During the term of the Financing Agreement, the Company may and will
enforce, collect and receive all amounts owing on the Accounts for the Agent's
and Lenders' benefit and on their behalf, but at the Company's expense; such
privilege shall terminate automatically upon
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the institution by or against the Company of any proceeding under any bankruptcy
or insolvency law or, at the election of the Agent, 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. Except for Retained Cash, all
checks, cash, notes or other instruments or property received by the Company
from the sale of Inventory must be deposited promptly to the Depository Accounts
and promptly thereafter and therefrom to a Concentration Account. The Company
shall require that all amounts due under credit card sales be remitted by the
credit card companies to the Concentration Account. All amounts received by the
Agent for the account of the Lenders will be credited to the Obligations upon
the Agent's receipt of "collected 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 pm
or on the next succeeding Business Day if received after 1:00 pm. 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.
5. The Company agrees to notify the Agent promptly of any matters
materially affecting the value, enforceability or collectibility of the
Accounts, in the aggregate, 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 thereafter all future credits or allowances shall be made only
after the Agent's prior written approval. Upon 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 and on notice from the Agent the
Company agrees that all returned, reclaimed or repossessed merchandise or goods
shall be set aside by the Company, marked with the Agent's name and held by the
Company for the Agent's account as owner and assignee.
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 above set forth, 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.
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7. After the end of each month, the Agent, on its own behalf and/or acting
on behalf of the Lenders, shall promptly send the Company a statement showing
the accounting for the charges, loans, advances and other transactions occurring
between the Agent, on its own behalf, and/or acting on behalf of the Lenders,
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.
8. In the event that the sum of (i) the outstanding balance of Revolving
Loans and (ii) outstanding balance of Letters of Credit exceeds (x) the maximum
amount thereof available under Sections 3 and 5 hereof or (y) the Line of Credit
(herein the amount of any such excess shall be referred to as the "Excess") such
Excess shall be due and payable to the Agent for the benefit of the Lenders
immediately upon the Agent's demand therefor.
SECTION 4. INTENTIONALLY OMITTED
SECTION 5. LETTERS OF CREDIT
In order to assist the Company in establishing or opening (i) documentary
Letters of Credit with an Issuing Bank to cover the purchase and importation of
inventory, and (ii) standby Letters of Credit with an Issuing Bank to cover such
other matters as the Company may so decide, except for the purchase of Inventory
or to secure present or future Trade Accounts Payable, the Company has requested
the Agent in behalf of the Lenders to join in the applications for such Letters
of Credit, and/or guarantee payment or performance of such Letters of Credit and
any drafts or acceptances thereunder through the issuance of the Letters of
Credit Guaranty, thereby lending the Agent's and 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.
1. Within the Line of Credit and Availability, the Lenders, acting through
the Agent, shall assist the Company in obtaining Letter(s) of Credit in an
amount not to exceed the Letter of Credit Sub-Line in the aggregate outstanding
at any one time. The Agent's and 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 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 purpose. 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 the 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.
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 the Letters of Credit
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Guaranty at the earlier of a) payment by the Agent under the Letters of Credit
Guaranty, or b) the occurrence of an Event of Default. 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, Paragraph 1 of this
Financing Agreement.
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 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. 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 Agent and the
Lenders and may be charged to the Company's Revolving Loan Account.
4. The Agent and/or the Lenders shall not be responsible for: the
existence, character, quality, quantity, condition, packing, value or delivery
of the goods purporting to be represented by any documents; any difference or
variation in the character, quality, quantity, condition, packing, value or
delivery of the goods from that expressed in the documents; the validity,
sufficiency or genuineness of any documents or of any endorsements thereon, even
if such documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; the time, place, manner or order in which
shipment is made; partial or incomplete shipment, or failure or omission to ship
any or all of the goods referred to in the Letters of Credit or documents; any
deviation from instructions; delay, default, or fraud by the shipper and/or
anyone else in connection with the Collateral or the shipping thereof; or 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 with respect to or in connection with any
Inventory which is the subject of any Letter of Credit.
5. In connection with any Letters of Credit, 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. After the occurrence of an Event of Default
which is not waived, the Agent shall have the full right and authority to clear
and resolve any questions of non-compliance of documents; to give any
instructions as to acceptance
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or rejection of any documents or goods; to execute any and all steamship or
airways guaranties (and applications therefore), indemnities or delivery orders;
to grant any extensions of the maturity of, time of payment for, or time of
presentation of, any drafts, acceptances, or documents; and to agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letters of Credit, drafts
or acceptances; all in the Agent's sole name, and the Issuing Bank shall be
entitled to comply with and honor any and all such documents or instruments
executed by or received solely from the Agent all without any notice to or any
consent from the Company. The foregoing shall not be deemed to limit the
Company's rights with respect to the Issuing Bank.
6. Without the Agent's express consent (which consent shall not be
unreasonably withheld) and the Agent's endorsement in writing, as applicable,
the Company agrees: a) not to execute any and all applications for steamship or
airway guaranties, indemnities or delivery orders; to grant any extensions of
the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; or to agree to any amendments, renewals, extensions,
modifications, 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 documents, or ii) give any instructions as to
acceptances or rejection of any documents or goods.
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, except to the extent that any
failure to so comply will not have a material adverse effect on such shipments.
The Company assumes all risk, liability and responsibility for, and agrees to
pay and discharge, all present and future local, state, federal or foreign
taxes, duties, or levies. 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.
8. Upon any payments made to the Issuing Bank under the Letter of Credit
Guaranty, the Agent for the benefit of the Lenders shall acquire by subrogation,
any rights, remedies, duties or obligations granted or undertaken by the Company
to the Issuing Bank in any application for Letters of Credit, any standing
agreement relating to Letters of Credit or otherwise, all of which shall be
deemed to have been granted to the Agent for the benefit of the Lenders and
apply in all respects to the Agent for the benefit of the Lenders and shall be
in addition to any rights, remedies, duties or obligations contained herein.
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SECTION 6. COLLATERAL
1. As security for the prompt payment in full of all loans and advances
made and to be made to the Company from time to time by the Agent and/or the
Lenders pursuant hereto, as well as to secure the payment in full of the other
Obligations, the Company hereby pledges and grants to the Agent for the benefit
of the Lenders a continuing general lien upon and security interest in all of
its:
(A) present and hereafter acquired Inventory;
(B) present and hereafter acquired Equipment;
(C) present and future Accounts;
(D) present and future Documents of Title;
(E) present and future General Intangibles;
(F) the Distribution Center; and
(G) present and future Other Collateral.
2. The security interests granted hereunder shall extend and attach to :
(A) All Collateral which is presently in existence and which is owned by
the Company or in which the Company has any interest, whether held by the
Company or others for its account, and, if any Collateral is Equipment, whether
the Company's interest in such Equipment is as owner or lessee or conditional
vendee;
(B) All Equipment whether the same constitutes personal property or
fixtures, including, but without limiting the generality of the foregoing, all
racks, shelving, displays, points of sale, equipment, computers, warehouse
equipment, tools, benches, tables, component parts thereof and additions
thereto, as well as all accessories, motors, engines and auxiliary parts used in
connection with or attached to the Equipment; and
(C) All Inventory and any portion thereof which may be returned, rejected,
reclaimed or repossessed by either the Agent or the Company from the Company's
customers, as well as to all supplies, goods, incidentals, packaging materials,
labels and any other items which contribute to the finished goods or products
manufactured or processed by the Company, or to the sale, promotion or shipment
thereof.
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<PAGE>
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. Inventory may be sold and
shipped by the Company to its customers in the ordinary course of the Company's
business, provided that all proceeds of all sales (including cash, accounts
receivable, checks, notes, instruments for the payment of money and similar
proceeds) are promptly deposited in accordance with Section 3, Paragraph 4 of
this Financing Agreement. 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 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.
4. The Company agrees at its own cost and expense to keep the Equipment
in as good and substantial repair and condition as the same is now or at the
time the lien and security interest granted herein shall attach thereto,
reasonable wear and tear excepted, making any and all repairs and replacements
when and where necessary. The Company also agrees to safeguard, protect and hold
all Equipment for the Agent's account and make no disposition thereof unless the
Company first obtains the prior written approval of the Agent. Except as set
forth below, any sale, exchange or other disposition of any Equipment shall only
be made by the Company with the prior written approval of the Agent, and the
proceeds of any such sales shall not be commingled with the Company's other
property, but shall be segregated, held by the Company in trust for the Agent
for the benefit of the Lenders as the Agent's exclusive property, and shall be
delivered immediately by the Company to the Agent in the identical form received
by the Company by deposit to the Depository Accounts. Upon the sale, exchange,
or other disposition of the Equipment, as herein provided, the security interest
provided for herein shall, without break in continuity and without further
formality or act, continue in, and attach to, all proceeds, including any
instruments for the payment of money, accounts receivable, contract rights,
documents of title, shipping documents, chattel paper and all other cash and
non-cash proceeds of such sales, exchange or disposition. As to any such sale,
exchange or other disposition, the Agent shall have all of the rights of an
unpaid seller, including stoppage in transit, replevin, rescission and
reclamation. Notwithstanding anything hereinabove contained to the contrary, the
Company may sell, exchange or otherwise dispose of obsolete Equipment or
Equipment no longer needed in the Company's operations, provided, however, that
(a) the then book value of the Equipment so disposed of does not exceed
$100,000.00 in the aggregate in any Fiscal Year and (b) the proceeds of such
sales or dispositions are delivered to the Agent in accordance with the
foregoing provisions of this paragraph, except that the Company may retain and
use such proceeds to purchase forthwith replacement Equipment which the Company
determines in its
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<PAGE>
reasonable business judgment to have a collateral value at least equal to the
Equipment so disposed of or sold, provided, however, that the aforesaid right
shall automatically cease upon the occurrence of an Event of Default which is
not cured within any applicable grace period or waived.
5. The rights and security interests granted to the Agent for the benefit
of the Lenders hereunder are to continue in full force and effect,
notwithstanding the termination of this Financing Agreement or the fact that the
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. To the extent that the Obligations are now or hereafter secured by any
assets or property other than the Collateral or by the guarantee, endorsement,
assets or property of any other person, then the Agent shall have the right in
its sole discretion to determine which rights, security, liens, security
interests or remedies the Agent shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of the Agent's or
the Lenders' rights hereunder.
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 existing and future Obligations. The Agent may in its
discretion charge any or all of the Obligations to the Revolving Loan Account of
the Company when due.
8. This Financing Agreement and the obligation of the Company to perform
all of its covenants and obligations hereunder are further secured by
mortgage(s), deed(s) of trust or assignment(s) on the Distribution Center.
9. The Company shall give to the Agent for the benefit of the Lenders,
from time to time such pledge or security agreements with respect to General
Intangibles of the Company, as the Agent, shall require to obtain valid first
liens thereon.
SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS
1. The Company hereby warrants and represents and/or covenants that: i)
the fair value of the Company's assets exceeds the book value of the Company's
liabilities; ii) the Company is generally able to pay its debts as they become
due and payable; and iii) the Company does not have unreasonably small capital
to carry on its business as it is currently conducted absent
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extraordinary and unforeseen circumstances. The Company further warrants and
represents that Schedule 2 hereto correctly and completely sets forth the
Company's chief executive office and all of the Company's Collateral locations;
and except for the Permitted Encumbrances, the security interests granted herein
constitute and shall at all times constitute the first and only liens on the
Collateral; that, except for the Permitted Encumbrances, the Company is or will
be at the time additional Collateral is acquired by it, the absolute owner of
the Collateral with full right to pledge, sell, consign, transfer and create a
security interest therein, free and clear of any and all claims or liens in
favor of others; that 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; that the Company will not
grant, create or permit to exist, any lien upon or security interest in the
Collateral, or any proceeds thereof, in favor of any other person other than the
holders of the Permitted Encumbrances; and that the Equipment does not comprise
a part of the Inventory of the Company and that the Equipment is and will only
be used by the Company in its business and will not be held for sale or lease,
or removed from its premises, or otherwise disposed of by the Company without
the prior written approval of the Agent except as otherwise permitted in Section
6 , Paragraph 4 of this Financing Agreement.
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 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 on the security interests granted to the Agent therein.
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, such written statements, and schedules as the Agent may reasonably
require, designating, identifying or describing the Collateral pledged to the
Agent hereunder. The Company's failure, however, to promptly give the Agent such
statements, or schedules shall not affect, diminish, modify or otherwise limit
the Agent's security interests in the Collateral.
4. The Company agrees to comply with the requirements of all state and
federal laws in order to grant to the Agent for the benefit of the Lenders valid
and perfected first security interests in the Collateral, subject only to the
Permitted Encumbrances. If, after a reasonable request by the Agent, the Company
shall fail to do so, the Agent is hereby authorized by the Company 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: filing notices of liens,
financing statements, amendments, renewals and continuations thereof;
cooperating with the Agent's custodians;
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<PAGE>
keeping stock records; transferring proceeds of Collateral to the Agent's
possession; and performing such further acts as the Agent may reasonably require
in order to effect the purposes of this Financing Agreement.
5. (i) The Company agrees to maintain insurance on the Real Estate,
Equipment and 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
Real Estate, Equipment and 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 Real Estate, Inventory and Equipment and to any payments
to be made under such policies. All original policies or true copies thereof are
to be delivered to the Agent, premium prepaid, with the loss payable endorsement
in the Agent's favor, and shall provide for not less than ten (10) 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. In the event of any loss or damage by fire or other
casualty, insurance proceeds relating to Inventory shall be deposited in the
Depository Accounts in accordance with paragraph 4 of Section 3 of the Financing
Agreement.
ii) In the event any part of the Company's Distribution Center or
Equipment is damaged by fire or other casualty and the insurance proceeds for
such damage or other casualty (the "Proceeds") is less than or equal to
$100,000.00, the Agent shall promptly apply such Proceeds to reduce the
Company's outstanding balance in its Revolving Loan Account .
iii) As long as an Event of Default has not occurred (which is not cured
to the Agent's satisfaction), and the Proceeds are in excess of $100,000.00, the
Company may elect (by delivering written notice to the Agent) to replace, repair
or restore such Distribution Center or Equipment to substantially the equivalent
condition prior to such fire or other casualty as set forth herein. If the
Company does not, or cannot, elect to use the Proceeds as set forth above, the
Agent may, subject to the rights of any holders of Permitted Encumbrances
holding claims senior to the Agent, apply the Proceeds to the payment of the
Obligations in such manner and in such order as the Agent may reasonably elect.
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iv) If the Company elects to use the Proceeds for the repair, replacement
or restoration of the Distribution Center and/or Equipment, and there is then no
Event of Default, a) proceeds of insurance on Equipment and/or the Distribution
Center in excess of $100,000.00 will be applied to the reduction of the
Revolving Loans of the Company and b) the Agent may set up a reserve against
Availability for an amount equal to the proceeds referred to in clause a)
hereof. The reserve will be reduced dollar-for-dollar upon receipt of
non-cancelable executed purchase orders, delivery receipts or contracts for the
replacement, repair or restoration of Equipment and/or the Distribution Center
and disbursements in connection therewith. Prior to the commencement of any
restoration, repair or replacement of the Distribution Center, the Company shall
provide the Agent with a restoration plan and a total budget certified by an
independent third party experienced in construction costing. If there are
insufficient Proceeds to cover the cost of restoration as so determined, the
Company shall be responsible for the amount of any such insufficiency, prior to
the commencement of restoration and shall demonstrate evidence of such before
the reserve will be reduced. Completion of restoration shall be evidenced by a
final, unqualified certification of the design architect employed, if any; an
unconditional Certificate of Occupancy, if applicable; such other certification
as may be required by law; or if none of the above is applicable, a written good
faith determination of completion by the Company (herein collectively the
"Completion"). Upon Completion, any remaining reserve as established hereunder
will be automatically released.
v) The Company agrees to pay any reasonable costs, fees or expenses which
the Agent may reasonably incur in connection with Paragraph 5 of Section 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 Collateral and if such taxes provided, however, that such taxes need not be
paid on or before the date fixed for payment thereof if: (i) such taxes are
being diligently contested in good faith by the Company by appropriate
proceedings or, (ii) the Company establishes such reserves as may be required by
GAAP, (iii) such taxes are not secured by a filed lien which is senior to the
liens of the Agent on the Collateral, and iv) such taxes secured by a filed lien
are not due the United States of America, or if any lien shall be claimed
thereunder x) for taxes due the United States of America or y) which in the
Agent's opinion might create a valid obligation having priority over the rights
granted to the Agent herein, 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. 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; (b) agrees to comply with all
environmental statutes, acts, rules, regulations or orders as presently existing
or as adopted or amended in the future,
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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; and (c) shall not be deemed to
have breached any provision of this Paragraph 7 if (i) the failure to comply
with the requirements of this Paragraph 7 resulted from good faith error or
innocent omission, (ii) the Company promptly commences and diligently pursues a
cure of such breach and (iii) such failure is cured within thirty (30) days
following the Company's receipt of notice of such failure.
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, audited Consolidated Financial Statements and Consolidating
Financial Statements certified by an authorized financial or accounting officer
of the Company as at the close of such year, and statements of profit and loss,
cash flow and reconciliation of surplus of Parent, the Company and all
subsidiaries of each for such year, audited by independent public accountants
selected by the Company and satisfactory to the Agent; within forty-five (45)
days after the end of each Fiscal Quarter Consolidated Financial Statements and
Consolidating Financial Statements as at the end of such period and statements
of profit and loss, cash flow and surplus of Parent, the Company and all
subsidiaries of each , certified by an authorized financial or accounting
officer of the Company; and within thirty (30) days after the end of each month
a Consolidated Financial Statements 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 Parent, the Company and all
subsidiaries thereof as the Agent may reasonably request, including without
limitation (a) the accountant's management practice letter and (b) thirty (30)
days prior to the beginning of each Fiscal Year, 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, pursuant to
which any one such officer must certify that: (i) 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; (ii)
during the particular accounting period: (x) there has been no Default or Event
of Default under this Financing
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Agreement, PROVIDED, HOWEVER, that if any such officer has knowledge that any
such Default or Event of Default, has occurred during such period, the existence
of and a detailed description of same shall be set forth in such officer's
certificate; and (y) the Company has not received any notice of cancellation
with respect to its property insurance policies; and (iii) the exhibits attached
to such financial statement(s) constitute detailed calculations showing
compliance with all financial covenants contained in this Financing Agreement.
9. Until termination of the Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Company agrees that, without
the prior written consent of the Agent, except as otherwise herein provided, the
Company will not:
A. 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, except for the Permitted Encumbrances;
B. Incur or create any Indebtedness other than the Permitted
Indebtedness;
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 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, consolidate or otherwise alter or modify its 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 name or address ; provided that (x) the Company shall
give the Agent thirty (30) days prior written notice thereof and (y)
the Company shall execute and deliver prior to or simultaneously
with any such action any and all documents and agreements requested
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,
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whether now or hereafter outstanding, except that the Company may
declare and pay dividends on its capital stock in an amount
sufficient to enable the Parent to a) redeem the capital stock owned
by its retired, deceased or terminated officers or shareholders
which the Parent is contractually obligated to redeem, provided that
in no event shall the aggregate amount of such dividend under this
clause (a) exceed $250,000.00 in the aggregate in any Fiscal Year;
or b) pay income or franchise taxes of the Company due as a result
of the filing of a consolidated, combined or unitary tax return in
which the operations of the Company are included, provided that, in
any instance under this Paragraph G, after giving effect to such
payment, no Default and/or Event of Default has occurred or would
occur hereunder; or
H. Make any advance or loan to, or any investment in, any firm, entity,
person or corporation, except for loans and advances to employees
and directors in the ordinary course of business not to exceed
$100,000.00 in the aggregate at any one time outstanding and except
as provided in paragraph 13 below.
10. Until termination of the Financing Agreement and payment and satisfaction
in full of all Obligations hereunder, the Company shall on a consolidated basis:
(A) have at the end of each Fiscal Quarter during the periods set forth below
EBITDA in an amount equal to:
(I) not more negative than negative $850,000.00 for the Fiscal Quarter
ending December 31, 1996;
(II) not more negative than negative $50,000.00 for the two (2) Fiscal
Quarters ending March 31, 1997;
(III) at least $2,650,000.00 for the three (3) Fiscal Quarters ending June
30, 1997;
(IV) at least $3,850,000.00 for the four (4) Fiscal Quarters ending
September 30, 1997;
(V) at least $3,900,000.00 for the four (4) Fiscal Quarters ending
December 31, 1997;
(VI) at least $3,700,000.00 for the four (4) Fiscal Quarters ending March
31, 1998;
(VII) at least $3,200,000.00 for the four (4) Fiscal Quarters ending June
30, 1998;
(VIII)at least $2,450,000.00 for the four (4) Fiscal Quarters ending
September 30, 1998;
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(IX) at least $1,950,000.00 for the four (4) Fiscal Quarters ending
December 31, 1998; and
(X) at least $2,500,000.00 for the four Fiscal Quarters ending March 31,
1999 and for each Fiscal Quarter thereafter for the four (4) Fiscal
Quarters then ending.
(B) maintain at all times during the periods below a Tangible Net Worth of not
less than the amount set forth below for the applicable period:
PERIOD TANGIBLE NET WORTH
As of the Closing Date $60,725,000.00
For the Fiscal Quarter ending
December 31, 1996 $58,250,000.00
For the Fiscal Quarter ending
March 31, 1997 $57,000,000.00
For the Fiscal Quarter ending
June 30, 1997 $57,050,000.00
For the Fiscal Quarter ending
September 30, 1997 $56,250,000.00
For the Fiscal Quarter ending
December 31, 1997 $54,050,000.00
For the Fiscal Quarter ending
March 31, 1998 $52,700,000.00
For the Fiscal Quarter ending
June 30, 1998 $52,450,000.00
For the Fiscal Quarter ending
September 30, 1998 $51,150,000.00
and for each Fiscal Quarter thereafter $50,000,000.00
Within 30 days after the Agent's receipt of the Company's Consolidated Financial
Statements for the Fiscal Year ending December 31, 1996, which shall be in form
satisfactory to the Agent (herein "Year End Statements"), the Agent shall review
such Year End Statements to determine whether it is necessary to revise the
financial covenants set forth in paragraph 10A and B of Section 7 of this
Financing Agreement (herein the "Financial Covenants"). In the event the Agent
determines it is necessary to revise the Financial Covenants, the Company, the
Agent and the Lenders hereby agree to reasonably, diligently and in good faith
negotiate the revision of such Financial Covenants. Any determination made by
the Agent pursuant to the terms of this Paragraph 10 shall be in writing.
The Agent and the Lenders agree that the Special Reserve Component shall
be deleted from each applicable definition and replaced by the Standard Reserve
Component upon the earlier to occur of : a) the revision of the Financial
Covenants and b) the determination by the Agent that the Financial Covenants
need not be revised; provided, however, that in the event
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the Company, the Agent and the Lenders cannot mutually agree upon revised
Financial Covenants, if such revisions are determined necessary by the Agent,
then, the Financial Covenants in effect as of the date hereof and the Special
Reserve Component shall continue to have full force and effect in the Financing
Agreement .
11. Without the prior written consent of the Agent, the Company will not:
a) enter into any Operating Lease if after giving effect thereto the aggregate
obligations with respect to Operating Leases of the Company during any Fiscal
Year would exceed $16,000,000.00 or b) contract for, purchase, make expenditures
for, lease pursuant to a Capital Lease or otherwise incur obligations with
respect to Capital Expenditures (whether subject to a security interest or
otherwise) during any period below in the aggregate amount in excess of:
FISCAL YEAR WORKING CAPITAL AMOUNT
a) For the Fiscal Year ending
December 31,1996 $6,000,000.00
b) For the Fiscal Year ending
December 31, 1997 $5,900,000.00
c) For the Fiscal Year ending
December 31, 1998, and for each
Fiscal Year end thereafter $5,000,000.00
12. The Company agrees to advise the Agent in writing of: a) all
expenditures (actual or anticipated) in excess of $150,000.00 for x)
environmental clean-up, y) environmental compliance or z) environmental testing
and the impact of said expenses on the Company's Working Capital; and b) any
notices the Company receives from any local, state or federal authority advising
the Company of any environmental liability (real or potential) stemming from 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.
13. Without the prior written consent of the Agent, the Company agrees
that it will not enter into any transaction, including, without limitation, any
purchase, sale, lease, loan or exchange of property with the Parent or any
subsidiary or affiliate of either the Company or Parent, except for transactions
that provide for: (i) management expenses and fees and expenses of directors of
the Company, the Parent, or an affiliate, in an aggregate amount not to exceed
$200,000.00 in each calendar year; (ii) an amount sufficient to enable the
Parent or any affiliate to pay federal and state income taxes on income
attributable to the Company and franchise taxes ; and (iii) the principal and
interest payments on the existing indebtedness of the Parent in the current
principal amount of $2,052,937.00 which indebtedness was incurred solely for the
benefit of the Company; and (iv) de minimis bank service charges relating to
bank accounts of the Parent or any affiliate.
14. The Company shall conduct or cause to be conducted, an actual physical
count of its Inventory at each store using cycle count procedures resulting in
all Inventory being counted at
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least one time each calendar year at each store and at each distribution center.
The Company shall, within thirty (30) Business Days after the end of each month,
provide the Agent with the results of the internally prepared cycle counts
completed at the Company's stores and distribution centers during that month.
Upon or after the occurrence of an Event of Default, at the Agent's sole option,
such physical Inventory count shall, in part, be conducted or reviewed by an
entity that is not an affiliate of the Company and which entity shall be
experienced in conducting or reviewing such a physical Inventory count. Upon the
Agent's reasonable request, the Company will provide the Agent with further
details of the Inventory cycle counts and review results, so long as the Agent's
request is for information readily available to the Company on existing
internally or externally prepared Inventory reports.
15. The Company shall remit any and all sales taxes when due to the
appropriate sales tax authorities when any such remittances are due, provided,
however, that such remittances need not be made on or before such due date if:
i) such sales taxes are being diligently contested by the Company in good faith
and by appropriate proceedings; ii) the Company establishes such reserves as may
be required by GAAP; and iii) the failure to remit such sales taxes does not
create a lien in favor of such sales tax authorities or impose upon the Agent or
any Lender any obligation to segregate proceeds.
16. The Company shall advise the Agent of any decision to open or close
any of its stores not less than fifteen (15) calendar days prior to the actual
closing and/or opening of any store.
17. At the Agent's sole discretion, the Company shall be required to
provide the Agent with inventory valuations once per calendar year and at the
request of the Agent, upon the occurrence of an Event of Default such inventory
valuations shall be required, without limitation as to frequency of same.
Inventory valuations shall at all times be conducted by an independent third
party appraisal firm acceptable to the Agent and paid for by the Company.
SECTION 8. INTEREST, FEES AND EXPENSES
1. Interest on the Revolving Loan shall be payable monthly as of the end
of each month and shall be an amount equal to the lesser of (a) the sum of (i)
one quarter of one percent (1/4%) plus the Chase Manhattan Bank Rate per annum
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 on balances other than Libor Loans and (ii) two and one quarter
percent (2 1/4%) plus the applicable Libor on any Libor Loan, on a per annum
basis, 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 or (b) interest computed in accordance with the provisions
of clause (a) but at the Maximum Legal Rate. In the event of any change in said
Chase Manhattan Bank Rate, the rate under clause (i) above shall change, as of
the first of the month following any change, so as to remain one quarter of one
percent (1/4%) above the Chase Manhattan Bank Rate. The rate hereunder shall be
calculated based on a 360-day year, unless such calculations would result in a
usurious rate, in which case interest shall be calculated on the basis of a year
of 365 or 366 days (as the case
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may be) and for actual days elapsed. The Agent and the Lenders shall be entitled
to charge the Company's Revolving Loan Account at the rate provided for herein
when due until all Obligations have been paid in full.
2. The Company may elect to use Libor as to any other outstanding
Revolving Loans provided A) there is then no Default or Event of Default, B) 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 and C) the election and Libor shall be effective, provided, there
is then 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 five (5) 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 Bank Rate 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: (i) any payment or prepayment on a
date other than the last day of a Libor Period for such Libor Loan, or (ii) any
failure of the Company to borrow a Libor Loan on the date for such borrowing
specified in the relevant notice; such compensation to include, without
limitation, an amount equal to any loss or expense suffered by the Agent 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 paragraph 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 paragraph. 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 Companies (i) initially to the Chase Manhattan Bank Rate loans
and (ii) subsequently to Libor Loans; PROVIDED, HOWEVER, x) upon the occurrence
of an Event of Default or y) in the event the aggregate amount of outstanding
Libor Rate 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
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such order as the Agent may elect in its reasonable business judgment. In the
event that any such amounts are applied to Revolving Loans which are Libor
Loans, such application shall be treated as a prepayment of such loans and the
Agent and the Lenders shall be entitled to indemnification hereunder.
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 (a) one and one half percent
(1.5%) per annum, payable monthly, on the face amount of each outstanding
standby Letter of Credit less the amount of any and all amounts previously drawn
under such Letters of Credit, and (b) one percent (1%) payable on the date of
issuance on the face amount of each outstanding documentary Letter of Credit.
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.
5. The Company shall reimburse or pay the Agent, as the case may be, for:
i) all Out-of-Pocket Expenses and ii) any applicable Documentation Fee.
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.
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 (a) for the benefit of the Lenders a Loan
Facility Fee in the amount of $150,000.00 (b) solely for the benefit of the
Agent, an Agent's Fee in the amount of $75,000.00, each of the foregoing fees
payable upon execution of this Financing Agreement.
8. Upon the date hereof and on such annual anniversary hereof the Company
shall pay to the Agent the Collateral Management Fee, which shall be fully
earned and not refundable or rebateable when due.
9. The Company shall pay the Agent's standard charges for, and the
reasonable fees and expenses of, the Agent's personnel used by the Agent for
reviewing the books and records of the Company and for verifying, testing
protecting, safeguarding, preserving or disposing of all or any part of the
Collateral provided, however, that the foregoing shall not be payable until the
occurrence of an Event of Default if the Company is paying a Collateral
Management Fee.
10. 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
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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.
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 account as herein provided will be
made as an accommodation to the Company and solely at the Agent's discretion.
SECTION 9. POWERS
The Company hereby constitutes the Agent in 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 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 Trade Accounts Receivable, in
the name of the Agent, the Company or the Agent's designee, information
concerning the amounts owing on the Trade Accounts Receivable.
(D) To transmit to customers indebted on Trade Accounts Receivable notice
of the Agent's interest therein and to notify customers indebted on Trade
Accounts Receivable to make payment directly to the Agent for the Company's
account; and
(E) To take or bring, in the name of the Agent or the Company, all steps,
actions, suits or proceedings deemed by the Agent necessary or desirable to
enforce or effect collection of the Accounts .
Notwithstanding anything hereinabove contained to the contrary, the powers
set forth in (b), (d) and (e) above may only be exercised after the occurrence
of an Event of Default and until such time as such Event of Default is waived in
writing by the Agent or cured to the Agent's satisfaction. In addition, the
powers set forth in (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.
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SECTION 10. EVENTS OF DEFAULT AND REMEDIES
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) 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;
B) the failure of the Company to generally meet debts as they mature;
C) 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 sixty (60)
days after commencement thereof;
D) breach by the Company in any material respect of any warranty,
representation or covenant contained herein (other than those
referred to in sub-paragraph e 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 clause d shall not 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 fifteen (15)
days from the date of Agent's discovery of such breach (the Agent
shall endeavor to notify the Company of such breach, but the failure
to so notify shall not detract from the Agent's rights or give the
Company any claim, cause of action or defense)
E) breach by the Company of any warranty, representation or covenant of
Section 3, Paragraphs 3 (other than the third sentence of paragraph
3) and 4; Section 6, Paragraphs 3 and 4 (other than the first
sentence of paragraph 4); Section 7, Paragraphs 1, 5, 6, and 9
through 17;
F) 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 in
accordance with the provisions hereof;
G) the Company shall i) engage in any "prohibited transaction" as
defined in ERISA, ii) have any "accumulated funding deficiency" as
defined in ERISA, iii) have any Reportable Event as defined in
ERISA, iv) terminate any Plan, as defined in ERISA or v) be engaged
in any proceeding in which the Pension Benefit Guaranty Corporation
shall seek appointment, or is appointed, as trustee or administrator
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of any Plan, as defined in ERISA, and with respect to this
sub-paragraph g) 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 materially adverse to the business,
operations or financial condition of the Company;
H) the occurrence of 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 $750,000.00, or
I) Hi-Lo Management Company, the general partner of the Company, ceases
to be the sole general partner of the Company or the Parent ceases
to own directly or indirectly all of the outstanding stock of Hi-Lo
Management Company.
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 assist the Company in obtaining Letters of Credit shall cease
unless such Default or Event of Default is waived in writing by the Agent in
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: i) all Obligations shall become
immediately due and payable; ii) 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 "ii)" a) the Agent has given the Company written
notice of the Event of Default, provided, however, that no notice is required if
the Event of Default is the Event listed in paragraph 1(c) of this Section 10
and b) the Company has failed to cure the Event of Default within fifteen (15)
days after x) the Agent deposited such notice in the United States mail or y)
the occurrence of the Event of Default listed in paragraph 1(c) of this Section
10; and iii) this Financing Agreement shall immediately terminate upon notice to
the Company, provided, however, that no notice of termination is required if the
Event of Default is the Event listed in paragraph 1(c) of this Section 10. 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.
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 exercise the remedies set forth in this paragraph 3, including but not
limited to the following: (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
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the name of the Company or the Agent in 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, Equipment and/or Other
Collateral without judicial process, and to lawfully and peacefully enter any
premises where any Inventory, Equipment 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 and Equipment 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 and
Equipment in such saleable form as the Agent shall deem appropriate. The Company
agrees, at the request of the Agent, to assemble the Inventory and Equipment 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
and Equipment in saleable form. However, if notice of intended disposition of
any Collateral is required by law, it is agreed that ten (10) days notice shall
constitute reasonable notification and full compliance with the law. The net
cash proceeds resulting from the Agent's exercise of any of the foregoing
rights, (after deducting all 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. The mortgage(s), deed(s) of trust or assignment(s) on the Real
Estate shall govern the rights and remedies of the Agent and the Lenders
thereto.
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SECTION 11. TERMINATION
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 paragraph
1(c) of Section 10 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, an Early Termination Fee provided, however, that the Agent for the
account of the Lenders, shall not be entitled to the Early Termination Fee if
the Early Termination Date occurs (i) after one year from the date of execution
of this Financing Agreement, and (ii) upon the sale of all or substantially all
of the Company's assets. All Obligations shall become due and payable as of any
termination hereunder or under Section 10 hereof and, pending a final accounting
(which shall be promptly performed), the Agent and the Lenders may withhold any
balances in the Company's account (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
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.
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.
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3. It is the intent of the Company, the Agent and the Lenders to conform
strictly to all applicable state and federal usuary 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 as interest or otherwise an
amount in excess of the maximum that can be legally collected, then such amount
which would be excessive interest shall be applied to the reduction of the
principal indebtedness hereof and any other amounts due with respect to the
Obligations evidenced hereby, but not to the payment of interest and if such
amount which would be 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
paragraph shall control and supersede every other provision hereof and all other
agreements between the Company, the Agent and the Lenders.
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.
5. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY,
THE AGENT AND THE LENDERS EACH HEREBY WAIVE ANY RIGHT TO A TRIAL
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BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT . TO
THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY HEREBY IRREVOCABLY WAIVES
PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED.
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 fax, or three days
after deposit in the United State mails, with proper first class postage prepaid
and addressed to the party to be notified as follows:
(A) if to the Agent, at:
The CIT Group/Business Credit, Inc.
Suite 200
5420 LBJ Freeway
Dallas, Texas 75240
Attn: Lan K. Haverfield, Regional Manager
Fax No.: 972-455-1690
(B) if to any other party becoming a Lender hereunder to the address
specified in the Assignment and Transfer Agreement
(C) if to the Company at:
2757 W. Bellfort
Houston, Texas 77054
Attn: Gary D. Walther, Chief Financial Officer
Fax No.: 713-663-9296
or to such other address as any party may designate for itself by like notice.
7. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS; PROVIDED,
HOWEVER, THAT PURSUANT TO ARTICLE 5069-15.10(B), TITLE 79, REVISED CIVIL
STATUTES OF TEXAS, 1925, AS AMENDED, IT IS AGREED THAT THE PROVISIONS OF CHAPTER
15, TITLE 79, REVISED CIVIL STATUES OF TEXAS, 1925, AS AMENDED, SHALL NOT APPLY
TO THE LOANS AND ADVANCES MADE HEREUNDER OR OTHERWISE, THIS FINANCING AGREEMENT
AND ALL OTHER AGREEMENTS BETWEEN THE COMPANY, THE AGENT AND THE LENDERS.
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
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is required pursuant to Section 14, Paragraph 10 hereof).
9. Any Lender organized under the laws of a jurisdiction outside of the
United States (a "Foreign Lender") shall deliver to Agent and the Company (i)
two valid, duly completed copies of IRS From 1001 or 4224 or successor
applicable form, as the case may be, and any other required form, certifying in
each case that such Foreign Lender is entitled to receive payments under this
Financing Agreement without deduction or withholding of any United States
federal income taxes, or (ii) if such Foreign Lender is not a "bank" within the
meaning of Section 881(c) (3) (A) of the Internal Revenue Code and cannot
deliver either IRS Form 1001 or 4224 pursuant to clause (i) above, (A) a duly
completed certificate of non-withholding acceptable to the Company and the Agent
in their reasonable discretion (any such certificate, a "TAX CERTIFICATE") AND
(B) two valid, duly completed copies of IRS Form W-8 or successor applicable
form, as the case may be, to establish an exemption from United States backup
withholding tax. Each such Foreign Lender shall also deliver to Agent and the
Company two further copies of said Form 1001 or 4224 or Form W-8 and a Tax
Certificate, or successor applicable forms, or other manner of required
certification, as the case may be, on or before the date that any such form
expires or becomes obsolete or otherwise is required to be resubmitted as a
condition to obtaining an exemption from a required withholding of United States
of America federal income tax or after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Company and
Agent, and such extensions or renewals thereof as may reasonably be requested by
the Company and Agent, certifying (x) in the case of a Form 1001 or 4224 that
such Foreign Lender is entitled to receive payments under this Financing
Agreement without deduction or withholding of any United States federal income
taxes, or (y) in the case of a Form W-8 and a Tax Certificate, establishing an
exemption from United States backup withholding tax.
SECTION 13. AGREEMENT BETWEEN THE LENDERS
1. A) The Agent, for the account of the Lenders, shall disburse all loans
and advances to the Company and shall handle all collections of Collateral and
repayment of Obligations. It is understood that for purposes of advances to the
Company and for purposes of this Section 13 the Agent is using the funds of the
Agent.
B) Unless the Agent shall have been notified in writing by any
Lender prior to any advance to the Company that such Lender will not make the
amount which would 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
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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.
2. On the Settlement Date, the Agent and the Lenders shall each remit to
the other, in immediately available funds, all amounts necessary so as to ensure
that, as of the Settlement Date, the Lenders shall have their proportionate
share of all outstanding Obligations.
3. The Agent shall forward to each Lender, at the end of each month, a
copy of the account statement rendered by the Agent to the Company.
4. The Agent shall, after receipt of any interest and fees earned under
this Financing Agreement, promptly remit to the Lenders: a) their pro rata
portion of all fees, provided, however, that the Lenders (other than CITBC in
its role as the Agent) shall x) not share in the Agent's Fee, the Collateral
Management Fee or Documentation Fees or the fees provided for in Section 8,
Paragraph 9; and y) 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 the Assignment and Transfer Agreement on all
outstanding amounts advanced by the Lenders on each Settlement Date, prior to
adjustment, that are subsequent to the last remittance by the Agent to the
Lenders of the Company's interest;
5. (A) The Company acknowledges that the Lenders may sell participations
in the loans and extensions of credit made and to be made to the Company
hereunder, provided, however, that a participant may not so purchase a
participation in an amount less than $5,000,000 or the then aggregate amount of
such Lender's interest in the loans and advances and extensions of credit
hereunder. The Company further acknowledges that in doing so, the Lenders may
grant to such participants certain rights which would require the participant's
consent to certain waivers, amendments and other actions with respect to the
provisions of this Financing Agreement, provided that the consent of any such
participant shall not be required except for matters requiring the consent of
all Lenders hereunder as set forth in Section 14, Paragraph 10 hereof. The
Lenders shall give the Company fifteen (15) days notice prior to the sale of a
participation by any such Lender, provided, however, the failure to give such
notice shall not result in any liability to the Agent or any Lender whatsoever.
(B) The Company authorizes each Lender to disclose to any
participant or purchasing lender (each, a "TRANSFEREE") and any prospective
Transferee any and all financial information in such Lender's possession
concerning the Company and their affiliates which has been delivered to such
Lender by or on behalf of the Company pursuant to this Agreement or which has
been delivered to such Lender by or on behalf of the Company in connection with
such Lender's credit evaluation of the Company and its affiliates prior to
entering into this Agreement, provided, however, that prior to such disclosure
to a then or potential participant the Lender must first obtain from the then or
potential participant a confidentiality agreement
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in form and substance similar to the confidentiality paragraph of this Financing
Agreement.
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.
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 x) predate the date of this Financing
Agreement or y) are based on transactions, actions or omissions that predate the
date of this Financing Agreement.
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 x) the occurrence of an Event of Default and y) the
election by the Required Lenders to accelerate the Obligations. In addition, the
Company authorizes, and the Lenders shall have the right, without notice, upon
any amount becoming due and payable hereunder, after the occurrence of an Event
of Default to set-off and apply against any and all property held by, or in the
possession of such Lender the Obligations due such Lenders.
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). CITBC shall give the Company fifteen (15) days prior notice of any such
assignment, provided, however, the failure to give such notice shall not result
in any liability to CITBC whatsoever. Upon execution of an Assignment and
Transfer Agreement, (i) the assignee thereunder shall be a party hereto and, to
the extent that rights and obligations hereunder have been assigned to it
pursuant to such assignment, have the rights and obligations of CITBC as the
case may be hereunder and (ii) CITBC shall, to the extent that rights and
obligations hereunder
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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 i) the prior written consent of the
Agent; ii) the payment to the Agent (solely for the Agent's account) by the
current or prospective Lender of a $5,000.00 fee for processing the assignment;
and (iii) if the Transferee is a Foreign Lender (as defined in Section 12,
Paragraph 9 hereof), such Foreign Lender first complies with the provisions of
Section 12, Paragraph 9 hereof. Additionally, no other Lender shall assign such
Lender's interest in the loans and advances and extensions of credit hereunder
(or any portion thereof) unless the interest to be so assigned is either not
less than $5,000,000 or all of such Lender's entire interest in the loans and
advances and extensions of credit hereunder. Notwithstanding anything to the
contrary herein contained, prior to any such assignment and/or the disclosure of
the Confidential Information, such Transferee, actual or potential, shall
execute a confidentiality agreement in form and substance substantially similar
to the confidentiality paragraph of this Financing Agreement.
10. The Company has made and will, from time to time, make available to
the Agent and/or the Lenders certain financial and other business information
(the "Confidential Information") relating to its business. By their signatures
hereto or to the Assignment and Transfer Agreement, the Agent and each Lender
agree to maintain the confidentiality of all Confidential Information, and to
disclose such information only (a) to officers, directors or employees of such
Agent or Lender and their legal or financial advisors, in each case to the
extent necessary to carry out this Financing Agreement and in the case of CITBC,
to The CIT Group Holdings, Inc., The CIT Group, Inc., Chase Manhattan Bank or
Dai-Ichi Kangyo Bank, but only, in the case of all of the foregoing Persons
referred to in this clause (a), after the Agent or the Lender, as the case may
be, has advised each such Person to maintain the confidentiality of the
Confidential Information, (b) to any other Person to the extent the disclosure
of such information to such Person is required in connection with the
examination of a Lender's records by appropriate authorities, pursuant to court
order, subpoena or other legal process or otherwise as required by law or
regulation, and (c) to Transferees or potential Transferees but only after such
Transferees or potential Transferees have executed a written confidentiality
agreement substantially in the form of this paragraph. The Lenders, the Agent,
Transferees and potential Transferees shall not be required to maintain the
confidentiality of any portion of the Confidential Information which (a) is
known by such Person or its agents, advisors or representatives prior to
disclosure or (b) becomes generally available to the public provided that the
disclosure of such Confidential Information does not violate a confidentiality
agreement of which the Transferees, potential Transferees, the Agent or the
Lender, as the case may be, has actual knowledge.
SECTION 14. AGENCY
1. Each Lender hereby irrevocably designates and appoints CITBC as the
Agent for the Lenders under this Financing Agreement and any ancillary loan
documents and irrevocably authorizes CITBC as Agent for such Lender, to take
such action on its behalf under the
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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 Financing Agreement and the ancillary
documents or otherwise exist against the Agent.
2. The Agent may execute any of its duties under this Financing Agreement
and all ancillary documents by or through agents or attorneys-in-fact and shall
be entitled to the advice of counsel concerning all matters pertaining to such
duties.
3. Neither the Agent nor any of its officers, directors, employees,
agents, or attorneys-in-fact shall be (i) liable to any Lender for any action
lawfully taken or omitted to be taken by it or such person under or in
connection with the Financing Agreement and all ancillary documents (except for
its or such person's own gross negligence or willful misconduct), or (ii)
responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Company or any officer thereof
contained in 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.
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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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.
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.
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 willful
misconduct. The agreements in this paragraph shall survive the payment of the
obligations.
8. The Agent may make loans to, and generally engage in any kind of
business with the Company as though the Agent were not the Agent hereunder. With
respect to its loans made
52
<PAGE>
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.
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 provided however that the Lenders shall: a) notify the Company of the
successor Agent and b) request the consent of the Company to such successor
Agent, which consent shall not be unreasonably withheld. The Company shall be
deemed to have consented to the successor Agent if the Lenders do not receive
from the Company, within ten (10) days of the Lenders' notice to the Company, a
written statement of the Company's objection to the successor Agent. Should the
Company not consent and no acceptable successor Agent is agreed upon within
thirty (30) days of the date the Company advised the Lenders of its objection to
the successor Agent, then the Lenders may appoint (without the Company's
consent) another successor Agent. After any retiring Agent's resignation
hereunder as Agent the provisions of this Section 14 shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent.
10. Notwithstanding anything contained in this Financing Agreement to the
contrary, the Agent will not, without the prior written consent of all Lenders:
a) amend the Financing Agreement to v) increase the Line of Credit; w) reduce
the interest rates; x) reduce or waive i) any fees in which the Lenders share
hereunder; or ii) the repayment of any Obligations due the Lenders; y) extend
the maturity of the Obligations; or z) alter or amend 1) this Paragraph 10 or 2)
the definitions of Eligible Accounts Receivable, Eligible Inventory, Accounts
Receivable Advance Percentage, Inventory Advance Percentage, Collateral or
Required Lenders, or the Agent's criteria for determining compliance with such
definitions of eligibility; b) release Collateral in bulk without a
corresponding reduction in the Obligations to the Lenders, or c) intentionally
make any Revolving Loan or assist in opening any Letter of Credit hereunder if
after giving effect thereto the total of Revolving Loans and Letters of Credit
hereunder for the Company would exceed one hundred and ten percent (110%) of the
maximum amount available under 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 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.
53
<PAGE>
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.
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 (i) give notice of termination to the Company hereunder or (ii)
purchase the Lender's share of the Obligations hereunder for the full amount
thereof plus accrued interest thereon. Unless so terminated this Financing
Agreement and the Line of Credit shall be automatically extended from
Anniversary Date to Anniversary Date.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Financing
Agreement to be executed and delivered by their proper and duly authorized
officers in Houston, Texas as of the date set forth above.
THE CIT GROUP/BUSINESS
CREDIT, INC., AS AGENT AND LENDER
By /S/ STEWART W. HAYES
Name: Stewart W. Hayes
Title: Vice President
Read and Agreed to:
HI-LO AUTO SUPPLY, L.P.
By Hi-Lo Management Company, its General Partner (SEAL)
By: /S/ GARY D. WALTHER
Name: Gary D. Walther
Title: Vice President
55
<PAGE>
Date October 23, 1996
To: THE CIT GROUP/BUSINESS CREDIT, INC., AS AGENT
Address: 5420 LBJ Freeway
Dallas, TX 75240
GUARANTY
Re: Hi-Lo Auto Supply, L.P.
(the "Company")
Address: 2575 W. Bellfort
Houston, Texas 77054
Gentlemen:
Reference is made to that certain Financing Agreement dated as of
October 23, 1996, as amended (herein the "Agreement") between you as Agent and
Lender, the Lenders, and the above-named Company. Each of the undersigned
(herein each a "Guarantor" and collectively the "Guarantors") hereby
unconditionally jointly and severally guarantees and agrees to be liable for the
full and indefeasible payment and performance when due of all now existing and
future indebtedness, obligations or liabilities of the Company to you and/or the
Lenders, howsoever arising, whether direct or indirect, absolute or contingent,
secured or unsecured, whether arising under the Agreement as now written or as
amended or supplemented hereafter, or by operation of law or otherwise,
including, without limitation, all Obligations (as defined in the Agreement) of
the Company to you. Further each of the Guarantors agrees to pay to you on
demand the amount of all expenses (including reasonable attorney's fees)
incurred by you and/or the Lenders in collecting or attempting to collect any of
the Company's obligations to you and/or the Lenders, whether from the Company,
or from any other obligor, or from the Guarantors, or in realizing upon any
collateral; and agrees to pay any interest at the Default Rate of Interest, as
defined in the Agreement, on all amounts payable to you hereunder, even if such
amount cannot be collected from the Company. (All of the aforementioned
obligations, liabilities, expenses and interest are hereinafter collectively
called the "Obligations"). To the extent you and/or the Lenders receive payment
on account of Obligations guaranteed hereby, which payment is thereafter set
aside or required to be repaid by you and/or the Lenders in whole or in part,
then, to the extent of any sum not finally retained by you (regardless of
whether such sum is recovered from you by the Company, its trustee, or any other
party acting for, on behalf of or through the Company or its representative),
the Guarantors' obligation to you and/or the Lenders therefor, under this
Guaranty, as
-1-
<PAGE>
amended, modified or supplemented, shall remain in full force and effect (or be
reinstated) until the Guarantors have made payment to you and/or the Lenders,
therefore, which payment shall be due upon demand.
This Guaranty is executed as an inducement to you and the Lenders to
make loans or advances to the Company or otherwise to extend credit or financial
accommodations to the Company, or to enter into or continue a financing
arrangement with the Company, and is executed in consideration of your doing or
having done any of the foregoing. Each of the Guarantors agrees that any of the
foregoing shall be done or extended by you in your sole discretion, and shall be
deemed to have been done or extended by you and the Lenders in consideration of
and in reliance upon the execution of this Guaranty, but that nothing herein
shall obligate you and/or the Lenders to do any of the foregoing.
Notice of acceptance of this Guaranty, the making of loans or advances,
or the extension of credit under the Agreement, the amendment, execution or
termination of the Agreement or any other agreements in connection therewith,
and presentment, demand, protest, notice of protest, notice of non-payment and
all other notices to which the Guarantors may be entitled (whether under this
Guaranty or the Agreement), and your reliance on this Guaranty are hereby
waived. Each of the Guarantors also waives notice of: changes in terms or
extensions of the time of payment, the taking and releasing of collateral or
guarantees (including the release of any of the Guarantors) and the settlement,
compromise or release of any Obligations, and agree that, as to each of the
Guarantors, the amount of the Obligations shall not be diminished by any of the
foregoing. Each of the Guarantors also agrees that you need not attempt to
collect any Obligations from the other Guarantors or any other obligor or to
realize upon any collateral, but may require the Guarantors to make immediate
payment of Obligations to you when due or at any time thereafter. You shall not
be liable for failure to collect Obligations or to realize upon any collateral
or security therefor, or any part thereof, or for any delay in so doing, nor
shall you be under any obligation to take any action whatsoever with regard
thereto.
This Guaranty is absolute, unconditional and continuing, regardless of
the validity, regularity or enforceability of any of the Obligations or the fact
that a security interest or lien in any collateral or security therefor may not
be enforceable by you (or any other Lender or Agent) or may otherwise be subject
to equities or defenses or prior claims in favor of others or may be invalid or
defective in any way and for any reason, including any action, or failure to
act, on your part (or any other Lender or Agent). Payment by the Guarantors
shall be made to you at your office from time to time on demand as Obligations
become due, and one or more successive or concurrent actions may be brought
hereon against the Guarantors (or any one or more of them) either in the same
action or in separate actions. In the event any claim or action, or action on
any judgment, based on this Guaranty, is made or brought against the Guarantors,
the Guarantors agree not to assert against you (or any other Lender or Agent)
any set-off or counterclaim which the Company may have, and, further, the
Guarantors agree not to deduct, set-off, or seek to counterclaim for or recoup,
any amounts which are or may be owed by you (or any other Lender or Agent) to
the
-2-
<PAGE>
Guarantors, or for any loss of contribution from any other guarantor.
Furthermore, in any litigation based on the Guaranty in which you and any of the
Guarantors shall be adverse parties, the Guarantors hereby waive trial by jury
and waive the right to interpose any defense based upon any Statute of
Limitations or any claim of laches and waive the performance of each and every
condition precedent to which the Guarantors might otherwise be entitled by law.
Each of the Guarantors hereby consents to the in personam jurisdiction of the
courts of the State of Texas. In the event that you bring any action or suit in
any court of record of the State of Texas or the Federal Government to enforce
any or all liabilities of the Guarantors hereunder, service of process may be
made on the Guarantors by mailing a copy of the summons to the Guarantors at the
address below set forth.
All sums at any time to the credit of the Guarantors and any property of
the Guarantors on which you (or any other Lender or Agent) at any time have a
lien or security interest, or of which you at any time have possession, shall
secure payment and performance of all Obligations and any and all other
obligations of the Guarantors to you however arising. The Guarantors shall have
no right of subrogation, indemnification or recourse to any Obligations or
collateral or guarantees therefor, or to any assets of the Company.
Upon the occurrence of any of the following events:
(1) any Event of Default under, or termination of, the Agreement;
(2) failure of any of the Guarantors to observe or perform any
agreements, warranties or covenants contained herein; or
(3) (a) dissolution or cessation of any of the Guarantors' business;
(b) calling of a meeting of the creditors of any of the
Guarantors for the purposes of compromising the debts of such
Guarantor;
(c) failure of any of the Guarantors to meet their debts as they
mature;
(d) commencement by any of the Guarantors of any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar
proceeds under federal or state law (herein collectively
"Insolvency Proceeding");
(e) commencement of any Insolvency Proceeding against any of the
Guarantors,
then, in the case of event (1) above the liability of all of the Guarantors for
the entire Obligations shall mature, and in the case of events (2) and (3)(a)
through (e) above the liability of the Guarantor with respect to which such
event relates for the entire Obligations shall mature even if the liability of
the Company therefor does not.
-3-
<PAGE>
This Guaranty may be terminated as to any one of the Guarantors only as
of any Anniversary Date (as defined in the Agreement) and then only upon actual
receipt by one of your officers of at least ninety (90) days prior written
notice of termination sent by registered or certified mail; provided however,
that any of the Guarantors so terminating this Guaranty shall remain bound
hereunder, and this Guaranty shall continue in full force and effect, with
respect to any and all Obligations created or arising prior to the effective
date of such termination and with respect to any and all extensions, renewals or
modifications of said pre-existing Obligations. Termination as to any one of the
Guarantors shall not affect the obligations of any of the other Guarantors, nor
relieve the one giving such notice from liability for any post termination
collection expenses or interest. This is a continuing agreement and written
notice as above provided shall be the only means of termination, notwithstanding
the fact that for certain periods of time there may be no Obligations owing to
you and/or the Lenders by the Company.
Your books and records showing the account between you and the Company
shall be admissible in evidence in any action or proceeding as prima facie proof
of the items therein set forth. Your monthly statements rendered to the Company
shall be binding upon the Guarantors (whether or not the Guarantors received
copies thereof) and shall constitute an account stated between you and the
Company unless you shall have received a written statement of the Company's
exceptions within thirty (30) days after the statement was mailed to the
Company.
Each of the Guarantors expressly waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution or any other
claim which it may now or hereafter have against the Company or any other person
directly or contingently liable for the Obligations guaranteed hereunder, or
against or with respect to the Company's property (including, without
limitation, property collateralizing its Obligations to you) arising from the
existence or performance of this Guaranty.
This Guaranty embodies the whole agreement of the parties and may not be
modified except in writing, and no course of dealing between you and any of the
Guarantors shall be effective to change or modify this Guaranty. Your failure to
exercise any right hereunder shall not be construed as a waiver of the right to
exercise the same or any other right at any other time and from time to time
thereafter, and such rights shall be considered as cumulative rather than
alternative. No knowledge of any breach or other nonobservance by any of the
Guarantors of the terms and provisions of this Guaranty shall constitute a
waiver thereof, nor a waiver of any obligations to be performed by the
Guarantors hereunder.
This Guaranty may be assigned by you (or any other Lender or Agent) and
shall be for your benefit and for the benefit of any of your (or any other
Lender or Agent) assignees or transferees, and shall cover any Obligations owed
to you or the Lenders at the time of assignment or transfer as well as any and
all future Obligations, loans, advances or extensions of credit made to the
Company by, or otherwise owed by the Company to, such assignee or transferee.
-4-
<PAGE>
This instrument is executed and given in addition to, and not in
substitution, reduction, replacement, or satisfaction of, any other endorsements
or guarantees of the Obligations, now existing or hereafter executed by any or
all of the Guarantors or others in your favor.
When used in this agreement, all pronouns shall, wherever applicable, be
deemed to include the singular and plural as well as the masculine, feminine,
and neuter genders, and "you" shall apply to you in your capacity as Agent and
Lender and as Agent for the Lenders. This agreement shall inure to the benefit
of you (and any other Lender or Agent), your (and any other Lender or Agent)
successors and assigns and any parent, subsidiary or affiliate of yours (and any
other Lender or Agent); shall be binding jointly and severally upon the
Guarantors and upon the respective heirs, executors, administrators, successors
and assigns of each of the Guarantors; and shall pertain to the Company and its
successors and assigns.
This Guaranty may be executed in any number of counterparts, each of
which when so executed shall be deemed an original and such counterparts shall
together constitute but one and the same document.
This Guaranty shall be governed by and construed in accordance with the
laws of the State of Texas.
IN WITNESS WHEREOF the Guarantors have executed and delivered this
Guaranty effective as of the date above set forth.
Name: HI-LO AUTOMOTIVE, INC.
/S/ GARY D. WALTHER
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
-5-
<PAGE>
Name: HI-LO MANAGEMENT COMPANY
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
Name: HI-LO INVESTMENT COMPANY
/S/ MARK A. FERRUCI
(signature)
Address: Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
Name: FIRST CALL MANAGEMENT COMPANY
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
Name: FIRST CALL AUTO SUPPLY, L.P.
By: Hi-Lo Management Company,
its General Partner
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
-6-
<PAGE>
Name: HI-LO MANAGEMENT COMPANY
/S/ GARY D. WALTHER
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
Name: HI-LO INVESTMENT COMPANY
(signature)
Address: Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
Name: FIRST CALL MANAGEMENT COMPANY
/S/ GARY D. WALTHER
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
Name: FIRST CALL AUTO SUPPLY, L.P.
By: Hi-Lo Management Company,
its General Partner
/S/ GARY D. WALTHER
(signature)
Address: 2575 W. Bellfort
Houston, Texas 77054
-6-
EXHIBIT 11.1
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
==============================================================================================
COLUMN A COLUMN B
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
AVERAGE COMMON SHARES OUTSTANDING ....... 10,756,350 10,734,181 10,756,350 10,733,114
COMMON EQUIVALENT SHARES RESULTING FROM
STOCK OPTIONS ISSUED .................. 0 18,590 0 21,627
------------ ----------- ------------ -----------
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING .................... 10,756,350 10,752,771 10,756,350 10,754,741
============ =========== ============ ===========
NET INCOME (LOSS) ....................... $ (51,659) $ 636 $ (51,905) $ 2,874
============ =========== ============ ===========
EARNINGS PER COMMON SHARE:
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE ...................... $ (4.80) $ .06 $ (4.83) $ .27
============ =========== ============ ===========
</TABLE>
Earnings per share have been computed by dividing net income by the
average number of common and common equivalent shares outstanding. Common
equivalent shares outstanding were computed using the treasury stock method. The
difference between shares for primary and fully diluted earnings per share was
not significant in any period. On November 1, 1994, a note was issued that is
convertible, effective November 1, 1996, into 93,859 shares of the Company's
Common Stock. As of September 30, 1996, this note had no significant effect on
earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE HILO AUTOMOTIVE INC. 3RD QUARTER 1996 INCOME STATEMENT AND BALANCE
SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 374
<SECURITIES> 0
<RECEIVABLES> 10,468
<ALLOWANCES> 930
<INVENTORY> 99,766
<CURRENT-ASSETS> 116,861
<PP&E> 76,751
<DEPRECIATION> 43,441
<TOTAL-ASSETS> 151,360
<CURRENT-LIABILITIES> 40,819
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 60,965
<TOTAL-LIABILITY-AND-EQUITY> 151,360
<SALES> 64,396
<TOTAL-REVENUES> 64,396
<CGS> 44,665
<TOTAL-COSTS> 124,190
<OTHER-EXPENSES> 184
<LOSS-PROVISION> 233
<INTEREST-EXPENSE> 1,085
<INCOME-PRETAX> (61,296)
<INCOME-TAX> (9,637)
<INCOME-CONTINUING> (51,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,659)
<EPS-PRIMARY> (4.80)
<EPS-DILUTED> (4.80)
</TABLE>
