<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 1999.
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Debtor-in-Possession as of March 27, 1999)
(Exact Name of Registrant as Specified In Its Charter)
TENNESSEE 62-0816060
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. BOX 24600, NASHVILLE, TN (MAILING ADDRESS)
7100 SERVICE MERCHANDISE DRIVE, BRENTWOOD, TN 37202-4600
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (615) 660-6000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Class Name of Exchange on
-------------- Which Registered
----------------
<S> <C>
COMMON STOCK ($.50 PAR VALUE) NEW YORK STOCK EXCHANGE
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
9% SENIOR SUBORDINATED DEBENTURES NEW YORK STOCK EXCHANGE
8 3/8% SENIOR NOTES NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1999, there were outstanding 100,267,293 shares of
the Registrant's common stock, $.50 par value (the "Common Stock"). The
aggregate market value of the Common Stock held by non-affiliates on February
28, 1999 (based upon the average of the high and low sales prices of such stock
as of such date) was $55,010,205. This calculation assumes that all shares of
Common Stock beneficially held by officers and members of the Board of Directors
of the Registrant are owned by "affiliates," a status which each of the officers
and directors may individually disclaim.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
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<S> <C> <C>
PART I ....................................................................................................................1
Item 1. Business............................................................................................1
Item 2. Properties .........................................................................................4
Item 3. Legal Proceedings...................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders.................................................7
PART II ...................................................................................................................7
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................7
Item 6. Selected Financial Data.............................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........................................20
Item 8. Financial Statements and Supplementary Data........................................................21
Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure......46
PART III..................................................................................................................46
Item 10. Directors and Executive Officers of the Registrant.................................................46
Item 11. Executive Compensation.............................................................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................54
Item 13. Certain Relationships and Related Transactions.....................................................55
PART IV ..................................................................................................................56
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ...................................56
</TABLE>
ii
<PAGE> 3
PART I
Except where the context indicates otherwise, the "Company" means
Service Merchandise Company, Inc. and its subsidiaries and the "Registrant"
means Service Merchandise Company, Inc. without reference to its subsidiaries.
Information included in this Annual Report on Form 10-K, unless indicated to be
given as of a specified date or for a specified period, is given as of January
3, 1999.
ITEM 1. BUSINESS
The Company, with 350 stores in 34 states at January 3, 1999, is one of
the nation's largest retailers of jewelry and offers a selection of brand-name
hard goods and other product lines. During the year ended January 3, 1999
("fiscal 1998"), the Company remerchandised its product offerings and attempted
to reposition itself in the mind of consumers as a specialty retailer focused on
jewelry and home products rather than a catalog showroom. The result was a
merchandise mix which provided more emphasis on higher margin home accents and
furnishings. Additionally, the Company ceased distribution of its traditional
fall catalog during fiscal 1998.
As a result of the Company's decreased net sales in the fourth quarter
of fiscal 1998 and the resulting negative cash flows from operations, in January
1999 the Company began an effort to effect an out-of-court restructuring plan.
As part of this out-of-court restructuring plan, on January 20, 1999, the
Company entered into a new credit facility with Citibank N.A. (the "Second
Amended and Restated Credit Facility"). The Company also developed a plan to
close up to 132 stores, up to four distribution centers and to reduce corporate
overhead (the "Rationalization Plan"). In March 1999, as part of the
Rationalization Plan, the Company announced the closing of the Dallas
distribution center and the reduction of its workforce at its Nashville
corporate offices by 150 employees.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Before the Company was able to effect an out-of-court restructuring, on
March 15, 1999, five of the Company's vendors filed an involuntary petition for
reorganization under Chapter 11 ("Chapter 11") of title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Middle District of Tennessee (the "Bankruptcy Court") seeking court
supervision of the Company's restructuring efforts. On March 27, 1999, the
Company and 31 of its subsidiaries (collectively, the "Debtors") filed voluntary
petitions with the Bankruptcy Court for reorganization under Chapter 11 under
case numbers 399-02649 through 399-02680 (the "Chapter 11 Cases") and orders for
relief were entered by the Bankruptcy Court. The Chapter 11 Cases have been
consolidated for the purpose of joint administration under Case No. 399-02649.
The Debtors are currently operating their businesses as debtors-in-possession
pursuant to the Bankruptcy Code.
Actions to collect pre-petition indebtedness are stayed and other
contractual obligations against the Debtors may not be enforced. In addition,
under the Bankruptcy Code, the Debtors may assume or reject executory contracts,
including lease obligations. Parties affected by these rejections may file
claims with the Bankruptcy Court in accordance with the reorganization process.
Substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Bankruptcy Court. Although the Debtors expect to file a
reorganization plan or plans that provide for emergence from bankruptcy in 2000
or 2001, there can be no assurance that a reorganization plan or plans will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan(s) will be consummated. As provided by the Bankruptcy Code, the Debtors
initially have the exclusive right to submit a plan of reorganization for 120
days. Further extensions may be sought and may be granted or rejected by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
such period or if such plan is not accepted by the required number of creditors
and equity holders, any party in interest may subsequently file its own plan of
reorganization for the Debtors. A plan of reorganization must be confirmed by
the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court
which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the Bankruptcy
Code are met. A plan of reorganization could also result in holders of the
Common Stock receiving no value for their interests. Because of such
possibilities, the value of the Common Stock is highly speculative.
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At the first day hearing held on March 29, 1999 before Judge George C.
Paine, the Bankruptcy Court entered first day orders granting authority to the
Debtors, among other things, to pay pre-petition and post-petition employee
wages, salaries, benefits and other employee obligations, to pay vendors and
other providers in the ordinary course for goods and services received from
March 15, 1999, and to honor customer service programs, including warranties,
returns, layaways and gift certificates.
The Company has entered into an agreement dated March 29, 1999 with
Citicorp USA, Inc., as administrative agent, BankBoston, N.A. as documentation
agent and collateral monitoring agent, and Salomon Smith Barney Inc. as sole
arranger and book manager, for a debtor-in-possession credit facility (the "DIP
Facility") under which the Company may borrow up to $750 million, subject to
certain limitations, to fund ongoing working capital needs while it prepares a
reorganization plan. The DIP Facility includes $100 million in term loans and a
maximum of $650 million in revolving loans. Financial covenants are subject to
amendment pending the finalization of the Company's business plan. The DIP
Facility includes a $200 million sub-facility for standby and trade letters of
credit. Interest rates on the DIP Facility are based on either the Citibank N.A.
Alternative Base Rate plus 1.25% for ABR Loans or 2.25% over LIBOR for
Eurodollar Loans. The DIP Facility is secured by substantially all of the assets
of the Company and its subsidiaries, subject only to valid, enforceable,
subsisting and non-voidable liens of record as of the date of commencement of
the Chapter 11 Cases and other liens permitted under the DIP Facility.
Borrowings under the DIP Facility are limited based on a borrowing base
formula which considers eligible inventories, eligible accounts receivable,
trade letters of credit and mortgage values on eligible real properties. The DIP
Facility contains restrictive covenants which are substantially similar to those
contained in the Second Amended and Restated Credit Facility, and are subject to
amendment pending finalization of the Company's business plan. The Company's
ability to obtain new borrowings after the first anniversary of the DIP Facility
is subject to the Company and the lenders having agreed to a business plan and
revised financial and other covenants.
On March 29, 1999, the Bankruptcy Court approved the DIP Facility on an
interim basis. The final hearing with respect to the DIP Facility has been set
for April 27, 1999. The Company believes the DIP Facility (if finally approved
by the Bankruptcy Court) should provide it with adequate liquidity to conduct
its operations while it prepares a reorganization plan.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Reference is made to Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Note B of Notes to Consolidated Financial Statements, and the
Report of Independent Auditors included herein which includes an explanatory
paragraph concerning a substantial doubt as to the Company's ability to continue
as a going concern. If it is determined that the liabilities subject to
compromise in the Chapter 11 Cases exceed the fair value of the assets,
unsecured claims may be satisfied at less than 100% of their face value and the
equity interests of the Company's shareholders may have no value.
GENERAL
The Company is one of the nation's largest retailers of jewelry and
offers a selection of brand-name hard goods and other product lines. Product
offerings are marketed to customers primarily through direct mail flyers,
newspaper inserts and television advertising. While customers may purchase
products through mail order, telephone order or via the Company's Internet web
site, the majority of purchases occur directly in a Company store.
The typical store consists of approximately 50,000 square feet of total
space (approximately 27,000 square feet selling space and 23,000 square feet
warehouse space) and is situated on a stand-alone lot or as an anchor in a
suburban mall or strip center. The Company also operates seven Service Select
stores, an 11,000 - 14,000 square foot format that carries a full line of
jewelry and an edited assortment of hardlines. The Company's stores are divided
into thematic product categories. In the Fine Jewelry department, merchandise is
displayed in showcases. In certain other departments, a sample of the
merchandise is displayed, and customers select their purchases via a "pull tag"
system. The pull tag is taken to a cashier, the product is paid for and the
merchandise is delivered to a pick-up station. In self-service departments,
customers select merchandise from a shelf or display and take it to a checkout
counter to finalize the purchase. In fiscal 1998, the Company transitioned from
a showroom retailer to a self-service retailer. Except for certain
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<PAGE> 5
electronics, large fitness equipment and jewelry, almost all product categories
may now be shopped on a self-service basis.
The Company implemented a new private label credit card program in
January 1998 (the "Program Agreement"). Sales on the credit card generate
accounts receivable which are owned by World Financial Network National Bank
("WFNNB") who reimburses the Company for the value of such credit sales. The
agreement between the Company and WFNNB provides for daily advances to the
Company for the prior day's sales and a monthly settlement for contractual
amounts owed by each party related to the receivables portfolio. During fiscal
1998, the credit card program provided a pre-tax income contribution of $19.6
million. The occurrence of an Event of Bankruptcy (as defined in the Program
Agreement) constitutes an Early Termination Event if (a) WFNNB was unable to
arrange for alternative sources of funding, or (b) the Company does not obtain
an order from the Bankruptcy Court within 10 days of an Event of Bankruptcy
authorizing and approving the Program Agreement and continuation of the program.
Such an Early Termination Event provides WFNNB the right to terminate the
Program Agreement and the program. The Company believes that the program may be
terminated in fiscal 1999. If the program is terminated, it will result in
suspension of the use of private label credit cards. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Selling, General and Administrative Expenses" and Note
Q of Notes to Consolidated Financial Statements.
Virtually every transaction in the store that involves payment,
customer information or inventory is recorded and transmitted, on a daily basis,
via satellite to a central information system at the Company's corporate
offices. In addition, by using the computer, customers may be provided with
suggested alternative items, back-order information, online mail orders, gift
registry, special orders and layaway information.
The Company's computerized daily inventory system tracks the status (on
hand, on order, or in transit), location and history of inventory in the retail
network. The raw data is used in the Company's inventory replenishment system
which tracks inventory positions, sales data and sales forecasts and generates
either suggested transfers from distribution centers or suggested purchase order
quantities. The inventory system also records all sales information to produce
daily margin reports with historical comparisons.
The Company's information systems track customers' purchases and
facilitate tailoring the Company's mailing lists to meet specific objectives.
The Company maintains a household database of information on over 24 million
households that is updated with each purchase. This database allows the Company
to target customers based on specific criteria, including the categories
purchased, the frequency of purchases and the value of those purchases.
SEASONALITY AND COMPETITION
The Company's business is highly seasonal, with the Christmas season
being the largest volume-selling period of the year. In preparation for the
Christmas season, the Company significantly increases its merchandise
inventories, which traditionally have been financed by internally generated
funds, short-term borrowings, trade credit and terms from vendors. The Company's
profitability and cash flows are primarily dependent upon the large sales volume
generated during the fourth quarter of its fiscal year. Fourth quarter net sales
accounted for 40.6% of total net sales in fiscal 1998.
The Company is engaged in a highly competitive business and competes
with most nationally known jewelry and general retail merchandisers including
department, general merchandise, specialty and discount stores. Many of these
competitors are larger and have greater financial resources than the Company.
The Company considers quality, value, merchandise mix, service, quality of
shopping experience and location to be the most significant competitive factors
in its retailing business.
SUPPLIERS
The Company purchases merchandise from approximately 1,700 suppliers,
most of which are manufacturers. Generally, most merchandise is shipped to the
Company's regional distribution centers and transported to the stores by
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commercial contract carriers. In fiscal 1998, the largest vendor accounted for
approximately 7.8% of total cash disbursements for inventory items. On January
27, 1999, the Company announced that it had suspended payment on unpaid invoices
for goods shipped prior to January 8, 1999, totaling approximately $200 million
related to trade payables for merchandise from vendors. The Company also
announced its intent to pay on a current basis invoices for goods shipped after
January 8, 1999. Prior to the filing of the Chapter 11 Cases, the Company's
ability to purchase merchandise was adversely affected by its lack of cash
reserves and the Company's deteriorating financial performance. Certain vendors
refused to ship merchandise to the Company or would only ship on a cash in
advance basis. As a result of the Chapter 11 Cases and the DIP Facility, the
Company intends to pay suppliers for merchandise received post-petition. The
Company believes its ability to acquire merchandise from its suppliers is
adequate to supply its business needs.
The Company's direct import program is responsible for sourcing and
repackaging many promotional and seasonal items. Direct import purchases, which
totaled approximately $250.2 million in fiscal 1998, allow the Company to reduce
many traditional cost factors, thereby lowering the cost of merchandise sold in
several product lines. In addition to its direct import program, the Company
imports diamonds, gemstones and gold which are used by contract fabricators in
the manufacturing of jewelry items.
EMPLOYEES
The number of persons employed by the Company fluctuates seasonally.
During fiscal 1998, the number of active employees varied from approximately
23,600 to approximately 42,700 including both permanent and temporary employees.
As of January 3, 1999, the Company had 23,409 permanent employees, of whom 84%
were hourly-paid personnel engaged in non-supervisory activities; the balance
consisted of administrative, executive, distribution center and store management
personnel. In March 1999, the Company began a program to reduce its workforce as
part of its Rationalization Plan. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview --
Out-of-Court Restructuring Plan." None of the Company's employees are covered by
a collective bargaining agreement. The Company has never experienced a work
stoppage due to a labor disagreement. The Company has experienced a material
loss of its workforce primarily due to the uncertainty surrounding the Company's
deteriorating financial condition and as a result of the filing of the Chapter
11 Cases. The Company anticipates implementing an employee retention plan,
subject to Bankruptcy Court approval, which the Company believes will enhance
its ability to retain employees.
ITEM 2. PROPERTIES
The Company leases and owns retail store facilities, warehouses and
office space. The Company has financed a number of its owned facilities out of
internally generated funds. Some owned facilities have ground leases on a
long-term basis, some are financed through industrial development financing
under which the Company either has ownership or a right to obtain ownership and
others are financed by real estate mortgages. The Company occupies office space
in two locations in greater Nashville, Tennessee, both of which are owned by the
Company. In March 1999, the Company announced a program to close up to 132 under
performing stores as part of its Rationalization Plan. During the pendency of
the Chapter 11 Cases, the Company expects to evaluate its properties and may
seek to reject a number of leases, including those related to stores scheduled
to be closed.
DISTRIBUTION CENTERS
The Company operated seven distribution centers and one return center
(Bowling Green, Kentucky) as of January 3, 1999. These distribution centers are
located in Florida, New York, Tennessee, and Texas, and contain an aggregate of
approximately 3,102,000 square feet as set forth below:
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<TABLE>
<CAPTION>
Center Location Sq. Feet Owned/Leased Lease Term
--------------- -------- ------------ ----------
<S> <C> <C> <C>
Orlando, FL 460,000 Leased Primary term extends through 6/30/00 with
renewal options through 6/30/22
Montgomery, NY 800,000 Sale/Leaseback Primary term extends through 12/31/24
Nashville, TN
(1) Owned 588,000 Owned Not applicable
(2) Owned satellite 268,000 Owned Not applicable
(3) Leased satellite 392,000 Leased Primary term extends through 1/31/01 with
renewal options through 1/31/05
Dallas, TX 594,000 Leased Primary term extends through 1/31/01 with
renewal options through 1/31/06
Bowling Green, KY (Return 180,000 Leased Primary term extends through 12/31/00 with
Center) renewal options through 12/31/25
</TABLE>
In March 1999, the Company adopted a Rationalization Plan pursuant to
which it may close up to four distribution centers and it has announced the
closing of the Dallas distribution center.
RETAIL STORES
As of January 3, 1999, the Company operated 350 retail stores
(typically consisting of approximately 50,000 square feet) as follows:
<TABLE>
<CAPTION>
Number of
Stores
------
<S> <C>
Owned land and building 90
Long-term ground lease with an owned building 36
Owned land with industrial development financing under which the 2
Company has ownership or a right to obtain ownership of the building
Leased 237
Stores which have been subleased (15)
------
Total 350
======
</TABLE>
Most of the leases contain renewal or purchase options. See Note I of
Notes to Consolidated Financial Statements for information concerning the
Company's lease commitments. In March 1999, the Company adopted a
Rationalization Plan pursuant to which it may close up to 132 stores.
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SERVICE MERCHANDISE COMPANY, INC.
STORE LOCATIONS
The numbers in parentheses show the number of stores per state and
where there is more than one store in any city, the number of stores in such
city as of fiscal year-end. An asterisk denotes locations with one or more
stores closed or scheduled to be closed as of April 2, 1999. As of January 3,
1999 the Company operated 350 stores in 34 states. As of April 2, 1999, the
Company operates 343 stores in 34 states.
<TABLE>
<S> <C> <C> <C> <C>
ALABAMA (7) GEORGIA (14) MARYLAND (6) NEW YORK (20) SOUTH CAROLINA (5)
Birmingham (2) * Atlanta (8) Baltimore * Albany Charleston
Huntsville (2) Augusta Columbia * Binghamton Columbia
Mobile Buckhead * Forestville * Buffalo Greenville
Montgomery Columbus * Frederick * East Meadow * Greenwood
Tuscaloosa Douglasville * Salisbury Hartsdale * Sumter
ARIZONA (3) Macon * Waldorf * Huntington TENNESSEE (17)
Glendale Savannah MASSACHUSETTS(11) Lake Grove Cookeville
Mesa (2) ILLINOIS (22) Auburn * Lawrence * Chattanooga (2)
ARKANSAS (4) * Chicago (22) * Boston (7) * Massapequa Jackson
* Fayetteville INDIANA (14) * Holyoke Middletown Johnson City
* Fort Smith Bloomington * Lanesboro/Pittsfield * Nanuet * Kingsport
* Little Rock (2) Clarksville Swansea Patchoque * Knoxville (2)
CALIFORNIA (2) Evansville MICHIGAN (13) * Plattsburgh * Memphis (4)
San Francisco Fort Wayne * Ann Arbor Poughkeepsie * Nashville (5)
San Jose Griffith * Detroit (8) Queens TEXAS (40)
COLORADO (1) Indianapolis (4) * Flint * Rochester (2) * Abilene
* Pueblo * Kokomo * Lansing (2) * Syracuse * Amarillo
CONNECTICUT (6) * Lafayette * Waterford * Utica Arlington
Danbury Merrillville MISSISSIPPI (6) * Yorktown Heights Austin
Derby South Bend * Gautier NORTH CAROLINA (7) Beaumont
Hartford (2) * Terre Haute * Gulfport Charlotte (2) * College Station
Orange KANSAS (3) Hattiesburg Fayetteville * Corpus Christi
* Waterbury Overland Park * Jackson (2) Gastonia * Dallas (6)
DELAWARE (3) Wichita (2) Meridian Greensboro El Paso
Dover KENTUCKY (9) MISSOURI (7) Raleigh (2) Ft. Worth (2)
Wilmington (2) Bowling Green * Independence OHIO (12) Harlingen
FLORIDA (50) Elizabethtown Springfield * Akron Houston (9)
Boca Raton Florence * St. Louis (5) * Canton Lake Jackson
Boynton Beach Lexington NEVADA (3) Cincinnati (4) Laredo
* Coral Springs * Louisville (3) * Las Vegas (2) * Columbus (2) Longview
* Davie Owensboro * Reno * Lima * Lubbock
Daytona Beach Paducah NEW HAMPSHIRE (5) * Mansfield * McAllen (2)
Ft. Myers LOUISIANA (14) Dover * Toledo (2) * Midland
Gainesville * Alexandria Manchester OKLAHOMA (7) * San Angelo
Jacksonville (3) * Baton Rouge (2) Nashua * Norman San Antonio (3)
Lakeland Houma Plaistow * Oklahoma City (3) * Temple
Leesburg * Lafayette (2) Salem * Tulsa (3) Tyler
* Melbourne * Lake Charles NEW JERSEY (6) PENNSYLVANIA (14) * Waco
Miami/Ft. Lauderdale (11) Monroe Hazlet Allentown VERMONT (1)
Naples * New Orleans (3) Paramus Harrisburg Burlington
Ocala Shreveport (2) * Turnersville Lancaster VIRGINIA (11)
Orlando (7) Slidell * Voorhees * Philadelphia (2) * Alexandria
Pensacola MAINE (5) Wayne * Pittsburgh (6) * Bailey's Crossroad
Port Charlotte * Auburn * Woodbridge Reading Chantilly
Sarasota (2) Augusta NEW MEXICO (2) Scranton Chesapeake
* Stuart * Bangor * Albuquerque Wilkes-Barre Dale City
Tallahassee (2) * Brunswick * Las Cruces Fredericksburg
Tampa/Clearwater Portland * Hampton
St. Petersburg (7) * Manassas
* W. Palm Beach * Norfolk
Vero Beach * Richmond (2)
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
On March 15, 1999, five of the Company's vendors filed an involuntary
petition for reorganization under Chapter 11 in the Bankruptcy Court seeking
court supervision of the Company's restructuring efforts. On March 27, 1999, the
Company and 31 of its subsidiaries filed voluntary petitions with the Bankruptcy
Court for reorganization under Chapter 11 of the Bankruptcy Code. The Debtors
are currently operating their businesses as debtors-in-possession. The Chapter
11 Cases have been consolidated for the purpose of joint administration under
case number 399-02649.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Additional information
regarding the Chapter 11 Cases is set forth in Item 1. "Business -- Proceedings
Under Chapter 11 of the Bankruptcy Code," Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Note B of Notes to
Consolidated Financial Statements, and the Report of Independent Auditors
included herein which includes an explanatory paragraph concerning a substantial
doubt as to the Company's ability to continue as a going concern. If it is
determined that the liabilities subject to compromise in the Chapter 11 Cases
exceed the fair value of the assets, unsecured claims may be satisfied at less
than 100% of their face value and the equity interests of the Company's
shareholders may have no value.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
During fiscal 1998 and 1997, the Common Stock traded on the New York
Stock Exchange (the "NYSE") under the symbol "SME." The number of holders of
Common Stock at March 2, 1998 was 5,844. On March 17, 1999, the NYSE notified
the Company that it was reviewing the listing status of the Company's listed
securities, including the Common Stock. Accordingly, while an established public
trading market currently exists with respect to the Common Stock, there can be
no assurance that the Common Stock will remain listed on the NYSE or otherwise
be the subject of an established public trading market.
High and low closing sales prices as reported by the NYSE for fiscal
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter...................................................................2 7/16 1 5/8
Second Quarter..................................................................2 1/4 1 5/8
Third Quarter...................................................................1 15/16 1 1/2
Fourth Quarter..................................................................1 11/16 9/32
<CAPTION>
1997 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter...................................................................4 3/4 3 3/8
Second Quarter..................................................................3 5/8 2 5/8
Third Quarter...................................................................4 1/2 2 7/8
Fourth Quarter..................................................................4 7/8 1 7/8
</TABLE>
The Amended and Restated Credit Facility and its successor, the Second
Amended and Restated Credit Facility, contained certain restrictive covenants,
including a prohibition on the payment of cash dividends. The Company has not
declared any cash dividends to shareholders for fiscal 1998 or 1997.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR
(In thousands, except per share, store, ratio -----------------------------------------------------------------------
and rate data) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 3,169,525 $ 3,662,778 $ 3,955,016 $ 4,018,525 $ 4,050,381
Earnings (loss) before interest and income taxes (a) (27,145) (63,801) 138,564 162,078 179,643
Interest expense - debt and capitalized leases (a) 83,255 78,531 75,636 80,908 78,707
Earnings (loss) before extraordinary loss and
cumulative effect of change in accounting
principle (110,307) (88,957) 39,330 50,325 61,570
Net earnings (loss) (110,307) (91,600) 39,330 50,325 56,155
RATIOS & RATES
Gross margin to net sales 23.8% 23.2% 24.2% 24.3% 24.0%
Selling, general and administrative expenses to net
sales (a) 22.4% 19.8% 19.2% 18.7% 18.0%
Effective tax rate 0.1% 37.5% 37.5% 38.0% 39.0%
Earnings (loss) before extraordinary loss and
cumulative effect of change in accounting
principle to net sales (3.5%) (2.4%) 1.0% 1.3% 1.5%
Net earnings (loss) to net sales (3.5%) (2.5%) 1.0% 1.3% 1.4%
PER COMMON SHARE - BASIC AND DILUTED (b)
Earnings (loss) per share before extraordinary loss
and cumulative effect of change in accounting
principle - Basic $ (1.11) $ (0.89) $ 0.39 $ 0.50 $ 0.62
Earnings (loss) per share before extraordinary loss
and cumulative effect of change in accounting
principle - Assuming dilution (1.11) (0.89) 0.39 0.50 0.62
Net earnings (loss) per share - Basic (1.11) (0.92) 0.39 0.50 0.56
Net earnings (loss) per share - Assuming dilution (1.11) (0.92) 0.39 0.50 0.56
Weighted - average common shares:
Basic 99,703 99,930 99,209 99,059 99,432
Diluted 99,703 99,930 100,326 100,357 100,105
FINANCIAL POSITION
Inventories $ 896,303 $ 929,818 $ 1,052,969 $ 1,034,467 $ 1,004,282
Notes payable 156,000 -- -- -- --
Accounts payable (a) 228,373 482,235 639,887 679,107 685,297
Working capital 255,980 586,501 489,597 365,025 290,696
Total assets (a) 1,626,895 1,951,461 2,087,452 1,999,008 1,972,433
Long-term obligations (c) 508,385 761,522 682,156 623,286 618,423
Shareholders' equity 225,895 336,505 427,094 386,742 336,376
RATIOS
Inventory turnover 2.6x 2.8x 2.9x 3.0x 3.2x
Current ratio (a) 1.3x 1.7x 1.5x 1.4x 1.3x
Long-term debt to long-term debt + equity 68.8% 69.4% 61.5% 61.7% 64.8%
OTHER INFORMATION
Total net sales increase (decrease) (13.5%) (7.4%) (1.6%) (0.8%) 6.2%
Comparable store net sales increase (decrease) (d) (8.9%) (3.1%) (1.9%) (3.3%) 1.3%
Number of stores 350 361 401 410 407
ADJUSTED EBITDA DATA
Adjusted EBITDA (e) $ 73,637 $ (4,561) $ 199,189 $ 224,816 $ 242,495
Adjusted EBITDA to net sales 2.3% (0.1%) 5.0% 5.6% 6.0%
CASH FLOW DATA
Cash flow from operating activities $ (291,351) $ (21,443) $ 65,737 $ 72,829 $ 83,472
Cash flow from investing activities (36,189) (23,270) (29,926) (47,778) (75,166)
Cash flow from financing activities 97,120 78,879 58,431 (8,095) (160,134)
</TABLE>
- ------------------------
(a) Certain prior period amounts have been reclassified for comparative
purposes.
(b) Restated to reflect the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 128.
(c) Includes both long-term debt and long-term portion of capitalized lease
obligations.
(d) Adjusted to reflect a comparable number of selling days.
(e) Adjusted EBITDA consists of net earnings before interest, income taxes,
depreciation and amortization. Also included in Adjusted EBITDA is other
amortization classified as selling, general and administrative expenses in
the following amounts: 1998 - $630; 1997 - $992; 1996 - $966; 1995 - $964;
1994 - $317. Certain amounts have been reclassified from selling, general
and administrative expenses to interest expense for both current and prior
periods. Adjusted EBITDA does not reflect restructuring charges or SFAS No.
121 charges. Adjusted EBITDA is not intended to represent net earnings, cash
flow or any other measure of performance in accordance with generally
accepted accounting principles, but is included because management believes
certain investors find it to be a useful tool for measuring operating
performance. While Adjusted EBITDA and similar variations thereof are
frequently used as a measure of operations and the ability to meet debt
service requirements, these terms are not necessarily comparable to other
similarly titled captions of other companies due to the potential
inconsistencies in the method of calculation.
8
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K includes certain forward-looking
statements based upon management's beliefs, as well as assumptions made by and
data currently available to management. This information has been, or in the
future may be, included in reliance on the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to a number of risks and uncertainties including, but not limited to, the
following: the ability of the Company to continue as a going concern; the
ability of the Company to obtain final Bankruptcy Court approval of the DIP
Facility and to operate pursuant to the terms of the DIP Facility; the ability
of the Company to operate successfully under a Chapter 11 proceeding; approval
of plans and activities by the Bankruptcy Court; risks associated with operating
a business in Chapter 11; the ability of the Company to create and have approved
a reorganization plan in the Chapter 11 Cases; adverse developments, with
respect to the Company's liquidity or results of operations; the ability of the
Company to obtain shipments and negotiate terms with vendors and service
providers for current orders; the ability to conduct inventory liquidation sales
to improve liquidity; the ability to develop, fund and execute an operating plan
for the Company; the ability of the Company to attract and retain key executives
and associates; competitive pressures from other retailers, including specialty
retailers and discount stores, which may affect the nature and viability of the
Company's business strategy; trends in the economy as a whole which may affect
consumer confidence and consumer demand for the types of goods sold by the
Company; the ability to maintain gross profit margins; the seasonal nature of
the Company's business and the ability of the Company to predict consumer demand
as a whole, as well as demand for specific goods; the ability of the Company to
attract and retain customers; costs associated with the shipping, handling and
control of inventory and the Company's ability to optimize its supply chain;
potential adverse publicity; availability and cost of management and labor
employed; real estate occupancy and development costs, including the substantial
fixed investment costs associated with opening, maintaining or closing a Company
store; the potential delisting of the Company's securities and the absence of an
active public trading market; the ability of the Company to provide a private
label credit card; and the ability to effect conversions to new technological
systems, including becoming Year 2000 compliant.
Actual results may differ materially from those anticipated in any such
forward-looking statements. The Company undertakes no obligation to update or
revise any forward-looking statements to reflect subsequent events or
circumstances.
OVERVIEW
The Notes to Consolidated Financial Statements are an integral part of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and should be read in conjunction herewith.
The Company, with 350 stores in 34 states at January 3, 1999, is one
of the nation's largest retailers of jewelry and offers a selection of
brand-name hard goods and other product lines. During fiscal 1998, the Company
remerchandised its product offerings and attempted to reposition itself in the
mind of consumers as a specialty retailer focused on jewelry and home products
rather than a catalog showroom. The result was a merchandise mix which provided
more emphasis on higher margin home accents and furnishings. Additionally, the
Company ceased distribution of its traditional fall catalog during fiscal 1998.
Out-of-Court Restructuring Plan
As a result of the Company's decreased net sales in the fourth quarter
of fiscal 1998 and the resulting negative cash flows from operations, in January
1999 the Company began an effort to effect an out-of-court restructuring
plan. As part of this out-of-court restructuring plan, on January 20, 1999, the
Company entered into the Second Amended and Restated Credit Facility. The
Company also developed a Rationalization Plan to close up to 132 stores, up to
four distribution centers and to reduce corporate overhead. In March 1999 as
part of the Rationalization Plan, the Company announced the closing of the
Dallas distribution center and the reduction of its workforce at its Nashville
corporate offices by 150 employees. As a result of the filing of the Chapter 11
Cases, aspects of the Rationalization Plan not implemented by March 27, 1999 or
not approved to date by the Bankruptcy Court may be subject to Bankruptcy Court
approval.
9
<PAGE> 12
Proceedings Under Chapter 11 of the Bankruptcy Code
Before the Company was able to effect an out-of-court restructuring, on
March 15, 1999, five of the Company's vendors filed an involuntary petition for
reorganization under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Tennessee seeking court supervision
of the Company's restructuring efforts. On March 27, 1999, the Company and 31 of
its subsidiaries filed voluntary petitions with the Bankruptcy Court for
reorganization under Chapter 11 and orders for relief were entered by the
Bankruptcy Court. The Chapter 11 Cases have been consolidated for the purpose of
joint administration under Case No. 399-02649. The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the Bankruptcy
Code.
Actions to collect pre-petition indebtedness are stayed and other
contractual obligations against the Debtors may not be enforced. In addition,
under the Bankruptcy Code the Debtors may assume or reject executory contracts,
including lease obligations. Parties affected by these rejections may file
claims with the Bankruptcy Court in accordance with the reorganization process.
Substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Bankruptcy Court. Although the Debtors expect to file a
reorganization plan or plans that provide for emergence from bankruptcy in 2000
or 2001, there can be no assurance that a reorganization plan or plans will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan(s) will be consummated. As provided by the Bankruptcy Code, the Debtors
initially have the exclusive right to submit a plan of reorganization for 120
days. Further extensions may be sought and may be granted or rejected by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
such period or if such plan is not accepted by the required number of creditors
and equity holders, any party in interest may subsequently file its own plan of
reorganization for the Debtors. A plan of reorganization must be confirmed by
the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court
which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the Bankruptcy
Code are met. A plan of reorganization could also result in holders of the
Common Stock receiving no value for their interests. Because of such
possibilities, the value of the Common Stock is highly speculative.
At the first day hearing held on March 29, 1999 before Judge George C.
Paine, the Bankruptcy Court entered first day orders granting authority to the
Debtors, among other things, to pay pre-petition and post-petition employee
wages, salaries, benefits and other employee obligations, and to pay vendors and
other providers in the ordinary course for goods and services received from
March 15, 1999, and to honor customer service programs, including warranties,
returns, layaways and gift certificates.
The Company has entered into the DIP Facility dated March 29, 1999 with
Citicorp USA, Inc., as administrative agent, BankBoston, N.A. as documentation
agent and collateral monitoring agent, and Salomon Smith Barney Inc. as sole
arranger and book manager, for a debtor-in-possession credit facility under
which the Company may borrow up to $750 million, subject to certain limitations,
to fund ongoing working capital needs while it prepares a reorganization plan.
The DIP Facility includes $100 million in term loans and a maximum of $650
million in revolving loans. Financial covenants are subject to amendment pending
the finalization of the Company's business plan. The DIP Facility includes a
$200 million sub-facility for standby and trade letters of credit. Interest
rates on the DIP Facility are based on either the Citibank N.A. Alternative Base
Rate plus 2.25% for LIBOR Loans or 1.25% for ABR Loans. The DIP Facility is
secured by substantially all of the assets of the Company and its subsidiaries,
subject only to valid, enforceable, subsisting and non-voidable liens of record
as of the date of commencement of the Chapter 11 Cases and other liens permitted
under the DIP Facility.
Borrowings under the DIP Facility are limited based on a borrowing base
formula which considers eligible inventories, eligible accounts receivable,
trade letters of credit and mortgage values on eligible real properties. The DIP
Facility contains restrictive covenants which are substantially similar to those
contained in the Second Amended and Restated Credit Facility, and are subject to
amendment pending finalization of the Company's business plan. The Company's
ability to obtain new borrowings after the first anniversary of the DIP Facility
is subject to the Company and the lenders having agreed upon a business plan and
revised financial and other covenants.
On March 29, 1999, the Bankruptcy Court approved the DIP Facility on an
interim basis. The final hearing with respect to the DIP Facility has been set
for April 27, 1999. The Company believes the DIP Facility (if finally approved
by the Bankruptcy Court) should provide it with adequate liquidity to conduct
its operations while it prepares a reorganization plan.
10
<PAGE> 13
The Company's Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The filing of the involuntary and voluntary petitions referred to
above, the related circumstances and the losses from operations raise
substantial doubt with respect to the Company's ability to continue as a going
concern. The appropriateness of using the going concern basis is dependent upon,
among other things, confirmation of a plan or plans of reorganization, future
profitable operations and the ability to generate cash from operations and
financing sources sufficient to meet obligations. As a result of the filing of
the Chapter 11 Cases and related circumstances, realization of assets and
liquidation of liabilities is subject to significant uncertainty. While under
the protection of Chapter 11, the Debtors may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the Consolidated Financial Statements. Further, a plan or plans of
reorganization could materially change the amounts reported in the accompanying
Consolidated Financial Statements. The Consolidated Financial Statements do not
include any adjustments relating to recoverability of the value of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary as a consequence of a plan of reorganization.
At this time, it is not possible to predict the outcome of the Chapter
11 Cases or their effect on the Company's business. Additional information
regarding the Chapter 11 Cases is set forth in Item 1. "Business -- Proceedings
Under Chapter 11 of the Bankruptcy Code," Note B of Notes to Consolidated
Financial Statements and the Report of Independent Auditors included herein
which includes an explanatory paragraph concerning a substantial doubt as to the
Company's ability to continue as a going concern. If it is determined that the
liabilities subject to compromise in the Chapter 11 Cases exceed the fair value
of the assets, unsecured claims may be satisfied at less than 100% of their face
value and the equity interests of the Company's shareholders may have no value.
The Company believes the DIP Facility, if finally approved by the Bankruptcy
Court, should provide the Company with adequate liquidity to conduct its
business while it prepares a reorganization plan. However, the Company's
liquidity, capital resources, results of operations and ability to continue as a
going concern are subject to known and unknown risks and uncertainties,
including those set forth above under "Safe Harbor Statement Under The Private
Securities Litigation Reform Act of 1995."
IMPAIRMENT
In the fourth quarter of fiscal 1998, the Company recorded a non-cash
impairment loss of $43.1 million related to a write-down of the Company's fixed
assets. See Note G of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Fiscal Year Ended January 3, 1999 Compared to Fiscal Year Ended December 28,
1997
The Company's consolidated statement of operations presentation changed
beginning with the second quarter of fiscal 1997. This change was made to
disclose the financial statement impact of the inventory liquidations and other
operating results associated with the closed facilities as a result of
restructuring and remerchandising activities. "Closed facilities as a result of
restructuring and remerchandising activities" reflects inventory liquidations
and other operating results of 44 stores and one distribution center closed
during 1997 and nine stores closed in fiscal 1998 as part of: (1) the Company's
restructuring plan announced in the first quarter of fiscal 1997 (the
"Restructuring Plan") and (2) exiting certain product lines as part of a
remerchandising program. Selling, general and administrative expenses for closed
facilities as a result of restructuring and remerchandising activities does not
include any allocation of corporate overhead. Prior year amounts reflect
operating results for these same facilities and merchandise classifications.
Net loss for fiscal 1998 was $110.3 million, or $1.11 per share,
compared to a net loss of $91.6 million, or $0.92 per share, for the year ended
December 28, 1997 ("fiscal 1997"). The increase in net loss was primarily a
result of decreased net sales and a $43.1 million impairment loss with respect
to certain fixed assets. Net sales were $3.17 billion for fiscal 1998 compared
to $3.66 billion for fiscal 1997. The decrease of $493.3 million in net sales,
or 13.5%, was the result of a $283.4 million or 8.9%, decline in comparable
store sales and a decline in net sales from closed facilities and
remerchandising activities of $209.9 million, or 95.3 %, due to declining
overall performance, store closings and exiting certain business lines including
video games, camping, team sports and office equipment. The consolidated
statement of operations includes a pre-tax, non-cash charge of approximately
$43.1 million, in connection with the write-down of certain long-lived assets
resulting from decreased expectations regarding future store cash flows. See
Note G of Notes to Consolidated Financial Statements. Income tax expense
increased over the prior year by approximately $53 million primarily due to the
recording of a deferred tax asset valuation
11
<PAGE> 14
allowance. Deferred taxes are recognized to reflect the estimated future
utilization of temporary book/tax differences. The Company has recorded a full
valuation allowance on net deferred tax assets as realization of such assets in
future years is uncertain. Debt Interest Expense increased approximately $6
million from the prior year as a result of increased borrowings.
The Company's business is highly seasonal with a significant portion of
its sales occurring in the fourth quarter. Fourth quarter net sales accounted
for 40.6% and 39.4% of total net sales in fiscal 1998 and 1997, respectively.
Fourth quarter net sales for fiscal 1998 decreased $157.6 million, or 10.9%,
when compared to the fourth quarter of fiscal 1997, primarily due to comparable
store sales decreases and the closure of nine under performing stores in fiscal
1998. Comparable store sales decreased $171.3 million, or 12.4%, for the fourth
quarter of fiscal 1998 compared to the prior year.
Net Sales
Total net sales for the Company was $3.17 billion in fiscal 1998
compared to $3.66 billion in fiscal 1997. The decline in net sales was primarily
due to the closure of 53 stores as a result of the restructuring and
remerchandising activities and disappointing sales. The Company maintains its
books using a 52/53 week year ending on the Sunday closest to the end of the
calendar year. There were 53 weeks in fiscal 1998 and 52 weeks in each of the
previous fiscal years. During the first quarter of fiscal 1999, the Company
experienced inventory shortages due to its deteriorating financial performance
and the uncertainties related to the Company's out-of-court restructuring plan.
The Company believes these factors have adversely affected sales in the first
quarter of fiscal 1999.
Net sales from operations excluding closed facilities as a result of
restructuring and remerchandising activities were $3.16 billion for fiscal 1998
compared to $3.44 billion for fiscal 1997, a decrease of $283.4 million or 8.2%.
Jewelry comparable store sales increased 3.6%, while hardline comparable store
sales were down 13.6%. Contributing to the overall decline in comparable store
sales was the conversion of the traditional store format and merchandise
selections during the first three quarters of fiscal 1998, reduced advertising
and overall performance declines. Increases in gold sales, jewelry special sales
events and warranty sales were offset in part by sales decreases in watches,
diamonds and precious and semi-precious stones. Sales increases in decorative
home, seasonal, telephones, home furnishings and photo categories were offset in
part by sales decreases in sporting and fitness, toys, small appliances,
housewares, audio, video and home office equipment.
Net sales from closed facilities as a result of restructuring and
remerchandising activities were $10.3 million for fiscal 1998 compared to $220.2
million for fiscal 1997. Sales from closed facilities as a result of
restructuring and remerchandising activities decreased primarily due to closing
nine under performing stores in fiscal 1998 as compared to 44 under performing
stores in fiscal 1997.
The Company maintains its books using a 52/53 week year ending on the
Sunday closest to the end of the calendar year. There were 53 weeks in fiscal
1998 and 52 weeks in each of fiscal 1997 and 1996. In the fourth quarter of
fiscal 1998, there were 14 reporting weeks. All previous quarters in fiscal
year's 1998, 1997 and 1996 were reported on a 13 week basis.
Gross Margin (loss)
In fiscal 1998, gross margin was $754.3 million as compared to $851.0
million in fiscal 1997. The decrease in gross margin dollars was primarily due
to the overall decline in sales.
Gross margin after cost of merchandise sold and buying and occupancy
expenses and excluding closed facilities as a result of restructuring and
remerchandising was $763.0 million, or 24.2% of net sales from operations
excluding closed facilities as a result of restructuring and remerchandising for
fiscal 1998, compared to $843.0 million, or 24.5% of net sales from operations
excluding closed facilities as a result of restructuring and remerchandising
activities for fiscal 1997. The reduced gross margin rate reflects a $14.7
million write-down lowering discontinued inventory items to their net realizable
value and competition induced price mark-downs, partially offset by a shift to a
higher margin merchandise assortment.
Gross margin loss for closed facilities as a result of restructuring
and remerchandising activities, after cost of merchandise sold and buying and
occupancy expenses, was $(8.7) million, or (85.2)% of sales of these facilities
in fiscal 1998 as compared to gross margin of $8.0 million or 3.6% in fiscal
1997. The increase in both gross loss and rate was due to greater merchandise
12
<PAGE> 15
discounts offered in liquidating inventories at the nine under performing stores
closed in fiscal 1998 as compared to the 44 under performing stores closed in
fiscal 1997 as part of the Company's restructuring and remerchandising programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses declined $20.5 million in
fiscal 1998 to $709.1 million from $729.6 million in fiscal 1997. The $20.5
million decline was primarily due to store closures and favorable results from
the private label credit card. If the credit card program is terminated, it will
result in suspension of the use of private label credit cards. See Note Q of
Notes to Consolidated Financial Statements.
Selling, general and administrative expenses were $706.7 million, or
22.4% of net sales from operations excluding closed facilities as a result of
restructuring and remerchandising for fiscal 1998 compared to $685.8 million, or
19.9% of net sales from operations excluding closed facilities as a result of
restructuring and remerchandising for fiscal 1997. The increase in selling,
general and administrative expenses was primarily attributable to an increase
in legal and consulting expenses of operations excluding closed facilities as a
result of restructuring and remerchandising activities incurred primarily in the
third and fourth quarters of fiscal 1998. This increase as a percent of sales
was partially offset by income of $19.6 million recognized from the private
label credit card program. If the program is terminated it will result in
suspension of the use of private label credit cards, which would adversely
affect selling, general and administrative expense for fiscal 1999.
The Company believes selling, general and administrative expenses in
the first quarter of fiscal 1999 will be adversely affected by severance and
other extraordinary expenses. See Item. 11 "Executive Compensation -- Severance
and Indemnification Agreements; Employment Agreements; Change in Control
Provisions."
Other Income
Other income increased $10.4 million in fiscal 1998 from $2.6 million
in fiscal 1997. The increase was primarily due to the gain on the sale/lease
back of the Company's aircraft.
Depreciation and Amortization
Depreciation and Amortization in fiscal 1998 was $57.1 million, a $1.2
million decline from $58.2 million in fiscal 1997.
Depreciation and amortization on owned and leased property and
equipment was $57.1 million for fiscal 1998 as compared to $58.2 million for
fiscal 1997, a decrease of 2.0%. Capital expenditures, excluding capitalized
leases, increased to $50.7 million in fiscal 1998 as compared to $40.8 million
in fiscal 1997. The Company closed a net 11 stores in fiscal 1998 as compared to
closing a net 40 stores (including the 44 under performing stores) in fiscal
1997.
Interest Expense
Interest expense on debt and capitalized leases increased to $83.3
million in fiscal 1998 from $78.5 million in fiscal 1997. Interest expense for
the year increased primarily due to the term loan being outstanding for the full
year partially offset by lower average borrowings against the revolver under the
Amended and Restated Credit Facility.
Income Tax
The Company recognized an income tax benefit of $0.1 million for fiscal
1998 compared to $53.4 million for fiscal 1997. The decrease in the benefit was
primarily due to the recording of a full valuation allowance against deferred
tax assets of $41.8 million. The effective income tax rate was reduced to 0.1%
for fiscal 1998 compared to 37.5% for fiscal 1997.
Restructuring Plan
The closing of nine stores during the first half of fiscal 1998 brought
the total number of closures in accordance with the Restructuring Plan to 53
stores and one distribution center. Store closures related to the Restructuring
Plan were completed
13
<PAGE> 16
in May 1998. Impairment charges recognized on the nine stores closed in fiscal
1998 were $5.2 million. The components of the restructuring charges and an
analysis of the amounts charged against the accrual during fiscal 1998 are
outlined in the following table:
<TABLE>
<CAPTION>
1998 ACTIVITY
---------------------------------------------------------------------------
ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
COSTS AS OF COSTS AS OF
DECEMBER 28, RESTRUCTURING ASSET CHANGE IN JANUARY 3,
(in thousands) 1997 COSTS PAID WRITE-DOWNS ESTIMATE 1999
-------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate costs $ 73,511 $(13,737) $ -- $ (6,613) $ 53,161
Property and equipment write-downs -- -- 5,706 (5,706) --
Employee severance 531 (155) -- (376) --
Other exit costs 2,200 -- -- (2,200) --
-------- -------- -------- -------- --------
Total $ 76,242 $(13,892) $ 5,706 $(14,895) 53,161
======== ======== ======== ========
Less: Current portion (7,864)
--------
$ 45,297
========
</TABLE>
The Restructuring Plan adopted by the Company in 1997 was for the
closure of up to 60 stores and one distribution center. The Company closed less
than 60 stores primarily due to the inability to negotiate acceptable exit terms
from the related lessors. Restructuring costs paid during fiscal 1998 relate
primarily to lease termination and other real estate costs. Lease termination
and other real estate costs consist principally of the remaining rental payments
required under the closing stores' lease agreements, net of any actual or
reasonably probable sublease income, as well as early termination costs. The
Company will pay lease termination fees as the Company is able to obtain such
terminations or as it rejects such leases under the Chapter 11 Cases. The leases
remaining on closed locations as of January 3, 1999 vary in length with
expiration dates ranging from February 1999 to December 2030. The ultimate
timing of lease termination payments will depend on the Company's ability to
negotiate acceptable lease exit terms. Reduced margins and changes in selling,
general and administrative expenses are reflected in the operating results as
inventory associated with the closing stores is liquidated.
Changes in estimates are representative of conditions existing as of
January 3, 1999. Due to favorable lease termination experience in the second
half of fiscal 1998 and favorable experience related to the sale of property and
equipment associated with the store closures, restructure reserves of $14.9
million were reversed in the fourth quarter of fiscal 1998.
The Restructuring Plan was based on an analysis of individual store
performance based on cash flow return on committed capital, suitability within
marketing demographic profiles and strategic geographic positioning. After the
effect of charges and costs related specifically to the closings, the immediate
ongoing impact of the closings on net income was insignificant as the stores
closed were near break-even contributors.
During the second quarter of fiscal 1997, the Company also began
implementing certain remerchandising strategies, including the exit of the low
margin computer business and certain components of the wireless communication
business. Additional remerchandising decisions were executed in the first
quarter of fiscal 1998 with the exit of infant and pet supply categories and
certain components of the sporting goods business.
In the third quarter of fiscal 1998, the Company completed the
remerchandising portion of its restructuring and repositioning plan announced in
March 1997.
Impaired Assets
In the fourth quarter of fiscal 1998, the Company recorded a non-cash
impairment loss of $43.1 million related to a write-down of the Company's fixed
assets. The Company performed a long-lived asset impairment analysis due to
projected cash flow losses combined with current operating and cash flow losses
at certain store locations.
Assets are evaluated for impairment on an individual store basis which
management believes is the lowest level for which there are identifiable cash
flows. Projected future cash flows (undiscounted and without interest) were
compared to the carrying amount of assets at each location. If the carrying
amount of the assets exceeded the projected future cash flows, an
14
<PAGE> 17
impairment loss was recognized. Impaired assets were written-down to their
estimated fair value. Fair value was based on sales of similar assets or other
estimates of fair value such as discounting estimated future cash flows.
Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from such estimates.
Fiscal Year Ended December 28, 1997 Compared to Fiscal Year Ended December 29,
1996
Net loss for fiscal 1997 was $(91.6) million, or $(0.92) per share,
compared to net earnings of $39.3 million, or $0.39 per share, for the year
ended December 29, 1996 ("fiscal 1996"). The decrease in earnings was primarily
the result of a $129.5 million pre-tax restructuring charge taken in the first
quarter of fiscal 1997, a $37.4 million pre-tax loss associated with inventory
liquidations from closed facilities and remerchandising activities, lower sales
from operations excluding closed facilities and remerchandising activities, a
$4.2 million pre-tax extraordinary loss on the early extinguishment of debt and
efforts to change the Company's business strategy to concentrate on core
merchandise strengths in jewelry and home furnishings. Several initiatives were
implemented during fiscal 1997 including launching a new marketing model aimed
at expanding the Company's customer base, aligning product offerings into
thematic merchandise categories, closing under performing stores and replacing
the traditional clipboard system with a new customer-friendly pull-tag system.
However, these initiatives did not result in an improvement in sales or earnings
for the Company in fiscal 1997.
Net Sales
Net sales were $3.66 billion for fiscal 1997 compared to $3.96 billion
for fiscal 1996. The decrease of $292.2 million or 7.4%, was the result of a
3.1% decline in comparable store sales and a decline in net sales from closed
facilities and remerchandising activities of $125.4 million due to the closure
of 53 under performing stores. Net sales from operations excluding closed
facilities and remerchandising activities were $3.44 billion for fiscal 1997
compared to $3.54 billion for fiscal 1996, a decrease of $102.1 million or 2.9%.
Comparable store sales declined 3.1%. Jewelry comparable store sales were down
0.4%. Improvements in gold sales, jewelry special sales events and warranty
sales were offset by sales declines in watches, diamonds and precious and
semi-precious stones.
Hardline comparable store sales were down 4.1%. Sales improvements in
decorative home, seasonal, telephone, home furnishing and photo categories were
offset by sales declines in sporting and fitness, toys, small appliances,
housewares, audio and home office equipment.
Net sales from closed facilities and remerchandising activities were
$220.2 million for fiscal 1997 compared to $410.3 million for fiscal 1996. Sales
from closed facilities and remerchandising activities for fiscal 1997 decreased
from fiscal 1996 due to the closing of 44 under performing stores in fiscal
1997.
Gross Margin
Gross margin, after cost of merchandise sold and buying and occupancy
expenses, decreased as a percentage of net sales to 23.2% in fiscal 1997 from
24.2% in fiscal 1996. The decrease in the margin rate is primarily attributable
to the closed facilities and remerchandising activities and declining overall
performance.
Gross margin, after cost of merchandise sold and buying and occupancy
expenses, for operations excluding closed facilities and remerchandising
activities decreased to $843.0 million, or 24.5% of sales from operations
excluding closed facilities and remerchandising activities for fiscal 1997 as
compared to $880.1 million, or 24.8% of sales from operations excluding closed
facilities and remerchandising activities for fiscal 1996. Lower sales from
operations excluding closed facilities and remerchandising activities affected
the gross margin dollar performance. Overall improvements in both jewelry and
hardline merchandise margins were offset by increases in freight and buying and
occupancy costs resulting in the reduction in gross margin rate from last year.
Gross margin after cost of merchandise sold and buying and occupancy
expenses, for closed facilities and remerchandising activities was $8.0 million,
or 3.6% of sales from closed facilities and remerchandising activities for
fiscal 1997 as compared to $77.0 million, or 18.8% of sales from closed
facilities and remerchandising activities for fiscal 1996. The decline in both
gross margin dollars and rate was due to the merchandise discounts offered in
liquidating inventories at the 44 under performing stores as part of the
Company's restructuring and remerchandising programs.
15
<PAGE> 18
Selling, General and Administrative Expenses
While selling, general and administrative expenses decreased $33.9
million in fiscal 1997 compared to fiscal 1996, they increased as a percentage
of net sales to 19.9% from 19.3% in fiscal 1996. This increase relative to sales
reflects the higher selling, general and administrative expenses cost structure
for the inventory liquidations and lower-than-planned sales in the fourth
quarter of fiscal 1997.
Selling, general and administrative expenses of operations excluding
closed facilities and remerchandising activities were $685.8 million, or 19.9%
of sales from operations excluding closed facilities and remerchandising
activities for fiscal 1997 compared to $695.7 million, or 19.3% of sales from
operations excluding closed facilities and remerchandising activities for fiscal
1996. A decrease in selling, general and administrative expenses associated with
reduced employment and advertising costs was not enough to offset the sales
volume decline, the net result being an increase in selling, general and
administrative expenses as a percentage of sales.
Selling, general and administrative expenses for closed facilities and
remerchandising activities were $43.9 million for fiscal 1997 compared to $67.8
million in fiscal 1996. The closing of the 44 under performing stores completed
in July 1997 resulted in the decreased selling, general and administrative costs
for the fiscal 1997.
Depreciation and Amortization
Depreciation and amortization on owned and leased property and
equipment was $58.2 million for fiscal 1997 as compared to $59.7 million for
fiscal 1996, a decrease of 2.4%. Capital expenditures, excluding capitalized
leases, remained relatively flat at $40.8 million in fiscal 1997 as compared to
$40.7 million in fiscal 1996. The Company closed a net 40 stores (including the
44 under performing stores) in fiscal 1997 as compared to closing a net nine
stores in fiscal 1996.
Interest Expense
Interest expense on debt and capitalized leases increased to $78.5
million in fiscal 1997 from $75.6 million in fiscal 1996. The increase is
primarily attributable to the issuance of $74.8 million in mortgage financing
notes that occurred primarily in the fourth quarter of fiscal 1996.
Income Tax
The effective income tax rate was 37.5% in fiscal 1997 and 1996.
Restructuring Plan
On March 25, 1997, the Company adopted the Restructuring Plan to close
up to 60 under performing stores and one distribution center. During the first
quarter of fiscal 1997, a pre-tax charge of $129.5 million for restructuring
costs was taken by the Company. The components of the restructuring charge and
an analysis of the amounts charged against the accrual through December 28, 1997
are outlined in the following table:
16
<PAGE> 19
<TABLE>
<CAPTION>
1997 ACTIVITY
----------------------------------------------------------------------
ACCRUED
RESTRUCTURING
ORIGINAL COSTS AS OF
CHARGE RESTRUCTURING ASSET CHANGE IN DECEMBER 28,
(in thousands) RECORDED COSTS PAID WRITE-DOWNS ESTIMATE 1997
--------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate costs $ 83,225 $ (12,812) $ -- $ 3,098 $ 73,511
Property and equipment write-downs 32,915 -- (32,915) -- --
Employee severance 4,869 (3,469) -- (869) 531
Other exit costs 8,501 (4,072) -- (2,229) 2,200
--------- --------- --------- --------- ---------
Total $ 129,510 $ (20,353) $ (32,915) $ -- 76,242
========= ========= ========= =========
Less: Current portion (21,178)
---------
$ 55,064
=========
</TABLE>
In the second quarter of fiscal 1997, management began the process of
closing 44 of the up to 60 stores and one distribution center. These closures
were completed by the end of July 1997. Liquidation of the inventory associated
with these 44 closed stores began in April 1997 and was completed in July 1997.
During the second quarter of fiscal 1997, the Company implemented
certain remerchandising strategies, including the exit of the low margin
computer business and certain components of the wireless communication business.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1999, the Debtors filed the Chapter 11 Cases which will
affect the Company's liquidity and capital resources in fiscal 1999. See Item 1.
"Business--Proceedings Under Chapter 11 of the Bankruptcy Code."
Availability under the Amended and Restated Credit Facility, trade
credit and terms from vendors, and long-term financing provided the resources
required to support operations, seasonal working capital requirements and
capital expenditures during fiscal 1998. The Company's business is highly
seasonal with the Company's inventory investment and related short-term
borrowing requirements reaching a peak prior to the Christmas season.
Historically, positive cash flow from operations has been generated principally
in the latter part of the fourth quarter of each fiscal year, in line with the
seasonal nature of the Company's business. Disappointing sales during the
holiday season, higher than projected inventories and lower than projected
payables resulted in negative cash flows, lower cash and cash equivalent
balances and higher short-term borrowings at January 3, 1999 compared to the
prior year.
Net cash provided (used) by operations was ($291.4) million for fiscal
1998 as compared to ($21.4) million for fiscal 1997 and $65.7 million for fiscal
1996. Cash flow from operations decreased for fiscal 1998 compared to fiscal
1997 primarily as a result of: (a) a significant reduction in accounts payable
balances related to, (i) disappointing sales during the holiday selling season,
which resulted in lower purchase levels, (ii) effects from changes in store
formats, merchandise mix and shortened terms, (iii) the prepayment of floor plan
vendors who terminated their financing arrangements, (iv) the prepayment of
certain outstanding factored payables, (v) the prepayment of various sales and
use taxes in anticipation of a potential Chapter 11 bankruptcy filing, and (b)
lower annual sales. Cash flow from operations decreased for fiscal 1997 compared
to fiscal 1996 as a result of: (a) decreased earnings attributable in part to
cash payments related to restructuring and remerchandising activities; (b)
reductions in accounts payable due to: (i) decreased purchase volumes as a
result of the store closings, (ii) a negotiated contraction in payment terms in
exchange for revised economics with certain vendors, (iii) aggressive use of
anticipation discounts or cash in advance payments at year-end and (iv) changes
in merchandise mix which changed the average terms. These factors were partially
offset by inventory liquidations associated with the closing stores.
Net cash provided by financing activities was $97.1 million, $78.9
million and $58.4 million for fiscal 1998, 1997, and 1996, respectively. Cash
provided in fiscal 1998 from financing activities reflected short-term
borrowings at year-end, partially offset by the repayment of long-term debt and
capitalized leases in accordance with scheduled maturities or related to
mortgage payoffs on stores closed and sold. Cash provided in fiscal 1997 from
financing activities reflected a $200 million term loan obtained in connection
with the completion of the Company's $900 million, five-year Amended and
Restated Credit Facility in the third quarter of fiscal 1997. This was partially
offset by the retirement of $86.2 million of Senior Notes due 2001
17
<PAGE> 20
and $17.4 million of debt issuance costs incurred primarily for the Amended and
Restated Credit Facility. Additionally, the Company paid $15.8 million in
mortgage payments including both prepayments and regularly scheduled payments.
In fiscal 1996, cash provided from financing activities reflected $73.6 million
in mortgage financing, which primarily consisted of a single 15-year financing
at a weighted average rate of 9.2%.
Capital Expenditures
Capital expenditures in fiscal 1998 and 1997 related primarily to the
remodeling of certain stores, new store construction, capital maintenance and
information systems expenditures. In fiscal 1998, the Company opened six stores
and closed 17 stores as compared to the opening of five stores and closing of 45
stores, including 44 under performing stores as part of the Restructuring Plan,
in fiscal 1997. In fiscal 1996, the Company opened six stores and closed 15
stores.
Planned capital expenditures for fiscal 1999 are expected to be
approximately $25.0 million and are expected to be directed primarily to capital
maintenance and information systems improvements. The Company expects to fund
these planned expenditures primarily with borrowings under the DIP Facility,
subject to Bankruptcy Court approval.
Capital Structure
The Company's principal source of liquidity during fiscal 1998 were
borrowings under the Amended and Restated Credit Facility, which included a $200
million term loan and a revolving credit facility with a maximum commitment
level of $700 million. At January 3, 1999, the Company had $156 million in
revolving loans outstanding under the Amended and Restated Credit Facility. The
Company had no borrowings outstanding thereunder on December 28, 1997.
Average short-term borrowings for fiscal 1998 decreased to $55.0
million as compared to $101.2 million for fiscal 1997, due primarily to the
addition of the term loan. Short-term borrowings under the revolver portion of
the Amended and Restated Credit Facility reached a maximum of $298.8 million
during fiscal 1998 as compared to $283.7 million in fiscal 1997.
Total debt as a percentage of total capital for fiscal 1998 was 79.8%
as compared to 70.2% in fiscal 1997 and 62.0% in fiscal 1996. The increase in
fiscal 1998 was due to the increase in revolver borrowings of $156 million and a
decline in shareholders' equity, which were partially offset by a decrease in
long-term debt.
On December 15, 1998, the Company announced that it had not made the
approximately $13.5 million interest payment due December 15, 1998 on its 9%
Subordinated Debentures. The related indenture provides for a 30 day grace
period. The Company stated that it would evaluate available alternatives during
that period. The Company obtained a 30 day waiver with respect to any cross
default under the Amended and Restated Credit Facility with respect to the
failure to make the December 15, 1998 interest payment. The non-payment of the
interest on the 9% Subordinated Debentures was a technical default under the
Amended and Restated Credit Facility and the Company's operating performance,
absent a waiver, would have resulted in a breach of the fixed-charge coverage
ratio covenants in agreements with First American National Bank and the Canadian
Imperial Bank of Commerce. On January 14, 1999, the Company made the
approximately $13.5 million interest payment on the 9% Subordinated Debentures.
As a first step in an effort to effect an out-of-court restructuring
plan, on January 20, 1999, the Company completed the Second Amended and Restated
Credit Facility, a $750 million, 30 month, asset-based credit facility replacing
the Amended and Restated Credit Facility. The Second Amended and Restated Credit
Facility included $150 million in term loans and a maximum of $600 million in
revolving loans. Financial covenants were subject to amendment pending the
finalization of the Company's business plan. The Second Amended and Restated
Credit Facility included a $200 million sub-facility for standby and trade
letters of credit. Interest rates on the Second Amended and Restated Credit
Facility were based on either Prime Rate + 1.50% or Eurodollar + 2.75%. The
Second Amended and Restated Credit Facility was secured by all material
unencumbered assets of the Company, including inventory but excluding previously
mortgaged property and leasehold interests.
Borrowings under the Second Amended and Restated Credit Facility were
limited based on a borrowing base formula which considered eligible inventories,
eligible accounts receivable and mortgage values on eligible real properties,
and limitations contained in the Company's public senior subordinated debt
indenture. The Second Amended and Restated Credit Facility contained certain
restrictive covenants, the most restrictive of which included: (a) maintenance
of an EBITDA amount (to be determined at a later date), (b) restrictions on
dividends and the incurrence of additional indebtedness, (c) restrictions on
incurring and assuming liens on property or assets, and (d) restrictions on
mergers, consolidations, and sales of assets, and (e) a capital spending maximum
of $50 million annually. Additionally, the Second Amended and Restated Credit
Facility
18
<PAGE> 21
required borrowings outstanding under the revolving loans to be less than an
amount to be specified at a later date for a period of 30 consecutive days each
year. From the date of its completion through the filing of the Chapter 11 Cases
and completion of the DIP Facility, availability under the Second Amended and
Restated Credit Facility was the Company's primary source of liquidity.
On March 29, 1999, the Company entered into the DIP Facility which
replaces the Second Amended and Restated Credit Facility and which the Company
believes will provide liquidity for the Company's operations while it prepares a
reorganization plan. However, there can be no assurance that the Company will be
able to access liquidity from the DIP Facility or from any other source, or that
such liquidity will be sufficient to meet the Company's needs. On March 29,
1999, the Bankruptcy Court approved the DIP Facility on an interim basis. The
DIP Facility remains subject to final Bankruptcy Court approval. A hearing for
this purpose has been set for April 27, 1999. See Item 1. "Business--Proceedings
under Chapter 11 of the Bankruptcy Code."
Inflation
The Company does not believe inflation has had a material impact on the
Company's net sales or net earnings (loss) during the last three fiscal years.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This pronouncement will be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is still in the process of analyzing
the impact of the adoption of this Statement. The Company anticipates that the
adoption of this Statement will not have a material impact on its operating
results or financial position.
YEAR 2000 COMPLIANCE
The Company is currently conducting an organization wide program to
ensure that all the systems critical to the operation of the Company are year
2000 compliant. In all categories the awareness and assessment phases are
complete. The renovation, validation (including testing) and implementation
phases are currently in progress. As of January 3, 1999, information technology
supported systems are approximately 90% complete and non-information technology
systems (end user systems) are approximately 95% complete. It is expected that
information technology supported systems will be completed by the end of the
second quarter of 1999 and end user systems will be completed in the first
quarter of 1999. In the course of the Company's preparation for year 2000, the
Company has corresponded with all software vendors, financial institutions, and
its top 1,000 merchandise vendors and we are monitoring their progress.
Replacement, conversion and testing of hardware and systems
applications are expected to cost between $2.5 million and $3.0 million. To
date, approximately $2.2 million of costs have been incurred. These costs are
being expensed as incurred.
Given that there can be no assurance that the systems of other entities
on which the Company relies will be year 2000 compliant in a timely manner, the
major risk factor associated with year 2000 pertains to our third party
relationships. The Company is currently developing contingency plans to address
a potential worst case scenario involving difficulties experienced by the U.S.
Postal Service in the distribution of direct mailings and other publications. If
such an event occurs, the Company would have to insert a majority of its
publications into local newspapers and other publications in lieu of mailing
them. If local utility companies are unable to provide services to any of our
locations, there is no contingency plan in place and our business would be at
risk. The Company is unable to determine the impact, if any, of the Chapter 11
Cases on the Company's year 2000 program.
19
<PAGE> 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's operations are subject to market risks primarily from
changes in interest rates. The Company has immaterial exposure to exchange rate
risk. The Company manages its interest rate risk by entering into interest rate
swap agreements. As of January 3, 1999, the Company was a party to interest rate
swaps covering $125 million in principal amount of indebtedness and expiring in
December 2000. These swaps exchange the Company's floating interest rate
exposure on $125 million in debt for fixed interest rate exposure. The Company
will pay a weighted average fixed rate of 5.97% on the $125 million notional
amount rather than the three-month LIBOR rate, which was 5.23% as of January 3,
1999. The fair value of the interest rate swap agreements was ($2.3) million as
of January 3, 1999. The following table summarizes as of January 3, 1999, the
amount of fixed interest rate indebtedness and the amount of variable rate
indebtedness that will become due in the stated period.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES OF TERM LOAN AND LONG-TERM DEBT AS OF 1/3/99 (INCLUDING CURRENT PORTION)
------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Fixed Rate Debt $ 3,903 $ 4,417 $ 18,623 $ 5,074 $155,884 $217,591 $405,492 $164,171
Average interest rate 8.96% 8.96% 8.97% 8.97% 9.07% 9.05
Variable Rate Debt 20,138 17,333 3,962 220,008 0 20,300 281,741 272,010
-------- --------
Average interest rate 7.09% 7.19% 7.53% 8.26% 3.72% 3.72%
Total Debt $ 24,041 $ 21,750 $ 22,585 $225,082 $155,884 $237,891 $687,233 $436,181
======== ========
</TABLE>
On March 27, 1999, the Debtors filed the Chapter 11 Cases. As a result
of the filing of the Chapter 11 Cases, principal or interest payments may not be
made on any pre-petition debt until a plan of reorganization defining the
repayment terms has been approved by the Bankruptcy Court.
20
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
(in thousands, except per share data) 1999 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities $ 3,159,260 $ 3,442,617 $ 3,544,670
Closed facilities as a result of restructuring and remerchandising activities 10,265 220,161 410,346
----------- ----------- -----------
3,169,525 3,662,778 3,955,016
----------- ----------- -----------
Costs and Expenses:
Cost of merchandise sold and buying and occupancy expenses:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 2,396,245 2,599,617 $ 2,664,585
Closed facilities as a result of restructuring and remerchandising activities 19,011 212,145 333,376
----------- ----------- -----------
2,415,256 2,811,762 2,997,961
----------- ----------- -----------
Gross margin after cost of merchandise sold and buying and occupancy
expenses:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 763,015 843,000 880,085
Closed facilities as a result of restructuring and remerchandising activities (8,746) 8,016 76,970
----------- ----------- -----------
754,269 851,016 957,055
----------- ----------- -----------
Selling, general and administrative expenses:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 706,701 685,779 695,717
Closed facilities as a result of restructuring and remerchandising activities: 2,384 43,851 67,771
----------- ----------- -----------
709,085 729,630 763,488
----------- ----------- -----------
Other income, net (12,927) (2,571) (4,656)
Restructuring charge (14,895) 129,510 --
Impairment of assets 43,079 -- --
Depreciation and amortization:
Operations excluding closed facilities as a result of restructuring and
remerchandising activities 56,979 55,063 53,857
Closed facilities as a result of restructuring and remerchandising activities 93 3,185 5,802
----------- ----------- -----------
57,072 58,248 59,659
----------- ----------- -----------
Earnings (loss) before interest, income tax and extraordinary item: (27,145) (63,801) 138,564
Interest expense - debt 76,563 70,663 66,993
Interest expense - capitalized leases 6,692 7,868 8,643
----------- ----------- -----------
Earnings (loss) before income tax and extraordinary item (110,400) (142,332) 62,928
Income tax provision (benefit) (93) (53,375) 23,598
----------- ----------- -----------
Earnings (loss) before extraordinary item (110,307) (88,957) 39,330
Extraordinary loss from early extinguishment of debt, net of
tax benefit of $1,585 -- (2,643) --
----------- ----------- -----------
Net earnings (loss) $ (110,307) $ (91,600) $ 39,330
=========== =========== ===========
Per Common Share - basic and diluted:
Earnings (loss) before extraordinary item $ (1.11) $ (0.89) $ 0.39
Extraordinary loss from early extinguishment of debt, net of tax benefit $ -- $ (0.03) $ --
----------- ----------- -----------
Net earnings (loss) $ (1.11) $ (0.92) $ 0.39
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
(In thousands, except per share data) 1999 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 133,749 $ 364,169
Accounts receivable, net of allowance of $2,999 and $3,456, respectively 38,098 43,130
Refundable income taxes 10,769 --
Inventories 896,303 929,818
Prepaid expenses and other assets 24,379 25,276
Deferred income taxes -- 22,478
----------- -----------
TOTAL CURRENT ASSETS 1,103,298 1,384,871
Net property and equipment - owned 439,710 490,345
Net property and equipment - capitalized expenses 21,297 33,289
Other assets and deferred charges 62,590 42,956
----------- -----------
TOTAL ASSETS $ 1,626,895 $ 1,951,461
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 156,000 $ --
Accounts payable 228,373 482,235
Accrued expenses 224,813 214,451
State and local sales taxes 1,726 48,331
Accrued restructuring costs 7,864 21,178
Borrowings classified as current 220,041 23,723
Current maturities of capitalized lease obligations 8,501 8,452
----------- -----------
TOTAL CURRENT LIABILITIES 847,318 798,370
Accrued restructuring costs 45,297 55,064
Long-term debt 467,192 711,512
Capitalized lease obligations 41,193 50,010
----------- -----------
TOTAL LIABILITIES 1,401,000 1,614,956
----------- -----------
Commitments and contingencies (Note Q)
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, authorized, 4,600 shares, undesignated as to
rate and other rights, none issued
Series A Junior Preferred Stock, $1 par value, authorized 1,100 shares,
none issued
Common stock, $.50 par value, authorized 500,000 shares, issued and
outstanding 100,340 and 100,376 shares, respectively 50,170 50,188
Additional paid-in capital 7,680 7,908
Deferred compensation (1,975) (2,787)
Accumulated other comprehensive income (loss) (869) --
Retained earnings 170,889 281,196
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 225,895 336,505
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,626,895 $ 1,951,461
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL OTHER
COMMON PAR PAID-IN DEFERRED COMPREHENSIVE COMPREHENSIVE
(in thousands) SHARES VALUE CAPITAL COMPENSATION LOSS LOSS
-------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 99,686 $ 49,843 $ 5,483 $ (2,050) $ -- $ --
Net earnings -- -- -- -- -- --
Exercise of stock options 52 26 93 -- -- --
Shares issued under restricted
stock awards 26 13 115 (128) -- --
Amortization of deferred compensation -- -- -- 927 -- --
Cancellation/forfeiture of restricted stock (6) (3) (21) -- -- --
-------- --------- --------- --------- --------- ---------
BALANCE DECEMBER 29, 1996 99,758 49,879 5,670 (1,251) -- --
Net loss -- -- -- -- -- --
Exercise of stock options 57 29 75 -- -- --
Shares issued under restricted
stock awards 621 310 2,393 (2,703) -- --
Amortization of deferred compensation -- -- -- 948 -- --
Cancellation/forfeiture of restricted stock (60) (30) (230) 219 -- --
-------- --------- --------- --------- --------- ---------
BALANCE DECEMBER 28, 1997 100,376 50,188 7,908 (2,787) -- --
Comprehensive loss:
Net loss -- -- -- -- (110,307) --
Minimum pension liability adjustment -- -- -- -- (869) (869)
---------
Comprehensive net loss $(111,176)
=========
Shares issued under restricted
stock awards 50 25 83 (108) --
Amortization of deferred compensation -- -- -- 625 --
Cancellation/forfeiture of restricted stock (86) (43) (311) 295 --
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 3, 1999 100,340 $ 50,170 $ 7,680 $ (1,975) $ (869)
======== ========= ========= ========= =========
<CAPTION>
(in thousands) RETAINED
EARNINGS TOTAL
--------- ---------
<S> <C> <C>
BALANCE DECEMBER 31, 1995 $ 333,466 $ 386,742
Net earnings 39,330 39,330
Exercise of stock options -- 119
Shares issued under restricted
stock awards -- --
Amortization of deferred compensation -- 927
Cancellation/forfeiture of restricted stock -- (24)
--------- ---------
BALANCE DECEMBER 29, 1996 372,796 427,094
Net loss (91,600) (91,600)
Exercise of stock options -- 104
Shares issued under restricted
stock awards -- --
Amortization of deferred compensation -- 948
Cancellation/forfeiture of restricted stock -- (41)
--------- ---------
BALANCE DECEMBER 28, 1997 281,196 336,505
Comprehensive loss:
Net loss (110,307) (110,307)
Minimum pension liability adjustment -- (869)
Comprehensive net loss
Shares issued under restricted
stock awards -- --
Amortization of deferred compensation -- 625
Cancellation/forfeiture of restricted stock -- (59)
- ----------------------------------------------------------------------
BALANCE JANUARY 3, 1999 $ 170,889 $ 225,895
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
(In thousands) 1999 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(110,307) $ (91,600) $ 39,330
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization (a) 63,820 62,345 62,683
Deferred income tax 24,303 (39,663) (1,244)
Gain on sale of property and equipment (12,927) (2,571) (4,656)
Write-down of property due to asset impairment 43,079 -- --
Write-down of property due to restructuring -- 32,915 --
Reversal of restructuring charges (14,895) -- --
Write-off of debt issue costs -- 2,208 --
Changes in assets and liabilities:
Accounts receivable 5,032 18,324 (7,833)
Inventories 33,515 123,151 (18,502)
Prepaid expenses and other assets (7,576) (1,368) 9,816
Accounts payable (253,862) (157,652) (39,219)
Accrued expenses (36,872) (9,866) 20,673
Accrued restructuring costs (13,892) 76,242 --
Income tax (10,769) (33,898) 4,689
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: (291,351) (21,433) 65,737
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (50,676) (40,838) (40,746)
Proceeds from sale of property and equipment 44,845 19,574 9,855
Restricted cash and other assets, net (30,358) (2,006) 965
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES: (36,189) (23,270) (29,926)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 156,000 483,700 421,700
Repayment of short-term borrowings -- (483,700) (421,700)
Proceeds from long-term debt -- 206,560 73,563
Repayment of term loan and long-term debt (48,002) (101,999) (2,486)
Repayment of capitalized lease obligations (8,649) (8,395) (8,693)
Debt issuance costs (2,170) (17,350) (4,048)
Exercise of stock options (forfeiture of restricted stock), net (59) 63 95
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 97,120 78,879 58,431
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (230,420) 34,176 94,242
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 364,169 329,993 235,751
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 133,749 $ 364,169 $ 329,993
========= ========= =========
SUPPLEMENTAL DATA:
Cash paid (received) during the year for:
Interest $ 63,632 $ 78,400 $ 71,300
Income tax $ (17,442) $ 21,100 $ 19,900
Non-cash financing activities --
Other comprehensive loss $ (869) $ -- $ --
</TABLE>
(a) Includes other amortization classified as either selling, general and
administrative expense or interest expense of $6,748 for fiscal 1998,
$4,058 for fiscal 1997, $2,972 for fiscal 1996, and $0, $39 and $52 of
discount amortization classified as interest expense in fiscal 1998, 1997
and 1996, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JANUARY 3, 1999
A. DESCRIPTION OF THE BUSINESS
The Company is one of the nation's largest retailers of jewelry and
offers a selection of brand-name hard goods and other product lines. The major
categories of goods offered by the Company are fine jewelry, kitchen and dining,
home accents and furniture, looking healthy/staying healthy, season to season,
travel and adventure, electronics and kid essentials. Customer purchases
typically take place in a Company store. The Company is engaged in a highly
competitive business and competes with most nationally known jewelry and general
retail merchandisers, including department, general merchandise, specialty and
discount stores. As of January 3, 1999, the Company operated 350 stores in 34
states.
B. SUBSEQUENT EVENTS AND GOING CONCERN MATTERS
Subsequent Events -- Out-of-Court Restructuring Plan
As a result of the Company's decreased net sales in the fourth quarter
of fiscal 1998 and the resulting negative cash flows from operations, in January
1999 the Company began an effort to effect an out-of-court restructuring plan.
As part of this out-of-court restructuring plan, on January 20, 1999, the
Company entered into a credit facility with Citibank, N.A. (the "Second Amended
and Restated Credit Agreement"). The Company also developed a plan to close up
to 132 stores, up to four distribution centers and to reduce corporate overhead
(the "Rationalization Plan"). In March 1999 as part of the Rationalization Plan,
the Company announced the closing of the Dallas distribution center and the
reduction of its workforce at its Nashville corporate offices by 150 employees.
As a result of the filing of the Chapter 11 Cases (as discussed below), aspects
of the Rationalization Plan not implemented by March 27, 1999 or not approved to
date by the Bankruptcy Court may be subject to Bankruptcy Court approval.
Subsequent Events -- Proceedings Under Chapter 11 of the Bankruptcy
Code
Before the Company was able to effect an out-of-court restructuring, on
March 15, 1999, five of the Company's vendors filed an involuntary petition for
reorganization under Chapter 11 ("Chapter 11") of title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Middle District of Tennessee (the "Bankruptcy Court") seeking court
supervision of the Company's restructuring efforts. On March 27, 1999, the
Company and 31 of its subsidiaries (collectively, the "Debtors") filed voluntary
petitions with the Bankruptcy Court for reorganization under Chapter 11 under
case numbers 399-02649 through 399-02680 (the "Chapter 11 Cases") and orders for
relief were entered by the Bankruptcy Court. The Chapter 11 Cases have been
consolidated for the purpose of joint administration under Case No. 399-02649.
The Debtors are currently operating their businesses as debtors-in-possession
pursuant to the Bankruptcy Code.
Actions to collect pre-petition indebtedness are stayed and other
contractual obligations against the Debtors may not be enforced. In addition,
under the Bankruptcy Code the Debtors may assume or reject executory contracts,
including lease obligations. Parties affected by these rejections may file
claims with the Bankruptcy Court in accordance with the reorganization process.
Substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Bankruptcy Court. Although the Debtors expect to file a
reorganization plan or plans that provide for emergence from bankruptcy in 2000
or 2001, there can be no assurance that a reorganization plan or plans will be
proposed by the Debtors or confirmed by the Bankruptcy Court, or that any such
plan(s) will be consummated. As provided by the Bankruptcy Code, the Debtors
initially have the exclusive right to submit a plan of reorganization for 120
days. Further extensions may be sought and may be granted or rejected by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
such period or if such plan is not accepted by the required number of creditors
and equity holders, any party in interest may subsequently file its own plan of
reorganization for the Debtors. A plan of reorganization must be confirmed by
the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court
which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a
plan notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the Bankruptcy
Code are met. A plan of reorganization could also result in holders of the
Common Stock receiving no value for their interests. Because of such
possibilities, the value of the Common Stock is highly speculative.
At the first day hearing held on March 29, 1999 before Judge George C.
Paine, the Bankruptcy Court entered first day orders granting authority to the
Debtors, among other things, to pay pre-petition and post-petition employee
wages, salaries,
25
<PAGE> 28
benefits and other employee obligations, to pay vendors and other providers in
the ordinary course for goods and services received from March 15, 1999, and to
honor customer service programs, including warranties, returns, layaways and
gift certificates.
The Company has entered into an agreement dated March 29, 1999 with
Citicorp USA, Inc., as administrative agent, BankBoston, N.A. as documentation
agent and collateral monitoring agent, and Salomon Smith Barney Inc. as sole
arranger and book manager, for a debtor-in-possession credit facility (the "DIP
Facility") under which the Company may borrow up to $750 million, subject to
certain limitations, to fund ongoing working capital needs while it prepares a
reorganization plan. The DIP Facility includes $100 million in term loans and a
maximum of $650 million in revolving loans. Financial covenants are subject to
amendment pending the finalization of the Company's business plan. The DIP
Facility includes a $200 million sub-facility for standby and trade letters of
credit. Interest rates on the DIP Facility are based on either the Citibank N.A.
Alternative Base Rate plus 1.25% for ABR Loans or 2.25% over LIBOR or Eurodollar
Loans. The DIP Facility is secured by substantially all of the assets of the
Company and its subsidiaries, subject only to valid, enforceable, subsisting and
non-voidable liens of record as of the date of commencement of the Chapter 11
Cases, and other liens permitted by the DIP Facility.
Borrowings under the DIP Facility are limited based on a borrowing base
formula which considers eligible inventories, eligible accounts receivable,
trade letters of credit and mortgage values on eligible real properties. The DIP
Facility contains restrictive covenants which are substantially similar to those
contained in the Second Amended and Restated Credit Facility, and are subject to
amendment pending finalization of the Company's business plan. The Company's
ability to obtain new borrowings after the first anniversary of the DIP Facility
is subject to the Company and the lenders having agreed upon a business plan and
revised financial and other covenants.
On March 29, 1999, the Bankruptcy Court approved the DIP Facility on an
interim basis. The final hearing with respect to the DIP Facility has been set
for April 27, 1999. The Company believes the DIP Facility (if finally approved
by the Bankruptcy Court) should provide it with adequate liquidity to conduct
its operations while it prepares a reorganization plan.
Going Concern Matters
The accompanying consolidated financial statements have been prepared
on a going concern basis of accounting and do not reflect any adjustments that
might result if the Company is unable to continue as a going concern. The
Company's recent losses and negative cash flows from operations, and the Chapter
11 Cases raise substantial doubt about the Company's ability to continue as a
going concern. As discussed above, management intends to submit a plan for
reorganization to the Bankruptcy Court. The ability of the Company to continue
as a going concern and appropriateness of using the going concern basis is
dependent upon, among other things, (i) the Company's ability to obtain and
comply with debtor-in-possession financing agreements, (ii) confirmation of a
plan of reorganization under the Bankruptcy Code, (iii) the Company's ability to
achieve profitable operations after such confirmation, and (iv) the Company's
ability to generate sufficient cash from operations to meet its obligations.
Management believes that the plan of reorganization, as it is being
developed and subject to approval of the Bankruptcy Court, and the DIP Facility,
along with cash provided by operations, will provide sufficient liquidity to
allow the Company to continue as a going concern; however, there can be no
assurance that the sources of liquidity will be available or sufficient to meet
the Company's needs. The consolidated financial statements do not include any
adjustments relating to recoverability and classification of recorded asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
C. FINANCIAL STATEMENT PRESENTATION
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. The consolidated financial
statements do not give effect to any adjustment to the carrying value of assets
or amounts and classifications of liabilities that might be necessary as a
result of the Chapter 11 Cases.
The Company's consolidated statements of operations presentation
changed in fiscal 1997 to disclose the financial statement impact of the
inventory liquidations associated with the closed facilities as a result of
restructuring and remerchandising activities. The line item "Closed facilities
as a result of restructuring and remerchandising activities" represents activity
specifically identifiable to inventory liquidations conducted in conjunction
with (1) the Company's restructuring plan
26
<PAGE> 29
adopted on March 25, 1997 ("Restructuring Plan") and (2) exiting the computer,
infant, pet supply and other merchandise categories and certain components of
the wireless communication and sporting goods categories as part of a
remerchandising program. As of January 3, 1999, 53 stores, one distribution
center and primarily all of the aforementioned merchandise categories have been
liquidated. All activity for these items is classified in "Closed facilities as
a result of restructuring and remerchandising activities." Prior year amounts
reflect operating results for these same facilities and merchandise
classifications. Selling, general and administrative expenses for closed
facilities as a result of restructuring and remerchandising activities does not
include any allocation of corporate overhead.
D. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned. All significant intercompany transactions and balances have been
eliminated.
Fiscal year: The Company maintains its books using a 52/53 week year
ending on the Sunday closest to the end of the calendar year. There were 53
weeks in the fiscal year ended January 3, 1999 and 52 weeks in each of the
previous two fiscal years.
Use of estimates: The preparation of the consolidated financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and related notes to the
consolidated financial statements. Changes in such estimates may affect amounts
reported in future periods.
Cash and cash equivalents: Cash and cash equivalents include cash on
hand and short-term, highly liquid investments which generally include
commercial paper, time deposits, securities under repurchase agreements, tax
exempt variable rate securities, master notes and institutional money market
funds, with an original maturity date less than 30 days. These investments are
valued at cost, which approximates market, and have a weighted-average interest
rate of 5.8% in the fiscal years ended January 3, 1999 and December 28, 1997.
Accounts receivable: Accounts receivable primarily includes trade
accounts, vendor allowances and customer layaway receivables and receivables for
income earned on the private label credit card.
Inventories: Inventories are valued at the lower of cost or market.
Cost is determined utilizing the first-in, first-out method and includes certain
buying and warehousing costs.
Advertising: The Company generally expenses the costs of producing and
communicating advertising the first time the advertising takes place. Net
advertising expense was $133.0 million, $135.0 million and $144.0 million for
fiscal 1998, 1997 and 1996, respectively. Advertising costs of $10.6 million and
$7.8 million were included in prepaid expenses at January 3, 1999 and December
28, 1997, respectively.
Property and equipment - owned: Owned property and equipment are stated
at cost. Depreciation and amortization are provided principally on the
straight-line method over a period of five to 10 years for furniture, fixtures
and equipment and 30 years for buildings. Leasehold improvements are depreciated
over the lesser of the life of the asset or the real estate lease term.
Accelerated depreciation methods are used for income tax purposes.
Property and equipment - capitalized leases: Capitalized leases are
recorded at the lower of fair value of the leased property or the present value
of the minimum lease payments at the inception of the lease. Amortization of
leased property is computed using the straight-line method over the lesser of
the life of the leased asset or the term of the lease.
Deferred charges and other assets: Deferred charges consist primarily
of debt issuance costs and deferred finance charges which are amortized over the
life of the related debt. This amortization is classified as interest expense.
Other assets primarily consist of restricted cash required by the private label
credit card agreement.
Derivative financial instruments: As part of a strategy to maintain an
acceptable level of exposure to the risk of interest rate fluctuation, the
Company has developed a targeted mix of fixed-rate versus variable rate debt.
The Company utilizes interest rate swaps to manage this mix. All outstanding
interest rate swaps have been designated as hedges of debt
27
<PAGE> 30
instruments. The Company recognizes interest differentials as adjustments to
interest expense in the period they occur. Gains and losses on terminations of
interest rate swaps would be deferred and amortized to interest expense over the
shorter of the original term of the agreements or the remaining life of the
associated outstanding debt. The counterparties to these instruments are major
financial institutions. The fair value of the Company's interest rate swap
agreements is based on dealer quotes. These values represent the amounts the
Company would receive or pay to terminate the agreements taking into
consideration current interest rates. These counterparties expose the Company to
credit risk in the event of non-performance; however, the Company does not
anticipate non-performance by the other parties. The Company does not hold or
issue derivative financial instruments for trading purposes.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This pronouncement will be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is still in the process of analyzing
the impact of the adoption of this Statement. The Company anticipates that the
adoption of this Statement will not have a material impact on its operating
results or financial position.
Impairment of assets: The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that net book
value of the asset may not be recoverable in accordance with the SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets to Be Disposed Of." The impact
of SFAS No. 121 for fiscal 1998 is disclosed in Note G in these consolidated
financial statements.
Insurance: In July 1998, Service Plus Assurance Company, Ltd., a
wholly-owned insurance company incorporated under the laws of Bermuda, was
established to provide coverage for the retained loss portion of the Company's
workers' compensation and general liability coverage. Accordingly, provisions
are made for the Company's discounted actuarially determined estimates of future
claim costs for such risks. To the extent that subsequent claim costs vary from
those estimated, current earnings are charged or credited.
Stock-based compensation: The Company accounts for stock-based employee
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The pro
forma impact of the fair value method of accounting for stock-based employee
compensation is disclosed in Note K to these consolidated financial statements
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."
Store opening costs: Costs of opening new stores are charged to
operations as incurred.
Income tax: The Company reports income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, the asset and
liability method is used for computing future income tax consequences of events
which have been recognized in the Company's consolidated financial statements or
income tax returns. Deferred income tax expense or benefit is the change during
the year in the Company's deferred income tax assets and liabilities.
Net earnings (loss) per common share: Net earnings (loss) per common
share for all periods have been computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic net earnings (loss) per common share is computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding during the year. Diluted net earnings (loss) per common share is
computed by dividing net earnings (loss) by the weighted-average number of
common shares outstanding during the year plus incremental shares that would
have been outstanding upon the assumed vesting of dilutive restricted stock and
the assumed exercise of dilutive stock options. See Note L for a reconciliation
of basic and diluted earnings (loss) per share.
Comprehensive Loss: Comprehensive loss is reported in accordance with
SFAS No. 130, "Reporting Comprehensive Income." Other comprehensive loss
includes minimum pension liability adjustments. For fiscal 1997 and 1996 net
income (loss) equaled comprehensive income (loss). See Note N for reporting of
minimum pension liabilities.
Retirement Plans and Other Postretirement Benefits: The Company reports
all information on its retirement plans and other postretirement benefits in
accordance with SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits". All periods reported have been stated in accordance
with SFAS 132. See Note N, "Retirement Plans".
Segment Reporting: The Company has adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information" during the year ended
January 3, 1999. See Note R, "Segment Reporting".
28
<PAGE> 31
Reclassification: Certain reclassifications have been made to fiscal
1997 and 1996 to conform to the fiscal 1998 presentation.
E. RESTRUCTURING PLAN
On March 25, 1997, the Company adopted a business restructuring plan to
close up to 60 under performing stores and one distribution center. As a result,
a pre-tax charge of $129.5 million for restructuring costs was taken in the
first quarter of fiscal 1997. The components of the restructuring charge and an
analysis of the amounts charged against the accrual during fiscal 1998 are
outlined in the following table:
<TABLE>
<CAPTION>
1998 ACTIVITY
---------------------------------------------------------------------
ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
COSTS AS OF COSTS AS OF
DECEMBER 28, RESTRUCTURING ASSET CHANGE IN JANUARY 3,
(in thousands) 1997 COSTS PAID WRITE-DOWNS ESTIMATE 1999
-------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Lease termination and other real estate costs $ 73,511 $(13,737) $ -- $ (6,613) $ 53,161
Property and equipment write-downs -- -- 5,706 (5,706) --
Employee severance 531 (155) -- (376) --
Other exit costs 2,200 -- -- (2,200) --
-------- -------- -------- -------- --------
Total $ 76,242 $(13,892) $ 5,706 $(14,895) 53,161
======== ======== ======== ========
Less: Current portion (7,864)
--------
$ 45,297
========
</TABLE>
The closing of nine stores during the first half of fiscal 1998 brought
the total number of closures, in accordance with the Restructuring Plan, to 53
stores and one distribution center. Store closures were completed as of May
1998. The Company closed less than 60 stores primarily due to the inability to
negotiate acceptable exit terms from the related lessors.
Restructuring costs paid during fiscal 1998 relate primarily to lease
termination and other real estate costs. The Company incurred $7.7 million in
contractual rent payments and lease termination fees and $6.0 million in other
real estate costs primarily related to utilities, common area maintenance fees,
real estate taxes and brokerage costs. The Company will pay lease termination
fees as the Company is able to obtain such terminations or as it rejects such
leases under the Chapter 11 Cases. In fiscal 1998, the Company paid $1.8 million
in lease termination fees compared with $4.1 million in fiscal 1997. The leases
remaining on closed locations as of January 3, 1999 vary in length with
expiration dates ranging from February 1999 to December 2030. The ultimate
timing of lease termination payments will depend on the Company's ability to
negotiate acceptable lease exit terms. The Company believes changes in estimates
are representative of deteriorating conditions existing as of January 3, 1999.
Restructure reserves of $14.9 million were reversed in the fourth quarter of
fiscal 1998 primarily due to favorable lease termination experience in the
second half of fiscal 1998 and favorable experience related to the sale of
property and equipment associated with the store closures.
As of January 3, 1999, property and equipment associated with the
Restructuring Plan have been written-down to reflect their estimated fair value.
Management anticipates selling or abandoning substantially all remaining owned
property and equipment associated with the Restructuring Plan. Approximately
3,000 employees were terminated pursuant to the Restructuring Plan. All such
terminations were completed as of May 1998.
29
<PAGE> 32
F. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1/3/99 12/28/97
----------- -----------
<S> <C> <C>
Owned assets:
Land $ 97,161 $ 106,551
Buildings 386,071 412,135
Furniture, fixtures and equipment 399,221 371,762
Leasehold improvements 108,375 110,672
Construction in progress 66 236
Other 2,484 6,618
----------- -----------
993,378 1,007,974
Less: Accumulated depreciation and amortization (553,668) (517,629)
----------- -----------
Owned assets, net $ 439,710 $ 490,345
=========== ===========
Capitalized leases:
Real estate $ 93,251 $ 99,750
Furniture, fixtures and equipment 7,046 10,274
----------- -----------
100,297 110,024
Less: Accumulated amortization (79,000) (76,735)
----------- -----------
Capitalized leases, net $ 21,297 $ 33,289
=========== ===========
</TABLE>
G. IMPAIRED ASSETS
In the fourth quarter of fiscal 1998, the Company recorded a non-cash
impairment loss of $43.1 million related to a write-down of the Company's fixed
assets. The Company performed a long-lived impairment analysis due to projected
cash flow losses combined with current operating and cash flow losses at certain
store locations.
Assets are evaluated for impairment on an individual store basis which
management believes is the lowest level for which there are identifiable cash
flows. Projected future cash flows (undiscounted and without interest) were
compared to the carrying amount of assets at each location. If the carrying
amount of the assets exceeded the projected future cash flows, an impairment
loss was recognized. Impaired assets were written-down to their estimated fair
value. Fair value was based on sales of similar assets or other estimates of
fair value such as discounting estimated future cash flows. Considerable
management judgment is necessary to estimate fair value. Accordingly, actual
results could vary significantly from such estimates. The following table is a
summary of the impairment charges recognized:
<TABLE>
<CAPTION>
IMPAIRMENT
ASSET TYPE AMOUNT
---------------------- -------
<S> <C>
Land $ 3,196
Buildings 6,501
Furniture and Fixtures 16,470
Leasehold Improvements 12,011
Capital Lease Assets 4,901
-------
TOTAL $43,079
=======
</TABLE>
H. BORROWINGS
This note contains information regarding the Company's short-term
borrowings and long-term debt as of January 3, 1999. On March 27, 1999, the
Company filed the Chapter 11 Cases. See Note B. As a result of the filing of the
Chapter 11 Cases, no principal or interest payments will be made on any
pre-petition debt until a plan of reorganization defining the repayment terms
has been approved by the Bankruptcy Court.
30
<PAGE> 33
The Company had a $900 million, fully-committed, asset-based credit
facility ("Amended and Restated Credit Facility") in place as of January 3, 1999
and December 28, 1997. The Amended and Restated Credit Facility included $200
million in term loans and up to a maximum of $700 million in revolving loans
including a $175 million subfacility for letters of credit. The Amended and
Restated Credit Facility was scheduled to mature on September 10, 2002. Interest
rates on the Amended and Restated Credit Facility were subject to change based
on a financial performance-based grid and could not exceed a rate of LIBOR
+2.25% on revolving loans and LIBOR +2.50% on the term loan. As of January 3,
1999 the revolving loans carried a rate of Prime +1.25% on both the term loan
and the revolver of LIBOR + 2.25%. The weighted-average interest rate on
borrowings under the Company's credit facilities in fiscal 1998 and 1997 was
8.0% and 7.8% respectively. There was a commitment fee of 3/8% on the undrawn
portion of the revolving loans. Revolving loans outstanding under the Amended
and Restated Credit Facility were $156 million and $0 as of January 3, 1999 and
December 28, 1997. The Amended and Restated Credit Facility was secured by all
material unencumbered assets of the Company and its subsidiaries, including
inventory but excluding previously mortgaged property and leasehold interests.
These security interests would have automatically terminated when the Company's
senior debt (or implied senior debt) achieves investment grade credit rating or
the Company met certain performance targets.
Borrowings under the Amended and Restated Credit Facility were limited
based on (a) a borrowing base formula which considers eligible inventories,
eligible accounts receivable and mortgage values on eligible real properties and
(b) limitations contained in the Company's public senior subordinated debt
indenture. Approximately $381.6 million of borrowings were unused and available
under the Amended and Restated Credit Facility as of January 3, 1999. The
Amended and Restated Credit Facility contained certain restrictive covenants,
the most restrictive of which included: (a) maintenance of a leverage ratio and
fixed charge coverage ratio, (b) restrictions on dividends, capital spending,
and the incurrence of additional indebtedness, (c) restrictions on incurring and
assuming liens on property or assets, and (d) restrictions on mergers,
consolidations, and sales of assets. The Amended and Restated Credit Facility
excluded from financial covenant calculations the impact of up to $175 million
of pre-tax charges and costs related to restructuring charges. Additionally, the
Amended and Restated Credit Facility required borrowings outstanding under the
revolving loans to be less than $150 million for a period of 30 consecutive days
each year. On October 28, 1998, the Company amended the Amended and Restated
Credit Facility to reduce the fixed charge coverage ratio from 1.25:1.0 to 1.05:
1.0 for the fourth quarter of fiscal 1998, for which the Company was not in
compliance.
As part of an out-of-court restructuring plan, on January 20, 1999, the
Company completed the Second Amended and Restated Credit Facility, a $750
million, 30 month, asset-based credit facility replacing the Amended and
Restated Credit Facility. The Second Restated and Amended Credit Facility
included $150 million in term loans, a maximum of $600 million in revolving
loans and a commitment fee of $23 million. Financial covenants were subject to
amendment pending the finalization of the Company's business plan. The Second
Amended and Restated Credit Facility included a $200 million sub- facility for
standby and trade letters of credit. Prior to the filing of the Chapter 11
Cases, interest rates on the Second Amended and Restated Credit Facility were
based on either Prime Rate + 1.50% or Eurodollar + 2.75%. The Second Amended and
Restated Credit Facility was secured by all material unencumbered assets of the
Company and its subsidiaries, including inventory but excluding previously
mortgaged property and leasehold interests.
Borrowings under the Second Amended and Restated Credit Facility were
limited based on a borrowing base formula which considered eligible inventories,
eligible accounts receivable and mortgage values on eligible real properties and
limitations contained in the Company's public senior subordinated debt
indenture. The Second Amended and Restated Credit Facility contained certain
restrictive covenants, the most restrictive of which included: (a) maintenance
of an EBITDA amount (to be determined at a later date), (b) restrictions on
dividends and the incurrence of additional indebtedness, (c) restrictions on
incurring and assuming liens on property or assets, (d) restrictions on mergers,
consolidations, and sales of assets, and (e) a capital spending maximum of $50
million annually. Additionally, the Second Amended and Restated Credit Facility
required borrowings outstanding under the revolving loans to be less than an
amount to be specified at a later date for a period of 30 consecutive days each
year. All borrowings under the Second Amended and Restated Credit Facility as of
January 3, 1999 are classified as current.
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<PAGE> 34
Borrowings consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1/3/99 12/28/97
--------- ---------
<S> <C> <C>
9% Senior Subordinated Debentures, payable in equal
installments in 2003 and 2004 $ 300,000 $ 300,000
Term loan, variable interest rate at January 3, 1999 of 7.76%,
payable in quarterly installments to 2002 196,000 200,000
8 3/8% Senior Notes due 2001 13,799 13,799
First Mortgage Secured Notes, variable interest rate at January
3, 1999 of 6.64%, payable in varying amounts from 1998
to 2002 62,707 90,000
Real Estate Mortgage Financing Notes, weighted-average
fixed interest rate at January 3, 1999 of 9.12%, payable in
mortgage installments to 2011 69,264 71,987
Industrial Revenue Bonds, fixed and variable interest rates,
weighted-average interest rate at January 3, 1999 of 3.5%,
payable in varying amounts to 2024 24,300 37,185
Mortgage notes payable, weighted-average fixed interest rate
at January 3, 1999 of 8.08%, payable in varying amounts
to 2022 21,163 22,264
--------- ---------
687,233 735,235
Less: Borrowings classified as current (220,041) (23,723)
--------- ---------
Long-term debt $ 467,192 $ 711,512
========= =========
</TABLE>
The Term Loan above has been classified as current, however the future scheduled
principal payments for the Company's borrowings (which are subject to being
restructured in connection with the Chapter 11 Cases) were as follows as of
January 3, 1999:
<TABLE>
<CAPTION>
(In thousands)
Fiscal Year
-------------------
<S> <C>
1999 $ 24,041
2000 21,750
2001 22,585
2002 225,082
2003 155,884
Thereafter 237,891
--------
Total $687,233
========
</TABLE>
During fiscal 1997, the Company retired $86.2 million of the Company's
$100 million 8 3/8% Senior Notes due 2001. As a result of this early retirement,
the Company recorded an extraordinary loss of $2.0 million after tax, or $0.02
per share. Additionally, a non-cash extraordinary loss of $0.6 million, or $0.01
per share, was recorded to write-off deferred financing charges associated with
the replacement of the Company's $525 million Reducing Revolving Credit Facility
with the Amended and Restated Credit Facility.
The Company has entered into an agreement with the Long Term Credit
Bank of Japan ("LTCB") in which LTCB will lend to the Company a total of $50
million in three equal installments of $16.7 million in June of 1998, 1999 and
2000 as its portion of the First Mortgage Secured Notes matures. The new notes
will carry a floating interest rate of LIBOR + 2.25%, mature on March 1, 2002
and will be secured with a second lien on the properties securing the $90
million permanent mortgage financing until those notes are paid, at which time,
the Company will provide first liens on certain properties to secure this note.
In fiscal 1997 the Company issued $6.6 million of Real Estate Financing
Notes to a bank.
32
<PAGE> 35
The 9% Senior Subordinated Debentures are subordinated to all senior
indebtedness of the Company, as defined, and are callable, at the Company's
option, at a premium of 104.5%, which decreases annually until reaching par in
December 2000. Interest on the debentures is payable semi-annually in June and
December. The Company delayed its interest payment due December 15, 1998. The
payment was made January 14, 1999. The non-payment of the interest was a
technical default under the Amended and Restated Credit Facility and the
Company's operating performance, absent a waiver, would have resulted in a
breach of the fixed-charge coverage ratio covenants in agreements with First
American National Bank and the Canadian Imperial Bank of Commerce. A waiver was
granted to the Company by those parties to waive the default until January 15,
1999. The technical default was cured upon payment.
Mortgages and Industrial Revenue Bonds are collateralized by property
and equipment having a net book value of approximately $26.3 million and $16.1
million, respectively, at January 3, 1999. The Industrial Revenue Bonds are
primarily floating rate demand obligations.
The Company has commercial and standby letters of credit used to secure
corporate obligations. The commercial letters of credit have contractual amounts
totaling $57.4 million and $44.5 million at January 3, 1999 and December 28,
1997, respectively. The standby letters of credit have contractual amounts
totaling $49.0 million and $59.0 million at January 3, 1999 and December 28,
1997, respectively.
General terms of the Company's debtor-in-possession financing facility
are discussed in Note B.
I. LEASE COMMITMENTS
The Company has both capital and operating lease agreements for stores
and other facilities as well as for certain furniture, fixtures and equipment.
Under most of these lease agreements, the Company pays taxes, insurance and
maintenance costs. Initial lease terms for stores generally range from 10 to 25
years with renewal periods for an additional five to ten years. Certain store
leases provide for additional contingent rental payments based on a percentage
of sales in excess of specified minimum amounts.
Future minimum lease payments as of January 3, 1999 (inclusive of
leases at closed stores that have not yet been terminated) are as follows:
<TABLE>
<CAPTION>
CAPITALIZED LEASE
OBLIGATIONS
--------------------------------
FURNITURE,
FIXTURES
AND OPERATING
(In thousands) REAL ESTATE EQUIPMENT LEASES
------------ ---------- --------
<S> <C> <C> <C>
Fiscal Year
1999 $ 11,860 $ 1,851 $ 66,801
2000 11,444 443 62,833
2001 10,423 62 57,528
2002 9,462 -- 55,103
2003 7,961 -- 50,389
Thereafter 23,686 -- 299,897
-------- ------- --------
Total minimum payments 74,836 2,356 $592,551
========
Less: Imputed interest and executory costs (27,478) (20)
-------- -------
Present value of net minimum lease payments 47,358 2,336
Less: Current maturities (6,334) (2,167)
-------- -------
Capitalized lease obligations $ 41,024 $ 169
======== =======
</TABLE>
33
<PAGE> 36
Minimum sublease rent income, not deducted from above, to be received
in the future under noncancellable operating subleases aggregated $28.3 million
at January 3, 1999. Minimum lease income to be received in the future on
noncancellable leases of owned properties aggregated $20.4 million at January 3,
1999.
Capitalized real estate and equipment leases are at effective interest
rates of approximately 12.5% and 8.2%, respectively, as of January 3, 1999.
There were no capital leases added in fiscal 1998 as compared to $5.4 million in
fiscal 1997.
Rental expense, net of lease income on owned properties and sublease
income on leased properties, consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
(in thousands) 1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals $ 71,537 $ 74,163 $ 85,038
Contingent rentals 962 1,237 1,376
Sublease rental income (3,353) (3,792) (4,296)
Owned properties rental income (3,768) (3,962) (4,819)
---------- ---------- ----------
Net rental expense $ 65,378 $ 67,646 $ 77,299
========== ========== ==========
</TABLE>
The lease obligations described above are subject to the impact of the
Chapter 11 Cases described in Note B.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments has been estimated by the
Company using available market information as of January 3, 1999 and December
28, 1997, and valuation methodologies considered appropriate to the
circumstances. The estimates presented are not necessarily indicative of amounts
the Company could realize in a current market exchange. The fair values set
forth below do not reflect the impact, if any, of the subsequent filing of the
Chapter 11 Cases described in Note B.
<TABLE>
<CAPTION>
1/3/99 12/28/97
------------------------------ ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(in thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 133,749 $ 133,749 $ 364,169 $ 364,169
Liabilities:
9% Senior Subordinated Debentures 300,000 64,125 300,000 213,000
Term Loan 196,000 196,000 200,000 196,593
Mortgages 153,134 145,529 184,251 176,846
Industrial Revenue Bonds 24,300 24,300 37,185 37,185
Notes payable to banks 156,000 156,000 -- --
8 3/8% Senior Notes 13,799 6,227 13,799 12,833
</TABLE>
Cash and cash equivalents: The carrying amount approximates fair value
due to the short maturity of these instruments (less than three months).
9% Senior Subordinated Debentures and 8 3/8% Senior Notes: Fair value
is based on quoted market prices from the New York Stock Exchange at January 3,
1999 and December 28, 1997.
Notes payable to banks, Term Loan and Mortgages: Fair value is based on
management's estimate of the present value of estimated future cash flows
discounted at the current market rate for financial instruments with similar
characteristics and maturities.
Industrial Revenue Bonds: The carrying value approximates the fair
value. Due to the variable rate nature of the instruments, the interest rate
paid by the Company is equivalent to the current market rate demanded by
investors; therefore, the instruments trade at par.
34
<PAGE> 37
Derivatives: As of January 3, 1999, the Company was party to interest
rate swaps covering $125 million in principal amount of indebtedness and
expiring in December 2000. These swaps exchange the floating interest rate
exposure on the $125 million of debt for fixed interest rate exposure. The
Company will pay a weighted average fixed rate of 5.97% on the $125 million
notional amount rather than the three-month LIBOR rate, which was 5.23% as of
January 3, 1999. As of January 3, 1999, these instruments had no carrying value.
The fair value of interest rate swap agreements are estimated based on quotes
from dealers of these instruments and represent the estimated amounts the
Company would expect to pay or receive to terminate the agreements. The fair
value of the Company's interest rate swap agreements was ($2.3) million and
($0.1) million as of January 3, 1999 and December 28, 1997, respectively.
K. STOCK OPTIONS AND AWARDS
Under the Company's employee stock incentive plans, the Compensation
Committee of the Board of Directors ("Compensation Committee") has authority to
grant the following types of awards: (a) stock options; (b) stock appreciation
rights; (c) restricted stock; (d) deferred stock; (e) stock purchase rights
and/or (f) other stock-based awards. Awards are exercisable subject to terms and
conditions as determined by the Compensation Committee with no awards
exercisable ten years after the date of grant.
In fiscal 1991, the Board of Directors adopted the 1991 Directors'
Equity Plan for nonemployee directors. Under the Second Amended and Restated
Directors' Plan eligible directors annually receive stock options exercisable
for 3,000 shares of the Company's common stock. The plan was amended in fiscal
1998 and 1997 to increase the number of shares covered by option grants to
directors and to permit participating nonemployee directors to receive all or
any portion of their quarterly retainer in the form of an option to purchase
shares of the Company's common stock, respectively. The stock options are
granted with an exercise price equal to the fair market value of the Company's
common stock as of the date of grant, are exercisable in 20% installments
beginning one year from the date of grant and expire ten years from the grant
date. An aggregate of 296,875 shares of the Company's common stock is authorized
to be issued under this plan.
During fiscal 1995, the Company amended and restated the 1989 Employee
Stock Incentive Plan ("Stock Incentive Plan") to increase the number of shares
issuable, to extend the term during which awards may be made under the Stock
Incentive Plan and to limit the amount of stock-based awards that may be granted
to any single officer or key employee under that plan. Options are generally
granted with a three to five-year vesting requirement. At January 3, 1999, there
were approximately 1.1 million shares of unissued common stock reserved for
issuance under the Company's Stock Incentive Plan.
On October 16, 1998, the Company repriced options granted between
August 1, 1989 and September 30, 1998 with grant prices ranging from $1.59 per
share to $10.13 per share. For each option exchanged, one new option was issued
with an exercise price of $1.25 per share. A total of 6.4 million options were
repriced and are exercisable in equal one-third installments beginning one year
from the date of grant. The repriced options expire five years from the grant
date.
Stock options: A summary of the status of the Company's two fixed stock
option plans for fiscal 1998, 1997 and 1996, and changes during those years is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- -------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
(shares in thousands) AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 9,126 $4.65 5,759 $5.35 5,521 $ 6.00
Granted 7,282 1.31 5,034 3.92 1,924 4.95
Exercised -- -- (57) 1.91 (52) 2.43
Forfeited or canceled (8,499) 4.30 (1,610) 5.54 (1,634) 7.20
------- ------- ------
Outstanding, end of year 7,909 1.96 9,126 4.65 5,759 5.35
======= ======= ======
Options exercisable at year-end 1,176 5.41 2,970 5.22 2,361 5.39
Weighted-average fair value of options
granted during the year $ 0.52 $ 2.19 $ 2.69
</TABLE>
35
<PAGE> 38
The following table summarizes information about fixed stock options
outstanding at January 3, 1999:
<TABLE>
<CAPTION>
(SHARES IN
THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGED
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES 1/3/99 LIFE PRICE AT 1/3/99 PRICE
- ---------------- ---------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.07-2.19 6,557 4.93 $ 1.24 73 $ 0.36
2.20-4.75 798 7.33 4.11 605 4.17
4.76-6.50 176 7.48 4.98 128 4.98
6.51-10.38 378 3.00 8.53 370 8.56
------ -----
$ 0.07-10.38 7,909 5.13 1.96 1,176 5.41
====== =====
</TABLE>
Had the fair value of options granted under these plans beginning in
1995 been recognized as compensation expense on a straight-line basis over the
vesting period of the grant in accordance with SFAS No. 123, the Company's net
earnings (loss) and net earnings (loss) per share would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share data)
FISCAL YEAR 1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $ (110,307) $ (91,600) $ 39,330
Pro forma $ (115,121) $ (94,285) $ 37,896
Net earnings (loss) per share - basic and diluted As reported $ (1.11) $ (0.92) 0.39
Pro forma $ (1.15) $ (0.94) 0.38
</TABLE>
The pro forma effect on net earnings (loss) for fiscal 1998, 1997 and
1996 is not representative of the pro forma effect on net earnings (loss) in
future years because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option- pricing
model with the following weighted-average assumptions applied to options
granted:
<TABLE>
<CAPTION>
Fiscal Year 1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
Dividend yield N/A N/A N/A
Expected volatility 48% 47% 50%
Risk-free interest rate range 4.2 to 5.8% 5.9 to 6.8% 5.4 to 6.8%
Expected life 3 to 6 Years 6 Years 6 Years
</TABLE>
Restricted stock awards: Periodically, the Company issues shares of
restricted stock under provisions of the Stock Incentive Plan. A total of
625,941 restricted shares remained outstanding at January 3, 1999. These
remaining shares will vest at various dates through the year 2002. During the
vesting periods, none of such shares may be sold, transferred, pledged or
assigned. During the restriction period, holders of the shares may exercise full
voting rights and receive all dividends with respect to those shares.
36
<PAGE> 39
Restricted stock activity for the last three fiscal years was as
follows:
<TABLE>
<CAPTION>
(Shares in thousands) 1998 1997 1996
SHARES SHARES SHARES
------ ------ ------
<S> <C> <C> <C>
Outstanding, beginning of year 675 512 515
Granted 51 621 26
Vested (26) (398) (23)
Forfeited or canceled (74) (60) (6)
----- ----- -----
Outstanding, end of year 626 675 512
===== ===== =====
Weighted-average fair value of restricted stock granted during the year $1.15 $4.35 $4.95
</TABLE>
Deferred compensation of $0.1 million was recorded during fiscal 1998
in connection with restricted stock awards. Deferred compensation amortization
relating to restricted stock awards of $0.6 million in fiscal 1998 and $0.9
million in fiscal 1997 and 1996 was charged to operations.
Service Merchandise Foundation option: The Service Merchandise
Foundation ("Foundation"), a private charitable foundation, was formed in 1990.
As a charitable contribution, the Company granted the Foundation an option to
purchase approximately 1.9 million shares of common stock at $2.20 per share,
the then current market price. The option is exercisable in whole or in part
from the date of grant until October 15, 2000. Under applicable Internal Revenue
Service rulings, the stock option may not be exercised directly by the
Foundation. The Foundation may sell all or a part of the option to unrelated
not-for-profit entities, which may then exercise the option directly. The option
is not treated as granted and outstanding until such time as the Foundation
sells all or part of it.
L. EARNINGS PER SHARE
The following table reconciles weighted-average shares used in the
earnings per share calculation for fiscal 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(In thousands, except per share data) (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED JANUARY 3, 1999:
Basic EPS $(110,307) 99,703 $ (1.11)
========
Effect of dilutive securities:
None -- --
--------- --------
Diluted EPS $(110,307) 99,703 $ (1.11)
========= ======== ========
FOR THE YEAR ENDED DECEMBER 28, 1997:
Basic EPS-before extraordinary item $ (88,957) 99,930 $ (0.89)
========
Effect of dilutive securities:
None -- --
--------- --------
Diluted EPS-before extraordinary item $ (88,957) 99,930 $ (0.89)
========= ======== ========
FOR THE YEAR ENDED DECEMBER 29, 1996:
Basic EPS $ 39,330 99,209 $ 0.39
========
Effect of dilutive securities:
Restricted stock -- 521
Options outstanding -- 596
--------- --------
Diluted EPS $ 39,330 100,326 $ 0.39
========= ======== ========
</TABLE>
The following table includes options to purchase shares of common stock
which were outstanding at the end of the respective fiscal year but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
Fiscal 1998 and 1997 include all options to purchase shares of common stock and
restricted stock, as they were anti-dilutive in the computation of diluted
earnings per share.
37
<PAGE> 40
<TABLE>
<CAPTION>
NUMBER SHARES
RANGE OF GRANT OUTSTANDING AT RANGE OF
YEAR DATES YEAR-END RANGE OF PRICES EXPIRATION DATES
- -------------- ----------------------- ------------------------ ------------------------ -------------------------
<S> <C> <C> <C> <C>
1998 08/01/89-12/29/98 8.5 million $1.10-$10.13 08/01/99-12/29/08
1997 04/23/88-11/03/97 9.8 million $2.20-$10.38 04/23/98-11/03/07
1996 10/27/88-11/08/95 1.6 million $5.77-$10.38 10/27/98-11/08/05
</TABLE>
M. SHAREHOLDERS' RIGHTS PLAN
Under the 1998 Shareholder Rights Plan, Series A Junior Preferred Stock
Purchase Rights (the "Rights") were issued for each outstanding share of Common
Stock to shareholders of record at the close of business on February 9, 1998.
Each Right entitles the registered holders to purchase from the Company one
one-hundredth of a share (a "Unit") of Series A Junior Preferred Stock, par
value $1 per share (the "Preferred Stock"), at a purchase price of $10 per Unit,
subject to adjustment. Initially, the Rights will attach to all certificates
representing shares of outstanding Common Stock, and no separate Rights
Certificates will be distributed. The Rights will separate from the Common
Stock, and the Distribution Date will occur, upon the earlier of (i) 10 days
following public announcement ("Stock Acquisition Date") that a person or group
of affiliated persons (other than the Company, or certain of its affiliates) (an
"Acquiring Person") has acquired, obtained the right to acquire, or otherwise
obtained beneficial ownership of 15% or more of the then outstanding shares of
Common Stock, or (ii) 10 days (or such date as may be determined by the Board of
Directors prior to any person becoming an "Acquiring Person") following the date
that a tender offer or exchange offer that would result in a person or group
beneficially owning 15% or more of the then outstanding shares of Common Stock
is first published or sent or given to shareholders. The Rights are not
exercisable until the Distribution Date and will expire at the close of business
on the tenth anniversary of the Rights Agreement unless earlier redeemed by the
Company as described below. If any person becomes the beneficial owner of 15% of
the Common Stock or if a 15% or more shareholder engages in certain self-dealing
transactions or a merger with the Company where the Company is not the surviving
corporation, each Right will entitle the shareholder, under alternative
circumstances, to buy either securities of the Company or securities of an
acquiring company (depending on the form of the transaction) at an exercise
price that will be half of the market value of such securities at the time. At
any time until ten days following the Stock Acquisition Date, a majority of the
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $.01 per Right, payable, at the election of such majority of Board of
Directors, in cash or shares of Common Stock.
N. RETIREMENT PLANS
The Company has a defined benefit pension plan (the "Restated
Retirement Plan") in which all employees of the Company are eligible to
participate upon reaching age 21 and completing one year of qualified service,
as defined in the Restated Retirement Plan. Benefits are based on years of
service and employee compensation. Contributions to the Restated Retirement Plan
are intended to provide not only for benefits attributed to service to date, but
also for benefits expected to be earned in the future. The Company's funding
policy has been to contribute at least the amount required by the Employee
Retirement Income Security Act of 1974, but no more than the maximum tax
deductible amount. In fiscal 1998, 1997 and 1996, the Company made contributions
of approximately $3.4 million, $4.8 million and $8.9 million, respectively, to
the Restated Retirement Plan.
The Company chose to remeasure the liabilities in June 1997 to reflect
the impact of closing 53 stores and one distribution center as part of the
Restructuring Plan (See Note E). This remeasurement resulted in a gain of $0.3
million due to curtailment of benefits.
The assets held by the Restated Retirement Plan primarily include
common stock, long-term corporate bonds and long-term government bonds.
The Company maintains a non-qualified supplemental retirement plan (the
"ESP") which covers certain management employees hired or promoted to their job
level prior to February 18, 1989. The ESP provides salary continuation and or
death benefits equal to two times the participant's annual salary at retirement
or at age 65. Employees who complete 20 years of service and terminate
employment prior to attaining retirement age are entitled to a death benefit up
to age 65, at which time they can elect salary continuation and/or a death
benefit. Salary continuation benefits are paid from the general assets of the
Company.
38
<PAGE> 41
The following valuation results are based on actuarial assumptions and
methods mandated by SFAS No. 132 and SFAS No. 87 "Employers Accounting for
Pensions."
<TABLE>
<CAPTION>
(IN THOUSANDS) RESTATED EXECUTIVE
CHANGE IN BENEFIT OBLIGATION RETIREMENT PLAN SECURITY PLAN
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 65,394 $ 63,732 $ 10,099 $ 9,095
Service cost 5,568 6,049 176 198
Interest cost 4,333 4,850 722 703
Actuarial loss 7,308 515 543 482
Benefits paid (9,884) (9,503) (596) (379)
Curtailment -- (249) -- --
-------- -------- -------- --------
Benefit obligation at end of year $ 72,719 $ 65,394 $ 10,944 $ 10,099
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 73,445 $ 69,945 $ -- $ --
Actual return on plan assets 7,646 8,245 -- --
Employer contribution 3,392 4,758 596 379
Benefits paid (9,884) (9,503) (596) (379)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 74,599 $ 73,445 $ -- $ --
======== ======== ======== ========
RECONCILIATION OF FUNDED STATUS
Funded status $ 1,880 $ 8,051 $(10,944) $(10,099)
Amounts not recognized (4,642) (4,483) -- --
Unrecognized net actuarial loss 12,786 6,683 1,721 1,144
Unrecognized prior service cost (663) (825) -- --
Unrecognized transition obligation (1,897) (2.276) 2,910 3,274
-------- -------- -------- --------
Net amount recognized $ 7,464 $ 7,150 $ (6,313) $ (5,681)
======== ======== ======== ========
AMOUNTS RECOGNIZED ON THE BALANCE SHEET
Prepaid benefit cost $ 7,464 $ 7,150 $ -- $ --
Accrued benefit liability -- -- (10,092) (9,149)
Intangible asset -- -- 2,910 3,468
Accumulated and other comprehensive loss * -- -- 869 --
-------- -------- -------- --------
Net amount recognized $ 7,464 $ 7,150 $ (6,313) $ (5,681)
======== ======== ======== ========
* Change in other comprehensive loss
Intangible asset $ -- $ -- $ 240 $ --
Accrued pension benefit cost -- -- 629 --
-------- -------- -------- --------
$ -- $ -- $ 869 $ --
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
RESTATED RETIREMENT PLAN 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
NET PERIODIC PENSION COST
Service Cost $ 5,568 $ 6,049 $ 5,946
Interest Cost 4,332 4,850 4,463
Expected return on assets (6,282) (6,099) (5,773)
Amortization of net transition amount (379) (379) (379)
Amortization of prior service cost (162) (165) (167)
Recognized net loss -- 239 610
------- ------- -------
Net periodic pension cost 3,077 4,495 4,700
Gain due to curtailment -- (273) --
------- ------- -------
Total amount reflected in earnings $ 3,077 $ 4,222 $ 4,700
======= ======= =======
</TABLE>
39
<PAGE> 42
(IN THOUSANDS)
<TABLE>
<CAPTION>
ESP 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
NET PERIODIC PENSION COST
Service Cost $ 176 $ 198 $ 222
Interest Cost 722 702 640
Amortization of net transition amount 364 364 364
Recognized net loss 31 -- 19
------ ------ ------
Net periodic pension cost $1,293 $1,264 $1,245
====== ====== ======
Total amount reflected in earnings $1,293 $1,264 $1,245
====== ====== ======
RESTATED RETIREMENT PLAN AND ESP
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS
Discount rate 6.75% 7.25% 7.75%
Expected long-term rate of return on assets 9.50% 9.50% 9.50%
Future salary increases 3.50% 4.00% 4.50%
</TABLE>
O. EMPLOYEE SAVINGS PLAN
The Service Merchandise Company, Inc. Savings and Investment Plan (the
"Plan") is a voluntary salary deferral plan under Section 401(k) of the Internal
Revenue Code. All employees of the Company (other than seasonal and temporary
employees) are eligible to participate upon reaching age 21 and completing one
qualifying year of service, as defined in the Plan. Eligible employees may elect
to defer from 1% to 15% of their compensation, subject to certain limitations.
The Company will match, based on earnings performance, up to 50% of the first 6%
of employees' salary deferrals. Deferrals and matching contributions are
invested in securities and investments as permitted by the Plan and directed by
each employee.
Company contributions to the Plan were $0.6 million, $1.3 million and
$2.1 million for fiscal 1998, 1997 and 1996, respectively. The Company match
percentage equaled 10% in fiscal 1998, 20% in fiscal 1997 and 30% in fiscal
1996.
40
<PAGE> 43
P. INCOME TAXES
Deferred income tax assets and liabilities at January 3, 1999 and
December 28, 1997 are comprised of the following:
<TABLE>
<CAPTION>
(In thousands) 1/3/99 12/28/97
-------- --------
<S> <C> <C>
Deferred income tax assets:
Financial accruals $ 42,220 $ 42,106
Capitalized leases 8,511 9,277
Tax credit and loss carryover 12,304 0
Other 1,683 5,197
-------- --------
Deferred income tax asset 64,718 56,580
-------- --------
Deferred income tax liabilities:
Depreciation (13,473) (22,185)
Layaway sales (1,884) (2,489)
Pension liability (2,315) (3,358)
Other (5,293) (4,245)
-------- --------
Deferred income tax liability (22,965) (32,277)
-------- --------
Net deferred income tax asset $ 41,753 $ 24,303
======== ========
Net current deferred income tax asset $ 20,182 $ 22,478
Net long-term deferred income tax asset 21,571 1,825
-------- --------
41,753 24,303
Valuation Allowance (41,753) 0
-------- --------
Net Deferred income tax asset $ 0 $ 24,303
======== ========
</TABLE>
The Company has recorded a full valuation allowance on net deferred tax
assets as realization of such assets in future years is uncertain.
The provision for income taxes, net of tax benefit of $1.6 million in
fiscal 1997 on the extraordinary loss from early extinguishment of debt,
consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
(In thousands) 1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Current income taxes:
Federal $(19,134) $(11,896) $21,695
State and local (423) (759) 1,271
-------- -------- -------
(19,557) (12,655) 22,966
Deferred benefit - tax attributes (12,304) (40,720) 632
Deferred benefit - other (9,985) 0 0
Valuation allowance 41,753 0 0
-------- -------- -------
Total income taxes $ (93) $(53,375) $23,598
======== ======== =======
</TABLE>
At January 3, 1999, the Company had net operating loss carry forwards of
$41.1 million which expire beginning in 2019.
41
<PAGE> 44
A reconciliation of the provision for income taxes to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
1998 1997 1996
-------- ------ -----
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit 1.3% 1.3% 1.6%
Valuation allowance (37.8)% --% --%
Other 1.6% 1.2% 0.9%
-------- ------ ------
Effective tax rate 0.1% 37.5% 37.5%
======== ====== ======
</TABLE>
Cash payments (refunds) for income taxes were $(17.4) million, $21.1
million and $19.9 million in fiscal 1998, 1997 and 1996, respectively.
Q. OTHER COMMITMENTS AND CONTINGENCIES
On January 28, 1997, the Company and Service Credit Corp. (the
"Subsidiary"), a wholly-owned subsidiary, entered into an agreement with World
Financial Network National Bank ("WFNNB") for the purpose of providing a
proprietary credit card to its customers. The contract requires the Subsidiary
to maintain a 3% credit risk reserve for the outstanding balances, which are
owned by WFNNB. The purpose of this reserve is to offset future potential
negative spreads or portfolio losses. The negative spreads or losses may result
from potential increased reimbursable contractual program costs. The 3% credit
risk reserve is held by the bankruptcy remote Subsidiary in the form of cash and
cash-equivalents. As of January 3, 1999, the contractual 3% credit risk reserve
was $10.8 million.
The Company believes the program may be terminated in fiscal 1999. If
the program is terminated, it will result in the suspension of the use of the
credit cards and all usual and customary contractual amounts due to each
respective party. Under the normal course of business, the amounts payable to
the respective parties result in positive cash flows to the Subsidiary. Under
Chapter 11, the amount payable to the respective parties may result in negative
cash flows (amounts due) from the Subsidiary. In the event that the program
costs exceed program revenues, the Subsidiary is obligated to pay WFNNB from the
credit risk reserve, the net difference between the program costs and the
program revenues.
Currently, the Subsidiary is analyzing its position and anticipates the
establishment of a provision to reflect the contractual credit risk reserve to
the maximum contractual obligation in the first quarter of fiscal year 1999. In
accordance with generally accepted accounting principles, certain income
deferrals and other accruals may be potentially impacted by the discontinuance
of the credit card program, which may have a significant negative impact on the
Company's future earnings.
On March 15, 1999, five of the Company's vendors filed an involuntary
petition for reorganization under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Middle District of Tennessee seeking
court supervision of the Company's restructuring efforts. On March 27, 1999, the
Company and 31 of its subsidiaries filed voluntary petitions with the Bankruptcy
Court for reorganization under Chapter 11 of the Bankruptcy Code.
The Company was involved in litigation, investigations and various
legal matters during fiscal 1998 which are being defended and handled in the
ordinary course of business. While the ultimate results of these matters cannot
be determined or predicted, management believes that they will not have a
material adverse effect on the Company's results of operations or financial
position. Any potential liability may be affected by the Chapter 11 Cases
described in Note B.
42
<PAGE> 45
R. SEGMENT REPORTING
The Company manages its business on the basis of one reportable
segment. See Note A for a brief description of the Company's business. As of
January 3, 1999, all of the Company's operations are located within the United
States. The following data is presented in accordance with SFAS No. 131 for all
periods presented.
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------------
CLASSES OF SIMILAR PRODUCTS 1/3/99 12/28/97 12/29/96
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales (in thousands):
Hardlines $2,249,628 $2,725,837 $2,977,325
Jewelry 919,897 936,941 977,691
---------- ---------- ----------
Total Net Sales $3,169,525 $3,662,778 $3,955,016
========== ========== ==========
</TABLE>
S. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The Company has historically incurred a net loss throughout the first
three quarters of the year due to the seasonality of its business. The results
of operations for the first three quarters are not necessarily indicative of the
operating results for the entire fiscal year.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
14 WEEKS
13 WEEKS ENDED ENDED
--------------------------------------------- -----------
3/29/98 6/28/98 9/27/98 1/3/99
---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Net sales $ 594,182 $ 685,112 $ 604,987 $ 1,285,244
========= ========= ========= ============
Gross margin(a) $ 143,101 $ 163,564 $ 138,254 $ 309,350
========= ========= ========= ============
Net Loss $ (24,101) $ (6,337) $ (38,098) $ (41,771)
========= ========= ========= ============
Per common share - basic and diluted-
Net loss $ (0.24) $ (0.06) $ (0.38) $ (0.42)
========= ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------------------------------------------------------
3/30/97 6/29/97 9/28/97 12/28/97
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net sales $ 686,400 $ 877,361 $ 656,144 $ 1,442,873
========= ========= ========= ===========
Gross margin(a) $ 154,760 $ 83,068 $ 151,190 $ 361,998
========= ========= ========= ===========
Earnings (loss) before extraordinary item $(107,217) $ (17,547) $ (22,360) $ 58,167
Extraordinary loss from early
extinguishment of debt, net of tax
benefit -- -- $ (2,643) --
--------- --------- --------- -----------
Net earnings (loss) $(107,217) $ (17,547) $ (25,003) $ 58,167
========= ======== ========== ===========
Per common share - basic and diluted-
Earnings (loss) before extraordinary item $ (1.07) $ (0.18) $ (0.22) $ 0.58
Extraordinary loss from early
extinguishment of debt, net of tax
benefit -- -- (0.03) --
--------- --------- --------- -----------
Net earnings (loss) $ (1.07) $ (0.18) $ (0.25) $ 0.58
========= ========= ========= ===========
</TABLE>
(a) Gross margin after cost of merchandise sold and buying and occupancy
expenses.
43
<PAGE> 46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
(1) (2)
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER DEDUCTIONS BALANCE AT
BEGINNING AND ACCOUNTS (DESCRIBE) END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (A) PERIOD
- ------------------------------------------ ------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
INVENTORY VALUATION ALLOWANCE
INCLUDED UNDER THE BALANCE SHEET
CAPTION "INVENTORY"
Year ended January 3, 1999 $ 16,945 $ 50,144 $ (42,072) $ 25,017
Year ended December 28, 1997 $ 10,048 $ 44,226 $ (37,329) $ 16,945
Year ended December 29, 1996 $ 11,694 $ 37,391 $ (39,037) $ 10,048
DEFERRED TAX ASSET VALUATION
ALLOWANCE INCLUDED UNDER THE BALANCE
SHEET CAPTION "DEFERRED INCOME TAXES"
Year ended January 3, 1999 (A) $ 0 $ 41,753 $ 0 $ 41,753
Year ended December 28, 1997 (A) $ 0 $ 0 $ 0 $ 0
Year ended December 29, 1996 (A) $ 0 $ 0 $ 0 $ 0
ALLOWANCE FOR DOUBTFUL ACCOUNTS
INCLUDED UNDER THE BALANCE SHEET
CAPTION "ACCOUNTS RECEIVABLE"
Year ended January 3, 1999 (A) $ 3,456 $ 4,541 $ (4,998) $ 2,999
Year ended December 28, 1997 (A) $ 4,593 $ 4,388 $ (5,525) $ 3,456
Year ended December 29, 1996 (A) $ 2,763 $ 2,183 $ (353) $ 4,593
ALLOWANCE FOR UNCOLLECTIBLE VENDOR
DEBITS INCLUDED UNDER THE BALANCE SHEET
CAPTION "ACCOUNTS PAYABLE"
Year ended January 3, 1999 (A) $ 0 $ 4,300 $ 0 $ 4,300
Year ended December 28, 1997 (A) $ 0 $ 0 $ 0 $ 0
Year ended December 29, 1996 (A) $ 0 $ 0 $ 0 $ 0
</TABLE>
- ------------
(A) Amounts written-off against the reserve.
44
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Service Merchandise Company, Inc.
We have audited the accompanying consolidated balance sheets of Service
Merchandise Company, Inc. and subsidiaries as of January 3, 1999 and December
28, 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended January 3, 1999. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Service Merchandise
Company, Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended January 3, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has experienced
recurring losses and negative cash flows from operations and as discussed in
Note B to the consolidated financial statements, on March 15, 1999 certain of
the Company's creditors filed an involuntary Chapter 11 reorganization petition
in the United States Bankruptcy Court seeking court supervision of the Company's
restructuring efforts. As also disclosed in Note B on March 27, 1999, the
Company and 31 of its subsidiaries filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans concerning these matters are also described in Note B. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 5, 1999
(March 31, 1999 as to Note B)
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No reportable items.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The following is a list of directors, their ages, positions and
business experience as of the date hereof:
<TABLE>
<CAPTION>
Name and Position Age Experience
- ----------------- --- ----------
<S> <C> <C>
Raymond Zimmerman 66 Chairman of the Board since January 1999; Chairman of the Board
Chairman of the Board from October 1981 through January 1998; Chief Executive Officer
from October 1981 to April 1997; President from July 1984 to
November 1994 and from 1981 to October 1983. Board member of
The Limited Stores, Columbus, Ohio.
S. Cusano 45 Chief Executive Officer since March 1999; Executive Vice President
Chief Executive Officer and Chief Financial Officer from April 1997 to March 1999; Vice
President and Chief Financial Officer from July 1993 to April 1997;
Group Vice President - Finance from December 1991 to July 1993.
Charles Septer 47 President and Chief Operating Officer since March 1999; Senior Vice
President and Chief Operating President, Jewelry Merchandising since 1988.
Officer
Richard P. Crane, Jr. 59 Practicing Attorney, Partner, Musick, Peeler & Garrett, Los Angeles,
California; Board member of North American Gaming, Inc.
R. Maynard Holt, J.D. 59 R. Maynard Holt, Business Consulting & Insurance, Nashville,
Tennessee.
Charles V. Moore 59 President and Board member of Trainer, Wortham & Company, Inc.,
Investment Counselors, New York, New York.
Harold Roitenberg 72 President of Roitenberg Investments, Inc., Minneapolis, Minnesota;
Board member of Damark International, Inc.
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of executive officers, their ages, positions
and business experience during the past five years as of the date hereof:
46
<PAGE> 49
<TABLE>
<CAPTION>
Name and Position (1) Age Experience
- --------------------- --- ----------
<S> <C> <C>
S. Cusano 45 Chief Executive Officer since March 1999; Executive Vice President
Chief Executive Officer and Chief Financial Officer from April 1997 to March 1999; Vice
President and Chief Financial Officer from July 1993 to April 1997;
Group Vice President - Finance from December 1991 to July 1993.
Charles Septer 47 President and Chief Operating Officer since March 1999; Senior Vice
President and Chief Operating President, Jewelry Merchandising since 1988.
Officer
Thomas L. Garrett, Jr. 45 Senior Vice President and Chief Financial Officer since March 1999;
Senior Vice President, Chief Vice President and Treasurer since July 1996; Treasurer, Magma
Financial Officer and Treasurer Copper Company from July 1992 to May 1996.
C. Steven Moore 36 Chief Administrative Officer since March 1999, Senior Vice President
Chief Administrative Officer, since February 9, 1999; Corporate Secretary since August 1996; Vice
Senior Vice President, President and General Counsel since August 1996; Senior Corporate
General Counsel and Attorney from November 1994 to August 1996; Corporate Attorney
Corporate Secretary from May 1992 to November 1994.
Gary Sease 55 Senior Vice President, Logistics since September 1996; Senior Vice
Senior Vice President, President, Operations Services of American National Can Company
Logistics from September 1992 to September 1996.
Kenneth Brame 51 Senior Vice President, Information Services and Chief Information
Senior Vice President, Officer since February 1996; Vice President, Systems Development,
Information Services and American Stores Company from May 1994 to February 1996; Director
Chief Information Officer of Systems Development, Belk Stores Services from April, 1989 to
April 1994.
Steven F. McCann 46 Senior Vice President of Finance and Chief Accounting Officer since
Senior Vice President of Finance August 1998; Vice President, Corporate Controller since June 1994;
and Chief Accounting Officer Vice President, Controller of Robinsons-May division of the May
Department Store Company from February 1993 to June 1994.
</TABLE>
- ---------------------
(1) All Executive Officers serve at the pleasure of the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, the Company's executive officers and persons
who beneficially own more that ten percent of the Common Stock to file reports
of ownership and changes in ownership with the SEC. Such directors, officers and
greater than ten percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms
furnished to the Company, or written representations from certain reporting
persons, the Company believes that during fiscal 1998 its directors, officers
and greater than ten percent beneficial owners were in compliance with all
applicable filing requirements.
47
<PAGE> 50
ITEM 11. EXECUTIVE COMPENSATION
This item contains information with respect to compensation paid to the
Company's Six Named Officers and its Directors.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
---------------------------------------------- -------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ All Other
Name and Principal Position Salary Bonus Compensation Awards SARs Compensation
During Fiscal 1998 Year ($) ($) ($)(5) ($)(7) (#) ($) (10)
- -------------------------- -------- --------- --------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary M. Witkin(1) 1998 $ 756,911 $ -- $ 30,000 $ -- 999,999 $ 8,794
President and CEO 1997 773,614 108,150 30,000 -- 1,000,000 5,474
1996 752,605 108,150 107,300 -- 200,000 179,996(6)
S. Cusano 1998 406,906 -- -- -- 579,500 4,050
Executive Vice President 1997 369,616 25,000 -- 31,250 (8) 425,000 2,300
and CFO 1996 326,105 -- -- 123,438 (9) 50,000 2,315
Harold Mulet(2) 1998 357,692 -- -- -- 365,000 3,428
Senior Vice President, 1997 319,492 50,000 -- -- 240,000 2,848
Store Operations 1996 309,226 50,000 -- -- 50,000 3,068
Charles Septer 1998 366,296 -- -- -- 402,153 2,818
Senior Vice President 1997 349,860 -- -- -- 240,000 2,757
Jewelry Merchandising 1996 340,607 -- -- -- 50,000 2,769
Gary Sease(3) 1998 324,861 -- -- -- 290,000 5,765
Senior Vice President 1997 309,000 50,000 -- -- -- 12,173
Logistics 1996 80,503 -- -- -- -- 5,212(11)
Raymond Zimmerman(4) 1998 322,730 -- 30,000 -- -- 3,362,629(12)
Chairman of the Board 1997 803,468 -- 30,000 -- 275,000 41,004
1996 781,604 -- 30,000 -- -- 39,538
</TABLE>
(1) Mr. Witkin resigned as President and CEO on January 4, 1999.
(2) Mr. Mulet's employment with the Company ceased on March 26, 1999.
(3) Mr. Sease's employment with the Company began on September 15, 1996.
(4) Mr. Zimmerman resigned as Chairman on January 29, 1998 and was
re-elected as Chairman on January 4, 1999.
(5) Mr. Zimmerman and Mr. Witkin received a non-accountable expense
allowance of $30,000 in fiscal 1998, 1997 and 1996.
(6) Includes $174,068 in relocation expense.
(7) The value of outstanding restricted stock awards as of January 3, 1999
are as follows:
<TABLE>
<CAPTION>
Name Number of Shares Value
---- ---------------- -----
<S> <C> <C>
Gary M. Witkin 70,000 $135,625
S. Cusano 15,001 29,054
</TABLE>
Dividends are payable on restricted stock when and if it is paid on
unrestricted stock. No dividends were paid in the reported fiscal years.
(8) Represents the value of 10,000 shares of restricted stock granted on
April 16, 1997, which had a market price of $3.125 on the grant date.
On April 16, 1998, 3,333 of the shares vested. The remainder will vest
on April 16, 1999 and 2000 respectively.
(9) Represents the value of 25,000 shares of restricted stock granted on
February 7, 1996, which had a market price of $4.937 on the grant date.
As of February 7, 1998, 16,666 of the shares had vested. The remainder
will vest on February 7, 1999.
(10) Represents estimated Company contributions in the defined contribution
plan, benefits derived from payments by the Company for group life
insurance, and benefits derived from split dollar life insurance. The
amount of such benefits for 1998 is set forth in the following table:
<TABLE>
<CAPTION>
Defined Contribution Plan Group Term Life Insurance Split Dollar Life Insurance
------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Raymond Zimmerman $500 $ 12,500 $ 21,580
Gary M. Witkin $600 $ 8,294 --
S. Cusano $500 $ 2,318 $ 957
Harold Mulet $500 $ 2,205 $ 723
Charles Septer $500 $ 2,593 --
Gary Sease $500 $ 5,265 --
</TABLE>
48
<PAGE> 51
The Company is the owner of the split dollar life insurance policies on
Messrs. Zimmerman, Cusano and Mulet. In 1998, the Company paid premiums
of approximately $114,116, $114,116 and $24,000, respectively. For each
policy, upon the payment of the policy proceeds, the Company will
receive, net of any tax liability, an amount equal to the aggregate
premiums paid. The remaining policy proceeds will be paid to the duly
named beneficiaries. None of these individuals have an interest in the
cash surrender value of the respective policies. Either party may
terminate the split dollar agreements at any time with thirty days
written notice.
(11) These amounts represent relocation expense.
(12) Includes $2,748 with respect to office equipment; $25,000 as a
relocation expense; $17,800 pertaining to the purchase of an
automobile; $160,000 as an office allowance; $3,111,837 in retirement
and benefit payments; $9,522 for reimbursed cobra costs; and $1,042 for
supplementary medical expense.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ----------------------------------------------------------------------------------- -------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS
OPTION/SAR GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) (1) FISCAL YEAR ($/SH) DATE 5% ($) 10%($)
- ------------------------- ---------- ---------------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman -- -- -- -- -- --
Gary M. Witkin 999,999 13.73% $1.2500 10/16/02 $ 1,503,722 $1,794,113
S. Cusano 579,500 7.96 1.2500 10/16/02 871,408 1,039,690
Harold Mulet 365,000 5.01 1.2500 10/16/02 559,686 667,770
Charles Septer 402,153 5.52 1.2500 10/16/02 604,727 721,509
Gary Sease 290,000 3.98 1.2500 10/16/02 436,080 520,293
</TABLE>
- -------------------
(1) Options granted effective as of October 16, 1998 at the fair market
value on the date of grant which vest 33.33% per year with the first
33.33% vesting on October 16, 1999 in exchange for outstanding options.
There are no criteria for vesting other than continued employment
through the vesting dates and no other material terms of the options
except as disclosed under "Change in Control Provisions Under the
Company's Stock Incentive Plans."
OPTIONS/SAR EXERCISE AND YEAR-END VALUE TABLE
The following table provides information as to opinions exercised or
held by the six Named Officers during fiscal 1998. None of the Named Officers
has been granted SARs.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTION/SARS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) FISCAL YEAR-END (#)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(1)
- -------------------------- ------------------- ----------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Raymond Zimmerman -- -- 279,166 / 0 $0/$0
Gary M. Witkin -- -- 191,667 / 1,133,333 $0/$0
S. Cusano -- -- 0 / 579,500 $0/$0
Harold Mulet -- -- 0 / 365,000 $0/$0
Charles Septer -- -- 0 / 402,153 $0/$0
Gary Sease -- -- 0 / 290,000 $0/$0
</TABLE>
(1) The number of unexercised options and/or SARs available at fiscal
year-end, whether exercisable or Unexercisable, includes out-of-the
money options, and the value of unexercised options and/or SARs
available at fiscal year-end does not include out-of-the money options.
49
<PAGE> 52
DIRECTOR COMPENSATION
In fiscal 1998, directors not otherwise employed as officers of the
Company initially received fees of $5,750 per quarter. Mr. Holt, Chairman of the
Audit Committee, received an additional $3,000 for the year.
Under the Directors' Deferred Compensation Plan, implemented in 1991,
directors have the option of deferring receipt of their fees until a period
following their service as a director or until retirement age.
Under the Second Amended and Restated Directors' Equity Plan each
nonemployee director receives on the date of the Annual Meeting of Shareholders,
options to purchase 3,000 shares of Common Stock at an exercise price equal to
the fair market value of such shares on the date of grant. The options expire 10
years from the date of grant and are exercisable in installments of twenty
percent each year beginning one year from the date of grant. The options become
immediately exercisable on a director's death or disability or on the date a
"change in control" is deemed to occur under the Amended and Restated 1989
Employee Stock Incentive Plan. See "Change in Control Provisions Under the
Company's Stock Incentive Plans." The Second Amended and Restated Directors'
Equity Plan provides nonemployee directors the option to apply their cash
retainer payment to acquire options to purchase shares of Common Stock of the
Company.
From January 29, 1998 until his resignation on January 7, 1999, James
E. Poole served as Chairman of the Board. The Company and Mr. Poole entered into
an agreement providing that so long as Mr. Poole served as Chairman of the Board
he was to receive $ 10,000 per month as additional compensation. Such
compensation was in addition to the compensation paid to each nonemployee
director and Mr. Poole continued to participate in the Directors' Equity Plan
for nonemployee directors. The agreement also provided for certain compensation
upon death, disability or removal from office, secretarial assistance and
reimbursement of reasonable expenses. In connection with his resignation as
Chairman of the Board and his retirement from the Board of Directors, the
Company paid Mr. Poole $250,000.
SEVERANCE AND INDEMNIFICATION AGREEMENTS; EMPLOYMENT AGREEMENTS; CHANGE IN
CONTROL PROVISIONS
During fiscal 1998, the Company had severance agreements with each of
the Named Officers currently employed by the Company other than Mr. Zimmerman.
The severance agreements were entered into in December 1998 and replaced
severance agreements previously in place with the Named Officers. Mr. Cusano's
severance agreement was subsequently amended as described below, and Mr. Cusano
and Mr. Septer subsequently entered into employment agreements as described
below.
The severance agreements in place during fiscal 1998 with Messrs.
Cusano, Mulet, Sease and Septer provide for the payment of compensation in the
form of salary continuation to the Named Officer in the amount of two times the
officer's maximum annual base salary payable in a lump sum or in twenty-four
(24) equal monthly installments, if the employment of the Named Officer is
terminated for any reason other than the officer's death, disability, or for
cause. If the Named Officer is terminated or deemed to be terminated within two
years of a Change in Control, he will be entitled to salary continuation in the
amount of three times the officer's maximum annual base salary. A Change in
Control under these agreements is the same as that used in the Company's Stock
Incentive Plan described below. Under the terms of these agreements, the
employment of a Named Officer is deemed terminated for cause if he engages in
(i) willful misconduct materially injurious to the Company; (ii) acts of
dishonesty or fraud; (iii) willful violations of obligations not to compete with
the Company or disclose confidential information. If the employment of a Named
Officer is terminated for death or for cause, he will be entitled only to his
base salary through the date of termination. If the employment is terminated by
reason of disability, the officer will be entitled only to his base salary
through the date of termination and such amounts as he is entitled to receive
under the Company's disability insurance policies. The agreements provide that
these Named Officers will not engage in various activities competitive with the
business of the Company for a period of one year from the date of any
termination giving rise to salary continuation payments.
On June 25, 1998, the Company entered into an agreement with Raymond
Zimmerman, wherein in light of Mr. Zimmerman's more than 40 years of service
and other valuable contributions to the Company, the Company agreed to pay Mr.
Zimmerman a retirement payment of $750,000; to cause Mr. Zimmerman's
outstanding options to vest pursuant to the terms of the Amended and Restated
1989 Employee Stock Incentive Plan; to provide for the continuation of certain
healthcare and life insurance benefits; and to provide for an automobile and a
moving expenses allowance. The agreement also provided for the payment of
$2,361,837, which together with amounts payable under the Company's Executive
Security Plan approximated on a discounted basis the amount of retirement
benefits which would have been payable to Mr. Zimmerman under the Restated
Retirement Plan if such plan did not contain maximum payment limits.
On January 8, 1999, the Company entered into an agreement with James
Poole, then the Chairman of the Board of Directors. The agreement provides for
the payment on January 11, 1999 of $250,000 in connection with his resignation
as Chairman of the Board of Directors and his retirement from the Board. The
agreement requires Mr. Poole to cooperate with the Company in litigation and
related proceedings. Mr. Poole is obligated under the agreement to maintain
certain matters in confidence and not to engage in various activities
competitive with the business of the Company.
50
<PAGE> 53
Gary M. Witkin entered into an agreement with the Company January 7,
1999 pursuant to which he resigned as President, Chief Executive Officer, and as
a director. The agreement provides for (i) the payment to Mr. Witkin of
$2,317,890, (ii) continuation of health care coverage for the shorter of two
years or his eligibility for coverage with another employer, (iii) the transfer
of title to his Company provided automobile. The agreement requires Mr. Witkin
to cooperate with the Company in litigation and related proceedings. Mr. Witkin
is obligated under the agreement to maintain certain matters in confidence and
not to compete with the Company.
Effective February 1, 1999, the Company entered into an agreement with
S. Cusano, then the Executive Vice President and Chief Financial Officer,
amending and restating his severance agreement with the Company. Under the terms
of this restated agreement, Mr. Cusano resigned effective May 20, 1999, but
agreed to continue as Executive Vice President and Chief Financial Officer
through the effective date of his resignation. The agreement provides for (i)
the payment to Mr. Cusano of $1,288,000 in installments payable through May 20,
1999, in addition to his regular pay while employed with the Company, (ii) the
vesting of all unvested stock options held by him on May 20, 1999, (iii) the
immediate transfer of title to his Company provided automobile, (iv) the
continuation of health care benefits for the shorter of two years or his
eligibility for coverage with another employer, and (v) the payment of Mr.
Cusano's attorney's fees. The Company has the right to terminate him at any
time. If he is terminated for Cause (defined as (a) the willful engaging in
misconduct materially injurious to the Company, (b) acts of dishonesty or fraud,
or (c) the willful violation of obligations not to compete with the Company or
disclose confidential information) the Company can stop further payments and
recoup prior incentive payments made. If his employment is terminated for death
or for cause, he will be entitled only to his base salary through the date of
termination. If the employment is terminated by reason of disability, the
officer will be entitled only to his base salary through the date of
termination, and such amounts as he is entitled to receive under the Company's
disability insurance policies. The agreement provides that Mr. Cusano will not
compete with the Company during the term of the Agreement.
In connection with his appointment as Chief Executive Officer, on March
23, 1999, the Company and Mr. Cusano entered into an employment agreement with
an initial term of three years which renews automatically for additional one
year terms unless either party gives appropriate notice to the other party. The
agreement provides for a base salary of $650,000 with the opportunity to receive
an annual incentive bonus. Any such annual incentive bonus would be subject to
offset by up to one-third of the amounts paid to Mr. Cusano pursuant to the
February 1, 1999 agreement between the Company and Mr. Cusano. In the event of
Mr. Cusano's termination other than for death, disability or cause within the
term of the agreement, Mr. Cusano would receive salary continuation in an amount
of two times his base salary and continuation of certain health care benefits.
This agreement is subject to Bankruptcy Court approval.
In connection with his appointment as President and Chief Operating
Officer, on March 23, 1999, the Company and Mr. Septer entered into an
employment agreement with an initial term of three years which renews
automatically for additional one year terms unless either party gives
appropriate notice to the other party. The agreement provides for a base salary
of $500,000. The agreement provides that Mr. Septer will be paid a bonus of
$250,000 on each of March 26, 1999 and April 23, 1999 (the "Special Bonus") and
that he will be entitled to receive an annual incentive bonus pursuant to the
Company's annual bonus plan offset by up to one-third of the amount of the
Special Bonus. In the event of Mr. Septer's termination other than for death,
disability or cause within the term of the agreement, Mr. Septer would receive
salary continuation in an amount of two times his base salary and continuation
of certain health care benefits. This agreement is subject to Bankruptcy Court
approval.
The Company also has indemnification agreements with each of its
directors and Named Officers providing for contractual rights of indemnification
to the fullest extent permitted by Tennessee law.
CHANGE IN CONTROL PROVISIONS UNDER THE COMPANY'S STOCK INCENTIVE PLANS
Under the Stock Incentive Plan, any stock options and SAR's which are
not then exercisable will become fully exercisable and vested upon a change in
control or a potential change in control. Similarly, a change in control or a
potential change in control will result in the lapsing of restrictions
applicable to restricted stock and other stock-based awards and such shares and
awards being deemed fully vested. Stock options, SARs, limited SARs, restricted
stock and other stock-based awards will, in such instances, unless otherwise
determined by the Compensation Committee in is sole discretion, be cashed out on
the basis of the change in control price as defined in the plan. A change in
control occurs if (i) any person becomes a beneficial owner directly or
indirectly of 20% or more of the total voting stock of the Company (subject to
certain exceptions); (ii) as a result of, or in connection with, any cash tender
or exchange offer, merger or other business combination or similar transaction,
less than a majority of the combined voting power of the then outstanding
securities of the Company is held in the aggregate
51
<PAGE> 54
by the holders of Company securities entitled to vote generally in the election
of directors immediately prior to such transaction; or (iii) during any period
of two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors cease for any reason to constitute at least a
majority thereof. A potential change in control means (i) approval by the
shareholders of an aggregate which, if completed, would constitute a change in
control, or (ii) the acquisition by a person of 5% or more of the total voting
stock of the Company and the adoption by the Board of a resolution that a
potential change in control, as defined in the plan, has occurred.
Options and shares of restricted stock granted under the Second
Amendment and Restated Directors' Equity Plan become immediately vested on the
date a "change in control" is deemed to occur under the Stock Incentive Plan.
PENSION PLAN
The Company's pension plan (the "Pension Plan") which is qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), includes all full-time employees who are at least age twenty-one with
one year of qualified service as defined by the Pension Plan. Directors who are
not officers or employees of the Company do not participate. In 1996, the
Pension Plan was changed to a traditional final average compensation plan, with
monthly benefits on years of service. Participants in the Pension Plan as of
January 1, 1998 are provided certain minimum benefits reflecting the provisions
of the prior Pension Plan based on compensation received during 1998.
The following table shows the estimated annual pension benefits payable
to a covered participant at normal retirement age, based on selected
compensation and years of service compensations:
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
---- ---- ---- --- ---
<S> <C> <C> <C> <C> <C>
$125,000 $20,430 $27,240 $34,050 $40,860 $47,670
150,000 26,055 34,740 43,425 52,110 60,795
175,000 28,305 34,740 47,175 56,610 66,045
200,000 28,305 34,740 47,175 56,610 66,045
225,000 28,305 34,740 47,175 56,610 66,045
250,000 28,305 34,740 47,175 56,610 66,045
300,000 28,305 34,740 47,175 56,610 66,045
400,000 28,305 34,740 47,175 56,610 66,045
450,000 28,305 34,740 47,175 56,610 66,045
500,000 28,305 34,740 47,175 56,610 66,045
</TABLE>
Compensation covered by the plan generally includes all compensation
earned by a participant, including elective deferrals to qualified plans but
excluding severance payments, expense reimbursements and allowances, and other
non-wage items. However, for purposes of determining benefits, compensation
covered by the plan is limited to $160,000. As a result, covered compensation
for each of the Named Officers is limited to $160,000 by Section 401 (a)(17) of
the Code. In addition, annual benefits payable from the plan are limited to
$130,000 by Section 415 of the Code. These limitations are indexed periodically
for inflation.
The estimated credited years of service covered by the plan for each of
the persons named in the compensation table are:
<TABLE>
<CAPTION>
As of December 31, 1998 As of Age 65
----------------------- ------------
<S> <C> <C>
Raymond Zimmerman 42 42
Gary M. Witkin 4 19
S. Cusano 7 27
Harold Mulet 3 21
Charles Septer 17 35
Gary Sease 2 12
</TABLE>
52
<PAGE> 55
Retirement benefits are computed on the basis of a straight life
annuity, unless the participant elects another method of payment. If the
participant is married, the benefit is converted into an actuarially equivalent
joint and 50% survivor benefit. The benefits shown in the table above are not
subject to deduction for Social Security or other offset amounts.
EXECUTIVE SECURITY PROGRAM
The Company maintains a non-qualified supplemental retirement plan (the
"ESP") which covers certain management employees hired or promoted to their job
level prior to February 28, 1989. The plan provides salary continuation and/or
death benefits equal to two times the participant's annual salary at retirement
age or at age 65. Employees who complete 20 years of service and terminate
employment prior to attaining retirement age are entitled to a death benefit up
to age 65, at which time they can elect salary continuation and/or death
benefits. Salary continuation benefits are paid from the general assets of the
Company. There are approximately 156 active employees covered. Twenty-nine
retirees currently received benefits and twenty-six terminated vested
participants are entitled to a future benefit. The Company maintains Corporate
Owned Life Insurance (COLI) policies purchased on participants covered by the
plan prior to the Tax Reform Act of 1986. The Company continues to maintain COLI
policies following termination or retirement of covered employees. Of the Named
Officers. only Raymond Zimmerman and Charles Septer are participants in the ESP.
Mr. Zimmerman's annual installment benefit is $154,600. Upon retirement and if
Mr. Septer chose to waive 100% of the death benefit, Mr. Septer's annual
installment benefit would be approximately $71,900. Continuation of the ESP is
subject to Bankruptcy Court approval.
53
<PAGE> 56
'
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1999, certain
information regarding the beneficial ownership of Common Stock by all directors
of the Company (unless otherwise noted), the Company's Chief Executive Officer
as of January 3, 1999, the four most highly compensated executive officers of
the Company other than such Chief Executive Officer, by all directors and
executive officers as a group, and all other persons beneficially owning greater
than five percent of the Common Stock. The Company believes each director or
officer, except as otherwise indicated, has sole voting and investment power
over the shares of Common Stock listed as beneficially owned by him.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED CLASS (1)
- ---- ------------------ ---------
<S> <C> <C>
Raymond Zimmerman.................................... 4,396,624
24,341 (2)
392,070 (3)
566,280 (4)
---------
5,379,315 (5) 5.4 %
Richard P. Crane..................................... 13,363 (6)
Charles V. Moore..................................... 162,945 (7)(8)
R. Maynard Holt...................................... 10,439 (6)(9)
Harold Roitenberg.................................... 42,813 (10)
S. Cusano............................................ 32,206 (11)
Harold Mulet......................................... --
Charles Septer....................................... 46,175 (12)
Gary M. Witkin....................................... 415,350 (13)
Gary Sease........................................... 10,000
FPA Paramount Fund, Inc.............................. 9,500,000 (14) 9.5%
All directors and executive officers as a group
(15 persons)...................................... 6,228,606 6.2 %
</TABLE>
- --------------------
(1) Percentages representing less than 1% of the outstanding shares of
Common Stock are not shown.
(2) Shares held by the Equitable Trust Company in an IRA account.
(3) Represents 239,748 shares owned of record by Mr. Zimmerman as trustee
for two nieces and 152,322 shares as to which Mr. Zimmerman is trustee
under the will of Mark K. Zimmerman.
(4) Represents 405,000 shares owned of record by the Raymond Zimmerman
Family Foundation and 161,280 shares owned of record by the Zimmerman
Foundation.
(5) The address for Mr. Zimmerman is 7100 Service Merchandise Drive,
Brentwood, Tennessee 37027.
(6) Includes 188 restricted shares of Common Stock granted under the Second
Amended and Restated Directors' Equity Plan, held by the Company until
restrictions lapse on April 15,1999, and currently exercisable options
to acquire 3,750 shares granted under the Second Amended and Restated
Directors' Equity Plan.
(7) Includes 188 restricted shares of Common Stock granted under the Second
Amended and Restated Directors' Equity Plan, held by the Company until
restrictions lapse on April 15,1999, and currently exercisable options
to acquire 67,547 shares granted under the Second Amended and Restated
Directors' Equity Plan.
(8) Includes 9,280 shares owned by Mr. Moore as custodian for two minor
children.
(9) Includes 1,937 shares owned of record by Mr. Holt as trustee for the R.
Maynard Holt Profit Sharing Plan, a qualified profit sharing plan under
the Internal Revenue Code, 2,100 shares owned by Mr. Holt's wife and
2,000 shares owned by Mr. Holt's mother.
(10) Includes 28,564 shares owned by Roitenberg Investments, Inc., which is
100% owned by Mr. Roitenberg, 188 restricted shares of Common Stock
granted under the Second Amended and Restated Directors' Equity Plan,
held by the Company until restrictions lapse on April 15, 1999, and
currently exercisable options to acquire 12,745 shares granted under
the Second Amended and Restated Directors' Equity Plan.
(11) Includes 32,206 restricted shares of Common Stock held by the Company
until restrictions lapse.
(12) Includes 1,148 shares held by Mr. Septer's wife (who is an employee of
the Company).
(13) Reflects Mr. Witkin's ownership as of January 3, 1999.
(14) Address: 11400 West Olympic Boulevard, Suite 1200, Los Angeles,
California 90064. According to its most recent Schedule 13G amendment,
FPA Paramount Fund, Inc. is a Maryland corporation registered as an
investment company under the Investment Company Act of 1940. First
Pacific Advisors, Inc., a Massachusetts corporation registered as an
investment adviser under the Investment Advisers Act of 1940, exercises
shared dispositive power over such shares of Common Stock.
54
<PAGE> 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases one store property from Raymond Zimmerman. For the
fiscal year ended January 3, 1999, Mr. Zimmerman received $81,000 under this
lease. The rent that has been or may be paid under this lease is and will be
comparable to rent paid by lessees of similar properties in the same general
location, and the terms of such lease are at least as favorable to the Company
as the terms that could be obtained from unaffiliated persons. The Company also
entered into certain other contractual arrangements with directors and
executive officers during fiscal 1998. See Item 11. "Executive Compensation --
Severance and Indemnification Agreements; Employment Agreements; Change in
Control Provisions."
55
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
EXHIBITS FILED WITH THIS FORM 10-K:
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
3.2 Registrant's By-Laws, as amended (restated in
electronic format only for the purpose of filing
with the Commission).
4.17 Post-Petition Credit Agreement dated as of
March 29, 1999 by and among the Registrant,
Citicorp USA, Inc., as administrative agent, Bank
Boston, N.A., as documentation agent and
collateral monitoring agent, and Salomon Smith
Barney, Inc., as sole arranger and book manager.
4.18 Master Security Agreement dated as of March 29,
1999 by and among Registrant and the Guarantors
as Grantors and Citicorp, USA, Inc. as
Administrative Agent.
10.8 Letter Agreement between the Registrant and
Jay Alix & Associates dated January 8,
1999.
10.9 Letter Agreement II between the Registrant and
Jay Alix & Associates dated March 23, 1999.
10.10 Form of Severance Agreement Amendment
between the Registrant and each of Messrs.
Cusano, Mulet, Sease and Septer.
10.11 Amended and Restated Employment Agreement
between the Registrant and Gary M. Witkin dated
December 16, 1998.
10.12 Letter Agreement between the Registrant and
Gary M. Witkin dated January 7, 1999.
10.13 Letter Agreement between the Registrant and
James E. Poole dated January 8, 1999, as
amended.
10.14 Letter Agreement among the Registrant and
S. Cusano dated February 1, 1999.
10.15 Second Amended and Restated Directors' Equity
Plan.
</TABLE>
56
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
10.16 Employment Agreement between Registrant and
S. Cusano dated March 23, 1999.
10.17 Employment Agreement between Registrant and
Charles Septer dated March 23, 1999.
10.18 Employment Agreement between Registrant and
C. Steven Moore dated March 23, 1999.
21 Subsidiaries of the Registrant.
23 Independent Auditors' consent.
27 Financial Data Schedule for the fiscal year ended
January 3, 1999.
EXHIBITS INCORPORATED HEREIN BY REFERENCE:
3.1 Registrant's Charter, as amended February 5, 1998 3.1
which is incorporated herein by reference to the
Registrant's Form 10-K for the fiscal year ended
December 28, 1997.
4.1 Rights Agreement dated February 2, 1998 which 99.2
is incorporated herein by reference from
Registrant's Form 8-K dated February 3, 1998.
4.2 Amended and Restated Rights Agreement dated 99.2
November 4, 1998 which is incorporated herein
by reference from Registrant's Form 8-K dated
November 4, 1998.
4.3 Note Purchase Agreement dated as of June 28, 4.2a
1990 concerning the refinancing of $90 million of
the Real Estate Bridge Loan under Credit
Agreement dated as of July 24, 1989 among the
Registrant, Various Banks and Chemical Bank as
Agent, which is incorporated herein by reference
from the Registrant's Form 10-Q for the second
quarter ended June 30, 1990.
4.4 Trust Indenture dated as of June 28, 1990 4.2b
concerning the refinancing of $90 million of the
Real Estate Bridge Loan under the Credit
Agreement dated as of July 24, 1989 among the
Registrant, Various Banks and Chemical Bank as
Agent, which is incorporated herein by reference
from the Registrant's Form 10-Q for the second
quarter ended June 30, 1990.
</TABLE>
57
<PAGE> 60
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.5 Indenture, dated as of February 15, 1993, between 4.1
the Registrant and First American National
Bank, as Trustee, regarding the
Registrant's $300,000,000 of 9% Senior
Subordinated Debentures due 2004, which is
incorporated herein by reference from the
Registrant's Form 8-K dated February 17,
1993.
4.6 First Supplemental Indenture, dated as of 4.2
February 15, 1993, between the Registrant and
First American National Bank, as Trustee,
regarding the Registrant's $300,000,000 of 9%
Senior Subordinated Debentures due 2004, which
is incorporated herein by reference from the
Registrant's Form 8-K dated February 17 1993.
4.7 Form of Debenture, regarding the Registrant's 4.3
$300,000,000 of 9% Senior Subordinated
Debentures due 2004, which is incorporated
herein by reference from the Registrant's Form 8-
K dated February 17, 1993.
4.8 Form of Notes, regarding the Registrant's 4.3
$100,000,000 of 8 3/8% Senior Notes due 2001,
which is incorporated herein by reference from the
Registrant's Form 8-K dated October 26, 1993.
4.9 Conditional Loan Commitment dated as of 4.2
September 9, 1996, concerning the $75 million
Real Estate Mortgage Financing among Service
Merchandise Company, Inc., and First Union
National Bank of North Carolina which is
incorporated herein by reference from the
Registrant's Form 10-Q for the third quarter ended
September 29, 1996.
4.10 Loan Agreement dated as of October 4, 1996 4.2a
concerning the $75 million Real Estate Mortgage
Financing among SMC-SPE- 1, Inc., and First
Union National Bank of North Carolina which is
incorporated herein by reference from the
Registrant's Form 10-Q for the third quarter ended
September 29, 1996.
4.11 Loan Agreement dated as of October 4, 1996 4.2b
concerning the $75 million Real Estate Mortgage
Financing among SMC-SPE-2, Inc., and First
Union National Bank of North Carolina which is
incorporated herein by reference from the
Registrant's Form 10-Q for the third quarter ended
September 29, 1996.
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
4.12 First Amendment to Loan Agreement dated as of 4.19
November 7, 1996 concerning the $75 million
Real Estate Mortgage Financing among SMC-
SPE-2, Inc., and First Union National Bank of
North Carolina which is incorporated herein by
reference to the Registrant's Form 10-K for the
fiscal year ended December 29, 1996.
4.13 Second Amendment to Loan Agreement dated as 4.20
of December 20, 1996 concerning the $75 million
Real Estate Mortgage Financing among SMC-
SPE-2, Inc., and First Union National Bank of
North Carolina which is incorporated herein by
reference to the Registrant's Form 10-K for the
fiscal year ended December 29, 1996.
4.14 Third Amendment to Loan Agreement dated as of 4.22
January 16, 1997 concerning the $75 million Real
Estate Mortgage Financing among SMC-SPE-2,
Inc., and First Union National Bank of North
Carolina which is incorporated herein by reference
to the Registrant's Form 10-K for the fiscal year
ended December 29, 1996.
4.15 Second Amended and Restated Credit Agreement 99.2
dated as of January 20, 1999 by and among
Service Merchandise Company, Inc., Citicorp
USA, Inc., as Administrative Agent, Bank Boston,
N.A. as Documentation Agent and Collateral
Monitoring Agent and other lenders which is
incorporated herein by reference from the
Registrant's Form 8-K dated January 28, 1999.
4.16 Note Issuance Agreement dated September 30, 4.15
1997 among Service Merchandise Company, Inc.,
H.J. Wilson Co., Inc. and The Long-Term Credit
Bank of Japan, Ltd. which is incorporated herein
by reference to the Registrant's Form 10-K for the
fiscal year ended December 28, 1997.
10.1 Stock Option Pledge Agreement between Service 10.2
Merchandise Company, Inc., and the Service
Merchandise Foundation dated October 15, 1990,
which is incorporated herein by reference from the
Registrant's Form 10-K for the fiscal year ended
December 29, 1990.
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
Exhibit No. Under Exhibit No. in
Item 601 of Document Where
Regulation S-K Brief Description Originally Filed
-------------- ----------------- ----------------
<S> <C> <C>
10.2 Aircraft Lease Agreement dated as of June 26, 10.1
1998 between the Registrant and General
Electric Capital Corporation which is
incorporated herein by reference from the
Registrant's Form 10-Q for the second
quarter ended June 28, 1998.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS:
10.3 Form of Indemnification Agreement between the Exhibit A
Registrant and each of Messrs. Zimmerman,
Crane, Holt, Moore, Roitenberg, Cusano,
Mulet and Septer which is incorporated
herein by reference from the Registrant's
Proxy Statement dated April 19, 1989.
10.4 Directors' Deferred Compensation Plan, which is 10.1
incorporated herein by reference from the
Registrant's Form 10-K for the fiscal year ended
December 29, 1990.
10.5 Key Executive Severance Plan Agreement for 10.2
execution by certain key executives in
replacement of employment contracts which is
incorporated herein by reference from the
Registrant's Form 10-Q for the third quarter ended
October 2, 1994.
10.6 Amended and Restated 1989 Employee Stock 10.2
Incentive Plan which is incorporated herein by
reference from the Registrant's Form 10-K for the
fiscal year ended January 1, 1995.
10.7 Retirement Benefits Agreement dated as June 25, 10.1
1998 which is incorporated herein by reference
from the Registrant's Form 10-Q for the third
quarter ended September 27, 1998.
</TABLE>
(b) Reports on Form 8-K.
During the quarter ended January 3, 1999, the Company filed the
following three reports on Form 8-K: (i) dated October 30, 1998
announcing an amendment to the $900 million term loan and revolving
line of credit; (ii) dated November 4, 1998 announcing an amendment to
the shareholder rights plan; and (iii) dated December 15, 1998
announcing that the Company had not made the $13.5 million interest
payment due on its 9% Subordinated Debentures and planned to exercise
the thirty-day grace period to evaluate available alternatives.
60
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SERVICE MERCHANDISE COMPANY, INC.
April 5, 1999 By: /s/ S. Cusano
- ------- -----------------------------------
S. Cusano
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Raymond Zimmerman
- ------------------------------------------
Raymond Zimmerman
Chairman of the Board
April 5, 1999
- --------
/s/ S. Cusano
- ------------------------------------------
S. Cusano
Director and Chief Executive Officer
(Principal Executive Officer)
April 5, 1999
- ---------
/s/ Richard P. Crane, Jr.
- ------------------------------------------
Richard P. Crane, Jr.
Director
April 5, 1999
- --------
- ------------------------------------------
Charles V. Moore
Director
, 1999
- ------------------
/s/ R. Maynard Holt
- ------------------------------------------
R. Maynard Holt
Director
April 5, 1999
- --------
- ------------------------------------------
Harold Roitenberg
Director
, 1999
- ------------------
61
<PAGE> 64
/s/ Charles Septer
- ------------------------------------------
Charles Septer
Director, President and Chief Operating Officer
April 5, 1999
- -------
/s/ Thomas L. Garrett
- ------------------------------------------
Thomas L. Garrett
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
April 5, 1999
- --------
/s/ Steven F. McCann
- ------------------------------------------
Steven F. McCann
Senior Vice President of Finance and
Chief Accounting Officer
(Principal Accounting Officer)
April 5, 1999
- --------
62
<PAGE> 1
Exhibit 3.2
Restated for Electronic Purposes
Only for Filing with the SEC
AMENDED AND RESTATED
BYLAWS
OF
SERVICE MERCHANDISE COMPANY, INC.
ARTICLE I.
OFFICES
The Corporation may have such offices, either within or without the
State of Tennessee, as the Board of Directors may designate or as the business
of the Corporation may require from time to time.
ARTICLE II.
SHAREHOLDERS
2.1 Annual Meeting.
An annual meeting of the shareholders of the Corporation shall be held
on such date as may be determined by the Board of Directors. The business to be
transacted at such meeting shall be the election of directors and such other
business as shall be properly brought before the meeting.
2.2 Special Meetings.
Special meetings of the shareholders, for any purpose or purposes,
unless otherwise prescribed by law, may be called by the Chairman or the Board
of Directors and shall be called by the Chairman or the Secretary at the written
request of persons holding of record not less than one-tenth (1/10th) of all the
outstanding shares of the Corporation entitled to vote at such meeting, which
written request shall state with specificity the purpose or purposes of such
meeting, including all statements necessary to make any statement of such
purpose not incomplete, false or misleading, and include any other information
specified in Schedule 14A, Rule 14a-3, Rule 14a-8 or Rule 14a-11 of the Rules
and Regulations of the Securities and Exchange Commission, and which written
request shall be accompanied by a certified check for fifty thousand dollars
($50,000) payable to the Corporation to cover the Corporation's expenses in
connection with such meeting, including the preparation of proxy materials or
information statements and the mailing of notices and proxy materials to
shareholders. Business transacted at all special meetings shall be confined to
the purpose or purposes stated in the notice of meeting. In the case of a
written request for a meeting
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by shareholders, the Corporation shall mail notice of the meeting pursuant to
Section 2.4(a) below within thirty (30) days of the receipt of a written request
complying with this Section 2.2.
2.3 Place of Meetings.
The Board of Directors may designate any place, either within or
without the State of Tennessee, as the place of meeting for any annual meeting
or for any special meeting. If no place is fixed by the Board of Directors, the
meeting shall be held at the principal office of the Corporation.
2.4 Notice of Meetings; Waiver.
(a) Notice. Notice of the date, time and place of each annual
and special shareholders' meeting and, in the case of a special meeting, a
description of the purpose or purposes for which the meeting is called, shall be
given no fewer than ten (10) days nor more than two (2) months before the date
of the meeting. Such notice shall comply with the requirements of Article XI of
these Bylaws.
(b) Waiver. A shareholder may waive any notice required by law,
the Charter or these Bylaws before or after the date and time stated in such
notice. The waiver must be in writing, be signed by the shareholder entitled to
the notice and be delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. A shareholder's attendance at a meeting: (1)
waives objection to lack of notice or defective notice of the meeting, unless
the shareholder at the beginning of the meeting (or promptly upon his arrival)
objects to holding the meeting or transacting business at the meeting; and (2)
waives objection to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting notice, unless the
shareholder objects to considering the matter when it is presented.
2.5 Record Date.
The Board of Directors shall fix as the record date for the
determination of shareholders entitled to notice of a shareholders' meeting, to
demand a special meeting, to vote or to take any other action, a date not more
than seventy (70) days before the meeting or action requiring a determination of
shareholders.
A record date fixed for a shareholders' meeting is effective for any
adjournment of such meeting unless the Board of Directors fixes a new record
date, which it must do if the meeting is adjourned to a date more than four (4)
months after the date fixed for the original meeting.
2.6 Shareholders' List.
After the record date for a meeting has been fixed, the Corporation
shall prepare an alphabetical list of the names of all shareholders who are
entitled to notice of a shareholders'
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meeting. Such list will be arranged by voting group (and within each voting
group by class or series of shares), and will show the address of and number of
shares held by each shareholder. The shareholders' list will be available for
inspection by any shareholder, beginning two (2) business days after notice of
the meeting is given for which the list was prepared and continuing through the
meeting, at the Corporation's principal office or at a place identified in the
meeting notice in the city where the meeting will be held. A shareholder, his
agent or attorney is entitled on written demand to inspect and, subject to the
requirements of the Tennessee Business Corporation Act (the 'Act"), to copy the
list, during regular business hours and at his expense, during the period it is
available for inspection.
2.7 Voting Groups; Quorum; Adjournment.
All shares entitled to vote and be counted together collectively on a
matter at a meeting of shareholders shall be a "voting group." Shares entitled
to vote as a separate voting group may take action on a matter at a meeting only
if a quorum of those shares exists with respect to that matter. Except as
otherwise required by the Act or provided in the Charter, a majority of the
votes entitled to be cast on a matter by a voting group constitutes a quorum of
that voting group for action on that matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
If a quorum of a voting group shall not be present or represented at
any meeting, the shares entitled to vote thereat shall have power to adjourn the
meeting to a different date, time or place without notice other than
announcement at the meeting of the new time, date or place to which the meeting
is adjourned. At any adjourned meeting at which a quorum of any voting group
shall be present or represented, any business may be transacted by such voting
group which might have been transacted at the meeting as originally called.
2.8 Voting of Shares.
Unless otherwise provided by the Act or the Charter, each outstanding
share is entitled to one (1) vote on each matter voted on at a shareholders'
meeting. Only shares are entitled to vote.
If a quorum exists, action on a matter (other than the election of
directors) by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
Charter or the Act requires a greater number of affirmative votes. Unless
otherwise provided in the Charter, directors are elected by a plurality of the
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present.
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2.9 Proxies.
A shareholder may vote his shares in person or by proxy. A shareholder
may appoint a proxy to vote or otherwise act for him by signing an appointment
either personally or by his attorney-in-fact. An appointment of a proxy is
effective when received by the Secretary or other officer or agent authorized to
tabulate votes. An appointment is valid for eleven (11) months unless another
period is expressly provided in the appointment form. An appointment of a proxy
is revocable by the shareholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest.
2.10 Acceptance of Shareholder Documents.
If the name signed on a shareholder document (a vote, consent, waiver,
or proxy appointment) corresponds to the name of a shareholder, the Corporation,
if acting in good faith, is entitled to accept such shareholder document and
give it effect as the act of the shareholder. If the name signed on such
shareholder document does not correspond to the name of a shareholder, the
Corporation, if acting in good faith, is nevertheless entitled to accept such
shareholder document and to give it effect as the act of the shareholder if:
(i) the shareholder is an entity and the name signed purports to
be that of an officer or agent of the entity;
(ii) the name signed purports to be that of a fiduciary
representing the shareholder and, if the Corporation requests, evidence
of fiduciary status acceptable to the Corporation has been presented
with respect to such shareholder document;
(iii) the name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder, and, if the Corporation
requests, evidence of this status acceptable to the Corporation has
been presented with respect to the shareholder document;
(iv) the name signed purports to be that of a pledgee, beneficial
owner or attorney-in-fact of the shareholder, and, if the Corporation
requests, evidence acceptable to the Corporation of the signatory's
authority to sign for the shareholder has been presented with respect
to such shareholder document; or
(v) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one
(1) of the co-owners and the person signing appears to be acting on
behalf of all the co-owners.
The Corporation is entitled to reject a shareholder document if the
Secretary or other officer or agent authorized to tabulate votes, acting in good
faith, has a reasonable basis for doubt about the validity of the signature on
such shareholder document or about the signatory's authority to sign for the
shareholder.
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2.11 Action Without Meeting.
Action required or permitted by the Act to be taken at a shareholders'
meeting may be taken without a meeting. If all shareholders entitled to vote on
the action consent to taking such action without a meeting, the affirmative vote
of the number of shares that would be necessary to authorize or take such action
at a meeting is the act of the shareholders.
The action must be evidenced by one (1) or more written consents
describing the action taken, signed by each shareholder entitled to vote on the
action in one (1) or more counterparts, indicating such signing shareholder's
vote or abstention on the action and delivered to the Corporation for inclusion
in the minutes or for filing with the corporate records.
If the Act or the Charter requires that notice of a proposed action be
given to nonvoting shareholders and the action is to be taken by consent of the
voting shareholders, then the Corporation will give its nonvoting shareholders
written notice of the proposed action at least ten (10) days before such action
is taken. Such notice will contain or be accompanied by the same material that
would have been required to be sent to nonvoting shareholders in a notice of a
meeting at which the proposed action would have been submitted to the
shareholders for action.
2.12 Presiding Officer and Secretary.
Meetings of the shareholders shall be presided over by the Chairman, or
if he is not present or if the Corporation shall not have a Chairman, by the
President, or if neither the Chairman nor the President is present, by a
chairman to be chosen by a majority of the shareholders entitled to vote at such
meeting. The Secretary or, in his absence, an Assistant Secretary shall act as
secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present, the shareholders entitled to vote at such meeting shall
choose any person present to act as secretary of the meeting.
2.13 Notice of Nominations. Nominations for the election of directors
may be made by the Board of Directors or a committee appointed by the Board of
Directors authorized to make such nominations or by any shareholder entitled to
vote in the election of directors generally. However, any such shareholder
nomination may be made only if written notice of such nomination has been given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the Corporation not later than (a) with respect to an election to
be held at an annual meeting of shareholders, one hundred twenty (120) days in
advance of such meeting, and (b) with respect to an election to be held at a
special meeting of shareholders for the election of directors called other than
by written request from a shareholder, the close of business on the tenth day
following the date on which notice of such meeting is first given to
shareholders, and (c) in the case of a special meeting of shareholders duly
called upon the written request of a shareholder to fill a vacancy or vacancies
(then existing or proposed to be created by removal at such meeting), within ten
(10) business days of such written request. In the case of any nomination by the
Board of Directors or a committee appointed by the Board of Directors authorized
to make such nominations, compliance with the
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proxy rules of the Securities and Exchange Commission shall constitute
compliance with the notice provisions of the preceding sentence.
In the case of any nomination by a shareholder, each such notice shall
set forth: (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected); and (b) as to the shareholder giving
the notice (i) the name and address, as they appear on the Corporation's books,
of such shareholder, (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder, (iii) a representation that
the shareholder is a record or beneficial holder of at least one percent (1%) or
$1,000 in market value of stock of the Corporation entitled to vote at such
meeting; has held such stock for at least one year and shall continue to own
such stock through the date of such meeting; and intends to appear in person or
by proxy at the meeting to present the nomination; and (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder. The Chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
2.14 Notice of New Business. At an annual meeting of the shareholders
only such new business shall be conducted, and only such proposals shall be
acted upon, as shall have been properly brought before the meeting. To be
properly brought before the annual meeting such new business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a shareholder. For a proposal to be
properly brought before an annual meeting by a shareholder, the shareholder must
have given timely notice thereof in writing to the Secretary of the Corporation
and the proposal and the shareholder must comply with Regulation 14-A under the
Securities Exchange Act of 1934. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than one hundred twenty (120) calendar days before the date
of the Corporation's proxy statement released to shareholders in connection with
the previous year's annual meeting. If the Company did not hold an annual
meeting the previous year, or if the date of the annual meeting has been changed
by more than thirty (30) calendar days from the date of the previous year's
annual meeting, then, in order to be timely, a shareholder's notice must be
received at the principal executive offices of the Corporation not later than
one hundred twenty (120) calendar days before the date of such annual meeting or
the tenth day following the date on which public announcement of such annual
meeting is first made. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
shareholder's notice as described above.
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A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, (d) a representation that the shareholder
is a record or beneficial holder of at least one percent (1%) or $1,000 in
market value of stock of the Corporation entitled to vote at such meeting; has
held such stock for at least one year and shall continue to own such stock
through the date of such meeting; and intends to appear in person or by proxy at
the meeting to present the proposal specified in the notice, and (e) any
financial interest of the shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 2.14. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that new business or any
shareholder proposal was not properly brought before the meeting in accordance
with the provisions of this Section 2.14, and if he should so determine, he
shall so declare to the meeting and any such business or proposal not properly
brought before the meeting shall not be acted upon at the meeting. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
2.15 Conduct of Meetings. Meetings of the shareholders generally shall
follow accepted rules of parliamentary procedure, subject to the following:
(a) The Chairman of the meeting shall have absolute authority
over the matters of procedure, and there shall be no appeal from the ruling of
the Chairman. If, in his absolute discretion, the Chairman deems it advisable to
dispense with the rules of parliamentary procedure as to any meeting of
shareholders or part thereof, he shall so state and shall state the rules under
which the meeting or appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents the continuation of
the legitimate business of the meeting, the Chairman may quit the chair and
announce the adjournment of the meeting; and upon so doing, the meeting is
immediately adjourned.
(c) The Chairman may ask or require that anyone not a bona fide
shareholder or proxy leave the meeting.
(d) The resolution or motion shall be considered for vote only
if proposed by a shareholder or a duly authorized proxy and seconded by a
shareholder or duly authorized proxy other than the individual who proposed the
resolution or motion.
(e) Except as the Chairman may permit, no matter shall be
presented to the meeting which has not been submitted for inclusion in the
agenda at least thirty (30) days prior to the meeting.
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ARTICLE III.
DIRECTORS
3.1 Powers and Duties.
All corporate powers shall be exercised by or under the authority of
and the business and affairs of the Corporation managed under the direction of
the Board of Directors.
3.2 Number and Term.
(a) Number. The Board of Directors shall consist of no fewer
than three (3) nor more than twelve (12) members. The exact number of directors,
within the minimum and maximum, or the range for the size of the Board, or
whether the size of the Board shall be fixed or variable-range may be fixed,
changed or determined from time to time by the Board of Directors.
(b) Term. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. Each class of directors shall be elected for a
three-year term. At the 1989 annual meeting of shareholders, Class III directors
shall be elected for a three-year term; at the 1990 annual meeting Class I
directors shall be elected for a three-year term; and at the 1991 annual meeting
Class II directors shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
3.3 Meetings; Notice.
The Board of Directors may hold regular and special meetings either
within or without the State of Tennessee. The Board of Directors may permit any
or all directors to participate in a regular or special meeting by, or conduct
the meeting through the use of, any means of communication by which all
directors participating may simultaneously hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
(a) Regular Meetings. Unless the Charter otherwise provides,
regular meetings of the Board of Directors may be held without notice of the
date, time, place or purpose of the meeting.
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(b) Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman, the President or any two (2) directors. Unless
the Charter otherwise provides, special meetings must be preceded by at least
twenty-four (24) hours' notice of the date, time and place of the meeting but
need not describe the purpose of such meeting. Such notice shall comply with the
requirements of Article XI of these Bylaws.
(c) Adjourned meetings. Notice of an adjourned meeting need not be
given if the time and place to which the meeting is adjourned are fixed at the
meeting at which the adjournment is taken, and if the period of adjournment does
not exceed one (1) month in any one (1) adjournment.
(d) Waiver of Notice. A director may waive any required notice
before or after the date and time stated in the notice. Except as provided in
the next sentence, the waiver must be in writing, signed by the director and
filed with the minutes or corporate records. A director's attendance at or
participation in a meeting waives any required notice to him of such meeting
unless the director at the beginning of the meeting (or promptly upon his
arrival) objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
3.4 Quorum.
Unless the Charter requires a greater number, a quorum of the Board of
Directors consists of a majority of the fixed number of directors if the
Corporation has a fixed board size or a majority of the number of directors
prescribed, or if no number is prescribed, the number in office immediately
before the meeting begins, if the Corporation has a variable range board.
3.5 Voting.
If a quorum is present when a vote is taken, the affirmative vote of a
majority of directors present is the act of the Board of Directors, unless the
Charter or these Bylaws require the vote of a greater number of directors. A
director who is present at a meeting of the Board of Directors when corporate
action is taken is deemed to have assented to such action unless:
(i) he objects at the beginning of the meeting (or promptly upon
his arrival) to holding the meeting or transacting business at the
meeting;
(ii) his dissent or abstention from the action taken is entered in
the minutes of the meeting; or
(iii) he delivers written notice of his dissent or abstention
to the presiding officer of the meeting before its adjournment or to
the Corporation immediately after adjournment of the meeting. The right
of dissent or abstention is not available to a director who votes in
favor of the action taken.
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3.6 Action without Meeting.
Unless the Charter otherwise provides, any action required or permitted
by the Act to be taken at a Board of Directors' meeting may be taken without a
meeting. If all directors consent to taking such action without a meeting, the
affirmative vote of the number of directors that would be necessary to authorize
or take such action at a meeting is the act of the Board of Directors. Such
action must be evidenced by one or more written consents describing the action
taken, signed by each director in one (1) or more counterparts, indicating each
signing director's vote or abstention on the action, which consents shall be
included in the minutes or filed with the corporate records reflecting the
action taken. Action taken by consent is effective when the last director signs
the consent, unless the consent specifies a different effective date.
3.7 Compensation.
Directors, and members of any committee created by the Board of
Directors, shall be entitled to such compensation for their services as
directors and members of such committee as shall be fixed from time to time by
the Board, and shall also be entitled to reimbursement for any reasonable
expenses incurred in attending meetings of the Board or of any such committee
meetings. Any director receiving such compensation shall not be barred from
serving the Corporation in any other capacity and receiving reasonable
compensation for such other services.
3.8 Resignation.
A director may resign at any time by delivering written notice to the
Board of Directors, the Chairman or President, or to the Corporation. A
resignation is effective when the notice is delivered unless the notice
specifies a later effective date.
3.9 Vacancies.
If a vacancy occurs on the Board of Directors, including a vacancy
resulting from an increase in the number of directors or a vacancy resulting
from the removal of a director, the Board of Directors may fill such vacancy by
an affirmative vote of a majority of the Board of Directors then in office, even
though the directors remaining in office may constitute fewer than a quorum of
the Board of Directors.
3.10 Removal of Directors.
Any director may be removed from office but only for cause by the
affirmative vote of the holders of a majority of the voting power of the shares
entitled to vote for the election of directors, considered for this purpose as
one class.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of preferred stock issued by the Corporation shall have the
right, voting separately by class or series,
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to elect directors at an annual or special meeting of shareholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of the Charter applicable thereto,
and such directors so elected shall not be divided into classes pursuant to
Section 3.2(b) hereof unless expressly provided by such terms. In the event of a
vacancy among the directors so elected by the holders of preferred stock, the
remaining preferred directors may fill the vacancy for the unexpired term.
A director may be removed by the shareholders only at a meeting called
for the purpose of removing him, and the meeting notice must state that the
purpose, or one of the purposes, of the meeting is removal of directors.
ARTICLE IV.
COMMITTEES
4.1 Committees.
Unless the Charter otherwise provides, the Board of Directors may
create one (1) or more committees, each consisting of one (1) or more members.
All members of committees of the Board of Directors that exercise powers of the
Board must be members of the Board and serve at the pleasure of the Board.
The creation of a committee and appointment of a member or members to
it must be approved by the greater of (i) a majority of all directors in office
when the action is taken or (ii) the number of directors required by the Charter
or these Bylaws to take action.
To the extent specified by the Board of Directors or in the Charter,
each committee may exercise the authority of the Board of Directors. A committee
may not, however:
(i) authorize distributions, except according to a formula or
method prescribed by the Board of Directors;
(ii) approve or propose to shareholders action that the Act
requires to be approved by shareholders;
(iii) fill vacancies on the Board or on any committee thereof;
(iv) amend the Charter without shareholder action;
(v) adopt, amend or repeal Bylaws;
(vi) approve a plan of merger not requiring shareholder approval;
(vii) authorize or approve reacquisitions of shares, except
according to a formula or method prescribed by the Board of Directors;
or
(viii) authorize or approve the issuance or sale or contract
for sale of shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except that
the Board of Directors may authorize such committee to do so within
limits specifically prescribed by the Board.
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All such committees and their members shall be governed by the same
statutory requirements regarding meetings, action without meetings, notice and
waiver of notice, quorum and voting requirements as are applicable to the Board
of Directors and its members.
ARTICLE V.
OFFICERS
5.1 Number.
The officers of the Corporation shall be a Chairman, a President, one
or more Vice-Presidents, a Secretary, a Treasurer and such other officers as
may be from time to time appointed by the Board of Directors or by the President
with the approval of the Board. One person may simultaneously hold more than one
office except the President may not simultaneously hold the office of Secretary.
5.2 Appointment.
The principal officers shall be appointed annually by the Board at the
first meeting of the Board following the annual meeting of the shareholders, or
as soon thereafter as is conveniently possible. Each officer shall serve at the
pleasure of the Board and until his successor shall have been appointed, or
until his death, resignation or removal.
5.3 Resignation and Removal.
An officer may resign at any time by delivering notice to the
Corporation. Such resignation is effective when such notice is delivered unless
such notice specifies a later effective date. An officer's resignation does not
affect the Corporation's contract rights, if any, with the officer.
The Board of Directors may remove any officer at any time with or
without cause, but such removal shall not prejudice the contract rights, if any,
of the person so removed.
5.4 Vacancies.
Any vacancy in an office from any cause may be filled for the unexpired
portion of the term by the Board of Directors.
5.5 Duties.
(a) Chairman. The Chairman shall preside at all meetings of the
shareholders and the Board of Directors, shall be the Chief Executive Officer of
the Corporation, and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
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(b) President. The President shall be the Chief Operating Officer
of the Corporation and shall have general supervision over the active management
of the business of the Corporation. He shall have the general powers and duties
of supervision and management usually vested in the office of the President of a
corporation and shall perform such other duties as the Board of Directors may
from time to time prescribe.
(c) Vice President. The Vice President or Vice Presidents (if any)
shall be active executive officers of the Corporation, shall assist the Chairman
and the President in the active management of the business, and shall perform
such other duties as the Board of Directors may from time to time prescribe. The
Board may designate a Vice President to be the chief financial officer of the
Corporation, in which event such authority shall preempt the duties and
responsibilities set forth herein for the Treasurer.
(d) Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the shareholders and shall prepare and
record all votes and all minutes of all such meetings in a book to be kept for
that purpose; he shall perform like duties for any committee when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
shareholders and of the Board of Directors when required, and unless directed
otherwise by the Board of Directors, shall keep a stock record containing the
names of all persons who are shareholders of the Corporation, showing their
place of residence and the number of shares held by them respectively. The
Secretary shall have the responsibility of authenticating records of the
Corporation. The Secretary shall perform such other duties as may be prescribed
from time to time by the Board of Directors.
(e) Treasurer. The Treasurer shall have the custody of the
Corporation's funds and securities, shall keep or cause to be kept full and
accurate account of receipts and disbursements in books belonging to the
Corporation, and shall deposit or cause to be deposited all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse or cause to be disbursed the funds of the Corporation as required in
the ordinary course of business or as may be ordered by the Board, taking proper
vouchers for such disbursements, and shall render to the Chairman, the President
and directors at the regular meetings of the Board, or whenever they may require
it, an account of all of his transactions as Treasurer and the financial
condition of the Corporation. He shall perform such other duties as may be
incident to his office or as prescribed from time to time by the Board of
Directors. The Treasurer shall give the Corporation a bond, if required by the
Board of Directors, in a sum and with one or more sureties satisfactory to the
Board for the faithful performance of the duties of his office and for the
restoration to the Corporation in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
(f) Other Officers. Other officers appointed by the Board of
Directors shall exercise such powers and perform such duties as may be delegated
to them.
13
<PAGE> 14
(g) Delegation of Duties. In case of the absence or disability
of any officer of the Corporation or of any person authorized to act in his
place, the Board of Directors may from time to time delegate the powers and
duties of such officer to any officer, or any director, or any other person whom
it may select, during such period of absence or disability.
5.6 Indemnification and Insurance.
(a) Indemnification. The Corporation shall indemnify and
advance expenses to each present and future director and officer of the
Corporation, or any person who may have served at its request as a director or
officer of another corporation (and, in either case, his heirs, executors and
administrators), to the full extent allowed by the laws of the State of
Tennessee, both as now in effect and as hereafter adopted. The Corporation may
indemnify and advance expenses to any employee or agent of the Corporation who
is not a director or officer (and his heirs, executors and administrators) to
the same extent as to a director or officer, if the Board of Directors
determines that to do so is in the best interests of the Corporation.
(b) Non-Exclusivity of Rights. The indemnification and advancement
of expenses provisions of subsection (a) of this Section 5.6 shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Charter, provision of these Bylaws,
resolution adopted by the shareholders, or resolution adopted by the Board of
Directors providing for such indemnification or advancement of expenses.
(c) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any individual who is or was a director, officer,
employee or agent of the Corporation, or who, while a director, officer,
employee or agent of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Act.
ARTICLE VI.
SHARES OF STOCK
6.1 Shares with or without Certificates.
The Board of Directors may authorize that some or all of the shares of
any or all of the Corporation's classes or series of stock be evidenced by a
certificate or certificates of stock. The Board of Directors may also authorize
the issue of some or all of the shares of any or all of the Corporation's
classes or series of stock without certificates. The rights and obligations of
shareholders with the same class and/or series of stock shall be identical
whether or not their shares are represented by certificates.
14
<PAGE> 15
(a) Shares with Certificates. If the Board of Directors chooses to
issue shares of stock evidenced by a certificate or certificates, each
individual certificate shall include the following on its face: (i) the
Corporation's name, (ii) the fact that the Corporation is organized under the
laws of the State of Tennessee, (iii) the name of the person to whom the
certificate is issued, (iv) the number of shares represented thereby, (v) the
class of shares and the designation of the series, if any, which the certificate
represents, and (vi) such other information as applicable law may require or as
may be lawful.
If the Corporation is authorized to issue different classes of shares
or different series within a class, the designations, relative rights,
preferences and limitations determined for each series (and the authority of the
Board of Directors to determine variations for future series) shall be
summarized on the front or back of each certificate. Alternatively, each
certificate shall state on its front or back that the Corporation will furnish
the shareholder this information in writing, without charge, upon request.
Each certificate of stock issued by the Corporation shall be signed
(either manually or in facsimile) by the Chairman, the President or a Vice
President, and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer. If the person who signed a certificate no longer holds
office when the certificate is issued, the certificate is nonetheless valid.
(b) Shares without Certificates. If the Board of Directors chooses
to issue shares of stock without certificates, the Corporation, if required by
the Act, shall, within a reasonable time after the issue or transfer of shares
without certificates, send the shareholder a written statement of the
information required on certificates by Section 6.1(a) of these Bylaws and any
other information required by the Act.
6.2 Subscriptions for Shares.
Subscriptions for shares of the Corporation shall be valid only if they
are in writing. Unless the subscription agreement provides otherwise,
subscriptions for shares, regardless of the time when they are made, shall be
paid in full at such time, or in such installments and at such periods, as shall
be determined by the Board of Directors. All calls for payment on subscriptions
shall be uniform as to all shares of the same class or of the same series,
unless the subscription agreement specifies otherwise.
6.3 Transfers.
Transfers of shares of the capital stock of the Corporation shall be
made only on the books of the Corporation by (i) the holder of record thereof,
(ii) by his legal representative, who, upon request of the Corporation, shall
furnish proper evidence of authority to transfer, or (iii) his attorney,
authorized by a power of attorney duly executed and filed with the Secretary of
the Corporation or a duly appointed transfer agent. Such transfers shall be made
only upon surrender, if applicable, of the certificate or certificates for such
shares properly endorsed and with all taxes thereon paid.
15
<PAGE> 16
6.4 Lost, Destroyed, or Stolen Certificates.
No certificate for shares of stock of the Corporation shall be issued
in place of any certificate alleged to have been lost, destroyed or stolen
except on production of evidence, satisfactory to the Board of Directors or
Transfer Agent for the Corporation's stock, of such loss, destruction or theft,
and, if the Board of Directors or Transfer Agent for the Corporation's stock so
requires, upon the furnishing of an indemnity bond in such amount and with such
terms and such surety as either the Board of Directors or Transfer Agent for the
Corporation's stock may in its discretion require.
ARTICLE VII.
CORPORATE ACTIONS
7.1 Contracts.
Unless otherwise required by the Board of Directors, the Chairman, the
President or any vice President shall execute contracts or other instruments on
behalf of and in the name of the Corporation. The Board of Directors may from
time to time authorize any other officer, assistant officer or agent to enter
into any contract or execute any instrument in the name of and on behalf of the
Corporation as it may deem appropriate, and such authority may be general or
confined to specific instances.
7.2 Loans.
No loans shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by the
Chairman, the President or the Board of Directors. Such authority may be general
or confined to specific instances.
7.3 Checks, Drafts, Etc.
Unless otherwise required by the Board of Directors, all checks,
drafts, bills of exchange and other negotiable instruments of the Corporation
shall be signed by either the Chairman, the President, a Vice President or such
other officer, assistant officer or agent of the Corporation as may be
authorized so to do by the Board of Directors, the chief financial officer or
the President. Such authority may be general or confined to specific business,
and, if so directed by the Board of Directors, the chief financial officer or
the President, the signatures of two or more such officers may be required.
7.4 Deposits.
All funds of the Company not otherwise employed shall be deposited from
time to time to the credit of the Corporation in such banks or other
depositories as the Board of Directors may authorize.
16
<PAGE> 17
7.5 Voting Securities Held by the Corporation.
Unless otherwise required by the Board of Directors, the Chairman or
the President shall have full power and authority on behalf of the Corporation
to attend any meeting of security holders, or to take action on written consent
as a security holder, of other corporations in which the Corporation may hold
securities. In connection therewith the Chairman or the President shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities which the Corporation possesses. The Board of Directors may, from
time to time, confer like powers upon any other person or persons.
7.6 Dividends.
The Board of Directors may, from time to time, declare, and the
Corporation may pay, dividends on its outstanding shares of capital stock in the
manner and upon the terms and conditions provided by applicable law. The record
date for the determination of shareholders entitled to receive the payment of
any dividend shall be determined by the Board of Directors, but which in any
event shall not be less than ten (10) days prior to the date of such payment.
ARTICLE VIII.
FISCAL YEAR
The fiscal year of the Corporation shall be determined by the Board of
Directors, and in the absence of such determination, shall end on the Saturday
closest in time to December 31 of each year.
ARTICLE IX.
CORPORATE SEAL
The Corporation shall not have a corporate seal.
ARTICLE X.
AMENDMENT OF BYLAWS
These Bylaws may be altered, amended or repealed, and new Bylaws may be
adopted at any meeting of the shareholders by the affirmative vote of a majority
of the stock represented at such meeting, or by the affirmative vote of a
majority of the members of the Board of Directors who are present at any regular
or special meeting.
17
<PAGE> 18
ARTICLE XI.
NOTICE
Unless otherwise provided for in these Bylaws, any notice required
shall be in writing except that oral notice is effective if it is reasonable
under the circumstances and not prohibited by the Charter or these Bylaws.
Notice may be communicated in person; by telephone, telegraph, teletype or other
form of wire or wireless communication; or by mail or private carrier. If these
forms of personal notice are impracticable, notice may be communicated by a
newspaper of general circulation in the area where published; or by radio,
television or other form of public broadcast communication. Written notice to a
domestic or foreign corporation authorized to transact business in Tennessee may
be addressed to its registered agent at its registered office or to the
corporation or its secretary at its principal office as shown in its most recent
annual report or, in the case of a foreign corporation that has not yet
delivered an annual report, in its application for a certificate of authority.
Written notice to shareholders, if in a comprehensible form, is
effective when mailed, if mailed postpaid and correctly addressed to the
shareholder's address shown in the Corporation's current record of shareholders.
Except as provided above, written notice, if in a comprehensible form, is
effective at the earliest of the following: (a) when received, (b) five (5) days
after its deposit in the United States mail, if mailed correctly addressed and
with first class postage affixed thereon; (c) on the date shown on the return
receipt, if sent by registered or certified mail, return receipt requested, and
the receipt is signed by or on behalf of the addressee; or (d) twenty (20) days
after its deposit in the United States mail, as evidenced by the postmark if
mailed correctly addressed, and with other than first class, registered or
certified postage affixed. Oral notice is effective when communicated if
communicated in a comprehensible manner.
18
<PAGE> 1
Exhibit 4.17
EXECUTION COPY
================================================================================
U.S. $750,000,000
POST-PETITION CREDIT AGREEMENT
BY AND AMONG
SERVICE MERCHANDISE COMPANY, INC.
A DEBTOR AND DEBTOR-IN-POSSESSION
AS BORROWER
THE LENDERS PARTY HERETO
CITICORP USA, INC.
AS COLLATERAL AGENT AND ADMINISTRATIVE AGENT
AND
BANKBOSTON, N.A.
AS DOCUMENTATION AGENT AND COLLATERAL MONITORING AGENT
AND
SALOMON SMITH BARNEY INC
AS ARRANGER AND BOOK MANAGER
DATED: AS OF MARCH 29, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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SECTION 1. DEFINITIONS
1.1 Defined Terms..................................................................................2
1.2 Other Definitional Provisions.................................................................42
SECTION 2. AMOUNTS AND TERMS OF TERM LOANS
2.1 Term Loans....................................................................................42
2.2 Repayment of Term Loans; Amortization.........................................................42
SECTION 3. AMOUNTS AND TERMS OF REVOLVING CREDIT COMMITMENTS AND THE INTERIM FACILITY
3.1 Revolving Credit Commitments..................................................................43
3.2 Procedure for Revolving Credit Borrowing......................................................43
3.3 Commitment Fee................................................................................44
3.4 Termination or Reduction of Commitments.......................................................44
3.5 Repayment of Revolving Loans..................................................................44
3.6 L/C Commitment................................................................................44
3.7 Procedure for Issuance of Letters of Credit...................................................46
3.8 Letter of Credit Fees, Commissions and Other Charges..........................................46
3.9 L/C Participations............................................................................47
3.10 Letter of Credit Reimbursement Obligations....................................................48
3.11 Obligations Absolute..........................................................................48
3.12 Letter of Credit Payments.....................................................................49
3.13 Letter of Credit Applications.................................................................49
3.14 Swing Line Commitment.........................................................................49
3.15 Procedure for Swing Line Borrowing............................................................50
3.16 Refunding of Swing Line Loans; Participations in Swing Line Loans.............................50
3.17 Other Fees....................................................................................52
SECTION 4. GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT
4.1 Optional and Mandatory Prepayments............................................................52
4.2 Conversion and Continuation Options...........................................................53
4.3 Minimum Amounts and Maximum Number of Tranches................................................54
4.4 Interest Rates and Payment Dates..............................................................54
4.5 Computation of Interest and Fees..............................................................55
4.6 Inability to Determine Interest Rate..........................................................55
4.7 Pro Rata Treatment and Payments...............................................................56
4.8 Illegality....................................................................................57
4.9 Requirements of Law...........................................................................57
4.10 Indemnification for Taxes.....................................................................58
4.11 Indemnity.....................................................................................60
4.12 Change of Lending Office......................................................................61
4.13 Evidence of Debt..............................................................................61
SECTION 5. REPRESENTATIONS AND WARRANTIES
5.1 Financial Condition...........................................................................62
</TABLE>
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<TABLE>
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5.2 No Change.....................................................................................63
5.3 Existence; Compliance with Law................................................................63
5.4 Power; Authorization; Enforceable Obligations.................................................63
5.5 No Legal Bar..................................................................................64
5.6 No Material Litigation........................................................................64
5.7 No Default....................................................................................64
5.8 No Burdensome Restrictions....................................................................64
5.9 Taxes.........................................................................................64
5.10 Federal Regulations...........................................................................65
5.11 ERISA.........................................................................................65
5.12 Investment Company Act; Other Regulations.....................................................65
5.13 Subsidiaries..................................................................................66
5.14 Environmental Matters.........................................................................66
5.15 The Security Documents........................................................................67
5.16 Ownership of Property; Liens..................................................................67
5.17 Intellectual Property.........................................................................67
5.18 Pledged Stock.................................................................................68
5.19 Real Estate Matters...........................................................................68
5.20 [Reserved]....................................................................................68
5.21 Purpose of Loans; Use of Proceeds.............................................................68
5.22 Accuracy of Information.......................................................................68
5.23 Depositary Accounts...........................................................................68
5.24 [Reserved]....................................................................................68
5.25 Y2K Compliance................................................................................68
5.26 Priority......................................................................................69
SECTION 6. CONDITIONS
6.1 Conditions to Effectiveness...................................................................70
(a) Bankruptcy Court Order.................................................................70
(b) Execution of Loan Documents............................................................70
(c) Closing Certificate....................................................................70
(d) Corporate Proceedings of the Borrower..................................................70
(e) Borrower Incumbency Certificate........................................................70
(f) Corporate Proceedings of Subsidiaries..................................................70
(g) Subsidiary Incumbency Certificates.....................................................71
(h) Fees...................................................................................71
(i) Legal Opinions.........................................................................71
(j) Lien Searches..........................................................................71
(k) No Material Adverse Change.............................................................71
(l) No Litigation..........................................................................71
(m) Consents and Approvals.................................................................72
(n) Insurance and Bonding..................................................................72
(o) Flood Insurance........................................................................72
(p) Budget.................................................................................72
(q) Additional Matters.....................................................................72
6.2 Conditions to Each Extension of Credit........................................................72
</TABLE>
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<TABLE>
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(a) Representations and Warranties.........................................................72
(b) No Default.............................................................................73
(c) Borrowing Base.........................................................................73
(d) No Legal Impediment....................................................................73
(e) Borrowing Base Certificate.............................................................73
(f) Interim Reserve Amount.................................................................73
(g) Bankruptcy Court Approval..............................................................73
SECTION 7. AFFIRMATIVE COVENANTS
7.1 Financial Statements..........................................................................73
7.2 Certificates; Other Information...............................................................74
7.3 Payment of Obligations........................................................................75
7.4 Maintenance of Existence; Compliance with Contractual Obligations and Requirements of
Law...........................................................................................76
7.5 Maintenance of Property; Insurance............................................................76
7.6 Inspection of Property; Books and Records; Discussions........................................76
7.7 Notices.......................................................................................76
7.8 Environmental Laws............................................................................77
7.9 Further Assurances............................................................................78
7.10 Application of Proceeds.......................................................................78
7.11 Additional Collateral.........................................................................78
7.12 Management Restructuring Consultant...........................................................79
7.13 Business Plans and Projections................................................................79
7.14 Depositary Account and Payments System; Cash Dominion.........................................79
7.15 Ongoing Y2K Reports...........................................................................79
7.16 Court Approval of This Agreement..............................................................80
SECTION 8. NEGATIVE COVENANTS
8.1 Financial Condition Covenants.................................................................80
(a) [Reserved].............................................................................80
(b) Capital Expenditures...................................................................80
8.2 Limitation on Guarantee Obligations...........................................................80
8.3 Limitation on Liens...........................................................................81
8.4 Limitation on Fundamental Changes.............................................................84
8.5 Limitation on Sale of Assets..................................................................85
8.6 Limitation on Dividends.......................................................................86
8.7 Limitation on Indebtedness....................................................................86
8.8 Limitation on Investments, Loans and Advances.................................................87
8.9 Limitation on Optional Payments and Modifications of Debt Instruments.........................88
8.10 Limitation on Transactions with Affiliates....................................................89
8.11 Limitation on Sales and Leasebacks............................................................89
8.12 Fiscal Years and Quarters.....................................................................90
8.13 Limitation on Conduct of Business.............................................................90
8.14 [Reserved]....................................................................................90
8.15 Limitation on Issuances of Capital Stock......................................................90
</TABLE>
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<TABLE>
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8.16 Foreign Holding Companies, Inactive Subsidiaries and Special Purpose Subsidiaries.............90
8.17 Permanent Order...............................................................................90
8.18 Application to Bankruptcy Court...............................................................90
8.19 Limitation on Reclamation Payments............................................................90
8.20 Liquidation Consultant........................................................................90
SECTION 9. EVENTS OF DEFAULT.............................................................................91
SECTION 10. ADMINISTRATIVE AGENT AND THE COLLATERAL MONITORING AGENT
10.1 Appointment...................................................................................95
10.2 Delegation of Duties..........................................................................95
10.3 Exculpatory Provisions........................................................................95
10.4 Reliance by Agents............................................................................95
10.5 Notice of Default.............................................................................96
10.6 Non-Reliance on Agents and Other Lenders......................................................96
10.7 Indemnification...............................................................................97
10.8 Agent in Its Individual Capacity..............................................................97
10.9 Successor Administrative Agent................................................................97
SECTION 11. MISCELLANEOUS
11.1 Amendments and Waivers........................................................................97
11.2 Notices.......................................................................................99
11.3 No Waiver; Cumulative Remedies...............................................................101
11.4 Survival of Representations and Warranties...................................................101
11.5 Payment of Expenses and Taxes; Indemnity.....................................................101
11.6 Successors and Assigns; Participations and Assignments.......................................102
11.7 Replacement of Lenders under Certain Circumstances...........................................105
11.8 Adjustments..................................................................................105
11.9 Counterparts.................................................................................106
11.10 Severability.................................................................................106
11.11 Integration..................................................................................106
11.12 Termination..................................................................................106
11.13 GOVERNING LAW................................................................................106
11.14 Acknowledgements.............................................................................106
11.15 WAIVER OF JURY TRIAL.........................................................................107
11.16 Confidentiality..............................................................................107
11.17 Section Headings.............................................................................108
11.18 Judgment Currency............................................................................108
11.19 Review of Business Plan......................................................................108
11.20 Negotiation of Revised Covenants.............................................................108
</TABLE>
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SCHEDULES
Schedule 1.1(a) Commitments
Schedule 1.1(b) Real Estate Eligibility Conditions
Schedule 5.1 Charges and Changes
Schedule 5.2 Changes
Schedule 5.4 Consents
Schedule 5.6 Litigation
Schedule 5.7 Defaults
Schedule 5.8 Restrictions
Schedule 5.13 Subsidiaries
Schedule 5.14 Environmental Matters
Schedule 5.17 Intellectual Property Matters
Schedule 5.19 Material Real Property
Schedule 5.23 Depositary Accounts
Schedule 5.25 Y2K Compliance
Schedule 6.1(j) Lien Search Jurisdictions
Schedule 7.3 Payments on Obligations
Schedule 7.4 Compliance with Obligations
Schedule 8.2(b) Existing Guarantee Obligations
Schedule 8.3(f) Existing Liens
Schedule 8.7(f) Existing Indebtedness
Schedule 8.10 Transactions with Affiliates
Schedule 11.2 Addresses
EXHIBITS
Exhibit A Form of Assignment and Acceptance
Exhibit B Form of Master Security Agreement
Exhibit C-1 Form of Revolving Credit Note
Exhibit C-2 Form of Term Loan Note
Exhibit D Form of Swing Line Note
Exhibit E-1 Form of Emergency Order
Exhibit E-2 Form of Permanent Order
Exhibit F Form of Borrower Closing Certificate
Exhibit G Form of Opinion of Counsel
Exhibit H Form of Borrowing Base Certificate
Exhibit I Available GOB Inventory Worksheet
Exhibit J Interim Budget
v
<PAGE> 7
POST-PETITION CREDIT AGREEMENT
POST-PETITION CREDIT AGREEMENT, dated as of March 29, 1999, by
and among SERVICE MERCHANDISE COMPANY, INC., a Tennessee corporation and a
debtor and debtor-in-possession under chapter 11 of the Bankruptcy Code (as
hereinafter defined) (the "Borrower"), the financial institutions and other
entities identified on the signature pages hereof as a "Lender" and the
financial institutions and other entities who become parties hereto as
successors or assigns as provided herein (collectively, the "Lenders" and each
individually, a "Lender"), CITICORP USA, INC., a Delaware corporation
("Citicorp"), as collateral agent and administrative agent for the Lenders (in
such capacity, the "Administrative Agent"), and BANKBOSTON, N.A., a national
banking association ("BankBoston"), as documentation agent and collateral
monitoring agent for the Lenders (in such capacities, the "Collateral Monitoring
Agent") (as amended, modified, supplemented, extended, renewed, or refinanced
from time to time, this "Agreement").
W I T N E S S E T H:
WHEREAS, on March 15, 1999 an involuntary chapter 11 petition
was filed against the Borrower in the United States Bankruptcy Court for the
Middle District of Tennessee; and
WHEREAS, the Board of Directors of the Borrower authorized the
Borrower to commence a voluntary chapter 11 case and, on March 27, 1999 (the
"Petition Date"), the Borrower filed a voluntary petition for relief under
chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for
the Middle District of Tennessee; and
WHEREAS, the Borrower is continuing to operate its business
and manage its property as debtor and debtor-in-possession under sections 1107
and 1108 of the Bankruptcy Code; and
WHEREAS, an immediate and ongoing need exists for the Borrower
to obtain additional funds in order to continue the operation of its business as
debtor and debtor-in-possession under the Bankruptcy Code and, accordingly, the
Borrower has requested that the Lenders extend post-petition financing; and
WHEREAS, the Lenders are willing to make funds available to
the Borrower pursuant to sections 364(c)(1), (c)(2) and (c)(3) of the Bankruptcy
Code, but only for the purposes and upon the terms and subject to the conditions
set forth in this Agreement; and
WHEREAS, the Borrower has agreed to secure its obligations to
the Lenders in connection with such financing with, inter alia, security
interests in, and liens on, all of its property and assets, whether real or
personal, tangible or intangible, as provided herein;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and subject to the satisfaction of the conditions set forth
herein, the Borrower, the Lenders, the Administrative Agent and the Collateral
Monitoring Agent hereby agree as follows:
<PAGE> 8
SECTION 1. DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, the following terms
shall have the following meanings:
"ABR": a fluctuating interest rate per annum as shall be in
effect from time to time, which rate per annum shall be equal at any time
to the then highest of:
(a) the rate of interest announced publicly by Citibank in
New York, New York, from time to time, as Citibank's base rate;
(b) the sum (adjusted to the nearest 1/4 of one percent
or, if there is no nearest 1/4 of one percent, to the next higher 1/4
of one percent) of (i) 1/2 of one percent per annum, plus (ii) the
rate per annum obtained by dividing (A) the latest three-week moving
average of secondary market morning offering rates in the United
States for three-month certificates of deposit of major United States
money market banks, such three-week moving average being determined
weekly on each Monday (or, if any such day is not a Business Day, on
the next succeeding Business Day) for the three-week period ending on
the previous Friday by Citibank on the basis of such rates reported
by certificate of deposit dealers to and published by the Federal
Reserve Bank of New York or, if such publication shall be suspended
or terminated, on the basis of quotations for such rates received by
Citibank from three New York certificate of deposit dealers of
recognized standing selected by Citibank, by (B) a percentage equal
to 100% minus the average of the daily percentages specified during
such three-week period by the Board of Governors of the Federal
Reserve System (or any successor) for determining the maximum reserve
requirement (including, without limitation, any emergency,
supplemental or other marginal reserve requirement) for Citibank in
respect of liabilities consisting of or including (among other
liabilities) three-month U.S. dollar nonpersonal time deposits in the
United States, plus (iii) the average during such three-week period
of the maximum annual assessment rates payable to the Federal Deposit
Insurance Corporation (or any successor) by banks which are members
of the Bank Insurance Fund for insuring U.S. dollar deposits in the
United States; and
(c) the sum (adjusted to the nearest 1/4 of one percent
or, if there is no nearest 1/4 of one percent, to the next higher 1/4
of one percent) of (i) 1/2 of one percent per annum plus (ii) the
Federal Funds Rate.
"ABR Loans": Term Loans or Revolving Loans the rate of interest
applicable to which is based upon the ABR.
"Account Debtor": any Person that is liable to make payments with
respect to an Account.
"Accounts": all "accounts" (as such term is defined in the UCC)
now owned or hereafter acquired by the Borrower or any Subsidiary Guarantor
and all Instruments and Chattel Paper now owned or hereafter acquired by
the Borrower or such Subsidiary Guarantor which
2
<PAGE> 9
evidence a right to payment for goods sold or leased or for services
rendered, whether or not such right has been earned by performance.
"Accounts Receivable Calculation Date": at any time, the last day
of the most recent fiscal month.
"Acquisition": as to any Person, the acquisition by such Person
of (a) Capital Stock of any other Person that is not a Subsidiary of such
Person if, after giving effect to the acquisition of such Capital Stock,
such other Person would be a Subsidiary of such Person, (b) all or
substantially all of the assets of any other Person or (c) assets
constituting one or more business units of any other Person.
"Administrative Agent": as defined in the preamble to this
Agreement, and any successor Administrative Agent appointed pursuant to
subsection 10.9.
"Affiliate": as to any Person, any other Person which, directly
or indirectly, is in control of, is controlled by, or is under common
control with, such Person. For purposes of this definition, "control" of a
Person means the power, directly or indirectly, either to (a) vote 5% or
more of the securities having ordinary voting power for the election of
directors of such Person or (b) direct or cause the direction of the
management and policies of such Person, whether by contract or otherwise.
For the purposes of this Agreement, the Borrower and its Restricted
Subsidiaries shall not be deemed to be Affiliates of each other and Jay
Alix & Associates or its successor, solely in its capacity as a management
restructuring consultant, or any successor management restructuring
consultant solely by reason of such capacity, shall not be deemed to be an
Affiliate of the Borrower or its Subsidiaries.
"Agents": collectively, the Administrative Agent and the
Collateral Monitoring Agent.
"Aggregate Outstanding Extensions of Credit": at any time, an
amount equal to the sum of (a) the Aggregate Revolving Credit Outstandings
at such time and (b) the aggregate outstanding principal amount of Term
Loans of all the Term Lenders at such time.
"Aggregate Revolving Credit Outstandings": at any time, an amount
equal to the Revolving Credit Extensions of Credit of all the Lenders at
such time.
"Agreement": as defined in the preamble to this Agreement.
"Agreement Currency": as defined in subsection 11.18.
"Applicable Commitment Fee Rate": 0.375% per annum, which will
accrue commencing on the Closing Date as a percentage of the daily average
unused portion of the Revolving Credit Commitments, payable monthly in
arrears and on the Termination Date.
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"Applicable Margin": for each Type of Loan, subject to subsection
4.4(d), the rate per annum set forth under the relevant column heading
below:
ABR LOANS EURODOLLAR LOANS
--------- ----------------
1.25% 2.25%
"Applicant": with respect to any Letter of Credit, the Borrower
or any Subsidiary Guarantor.
"Application": an application or request, in such form as an
Issuing Bank may specify from time to time, requesting such Issuing Bank to
open a Letter of Credit.
"Arranger and Book Manager": Salomon Smith Barney Inc.
"Asset Sale": any sale or other disposition, or series of sales
or other dispositions (including, without limitation, by merger or
consolidation, and whether by operation of law or otherwise), made on or
after the Effective Date by the Borrower and/or any of the Restricted
Subsidiaries to any Person of any asset or assets which individually yields
or in the aggregate for a series of related transactions yield proceeds or
have a fair market value in excess of $150,000; provided that, any sale or
other disposition permitted pursuant to clauses (a) through (e) and clauses
(h) through (k) of subsection 8.5 shall not constitute an Asset Sale for
purposes of this Agreement.
"Asset Sale Proceeds": with respect to any Asset Sale, cash
payments received by the Borrower or any Restricted Subsidiary (including,
without limitation, any cash payments received by way of deferred payment
of principal (but not interest) pursuant to a note or receivable or
otherwise and any cash realized from any disposition of non-cash proceeds
received by the seller, but only as and when received) from any Asset Sale
(after repayment of any Indebtedness other than the Loans due by reason of
such Asset Sale), in each case net of the amount of (i) brokers' and
advisors' fees and commissions payable in connection with such Asset Sale,
(ii) all foreign, federal, state and local taxes estimated in good faith by
the Borrower to be payable as a direct consequence of such Asset Sale,
including, without limitation, in connection with the payment of a dividend
or the making of a distribution by a Restricted Subsidiary of such payments
to the Borrower or any other Restricted Subsidiary (including, without
limitation, taxes withheld in connection with the repatriation of such
proceeds), net of any tax benefits derived in respect of such dividend or
distribution, (iii) the fees and expenses attributable to such Asset Sale,
to the extent not included in clause (i) above, and (iv) any amount
required to be paid to any Person (other than the Borrower or any
Restricted Subsidiary) owning a beneficial interest in the property or
assets subject to such Asset Sale. For purposes of this definition, (x) an
Asset Sale shall be deemed to include, without limitation, any award of
compensation for any asset or property or group thereof taken by
condemnation or eminent domain and insurance proceeds for the loss of or
damage to any asset or property if such award or proceeds equals or exceeds
$2,000,000 (per occurrence), and (y) in the case of insurance proceeds for
damage to any Operating Asset, such proceeds shall not be deemed Asset Sale
Proceeds so long as no Event of Default shall have occurred and be
continuing and if such Operating Assets are repaired within 120 days of the
receipt of such proceeds or a binding
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<PAGE> 11
agreement to repair the same is entered into within such 120-day period and
such repairs are completed within one year of the date of the receipt of
such proceeds.
"Assignee": as defined in subsection 11.6(c).
"Available Accounts Receivable Amount": as of any Accounts
Receivable Calculation Date, an amount equal to up to 75% of the Eligible
Trade Accounts Receivable Amount as of such Accounts Receivable Calculation
Date.
"Available Cash Equivalents": as of any Calculation Date, an
amount equal to 100% of Cash Equivalents which have then been pledged to
the Administrative Agent pursuant to the Master Security Agreement.
"Available GOB Inventory Amount": as of any Calculation Date, an
amount equal to the GOB Inventory Amount minus the GOB Discount Amount for
the period reported on at such Calculation Date, as calculated on the
Available GOB Inventory Worksheet attached hereto as Exhibit I.
"Available Inventory Amount": as of any Calculation Date, an
amount equal to (a) 70% (subject to upward adjustment to 72.5% in the
Agents' discretion) of the Eligible Adjusted Inventory Amount (excluding
the Eligible Adjusted Inventory Amount in respect of Inventory at the OSS
Subsidiary) as of such Calculation Date, plus (b) 50% of the Eligible
Adjusted Inventory Amount for Inventory at the OSS Subsidiary as of such
Calculation Date, minus (c) the Customer Credit Liability Amount as of the
most recent Reserve Calculation Date; provided that, during the peak
seasonal inventory period of September 1st through December 10th only, the
Agents may, in their sole discretion exercised commercially reasonably,
increase the allowable percentage rate as to clause (a) of this definition
to 75%.
"Available L/C Amount": as of any Calculation Date, an amount
equal to up to 60% of the sum of (a) the aggregate undrawn face amount of
Trade Letters of Credit (including Trade Letters of Credit which have been
collateralized by Standby Letters of Credit issued by an Issuing Bank)
issued to finance the purchase of Inventory (excluding any Inventory
included in the calculation of Eligible Inventory Amount) and (b) the
aggregate Inventory Value of Inventory financed with Trade Letters of
Credit which have been fully drawn and the Reimbursement Obligations in
respect of which have been fully paid so long as, in the case of clause (a)
and (b), (i) such Inventory shall be in transit to properties owned or
leased by the Borrower or a Subsidiary Guarantor in the United States, (ii)
such Inventory is not included in the calculation of Eligible Inventory
Amount and, upon arrival in the United States, will be included in the
determination of the Eligible Inventory Amount (but not included in the
determination of the Ineligible Inventory Amount) and (iii) the
Administrative Agent or its agent or bailee shall be named as the consignee
of the applicable bill of lading or other document of title.
"Available Leasehold Amount": as of any Calculation Date, an
amount equal to the lesser of (i) 25% of the Eligible Leasehold Interests
and (ii) $25,000,000.
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<PAGE> 12
"Available Mortgaged Real Property Amount": an amount equal to
the lesser of (i) 54.5% of the excess of (A) the aggregate Mortgage Value
of all parcels of Eligible Mortgaged Real Property as of the most recent
Calculation Date over (B) the sum of (I) the aggregate Real Property
Amortization Amounts for all parcels of Eligible Mortgaged Real Property at
such time, (II) the Environmental Reserve Amount at such time and (III) the
aggregate Mechanics' Lien Reserve Amounts for all parcels of Eligible
Mortgaged Real Property at such time and (ii) $82,000,000.
"Available Revolving Credit Commitment": as to any Lender, at any
time, an amount equal to the excess, if any, of (a) such Lender's Revolving
Credit Commitment at such time over (b) such Lender's Revolving Credit
Extensions of Credit at such time.
"BankBoston": as defined in the preamble to this Agreement.
"Bankruptcy Code": title 11, United State Code, as amended from
time to time, as applicable to the Reorganization Case.
"Bankruptcy Court": the United States Bankruptcy Court for the
Middle District of Tennessee and any other court having competent
jurisdiction over the Reorganization Cases, the Borrower or the Subsidiary
Guarantors, or any of their assets.
"benefited Lenders": as defined in subsection 11.8(a).
"Blocked Account Agreement": as defined in the Master Security
Agreement..
"Board of Governors": the Board of Governors of the Federal
Reserve System and any Governmental Authority which succeeds to the powers
and functions thereof.
"Borrower": as defined in the preamble to this Agreement.
"Borrowing Base": at any time, (i) an amount, calculated based
upon the Borrowing Base Certificate delivered pursuant to subsection 6.2(e)
and thereafter the most recent Borrowing Base Certificate delivered
pursuant to this Agreement, equal to the sum of (a) the Available Inventory
Amount as of the most recent Calculation Date, plus (b) the Available
Accounts Receivable Amount as of the most recent Accounts Receivable
Calculation Date, plus (c) the Available L/C Amount as of the most recent
Calculation Date, plus (d) the Available Mortgaged Real Property Amount as
of the most recent Calculation Date, plus (e) In-Transit Cash calculated as
of the Wednesday immediately preceding the most recent Calculation Date,
minus (f) the Interim Reserve Amount, plus (g) the Available Leasehold
Amount, plus (ii) on each Borrowing Date, the Available Cash Equivalents
amount as of such Borrowing Date. The Borrowing Base established based upon
a particular Borrowing Base Certificate shall remain in effect until the
delivery of a subsequent Borrowing Base Certificate. The Agents shall have
the right, in connection with any periodic audit or appraisal of the
Inventory performed by or on behalf of the Agents, any reports provided to
the Agents by the Borrower, or as a result of changing market conditions,
in their sole discretion exercised commercially reasonably and in
accordance with customary business practices for comparable asset based
transactions of
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<PAGE> 13
$100,000,000 or more and upon at least 10 days prior written notice to the
Borrower, to require that additional reserves of the types described below
be included in the determination of the Available Inventory Amount: (a)
additional reserves relating to new categories of inventory (e.g. produce)
unrelated to the current or disclosed future business of the Borrower and
the Subsidiary Guarantors; (b) additional reserves to reflect substantial
changes in the overall composition or mix of the Inventory which have the
effect of materially reducing the Net Recoverable Value of the Inventory
taken as a whole; (c) additional reserves relating to changes in the
marketability of Inventory (including, for example, as a result of a
recession) which have the effect of materially reducing the Net Recoverable
Value of the Inventory taken as a whole; (d) additional reserves relating
to a material negative variance between the Borrower's or a Subsidiary
Guarantor's cost and the market price of a major product category (e.g., a
decline in the price of gold), and (e) additional GOB Inventory reserves.
"Borrowing Base Certificate": as defined in subsection 7.2(c).
"Borrowing Date": any Business Day specified in a notice pursuant
to subsection 3.2 or 3.15 as a date on which the Borrower requests the
Lenders to make Loans hereunder.
"Business": as defined in subsection 5.14(b).
"Business Day": a day other than a Saturday, Sunday or other day
on which commercial banks in New York City are authorized or required by
law to close, provided that, when used in connection with a Eurodollar
Loan, the term "Business Day" shall also exclude any day on which banks are
not open for dealings in Dollar deposits in the London interbank market.
"Business Plan": a business plan of the Borrower and its
Subsidiaries through the period ending June 30, 2001, which shall contain
forecasted expenditures, revenues, net income and cash flow during such
period, and the Borrower's business strategy, including store openings and
closings, store consolidations, capital expenditures, expense reductions,
and similar strategic plans relating to the conduct of the business of the
Borrower and its Subsidiaries.
"Calculation Date": at any time, the last day of any period
covered by the most recent Borrowing Base Certificate.
"Capital Expenditures": for any period, the aggregate of all
expenditures (whether paid in cash or accrued as liabilities during such
period) by the Borrower or any Restricted Subsidiary during such period
that, in conformity with GAAP, are required to be included in "capital
expenditures", "additions to property, plant, equipment or intangibles" or
similar fixed asset accounts reflected in the consolidated balance sheet of
the Borrower and the Restricted Subsidiaries which are consolidated
Subsidiaries of the Borrower (including equipment which is purchased
simultaneously with the trade-in of existing equipment owned by the
Borrower or any Restricted Subsidiary to the extent of the gross amount of
such purchase price less the book value of the equipment being traded-in at
such time), but excluding expenditures made in connection with the
replacement or restoration of assets to the extent reimbursed or financed
from insurance proceeds paid on account of the loss of or the damage to
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<PAGE> 14
the assets being replaced or restored, or from awards of compensation
arising from the taking by condemnation or eminent domain of such assets
being replaced and deducting cash amounts (including free rent) received by
the Borrower and the Restricted Subsidiaries from other Persons during such
period in reimbursement of Capital Expenditures made by the Borrower and
the Restricted Subsidiaries.
"Capital Stock": any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation,
any and all equivalent ownership interests in a Person (other than a
corporation) and any and all warrants or options to purchase any of the
foregoing.
"Cash Equivalents": (a) direct obligations of, or obligations
guaranteed by, the United States of America or any agency thereof, (b)
commercial paper issued in the United States of America and rated at least
A-1 or P-1 by at least one nationally recognized rating organization, (c)
certificates of deposit issued by or eurodollar deposits made with any
Lender, any affiliate of any Lender, or any bank or trust company which has
(or the parent of which has) capital, surplus and undivided profits
aggregating at least $100,000,000 (or the equivalent amount in another
currency), (d) loan participations in respect of loans made in the United
States by any bank or trust company referred to in clause (c) above to
borrowers which have short-term ratings of at least A-1 or P-1 by at least
one nationally recognized rating organization, (e) drafts accepted by any
bank or trust company referred to in clause (c) above or any other
negotiable instrument guaranteed or endorsed with full recourse by any such
bank or trust company, (f) repurchase agreements with respect to any of the
foregoing types of securities described in clause (a), (b) and (d) above,
(g) investments in money market funds substantially all of whose assets are
comprised of securities of the types described in clauses (a) through (f)
above, (h) obligations the return with respect to which is excluded from
gross income under Section 103 of the Tax Code, with a maturity of not more
than six months or with the right of the holder to put such obligations for
purchase at par upon not more than seven days' notice and which are rated
at least A-l or P-1 by at least one nationally recognized rating
organization, (i) (A) tax free money market funds that invest solely in the
securities described in clause (h) above or (B) money market preferred
municipal bond funds which have a term of not more than seven days and
which are rated at least AAA or the equivalent thereof by Standard & Poor's
Ratings Group or at least Aaa or the equivalent thereof by Moody's
Investors Services, Inc., and (j) any other securities reasonably
acceptable to the Administrative Agent which are rated at least A-1 or P-1
by at least one nationally recognized rating organization, or which are of
an equivalent credit quality in the reasonable judgment of the
Administrative Agent, provided that (i) all such obligations, commercial
paper, certificates of deposit, eurodollar deposits, loan participations,
drafts, investments, instruments, securities and repurchase agreements are
denominated in Dollars, (ii) each such obligation, commercial paper,
certificate of deposit, draft, investment, security and instrument
(including those subject to repurchase agreements) is evidenced by an
Instrument or a Security of which (and of any confirmations related
thereto) the Administrative Agent or its agents promptly take possession
unless such items are Permitted Book-Entry Securities or, at the Borrower's
or the relevant Subsidiary Guarantor's option, an Excepted Cash Equivalent
or, in the case of eurodollar deposits or loan participations, are held in
the name of the Administrative Agent or any agent therefor, and in the case
of loan participations, are evidenced by facsimile or other written
confirmation, (iii) each such obligation, certificate of
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<PAGE> 15
deposit, draft, investment, security and instrument (including those
subject to repurchase agreements) matures within six months after it is
acquired by the Borrower or any Subsidiary Guarantor and (iv) each item of
such commercial paper (including those subject to repurchase agreements)
matures within three months after it is acquired by the Borrower or any
Subsidiary Guarantor.
"Cash Proceeds": all Proceeds of Collateral consisting of cash,
checks, credit card proceeds, money orders or commercial paper of any kind
whatsoever.
"Chattel Paper": with respect to the Borrower or any Subsidiary
Guarantor, all "chattel paper" (as such term is defined in the UCC) now
owned or hereafter acquired by such Borrower or Subsidiary Guarantor.
"Citicorp": as defined in the preamble to this Agreement.
"Claim": as defined in section 101(5) of the Bankruptcy Code.
"Closing Date": the date two Business Days after the date on
which the Bankruptcy Court enters the Emergency Order, on which Business
Day the conditions set forth in subsection 6.1 shall be satisfied other
than those that specifically are not required to be satisfied until the
Effective Date.
"Closing Fee": a fee, payable to each Lender, equal to 0.50% of
such Lender's total commitment set forth on Schedule 1.1(a) under the
column heading "Total", (i) two-thirds of which shall be payable on the
Closing Date and (ii) one-third of which shall be payable on the date of
entry of the Permanent Order by the Bankruptcy Court.
"Collateral": collectively, all the Security and all other
property in which the Administrative Agent is granted a Lien from time to
time hereunder or under any Security Document or Emergency Order or
Permanent Order.
"Collateral Account": the account maintained by the
Administrative Agent at Citibank, N.A. in New York, New York entitled the
"Citicorp USA, Inc., as Administrative Agent: Service Merchandise Company,
Inc. - Collateral Account".
"Collateral Monitoring Agent": as defined in the preamble to this
Agreement.
"Commitment": with respect to any Lender, such Lender's Revolving
Credit Commitment, and collectively, as to all the Lenders, the
"Commitments".
"Committee": as defined in the definition of "Permitted
Expenses".
"Commonly Controlled Entity": an entity, whether or not
incorporated, which is under common control with the Borrower within the
meaning of Section 4001 of ERISA or is part of a group which includes the
Borrower and which is treated as a single employer under Section 414 of the
Tax Code.
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<PAGE> 16
"Confidential Information": as defined in subsection 11.16.
"Consignment Inventory": all Inventory of the Borrower and the
Subsidiary Guarantors consisting of Inventory supplied by vendors on a
consignment basis, including without limitation, jewelry and watches
currently purchased on a consignment basis, and other categories of
Inventory to be purchased on a consignment basis in the future; provided
that the terms, arrangements and/or agreements for such Inventory shall be
on normal and typical business terms for consignment Inventory.
"Consignment Inventory Account": an account maintained by the
Administrative Agent at Citibank, N.A. (or such other bank approved by the
Administrative Agent) entitled "Citicorp USA, Inc., as Administrative
Agent: Service Merchandise Company, Inc. - Consignment Inventory Account",
into which the Borrower shall deposit, not less frequently than weekly, all
amounts due to the suppliers of Consignment Inventory consisting of (i) the
cost of the Consignment Inventory actually sold plus (ii) other expenses
due and payable to such suppliers of Consignment Inventory.
"Consolidated": when used in connection with any defined term,
and not otherwise defined, such term as it applies to any Person and its
Subsidiaries on a consolidated basis, after eliminating all intercompany
items.
"Consummation Date": the date of substantial consummation of a
Plan of Reorganization confirmed by a Final Order.
"Continuing Directors": as defined in Section 9(j).
"Contractual Obligation": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
material property is bound.
"Credit Agreement Obligations": the collective reference to the
unpaid principal of and interest on the Loans and the Reimbursement
Obligations and all other obligations and liabilities of the Borrower to
the Administrative Agent or the Lenders (including interest accruing at the
then applicable rate provided for herein after the maturity of the Loans or
Reimbursement Obligations and interest accruing at the then applicable rate
provided for herein after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating
to the Borrower, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter
incurred, which may arise under, out of, or in connection with, this
Agreement, any Letter of Credit, any of the other Loan Documents or any
other document made, delivered or given in connection herewith or
therewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise (including all
fees and disbursements of counsel to the Agents or to the Lenders that are
required to be paid by the Borrower pursuant to the terms of this Agreement
or any other Loan Document).
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<PAGE> 17
"Credit Card Issuer": any bank or other Person which issues
credit cards and extends credit to cardholders in connection with a Credit
Card Program.
"Credit Card Program": a private credit card program and/or
co-branded Visa, Mastercard or other credit card program created and
operated or maintained by the Credit Card Subsidiaries pursuant to (a) the
Private Label Credit Card Agreement, dated as of January 28, 1997, among
World Financial Network National Bank, the Borrower and Service Credit
Corp. (formerly known as Service Merchandise Co. No. 80, Inc.) or (b) any
other similar agreement or arrangement with terms and conditions reasonably
satisfactory to the Administrative Agent.
"Credit Card Subsidiaries": any direct or indirect Subsidiary of
the Borrower, and any wholly-owned Subsidiaries of such Subsidiary,
existing from time to time that are created in connection with a Credit
Card Program, as long as (i) such Subsidiaries engage in no business or
transactions other than (x) the issuance (or providing for the issuance) of
credit cards, the extension of credit to cardholders pursuant thereto, and
other transactions arising from or related thereto (including the sale or
transfer of Accounts or credit card receivables pursuant to asset backed
financing transactions) and (y) the entering into and performance of
agreements with a Credit Card Issuer that facilitate the Credit Card
Issuer's doing business in connection with a Credit Card Program and (ii)
the liabilities of the Credit Card Subsidiaries are without recourse to the
Borrower and its Restricted Subsidiaries (other than the Credit Card
Subsidiaries), provided that the Borrower and its Restricted Subsidiaries
may enter into customary commitments and/or underwriting agreements on
behalf of the Credit Card Subsidiaries for the purpose of customary
securities law or regulatory indemnifications.
"Current Assets": cash, accounts receivable, inventory and all
other assets (other than Fixed Assets) used in the operation of the
business of the Borrower and its Subsidiaries.
"Custody and Control Agreement": as defined in the Master
Security Agreement.
"Customer Credit Liability Amount": as of any Reserve Calculation
Date, an amount equal to 50% of the aggregate amount of gift certificates,
merchandise credits and special order deposits then outstanding entitling
the holders thereof to use all or a portion thereof to pay all or a portion
of the purchase price for any Inventory as of such day which are not being
held for escheatment or which have not been escheated as of such day.
"Customs Broker Inventory": any Inventory which has arrived in
the United States and is located at a customs broker's warehouse facility,
so long as such Inventory (a) is fully paid and subject only to a Lien in
favor of the Administrative Agent (other than Permitted Inventory Liens),
(b) is in the possession of such customs broker, and (c) such Inventory is
reported in a Borrowing Base Certificate separately from other Inventory
included in the calculation of the Available Inventory Amount.
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<PAGE> 18
"Default": any of the events specified in Section 9 which, with
the giving of notice, the lapse of time, or both, or the satisfaction of
any other condition specified in Section 9, would become an Event of
Default.
"Depositary Bank": each bank or financial institution at which
the Borrower or any Subsidiary Guarantor maintains any depositary account
into which Cash Proceeds are deposited, including each bank or financial
institution listed on Schedule 5.23.
"Derivative Agreements": any foreign exchange contracts, interest
rate and currency swap agreements, floors, caps, collars, swaptions and
similar derivative contracts, in each case, between the Borrower or any
Subsidiary Guarantor, on the one hand, and any Lender or any Affiliate of
any Lender, on the other hand.
"Designated Material Real Property": collectively, at any time,
(a) all parcels of Material Real Property which are then subject to a first
priority Lien granted pursuant to the Master Security Agreement, (b) the
Excluded Properties, (c) all parcels of Material Real Property deemed to be
parcels of Designated Material Real Property pursuant to clause (k) or (q)
of subsection 8.3 and (d) the parcels of real property identified on
Schedule 5.19 under the heading "Other Material Real Property."
"Dollars" and "$": dollars in lawful currency of the United
States of America.
"Dollar Equivalent": at any date of determination thereof with
respect to the face amount of any Letter of Credit issued in any currency
other than Dollars or any Reimbursement Obligations in respect of any such
Letter of Credit, an amount in dollars equivalent to such face amount
calculated at the rate of exchange quoted by the Administrative Agent on
such date of determination (at the hour on such date of determination at
which it customarily makes such determination) to prime banks in the
interbank market where its foreign currency exchange operations in respect
of the currency in which such Letter of Credit is issued are then being
conducted for the spot purchase of such currency with Dollars.
"Domestic Subsidiary": any Subsidiary of the Borrower organized
under the laws of any jurisdiction (including territories) within the
United States of America, excluding the Inactive Subsidiaries,
Securitization Entities, Excluded Subsidiaries, Special Purpose
Subsidiaries and Foreign Holding Companies.
"EBITDA": with respect to any period, Consolidated Net Income of
the Borrower and its Consolidated Subsidiaries for such period plus (a) in
each case to the extent deducted in determining such Consolidated Net
Income for such period, the sum of the following (without duplication): (i)
Consolidated Interest Expense of the Borrower and its Consolidated
Subsidiaries, (ii) consolidated income tax expense of the Borrower and its
Consolidated Subsidiaries, (iii) consolidated depreciation and amortization
expense of the Borrower and its Consolidated Subsidiaries, including,
without limitation, depreciation and amortization included in selling,
general and administrative expenses of the Borrower and its Consolidated
Subsidiaries, (iv) any non-cash expenses, non-cash losses or other non-cash
charges resulting from the write-down in the valuation of any assets, (v)
any non-recurring charge or restructuring
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<PAGE> 19
charge which, in accordance with GAAP is excluded from operating income,
and (vi) losses, expenses and other charges, including related severance
payments in respect of going-out-of-business sales to the extent such cash
losses, expenses and other charges do not exceed the cash proceeds received
from such sales, minus (b) to the extent added in determining such
Consolidated Net Income for such period, any non-cash gains resulting from
the write-up in the valuation of any assets, plus or minus (c) the amount
of cash received or expended in such period in respect of any amount which,
under clause (v) above, was taken into account in determining EBITDA for
such or any prior period.
"Effective Date": the date on which the conditions set forth in
subsection 6.1 are satisfied.
"Eligible Adjusted Inventory Amount": as of any Calculation Date,
(a) the Eligible Inventory Amount, plus (b) the Available GOB Inventory
Amount, minus (c) the Shrink Reserve in respect of such Eligible Inventory
Amount, in each case as of such Calculation Date.
"Eligible Assignee": as defined in subsection 11.6(c).
"Eligible Inventory Amount": as of any Calculation Date, (a) the
Inventory Value as of such Calculation Date of all Inventory of the
Borrower and the Subsidiary Guarantors that consists of finished goods,
loose diamonds or colored stones, plus (b) the Inventory Value of all
Customs Broker Inventory as of such Calculation Date, plus (c) the
Inventory Value of all Landed Inventory as of such Calculation Date, minus
(d) the sum of (i) the Ineligible Inventory Amount as of such Calculation
Date and (ii) the GOB Inventory Amount as of such Calculation Date.
"Eligible Leasehold Interests": at any date, the forced
liquidation value at such date of leasehold interests as determined by an
appraiser reasonably acceptable to the Agents.
"Eligible Mortgaged Real Property": at any time, any parcel of
Material Real Property of the Borrower or any Subsidiary Guarantor as to
which each of the following conditions has been satisfied at such time:
(a) (i) Such parcel of Material Real Property (A) is
comprised of a developed retail store, distribution center, shopping
center or office building with respect to which a certificate of
occupancy or temporary certificate of occupancy or the local
equivalent thereof (or any other similar proof of completion) shall
have been issued by the relevant Governmental Authority or the
Administrative Agent shall have received other evidence reasonably
satisfactory to it of the completion of such retail store,
distribution center, shopping center or office building or (B) is
undeveloped and has a book value (excluding soft costs) of at least
$1,000,000, (ii) a Lien on such parcel of Material Real Property
shall have been granted by the Borrower or such Subsidiary Guarantor,
as the case may be, in favor of the Administrative Agent pursuant to
the Master Security Agreement, and (iii) such Lien shall be in full
force and effect in favor of the Administrative Agent at such time.
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(b) except as otherwise permitted by the Administrative
Agent, the Administrative Agent and, in the case of clause (i), the
title insurance company issuing the policy referred to in clause (c)
of this definition shall have received (i) maps or plats of an
as-built survey of the sites of the Material Real Property certified
to the Administrative Agent and such title insurance company in a
manner reasonably satisfactory to them, dated a date reasonably
satisfactory to the Administrative Agent and such title insurance
company, by an independent professional licensed land surveyor
reasonably satisfactory to the Administrative Agent and such 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 in 1992, and, without limiting the
generality of the foregoing, there shall be surveyed and shown on
such maps, plats or surveys the following: (A) the locations on such
sites of all the buildings, structures and other improvements and the
established building setback lines (where setback information is
readily obtainable); (B) the lines of streets abutting such sites and
the width thereof; (C) all access and other easements appurtenant to
such sites or necessary to use such sites; (D) all roadways, paths,
driveways, easements, encroachments and overhanging projections and
similar encumbrances affecting such sites, whether recorded, apparent
from a physical inspection of such sites or otherwise known to the
surveyor; (E) any encroachments on any adjoining property by the
building structures and improvements on such sites; and (F) if such
sites are described as being on a filed map, a legend or other
information relating the survey to said map or (ii) in the case of
any such parcel of Material Real Property listed on Part I of
Schedule 5.19, a copy of either (A) an as-built survey of such parcel
of Material Real Property if such parcel of Material Real Property
was developed as of the Effective Date or a boundary survey of such
parcel of Material Real Property if such parcel of Material Real
Property was undeveloped as of the Effective Date, in each case
prepared within five years prior to the Effective Date or (B) a copy
of a survey delivered pursuant to one or more of the Previous Credit
Agreements in connection with any Mortgage on such parcel of Material
Real Property.
(c) the Administrative Agent shall have received in
respect of such parcel of Material Real Property a mortgagee's title
policy (or policies) or marked-up unconditional binder (or binders)
for such insurance (or other evidence acceptable to the
Administrative Agent proving ownership thereof) dated a date
reasonably satisfactory to the Administrative Agent, and such policy
shall (A) be in an amount not less than the Mortgage Value (as of the
date such parcel of Material Real Property becomes a parcel of
Eligible Mortgaged Real Property) of such parcel of Material Real
Property, (B) be issued at ordinary rates, (C) insure that the Lien
granted pursuant to the Master Security Agreement insured thereby
creates a valid first Lien on such parcel of Material Real Property
free and clear of all defects and encumbrances, except such as may be
approved by the Administrative Agent and Permitted Mortgage Liens,
(D) name the Administrative Agent for the benefit of the Lenders as
the insured thereunder, (E) be in the form of ALTA Loan Policy - 1992
(or such local equivalent thereof as is reasonably satisfactory to
the Administrative Agent), (F) contain a comprehensive lender's
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endorsement and (G) be issued by Chicago Title Insurance Company,
First American Title Insurance Company, Lawyers Title Insurance
Corporation or any other title company reasonably satisfactory to the
Administrative Agent (including any such title companies acting as
co-insurers or reinsurers). The Administrative Agent shall have
received (x) evidence satisfactory to it that all premiums in respect
of each such policy have been paid and (y) a copy of all documents
referred to, or listed as exceptions to title, in such title policy
(or policies);
(d) the Administrative Agent shall have received an
Existing Appraisal with respect to such parcel of Material Real
Property;
(e) with respect to any such parcel of Material Real
Property acquired after the Effective Date or which is designated as
a "Phase I Property" on Schedule 5.19, a Phase I environmental report
with respect to such parcel of Material Real Property, dated a date
not more than one year prior to the date such parcel first became
Eligible Mortgaged Real Property under either of the Previous Credit
Agreements, or not more than one year prior to the date such parcel
becomes Eligible Mortgaged Real Property under this Agreement,
showing no material condition of environmental concern shall have
been delivered to the Administrative Agent and in form reasonably
satisfactory to the Administrative Agent;
(f) if such parcel of Material Real Property is subject to
a ground lease in favor of the Borrower or any Subsidiary Guarantor
as lessee, no consent shall be required under such ground lease to
mortgage or foreclose upon such parcel of Material Real Property (or
such consent shall have been obtained); and
(g) such parcel of Material Real Property shall be in
compliance, or, as applicable, the Loan Party which is the owner or
lessee thereof, shall be in compliance, with all of the terms,
covenants, conditions, representations and warranties set forth in
Schedule 1.1(b), provided that, (i) if any such term, covenant,
condition, representation or warranty shall reference any provision
of this Agreement, such reference shall be read without giving effect
to any qualification or limitation contained therein regarding a
Material Adverse Effect, and (ii) if such parcel of Material Real
Property or, as applicable, the Loan Party which is the owner or
lessee thereof ceases to be in compliance with any of the terms,
covenants, conditions, representations or warranties set forth in
Schedule 1.1(b), such parcel of Material Real Property shall cease
(effective as of the delivery of the next succeeding Borrowing Base
Certificate) to be Eligible Mortgaged Real Property during the
continuation of such non-compliance if such non-compliance could
reasonably be expected to have a material adverse effect on the value
of such parcel of Material Real Property, but such non-compliance
shall not constitute, in and of itself, a Default or Event of
Default.
If a parcel of Material Real Property of the type described in
clause (a)(i)(B) of this definition becomes a parcel of Eligible Mortgaged
Real Property and is thereafter subsequently developed such that such
parcel of Eligible Mortgaged Real Property satisfies the requirements of
clause (a)(i)(A) of this definition, the Borrower may, at its option,
deliver a
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notice to the Administrative Agent to the effect that the Borrower wishes
to cause such parcel of Material Real Property to satisfy the requirements
of this definition as if (x) such parcel of Material Real Property became a
parcel of Material Real Property as of the date of such notice, (y) such
parcel of Material Real Property was not then a parcel of Eligible
Mortgaged Real Property and (z) if applicable, such parcel of Material Real
Property was not subject to a Lien granted pursuant to the Master Security
Agreement as of the Effective Date. Upon delivery of any such notice, the
Administrative Agent shall commission a new appraisal with respect to such
parcel of Material Real Property. Upon satisfaction of the conditions set
forth in this definition following such date with respect to such parcel of
Material Real Property (other than the condition set forth in clause (e)
above, such parcel of Material Real Property shall, without duplication, be
deemed to become a parcel of Eligible Mortgaged Real Property as of the
date such conditions are satisfied and the Mortgage Value of such parcel of
Eligible Mortgaged Real Property shall be included in the Borrowing Base
effective as of the delivery of the Borrowing Base Certificate in respect
of the fiscal month in which such conditions are satisfied.
"Eligible Trade Accounts Percentage": as of any Accounts
Receivable Calculation Date, up to 85%, provided that, in connection with
each periodic audit or appraisal of the Accounts of the Borrower and the
Subsidiary Guarantors performed by or on behalf of the Administrative
Agent, the Administrative Agent shall have the right in its sole discretion
exercised commercially reasonably and in accordance with customary business
practices, upon at least 10 days prior written notice to the Borrower, to
change the "Eligible Trade Accounts Percentage" to the percentage estimated
to be the percentage of the aggregate amount of the Accounts as of such
Accounts Receivable Calculation Date which satisfy each of the following
criteria:
(a) such Account has been adjusted to reflect the return
or rejection of, or any loss of or damage to any of the Inventory
giving rise to such Account and is not subject to bona fide set-offs,
counterclaims, defenses, or disputes asserted with respect to such
Account (it being understood that such Account shall not include
material financing charges, or late or other fees);
(b) the Account Debtor with respect to such Account is not
insolvent or the subject of any bankruptcy case or insolvency
proceeding of any kind, unless such Account is due from such Account
Debtor as an administrative priority claim under the Bankruptcy Code
and the Administrative Agent, in the exercise of its reasonable
business judgment, deems the Account Debtor to be creditworthy;
(c) the Account Debtor in respect of such an Account has a
place of business within the United States of America (excluding
Puerto Rico, the Virgin Islands and any other territory of the United
States);
(d) the Account Debtor in respect of such Account is not
the United States of America or any state, territory, subdivision,
department, or agency thereof, unless all applicable requirements of
the Assignment of Claims Act of 1940 have been satisfied;
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(e) such Account does not arise out of transactions with
an employee, officer, director, Subsidiary or Affiliate of the
Borrower or any Subsidiary Guarantor;
(f) no amount payable in respect of such Account has
remained unpaid for a period exceeding sixty days after the due date
stated on the invoice therefor (excluding the amount of any net
credit balances relating to Accounts with invoice dates more than 60
days from the due date);
(g) such Account is owed by an Account Debtor which does
not then have balances on its Accounts which are more than 60 days
past due which exceed 50% of the total balance of all such Accounts
owed by such Account Debtor;
(h) such Account has not been and is not required to be
charged off or written off as uncollectible in accordance with the
customary business practice of the Borrower and the Subsidiary
Guarantors;
(i) such Account does not arise out of any claim in tort,
is not evidenced by chattel paper, a promissory note, a negotiable
instrument, or any other instrument of any kind or, if such Account
is evidenced by chattel paper, a promissory note, a negotiable
instrument or any other instrument, such chattel paper, promissory
note, negotiable instrument or other instrument has been delivered to
the Administrative Agent and is subject to a first priority security
interest in favor of the Administrative Agent;
(j) the amount of the face value of such Account listed on
any schedule of Accounts and shown on all invoices and statements
delivered to the Agent with respect to such Account is not subject to
any asserted bona fide retainages or holdbacks of any type, is
actually and absolutely owing, and is not contingent on any
condition, in each case, other than in respect of repurchase or
return agreements that (i) arise in the ordinary course of the
Borrower's business and (ii) are consistent with the Borrower or such
Subsidiary Guarantor's historical business practice;
(k) such Account does not arise out of a cash on delivery
sale; and
(l) such Account does not arise out of the sale of
samples.
In addition, to the extent that any Accounts or credit card
receivables that arise in connection with a Credit Card Program are
included in Eligible Trade Accounts Receivable at the option of the
Borrower, the Eligible Trade Accounts Percentage shall include such
reserves and the Available Accounts Receivable Amount shall reflect
eligibility criteria as the Administrative Agent shall require in its sole
discretion with respect to such Accounts and credit card receivables as a
separate class of Accounts based upon the results of any periodic audit or
appraisal of the Accounts of the Borrower and the Subsidiary Guarantors
performed by or on behalf of the Administrative Agent, provided that no
such Accounts or credit card receivables shall be included in "Eligible
Trade Accounts Receivable" until a satisfactory audit or appraisal
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of such Accounts and credit card receivables has been performed by or on
behalf of the Administrative Agent.
It is understood that, to the extent that information is not
available to determine the amount of Accounts which satisfy the criteria
described above, the Administrative Agent shall estimate the amount of such
Accounts which satisfy such criteria in determining the Eligible Trade
Accounts Percentage. The Borrower shall, at the request of the
Administrative Agent in connection with any periodic audit or appraisal of
the Accounts of the Borrower and the Subsidiary Guarantors related to the
Credit Card Program, deliver a calculation in reasonable detail of all
Accounts which satisfy the criteria described above to the extent such
information is reasonably available to the Borrower and the Subsidiary
Guarantors.
"Eligible Trade Accounts Receivable Amount": as of any Accounts
Receivable Calculation Date, an amount equal to the Eligible Trade Accounts
Percentage of the aggregate amount of all Accounts of the Borrower and the
Subsidiary Guarantors as of such Accounts Receivable Calculation Date that
satisfy all of the following criteria as of such Accounts Receivable
Calculation Date:
(a) such Account is owned solely by the Borrower or a
Subsidiary Guarantor and is evidenced by an invoice and has arisen
from the sale of goods which have been shipped or delivered to an
Account Debtor on an absolute sale basis, have not been shipped or
delivered on a consignment, approval, or sale-return basis, and are
not subject to any repurchase or return agreement or arrangement,
other than those repurchase or return agreements or arrangements that
(i) arise in the ordinary course of the Borrower's business and (ii)
are consistent with the Borrower or such Subsidiary Guarantor's
historical business practices; and
(b) such Account is subject to a Lien in favor of the
Administrative Agent and is not subject to Liens other than Permitted
Account Liens.
"Emergency Order": that certain order issued by the Bankruptcy
Court in form and substance satisfactory to the Administrative Agent, in
substantially the form of Exhibit E-1.
"Environmental Laws": any and all foreign, federal, state, local
or municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements
of Law (including common law) regulating or imposing liability or standards
of conduct concerning protection of human health or the environment, as are
now or may at any time hereafter be in effect.
"Environmental Reserve Amount": at any time, an amount equal to
the product of (a) $75,000 and (b) the number of parcels of Eligible
Mortgaged Real Property which are included in the Borrowing Base at such
time.
"Equipment": all equipment, machinery, chattels, tools, dies,
jigs, molds, parts, machine tools, furniture, furnishings, fixtures and
supplies, of every nature, now owned or hereafter acquired by the Borrower
or any Subsidiary Guarantor, wherever located, additions,
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accessories and improvements thereto and substitutions therefor and all
parts and equipment which may be attached to or which are necessary for the
operation and use of such personal property or fixtures, whether or not the
same shall be deemed to be affixed to real property and in any event all
"equipment" (as such term is defined in the UCC), but excluding Inventory.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal) of reserve requirements in effect on such day
(including, without limitation, basic, supplemental, marginal and emergency
reserves under any regulations of the Board of Governors or other
Governmental Authority having jurisdiction with respect thereto) prescribed
for eurocurrency funding (currently referred to as "Eurocurrency
Liabilities" in Regulation D of the Board of Governors) maintained by a
member bank of the Federal Reserve System.
"Eurodollar Base Rate": with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, the rate per annum equal
to the rate for deposits in Dollars for the period commencing on the first
day of such Interest Period and ending on the last day of such Interest
Period which appears on Telerate Page 3750 as of 11:00 A.M., London time,
two Business Days prior to the beginning of such Interest Period. If at
least two rates appear on such Telerate Page for such Interest Period, the
"Eurodollar Base Rate" shall be the arithmetic mean of such rates. If the
"Eurodollar Base Rate" cannot be determined in accordance with the
immediately preceding sentences with respect to any Interest Period, the
"Eurodollar Base Rate" with respect to each day during such Interest Period
shall be the rate per annum equal to the average (rounded upward to the
nearest 1/100th of 1%) of the respective rates notified to the
Administrative Agent by each of the Lenders as the rate at which such
Lender is offered Dollar deposits at or about 10:00 A.M. New York City
time, two Business Days prior to the beginning of such Interest Period in
the interbank eurodollar market where the eurodollar and foreign currency
and exchange operations in respect of its Eurodollar Loans are then being
conducted for delivery on the first day of such Interest Period for the
number of days comprised therein and in an amount comparable to the amount
of its Eurodollar Loan to be outstanding during such Interest Period.
"Eurodollar Loans": Term Loans and Revolving Loans the rate of
interest applicable to which is based upon the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, a rate per annum determined for
such day in accordance with the following formula (rounded upward to the
nearest 1/100th of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
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"Event of Default": any of the events specified in Section 9,
provided that any requirement for the giving of notice, the lapse of time,
or both, or any other condition, has been satisfied.
"Excepted Cash Equivalents": Cash Equivalents up to an aggregate
amount at any one time equal to the amount not required to be pledged to
the Administrative Agent by reason of subsection 8.8(b).
"Excluded Properties": those properties listed as such on
Schedule 5.19.
"Excluded Subsidiaries": SerPlus Assurance Co., Ltd., SMC
Aviation, Inc., SMC-SPE, Inc., SMC-SPE-2, Inc. and Service Credit Corp.
"Existing Appraisal": with respect to any parcel of Material Real
Property, a final complete appraisal of the value of such parcel of
Material Real Property, commissioned in connection with the Previous Credit
Agreements (and delivered to the Administrative Agent) or this Agreement
and valued on an "alternative use" basis which in the reasonable judgment
of the Administrative Agent satisfies all applicable requirements of FIRREA
and the Uniform Standards of Professional Appraisal Practice.
"Existing Credit Agreement": the Second Amended and Restated
Credit Agreement, dated as of January 20, 1999, among SMC, as borrower, the
lenders party thereto, Citicorp, as collateral and administrative agent for
such lenders, and BankBoston, as documentation agent and collateral
monitoring agent for such lenders, as amended.
"Extension of Credit": with respect to any Lender, (a) the making
of a Loan by such Lender and (b) the issuance or extension of a Letter of
Credit in which such Lender has a participating interest.
"Federal Funds Rate": means for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the
average of the quotations for such day on such transactions received by the
Administrative Agent from three Federal funds brokers of recognized
standing selected by it.
"Final Order": an order or judgment of the Bankruptcy Court as
entered on the docket of the Clerk of the Bankruptcy Court, that has not
been reversed, stayed, modified or amended, and as to which the time to
appeal, petition for certiorari, reargument or rehearing has expired and no
proceeding for certiorari, reargument or rehearing is pending or any right
to appeal, reargue, petition for certiorari or seek rehearing has been
waived, or if an appeal, reargument, petition for certiorari, or rehearing
thereof has been sought, the order or judgment of the Bankruptcy Court has
been affirmed by the highest court to which the order was appealed
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from which the reargument or rehearing was sought, or certiorari has been
denied, and the time to take any further appeal or to seek certiorari or
further reargument or rehearing has expired.
"Financing Lease": any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance
with GAAP to be capitalized on a balance sheet of such lessee.
"FIRREA": the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, as amended.
"First Day Orders": those orders entered by the Bankruptcy Court
on the Petition Date or within five Business Days of the Petition Date or
based on motions filed on the Petition Date.
"First Union Permitted Mortgage Financing": all Indebtedness, if
any, and other obligations of the Borrower and its Subsidiaries, now
existing or hereafter arising, under or in connection with (a) that certain
Loan Agreement dated as of October 4, 1996 by and between SMC-SPE-l, Inc.,
as borrower, and First Union National Bank of North Carolina, as lender,
and the guaranties, mortgage and security and other agreements, instruments
and other documents from time to time executed and delivered in connection
therewith and (b) that certain Loan Agreement dated as of October 4, 1996
by and between SMC-SPE-2, Inc., as borrower, and First Union National Bank
of North Carolina, as lender, and the guaranties, mortgage and security and
other agreements, instruments and other documents from time to time
executed and delivered in connection therewith, in each case, subject to
compliance with the terms hereof, as the same may now or hereafter be
amended, restated, modified, increased, extended, refinanced, replaced or
refunded.
"Fiscal Year": each fiscal year of the Borrower. Fiscal Years are
referred to herein by reference to the calendar year in which a majority of
the days comprising such Fiscal Year fall.
"Fixed Assets": plant, machinery, equipment, furniture and
fixtures, leasehold improvements and other tangible property used in the
operation of the business of the Borrower and its Subsidiaries, and
including (except in respect of the OSS Disposition) the proceeds of the
sale of all or substantially all of the Capital Stock of a Subsidiary
Guarantor (except to the extent of the allocated value of any Current
Assets included in the proceeds of such sale of Capital Stock).
"Floor Planning Facility": as to the Borrower or any Restricted
Subsidiary, any manufacturer- or vendor-sponsored Inventory financing
program (whether directly from the manufacturer or vendor or through a
third party financing source) extending loans or trade terms to the
Borrower or such Restricted Subsidiary and secured solely by such
manufacturer's or vendor's named brand or identified Inventory, subject to
the prior approval of the Administrative Agent in its reasonable discretion
and execution and delivery of an intercreditor agreement reasonably
acceptable to the Administrative Agent.
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"Foreign Holding Company": any Subsidiary organized under the
laws of any jurisdiction (including territories) within the United States
of America whose sole assets (exclusive of assets with an aggregate book
value not exceeding $5,000,000 and assets consisting of advances or loans
to the Borrower or any of its Subsidiaries) consist of the Capital Stock of
one or more Foreign Subsidiaries or other Foreign Holding Companies.
"Foreign L/C Commitment Sublimit": at any time, the lesser of (a)
$10,000,000 and (b) the Revolving Credit Commitments then in effect.
"Foreign Subsidiary": any Subsidiary of the Borrower organized
under the law of any jurisdiction outside the United States of America,
excluding Inactive Subsidiaries, but including in any event Foreign Holding
Companies.
"GAAP": generally accepted accounting principles in the United
States of America in effect from time to time, provided that, solely for
purposes of determining compliance with subsection 8.1, "GAAP" shall mean
generally accepted accounting principles in the United States of America in
effect as of the Effective Date.
"GOB Deal Shrink": an amount equal to (i) the difference between
(A) the Inventory Value of the GOB Inventory and (B) the value of the GOB
Inventory as determined by a physical inventory count taken immediately
prior to the commencement of a going-out-of-business or similar sale at the
GOB Stores, or (ii) in the absence of a physical count of the GOB
Inventory, 3% of the Inventory Value of the GOB Inventory on the date of
commencement of the going-out-of-business or similar sales.
"GOB Discount Amount": an amount equal to (i) the weighted
average discount offered to customers during the applicable period of the
going-out-of-business or similar sale, expressed as a percentage,
multiplied by (ii) the GOB Inventory Amount.
"GOB Inventory": all Inventory located at GOB Stores as of the
Calculation Date after the date of commencement of a going-out-of-business
or similar sale at such GOB Stores.
"GOB Inventory Amount": as of any Calculation Date, the Inventory
Value of the GOB Inventory as of such Calculation Date, minus (a) the
Shrink Reserve in respect of such GOB Inventory as of such Calculation
Date, minus (b) the GOB Deal Shrink as of such Calculation Date, minus (c)
the Inventory Value of all GOB Inventory remaining at any GOB Store on the
91st day after the commencement of the going-out-of-business or similar
sale with respect to such GOB Store, minus (d) 35% of the Inventory Value
of the GOB Inventory located at the Initial GOB Stores as of such
Calculation Date.
"GOB Stores": the Borrower's and the Subsidiary Guarantors'
stores which are in the process of being liquidated and closed.
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"Governmental Authority": any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Guarantee Obligation": as to any Person (the "guaranteeing
person"), without duplication, any obligation, contingent or otherwise, of
the guaranteeing person (a) under a guarantee, reimbursement, indemnity or
similar obligation guaranteeing or in effect guaranteeing any Indebtedness
of any other Person, in any manner, whether directly or indirectly, (b) to
reimburse any other Person for drawings under undrawn letters of credit
issued by such other Person for the account of the guaranteeing person, or
(c) under a guarantee, reimbursement, indemnity or similar obligation to
the extent the obligations of the guaranteeing person in respect thereof
should be reflected as a liability in a consolidated balance sheet of the
guaranteeing person (or should be reflected in the notes thereto) in
accordance with GAAP, provided that the term Guarantee Obligation shall not
include endorsements of instruments for deposit or collection in the
ordinary course of business. The amount of any Guarantee Obligation of any
guaranteeing person shall be deemed to be the lower of (i) an amount equal
to the stated or determinable amount of the primary obligation in respect
of which such Guarantee Obligation is made and (ii) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by such guaranteeing
person in good faith.
"IE System": the Borrower's electronic inventory evaluation
system which tracks Inventory on a store-by-store basis.
"In-Transit Cash": as of the date of determination, the aggregate
amount of (i) cash and cash equivalents of the Borrower and the Subsidiary
Guarantors which is deposited into deposit accounts covered by Blocked
Account Agreements, plus (ii) the net amount receivable by the Borrower and
the Subsidiary Guarantors in respect of Visa, Mastercard or other branded
credit card receivables (after deduction of discounts and fees payable to
the processors of such credit card receivables) to the extent such amounts
are credited to deposit accounts covered by Blocked Account Agreements or
other arrangements acceptable to the Agents in their sole discretion
exercised commercially reasonably, in each case prior to the transfer of
such amounts to the Collateral Account.
"Inactive Subsidiary": any Subsidiary of the Borrower which (and
only for so long as such Subsidiary) (a) does not own assets with an
aggregate book value in excess of $5,000,000 and (b) is not then engaged in
any business.
"Indebtedness": of any Person at any date (a) all indebtedness of
such Person for borrowed money or for the deferred purchase price of
property or services (other than trade liabilities and accounts payable
incurred in the ordinary course of business and payable in accordance with
the Borrower's and its Restricted Subsidiaries' customary practices and
extensions thereof), (b) any other indebtedness of such Person which is
evidenced by a note,
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bond, debenture or similar instrument, (c) all obligations (to the extent
capitalized for accounting purposes) of such Person under Financing Leases,
(d) all obligations of such Person in respect of acceptances issued or
created for the account of such Person, (e) all obligations of the types
described in the other clauses of this definition secured by any Lien on
any property owned by such Person even though such Person has not assumed
or otherwise become liable for the payment thereof and (f) all obligations
of such Person in respect of interest rate and currency hedging agreements.
For purposes of this Agreement, (x) the amount of any Indebtedness referred
to in clause (f) of the preceding sentence shall be the net amounts
(including by offset of amounts payable thereunder), including any net
termination payments, required to be paid to a counterparty rather than any
notional amount with regard to which payments may be calculated and (y) any
obligations described in clauses (a) through (e) above denominated in a
currency other than Dollars shall be determined after giving effect to
related currency swap and hedging agreements. It is understood and agreed
that "Indebtedness" of a Person (i) shall include advances or loans to such
Person under Floor Planning Facilities and (ii) shall not include (A)
obligations of such Person in respect of letters of credit to the extent
such obligations are not reflected as liabilities on the consolidated
balance sheet of such Person (excluding the notes to such balance sheet) in
accordance with GAAP or (B) obligations of such Person in respect of
consignments of Inventory to such Person.
"Indemnified Liabilities": as defined in subsection 11.5.
"Ineligible Inventory Amount": as of any Calculation Date, the
Inventory Value of all Inventory of the Borrower and the Subsidiary
Guarantors that falls in any one or more of the following categories as of
such Calculation Date:
(a) Consignment Inventory or any other Inventory that (i)
is not owned solely by the Borrower or any such Subsidiary Guarantor
or (ii) is leased by or on consignment or sale-or-return to the
Borrower or any such Subsidiary Guarantor;
(b) Inventory that is not located at (or in transit
between) property that is owned or leased by the Borrower or any
Subsidiary Guarantor, other than Landed Inventory and Customs Broker
Inventory;
(c) Inventory that is subject to a layaway purchase by any
customer;
(d) Inventory that is damaged or defective or has
otherwise been segregated for return to the vendor thereof;
(e) Inventory that is not located in the United States of
America;
(f) Inventory which is not subject to a Lien in favor of
the Administrative Agent or is subject to any Lien (other than
Permitted Inventory Liens);
(g) Inventory which is subject to a Lien in connection
with Floor Planning Facilities;
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(h) Inventory that is being repaired or is used in the
repair of other Inventory; and
(i) Inventory consisting of "Samples" which is not
included in the normal merchandising assortment but has been supplied
by vendors for consideration to be included in the merchandising
assortment.
"Initial GOB Stores": the initial 134 stores announced by the
Borrower and the Subsidiary Guarantors as the first stores to be liquidated
and closed.
"Insolvency": with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
"Instrument": any "instrument" (as such term is defined in the
UCC) now owned or hereafter acquired by the Borrower or any Subsidiary
Guarantor.
"Intellectual Property": as defined in subsection 5.17.
"Intercompany Debt": with respect to the Borrower, any
Indebtedness of the Borrower to any Subsidiary Guarantor and, with respect
to any Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor
to the Borrower or any other Subsidiary Guarantor, including all amounts
payable in respect thereof whether in respect of principal, interest or
otherwise.
"Interest Expense": of any Person for any period, (a) the amount
of interest expense, both expensed and capitalized, of such Person and its
Consolidated Subsidiaries determined on a consolidated basis in accordance
with GAAP for such period, plus, without duplication, that portion of
payments under Financing Leases of such Person attributable to interest
expense of such Person for such period in accordance with GAAP minus (b)
the amount of interest income of such Person and its Consolidated
Subsidiaries determined on a consolidated basis in accordance with GAAP for
such period.
"Interest Payment Date": (a) as to any ABR Loan, the last day of
each month, (b) as to any Eurodollar Loan having an Interest Period of
three months or less, the last day of such Interest Period, (c) as to any
Eurodollar Loan having an Interest Period longer than three months, each
day which is three months, or a whole multiple thereof, after the first day
of such Interest Period and the last day of such Interest Period and (d) as
to any Swing Line Loan, the last day of each month.
"Interest Period": with respect to any Eurodollar Loan:
(a) initially, the period commencing on the borrowing or
conversion date, as the case may be, with respect to such Eurodollar
Loan and ending one, two, three or six months thereafter, as selected
by the Borrower in its notice of borrowing or notice of conversion,
as the case may be, given with respect thereto; and
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(b) thereafter, each period commencing on the last day of
the next preceding Interest Period applicable to such Eurodollar Loan
and ending one, two, three or six months thereafter, as selected by
the Borrower by irrevocable notice to the Administrative Agent not
less than three Business Days prior to the last day of the then
current Interest Period with respect thereto;
provided that, all of the foregoing provisions relating to Interest Periods
are subject to the following:
(1) if any Interest Period would otherwise end on a day
that is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day unless the result of such extension
would be to carry such Interest Period into another calendar month in
which event such Interest Period shall end on the immediately
preceding Business Day;
(2) any Interest Period that would otherwise extend
beyond, in the case of Eurodollar Loans which are Revolving Loans,
the Termination Date or, in the case of Eurodollar Loans which are
Term Loans, beyond the Term Loan Termination Date, as the case may
be;
(3) any Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of
such Interest Period) shall end on the last Business Day of a
calendar month; and
(4) from the Effective Date until such time as the
Administrative Agent notifies the Borrower of the completion of the
syndication of this credit facility, "Interest Period" shall mean the
period commencing on the borrowing or conversion date, as the case
may be, with respect to all Eurodollar Loans and ending seven or
fourteen days or one month thereafter, as selected by the Borrower in
its notice of borrowing or notice of conversion, as the case may be,
given with respect thereto, and agreed to by the Administrative
Agent.
"Interim Budget": the interim budget prepared by the Borrower
detailing the Borrower's anticipated revenues, operating expenses and cash
flow from the Closing Date to the Effective Date, in the form attached
hereto as Exhibit J.
"Interim Facility": the interim revolving credit facility made
available prior to the Effective Date pursuant to section 3.1(a), as
approved by the Emergency Order.
"Interim Facility Period": the period between the Closing Date
and the earlier of (i) the Effective Date and (ii) 45 days after the
Petition Date.
"Interim Maximum Amount": as defined in subsection 3.1 of this
Agreement.
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"Interim Reserve Amount": an amount equal to (a) from the Closing
Date until the Effective Date, $75,000,000, (b) from the Effective Date
until the date (i) the Administrative Agent accepts the Business Plan and
(ii) the Borrower and the Agents mutually agree on new and revised
covenants pursuant to subsection 11.20 (such date, the "Plan Acceptance
Date"), $50,000,000 and (c) from and after the Plan Acceptance Date, zero.
"Inventory": goods now owned or hereafter acquired by the
Borrower or any Subsidiary Guarantor and held for sale or lease or to be
furnished under contracts of service or so leased or furnished, and all raw
materials, work in process or materials used or consumed in a business, and
in any event including all "inventory" (as such term is defined in the UCC)
but excluding Equipment.
"Inventory Value": with respect to any Inventory of the Borrower
or any Subsidiary Guarantor reflected on the Borrower's Borrowing Base
Certificate, the value of such Inventory valued at cost on the IE System on
a basis consistent with the Borrower's or such Subsidiary Guarantor's
current and historical accounting practice (without giving effect to
markdowns, intercompany profit, rebates and discounts, accounts payable
inventory accruals and capitalized inventory costs on the consolidated
balance sheet of the Borrower and its Consolidated Subsidiaries in respect
of Inventory), plus freight charges incurred in connection therewith, minus
accruals for deferred volume rebates (it being understood that the amount
of freight charges and accruals for deferred volume rebates shall be
determined monthly as of the end of the most recent fiscal month,
notwithstanding the fact that Borrowing Base Certificates may be delivered
more frequently than monthly pursuant to this Agreement). The value of the
Inventory as set forth above will, without duplication for any element of
the Shrink Reserve, be calculated net of the reserve established by the
Borrower or any Subsidiary Guarantor on a basis consistent with the
Borrower's or such Subsidiary Guarantor's current and historical accounting
practice in respect of lost, misplaced or stolen Inventory at such time.
"Investment": as defined in subsection 8.8.
"Investment Securities": all Instruments and all "securities" (as
such term is defined in the UCC) now owned or hereafter acquired by the
Borrower or any Subsidiary Guarantor, other than (a) Pledged Stock, (b)
Capital Stock of any Subsidiary that is not expressly required to be
pledged pursuant this Agreement or the Master Security Agreement, (c) Cash
Equivalents and (d) any note, debenture, bond or other Instrument
evidencing Intercompany Debt.
"Issuing Banks": initially, each Lender and each Affiliate of a
Lender specified on Schedule 1.1(a) as an Issuing Bank in its capacity as
issuer of a Letter of Credit. Additional Lenders or Affiliates of
additional Lenders may from time to time be designated as "Issuing Banks"
by the Borrower (in each case, with the consent of such Lender and such
Affiliate) by written notice to such effect from the Borrower to the
Administrative Agent, provided that such designation is consented to by the
Administrative Agent (which consent by the Administrative Agent shall not
be unreasonable withheld). Each Affiliate of a Lender acting as an issuing
Bank shall be deemed to have agreed to be bound by, and shall have the
benefits of, the provisions of
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this Agreement and the other Loan Documents applicable to Issuing Banks and
shall be deemed a party hereto.
"Judgment Currency": as defined in subsection 11.18.
"Landed Inventory": any Inventory which has arrived in the United
States and cleared customs but which has not been delivered to property
that is owned or leased by the Borrower or any Subsidiary Guarantor as long
as such Inventory (a) is fully paid and subject only to a Lien in favor of
the Administrative Agent (other than Permitted Inventory Liens), (b) is in
the possession of the Borrower or any Subsidiary Guarantor or any agent
thereof and (c) is reported in a Borrowing Base Certificate separately from
other Inventory included in the calculation of the Available Inventory
Amount.
"L/C Commitment": the lesser of (a) $200,000,000 (or, during the
Interim Facility Period, $80,000,000) and (b) the Revolving Credit
Commitments then in effect.
"L/C Fee Payment Date": the last day of each month and the
Termination Date.
"L/C Obligations": at any time, an amount equal to the sum of (a)
the Trade Letter of Credit Outstandings at such time and (b) the Standby
Letter of Credit Outstandings at such time.
"L/C Participants": the collective reference to all the Revolving
Credit Lenders.
"Lender" and "Lenders": as defined in the preamble to this
Agreement.
"Letters of Credit": as defined in subsection 3.6(a).
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement
and any Financing Lease having substantially the same economic effect as
any of the foregoing).
"Loan": any Term Loan, Revolving Loan or Swing Line Loan, as the
case may be.
"Loan Documents": this Agreement, the Notes, the Master Security
Agreement and all other Security Documents, each Application, the other
documents executed or delivered pursuant to subsection 6.1 by the Borrower
or any Subsidiary of the Borrower and all other instruments, agreements and
written contractual obligations between the Borrower and any Subsidiary of
the Borrower, on the one hand, and any of the Agents or the Lenders, on the
other hand, in each case delivered to either the Administrative Agent or
such Lender before, on, or after the Effective Date pursuant to or in
connection with the transactions contemplated hereby.
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"Loan Parties": the collective reference to the Borrower and the
Subsidiary Guarantors.
"Lockbox Agreement": as defined in the Master Security Agreement.
"LTCB Permitted Mortgage Financing": all Indebtedness, if any,
and other obligations of the Borrower and its Subsidiaries, now existing or
hereafter arising, under or in connection with (a) that certain Indenture
dated June 28, 1990 by and among the Borrower, H.J. Wilson Co., Inc., The
Long-Term Credit Bank of Japan, Limited, New York Branch, as administrative
agent, and The Bank of New York (as successor trustee to Sovran
Bank/Central South), as trustee, and (b) the guaranties, mortgage and
security and other agreements, instruments and other documents from time to
time executed and delivered in connection therewith, in each case, subject
to compliance with the terms hereof, as the same may now or hereafter be
amended, restated, modified, increased extended, refinanced, replaced or
refunded.
"Majority Lenders": at any time, Lenders the Voting Percentages
of which aggregate more than 50%.
"Majority Revolving Credit Lenders": at any time, Revolving
Credit Lenders the Revolving Credit Commitment Percentages of which
aggregate more than 50%.
"Majority Term Loan Lenders": at any time, Term Loan Lenders
whose Term Loans aggregate more than 50% of the outstanding principal
amount of all Term Loans.
"Management Restructuring Consultant": Jay Alix & Associates.
"Master Security Agreement": the Master Security Agreement to be
made by the Borrower and each Subsidiary Guarantor in favor of the
Administrative Agent, in substantially the form of Exhibit B, as the same
may be amended, supplemented or otherwise modified from time to time.
"Material Adverse Effect": a material adverse effect on (a) the
business, operations, performance, property, or condition (financial or
otherwise) of the Borrower and its Subsidiaries taken as a whole or (b) the
ability of the Borrower or any Subsidiary Guarantor, taken as a whole, to
perform their respective obligations under this Agreement or any of the
other Loan Documents or the material rights or remedies, of the
Administrative Agent or the Lenders hereunder or thereunder.
"Material Real Property": real property not subject to a
mortgage, deed of trust or other similar instrument (other than pursuant
hereto or any other Loan Document) that (a) (i) is owned in fee by the
Borrower or any Subsidiary Guarantor and is not subject to a ground lease
in favor of any other Person as lessee, (ii) is located in the United
States or Puerto Rico and (iii) (A) has been developed with a retail store,
distribution center, shopping center or office building with respect to
which a certificate of occupancy or temporary certificate of occupancy or
the local equivalent thereof (or any other similar proof of completion)
shall have been issued by the relevant Governmental Authority, (B) is being
developed with a retail store, distribution center, shopping center or
office building which is under construction as of the Effective Date or (C)
is undeveloped and has a book value (excluding soft costs) of at least
$1,000,000 or (b) (i) (A) consists of a developed retail store,
distribution center,
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<PAGE> 36
shopping center or office building with respect to which a certificate of
occupancy or temporary certificate of occupancy or the local equivalent
thereof (or any other similar proof of completion) shall have been issued
by the relevant Governmental Authority, or (B) is being developed with a
retail store, distribution center, shopping center or office building which
was under construction as of the Effective Date, (ii) is located on
property which is subject to a ground lease in favor of the Borrower or any
Subsidiary Guarantor as lessee and no consent shall be required under such
ground lease to mortgage or foreclose upon such property (or such consent
shall have been obtained), (iii) is or, upon completion, will be classified
as an owned retail store, distribution center, shopping center or office
building by the Borrower or such Subsidiary Guarantor and (iv) is located
in the United States or Puerto Rico.
"Materials of Environmental Concern": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes defined or regulated as
such in or under any Environmental Law, including, without limitation,
asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.
"Mechanics' Lien Reserve Amount": with respect to any parcel of
Eligible Mortgaged Real Property at any time, an amount equal to the
excess, if any, of (a) the sum of all outstanding amounts which are then
secured by mechanics' liens on such parcel of Eligible Mortgaged Real
Property and which have been outstanding for a period in excess of one year
over (b) $200,000.
"Mortgage": a fee or ground leasehold mortgage, deed of trust or
other similar document executed and delivered in favor of the
Administrative Agent pursuant to any of the Previous Credit Agreements, as
the same may have been amended, supplemented or otherwise modified from
time to time and still in effect.
"Mortgage Value": with respect to any parcel of Eligible
Mortgaged Real Property, the lesser of (a) the maximum stated amount
secured by the Lien on such parcel of Eligible Mortgaged Real Property
granted in favor of the applicable secured mortgagee pursuant to the
relevant Mortgage and (b) the value of such parcel of Eligible Mortgaged
Real Property set forth in the Existing Appraisal delivered with respect
thereto.
"Mortgaged Property": all property of the Borrower and any
Subsidiary Guarantor in which the Administrative Agent is granted a Lien
pursuant to the Master Security Agreement or the Emergency Order or
Permanent Order.
"Multiemployer Plan": a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Net Income": of any Person for any period, net income of such
Person and its Consolidated Subsidiaries, determined on a consolidated
basis in accordance with GAAP for such period.
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"Net Recoverable Value": as to the Inventory of the Borrower and
the Subsidiary Guarantors, the amount determined based upon periodic audits
or appraisals of such Inventory to be equal to the percentage of the cost
of Inventory which could be realized (net of disposal costs and expenses)
in a liquidation sale of the Inventory at such time.
"Non-Excluded Taxes": as defined in subsection 4.10.
"Notes": the collective reference to any Revolving Credit Notes
or Swing Line Notes.
"Operating Assets": assets employed by any Loan Party in the
operation of its business (including assets constituting property, plant or
equipment but excluding assets held for investment).
"OSS Disposition": the sale or other disposition of the Capital
Stock in, or all or substantially all of the assets of, the OSS Subsidiary
for fair market value and on terms and conditions reasonably satisfactory
to the Administrative Agent.
"OSS Subsidiary": the Borrower's office supply Subsidiary.
"Overdraft": at any time, the amount by which the aggregate
amount debited from any deposit, concentration, operating or disbursement
account maintained by the Borrower or any Subsidiary Guarantor with any
Lender or any Affiliate of any Lender, as a result of processing of payment
orders issued by the Borrower or such Subsidiary Guarantor or otherwise,
exceeds the aggregate funds on deposit in such account.
"Parcel": when used in connection with any parcel of real
property, means such parcel of real property, together with all of the
structures, buildings and other improvements located thereon and all other
property associated therewith and, when used in connection with any parcel
of real property subject to a ground lease in favor of the Borrower or any
Subsidiary Guarantor as lessee, means the leasehold interest in such ground
lease.
"Participant": as defined in subsection 11.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA, or any Governmental Authority
which succeeds to the powers and functions thereof.
"Permanent Facility": the revolving credit facility and term
loans made available from and after the Effective Date pursuant to section
3.1(a), as approved by the Permanent Order.
"Permanent Mortgage Financing": collectively, the LTCB Permitted
Mortgage Financing and the First Union Permitted Mortgage Financing.
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"Permanent Order": that certain order entered by the Bankruptcy
Court approving this Agreement, in form and substance satisfactory to the
Administrative Agent, in substantially the form of Exhibit E-2.
"Permitted Account Liens": the collective reference to Liens
permitted by subsections 8.3(a), 8.3(b) and 8.3(l) or securing the Previous
Credit Agreement Outstandings.
"Permitted Book-Entry Securities": securities (i) which conform
in all respects to the requirements set forth in the definition of Cash
Equivalents except that such securities are not evidenced by a certificate
and (ii) in which the Administrative Agent shall have acquired a perfected
first priority security interest or in the security entitlement with
respect thereto in the manner provided by the UCC.
"Permitted Expenses": expenses arising from claims in the
Reorganization Cases of the following parties for the following amounts:
(i)(A) allowed professional fees and disbursements incurred by the
professionals (the "Professionals") retained, pursuant to sections 327(a)
or (e) of the Bankruptcy Code under a general retainer (excepting ordinary
course professionals) or 1103(a), by the Loan Parties and up to two
statutory committees (the "Committee") appointed in the Reorganization
Cases and (B) the expenses of any member of any such Committee allowed
under section 503(b)(3)(F) of the Bankruptcy Code, in an aggregate amount,
after the occurrence and during the continuance of an Event of Default, not
to exceed the sum of $3,000,000, inclusive of any holdbacks required by the
Bankruptcy Court for post-default services, plus professional fees and
disbursements previously incurred, accrued or invoiced prior to such Event
of Default and the delivery of notice as provided below, to the extent
previously or subsequently allowed, and (ii) quarterly fees required to be
paid to the United States Trustee pursuant to 28 U.S.C. ss. 1930(a)(6) and
any fees payable to the Clerk of the Bankruptcy Court; provided that
notwithstanding the occurrence or continuance of an Event of Default, no
fees or disbursements incurred, accrued or invoiced during the pendency of
an Event of Default shall reduce the gross amount of the Permitted Expenses
prior to the delivery (by hand, facsimile or overnights delivery) to the
Borrower and counsel to the Committee of a notice by the Administrative
Agent of the Borrower's noncompliance with the terms of this Agreement and
the triggering of the dollar limitations set forth above; provided, further
that Permitted Expenses shall not include, apply to or be available for any
fees or expenses incurred by any person, including the Professionals or the
Committee, in (A) objecting to or contesting in any manner, or in raising
any defenses to, the validity, extent, perfection, priority or
enforceability of Indebtedness arising under the Previous Credit Agreements
or this Agreement (or, in either case, any other Loan Documents related
thereto) or any liens or security interests with respect thereto or any
other rights or interests of the Administrative Agent or the Lenders, or in
asserting any claims or causes of action, including, without limitation,
any actions under chapter 5 of the Bankruptcy Code, against the
Administrative Agent, the Collateral Monitoring Agent or the Lenders, (B)
preventing, hindering or delaying the Lenders' or the Administrative
Agent's enforcement or realization upon any of the Collateral (during the
continuance of an Event of Default), (C) using cash collateral or selling
any Collateral except as permitted herein, (D) incurring Indebtedness
except as permitted herein or (E) modifying the Lenders' or the
Administrative Agent's rights under this Agreement or the other Loan
Documents in a non-consensual manner. As long as no Event of Default shall
have occurred and be continuing, the
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Borrower and the Subsidiary Guarantors shall pay compensation and
reimbursement of expenses as authorized by any applicable order of the
Bankruptcy Court, as the same may be payable, and the amount shall be
Permitted Expenses. The automatic stay shall be deemed lifted with respect
to the delivery by the Administrative Agent or the Lenders of the notice
notifying the Borrower of the commencement of the limitation described
above.
"Permitted Inventory Liens": the collective reference to Liens
permitted by subsections 8.3(a), 8.3(b) and 8.3(1) or securing the Previous
Credit Agreement Outstandings.
"Permitted Mortgage Liens": the collective reference to Liens
permitted by subsections 8.3(a), 8.3(b), 8.3(e) and 8.3(l), or securing the
Previous Credit Agreement Outstandings.
"Permitted Prepetition Claim Payment": a payment (as adequate
protection or otherwise) on account of any Claim arising or deemed to have
arisen prior to the commencement of the Reorganization Cases, which is made
(i) pursuant to authority granted by a First Day Order of the Bankruptcy
Court, (ii) in connection with (A) pre-petition Consignment Inventory
Claims, (B) reclamation Claims up to $15,000,000, (C) pre-petition sales
tax and payroll tax Claims, (D) Claims in respect of the assumption of
leases and other contractual obligations, and (E) additional pre-petition
Claims of up to $15,000,000, or (iii) in satisfaction of secured
Indebtedness by application of the Proceeds received from the sale of the
specific assets securing such Indebtedness.
"Permitted Sale-Leaseback": as defined in subsection 8.11.
"Permitted Trade L/C Facility": all Indebtedness, if any, and
other obligations of the Borrower and its Subsidiaries, now existing or
hereafter arising, under or in connection with (a) any letters of credit
issued at any time for the account of the Borrower or any of its
Subsidiaries pursuant to that certain Letter of Credit Application
Agreement dated May 31, 1997 by and among Wholesale Supply Company, Inc.,
the Borrower and First American National Bank and (b) the commitment
letters, security agreements, guarantees, instruments and other documents
executed and delivered from time to time in connection therewith, in each
case, subject to compliance with the terms hereof, as the same may now or
hereafter be amended, restated, modified, increased, extended, refinanced,
replaced or refunded from time to time.
"Person": an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint
venture, limited liability company, Governmental Authority or other entity
of whatever nature.
"Petition Date": as defined in the recitals hereto.
"Plan": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which the Borrower or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
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"Plan Acceptance Date": as defined in the definition of "Interim
Reserve Amount".
"Plan of Reorganization": a proposed plan of reorganization for
the Borrower whether filed with or confirmed by order of the Bankruptcy
Court.
"Pledged Securities": the collective reference to (i) the Pledged
Stock, (ii) all Investment Securities, (iii) all Cash Equivalents,
Permitted Book-Entry Securities and funds held or on deposit from time to
time in the Securities Accounts, and (iv) all Proceeds thereof, except as
provided for in subsection 10.9 of the Master Security Agreement.
"Pledged Stock": the shares of Capital Stock set forth on
Schedule 2 to the Master Security Agreement and other shares of Capital
Stock pledged thereunder from time to time pursuant to Section 4 thereof.
"Pledgors": the collective reference to the obligors parties to
the Master Security Agreement.
"Previous Credit Agreement Outstandings": at any date, the sum of
all the amounts outstanding at such date (whether for principal, interest,
fees, reimbursement obligations or otherwise) under any of the Previous
Credit Agreements or secured by the collateral granted pursuant to the
Existing Credit Agreement and the Emergency Order.
"Previous Credit Agreements": the Credit Agreement, dated as of
June 8, 1994, among SMC, as borrower, the lenders party thereto, and The
Chase Manhattan Bank, as administrative agent, as amended and restated by
the Amended and Restated Credit Agreement, dated as of September 10, 1997,
among SMC, as borrower, the lenders party thereto, The Chase Manhattan
Bank, as administrative agent and collateral agent for such lenders, and
Citicorp, as documentation agent for such lenders, as amended and restated
by the Existing Credit Agreement, each as amended.
"Proceeds": as defined in the UCC.
"Professionals": as defined in the definition of "Permitted
Expenses".
"Protective Advance": as defined in subsection 3.16(f).
"Qualified Stock": any stock of the Borrower which does not by
its terms mature or require repurchase or redemption thereof in whole or in
part on or prior to the first anniversary of the Termination Date or the
Term Loan Maturity Date.
"Real Property Amortization Amount": with respect to any parcel
of Eligible Mortgaged Real Property at any time, an amount equal to the
product of (a) $500,000 times (b) the number of full three-month periods
that have been elapsed since the Effective Date.
"Register": as defined in subsection 11.6(d).
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"Regulation U": Regulation U of the Board of Governors as in
effect from time to time.
"Regulation X": Regulation X of the Board of Governors as in
effect from time to time.
"Reimbursement Obligation": the obligation of the Borrower
pursuant to subsection 3.10(a) to reimburse each Issuing Bank for amounts
drawn under any Letter of Credit issued by such Issuing Bank.
"Releasees": as defined in subsection 11.24.
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.
"Reorganization Cases": the collective reference to the cases of
the Borrower and the Subsidiary Guarantors pursuant to chapter 11 of the
Bankruptcy Code pending in the Bankruptcy Court.
"Reportable Event": any of the events set forth in Section 4043
of ERISA, other than those events as to which the thirty day notice period
is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of
PBGC Reg. ss. 4043.
"Required Lenders": at any time, Lenders the Voting Percentages
of which aggregate more than 66-2/3%.
"Requirement of Law": as to any Person, the Certificate or
Articles of Incorporation and Bylaws or other organizational or governing
documents of such Person, and any law, statute, ordinance, code, decree,
treaty, rule or regulation or determination of an arbitrator or a court or
other Governmental Authority, in each case applicable to or binding upon
such Person or any of its property or to which such Person or any of its
property is subject (including, without limitation, laws, ordinances and
regulations pertaining to the zoning, occupancy and subdivision of real
property).
"Reserve Calculation Date": the date of the second Borrowing Base
Certificate of any month, in which Borrowing Base Certificate the various
reserve amounts shall be calculated and/or revised based upon the operating
results as of the end of the previous fiscal month.
"Responsible Officer": the chief executive officer, the
president, any executive vice president, the chief financial officer or the
treasurer of the Borrower or, with respect to financial matters, the chief
executive officer, the president, the executive vice president-finance, the
chief financial officer or treasurer of the Borrower, provided that, for
purposes of subsection 10.3(f) of the Master Security Agreement and
subsection 7.7 and Section 9(d) only, a "Responsible Officer" shall also
include the general counsel and any assistant treasurer of the Borrower.
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"Restricted Payments": as defined in subsection 8.6.
"Restricted Subsidiaries": collectively, the Domestic
Subsidiaries and Foreign Subsidiaries.
"Revolving Credit Commitment": as to any Lender, the obligation
of such Lender to make Revolving Loans to and/or participate in Swing Line
Loans to and/or issue or participate in Letters of Credit issued on behalf
of the Borrower in an aggregate principal and/or face amount at any one
time outstanding not to exceed the amount set forth opposite such Lender's
name on Schedule 1.1(a) under the heading "Revolving Credit Commitment", as
such amount may be reduced from time to time pursuant to this Agreement or
as such amount may be adjusted from time to time pursuant to subsection
11.6.
"Revolving Credit Commitment Percentage": as to any Lender (a) at
any time prior to the termination of the Revolving Credit Commitments, the
percentage of the Revolving Credit Commitments then constituted by such
Lender's Revolving Credit Commitment and (b) at any time after the
termination of the Revolving Credit Commitments, the percentage which (i)
the sum of (x) such Lender's Revolving Loans then outstanding plus (y) the
product of such Lender's Revolving Credit Commitment Percentage immediately
prior to the termination of the Revolving Credit Commitments (after giving
effect to any permitted assignment pursuant to subsection 11.6) times the
sum of (1) the aggregate principal amount of Swing Line Loans then
outstanding plus (2) the L/C Obligations then outstanding then constitutes
of (ii) the sum of (x) the aggregate principal amount of Revolving Loans of
all the Lenders then outstanding plus (y) the aggregate principal amount of
all Swing Line Loans then outstanding plus (z) the aggregate L/C
Obligations then outstanding.
"Revolving Credit Commitment Period": the period from and
including the Closing Date to but not including the Termination Date.
"Revolving Credit Extensions of Credit": as to any Lender at any
time, an amount equal to the sum of (a) the aggregate principal amount of
all Revolving Loans made by such Lender then outstanding and (b) such
Lender's Revolving Credit Commitment Percentage of the sum of (i) the
aggregate principal amount of Swing Line Loans then outstanding and (ii)
the L/C Obligations then outstanding.
"Revolving Credit Lender": any Lender with an unused Revolving
Credit Commitment hereunder and/or any Revolving Loans outstanding
hereunder.
"Revolving Loans": as defined in subsection 3.1(a).
"Revolving Credit Note": as defined in subsection 4.13(d).
"Sale-Leaseback": as defined in subsection 8.11.
"SEC": the Securities and Exchange Commission and any
Governmental Authority which succeeds to the powers and functions thereof.
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"Secured Obligations": all of the following, in each case whether
now existing or hereafter incurred or created, except to the extent
otherwise expressly provided in the agreements or instruments relating
thereto:
(i) the Credit Agreement Obligations;
(ii) all sums payable by the Borrower and the Subsidiary
Guarantors under the Master Security Agreement or any other Security
Document;
(iii) liabilities of the Borrower or any Subsidiary Guarantor for
Overdrafts; and
(iv) liabilities and obligations of the Borrower or any
Subsidiary Guarantor under Derivative Agreements.
When used in this Agreement or any of the other Loan Documents with respect
to any of the Secured Obligations that constitute the obligations of the
Borrower or any Subsidiary Guarantor in respect of a Letter of Credit
issued on behalf of the Borrower or such Subsidiary Guarantor or under any
Derivative Agreement or any similar obligation, the term "outstanding"
shall include, at any time, without duplication, the aggregate of the
principal, interest and other amounts then outstanding that are the subject
of such Letter of Credit or similar obligation that have not then been
reimbursed by the Borrower or the relevant Subsidiary Guarantor and the
amount then available to be drawn or demanded under such Letter of Credit
or similar obligation (assuming compliance with all conditions to drawing)
or the termination liabilities, if any, of the Borrower or the Subsidiary
Guarantor under such Derivative Agreement.
"Secured Parties": the Lenders, the Issuing Banks, the
Administrative Agent, the Collateral Monitoring Agent, each counterparty to
any Derivative Agreement entered into with the Borrower (if such
counterparty is a Lender or an affiliate of a Lender) and the beneficiaries
of each indemnification obligation of any Loan Party undertaken in any Loan
Document, and the successors and assigns of each of the foregoing.
"Securitization Entity": with respect to the Borrower or any
Subsidiary, a corporation, partnership, trust, limited liability company or
other entity that is formed by the Borrower or such Subsidiary for the
purpose of effecting or facilitating a Securitization Transaction and which
engages in no business and incurs no Indebtedness or other liabilities
other than those related to or incidental to the Securitization
Transaction.
"Securitization Transaction": a transaction or series of related
transactions pursuant to which a corporation, partnership, trust, limited
liability company or other entity incurs obligations or issues interests,
the proceeds of which are used to finance a discrete pool (which may be
fixed or revolving) of receivables, leases or other financial assets, or a
discrete portfolio of real property or equipment, subject in each case to
the approval of the Agents.
"Securities Account": any account which is maintained with the
Administrative Agent or any agent thereof pursuant to any of the Previous
Credit Agreements and still in effect on the Petition Date or any
instructions delivered by the Borrower or a Subsidiary Guarantor to
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the Administrative Agent or such agent in accordance with subsection 4.8(a)
of the Master Security Agreement, in which all Pledged Securities which are
Cash Equivalents (other than Excepted Cash Equivalents) are to be held by
the Administrative Agent or a custodian or other agent of the
Administrative Agent, subject to release upon request by the relevant
Pledgor strictly in accordance with such Previous Credit Agreements until
the Petition Date or subsection 4.8(c) of the Master Security Agreement
thereafter, and in each of which the Administrative Agent shall have a
perfected first priority security interest.
"Security": as defined in subsection 1.1 of the Master Security
Agreement.
"Security Documents": the collective reference to the Master
Security Agreement, the Blocked Account Agreements, the Custody and Control
Agreements, the Lockbox Agreements and each other agreement entered into
pursuant to subsection 11.1(b) of the Master Security Agreement.
"Senior Notes Indenture": the Indenture, dated as of October 15,
1993, between the Borrower and State Street Bank and Trust Company (as
successor trustee to The First National Bank of Boston), as trustee, as
amended, supplemented or otherwise modified from time to time.
"Shrink Reserve": as of any Calculation Date, an amount equal to
1.75% of the cost of Inventory as reflected on the IE System. Such Shrink
Reserve percentage shall adjust from time to time at the Agents' sole
discretion exercised commercially reasonably in accordance with customary
business practices, based on the results of the Borrower's cycle and
physical Inventory counts.
"Single Employer Plan": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"SMC": Service Merchandise Company, Inc., a Tennessee
corporation.
"Special Purpose Subsidiary": any Subsidiary of the Borrower
organized solely for the purpose of (a) holding a license or permit issued
by any Governmental Authority and used in connection with the business of
the Borrower and/or its Subsidiaries or (b) providing employee services for
use in the foreign operations of the Borrower or any of its Subsidiaries,
provided that such Subsidiary shall only be a "Special Purpose Subsidiary"
for so long as such Subsidiary does not own any assets (other than any such
license or permit and other than any assets with a book value not exceeding
$5,000,000 in the aggregate) and does not engage in any business other than
holding such license or permit or providing such employee services and, in
each case, activities directly related thereto.
"Standby L/C Fee Rate": at any time, the rate per annum on the
aggregate undrawn amount of Standby Letters of Credit equal to 2.0%,
provided that during the continuance of an Event of Default the Standby L/C
Fee Rate shall be 4.0% per annum.
"Standby Letter of Credit": as defined in subsection 3.6(b)(i).
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"Standby Letter of Credit Outstandings": at any time, an amount
equal to the sum of (a) the aggregate then undrawn and unexpired amount of
the then outstanding Standby Letters of Credit issued in Dollars, (b) the
Dollar Equivalent of the aggregate then undrawn and unexpired amount of
then outstanding Letters of Credit issued in currencies other than Dollars
(such Dollar Equivalent to be determined as of the date of issuance of such
Standby Letter of Credit), (c) the aggregate amount of Reimbursement
Obligations in respect of Standby Letters of Credit issued in Dollars which
have not then been paid pursuant to subsection 3.10(a) and (d) (i) the
Dollar Equivalent of the aggregate amounts of Reimbursement Obligations in
respect of Standby Letters of Credit issued in currencies other than
Dollars which have not been reimbursed pursuant to subsection 3.10(a) (such
Dollar Equivalent to be calculated as of the date such Reimbursement
Obligation becomes due and payable) and which have not been converted into
Dollars in accordance with subsection 3.10(a) and (ii) the aggregate amount
of Reimbursement Obligations in respect of Standby Letters of Credit issued
in currencies other than Dollars which have not been reimbursed pursuant to
subsection 3.10(a) and which have been converted into Dollars in accordance
with such subsection.
"Subordinated Debentures": the Borrower's 9% Senior Subordinated
Debentures due 2004 issued pursuant to the Subordinated Debt Indenture.
"Subordinated Debt Indenture": the Indenture, dated as of
February 15, 1993, between the Borrower and First American National Bank,
as trustee, as amended, supplemented or otherwise modified from time to
time in accordance with the terms hereof.
"Subsidiary": as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through
one or more intermediaries, or both, by such Person. Unless otherwise
qualified, all references to a "Subsidiary" or to "Subsidiaries" in this
Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.
"Subsidiary Guarantor": each Subsidiary set forth on Schedule
5.13 under the heading "Initial Subsidiary Guarantors", together with each
other Subsidiary that becomes a party to the Master Security Agreement in
compliance with subsection 7.11(b).
"Swing Line Commitment": the lesser of (a) $50,000,000 and (b)
the Revolving Credit Commitments then in effect.
"Swing Line Lender": Citicorp and any other Lender acceptable to
the Administrative Agent that agrees to be a Swing Line Lender.
"Swing Line Loans": as defined in subsection 3.14.
"Swing Line Note": as defined in subsection 4.13(f).
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"Tax Code": the Internal Revenue Code of 1986, as amended from
time to time.
"Telerate Page 3750": the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that
service for the purpose of displaying comparable rates or prices).
"Term Loan": as defined in subsection 2.1.
"Term Loan Lender": any Lender with Term Loans outstanding
hereunder.
"Term Note": as defined in subsection 4.13(e).
"Termination Date": the earliest of (i) June 30, 2001, (ii) the
Consummation Date and (iii) in the case of the Revolving Loans, the date of
termination in whole of the Revolving Credit Commitments pursuant to
subsection 3.4 or Section 9.
"Trade L/C Fee Rate": at any time the rate per annum on the
aggregate undrawn amount of Trade Letters of Credit equal to 1.0%, provided
that during the continuance of any Event of Default, the Trade L/C Fee Rate
shall be 3.0% per annum.
"Trade Letter of Credit": as defined in subsection 3.6(b)(i).
"Trade Letter of Credit Outstandings": at any time, an amount
equal to the sum of (a) the aggregate then undrawn and unexpired amount of
the then outstanding Trade Letters of Credit issued in Dollars, (b) the
Dollar Equivalent of the aggregate then undrawn and unexpired amount of the
then outstanding Trade Letters of Credit issued in currencies other than
Dollars (such Dollar Equivalent to be calculated as of the date of issuance
of such Letters of Credit), (c) the aggregate amount of Reimbursement
Obligations in respect of Trade Letters of Credit issued in Dollars which
have not then been paid pursuant to subsection 3.10(a) and (d) (i) the
Dollar Equivalent of the aggregate amount of Reimbursement Obligations in
respect of Trade Letters of Credit issued in currencies other than Dollars
which have not then been paid pursuant to subsection 3.10(a) (such Dollar
Equivalent to be calculated as of the date such Reimbursement Obligation
becomes due and payable) and which have not been converted into Dollars in
accordance with subsection 3.10(a) and (ii) the aggregate amount of
Reimbursement Obligations in respect of Trade Letters of Credit issued in
currencies other than Dollars which have not been reimbursed pursuant to
subsection 3.10(a) and which have been converted into Dollars in accordance
with such subsection.
"Tranche": the collective reference to Eurodollar Loans the then
current Interest Periods with respect to all of which begin on the same
date and end on the same later date (whether or not such Eurodollar Loans
shall originally have been made on the same day).
"Transferee": as defined in subsection 11.6(f).
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"Transaction Costs": the fees, costs and expenses payable by the
Borrower to any Agent or Lender in connection with the execution, delivery
and performance of the Loan Documents and the transactions contemplated
thereby.
"Type": as to any Term Loan or Revolving Loan, its nature as an
ABR Loan or a Eurodollar Loan.
"UCC": the Uniform Commercial Code as in effect in the State of
New York from time to time or, where applicable as to specific Collateral,
any other relevant state.
"UCC Filing Collateral": Collateral (other than fixtures) as to
which filing financing statements under the UCC of the applicable
jurisdiction is an appropriate method of perfection of a security interest
in such Collateral.
"Uniform Customs": the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, and the International Standby Practices - ISP98,
International Chamber of Commerce Publication No. 590, each as the same may
be amended or revised from time to time.
"Voting Percentage": as to any Lender (a) at any time prior to
the termination of the Revolving Credit Commitments, the percentage which
(i) the sum of (x) such Lender's Revolving Credit Commitment plus (y) the
outstanding principal amount of such Lender's Term Loan then constitutes of
(ii) the sum of (x) the Revolving Credit Commitments of all the Lenders,
plus (y) the aggregate principal amount of Term Loans of all the Lenders
then outstanding and (b) at any time after the termination of the Revolving
Credit Commitments, the percentage which (i) the sum of (x) the principal
amount of such Lender's Loans (other than Swing Line Loans) then
outstanding plus (y) the product of such Lender's Revolving Credit
Commitment Percentage times the L/C Obligations and Swing Line Loans then
outstanding then constitutes of (ii) the sum of (x) the aggregate principal
amount of Loans of all the Lenders then outstanding plus (y) the aggregate
L/C Obligations of all the Lenders then outstanding.
"Y2K Compliance": the ability of a computer program to (i)
record, store, process, calculate, present and, where appropriate, insert
time and accurate dates and calculations for calendar dates falling on or
after (and, if applicable, spans of time including) January 1, 2000, (ii)
record, store, process, calculate and present any information and/or data
dependent on or relating to such dates in the same manner, and with the
same functionality, data integrity and performance, as the Software
records, stores, processes, calculates and presents calendar dates on or
before December 31, 1999 and in such fashion as to respond to two-digit
date input in a way that eliminates all ambiguities as to the century of
concern, and treats the year 2000 as a leap-year and correctly and
accurately regards and processes data and information with respect thereto,
and (iii) lose no functionality with respect to the introduction of
records, including but not limited to back-up and archived information
and/or data, containing dates falling on or after January 1, 2000 and "Y2K
Compliant" has the correlative meaning.
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1.2 OTHER DEFINITIONAL PROVISIONS.
(a) Unless otherwise specified therein, all terms defined in this
Agreement shall have the defined meanings when used in any Loan Document or any
certificate or other document made or delivered pursuant hereto or thereto.
(b) As used herein and in any other Loan Document, and any
certificate or other document made or delivered pursuant hereto or thereto,
accounting terms relating to the Borrower and its Subsidiaries not defined in
subsection 1.1 and accounting terms partly defined in subsection 1.1, to the
extent not defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, subsection,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.
(d) The word "including" shall mean "including, without limitation"
unless the context otherwise requires.
(e) The meanings given to defined terms herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNTS AND TERMS OF TERM LOANS
2.1 TERM LOANS. On the Effective Date the Term Loan Lenders shall
make Term Loans to the Borrower in an aggregate principal amount equal to
$100,000,000, the proceeds of which will be used first to repay outstanding Term
Loans under the Existing Credit Agreement, second, if the outstanding Term Loans
under the Existing Credit Agreement are less than $100,000,000 to repay
outstanding Revolving Credit Loans under the Existing Credit Agreement, and
third to repay outstanding Revolving Credit Loans under the Permanent Facility.
After giving effect to such Term Loans under this Agreement, each Term Loan
Lender shall have outstanding a Term Loan owing to it by the Borrower in a
principal amount equal to the amount set forth opposite such Lender's name on
Schedule 1.1(a). The Term Loans may from time to time be (i) Eurodollar Loans,
(ii) ABR Loans or (iii) a combination thereof, as determined by the Borrower and
notified to the Administrative Agent in accordance with subsection 4.2.
2.2 REPAYMENT OF TERM LOANS; AMORTIZATION. The Borrower hereby agrees
to pay interest on the unpaid principal amount of the Term Loans from time to
time outstanding from the Effective Date until payment in full thereof at the
rates per annum, and on the dates, set forth in subsection 4.4. The principal
amount of the Term Loans shall be payable in eight equal quarterly installments,
each in an aggregate principal amount equal to $250,000 on the first Business
Day of the months of January, April, July and October, beginning on July 1,
1999, and a final installment in an aggregate principal amount equal to the
remaining principal balance thereof on the Termination Date. The Borrower hereby
further agrees to pay interest on the unpaid principal amount of the Term Loans
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from time to time outstanding from the Effective Date until payment in full
thereof at the rates per annum, and on the dates, set forth in subsection 4.4.
SECTION 3. AMOUNTS AND TERMS OF REVOLVING CREDIT COMMITMENTS AND THE INTERIM
FACILITY
3.1 REVOLVING CREDIT COMMITMENTS.
(a) Subject to the terms and conditions hereof, each Revolving Credit
Lender severally agrees to make revolving credit loans ("Revolving Loans") to
the Borrower from time to time during the Revolving Credit Commitment Period in
an aggregate principal amount at any one time outstanding which, when added to
such Revolving Credit Lender's Revolving Credit Commitment Percentage of an
amount equal to the sum of (i) the aggregate principal amount of Swing Line
Loans then outstanding plus (ii) the then outstanding L/C Obligations (in each
case, after giving effect to the use of proceeds of such Revolving Loans), does
not exceed the amount of such Revolving Credit Lender's Revolving Credit
Commitment, provided that no Revolving Credit Lender shall be required to make a
Revolving Loan to the extent that, after giving effect thereto, (x) other than
during the Interim Facility Period, the Aggregate Outstanding Extensions of
Credit at such time would exceed the Borrowing Base or (y) during the Interim
Facility Period, the sum of the Aggregate Outstanding Extensions of Credit at
such time and the Previous Credit Agreement Outstandings at such time would
exceed the lesser of the Borrowing Base at such time and $500,000,000. During
the Revolving Credit Commitment Period, the Borrower may use the Revolving
Credit Commitments by borrowing, prepaying and reborrowing the Revolving Loans
in whole or in part, all in accordance with the terms and conditions hereof.
(b) The Revolving Loans may from time to time be (i) Eurodollar
Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by the
Borrower and notified to the Administrative Agent in accordance with subsections
3.2 and 4.2.
3.2 PROCEDURE FOR REVOLVING CREDIT BORROWING. The Borrower may borrow
under the Revolving Credit Commitments during the Revolving Credit Commitment
Period on any Business Day, provided that the Borrower shall give the
Administrative Agent irrevocable notice (which notice must be received by the
Administrative Agent prior to 12:00 Noon, New York City time, (a) three Business
Days prior to the requested Borrowing Date, if all or any part of the requested
Revolving Loans are to be initially Eurodollar Loans or (b) one Business Day
prior to the requested Borrowing Date, otherwise), which notice may be given by
telephone (to be promptly confirmed in writing, including by facsimile),
specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date,
(iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a
combination thereof and (iv) if the borrowing is to be entirely or partly of
Eurodollar Loans, the respective amounts of each such Type of Loan and the
respective lengths of the initial Interest Periods therefor. Each borrowing
under the Revolving Credit Commitments shall be in an amount equal to (x) in the
case of ABR Loans (except as otherwise provided in subsection 3.16(a)),
$5,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the then
Available Revolving Credit Commitments are less than $5,000,000, such lesser
amount) and (y) in the case of Eurodollar Loans, $10,000,000 or a whole multiple
of $l,000,000 in excess thereof. Upon receipt of any such notice from the
Borrower, the Administrative Agent shall promptly notify each Revolving
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Credit Lender thereof. Each Revolving Credit Lender will make the amount of its
pro rata share of each borrowing available to the Administrative Agent for the
account of the Borrower at the office of the Administrative Agent specified in
subsection 11.2 prior to 1:00 P.M., New York City time, on the Borrowing Date
requested by the Borrower in Dollars and in funds immediately available to the
Administrative Agent. Such borrowing will be made available to the Borrower
promptly (but in no event later than 1:00 P.M., New York City time) by the
Administrative Agent crediting the account of the Borrower on the books of such
office of the Administrative Agent with the aggregate of the amounts made
available to the Administrative Agent by the Revolving Credit Lenders and in
like funds as received by the Administrative Agent.
3.3 COMMITMENT FEE. The Borrower agrees to pay to the Administrative
Agent for the account of each Revolving Credit Lender a non-refundable
commitment fee for the period from and including the first day of the Revolving
Credit Commitment Period to but not including the Termination Date, computed at
a rate per annum equal to the Applicable Commitment Fee Rate then in effect on
the average daily amount of the Available Revolving Credit Commitment of such
Revolving Credit Lender during the period (net of any Swing Line Loans made by
such Revolving Credit Lender as a Swing Line Lender, to the extent and only to
the extent such Swing Line Loans are less than or equal to the unused Revolving
Credit Commitment of such Revolving Credit Lender) for which payment is made,
payable monthly in arrears on the last day of each month and on the Termination
Date (whether by stated maturity or otherwise) or such earlier date as the
Revolving Credit Commitments shall terminate as provided herein, commencing on
the first of such dates to occur after the Closing Date.
3.4 TERMINATION OR REDUCTION OF COMMITMENTS. The Borrower shall have
the right, upon not less than two Business Days' notice to the Administrative
Agent, to terminate the Revolving Credit Commitments or, from time to time, to
reduce the amount of the Revolving Credit Commitments, provided that no such
termination or reduction shall be permitted if, after giving effect thereto and
to any prepayments of the Revolving Loans made on the effective date thereof,
the aggregate principal amount of the Revolving Loans then outstanding, when
added to the then outstanding L/C Obligations and the aggregate principal amount
of then outstanding Swing Line Loans, would exceed the Revolving Credit
Commitments then in effect. Any such reduction shall be in an amount equal to
$10,000,000 or a whole multiple of $l,000,000 in excess thereof and shall reduce
permanently the Revolving Credit Commitments then in effect. Upon receipt of any
notice pursuant to this subsection 3.4, the Administrative Agent shall promptly
notify each Revolving Credit Lender thereof.
3.5 REPAYMENT OF REVOLVING LOANS. The Borrower hereby unconditionally
promises to pay to the Administrative Agent for the account of each Revolving
Credit Lender the then unpaid principal amount of each Revolving Loan of such
Revolving Credit Lender on the Termination Date (or such earlier date on which
the Revolving Loans become due and payable pursuant to Section 9). The Borrower
hereby further agrees to pay interest on the unpaid principal amount of the
Revolving Loans from time to time outstanding from the Effective Date until
payment in full thereof at the rates per annum, and on the dates, set forth in
subsection 4.4.
3.6 L/C COMMITMENT.
(a) Subject to the terms and conditions hereof, each Issuing Bank, in
reliance on the agreements of the other Lenders set forth in subsection 3.9(a),
agrees to issue letters of credit ("Letters of
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Credit") for the account of the Borrower on any Business Day during the
Revolving Credit Commitment Period in such form as may be approved from time to
time by such Issuing Bank; provided that no Issuing Bank shall have any
obligation to issue any Letter of Credit if, after giving effect to such
issuance, (i) the L/C Obligations at such time would exceed the L/C Commitment,
(ii) the Standby Letter of Credit Outstandings at such time would exceed
$125,000,000, (iii) the Aggregate Revolving Credit Outstandings at such time
would exceed the aggregate amount of the Revolving Credit Commitments at such
time, (iv) in the case of Letters of Credit issued in currencies other than
Dollars only, the L/C Obligations in respect of Letters of Credit issued in
currencies other than Dollars would exceed the Foreign L/C Commitment Sublimit
at such time, or (v) the Aggregate Outstanding Extensions of Credit at such time
would exceed the Borrowing Base at such time.
(b) Each Letter of Credit shall:
(i) be denominated in Dollars or such other currency that as of the
date of issuance thereof is in the reasonable judgment of the relevant
Issuing Bank (which shall be binding on the L/C Participants) freely
convertible or exchangeable into Dollars as the Borrower, the relevant
Issuing Bank and the Administrative Agent may from time to time agree, and
shall be either (A) a standby letter of credit issued to support
obligations of the Borrower or a Subsidiary, contingent or otherwise (a
"Standby Letter of Credit"), or (B) a commercial letter of credit issued in
respect of the purchase of inventory or other goods or services by the
Borrower and its Subsidiaries in the ordinary course of business (a "Trade
Letter of Credit"), and
(ii) expire no later than the earlier of (A) five Business Days prior
to the Termination Date and (B) one year after the date of issuance
thereof, provided that, subject to clause (A) above, any Letter of Credit
may, at the request of the Applicant as set forth in the applicable
Application, be automatically renewed on each anniversary of the issuance
thereof for an additional period of one year or less unless the Issuing
Bank which issued such Letter of Credit shall have given at least sixty
days prior written notice to the Borrower and the beneficiary of such
Letter of Credit that such Letter of Credit will not be renewed, in which
case such Letter of Credit may, at the option of the Borrower, provide that
the beneficiary of such Letter of Credit will be entitled to draw on such
Letter of Credit at any time during the thirty days prior to the expiry
thereof.
(c) Each Letter of Credit shall be subject to the Uniform Customs
and, to the extent not inconsistent therewith, the law of the State of New York.
(d) No Issuing Bank shall at any time be obligated to issue any
Letter of Credit hereunder if such issuance would conflict with, or cause such
Issuing Bank or any L/C Participant to exceed any limits imposed by, any
applicable Requirement of Law.
(e) On the Effective Date, all letters of credit and the
reimbursement obligations attendant thereto issued pursuant to or under any of
the Previous Credit Agreements which are then outstanding shall be from and
after such date deemed to be and become for all purposes Letters of Credit with
Reimbursement Obligations attendant thereto issued pursuant to and be
outstanding under this Agreement.
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3.7 PROCEDURE FOR ISSUANCE OF LETTERS OF CREDIT. An Applicant may
from time to time request that an Issuing Bank issue a Letter of Credit by
delivering (a) to such Issuing Bank at its address for notices specified herein
in such manner as may be agreed by or be reasonably acceptable to such Issuing
Bank (including by electronic transmission) an Application therefor, completed
to the satisfaction of such Issuing Bank, and such other certificates, documents
and other papers and information as such Issuing Bank may reasonably request and
(b) a notice to the Administrative Agent that such Letter of Credit has been
requested. Upon receipt of any Application, each Issuing Bank agrees to process
such Application and the certificates, documents and other papers and
information delivered to it in connection therewith in accordance with its
customary procedures and shall promptly issue the Letter of Credit requested
thereby (but in no event shall such Issuing Bank be required to issue any Letter
of Credit earlier than two Business Days after its receipt of the Application
therefor and all such other certificates, documents and other papers and
information relating thereto) by issuing the original of such Letter of Credit
to the beneficiary thereof or as otherwise may be agreed by such Issuing Bank
and the Borrower. Each Issuing Bank shall furnish a copy of each Letter of
Credit issued by such Issuing Bank to the Borrower and the Administrative Agent
promptly following the issuance thereof.
3.8 LETTER OF CREDIT FEES, COMMISSIONS AND OTHER CHARGES.
(a) The Borrower shall pay to the relevant Issuing Bank with respect
to each Letter of Credit issued by such Issuing Bank under this Agreement, for
the account of such Issuing Bank, a fronting fee with respect to the period from
the date of issuance of such Letter of Credit to the expiration or termination
date of such Letter of Credit, computed at a rate per annum equal to 0.25% on
the average aggregate amount available to be drawn under such Letter of Credit
during the period for which such fee is calculated. Such fronting fee shall be
payable monthly in arrears on each L/C Fee Payment Date to occur after the
issuance of such Letter of Credit and on the Termination Date or on such earlier
date as the Revolving Credit Commitments shall terminate as provided herein and
shall be nonrefundable.
(b) The Borrower shall pay to the Administrative Agent, for the
account of the L/C Participants, a letter of credit commission with respect to
each Trade Letter of Credit issued under this Agreement with respect to the
period from the date of issuance of such Trade Letter of Credit to the
expiration or termination date of such Letter of Credit, computed at a rate per
annum equal to the Trade L/C Fee Rate in effect from time to time on the average
aggregate amount available to be drawn under such Trade Letter of Credit during
the period for which such fee is calculated. Such commission shall be shared
ratably among the L/C Participants in accordance with their respective Revolving
Credit Commitment Percentages. Such commission shall be payable in arrears on
each L/C Fee Payment Date to occur after the issuance of such Letter of Credit
and on the Termination Date (or on such earlier date as the Revolving Credit
Commitments shall terminate as provided herein) and shall be nonrefundable.
(c) The Borrower shall pay to the Administrative Agent, for the
account of the L/C Participants, a letter of credit commission with respect to
each Standby Letter of Credit with respect to the period from the date of
issuance of such Standby Letter of Credit to the expiration or termination date
of such Letter of Credit, computed at a rate per annum equal to the Standby L/C
Fee Rate in effect from time to time on the average aggregate amount available
to be drawn under such Standby Letter of Credit during the period for which such
fee is calculated. Such commission shall be shared ratably among the L/C
Participants in accordance with their respective Revolving Credit Commitment
Percentages. Such commission shall be payable in arrears on each L/C Fee Payment
Date to occur after the issuance of such
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Letter of Credit and on the Termination Date (or on such earlier date as the
Revolving Credit Commitments shall terminate as provided herein) and shall be
nonrefundable.
(d) In addition to the foregoing fees and commissions, the Borrower
shall pay or reimburse each Issuing Bank for such normal and customary costs and
expenses as may be agreed upon by the Borrower and such Issuing Bank in
connection with issuing, effecting payment under, amending or otherwise
administering any Letter of Credit issued by such Issuing Bank.
(e) The Administrative Agent shall, promptly following its receipt
thereof, distribute to each Issuing Bank and the L/C Participants all fees and
commissions received by the Administrative Agent for their respective accounts
pursuant to this subsection.
3.9 L/C PARTICIPATIONS.
(a) Each Issuing Bank irrevocably agrees to grant and hereby grants
to each L/C Participant (other than such Issuing Bank), and, to induce such
Issuing Bank to issue Letters of Credit hereunder, each such L/C Participant
irrevocably agrees to accept and purchase and hereby accepts and purchases from
such Issuing Bank, on the terms and conditions hereinafter stated, for such L/C
Participant's own account and risk an undivided interest equal to such L/C
Participant's Revolving Credit Commitment Percentage in such Issuing Bank's
obligations and rights under each Letter of Credit issued by such Issuing Bank
hereunder and the amount of each draft paid by such Issuing Bank thereunder.
Each such L/C Participant unconditionally and irrevocably agrees with each
Issuing Bank that, if a draft is paid under any Letter of Credit issued by such
Issuing Bank for which such Issuing Bank is not reimbursed in full by the
Borrower in accordance with the terms of this Agreement, such L/C Participant
shall pay to the Administrative Agent for the account of such Issuing Bank upon
demand an amount equal to such L/C Participant's Revolving Credit Commitment
Percentage of the amount of such draft, or any part thereof, which is not so
reimbursed.
(b) If any amount required to be paid by any L/C Participant to any
Issuing Bank pursuant to subsection 3.9(a) in respect of any unreimbursed
portion of any payment made by such Issuing Bank under any Letter of Credit
issued by such Issuing Bank is paid to such Issuing Bank within three Business
Days after the date such payment is due, such L/C Participant shall pay to such
Issuing Bank on demand an amount equal to the product of (i) such amount, times
(ii) the daily average Federal Funds Rate, during the period from and including
the date such payment is required to the date on which such payment is
immediately available to such Issuing Bank, times (iii) a fraction the numerator
of which is the number of days that elapse during such period and the
denominator of which is 360. If any such amount required to be paid by any L/C
Participant pursuant to subsection 3.9(a) is not in fact made available to any
Issuing Bank by such L/C Participant within three Business Days after the date
such payment is due, such Issuing Bank shall be entitled to recover from such
L/C Participant, on demand, such amount with interest thereon calculated from
such due date at the rate per annum applicable to Revolving Credit Loans that
are ABR Loans hereunder. A certificate of any Issuing Bank submitted to any L/C
Participant with respect to any amounts owing under this subsection shall be
conclusive in the absence of manifest error.
(c) Whenever, at any time after any Issuing Bank has made payment
under any Letter of Credit issued by such Issuing Bank and has received from any
L/C Participant its pro rata share
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of such payment in accordance with subsection 3.9(a), such Issuing Bank receives
any payment related to such Letter of Credit (whether directly from the Borrower
or otherwise, including proceeds of collateral applied thereto by such Issuing
Bank), or any payment of interest on account thereof, such Issuing Bank will
distribute to such L/C Participant its pro rata share thereof.
(d) If any payment received by any Issuing Bank pursuant to
subsection 3.10 with respect to any Letter of Credit issued by it shall be
required to be returned by such Issuing Bank, each L/C Participant shall pay to
such Issuing Bank its pro rata share thereof.
3.10 LETTER OF CREDIT REIMBURSEMENT OBLIGATIONS.
(a) The Borrower agrees to reimburse each Issuing Bank for the amount
of (i) any draft paid by such Issuing Bank under any Letter of Credit issued by
such Issuing Bank and (ii) any taxes, fees, charges or other costs or expenses
reasonably incurred by such Issuing Bank in connection with such payment
(including any such costs and expenses related to any conversion of any such
amount into Dollars as contemplated by the next succeeding sentence). Except as
otherwise agreed by the Borrower and the relevant Issuing Bank, each such
payment shall be made to the relevant Issuing Bank at its address for notices
specified herein in the currency in which the relevant Letter of Credit was
issued in immediately available funds in such currency, provided that if the
Borrower does not reimburse the relevant Issuing Bank for any draft paid by such
Issuing Bank under any Letter of Credit issued by such Issuing Bank in a
currency other than Dollars on the date required pursuant to subsection 3.10(b),
such Issuing Bank shall convert such amount into Dollars at the rate of exchange
then available to such Issuing Bank in the interbank market where its foreign
currency exchange operations in respect of such currency are then being
conducted and the Borrower shall thereafter be required to reimburse in Dollars
such Issuing Bank for such amount with interest pursuant to subsection 3.10(b).
(b) If any draft shall be presented for payment under any Letter of
Credit issued by any Issuing Bank, such Issuing Bank shall promptly notify the
Borrower of the date and amount thereof. The Borrower shall reimburse each
Issuing Bank pursuant to subsection 3.10(a) with respect to any drawing under
any Letter of Credit issued by such Issuing Bank on (i) the Business Day on
which such drawing is paid by such Issuing Bank, if notice of such drawing is
given to the Borrower by such Issuing Bank prior to 12:00 Noon, New York City
time, on the date such drawing is paid, or (ii) the first Business Day after
notice of such drawing is given to the Borrower by the Issuing Bank, if such
notice is given after 12:00 Noon, New York City time, on the date such drawing
is paid, and, if such drawing is reimbursed after the date of such drawing,
interest shall be payable on the amount of such drawing for the period from the
date such drawing is paid by the Issuing Bank until reimbursed by the Borrower
at the rate then applicable to Revolving Credit Loans that are ABR Loans
hereunder. If any amount payable under this subsection is not paid when due,
interest shall be payable on such amount from the date such amount becomes
payable under this subsection until payment in full thereof at the rate which
would be payable on any outstanding ABR Loans which were then overdue.
3.11 OBLIGATIONS ABSOLUTE.
(a) The Borrower's obligations under this Section 3 in respect of
Letters of Credit shall be absolute and unconditional under any and all
circumstances and irrespective of any set-off,
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counterclaim or defense to payment which the Borrower or any Applicant may have
or have had against any Issuing Bank or any beneficiary of any Letter of Credit.
(b) The Borrower also agrees with each Issuing Bank that such Issuing
Bank shall not be responsible for, and the Borrower's Reimbursement Obligations
shall not be affected by, among other things, (i) the validity or genuineness of
documents or of any endorsements thereon, even though such documents shall in
fact prove to be invalid, fraudulent or forged, or (ii) any dispute between or
among the Borrower, any Applicant and any beneficiary of any Letter of Credit or
any other party to which such Letter of Credit may be transferred or (iii) any
claims whatsoever of the Borrower or any Applicant against any beneficiary of
such Letter of Credit or any such transferee.
(c) No Issuing Bank shall be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit issued by
such Issuing Bank, except for errors or omissions caused by such Issuing Bank's
gross negligence or willful misconduct.
(d) The Borrower agrees that any action taken or omitted by any
Issuing Bank under or in connection with any Letter of Credit issued by such
Issuing Bank or the related drafts or documents, if done in the absence of gross
negligence or willful misconduct and in accordance with the standards of care
specified in the UCC and the Uniform Customs, shall be binding on the Borrower
and shall not result in any liability of such Issuing Bank to the Borrower.
3.12 LETTER OF CREDIT PAYMENTS. The responsibility of each Issuing
Bank to the Borrower in connection with any draft presented for payment under
any Letter of Credit issued by such Issuing Bank shall, in addition to any
payment obligation expressly provided for in such Letter of Credit, be limited
to determining that the documents (including each draft) delivered under such
Letter of Credit in connection with such presentment are in conformity with such
Letter of Credit.
3.13 LETTER OF CREDIT APPLICATIONS. To the extent that any provision
of any Application related to any Letter of Credit is inconsistent with the
provisions of this Section 3 or any other terms of this Agreement or any other
Loan Document, the provisions of this Section 3 shall apply and such
inconsistent provision of such Application shall be of no force and effect.
3.14 SWING LINE COMMITMENT. Subject to the terms and conditions
hereof, each Swing Line Lender, in reliance on the agreements of the other
Lenders set forth in subsection 3.16, agrees to make swing line loans ("Swing
Line Loans") to the Borrower from time to time during the Revolving Credit
Commitment Period, provided that (a) no Swing Line Lender shall have any
obligation to make a Swing Line Loan if, after giving effect to any such Swing
Line Loans and the use of proceeds thereof, (i) the aggregate principal amount
of Swing Line Loans then outstanding would exceed the Swing Line Commitment,
(ii) the Aggregate Revolving Credit Outstandings at such time would exceed the
Revolving Credit Commitments in effect at such time or (iii) the Aggregate
Outstanding Extensions of Credit at such time plus, during the Interim Facility
Period, the Previous Credit Agreement Outstandings at such time, would exceed
(x) other than during the Interim Facility Period, the Borrowing Base at such
time or (y) during the Interim Facility Period, the lesser of the Borrowing Base
at such time and $500,000,000, and (b) all borrowings and prepayments of Swing
Line Loans shall be made such that the aggregate principal amount of Swing Line
Loans of each Swing Line Lender outstanding at any time
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shall be equal. During the Revolving Credit Commitment Period, the Borrower may
use the Swing Line Commitment by borrowing, prepaying and reborrowing the Swing
Line Loans in whole or in part, all in accordance with the terms and conditions
hereof. All Swing Line Loans shall be ABR Loans.
3.15 PROCEDURE FOR SWING LINE BORROWING. The Borrower may borrow
under the Swing Line Commitment during the Revolving Credit Commitment Period on
any Business Day, provided that the Borrower shall give the relevant Swing Line
Lender and the Administrative Agent irrevocable notice (which notice may be
given by telephone (to be promptly confirmed in writing, including by facsimile)
and must be received by the Swing Line Lender prior to 1:00 P.M. New York City
time) on the requested Borrowing Date specifying the amount of the requested
Swing Line Loan which shall be in an aggregate minimum amount of $l,000,000 or a
whole multiple of $100,000 in excess thereof (or, if less, the unused portion of
the Swing Line Commitment). The proceeds of the Swing Line Loan will be made
available by the relevant Swing Line Lender to the Borrower at the office of the
Swing Line Lender by 4:00 P.M., New York City time, on the Borrowing Date by
crediting the account of the Borrower at such office with such proceeds. The
Borrower may at any time and from time to time, subject to subsection 3.14,
prepay the Swing Line Loans, in whole or in part, without premium or penalty, by
notifying (which notice may be given by telephone (to be promptly confirmed in
writing, including by facsimile)) the relevant Swing Line Lender and the
Administrative Agent prior to 2:00 P.M., New York City time, on any Business Day
of the date and amount of prepayment. If any such notice is given, the amount
specified in such notice shall be due and payable on the date specified therein.
Partial prepayments shall be in an aggregate principal amount of $100,000 or a
whole multiple of $100,000 in excess thereof.
3.16 REFUNDING OF SWING LINE LOANS; PARTICIPATIONS IN SWING LINE
LOANS.
(a) Except as otherwise provided in subsection 3.16(f), in the event
that (i) the aggregate average daily outstanding principal amount of Swing Line
Loans during any weekly period ending on Thursday (or, in the event Thursday is
not a Business Day, on the next succeeding Business Day) of any week exceeds
$30,000,000, and (ii) the principal amount of Swing Line Loans outstanding on
the last day of such period exceeds $30,000,000, the Borrower shall, or the
Administrative Agent may, on behalf of the Borrower (which hereby irrevocably
authorizes the Administrative Agent to act on its behalf in such regard) request
each Revolving Credit Lender to make a Revolving Loan (which shall be an ABR
Loan) in an amount equal to such Lender's Revolving Credit Commitment Percentage
of the amount by which the aggregate outstanding principal amount of Swing Line
Loans on the last day of such period exceeds $20,000,000, regardless of whether
the conditions set forth in subsection 6.2 have been satisfied in connection
therewith. The Swing Line Lenders may, on behalf of the Borrower (which hereby
authorizes the Swing Line Lenders to act on its behalf in such regard), at any
time request each Revolving Credit Lender (including the Swing Line Lenders) to
make a Revolving Credit Loan (which shall be an ABR Loan) in an amount equal to
such Lender's Revolving Credit Commitment Percentage of the aggregate principal
amount of Swing Line Loans then outstanding, regardless of whether the
conditions set forth in subsection 6.2 have been satisfied in connection
therewith. Unless any of the events described in paragraph (f) of Section 9
shall have occurred with respect to the Borrower (in which event the procedures
of paragraph (c) of this subsection 3.16 shall apply) each Lender shall make the
proceeds of its Revolving Loan available to the Administrative Agent for the
account of the relevant Swing Line Lender at the Administrative Agent's office
specified in or pursuant to subsection 11.2 prior to 11:00 A.M., New York City
time, in funds immediately available in Dollars on the Business Day next
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succeeding the date such notice is given. The proceeds of such Revolving Loans
shall be immediately applied to repay the relevant Swing Line Loan. Effective on
the day such Revolving Loans are made, the relevant Swing Line Loan so paid
shall no longer be outstanding as a Swing Line Loan and shall no longer be due
under the Swing Line Note. The Borrower authorizes each Swing Line Lender, upon
written notice to the Borrower, to charge the Borrower's accounts with such
Swing Line Lender (up to the amount available in each such account) in order to
immediately pay the amount of its outstanding Swing Line Loans to the extent
amounts received from the Lenders are not sufficient to repay in full such
outstanding Swing Line Loans.
(b) Notwithstanding anything herein to the contrary, and except as
provided in subsection 3.16(f), no Swing Line Lender shall make any Swing Line
Loans if the Swing Line Lender has received written notice that the conditions
set forth in subsection 6.2 have not been satisfied in connection with the
making of such Swing Line Loans and no Swing Line Lender shall otherwise be
required to determine that, or take notice whether, the conditions precedent set
forth in subsection 6.2 have been satisfied in connection with the making of any
Swing Line Loan.
(c) If prior to the making of a Revolving Loan pursuant to subsection
3.16(a) one of the events described in paragraph (f) of Section 9 shall have
occurred and be continuing with respect to the Borrower, each Lender will, on
the date such Revolving Loan was to or would have been made pursuant to the
notice in subsection 3.16(a), purchase an undivided participating interest in
the outstanding Swing Line Loans in an amount equal to (i) its Revolving Credit
Commitment Percentage times (ii) the aggregate principal amount of Swing Line
Loans then outstanding. Each Lender will immediately transfer to the Swing Line
Lender, in immediately available funds, the amount of its participation.
(d) Whenever, at any time after any Lender has purchased a
participating interest in a Swing Line Loan, any Swing Line Lender receives any
payment on account thereof, such Swing Line Lender will distribute to such
Lender its participating interest in such amount (appropriately adjusted, in the
case of interest payments, to reflect the period of time during which such
Lender's participating interest was outstanding and funded), provided that, in
the event that such payment received by such Swing Line Lender is required to be
returned, such Lender will return to such Swing Line Lender any portion thereof
previously distributed by such Swing Line Lender to it.
(e) Each Lender's obligation to make the Revolving Loans referred to
in subsection 3.16(a) and to purchase participating interests pursuant to
subsection 3.16(c) shall be absolute and unconditional and shall not be affected
by any circumstance, including, without limitation, (i) any setoff,
counterclaim, recoupment, defense or other right which such Lender or the
Borrower may have against the relevant Swing Line Lender, the Borrower or any
other Person for any reason whatsoever, (ii) the occurrence or continuance of a
Default or an Event of Default, (iii) any adverse change in the condition
(financial or otherwise) of the Borrower, (iv) any breach of this Agreement or
any other Loan Document by the Borrower, any Subsidiary or any other Lender, or
(v) any other circumstance, happening or event whatsoever, whether or not
similar to any of the foregoing.
(f) (i) The Administrative Agent may, as a Swing Line Lender
hereunder, from time to time, after the occurrence and during the continuance of
any Default or Event of Default, and subject to clause (C) of this subsection
3.16(f), and notwithstanding the requirements of subsections
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6.2(a) and 6.2(b), make such disbursements and advances pursuant to the Loan
Documents, in the form of Swing Line Loans, which the Administrative Agent, in
its sole discretion, deems necessary or desirable to preserve or protect the
Collateral or any portion thereof or to enhance the likelihood or maximize the
amount of repayment of the Loans and other Credit Agreement Obligations;
provided that, after giving effect to any such Swing Line Loans and the use of
proceeds thereof, (A) the aggregate principal amount of Swing Line Loans then
outstanding would not exceed the Swing Line Commitment, (B) the Aggregate
Revolving Credit Outstandings at such time would not exceed the Revolving Credit
Commitment in effect at such time and (C) the Aggregate Outstanding Extensions
of Credit at such time would not exceed (x) the Borrowing Base at such time or
(y) if applicable, the Interim Maximum Amount (collectively, "Protective
Advances"). The Administrative Agent shall notify the Borrower and each Lender
in writing of such Protective Advance. All outstanding principal of, and
interest on, the Protective Advances shall constitute Credit Agreement
Obligations secured by the Collateral until paid in full by the Borrower.
3.17 OTHER FEES. The Borrower agrees to pay (i) to the Administrative
Agent the fees in the amounts and on the dates set forth in the Fee Letter dated
March 25, 1999 from Citicorp to the Borrower, and accepted by the Borrower on
the same date and (ii) to the Lenders the Closing Fee.
SECTION 4. GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT
4.1 OPTIONAL AND MANDATORY PREPAYMENTS.
(a) The Borrower may, at any time and from time to time, prepay the
Loans, in whole or in part, without premium or penalty (except, with respect to
Eurodollar Loans that are prepaid on a date other than the last day of the
Interest Period with respect thereto, as provided under subsection 4.11), upon
(i) in the case of prepayments of Eurodollar Loans, at least three Business
Days' irrevocable notice (which notice may be given by telephone (to be promptly
confirmed in writing, including by facsimile) to the Administrative Agent and
(ii) in the case of prepayments of ABR Loans (other than Swing Line Loans),
irrevocable notice (which notice may be given by telephone (to be promptly
confirmed in writing, including by facsimile)) to the Administrative Agent prior
to 11:30 A.M., New York City time, on the date of such prepayment, in each case
specifying the date and amount of prepayment and whether the prepayment is of
Eurodollar Loans, ABR Loans or a combination thereof, and, if of a combination
thereof, the amount allocable to each. Upon receipt of any such notice the
Administrative Agent shall promptly notify each affected Lender thereof. If any
such notice is given, the amount specified in such notice shall be due and
payable on the date specified therein, together with any amounts payable
pursuant to subsection 4.11 in connection therewith and, in the case of
prepayments of the Term Loans only, accrued interest to such date on the amount
prepaid. Amounts prepaid on account of the Term Loans may not be reborrowed and
will be applied to the installments thereof in the scheduled order of maturity
thereof. Partial prepayments under this subsection 4.1(a) shall be, in the case
of Eurodollar Loans, in an aggregate principal amount of $10,000,000 or a whole
multiple of $1,000,000 in excess thereof and in the case of ABR Loans, in an
aggregate principal amount of $5,000,000 or a whole multiple of $1,000,000 in
excess thereof.
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(b) If, at any time, the Aggregate Outstanding Extensions of Credit
at such time exceed (x) the Borrowing Base at such time or (y) if applicable,
the Interim Maximum Amount, the Borrower shall, without notice or demand,
immediately repay Swing Line Loans then outstanding and/or, after the Swing Line
Loans have been paid in full, Revolving Loans in an aggregate principal amount
equal to the lesser of (i) the amount of such excess and (ii) the aggregate
principal amount of Swing Line Loans and Revolving Loans then outstanding,
together with interest accrued to the date of such payment or prepayment on the
principal so prepaid and any amounts payable under subsection 4.11 in connection
therewith. To the extent that after giving effect to any prepayment of Swing
Line Loans and Revolving Loans required by the preceding sentence, the Aggregate
Outstanding Extensions of Credit at such time exceed the Borrowing Base at such
time or the Interim Maximum Amount, if applicable, the Borrower shall, without
notice or demand, immediately deposit in the Collateral Account upon terms
reasonably satisfactory to the Administrative Agent an amount equal to the
lesser of (i) the aggregate then outstanding L/C Obligations and (ii) the amount
of such remaining excess. The Administrative Agent shall apply any cash
deposited in the Collateral Account (to the extent thereof) to pay any
Reimbursement Obligations which become due thereafter. To the extent that after
giving effect to any prepayment of the Revolving Loans and cash deposits
required by the preceding sentences, the Aggregate Outstanding Extensions of
Credit at such time exceed the Borrowing Base at such time or the Interim
Maximum Amount, if applicable, the Borrower shall, without notice or demand,
immediately repay the Term Loans in the scheduled order of maturity thereof in
an aggregate principal amount equal to the lesser of (i) the amount of such
excess and (ii) the aggregate principal amount of Term Loans then outstanding,
together with interest accrued to the date of such payment or prepayment on the
principal so prepaid and any amounts payable under subsection 4.11 in connection
therewith. The Borrower shall also prepay the Revolving Loans to the extent
required to comply with subsection 3.16.
(c) The Borrower shall repay the Revolving Loans, within three
Business Days after the receipt by the Borrower or any Restricted Subsidiary of
any Asset Sale Proceeds in respect of the Collateral, in an amount equal to such
Asset Sale Proceeds.
(d) The Borrower agrees that all available funds in the Collateral
Account (except for Asset Sale Proceeds) shall be applied first, pro rata, to
the amount of the Swing Line Loans and any Reimbursement Obligations then
outstanding, next to the outstanding principal amount of the Revolving Loans,
then (i) on any Business Day that any funds are on deposit in the Collateral
Account and no Default or Event of Default has occurred and is continuing, the
Borrower may direct the Administrative Agent to transfer to the Borrower's
disbursement account funds up to the difference between the Borrowing Base as
reflected in the most recent Borrowing Base Certificate and 100% of the
remaining Secured Obligations and (ii) on any Business Day that any funds are on
deposit in the Collateral Account and a Default or Event of Default has occurred
and is continuing, the Borrower may direct the Administrative Agent to transfer
to the Borrower's disbursement account funds up to the difference between the
Borrowing Base as reflected in the most recent Borrowing Base Certificate and
105% of the remaining Secured Obligations. The Borrower shall utilize funds on
deposit in the Collateral Account that are available to it pursuant to the terms
hereof prior to requesting Revolving Loans to be made hereunder.
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4.2 CONVERSION AND CONTINUATION OPTIONS.
(a) The Borrower may, subject to paragraph (b) below, elect from time
to time to convert Eurodollar Loans to ABR Loans by giving the Administrative
Agent irrevocable notice of such election prior to 1:00 P.M., New York City
time, three Business Days prior to the date of conversion, which notice may be
given by telephone (to be promptly confirmed in writing, including by
facsimile), provided that any such conversion of Eurodollar Loans may only be
made on the last day of an Interest Period with respect thereto. The Borrower
may elect from time to time to convert ABR Loans to Eurodollar Loans by giving
the Administrative Agent irrevocable notice of such election prior to 1:00 P.M.,
New York City time, three Business Days prior to the date of conversion, which
notice may be given by telephone (to be promptly confirmed in writing, including
by facsimile). Any such notice of conversion to Eurodollar Loans shall specify
the length of the initial Interest Period or Interest Periods therefor. Upon
receipt of any such notice the Administrative Agent shall promptly notify each
affected Lender thereof. All or any part of outstanding Eurodollar Loans and ABR
Loans may be converted as provided herein, provided that (i) no ABR Loan may be
converted into a Eurodollar Loan when any Event of Default has occurred and is
continuing and (ii) no ABR Loan may be converted into a Eurodollar Loan after
the date that is one month prior to the Termination Date.
(b) Any Eurodollar Loans may be continued as such upon the expiration
of the then current Interest Period with respect thereto by the Borrower giving
notice to the Administrative Agent in accordance with the applicable provisions
of the term "Interest Period" set forth in subsection 1.1, of the length of the
next Interest Period to be applicable to such Eurodollar Loans, which notice may
be given by telephone (to be promptly confirmed in writing, including by
facsimile), provided that no Eurodollar Loan may be continued as such (i) when
any Event of Default has occurred and is continuing and the Administrative Agent
has notified the Borrower that it has determined that such a continuation is not
appropriate or (ii) after the date that is one month prior to the Termination
Date (in the case of continuations of Revolving Loans) or prior to the Term Loan
Maturity Date (in the case of continuations of Term Loans), and provided
further, that if the Borrower shall fail to give such notice or if such
continuation is not permitted such Eurodollar Loans shall be automatically
converted to ABR Loans on the last day of such then expiring Interest Period.
Upon receipt of any notice pursuant to this subsection 4.2(b), the
Administrative Agent shall notify each affected Lender thereof.
4.3 MINIMUM AMOUNTS AND MAXIMUM NUMBER OF TRANCHES. All borrowings,
conversions and continuations of Eurodollar Loans hereunder and all selections
of Interest Periods hereunder shall be in such amounts and be made pursuant to
such elections so that, after giving effect thereto, the aggregate principal
amount of Eurodollar Loans comprising each Tranche shall be equal to $10,000,000
or a whole multiple of $l,000,000 in excess thereof. In no event shall there be
more than 20 Tranches outstanding at any time.
4.4 INTEREST RATES AND PAYMENT DATES.
(a) Each Eurodollar Loan shall bear interest for each day during each
Interest Period with respect thereto at a rate per annum equal to the Eurodollar
Rate determined for such Interest Period plus the Applicable Margin.
(b) Each ABR Loan shall bear interest at a rate per annum equal to
the ABR plus the Applicable Margin.
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(c) Each Swing Line Loan shall bear interest at a rate per annum
equal to the ABR plus the Applicable Margin for ABR Loans.
(d) Notwithstanding the rate of interest specified in this subsection
4.4 or elsewhere herein, effective immediately upon the occurrence of any Event
of Default and for so long thereafter as such Event of Default is continuing,
the principal balance of all Loans shall bear interest at a rate per annum which
is the rate that would otherwise be applicable thereto pursuant to this
Agreement plus 2% per annum. If all or a portion of (i) any interest payable on
any Loan, (ii) any commitment fee or (iii) any other amount payable hereunder
shall not be paid when due (whether at the stated maturity, by acceleration or
otherwise), any such overdue interest, commitment fee or other amount shall bear
interest at a rate per annum which is the rate described in paragraph (b) of
this subsection plus 2%, in each case from the date of such non-payment until
such overdue interest, commitment fee or other amount is paid in full (as well
after as before judgment).
(e) Interest shall be payable in arrears on each Interest Payment
Date, provided that (i) interest accruing pursuant to subsection 4.4(d) shall be
payable from time to time on demand and (ii) interest on the Term Loans shall
also be payable on the Term Loan Maturity Date (or such earlier date on which
the Term Loans become due and payable pursuant to Section 9) and (iii) interest
on the Revolving Loans shall also be due and payable on the Termination Date (or
such earlier date on which the Revolving Loans become due and payable pursuant
to Section 9).
4.5 COMPUTATION OF INTEREST AND FEES.
(a) Commitment fees and, whenever it is calculated on the basis of
Citibank's prime rate, interest shall be calculated on the basis of a 365- (or
366-, as the case may be) day year for the actual days elapsed; and otherwise
interest and fees and commissions in respect of Letters of Credit shall be
calculated on the basis of a 360-day year for the actual days elapsed. The
Administrative Agent shall as soon as practicable notify the Borrower and the
affected Lenders of each determination of a Eurodollar Rate. Any change in the
interest rate on a Loan resulting from a change in the ABR or the Eurocurrency
Reserve Requirements shall become effective as of the opening of business on the
day on which such change becomes effective. The Administrative Agent shall as
soon as practicable notify the Borrower and the affected Lenders of the
effective date and the amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative
Agent pursuant to any provision of this Agreement shall be presumed correct in
the absence of manifest error.
(c) Each Lender shall use its best efforts to furnish quotations of
rates to the Administrative Agent as contemplated hereby. If any of the Lenders
shall be unable or shall otherwise fail to supply such rates to the
Administrative Agent upon its request, the rate of interest shall, subject to
the provisions of this subsection 4.5, be determined on the basis of the
quotations of the remaining Lenders or Lender.
4.6 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day
of any Interest Period:
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(i) the Administrative Agent shall have determined (which
determination shall be conclusive and binding upon the Borrower) that, by
reason of circumstances affecting the relevant market, adequate and
reasonable means do not exist for ascertaining the Eurodollar Rate for such
Interest Period, or
(ii) the Administrative Agent shall have received notice from any
Lender that the making or continuation of any Eurodollar Loan has become
impracticable as a result of a contingency occurring after the date hereof
which materially and adversely affects the London interbank market,
the Administrative Agent shall give facsimile or telephonic notice thereof to
the Borrower and the affected Lenders as soon as practicable thereafter. If such
notice is given (x) any Eurodollar Loans requested to be made on the first day
of such Interest Period shall be made as ABR Loans, (y) any ABR Loans that were
to have been converted on the first day of such Interest Period to Eurodollar
Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans
which the Borrower has requested to continue as such pursuant to subsection
4.2(b) shall be converted, on the first day of such Interest Period, to ABR
Loans, provided that, in the case of clause (b) above, only the Eurodollar Loan
of a Lender which delivers a notice pursuant to such clause shall be subject to
this sentence and the following sentence. Until such notice has been withdrawn
by the Administrative Agent, no further Eurodollar Loans shall be made or
continued as such, nor shall the Borrower have the right to convert ABR Loans to
Eurodollar Loans.
4.7 PRO RATA TREATMENT AND PAYMENTS.
(a) Except as otherwise provided in subsections 3.6 through 3.16, all
payments (including prepayments) to be made by the Borrower hereunder, whether
on account of principal, interest, fees or otherwise, shall be made without set
off or counterclaim and shall be made prior to 1:00 P.M., New York City time, on
the due date thereof to the Administrative Agent, for the account of the
Revolving Credit Lenders or the Term Loan Lenders, as the case may be, at the
Administrative Agent's office specified in or pursuant to subsection 11.2
(except as otherwise provided herein) in Dollars and in immediately available
funds. The Administrative Agent shall distribute such payments to the Lenders
entitled to receive the same promptly upon receipt in like funds as received. If
any payment hereunder (other than payments on Eurodollar Loans) becomes due and
payable on a day other than a Business Day, such payment shall be extended to
the next succeeding Business Day, and, with respect to payments of principal.
Interest thereon shall be payable at the then applicable rate during such
extension. If any payment on a Eurodollar Loan becomes due and payable on a day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day (and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension)
unless the result of such extension would be to extend such payment into another
calendar month, in which event such payment shall be made on the immediately
preceding Business Day. Each payment (including each prepayment) by the Borrower
on account of principal of and interest on the Term Loans shall be made pro rata
according to the respective outstanding principal amounts of the Term Loans then
held by the Term Loan Lenders.
(b) Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its portion
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of such borrowing available to the Administrative Agent, the Administrative
Agent may assume that such Lender is making such amount available to the
Administrative Agent, and the Administrative Agent may, in reliance upon such
assumption, make available to the Borrower a corresponding amount. If such
amount is not made available to the Administrative Agent by the required time on
the Borrowing Date therefor, such Lender shall pay to the Administrative Agent,
on demand, such amount with interest thereon at a rate equal to the daily
average Federal Funds Rate for the period until such Lender makes such amount
immediately available to the Administrative Agent. A certificate of the
Administrative Agent submitted to any Lender with respect to any amounts owing
under this subsection shall be conclusive in the absence of manifest error. If
such Lender's portion of such borrowing is not made available to the
Administrative Agent by such Lender within three Business Days of such Borrowing
Date, the Administrative Agent shall also be entitled to recover such amount
with interest thereon at the rate per annum applicable to ABR Loans hereunder,
on demand, from the Borrower.
(c) Each borrowing by the Borrower of Revolving Loans shall be made
ratably from the Revolving Credit Lenders in accordance with their respective
and Revolving Credit Commitment Percentages. Any reduction of the Revolving
Credit Commitments shall be made ratably among the Lenders, in accordance with
their respective Revolving Credit Commitment Percentages. Each payment
(including each prepayment) by the Borrower on account of principal of and
interest on the Revolving Loans shall be made pro rata according to the
respective outstanding principal amounts of the Revolving Loans then held by the
Revolving Credit Lenders.
4.8 ILLEGALITY. Notwithstanding any other provision herein, if the
adoption of or any change in any Requirement of Law or in the interpretation or
application thereof shall make it unlawful for any Lender to make or maintain
Eurodollar Loans as contemplated by this Agreement, such Lender shall give
prompt notice thereof to the Borrower and the Administrative Agent and
thereafter (a) the commitment of such Lender hereunder to make Eurodollar Loans,
continue Eurodollar Loans as such and convert ABR Loans to Eurodollar Loans
shall forthwith be suspended during the period of illegality and (b) such
Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted
automatically to ABR Loans on the respective last days of the then current
Interest Periods with respect to such Loans or within such earlier period as
required by law. If any such conversion of a Eurodollar Loan occurs on a day
which is not the last day of the then current Interest Period with respect
thereto, the Borrower shall pay to such Lender such amounts, if any, as may be
required pursuant to subsection 4.11.
4.9 REQUIREMENTS OF LAW.
(a) If the adoption of or any change in any Requirement of Law or in
the interpretation or application thereof or compliance by any Lender with any
request or directive (whether or not having the force of law) from any central
bank or other Governmental Authority made subsequent to the date hereof shall
increase the cost to such Lender, by an amount which such Lender deems to be
material, of making, converting into, continuing or maintaining Eurodollar Loans
or issuing or participating in Letters of Credit or reduce any amount receivable
hereunder in respect thereof including any such cost or reduced amount
receivable resulting from (i) any tax of any kind whatsoever with respect to
this Agreement, any Note, any Eurodollar Loan, any Letter of Credit issued or
participated in by it or any Application, or change the basis of taxation of
payments to such Lender in respect thereof (except for Non-Excluded Taxes
covered by subsection 4.10 and changes in the rate of tax on the overall gross
or net income of such Lender) or (ii) any reserve, special deposit, compulsory
loan or singular
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requirement against assets held by deposits or other liabilities in or for the
account of, advances, loans or other extensions of credit by, or any other
acquisition of funds by, any office of such Lender which is not otherwise
included in the determination of the Eurodollar Rate hereunder, then, in any
such case, within 15 days after demand therefor (accompanied by the certificate
contemplated by subsection 4.9(c) with respect thereto) the Borrower shall pay
such Lender such additional amount or amounts as will compensate such Lender for
such increased cost or reduced amount receivable.
(b) If any Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder or under or in respect of any Letter of
Credit to a level below that which such Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's or such corporation's policies with respect to capital adequacy)
by an amount deemed by such Lender to be material, then from time to time,
within 15 days after demand therefor (accompanied by the certificate
contemplated by subsection 4.9(c) with respect thereto), the Borrower shall pay
to such Lender such additional amount or amounts as will compensate such Lender
for such reduction.
(c) If any Lender becomes entitled to claim any additional amounts
pursuant to this subsection 4.9, it shall promptly notify the Borrower (with a
copy to the Administrative Agent) of the event by reason of which it has become
so entitled, provided that no Lender shall be entitled to claim any such
additional amount (i) with respect to the period which is more than 180 days
prior to the delivery of such notice or (ii) if such Lender shall not seek as a
result of such event payment of any similar amounts from at least one other
borrower to whom it has extended credit. A certificate as to any additional
amounts payable pursuant to this subsection 4.9 submitted by such Lender to the
Borrower (with a copy to the Administrative Agent) setting forth in reasonable
detail the calculation of such amounts and the basis therefor shall be
conclusive in the absence of manifest error. The agreements in this subsection
shall survive the termination of this Agreement and the payment of the Loans and
all other amounts payable hereunder.
4.10 INDEMNIFICATION FOR TAXES.
(a) All payments made by the Borrower under this Agreement and any
Notes shall be made free and clear of, and without deduction or withholding for
or on account of, any present or future income, stamp or other taxes, levies,
imposts, duties, charges, fees, deductions or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by any Governmental Authority,
excluding net income taxes and franchise and excise taxes (imposed in lieu of
net income taxes) imposed on the Administrative Agent or any Lender as a result
of a present or former connection between the Administrative Agent or such
Lender and the jurisdiction of the Governmental Authority imposing such tax or
any political subdivision or taxing authority thereof or therein (other than any
such connection arising solely from the Administrative Agent or such Lender
having executed, delivered or performed its obligations or received a payment
under, or enforced, this Agreement or any Note). If any such non-excluded taxes,
levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the
Administrative Agent or any Lender
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hereunder or under any Note, the amounts so payable to the Administrative Agent
or such Lender shall be increased to the extent necessary to yield to the
Administrative Agent or such Lender (after payment of all Non-Excluded Taxes)
interest or any such other amounts payable hereunder at the rates or in the
amounts specified in this Agreement, provided, that the Borrower shall not be
required to increase any such amounts payable to any Lender that is not
organized under the laws of the United States of America or a state thereof if
such Lender fails to comply with the requirements of paragraph (b) of this
subsection 4.10. Whenever any Non-Excluded Taxes are payable by the Borrower, as
promptly as possible thereafter the Borrower shall send to the Administrative
Agent for its own account or for the account of such Lender, as the case may be,
a certified copy of an original official receipt received by the Borrower
showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes
when due to the appropriate taxing authority or fails to remit to the
Administrative Agent the required receipts or other required documentary
evidence, the Borrower shall indemnify the Administrative Agent and the Lenders
for any incremental taxes, interest or penalties that may become payable by the
Administrative Agent or any Lender as a result of any such failure. The
agreements in this subsection shall survive the termination of this Agreement
and the payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
(i) in the case of a Lender or a Transferee that is a "bank" under
Section 881(c)(3)(A) of the Tax Code:
(A) on or before the date it becomes a party to this
Agreement (or, in the case of a Participant, on or before the date
such Participant becomes a Participant hereunder), deliver to the
Borrower and the Administrative Agent (I) two duly completed copies
of United States Internal Revenue Service Form 1001 or 4224, or
successor applicable form, as the case may be, and (II) an Internal
Revenue Service Form W-8 or W-9, or successor applicable form, as the
case may be;
(B) deliver to the Borrower and the Administrative Agent
two further copies of any such form or certification on or before the
date that any such form or certification expires or becomes obsolete
and after the occurrence of any event requiring a change in the most
recent form previously delivered by it to the Borrower; and
(C) obtain such extensions of time for filing and complete
such forms or certifications as may reasonably be requested by the
Borrower or the Administrative Agent; and
(ii) in the case of a Lender or a Transferee that is not a "bank"
under Section 881(c)(3)(A) of the Tax Code:
(A) on or before the date it becomes a party to this
Agreement (or, in the case of a Participant, on or before the date
such Participant becomes a Participant hereunder), deliver to the
Borrower and the Administrative Agent (I) a statement under penalties
of perjury that such Lender or Transferee (x) is not a "bank" under
Section 881(c)(3)(A) of the Tax Code, is not subject to regulatory or
other legal requirements as
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a bank in any jurisdiction, and has not been treated as a bank for
purposes of any tax, securities law or other filing or submission
made to any Governmental Authority, any application made to a rating
agency or qualification for any exemption from tax, securities law or
other legal requirements, (y) is not a 10-percent shareholder within
the meaning of Section 881(c)(3)(B) of the Tax Code and (z) is not a
controlled foreign corporation receiving interest from a related
person within the meaning of Section 881(c)(3)(C) of the Tax Code and
(II) a properly completed and duly executed internal Revenue Service
Form W-8 or applicable successor form;
(B) deliver to the Borrower and the Administrative Agent
two further properly completed and duly executed copies of such Form
W-8, or any successor applicable form, on or before the date that any
such Form W-8 expires or becomes obsolete or after the occurrence of
any event requiring a change in the most recent form previously
delivered by it to the Borrower or upon the request of the Borrower;
and
(C) obtain such extensions of time for filing and
completing such forms or certifications as may be reasonably
requested by the Borrower or the Administrative Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises the Borrower and the
Administrative Agent. Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall certify (i) in the case of a
Form 1001 or 4224, that it is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes and
(ii) in the case of a Form W-8 or W-9 provided pursuant to subsection
4.10(b)(i)(A)(II) that it is entitled to an exemption from United States backup
withholding tax. Each Person that shall become a Lender or a Participant
pursuant to subsection 11.6 shall, upon the effectiveness of the related
transfer, be required to provide all of the forms and statements required
pursuant to this subsection, provided that in the case of a Participant such
Participant shall furnish all such required forms and statements to the Lender
from which the related participation shall have been purchased.
4.11 INDEMNITY. The Borrower agrees to indemnify each Lender and to
hold each Lender harmless from any loss or reasonable expense which such Lender
may sustain or incur as a consequence of (a) default by the Borrower in making a
borrowing of, conversion into or continuation of Eurodollar Loans, after the
Borrower has given a notice requesting the same in accordance with the
provisions of this Agreement, (b) default by the Borrower in making any
prepayment of a Eurodollar Loan, after the Borrower has given a notice thereof
in accordance with the provisions of this Agreement or (c) the making of a
prepayment or conversion of Eurodollar Loans on a day which is not the last day
of an Interest Period with respect thereto, which loss shall be equal to the
excess, if any, of (i) the amount of interest which would have accrued on the
amount so prepaid or converted, or not so borrowed, converted or continued, for
the period from the date of such prepayment or conversion or of such failure to
borrow, convert or continue to the last day of such Interest Period (or proposed
Interest Period), respectively, in each case at the applicable Eurodollar Rate
(exclusive of any Applicable Margin) for such Eurodollar Loans provided for
herein over (ii) the amount of interest (as reasonably determined by
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such Lender) which would have accrued to such Lender on such amount by placing
such amount on deposit for a comparable period with leading banks in the
interbank eurodollar market (it being understood that the Borrower shall not be
required to indemnify any Lender for lost profits). A certificate as to any
amounts payable pursuant to this subsection 4.11 submitted by any Lender to the
Borrower (with a copy to the Administrative Agent) shall be conclusive in the
absence of manifest error. This covenant shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
4.12 CHANGE OF LENDING OFFICE. Each Lender agrees that if it makes
any demand for payment under subsection 4.9 or 4.10(a), or if any adoption or
change of the type described in subsection 4.8 shall occur with respect to it,
it will use reasonable efforts (consistent with its internal policy and legal
and regulatory restrictions and so long as such efforts would not be
disadvantageous to it, as determined in its sole discretion) to designate a
different lending office if the making of such a designation would reduce or
obviate the need for the Borrower to make payments under subsection 4.9 or
4.10(a), or would eliminate or reduce the effect of any adoption or change
described in subsection 4.8.
4.13 EVIDENCE OF DEBT.
(a) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing indebtedness of the Borrower to such Lender
resulting from the Loans of such Lender, including the amounts of principal and
interest payable and paid to such Lender from time to time under this Agreement.
(b) The Administrative Agent shall maintain the Register pursuant to
subsection 11.6(d), and a subaccount therein for each Lender, in which shall be
recorded (i) the amount of each Loan made hereunder, the Type thereof and each
Interest Period (if any) applicable thereto, (ii) the amount of any principal or
interest due and payable or to become due and payable from the Borrower to each
Lender hereunder and (iii) both the amount of any sum received by the
Administrative Agent hereunder from the Borrower and each Lender's share
thereof.
(c) The entries made in the Register and the accounts of each Lender
maintained pursuant to subsection 4.13(a) shall, to the extent permitted by
applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrower therein recorded; provided, that the failure of any
Lender or the Administrative Agent to maintain the Register or any such account,
or any error therein, shall not in any manner affect the obligation of the
Borrower to repay (with applicable interest) the Loans in accordance with the
terms of this Agreement.
(d) The Borrower agrees that, upon the request to the Administrative
Agent by any Lender, the Borrower will execute and deliver to such Lender a
promissory note of the Borrower evidencing the Revolving Loans of such Lender,
substantially in the form of Exhibit C-1 (each, "Revolving Credit Note"),
payable to the order of such Lender. Each Lender is hereby authorized to record
the date, Type and amount of each Revolving Loan of such Lender, the date and
amount of each payment or prepayment of principal thereof, each continuation of
all or a portion thereof as the same Type, each conversion of all or a portion
thereof to another Type and, in the case of Eurodollar Loans, the length of each
Interest Period and Eurodollar Rate with respect thereto, on the schedule (or
any continuation of the schedule) annexed to and constituting a part of its
Revolving Credit Note, as the case
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may be, and any such recordation shall, to the extent permitted by applicable
law, constitute prima facie evidence of the accuracy of the information so
recorded, provided that the failure to make any such recordation (or any error
therein) shall not affect the obligation of the Borrower to repay (with
applicable interest) the Revolving Loans in accordance with the terms of this
Agreement.
(e) The Borrower agrees that, upon the request to the Administrative
Agent by any Term Loan Lender, the Borrower will execute and deliver to such
Term Loan Lender a promissory note of the Borrower evidencing the Term Loan of
such Term Loan Lender, substantially in the form of Exhibit C-2 (a "Term Note"),
payable to the order of such Term Loan Lender and in a principal amount equal
to, the outstanding Term Loan of such Term Loan Lender. Each Term Loan Lender is
hereby authorized to record the date, Type and amount of the Term Loan of such
Term Loan Lender, the date and amount of each payment or prepayment of principal
thereof, each continuation of all or portion thereof as the same Type, each
conversion of all or a portion thereof to another Type and, in the case of
Eurodollar Loans, the length of each Interest Period and Eurodollar Rate with
respect thereto, on the schedule (or any continuation of the schedule) annexed
to and constituting a part of its Term Note, as the case may be, and any such
recordation shall, to the extent permitted by applicable law, constitute prima
facie evidence of the accuracy of the information so recorded, provided that the
failure to make any such recordation (or any error therein) shall not affect the
obligation of the Borrower to repay (with applicable interest) the Term Loans in
accordance with the terms of this Agreement.
(f) The Borrower agrees that, upon the request to the Administrative
Agent by any Swing Line Lender, the Borrower will execute and deliver to such
Swing Line Lender a promissory note of the Borrower evidencing the Swing Line
Loans of such Swing Line Lender, substantially in the form of Exhibit D (a
"Swing Line Note"), payable to the order of such Swing Line Lender and in a
principal amount equal to the Swing Line Commitment. Each Swing Line Lender is
hereby authorized to record the date and amount of each Swing Line Loan made by
it and the date and amount of each payment or prepayment of principal thereof on
the schedule (or any continuation of the schedule) annexed to and constituting a
part of its Swing Line Note, as the case may be, and any such recordation shall,
to the extent permitted by applicable law, constitute prima facie evidence of
the accuracy of the information so recorded, provided that the failure to make
any such recordation (or any error therein) shall not affect the obligation of
the Borrower to repay (with applicable interest) the Swing Line Loans in
accordance with the terms of this Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this
Agreement and to make or continue to make the Extensions of Credit, the Borrower
hereby represents and warrants to the Administrative Agent and each Lender that:
5.1 FINANCIAL CONDITION. The consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as at December 28, 1997 and the
related consolidated statements of income and retained earnings and cash flows
for the Fiscal Year ended on such date, reported on by Deloitte & Touche, copies
of which have heretofore been furnished to each Lender, are complete and correct
in all material respects and present fairly the consolidated financial condition
of the Borrower and its Consolidated Subsidiaries as at such date, and the
consolidated results of their operations and their
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consolidated cash flows for the Fiscal Year then ended. The unaudited
consolidated balance sheet of the Borrower and its consolidated Subsidiaries as
at September 30, 1998 and the related unaudited consolidated statements of,
financial condition, income and retained earnings and cash flows for the
nine-month period ended on such date, certified by a Responsible Officer, copies
of which have heretofore been furnished to each Lender, are complete and correct
and present fairly the consolidated financial condition of the Borrower and its
consolidated Subsidiaries as at such date, and the consolidated results of their
operations and their consolidated cash flows for the nine-month period then
ended (subject to normal year-end audit adjustments). All such financial
statements, including the related schedules and notes thereto, have been
prepared in accordance with GAAP applied consistently throughout the periods
involved (except as approved by such accountants or Responsible Officer, as the
case may be, and as disclosed therein). Except as set forth on Schedule 5.1 or
as permitted by the Existing Credit Agreement, neither the Borrower nor any of
its Consolidated Subsidiaries had, at the date of the most recent balance sheet
referred to above, any material Guarantee Obligation not permitted under
subsection 8.2, material contingent liability or liability for taxes, or any
material long-term lease or unusual forward or long-term commitment, including,
without limitation, any interest rate or foreign currency swap or exchange
transaction, which is not reflected in the foregoing statements or in the notes
thereto. Except as set forth on Schedule 5.1 or as permitted by the Existing
Credit Agreement, during the period from December 28, 1997 to and including the
date hereof, there has been no sale, transfer or other disposition by the
Borrower or any of its Consolidated Subsidiaries of any material part of its
business or property and no purchase or other acquisition of any business or
property (including any capital stock of any other Person) material in relation
to the consolidated financial condition of the Borrower and its Consolidated
Subsidiaries at December 28, 1997.
5.2 NO CHANGE. Except as set forth on Schedule 5.2 and other than the
Reorganization Cases and the events related to the Reorganization Cases, since
September 30, 1998, there has been no development or event which has had or
could reasonably be expected to have a Material Adverse Effect.
5.3 EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower and its
Restricted Subsidiaries (a) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (b) has the
power and authority, and the legal right, to own and operate its property, to
lease the property it operates as lessee and to conduct the business in which it
is currently engaged, (c) is duly qualified as a foreign corporation, foreign
limited liability company or foreign limited partnership, as the case may be,
and in good standing under the laws of each jurisdiction where its ownership,
lease or operation of property or the conduct of its business requires such
qualification and (d) is in compliance with all Requirements of Law, including
the requirements of the WARN Act, except, in each case, where the failure to be
so organized, existing, in good standing or qualified, or the failure to have
such power or authority or to so comply, could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
5.4 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each of the
Borrower and its Restricted Subsidiaries has the power and authority, and the
legal right, to make, deliver and perform the Loan Documents to which it is a
party and (in the case of the Borrower) to borrow and obtain the other
Extensions of Credit hereunder and has taken all necessary corporate or other
action to authorize the Extensions of Credit on the terms and conditions of this
Agreement and any Notes and to authorize the execution, delivery and performance
of the Loan Documents to which it is a party. No consent or
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authorization of, filing with, notice to, or other act by or in respect of, any
Governmental Authority or any other Person is required in connection with the
Extensions of Credit hereunder or with the execution, delivery, performance,
validity or enforceability of the Loan Documents to which the Borrower or any of
its Restricted Subsidiaries is a party except as may be necessary to perfect the
Liens created pursuant to the Security Documents, except as described on
Schedule 5.4 and except those which have been obtained, made or waived. This
Agreement has been, and each other Loan Document will be, duly executed and
delivered on behalf of the Borrower and each of its Restricted Subsidiaries that
is a party thereto. This Agreement constitutes, and each other Loan Document
when executed and delivered will constitute, a legal, valid and binding
obligation of the Borrower and each of its Restricted Subsidiaries that is a
party thereto enforceable against the Borrower and each such Restricted
Subsidiary in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
5.5 NO LEGAL BAR. The execution, delivery and performance of the Loan
Documents to which the Borrower or any of its Restricted Subsidiaries is a
party, the Extensions of Credit hereunder and the use of the proceeds thereof
will not violate any Requirement of Law or Contractual Obligation of the
Borrower or of any of its Restricted Subsidiaries and will not result in, or
require, the creation or imposition of any Lien on any of its or their
respective properties or revenues pursuant to any such Requirement of Law or
Contractual Obligation (other than pursuant to the Loan Documents), except to
the extent (a) that any such violations (individually or in the aggregate) could
not reasonably be expected to have a Material Adverse Effect and (b) that any
such Liens would otherwise be permitted under subsection 8.3.
5.6 NO MATERIAL LITIGATION. Except as set forth on Schedule 5.6 and
other than the Reorganization Cases, no litigation, investigation or proceeding
of or before any arbitrator or Governmental Authority is pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any of its
Restricted Subsidiaries or against any of its or their respective properties or
revenues (a) with respect to any of the Loan Documents or any of the
transactions contemplated hereby or thereby or (b) which could reasonably be
expected to have a Material Adverse Effect.
5.7 NO DEFAULT. As of any date after the Effective Date, except as
set forth on Schedule 5.7, (i) neither the Borrower nor any of its Restricted
Subsidiaries is in default under or with respect to any Contractual Obligation
in respect of post-petition Indebtedness or other obligations greater than
$1,000,000, and (ii) no other party is in default under or with respect to any
Contractual Obligation in respect of Indebtedness or other obligations greater
than $1,000,000 owed to the Borrower or any of its Restricted Subsidiaries, in
each case which could reasonably be expected to have a Material Adverse Effect.
No Default or Event of Default has occurred and is continuing.
5.8 NO BURDENSOME RESTRICTIONS. Except as set forth on Schedule 5.8,
no Requirement of Law or Contractual Obligation of the Borrower or any of its
Restricted Subsidiaries could reasonably be expected to have a Material Adverse
Effect.
5.9 TAXES. Each of the Borrower and its Restricted Subsidiaries has
filed or caused to be filed all tax returns which, to the knowledge of the
Borrower, are required to be filed and has paid
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all taxes shown to be due and payable on said returns or on any assessments made
against it or any of its property (including, without limitation, any Material
Real Property) and all other taxes, fees or other charges imposed on it or any
of its property by any Governmental Authority (other than any such tax returns,
taxes, fees or other charges (i) the amount or validity of which are then being
contested in good faith by appropriate proceedings and with respect to which
reserves in conformity with GAAP have been provided on the books of the Borrower
or its Subsidiaries, as the case may be, or (ii) which, if not paid or filed,
could not reasonably be expected to have a Material Adverse Effect); no tax Lien
has been filed, and, to the knowledge of the Borrower, no claim is being
asserted, with respect to any such tax, fee or other charge (other than with
respect to any such tax, fee or other charge the amount or validity of which is
then being contested in good faith by appropriate proceedings and with respect
to which reserves in conformity with GAAP have been provided on the books of the
Borrower or its Subsidiaries, as the case may be) which could reasonably be
expected to have a Material Adverse Effect.
5.10 FEDERAL REGULATIONS. No part of the proceeds of any Extension of
Credit will be used in violation of Regulation U and in no event shall "margin
stock" constitute 25% or more of the assets of the Borrower and its Restricted
Subsidiaries that are subject to the restrictions contained in Section 8.
5.11 ERISA. Other than the Reorganization Cases, neither a Reportable
Event nor an "accumulated funding deficiency" (within the meaning of Section 412
of the Tax Code or Section 302 of ERISA) which could reasonably be expected to
have a Material Adverse Effect has occurred during the five-year period prior to
the date on which this representation is made or deemed made with respect to any
Plan. Each Plan has complied in all material respects with the applicable
provisions of ERISA and the Tax Code, except where the failure to so comply
could not reasonably be expected to have a Material Adverse Effect. No
termination of a Single Employer Plan has occurred, except where such a
termination could not reasonably be expected to have a Material Adverse Effect,
and no Lien in favor of the PBGC or a Plan has arisen, during such five-year
period. The present value of all accrued benefits under each Single Employer
Plan (based on those assumptions used to fund such Plan) did not, as of the last
annual valuation date prior to the date on which this representation is made or
deemed made, exceed the value of the assets of such Plan allocable to such
accrued benefits, except to the extent any such excess (individually or in the
aggregate) could not reasonably be expected to have a Material Adverse Effect.
Neither the Borrower nor any Commonly Controlled Entity has had a complete or
partial withdrawal from any Multiemployer Plan, except where such withdrawal
could not reasonably be expected to have a Material Adverse Effect, and neither
the Borrower nor any Commonly Controlled Entity would become subject to any
liability under ERISA if the Borrower or any such Commonly Controlled Entity
were to withdraw completely from all Multiemployer Plans as of the valuation
date most closely preceding the date on which this representation is made or
deemed made, except where such liability could not reasonably be expected to
have a Material Adverse Effect. No such Multiemployer Plan is in Reorganization
or Insolvency.
5.12 INVESTMENT COMPANY ACT; OTHER REGULATIONS. The Borrower is not
an "investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. To the
best knowledge of the Borrower, the Borrower is not subject to regulation under
any federal or state statute or regulation (other than Regulation X) which
limits its ability to incur Indebtedness.
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5.13 SUBSIDIARIES. Schedule 5.13 sets forth all the Subsidiaries of
the Borrower at the date hereof.
5.14 ENVIRONMENTAL MATTERS. To the knowledge of the Borrower, except
as set forth on Schedule 5.14:
(a) The Mortgaged Properties do not contain any Materials of
Environmental Concern in amounts or concentrations or under such conditions
which (i) constitute a violation of, or (ii) could reasonably be expected to
give rise to liability under, any Environmental Law, except in either case
insofar as such violation or liability, or any aggregation thereof, could not
reasonably be expected to have a Material Adverse Effect.
(b) The Mortgaged Properties and all operations at the Mortgaged
Properties are in compliance, and have within the periods covered by the
applicable statute of limitations been in compliance, in all material respects
with all applicable Environmental Laws, and there is no contamination at, under
or about the Mortgaged Properties or violation of any Environmental Law with
respect to the Mortgaged Properties or the business operated by the Borrower or
any of its Restricted Subsidiaries at the Mortgaged Properties (the "Business"),
except for any such noncompliance, contamination or violation (or any
aggregation thereof) which could not reasonably be expected to have a Material
Adverse Effect.
(c) Neither the Borrower nor any of its Subsidiaries has received any
notice of violation, alleged violation, noncompliance, liability or potential
liability regarding environmental matters or compliance with Environmental Laws
with regard to any of the Mortgaged Properties or the Business, nor does the
Borrower have knowledge or reason to believe that any such notice will be
received or is being threatened, except insofar as such notice or threatened
notice, or any aggregation thereof, does not involve a matter or matters that
could reasonably be expected to have a Material Adverse Effect.
(d) Materials of Environmental Concern have not been transported or
disposed of from the Mortgaged Properties in violation of, or in a manner or to
a location which could reasonably be expected to give rise to liability under,
any Environmental Law, nor have any Materials of Environmental Concern been
generated, treated, stored or disposed of at, on or under any of the Mortgaged
Properties in violation of, or in a manner that could reasonably be expected to
give rise to liability under, any applicable Environmental Law except insofar as
any such violation or liability referred to in this paragraph, or any
aggregation thereof, could not reasonably be expected to have a Material Adverse
Effect.
(e) No judicial proceeding or governmental or administrative action
is pending or threatened under any Environmental Law to which the Borrower or
any Restricted Subsidiary is or could reasonably be expected to be named as a
party with respect to the Mortgaged Properties or the Business, nor are there
any consent decrees or other decrees, consent orders, administrative orders or
other orders, or other administrative or judicial requirements outstanding under
any Environmental Law with respect to the Mortgaged Properties or the Business
except insofar as such proceeding, action, decree, order or other requirement,
or any aggregation thereof, could not reasonably be expected to have a Material
Adverse Effect.
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(f) There has been no release or threat of release of Materials of
Environmental Concern at or from the Mortgaged Properties, or arising from or
related to the operations of the Borrower or any Restricted Subsidiary in
connection with the Mortgaged Properties or otherwise in connection with the
Business, in violation of or in amounts or in a manner that could reasonably
give rise to liability under Environmental Laws except insofar as any such
violation or liability referred to in this paragraph, or any aggregation
thereof, could not reasonably be expected to have a Material Adverse Effect.
(g) Each of the representations and warranties set forth in
subsections 5.14(a) through (f) is true and correct with respect to each parcel
of real property owned or operated by the Borrower or any of its Restricted
Subsidiaries (other than the Mortgaged Properties) except to the extent that the
facts and circumstances giving rise to any such failure to be so true and
correct could not reasonably be expected to have a Material Adverse Effect.
5.15 THE SECURITY DOCUMENTS. The provisions of the Master Security
Agreement are effective to create in favor of the Administrative Agent a legal
and valid security interest in all right, title and interest of the Borrower and
each Subsidiary Guarantor party thereto in the collateral described therein, and
the Administrative Agent has a fully perfected Lien on all right, title and
interest of the Borrower and each Subsidiary Guarantor in all Mortgaged Property
and security interest in all right, title and interest of the Borrower or such
Subsidiary Guarantor, as the case may be, in all "accounts", "chattel paper",
"inventory", "investment property" and "general intangibles" (each as defined in
the applicable UCC) in each case superior in right to any Liens of any third
person against such collateral or interests therein, subject only to Liens
permitted under subsection 8.3 or by the Master Security Agreement.
5.16 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and each
Restricted Subsidiary has good title in fee simple to, or valid ground leasehold
interests in, their respective Material Real Properties and has good title in
fee simple to their other owned real property and valid ownership interests in
their owned personal property, in each case that is material to the operation of
their respective businesses, subject to defects in title and leasehold and other
interests which are not material to the business, operations and financial
condition of the Borrower and its Restricted Subsidiaries taken as a whole and
other than those items referred to in the applicable Mortgages or in the
schedules to the applicable Mortgages, and none of such property is subject to
any Lien other than Liens permitted under subsection 8.3.
5.17 INTELLECTUAL PROPERTY. The Borrower and each of its Restricted
Subsidiaries owns, or is licensed to use, all trademarks, tradenames,
copyrights, technology, know-how and processes necessary for the conduct of its
business as currently conducted except for those the failure to own or license
which could not reasonably be expected to have a Material Adverse Effect (the
"Intellectual Property"). Except as set forth on Schedule 5.17, no claim has
been asserted and is pending by any Person challenging or questioning the use of
any such Intellectual Property or the validity or effectiveness of any such
Intellectual Property, which could reasonably be expected to have a Material
Adverse Effect, nor does the Borrower know of any valid basis for any such
claim. Except as set forth on Schedule 5.17, to the Borrower's knowledge, the
use of such Intellectual Property by the Borrower and its Restricted
Subsidiaries does not infringe on the rights of any Person, except for such
claims and infringements that, in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
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5.18 PLEDGED STOCK. As of the date hereof, the shares of Capital
Stock listed on Schedule A to the Master Security Agreement will constitute all
the issued and outstanding shares of Capital Stock of the issuers thereof listed
on said Schedule that are owned by the Borrower or the Subsidiary Guarantors
party to the Master Security Agreement; all such shares have been duly and
validly issued and are fully paid and nonassessable; the relevant Pledgor of
said shares is the record and beneficial owner of said shares; and said shares
are free of any Liens or options in favor of, or claims of, any other Person,
except the Lien of the Master Security Agreement (subject to Section 14 thereof)
and Liens permitted under subsection 8.3(a).
5.19 REAL ESTATE MATTERS. The real property described on Schedule
5.19 constitutes all of the Material Real Property of the Borrower or any
Subsidiary Guarantor on the date hereof.
5.20 [RESERVED].
5.21 PURPOSE OF LOANS; USE OF PROCEEDS. The proceeds of the Revolving
Loans made available pursuant to the Interim Facility will be used to pay
certain post-petition operating expenses incurred in the ordinary course of
business and other general corporate purposes. The proceeds of the Revolving
Loans and the Term Loans made on the Effective Date will be used to repay all
Term Loans and Revolving Credit Loans outstanding under the Previous Credit
Agreements and Transaction Costs and other general corporate purposes, and the
proceeds of all other Revolving Loans and all Swing Line Loans made after the
Effective Date will be used to provide working capital from time to time for the
Borrower and its Subsidiaries and for other general corporate purposes.
5.22 ACCURACY OF INFORMATION. All statements and other information
(other than statements and information constituting projections or
forward-looking statements) contained in any written documents or other
materials provided to the Administrative Agent and the Lenders by the Borrower
are, when taken as a whole, correct in all material respects and do not contain
any untrue statements of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not materially
misleading in light of the circumstances under which such statements were made.
All statements and other information constituting projections which are
contained in any written documents or other materials provided to the
Administrative Agent and the Lenders by the Borrower were prepared based on good
faith estimates and assumptions of the Borrower believed to be reasonable at the
time such projections were prepared.
5.23 DEPOSITARY ACCOUNTS. Schedule 5.23 sets forth a true and
complete list of all bank accounts maintained by the Borrower and its Restricted
Subsidiaries as of the date hereof.
5.24 [RESERVED].
5.25 Y2K COMPLIANCE. Except as disclosed on Schedule 5.25, the
Borrower
(a) has reviewed the areas within its operations and the operations
of its Subsidiaries that utilize computers;
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(b) has completed the development of a program for testing whether
all computer systems necessary for the current operation of its business and the
business of its Subsidiaries taken as a whole are Y2K Compliant;
(c) has tested all such computer systems for Y2K compliance and
furnished to the Administrative Agent a written report of the results thereof;
(d) has developed a written course of action to make all the computer
systems utilized by it or any of its Subsidiaries and necessary for the business
of the Borrower and its Subsidiaries taken as a whole Y2K Compliant and
furnished to the Administrative Agent a copy thereof;
(e) has identified all the changes, modifications and corrections
indicated in the course of action referred to in clause (d) above;
(f) has identified those of its customers, suppliers and others who
are critical to its business and that of its Subsidiaries taken as a whole or
with whom it electronically transmits or receives data and inquired of them as
to whether the computer systems utilized by such customers, suppliers and others
and critical for their operations are Y2K Compliant, and summarized the results
of such inquiries in a written report, a copy of which it has furnished to the
Administrative Agent;
(g) has tested each computer system necessary to the business of the
Borrower and its Subsidiaries taken as a whole interfacing with customers,
suppliers and others identified pursuant to clause (f) above;
(h) has implemented all the changes, modifications and corrections
required by the tests refereed to in clause (g) above;
(i) has developed a written contingency plan for action to be taken
by the Borrower and its Subsidiaries in the event that any of the computer
systems utilized by it in its business and the business of its Subsidiaries or
by the customers, suppliers and others identified pursuant to clause (f) above
and critical for their operations is not Y2K Compliant; and
(j) has no reason to believe and does not believe that it will be
unable to complete the testing or make the modifications not yet completed that
are shown on Schedule 5.25 or implement any contingency plan referred to in
clause (i) above except for any inability that will not have a Material Adverse
Effect.
5.26 PRIORITY. Pursuant to subsections 364(c)(1), (2) and (3) of the
Bankruptcy Code and the Emergency Order and the Permanent Order, the obligations
of the Borrower hereunder and under the other Loan Documents constitute allowed
administrative expense claims in the Reorganization Cases having priority over
all administrative expenses of the kind specified in sections 503(b) or 507(b)
of the Bankruptcy Code, subject only to Permitted Expenses.
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SECTION 6. CONDITIONS
6.1 CONDITIONS TO EFFECTIVENESS. This Agreement shall become
effective upon satisfaction or waiver of the following conditions, except such
conditions that, by their terms, need only be satisfied in respect of the
Permanent Facility for the Effective Date to occur:
(a) Bankruptcy Court Order.
(i) The Bankruptcy Court shall have entered (A) for the Interim
Facility, the Emergency Order and (B) for the Permanent Facility, the
Permanent Order, each being certified by the Clerk of the Bankruptcy Court
as having been duly entered.
(ii) The First Day Orders and all motions and other documents to be
filed with and submitted to the Bankruptcy Court in connection with the
Interim Facility and the Permanent Facility and the approval thereof shall
be satisfactory in form and substance to the Administrative Agent.
(b) Execution of Loan Documents. The Administrative Agent shall have
received (i) this Agreement, executed and delivered by a duly authorized officer
of the Borrower, with a counterpart for the Administrative Agent and each Lender
and (ii) the Master Security Agreement, executed and delivered by a duly
authorized officer of each Loan Party that is a party thereto, with a copy for
each Lender.
(c) Closing Certificate. The Administrative Agent shall have
received, with a copy for each Lender, a certificate of the Borrower, dated the
Closing Date, substantially in the form of Exhibit F, with appropriate
insertions and attachments, executed by the President, the Chief Executive
Officer or any Vice President and the Secretary or any Assistant Secretary of
the Borrower.
(d) Corporate Proceedings of the Borrower. The Administrative Agent
shall have received, with a copy for each Lender, a copy of the resolutions, in
form and substance reasonably satisfactory to the Administrative Agent, of the
Board of Directors of the Borrower authorizing (i) the execution, delivery and
performance of this Agreement and the other Loan Documents to which it is a
party (ii) the Extensions of Credit contemplated hereunder and (iii) the
granting by it of the Liens created pursuant to the Security Documents,
certified by the Secretary or an Assistant Secretary of the Borrower as of the
Closing Date, which certificate shall be in form and substance reasonably
satisfactory to the Administrative Agent and shall state that the resolutions
thereby certified have not been amended, modified, revoked or rescinded.
(e) Borrower Incumbency Certificate. The Administrative Agent shall
have received, with a copy for each Lender, a certificate of the Borrower, dated
the Closing Date, as to the incumbency and signature of the officers of the
Borrower executing any Loan Document reasonably satisfactory in form and
substance to the Administrative Agent, executed by the President, the Chief
Executive Officer or any Vice President and the Secretary or any Assistant
Secretary of the Borrower.
(f) Corporate Proceedings of Subsidiaries. The Administrative Agent
shall have received, with a copy for each Lender, a copy of the resolutions, in
form and substance reasonably
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satisfactory to the Administrative Agent, of the Board of Directors or sole
shareholder of each Restricted Subsidiary which is a party to a Loan Document
authorizing (i) the execution, delivery and performance of the Loan Documents to
which it is a party and (ii) the granting by it of the Liens created pursuant to
the Security Documents to which it is a party certified by the Secretary or an
Assistant Secretary of each such Subsidiary as of the Closing Date, which
certificate shall be in form and substance reasonably satisfactory to the
Administrative Agent and shall state that the resolutions thereby certified have
not been amended, modified, revoked or rescinded.
(g) Subsidiary Incumbency Certificates. The Administrative Agent
shall have received, with a copy for each Lender, a certificate of each
Restricted Subsidiary of the Borrower which is a party to a Loan Document, dated
the Closing Date, as to the incumbency and signature of the officers of such
Subsidiary acknowledging and consenting to the execution and delivery of this
Agreement by the Borrower, reasonably satisfactory in form and substance to the
Administrative Agent, executed by the President, the Chief Executive Officer or
any Vice President and the Secretary or any Assistant Secretary of such
Subsidiary.
(h) Fees.
(i) The Administrative Agent, the Collateral Monitoring Agent, the
Arranger and Book Manager and each Lender shall have received or
concurrently receive the Transaction Costs payable on or prior to the
Effective Date and the Administrative Agent shall have been reimbursed for
all expenses for which invoices have been presented to the Borrower.
(ii) On the Closing Date the Lenders shall have been paid the first
installment of the Closing Fee, and on the date the Bankruptcy Court shall
have entered the Permanent Order, the Lenders shall have been paid the
second installment of the Closing Fee.
(i) Legal Opinions. The Administrative Agent shall have received,
with a copy for each Lender, (i) the executed legal opinion of Skadden, Arps,
Slate, Meagher & Flom LLP, counsel to the Borrower and the other Loan Parties,
substantially in the form of Exhibit G; and (ii) such other legal opinions as
the Administrative Agent may reasonably require.
(j) Lien Searches. On or before the Effective Date, the
Administrative Agent shall have received the results of a recent search in the
jurisdictions listed on Schedule 6.1(j) of the UCC, judgment and tax lien
filings (as indicated on such Schedule) which may have been filed with respect
to personal property of the Borrower and the Subsidiary Guarantors, and the
results of such search shall be reasonably satisfactory to the Administrative
Agent.
(k) No Material Adverse Change. Except as set forth on Schedule 5.2
and other than the Reorganization Cases and the events related to the
Reorganization Cases, there shall have occurred no material adverse change in
the business, condition (financial or otherwise), operations, performance or
properties of the Borrower and its subsidiaries since September 30, 1998.
(l) No Litigation. Other than the Reorganization Cases, there shall
exist no action, suit, investigation, litigation or proceeding pending or
threatened in any court or before any arbitrator or governmental instrumentality
that could reasonably be expected to have a material adverse effect on the
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business, condition (financial or otherwise), operations, performance,
properties or prospects of the Borrower and its subsidiaries.
(m) Consents and Approvals. All governmental and third party consents
and approvals necessary in connection with this Agreement and the grant of
security interests shall have been obtained (without the imposition of any
conditions that are not reasonably acceptable to the Lenders) and shall remain
in effect; and no law or regulation shall be applicable in the reasonable
judgment of the Lenders that restrains, prevents or imposes materially adverse
conditions upon the transactions contemplated hereby.
(n) Insurance and Bonding. The Lenders shall be satisfied with the
amount, types and terms and conditions of all insurance and bonding maintained
by the Borrower and its subsidiaries, and the Lenders shall have received
endorsements naming the Administrative Agent, on behalf of the Lenders, as an
additional insured and loss payee under all insurance policies to be maintained
with respect to the properties of the Borrower and its Subsidiaries forming part
of the Lenders' Collateral.
(o) Flood Insurance. To the extent required by applicable law, the
Administrative Agent shall have received (i) evidence of a policy of flood
insurance which (A) covers any parcel of Material Real Property subject to a
first priority Mortgage located in an area identified as an area having special
flood hazards by the Secretary of Housing and Urban Development or other
applicable agency, and (B) otherwise complies with such applicable law and (ii)
confirmation that the Borrower has received the notice required pursuant to
Section 208(e)(3) of Regulation H of the Board of Governors.
(p) Budget The Administrative Agent shall have received the Interim
Budget.
(q) Additional Matters. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by this Agreement and the other Loan Documents shall
be reasonably satisfactory in form and substance to the Administrative Agent,
and the Administrative Agent shall have received such other documents and legal
opinions in respect of any aspect or consequence of the transactions
contemplated hereby or thereby as it shall reasonably request.
6.2 CONDITIONS TO EACH EXTENSION OF CREDIT. The agreement of each
Lender to make any Extension of Credit requested to be made by it on any date
(including, without limitation, its initial Extension of Credit) is subject to
the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the representations and
warranties made by the Loan Parties in or pursuant to Section 5 and in or
pursuant to the other Loan Documents shall be true and correct in all material
respects and as of such date as if made on and as of such date, except to the
extent such representations and warranties related to a specific earlier date in
which case such representations and warranties shall be true and correct in all
material respects as of such earlier date, provided, that if such earlier date
is the "date hereof", such representation and warranty shall also be true and
correct in all material respects on and as of the Effective Date.
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(b) No Default. No Default or Event of Default shall have occurred
and be continuing on such date or after giving effect to the Extension of Credit
requested to be made on such date.
(c) Borrowing Base. After giving effect to the Extensions of Credit
requested to be made on any such date and the use of proceeds thereof, the
Aggregate Outstanding Extensions of Credit at such time (plus, during the
Interim Facility Period, Previous Credit Agreement Outstandings at such time)
shall not exceed the Borrowing Base at such time.
(d) No Legal Impediment. The making of the Loans on such date does
not violate any Requirement of Law and is not enjoined, temporarily,
preliminarily or permanently.
(e) Borrowing Base Certificate. The Administrative Agent shall have
received a Borrowing Base Certificate, executed and delivered by a duly
authorized officer of the Borrower.
(f) Interim Reserve Amount. From and after the first anniversary of
the date hereof, the Interim Reserve Amount shall have been reduced to zero in
accordance with the definition of Interim Reserve Amount.
(g) Bankruptcy Court Approval. With respect to the Interim Facility,
the Emergency Order authorizing and approving the Interim Facility and, with
respect to the Permanent Facility, the Permanent Order authorizing and approving
the Permanent Facility, shall be in full force and effect and shall not have
been vacated, reversed, modified, amended or stayed without the consent of the
Required Lenders.
Each Extension of Credit to the Borrower hereunder shall constitute a
representation and warranty by the Borrower as of the date thereof that, except
to the extent waived in accordance with this Agreement, the conditions contained
in this subsection have been satisfied.
SECTION 7. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect or any Letter of Credit remains outstanding or any amount is owing to any
Lender or the Administrative Agent hereunder or under any other Loan Document,
the Borrower shall and (except in the case of delivery of financial information,
reports and notices) shall cause each of its Restricted Subsidiaries to:
7.1 FINANCIAL STATEMENTS. Furnish to the Administrative Agent with a
copy for each Lender:
(a) as soon as available, but in any event within 90 days after the
end of each Fiscal Year of the Borrower (or, in the case of the first such
financial statements to be delivered after the Closing Date, 120 days), a copy
of the consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries as at the end of such year and the related consolidated statements
of income and retained earnings and of cash flows for such year, setting forth
in each case in comparative form the figures as of the end of and for the
previous Fiscal Year, reported on without a qualification as to the scope of the
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audit, by Deloitte & Touche or other independent certified public accountants of
nationally recognized standing, together with a copy of the Borrower's Form 10-K
filed with the SEC for such Fiscal Year;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each Fiscal Year
of the Borrower (or, in the case of the first such financial statements to be
delivered after the Closing Date, 60 days), the unaudited consolidated balance
sheet of the Borrower and its Consolidated Subsidiaries as at the end of such
quarter and the related unaudited consolidated statements of income and retained
earnings and of cash flows of the Borrower and its Consolidated Subsidiaries for
such quarter and the portion of the Fiscal Year through the end of such quarter,
setting forth in each case in comparative form the figures for the previous
Fiscal Year as set forth in the Borrower's Form 10-Q filed with the SEC for such
quarterly period, certified by a Responsible Officer as being fairly stated in
all material respects (subject to normal year-end audit adjustments);
(c) as soon as available, but in any event not later than 30 days
after the end of each fiscal month (other than a fiscal month which is also the
end of a quarterly period), an unaudited consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries in summary form as at the end of such
fiscal month and the related unaudited consolidated statement of income of the
Borrower and its Consolidated Subsidiaries in summary form for such fiscal
month, certified by a Responsible Officer as being fairly stated in all material
respects (subject to normal year-end audit adjustments);
(d) as soon as available, but in any event not later than 60 days
after the commencement of each Fiscal Year, an annual review of the results of
operations for the preceding Fiscal Year setting forth a comparison to the
projections of the operating budget and cash flow budget for such preceding
Fiscal Year delivered to the Lenders and containing a discussion in reasonable
detail of any material differences therein; and
(e) as soon as available, but in any event not later than 120 days
after the Effective Date, the Business Plan and;
(f) as soon as available, all schedules of assets and liabilities,
all statements of financial affairs, all operating reports, all claims registers
and all other pleadings, in each case filed in the Reorganization Cases by or on
behalf of any Loan Party.
All such financial statements referred to in paragraphs (a) and (b) above shall
be complete and correct in all material respects (subject to, in the case of the
financial statements referred to in paragraph (b) above, normal year-end
adjustments) and shall be prepared in reasonable detail and in accordance with
GAAP applied consistently throughout the periods reflected therein and with
prior periods (except as approved by such accountants or officer, as the case
may be, and disclosed therein). The financial statements referred to in
paragraph (c) above shall be prepared in summary form and otherwise in a manner
consistent with the Borrower's current internal reporting practices.
7.2 CERTIFICATES; OTHER INFORMATION. Furnish to the Administrative
Agent with a copy for each Lender:
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(a) concurrently with the delivery of the financial statements
referred to in subsection 7.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in making
the examination necessary therefor no knowledge was obtained of any Default or
Event of Default under subsection 8.1, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in subsections 7.1(a) and (b), a certificate of a Responsible
Officer (i) stating that such Responsible Officer has obtained no knowledge of
any Default or Event of Default with respect to the period covered by such
financial statements except as specified in such certificate and (ii) setting
forth, in reasonable detail, a calculation of the financial covenants set forth
in subsection 8.1 for the period corresponding to such financial statements;
(c) on or prior to Thursday of each week, an officer's certificate as
of the previous Sunday substantially in the form of Exhibit H (a "Borrowing Base
Certificate"), certified by a Responsible Officer as true and correct, provided
that any reserves of the types described in the definition of "Borrowing Base"
shall be calculated and/or revised in each Borrowing Base Certificate delivered
on the Reserve Calculation Date, and provided, further, that as to each
Borrowing Base Certificate, (A) Available Cash Equivalents shall be calculated
as of the date of delivery of the Borrowing Base Certificate, and (B) In-Transit
Cash shall be calculated as of the date immediately preceding the date of
delivery of the Borrowing Base Certificate;
(d) concurrently with the delivery of the financial statements
referred to in subsections 7.1(a) and (b), a certificate of a Responsible
Officer setting forth a list of all stores and distribution centers owned or
leased and classified as owned by the Borrower or any of its Restricted
Subsidiaries for which a certificate of occupancy or a temporary certificate of
occupancy has been issued during the period covered by such financial
statements;
(e) not later than (i) 90 days after the beginning of each Fiscal
Year of the Borrower (or in the case of the 1999 Fiscal Year, 120 days after the
Effective Date), a copy of the projections by the Borrower of the operating
budget and cash flow budget of the Borrower and its Subsidiaries for such Fiscal
Year, such projections to be accompanied by a certificate of a Responsible
Officer to the effect that such projections have been prepared on the basis of
assumptions believed to have been reasonable when made and (ii) 45 days after
the first day of the third fiscal quarter of such fiscal year, a certificate of
a Responsible Officer updating such projections and budgets for any significant
changes since the delivery thereof;
(f) promptly after the same are sent, copies of all financial
statements and reports which the Borrower sends to its stockholders, and
promptly after the same are filed, copies of all reports on Form 8-K which the
Borrower may make to, or file with, the SEC; and
(g) promptly, such additional financial, Collateral and other
information and business reports as the Agents (on their own behalf or on behalf
of any Lender) may from time to time reasonably request.
7.3 PAYMENT OF OBLIGATIONS. Except as set forth on Schedule 7.3 or as
otherwise required by the Bankruptcy Code or by a Final Order of the Bankruptcy
Court, pay, discharge or
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otherwise satisfy (whether by exchange, compromise, settlement or similar
satisfaction of such obligations) at or before maturity or before they become
delinquent, as the case may be, all its post-petition obligations of whatever
nature, except where (i) the amount or validity thereof is currently being
contested in good faith by appropriate proceedings and reserves in conformity
with GAAP with respect thereto have been provided on the books of the Borrower
or its Subsidiaries, as the case may be, or (ii) the failure to so pay,
discharge or otherwise satisfy such obligation could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
7.4 MAINTENANCE OF EXISTENCE; COMPLIANCE WITH CONTRACTUAL OBLIGATIONS
AND REQUIREMENTS OF LAW. Except as set forth on Schedule 7.4, preserve, renew
and keep in full force and effect its corporate existence and take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business except as otherwise permitted
pursuant to subsection 8.4 and except where the failure to maintain such rights,
privileges and franchises could not, in the aggregate, reasonably be expected to
have a Material Adverse Effect; comply with all post-petition Contractual
Obligations and Requirements of Law except to the extent that failure to comply
therewith could not, in the aggregate, be reasonably expected to have a Material
Adverse Effect, provided, that the Borrower shall comply in all material
respects with (i) the Bankruptcy Code, (ii) the Federal Rules of Bankruptcy
Procedure and (iii) the local rules and all orders of the Bankruptcy Court.
7.5 MAINTENANCE OF PROPERTY; INSURANCE. Except as otherwise required
by the Bankruptcy Code or by a Final Order of the Bankruptcy Court, keep its
property necessary in its business in good working order and condition, ordinary
wear and tear excepted, if the failure to do so could reasonably be expected to
have a Material Adverse Effect; maintain with financially sound and reputable
insurance companies insurance on all its property in at least such amounts and
against at least such risks as are usually insured against in the same general
area by similar companies of comparable size engaged in the same or a similar
business and owning or operating similar properties in localities where the
Borrower and its Restricted Subsidiaries operate and furnish upon the written
request of the Administrative Agent information as to the insurance carried.
7.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and, upon
reasonable prior written notice, permit representatives of the Administrative
Agent or the Majority Lenders to visit and inspect any of its properties and
examine and make abstracts from the books of account of the Borrower and its
Restricted Subsidiaries at any reasonable time and as often as may reasonably be
desired and, during normal business hours, to discuss the business, operations,
properties and financial and other condition of the Borrower and its Restricted
Subsidiaries with officers and employees of the Borrower and its Restricted
Subsidiaries and, in the presence of a Responsible Officer, with its independent
certified public accountants.
7.7 NOTICES. Promptly upon a Responsible Officer becoming aware
thereof, give notice to the Administrative Agent (which shall promptly give
notice thereof to each Lender) of:
(a) the occurrence of any Default or Event of Default;
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(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Restricted Subsidiaries which could
reasonably be expected to have a Material Adverse Effect or (ii) litigation,
investigation or proceeding which may exist at any time between the Borrower or
any of its Subsidiaries and any Governmental Authority, which could reasonably
be expected to have a Material Adverse Effect;
(c) any claims, litigation or proceeding affecting the Borrower or
any of its Subsidiaries in which the amount involved is $20,000,000 or more to
the extent not covered by insurance or in which injunctive or similar relief is
sought which, in any such case, could reasonably be expected to have a Material
Adverse Effect;
(d) the following events, as soon as administratively practicable and
in any event within 30 days after the Borrower knows or has reason to know
thereof: (i) the occurrence or expected occurrence of any Reportable Event with
respect to any Plan, a failure to make any required contribution to a Plan, the
creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or
the termination, Reorganization or Insolvency of, any Multiemployer Plan which,
in any case, could reasonably be expected to have a Material Adverse Effect or
(ii) the institution of proceedings or the taking of any other action by the
PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan
with respect to the withdrawal from, or the termination, Reorganization or
Insolvency of, any Plan which, in any case, could reasonably be expected to have
a Material Adverse Effect; and
(e) if the Borrower or any of the Subsidiary Guarantors cease to
perform cycle counts in accordance with historical practices.
Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the Borrower proposes to take with respect thereto.
7.8 ENVIRONMENTAL LAWS.
(a) Except as otherwise required by the Bankruptcy Code or by a Final
Order of the Bankruptcy Court, comply with all applicable Environmental Laws and
obtain and comply in all material respects with and maintain any and all
licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws except in any such case to the extent that failure
to do so could not be reasonably expected to have a Material Adverse Effect.;
and
(b) Except as otherwise required by the Bankruptcy Code or by a Final
Order of the Bankruptcy Court, conduct and complete all investigations, studies,
sampling and testing, and all remedial, removal and other actions required under
Environmental Laws, except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect, and promptly comply in all material
respects with all lawful orders and directives of all Governmental Authorities
regarding Environmental Laws except to the extent that the same are being
contested in good faith by appropriate proceedings and the pendency of such
proceedings could not be reasonably expected to have a Material Adverse Effect.
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7.9 FURTHER ASSURANCES. Upon the request of the Administrative Agent
at any time, promptly perform or cause to be performed any and all acts and
execute or cause to be executed any and all documents which are necessary or, in
the reasonable opinion of the Administrative Agent, advisable to maintain in
favor of the Administrative Agent Liens on the Collateral that are duly
perfected (to the extent that the same are contemplated to be so perfected under
the terms of the Loan Documents) in accordance with all applicable Requirements
of Law.
7.10 APPLICATION OF PROCEEDS. The Borrower shall use the entire
amount of the proceeds of each Loan in accordance with subsection 5.21, provided
that nothing herein shall in any way prejudice or prevent the Administrative
Agent or the Lenders from objecting, for any reason, to any requests or
applications made for interim or final allowances of compensation for services
rendered or reimbursement of expenses incurred under section 105(a), 330 or 331
of the Bankruptcy Code by any party in interest, and provided, further, that
unless otherwise allowed by the Bankruptcy Court, the Borrower shall not use the
proceeds from any Loans for any purpose that is prohibited under the Bankruptcy
Code.
7.11 ADDITIONAL COLLATERAL.
(a) With respect to any Person that, subsequent to the Effective
Date, becomes a Domestic Subsidiary (other than a Credit Card Subsidiary)
promptly: (i) execute and deliver to the Administrative Agent a new pledge
agreement or such amendments to the Master Security Agreement as the
Administrative Agent shall deem necessary or advisable to grant to the
Administrative Agent a Lien on the Capital Stock of such Domestic Subsidiary
which is owned by the Borrower or any of its Subsidiaries, (ii) deliver to the
Administrative Agent the certificates representing such Capital Stock, together
with undated stock powers executed and delivered in blank by a duly authorized
officer of the pledgor thereof, (iii) cause such new Domestic Subsidiary (A) to
become a party to the Master Security Agreement, in each case pursuant to
documentation which is in form and substance satisfactory to the Administrative
Agent, and (B) to take all actions reasonably deemed necessary or advisable by
the Administrative Agent to cause the Lien created by the Master Security
Agreement to be duly perfected (to the extent contemplated therein and in the
other Loan Documents) in accordance with all applicable Requirements of Law,
including, without limitation, the filing of financing statements in such
jurisdictions as may be requested by the Administrative Agent (it being agreed
that for any such Domestic Subsidiary that is not a debtor-in-possession, no
action shall be required pursuant to this clause (iii) to perfect a Lien in
assets that would not constitute UCC Filing Collateral or in assets constituting
UCC Filing Collateral if such perfection relates to assets constituting UCC
Filing Collateral with an aggregate book value of less than $1,000,000) and (iv)
with respect to assets of any such Domestic Subsidiary with a book value in
excess of $l,000,000 that are perfected under the laws of any jurisdiction, if
requested by the Administrative Agent, deliver to the Administrative Agent legal
opinions relating to the matters described in clauses (i), (ii) and (iii)
immediately preceding, which opinions shall be in form and substance, and from
counsel, reasonably satisfactory to the Administrative Agent.
(b) With respect to any Person that, subsequent to the Effective
Date, becomes a Foreign Subsidiary with a net worth in excess of $l,000,000 or
Inventory with a book value in excess of $1,000,000, promptly upon the request
of the Administrative Agent: (i) execute and deliver to the Administrative Agent
a new pledge agreement or such amendments to the Master Security Agreement as
the Administrative Agent shall deem necessary or advisable to grant to the
Administrative Agent a Lien
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on the Capital Stock of such Subsidiary which is owned by the Borrower or any of
its Subsidiaries (provided that in no event shall more than 65% of the Capital
Stock of any such Subsidiary be required to be so pledged) and (ii) deliver to
the Administrative Agent any certificates representing such Capital Stock,
together with undated stock powers executed and delivered in blank by a duly
authorized officer of the Borrower or such Subsidiary, as the case may be, and
take or cause to be taken all such other actions under the law of the
jurisdiction of organization of such Foreign Subsidiary as may be necessary or
advisable to perfect such Lien on such Capital Stock.
(c) If the Borrower or any Subsidiary Guarantor shall acquire any
Investment Securities (other than Investment Securities of any issuer
aggregating less than $1,000,000) such Loan Party shall deliver certificates
representing such Investment Securities to the Administrative Agent or its agent
or custodian (or otherwise "transfer" such Investment Security (within the
meaning of the applicable UCC) to the Administrative Agent or its agent or
custodian (or take such other action as shall be required to perfect the
security interest of the Collateral in accordance with the applicable UCC)),
together with, when necessary or appropriate, undated powers as provided in
subsection 4.1(b) of the Master Security Agreement, to be held by the
Administrative Agent (or its agent or custodian) as Pledged Securities, subject
to the terms of the Master Security Agreement, as collateral security for the
Secured Obligations.
7.12 MANAGEMENT RESTRUCTURING CONSULTANT. Unless the Administrative
Agent determines in its sole discretion that a management restructuring
consultant is no longer required, upon the Management Restructuring Consultant
ceasing for any reason to act in such capacity, the Borrower shall be required
to retain another management restructuring consultant with duties and
responsibilities substantially the same as the Management Restructuring
Consultant and otherwise satisfactory to the Administrative Agent within 60
Business Days after such resignation.
7.13 BUSINESS PLANS AND PROJECTIONS. Furnish to the Administrative
Agent annual updates of the Borrower's Business Plan and financial projections
and, not later than each August 31, an update of the Borrower's Business Plan
and financial projections through the following January 31st.
7.14 DEPOSITARY ACCOUNT AND PAYMENTS SYSTEM; CASH DOMINION. The
Borrower has established a depositary account and payment system under the
Existing Credit Agreement pursuant to which, subject to the terms of the Loan
Documents, the Administrative Agent possesses sole dominion and control over the
Borrower's and the Subsidiary Guarantors' cash. Except as set forth in the Loan
Documents, neither the Borrower nor any Subsidiary Guarantor, nor any Person or
entity claiming by, through or under the Borrower nor any Subsidiary Guarantor
shall have any control over the use of, or any right to effect a withdrawal
from, any such depositary account and such payment system. The Borrower shall
maintain such depositary account and payment system and shall, within 30 days
after the entry of the Emergency Order (or such later date approved by the
Administrative Agent), deliver to each Depositary Bank instructions reasonably
satisfactory to the Administrative Agent (i) informing each such Depositary Bank
of the Reorganization Cases and (ii) informing each such Depositary Bank of the
Bankruptcy Court's order directing that all of the Loan Parties' cash continue
to be sent to the Administrative Agent pursuant to the existing arrangements.
7.15 ONGOING Y2K REPORTS. The Borrower will certify to the
Administrative Agent each month that the representation and warranty contained
in subsection 5.25 remains true and correct
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and, if exceptions are set forth on Schedule 5.25, the progress made during the
preceding month with respect to the elimination thereof will in any event
eliminate the exception set forth on Schedule 5.25 with respect to clauses (e),
(f), (g) and (h) of Schedule 5.25 by June 30, 1999 and to clauses (i) and (j) of
Schedule 5.25 by September 30, 1999.
7.16 COURT APPROVAL OF THIS AGREEMENT. The Borrower shall use its
best efforts to obtain the approval of the Bankruptcy Court of this Agreement.
SECTION 8. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect or any Letter of Credit remains outstanding or any amount is owing to any
Lender or the Administrative Agent hereunder or under any other Loan Document,
the Borrower shall not, and (except in the case of subsection 8.1) shall not
permit any of its Restricted Subsidiaries to, directly or indirectly:
8.1 FINANCIAL CONDITION COVENANTS.
(a) [Reserved].
(b) Capital Expenditures. Make aggregate Capital Expenditures in any
Fiscal Year in excess of $50 million, provided that, for any Fiscal Year in
which the Capital Expenditures made by the Borrower and its Restricted
Subsidiaries are less than the amount permitted pursuant hereto, the Capital
Expenditure limit for the next Fiscal Year shall be increased by 50% of the
difference between the amount permitted pursuant hereto for such Fiscal Year and
such actual Capital Expenditures made during such Fiscal Year, and the
expenditures of such excess may be made at any time during the applicable
carry-forward Fiscal Year. Notwithstanding the foregoing, no Capital
Expenditures shall be made if, before or after giving effect to the making of
such Capital Expenditure, an Event of Default then exists or thereafter would
exist.
8.2 LIMITATION ON GUARANTEE OBLIGATIONS. Create, incur, assume or
suffer to exist any Guarantee Obligation except:
(a) the Guarantee Obligations in the Master Security Agreement and
any Guarantee Obligations arising under any of the other Loan Documents;
(b) Guarantee Obligations in existence on the Effective Date and (i)
set forth on Schedule 8.2(b) or (ii) otherwise not exceeding $5,000,000 in the
aggregate;
(c) Guarantee Obligations of the Borrower or any Restricted
Subsidiary of obligations (other than the Subordinated Debentures) of any
Restricted Subsidiary or the Borrower which obligations are otherwise permitted
under this Agreement;
(d) Guarantee Obligations entered into in connection with surety,
appeal, payment and performance bonds (and other obligations of a like nature)
incurred in the ordinary course of business;
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(e) subject to subsection 8.8(e), Guarantee Obligations of the
Borrower or any Restricted Subsidiary of Indebtedness or other obligations
incurred in the ordinary course of business of Subsidiaries that are not
Subsidiary Guarantors (including, without limitation, obligations in respect of
indemnifications on behalf of Credit Card Subsidiaries as contemplated by the
proviso to the definition of Credit Card Subsidiaries, to the extent such
obligations constitute Guarantee Obligations); provided that the aggregate
amount of the Indebtedness or other obligations shall not exceed (i) in the case
of Indebtedness and other obligations in respect of non-Credit Card Program
obligations, together with Investments permitted pursuant to subsection 8.8(e),
$10,000,000 and (ii) in the case of Indebtedness and other obligations in
respect of Credit Card Program obligations, together with Investments permitted
pursuant to subsection 8.8(h), $25,000,000;
(f) Guarantee Obligations in respect of obligations of vendors to the
Borrower and its Restricted Subsidiaries created in the ordinary course of
business;
(g) Guarantee Obligations of the Borrower or any Restricted
Subsidiary of Indebtedness or other obligations of Securitization Entities
incurred in connection with Securitization Transactions;
(h) Guarantee Obligations in respect of (i) the Permitted Trade L/C
Facility and other obligations in respect of Trade Letters of Credit and (ii)
other obligations in respect of Standby Letters of Credit, provided that the
aggregate outstanding amount of all such Guarantee Obligations (not otherwise
permitted pursuant to this subsection 8.2) shall at no time exceed, in the case
of clause (i) $100,000,000, and in the case of clause (ii) $10,000,000; and
(i) Guarantee Obligations of the Borrower or any Restricted
Subsidiary incurred in the ordinary course of business in respect of obligations
(other than Indebtedness) of others and other Guarantee Obligations (in each
case not otherwise permitted pursuant to this subsection 8.2) incurred after the
Effective Date, provided that the aggregate amount of all such Guarantee
Obligations for the Borrower and its Restricted Subsidiaries shall not exceed
$15,000,000 at any one time outstanding.
8.3 LIMITATION ON LIENS. Create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained on the books of the Borrower or its Subsidiaries, as the
case may be, in conformity with GAAP (or, in the case of Foreign Subsidiaries,
generally accepted accounting principles in effect from time to time in their
respective jurisdictions of incorporation);
(b) carriers', warehousemen's, mechanics', landlord's, materialmen's,
repairmen's or other like Liens (including statutory Liens and other Liens
arising by operation of law) arising in the ordinary course of business securing
amounts which do not in the aggregate impair the use thereof in the operation of
the business of the Borrower and its Restricted Subsidiaries, which are not
overdue for a period of more than 60 days or which are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property or assets subject to any such
Lien;
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(c) (i) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements and (ii) Liens granted to banks in the ordinary course of business
in connection with deposit, disbursement or concentration accounts (other than
in connection with borrowed money) maintained with such banks on funds and other
items in such accounts;
(d) Liens granted and deposits made in connection with the
performance of bids, trade arrangements and real estate related contracts
entered into in the ordinary course of business (in each case, other than for
borrowed money), utilities, leases, statutory obligations, surety, appeal and
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(e) easements, rights-of-way, restrictions, subdivisions,
parcelizations and other similar encumbrances incurred in the ordinary course of
business which do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of the Borrower or such Restricted Subsidiary;
(f) Liens in existence on the Effective Date and (i) listed on
Schedule 8.3(f) securing Indebtedness or other obligations described on such
Schedule or (ii) otherwise securing Indebtedness or other obligations not
exceeding $8,000,000 in the aggregate;
(g) Liens securing Indebtedness or other obligations of the Borrower
and its Restricted Subsidiaries incurred after the Effective Date to finance the
acquisition, construction or completion of fixed or capital assets (whether
pursuant to a loan, a Financing Lease or otherwise), including, without
limitation, improvements, provided that (i) such Liens are created within 180
days after such acquisition, construction or completion and (ii) such Liens do
not at any time encumber any property other than the property financed by such
Indebtedness or other obligations and the proceeds thereof; and the Indebtedness
or other obligations secured by such Liens do not exceed a principal amount of
$35,000,000.
(h) Liens on assets of any Foreign Subsidiary securing Indebtedness
of such Foreign Subsidiary and other obligations incurred in the ordinary course
of business;
(i) Liens on the fixed assets of a corporation which becomes a
Restricted Subsidiary after the Effective Date and Liens existing on fixed
assets acquired by the Borrower or a Restricted Subsidiary after the Effective
Date, in either case securing Indebtedness or other obligations, provided that
no such Liens shall cover any current assets (including Accounts or Inventory)
of the Borrower or any Restricted Subsidiary, the Capital Stock of any
Subsidiary (including, without limitation, any Securitization Entity or Credit
Card Subsidiary) or any Indebtedness of the Borrower or any Subsidiary, and
provided, further, that (A) such Liens existed at the time such corporation
became a Restricted Subsidiary or such fixed asset was acquired and were not
created in anticipation thereof, (B) any such Lien is not spread to cover any
additional property or assets of such corporation after the time such
corporation becomes a Restricted Subsidiary or such fixed asset is acquired, and
(C) the amount of Indebtedness or other obligations secured thereby is not
increased;
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(j) Liens securing Indebtedness or other obligations which refunds,
refinances extends or otherwise restructures any other Indebtedness or other
obligations to the extent such refunded or refinanced Indebtedness or other
obligation was originally permitted to be secured pursuant to this subsection,
provided that the principal amount of such Indebtedness is not increased (other
than by an amount equal to any costs and expenses incurred in connection with
such refunding or refinancing) and that no such Lien is spread to cover
additional property;
(k) Liens (not otherwise permitted hereunder) which secure
Indebtedness or other obligations not exceeding (as to the Borrower and all its
Restricted Subsidiaries) $20,000,000 in aggregate principal or face amount at
any time outstanding, provided that no such Liens shall cover any current assets
(including Accounts or Inventory) of the Borrower or any Restricted Subsidiary,
the Capital Stock of any Subsidiary (including, without limitation, any
Securitization Entity or Credit Card Subsidiary) or any Indebtedness of the
Borrower or any Subsidiary;
(l) Liens created pursuant to the Security Documents;
(m) Liens created in favor of any Person who delivers goods under a
consignment to the Borrower or a Restricted Subsidiary, provided that the
Borrower or such Restricted Subsidiary treats and designates on its books and
records such goods as "goods on consignment" for all purposes and such goods are
not included as Inventory of the Borrower or such Restricted Subsidiary, as the
case may be, on the books of the Borrower or such Restricted Subsidiary, as the
case may be;
(n) Subject to execution and delivery of intercreditor agreements
reasonably satisfactory to the Administrative Agent, Liens granted to secure the
Borrower's or any Restricted Subsidiary's obligations under any Floor Planning
Facility, provided that such Liens are limited to the goods financed pursuant to
such Floor Planning Facility and the proceeds of such goods;
(o) Liens covering Accounts, credit card receivables and related
assets owned or that may be deemed owned by the Borrower and its Restricted
Subsidiaries in connection with a Credit Card Program;
(p) Liens arising from offsets, deposits or restricted assets granted
by any Credit Card Subsidiary in respect of a Credit Card Program;
(q) Liens on real property (and related fixtures and leases) owned or
leased by the Borrower or any Restricted Subsidiary, including Designated
Material Real Property, securing Indebtedness of the Borrower and such
Restricted Subsidiary, provided that if any such Lien is granted on a parcel of
Designated Material Real Property to replace (x) any then existing Lien on any
parcel of real property which secures any Permanent Mortgage Financing or (y)
any letter of credit issued after the Effective Date to replace a Lien on any
parcel of real property which previously secured any Permanent Mortgage
Financing, in each case in accordance with the terms thereof, then (1) such
parcel of Designated Material Real Property shall cease to be a parcel of
Designated Material Real Property for purposes of this Agreement and (2) the
parcel of real property which is then or was previously subject to a Lien to
secure any Permanent Mortgage Financing (A) must have a fair market value valued
on an "alternative use" basis (as determined in good faith by the Borrower)
approximately equal to the fair market value valued on an "alternative use"
basis (as determined in good faith by the Borrower) of the
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relevant parcel of Designated Material Real Property and (B) shall be deemed to
be a parcel of Designated Material Real Property for all purposes of this
Agreement;
(r) Liens arising under or in connection with Permitted
Sale-Leasebacks;
(s) Liens (including possessory Liens) on cash (and corresponding
Liens on cash collateral accounts and all investments of amounts on deposit
therein), commercial documents relating to goods financed under the relevant
facility or trade letters of credit, such goods and the proceeds thereof, in
each case securing the Permitted Trade L/C Facility and other obligations in
respect of Trade Letters of Credit, provided that no such Lien may extend to or
cover such commercial documents, goods or related proceeds after such goods are
delivered to a warehouse, distribution center or store owned or leased by the
Borrower or a Restricted Subsidiary (it being understood that the Administrative
Agent may (and, to the extent the same is reasonably satisfactory to it, shall)
enter into one or more intercreditor agreements with respect to the Permitted
Trade L/C Facility or other Trade Letters of Credit with respect to the
foregoing); and
(t) Liens arising out of the deposit arrangement described on
Schedule 5.23;
provided that, notwithstanding the foregoing, no Lien created, incurred, assumed
or suffered to exist pursuant to this subsection 8.3 (other than Permitted
Inventory Liens and Liens permitted under subsections 8.3(h), 8.3(m), 8.3(n) and
8.3(s)) shall be a Lien on Inventory or Accounts of the Borrower or any of its
Restricted Subsidiaries.
8.4 LIMITATION ON FUNDAMENTAL CHANGES. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets except:
(a) any Restricted Subsidiary of the Borrower may be merged or
consolidated with or into the Borrower (provided that the Borrower shall be the
continuing or surviving corporation) or with or into any one or more wholly
owned Subsidiaries of the Borrower (provided that a Subsidiary Guarantor or
wholly owned Restricted Subsidiary or Restricted Subsidiaries shall be the
continuing or surviving corporation and provided, further, that if one of the
parties to such transaction (i) is a Subsidiary Guarantor then the continuing or
surviving corporation shall be a Subsidiary Guarantor or (ii) is not a
Restricted Subsidiary, no Default shall result therefrom);
(b) any Restricted Subsidiary may convey, sell, lease, transfer,
assign or otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Borrower or any Subsidiary Guarantor or any
wholly owned Restricted Subsidiary of the Borrower (provided that if such
selling Restricted Subsidiary is a Subsidiary Guarantor then the acquiring
Restricted Subsidiary shall be a Subsidiary Guarantor); and
(c) any Restricted Subsidiary may be merged or consolidated with or
into, or convey, sell, lease, transfer, assign or otherwise dispose of any or
all of its assets to, any Person to the extent that the sale or other
disposition of the assets of such Restricted Subsidiary would be permitted under
subsection 8.5.
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8.5 LIMITATION ON SALE OF ASSETS. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests), whether
now owned or hereafter acquired, or, in the case of any Restricted Subsidiary,
issue or sell any shares of such Restricted Subsidiary's Capital Stock to any
Person (other than the Borrower or any Subsidiary Guarantor or, if such
Restricted Subsidiary is not (x) a wholly-owned Restricted Subsidiary, pro-rata
to the owners of the equity securities of such Restricted Subsidiary or (y) a
Subsidiary Guarantor, to any Restricted Subsidiary), except:
(a) the sale or other disposition of uneconomical, obsolete, surplus
or worn out assets in the ordinary course of business, including, without
limitation, in connection with store closures and real estate development or
divestiture activities;
(b) the sale or other disposition of Inventory and other Current
Assets in the ordinary course of business (including sales of Inventory and
other Current Assets in connection with closed stores or stores to be closed or
sold and sales of discontinued Inventory pursuant to the Business Plan) and
transfers of assets among the Borrower and the Subsidiary Guarantors pursuant to
reasonable business requirements;
(c) (i) the sale or discount of accounts receivable arising in the
ordinary course of business in connection with the compromise or collection
thereof and (ii) sales or other dispositions of Cash Equivalents in the ordinary
course of business in each case at fair market value and on commercially
reasonable terms;
(d) as permitted by subsection 8.4(b);
(e) the OSS Disposition;
(f) Asset Sales of any assets (other than, directly or indirectly,
Inventory) in connection with Permitted Sale-Leasebacks or Securitization
Transactions, provided that (i) in the case of an Asset Sale in connection with
a Permitted Sale-Leaseback to the extent otherwise permitted hereunder (other
than an Asset sale in connection with a Securitization Transaction), the
proceeds of any such Permitted Sale-Leaseback shall be entirely in cash and
shall be not less than 100% of the fair market value of the assets being sold
(as determined by the Borrower in good faith) and (ii) in the case of an Asset
Sale in connection with a Securitization Transaction (which may be in the form
of a capital contribution to the relevant Securitization Entity), the purchase
price (including the Capital Stock of any Securitization Entity owned by the
Borrower or any Restricted Subsidiary) with respect to the assets sold or
disposed shall be not less than the fair market value of such assets (as
determined by the Borrower in good faith);
(g) the sale or other disposition of any property (other than,
directly or indirectly, Inventory and other Current Assets, and other than any
sale or other disposition which is otherwise permitted under this subsection
8.5), provided that at the time of and after giving effect to such sale or
disposition, the aggregate fair market value of all assets so sold or disposed
of in any Fiscal Year pursuant to this paragraph (g) shall not exceed an amount
equal to $125,000,000;
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(h) subject to the other terms and provisions hereof, leases or
subleases (or assignments of leases) or licenses or sublicenses (or assignments
of licenses or sublicenses) of any assets in the ordinary course of business;
(i) sales and other dispositions of assets in connection with
Investments (other than Investments received in respect of the sale or
disposition of Fixed Assets) permitted under subsection 8.8;
(j) sales or other dispositions of Accounts, credit card receivables
and related assets in connection with a Credit Card Program; and
(k) issuances, sales and other dispositions of Capital Stock by any
Credit Card Subsidiary to any Person so long as after giving effect thereto,
such Credit Card Subsidiary remains a Subsidiary;
provided that the foregoing limitations are not intended to prevent the Borrower
from rejecting leases or contracts in connection with the Reorganization Cases.
8.6 LIMITATION ON DIVIDENDS. Declare or pay any dividend (other than
dividends payable solely in common stock or Qualified Stock of the Borrower or
options or warrants with respect thereto) on, or make any payment on account of,
or set apart assets for a sinking or other analogous fund for, the purchase
redemption, defeasance, retirement or other acquisition of, any shares of any
class of Capital Stock (including Qualified Stock) of the Borrower or any
warrants or options to purchase any such Stock, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of the Borrower or
any Restricted Subsidiary (such declarations, payments, setting apart,
purchases, redemptions, defeasances, retirements, acquisitions and distributions
being herein called "Restricted Payments"), except that the Borrower may (i)
purchase or exchange then-existing employee stock options for consideration
consisting solely of (subject to subsection 8.15) Capital Stock of the Borrower
and (ii) may purchase or redeem up to $1,000,000 in Capital Stock solely for the
purpose of purchasing minority interests in order for such Subsidiaries to
become wholly owned Subsidiaries of the Borrower.
8.7 LIMITATION ON INDEBTEDNESS. The Borrower shall not create or
suffer to exist, or permit any Restricted Subsidiary to create or suffer to
exist, any Indebtedness except:
(a) the Credit Agreement Obligations;
(b) Guarantee Obligations permitted by subsection 8.2;
(c) [reserved];
(d) Intercompany Debt and Indebtedness of the Borrower to any
Excluded Subsidiary, provided that such Indebtedness to an Excluded Subsidiary
is (i) at all times junior and subordinate in right of payment to the Secured
Obligations and (ii) not paid until after the repayment in full of the Credit
Agreement Obligations;
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(e) Indebtedness secured by Liens permitted by subsection 8.3,
including without limitation, in respect of Floor Planning Facilities permitted
under subsection 8.3(n);
(f) Indebtedness outstanding on the Effective Date and listed on
Schedule 8.7(f) and refinancings thereof to the extent permitted under
subsection 8.9; and
(g) Indebtedness of the Borrower arising pursuant to Derivative
Agreements entered into with any Lender for the purpose of hedging the
Borrower's interest rate exposure and not for speculative purposes, and
Indebtedness in respect of cash management obligations.
8.8 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. Make any advance,
loan, extension of credit or capital contribution to, or purchase any stock,
bonds, notes, debentures or other securities of any Person or consummate any
Acquisition (an "Investment"), except for:
(a) extensions of trade credit and prepaid expenses made in the
ordinary course of business;
(b) Investments in Cash Equivalents; provided that (A) the maximum
amount of cash and Cash Equivalents held in accounts (other than Consignment
Inventory Accounts) over which the Administrative Agent does not have a valid
and perfected Lien shall not exceed $15,000,000 and (B) the maximum amount of
cash and Cash Equivalents held in Consignment Inventory Accounts shall not
exceed the amounts due to suppliers of Consignment Inventory consisting of (i)
the cost of the Consignment Inventory actually sold plus (ii) other expenses due
and payable to such suppliers of Consignment Inventory;
(c) (i) loans to officers of the Borrower or any Subsidiary, (ii)
loans and advances to employees of the Borrower or its Subsidiaries for travel,
entertainment and relocation expenses in the ordinary course of business, and
(iii) loans by the Borrower to its employees (other than to officers of the
Borrower or any Subsidiary) in connection with management incentive plans,
provided that the aggregate outstanding principal amount of all such loans and
advances shall not exceed $5,000,000 at any time;
(d) Investments by the Borrower in Subsidiary Guarantors and
Investments by Restricted Subsidiaries in the Borrower and in Subsidiary
Guarantors;
(e) Investments not otherwise permitted hereunder by the Borrower and
Restricted Subsidiaries in Subsidiaries that are not Subsidiary Guarantors,
provided that, after giving effect to such Investments, the aggregate then
outstanding amount of all such Investments (including Investments in such
Subsidiaries in the nature of sales and transfers of assets (including, pursuant
to a transaction permitted under subsection 8.4) for less than fair market value
and Guarantee Obligations pursuant to subsection 8.2(e)) made subsequent to the
Effective Date pursuant to this paragraph (e), together with Guarantee
Obligations permitted pursuant to subsection 8.2(e), shall not exceed
$10,000,000, provided, further, that the conversion of any Indebtedness owed to
the Borrower or any Restricted Subsidiary by any Subsidiary into equity of such
Subsidiary shall not constitute an additional Investment in such Subsidiary by
the Borrower or such Restricted Subsidiary for purposes of the limitation
contained in the immediately preceding proviso;
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(f) Investments received in connection with the creation and
collection of accounts receivable in the ordinary course of business;
(g) Investments received as consideration in connection with any
Asset Sale or other disposition of assets permitted hereunder;
(h) Investments not otherwise permitted hereunder in Credit Card
Subsidiaries in an amount, together with Guaranteed Obligations permitted
pursuant to subsection 8.2(e), not to exceed $25,000,000 outstanding at any
time;
(i) Investments by Credit Card Subsidiaries in connection with the
Credit Card Program;
(j) loans and advances to suppliers in the ordinary course of
business consistent with past practice but in any event not in excess of an
outstanding principal amount of $500,000;
(k) purchases of Accounts, credit card receivables and related assets
by Credit Card Subsidiaries in connection with the Credit Card Program; and
(l) Acquisitions and other Investments not otherwise permitted
hereunder made by the Borrower or any of its Restricted Subsidiaries, provided
that, after giving effect thereto, (i) the aggregate outstanding amount of all
such Investments (other than Acquisitions) made at any time after the Effective
Date, shall not exceed the sum of $2,000,000 and (ii) the aggregate outstanding
amount of all such Acquisitions (including assumed Indebtedness and the fair
market value of Capital Stock issued) and other Investments made at any time
after the Effective Date shall not exceed the sum of $20,000,000.
8.9 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT
INSTRUMENTS. At any time:
(a) make any optional payment or prepayment on or optionally redeem
or purchase any Indebtedness (other than the Loans and Indebtedness of the
Borrower or any Restricted Subsidiary to the Borrower or any Restricted
Subsidiary) of the Borrower or any Subsidiary,
(b) make any optional payment or prepayment on account of the
principal of, or interest on, or secure any amendment or waiver of any terms of,
or optionally redeem or purchase, any Subordinated Debentures, or
(c) amend, modify or change, or consent or agree to any amendment,
modification or change to any of the terms relating to the payment or prepayment
of principal of or interest on, any Indebtedness described in clause (a), or the
Subordinated Debentures or the Subordinated Debt Indenture (other than any such
amendment, modification or change which would extend the maturity or reduce the
amount of any payment of principal thereof or which would reduce the rate or
extend the date for payment of interest thereon), provided, that the Borrower
and its Restricted Subsidiaries may prepay Indebtedness (other than the
Subordinated Debentures) permitted hereunder:
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(A) from the proceeds of new Indebtedness incurred to refinance such
Indebtedness and permitted hereunder to be incurred,
(B) under Financing Leases for stores and other property no longer
occupied or used by the Borrower or such Restricted Subsidiary in
connection with the settlement, termination or assignment of such Financing
Lease,
(C) secured by assets in connection with any sale or other
disposition of such assets permitted under subsection 8.5,
(D) consisting of Floor Planning Facilities,
(E) incurred after the Effective Date and otherwise permitted
hereunder to the extent such prepayment is financed with the proceeds of
other Indebtedness (other than Loans) permitted hereunder,
(F) consisting of Financing Leases as long as such Financing Leases
are paid in full in connection with any such prepayment and such prepayment
is made in connection with the closure or sale of a parcel of real property
subject to such Financing Lease,
(G) secured by a Lien on any parcel of Material Real Property so long
as such Indebtedness is paid in full in connection with any such prepayment
and such prepayment is financed with the proceeds of other Indebtedness
(other than Loans) permitted hereunder,
(H) that is short term Indebtedness and unsecured, and
(I) from proceeds of the issuance of Capital Stock, but only if after
giving effect to such issuance, no Default or Event of Default would have
occurred and be continuing.
8.10 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Except as set forth
on Schedule 8.10, enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of property or the rendering of any service,
with any Affiliate unless such transaction is (a) otherwise permitted under this
Agreement or (b) upon fair and reasonable terms no less favorable to the
Borrower or such Restricted Subsidiary, as the case may be, than it would obtain
in a comparable arm's length transaction with a Person which is not an
Affiliate.
8.11 LIMITATION ON SALES AND LEASEBACKS. Enter into any arrangement
with any Person providing for the leasing by the Borrower or any Restricted
Subsidiary of real or personal property (other than Capital Stock) which has
been or is to be sold or transferred by the Borrower or such Restricted
Subsidiary to such Person or to any other Person to whom funds have been or are
to be advanced by such Person on the security of such property or rental
obligations of the Borrower or such Restricted Subsidiary (such arrangement, a
"Sale-Leaseback"), except for Sale-Leasebacks in the ordinary course of the
Borrower's or such Restricted Subsidiary's business, consistent with past
practice and at market rates and subject to compliance with subsection 8.5(e),
or Sale-Leasebacks in connection with Securitization Transactions ("Permitted
Sale-Leasebacks"), in each case on terms and conditions acceptable to the
Administrative Agent in its sole discretion, exercised commercially reasonably
and in
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accordance with its customary criteria. For the avoidance of doubt,
Sale-Leasebacks that result in a Financing Lease shall be treated as
Indebtedness for all purposes of this Agreement.
8.12 FISCAL YEARS AND QUARTERS. Change the last day of the Fiscal
Year of the Borrower (other than to a day on or about January 31 of any calendar
year) or permit any Fiscal Year to be less than a period of approximately 365
days or permit any fiscal quarter to be less than a period of approximately 90
days.
8.13 LIMITATION ON CONDUCT OF BUSINESS. Enter into any business
either directly or through any Restricted Subsidiary except for businesses in
which the Company and its Subsidiaries are engaged on the date of this Agreement
and businesses related or similar thereto or entered into in connection with any
of the foregoing.
8.14 [RESERVED].
8.15 LIMITATION ON ISSUANCES OF CAPITAL STOCK. Issue (a) any
preferred stock or (b) any class of redeemable common stock, provided, however,
that the Borrower may issue Qualified Stock.
8.16 FOREIGN HOLDING COMPANIES, INACTIVE SUBSIDIARIES AND SPECIAL
PURPOSE SUBSIDIARIES. Permit the aggregate book value of the assets of all
Foreign Holding Companies (exclusive of assets consisting of advances or loans
to the Borrower or any of its Subsidiaries and Capital Stock of Foreign
Subsidiaries and other Foreign Holding Companies), Inactive Subsidiaries and
Special Purpose Subsidiaries (exclusive of assets consisting of licenses or
permits) which are not Subsidiary Guarantors to exceed $25,000,000 at any time.
8.17 PERMANENT ORDER. Make or permit to be made any change, amendment
or modification, or any application or motion for any change, amendment or
modification, to the Permanent Order without the prior written consent of the
Required Lenders.
8.18 APPLICATION TO BANKRUPTCY COURT. Apply to the Bankruptcy Court
for the authority to take any action that is prohibited by the terms of this
Agreement or any of the other Loan Documents or refrain from taking any action
that is required to be taken by the terms of this Agreement or any of the other
Loan Documents.
8.19 LIMITATION ON RECLAMATION PAYMENTS. Make any reclamation payment
in excess of $15,000,000.
8.20 LIQUIDATION CONSULTANT. Replace or make any material
modification in the contractual arrangements with any Person engaged to conduct
or assist the Borrower in conducting liquidations sales, without the prior
written consent of the Administrative Agent, which consent shall not
unreasonably be withheld.
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SECTION 9. EVENTS OF DEFAULT.
If any of the following events shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Loan when due
in accordance with the terms hereof; or the Borrower shall fail to pay any
Reimbursement Obligation within two Business Days after such Reimbursement
Obligation becomes due in accordance with the terms hereof; or the Borrower
shall fail to pay any interest on any Loan, or any other amount payable
hereunder, within five days after any such interest or other amount becomes due
in accordance with the terms hereof; or
(b) Any representation or warranty made or deemed made by the
Borrower or any other Loan Party herein or in any other Loan Document or which
is contained in any certificate, document or financial or other statement
furnished by it at any time under or in connection with this Agreement or any
such other Loan Document shall prove to have been incorrect in any material
respect on or as of the date made or deemed made; or
(c) The Borrower shall default in the observance or performance of
any agreement contained in subsection 7.7(a), 7.12 or 7.14 or Section 8, or the
Borrower shall fail to deliver a Borrowing Base Certificate pursuant to
subsection 7.2(c) within two Business Days after such Borrowing Base Certificate
was due pursuant to such subsection; or
(d) The Borrower or any other Loan Party shall default in the
observance or performance of any other agreement contained in this Agreement or
any other Loan Document (other than as provided in paragraphs (a) through (c) of
this Section), and such default shall continue unremedied for a period of 30
days after the earlier of (i) the date upon which written notice thereof is
given to the Borrower by the Administrative Agent or the Majority Lenders or
(ii) the date upon which a Responsible Officer becomes aware of such default; or
(e) The Borrower or any of its Restricted Subsidiaries shall (i)
default after the commencement of the Reorganization Cases in any payment of
principal of or interest on any post-petition Indebtedness (other than the
Loans) or in the payment of any post-petition Guarantee Obligation, beyond the
period of grace, if any, provided in the instrument or agreement under which
such Indebtedness or Guarantee Obligation was created; or (ii) default in the
observance or performance of any other agreement or condition relating to any
such Indebtedness or Guarantee Obligation or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or
agent on behalf of such holder or holders or beneficiary or beneficiaries) to
cause, with the giving of notice if required (but after the expiration of all
grace periods applicable thereto), such Indebtedness to become due prior to its
stated maturity or such Guarantee Obligation to become payable, provided that
(x) no Default or Event of Default shall exist under this paragraph (A) unless
the aggregate amount of Indebtedness (other than Indebtedness in respect of
Floor Planning Facilities) and/or Guarantee Obligations in respect of which any
default or other event or condition referred to in this paragraph shall have
occurred shall be equal to at least $10,000,000 or (B) unless the aggregate
amount of Indebtedness in respect of Floor Planning Facilities in respect of
which any default or other event or condition referred
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to in this paragraph shall have occurred shall be equal to at least $20,000,000
and (y) clause (ii) above shall not apply to Indebtedness that becomes due
solely as a result of the voluntary sale or transfer of property or assets or
prepayments that become due as a result of any issuance of Capital Stock or
incurrence of Indebtedness (in each case to the extent such, sale, transfer,
issuance or incurrence is permitted by the terms of such Indebtedness); or
(f) [reserved]; or
(g) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Tax Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived, shall exist with respect to any Plan or any Lien
in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any
Commonly Controlled Entity, (iii) a Reportable Event (other than the
Reorganization Cases) shall occur with respect to, or proceedings shall commence
to have a trustee appointed, or a trustee shall be appointed, to administer or
to terminate, any Single Employer Plan, which Reportable Event or commencement
of proceedings or appointment of a trustee is, in the reasonable opinion of the
Majority Lenders, likely to result in the termination of such Plan for purposes
of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes
of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall,
or in the reasonable opinion of the Majority Lenders is likely to, incur any
liability in connection with a withdrawal from, or the Insolvency or
Reorganization of, a Multiemployer Plan or (vi) any other event or condition
shall occur or exist with respect to a Plan; and in each case in clauses (i)
through (vi) above, such event or condition, together with all other such events
or conditions, if any, could reasonably be expected to have a Material Adverse
Effect; or
(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Restricted Subsidiaries involving in the aggregate a
liability (to the extent not paid or covered by insurance) of $15,000,000 or
more, and such judgments or decrees shall not have been vacated, discharged,
stayed or bonded pending appeal within 60 days from the entry thereof; or
(i) (i) For any reason (other than any act on the part of the
Administrative Agent or any Lender or any act or failure to act (except to the
extent such act or failure to act constitutes a breach of the relevant Blocked
Account Agreement or Lockbox Agreement on the part of any Depositary Bank) the
Master Security Agreement or any Security Document ceases to be or is not in
full force and effect in any material respect and such default shall continue
unremedied for 30 days after the earlier of receipt by the Borrower of notice of
such default from the Administrative Agent or actual knowledge of such default
by a Responsible Officer, (ii) the Borrower or any of its Restricted
Subsidiaries shall assert in writing that the Master Security Agreement or any
Security Document has ceased to be or is not in full force and effect or (iii)
the Lien created by any of the Security Documents shall cease to be enforceable
and of the same effect and priority purported to be created thereby except to
the extent contemplated hereunder and under the other Loan Documents; or
(j) (i) Any Person or "group" (within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended) (A) shall have
acquired beneficial ownership of 50% or more of any outstanding class of Capital
Stock having ordinary voting power in the election of directors of the Borrower
or (B) shall obtain the power (whether or not exercised) to elect a majority of
the Borrower's directors, or (ii) (A) the Board of Directors of the Borrower
shall not consist of a majority of
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Continuing Directors; "Continuing Directors" shall mean the directors of the
Borrower on the Effective Date and each other director, if such other director's
nomination for election to the Board of Directors of the Borrower is recommended
by a majority of the then Continuing Directors and (B) the Chief Executive
Officer of the Borrower shall resign or be removed during the period commencing
three months prior to the date the Board of Directors shall not consist of a
majority of Continuing Directors and ending six months after such date; or
(k) Any provision of any Loan Document shall for any reason cease to
be valid and binding on the Loan Party party thereto other than by reason of the
application of applicable bankruptcy, insolvency, reorganization or other
similar laws or the application of equitable principles relating to or limiting
creditors' rights generally, or such Loan Party shall so state in writing; or
(l) Any Loan Party shall fail to comply with the terms of either the
Emergency Order or the Permanent Order in any material respect; or
(m) Any of the Reorganization Cases shall be dismissed, suspended or
converted to a case under chapter 7 of the Bankruptcy Code or a trustee shall be
appointed in any of the Reorganization Cases, or an application shall be filed
by a Loan Party for the approval of, or there shall arise, any other claim
having priority senior to or pari passu with the claims of the Administrative
Agent and the Lenders under the Loan Documents or any other claim having
priority over any or all administrative expenses of the kind specified in
sections 503(b) or 507(b) of the Bankruptcy Code (other than Permitted
Expenses); or
(n) The Bankruptcy Court shall (i) enter an order approving payment
of any pre-petition Claims other than an order approving a Permitted Prepetition
Claim Payment, (ii) enter a First Day Order not approved by the Administrative
Agent, (iii) grant relief from the automatic stay applicable under section 362
of the Bankruptcy Code to holders of security interests in respect of the
ability of such holders to foreclose on assets valued in excess of $15,000,000
in the aggregate, or (iv) except to the extent the same would not constitute a
default under any of the previous clauses, enter an order approving any
settlement or other stipulation with any creditor of the Borrower other than the
Administrative Agent and the Lenders or otherwise providing for payments as
adequate protection or otherwise to such creditor individually or in the
aggregate in excess of $1,000,000 for any and all such creditors; or
(o) A Loan Party shall make any payment (as adequate protection or
otherwise) on account of any Claim arising or deemed to have arisen prior to the
commencement of the Reorganization Cases other than a payment or payments which
would not constitute a default under Section 9(n)(ii) or a Permitted Prepetition
Claim Payment; or
(p) The Bankruptcy Court shall enter an order amending,
supplementing, vacating or otherwise modifying the Emergency Order or Permanent
Order without the consent of the Required Lenders; or
(q) The Bankruptcy Court shall enter an order appointing an examiner
with powers beyond the duty to investigate and report, as set forth in section
1106(a)(3) and (4) of the Bankruptcy Code in any of the Reorganization Cases; or
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(r) A Loan Party shall bring a motion in any of the Reorganization
Cases: (i) to obtain working capital financing from any Person other than the
Lenders under section 364(d) of the Bankruptcy Code (other than with respect to
a working capital financing used, in whole or in part, to repay in full the
Credit Agreement Obligations) or (ii) to obtain financing from any Person other
than the Lenders under section 364(c) of the Bankruptcy Code (other than with
respect to a financing used, in whole or in part, to repay in full the Credit
Agreement Obligations or otherwise permitted by this Agreement) or (iii) to
grant any Lien other than Liens upon or affecting any Collateral permitted by
the Master Security Agreement or (iv) except as otherwise provided herein, to
use any of the Collateral pursuant to section 363(c) of the Bankruptcy Code
without the prior written consent of the Required Lenders except to pay
Permitted Expenses or (v) to recover from any portions of the Collateral any
costs or expenses of preserving or disposing of such Collateral under section
506(c) of the Bankruptcy Code; or
(s) The Bankruptcy Court shall enter an order granting relief
pursuant to section 362(d) of the Bankruptcy Code (except to the extent such
would not cause a breach of clause (iii) of Section 9(n)); or
(t) The Permanent Order shall not have been entered by the Bankruptcy
Court on the 45th day after the Petition Date, or, if then entered, the
Permanent Order shall be stayed, reversed, modified, amended or vacated, in
whole or in part;
then, and in any such event, either or both of the following actions may be
taken: (i) with the consent of the Majority Lenders, the Administrative Agent
may, or upon the request of the Majority Lenders, the Administrative Agent
shall, by notice to the Borrower declare the Commitments to be terminated
forthwith, whereupon the Commitments shall immediately terminate; and (ii) with
the consent of the Majority Lenders, the Administrative Agent may, or upon the
request of the Majority Lenders, the Administrative Agent shall, by notice to
the Borrower, declare the Loans hereunder (with accrued interest thereon) and
all other amounts owing under this Agreement (including, without limitation, all
amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder) to be due and payable forthwith, whereupon the same shall
immediately become due and payable. Except as expressly provided above in this
Section, presentment, demand, protest and all other notices of any kind are
hereby expressly waived. In addition, subject to any requirement of the giving
of notice by the terms of the Interim Order or the Permanent Order, the Agents
and the Lenders shall be entitled to exercise their respective rights under the
Master Security Agreement or any other Security Document.
With respect to all Letters of Credit with respect to which
presentment for honor shall not have occurred at the time of an acceleration
pursuant to the preceding paragraph, the Borrower shall at such time deposit in
a cash Collateral Account opened by the Administrative Agent an amount equal to
the aggregate then undrawn and unexpired amount of such Letters of Credit. The
Borrower hereby grants to the Administrative Agent, for the benefit of each
Issuing Bank and the L/C Participants, a security interest in such cash
Collateral to secure all obligations of the Borrower under this Agreement and
the other Loan Documents. Amounts held in such cash Collateral Account shall be
applied by the Administrative Agent to the payment of drafts drawn under such
Letters of Credit, and the unused portion thereof after all such Letters of
Credit shall have expired or been fully drawn upon, if any, shall be applied to
repay other obligations of the Borrower hereunder and under the Notes. After all
such
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Letters of Credit shall have expired or been fully drawn upon, all Reimbursement
Obligations shall have been satisfied and all other obligations of the Borrower
hereunder and under the Notes shall have been paid in full, the balance, if any,
in such cash Collateral Account shall be returned to the Borrower. The Borrower
shall execute and deliver to the Administrative Agent, for the account of each
Issuing Bank and the L/C Participants, such further documents and instruments as
the Administrative Agent may reasonably request to evidence the creation and
perfection of the security interest in such cash Collateral Account.
SECTION 10. ADMINISTRATIVE AGENT AND THE COLLATERAL MONITORING AGENT
10.1 APPOINTMENT. Each Lender hereby irrevocably designates and
appoints each Agent as the agent of such Lender under this Agreement and the
other Loan Documents, and each Lender irrevocably authorizes each Agent, in such
capacity, to take such action on its behalf under the provisions of this
Agreement and the other Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to such Agent by the terms of this
Agreement and the other Loan Documents, together with such other powers as are
reasonably incidental thereto, including, without limitation, all powers, rights
and remedies provided in the Master Security Agreement. Notwithstanding any
provision to the contrary elsewhere in this Agreement, neither Agent shall 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
Agreement or any other Loan Document or otherwise exist against the either
Agent.
10.2 DELEGATION OF DUTIES. Each Agent may execute any of its duties
under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. No Agent shall be responsible for the
negligence or misconduct of any agents or attorneys in-fact selected by it with
reasonable care.
10.3 EXCULPATORY PROVISIONS. No Agent nor any of their respective
officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be
(i) liable for any action lawfully taken or omitted to be taken by it or such
Person under or in connection with this Agreement or any other Loan Document
(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 Borrower or any officer
thereof contained in this Agreement or any other Loan Document or in any
certificate, report, statement or other document referred to or provided for in,
or received by such Agent under or in connection with, this Agreement or any
other Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document or
for any failure of the Borrower to perform its obligations hereunder or
thereunder. No Agent shall 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 Agreement or any other Loan Document, or to
inspect the properties, books or records of the Borrower.
10.4 RELIANCE BY AGENTS. Each Agent shall be entitled to rely, and
shall be fully protected in relying, upon any Note, writing, resolution, notice,
consent, certificate, affidavit, letter, facsimile, 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
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advice and statements of legal counsel (including, without limitation, counsel
to the Borrower), independent accountants and other experts selected by such
Agent. The Administrative Agent may deem and treat the payee of any Note as the
owner thereof for all purposes unless a written notice of assignment,
negotiation or transfer thereof shall have been filed with the Administrative
Agent. Each Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of Lenders entitled to so act in accordance
with the terms of this Agreement 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. Each Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement and the other Loan Documents in
accordance with a request of Lenders entitled to so act in accordance with the
terms of this Agreement, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Lenders and all future holders of
the Loans.
10.5 NOTICE OF DEFAULT. No Agent shall be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless
such Agent has received notice from a Lender or the Borrower referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default". In the event that the Administrative Agent
receives such a notice, the Administrative Agent shall promptly give notice
thereof to the Lenders. The Administrative Agent shall take such action with
respect to such Default or Event of Default as shall be reasonably directed by
Lenders entitled to so act in accordance with the terms of this Agreement;
provided that unless and until the Administrative Agent shall have received such
directions, the Administrative Agent may (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 in the best interests of the
Lenders.
10.6 NON-RELIANCE ON AGENTS AND OTHER LENDERS. Each Lender expressly
acknowledges that no Agent nor any of their respective officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representations
or warranties to it and that no act by either Agent hereafter taken, including
any review of the affairs of the Borrower, shall be deemed to constitute any
representation or warranty by such Agent to any Lender. Each Lender represents
to the Agents that it has, independently and without reliance upon the Agents 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
Borrower and made its own decision to make its Loans hereunder and enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Agents 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 this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower. Except for notices, reports and other documents expressly required to
be furnished to the Lenders by the Administrative Agent hereunder, no Agent
shall have any duty or responsibility to provide any Lender with any credit or
other information concerning the business, operations, property, condition
(financial or otherwise), prospects or creditworthiness of the Borrower which
may come into the possession of such Agent or any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates.
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10.7 INDEMNIFICATION. The Lenders agree to indemnify each Agent in
its capacity as such (to the extent not reimbursed by the Borrower and without
limiting the obligation of the Borrower to do so), ratably according to their
respective Voting Percentages in effect on the date on which indemnification is
sought, from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the Loans) be imposed on, incurred by or asserted
against such Agent in any way relating to or arising out of, the Commitments,
this Agreement, any of the other Loan Documents or any documents contemplated by
or referred to herein or therein or the transactions contemplated hereby or
thereby or any action taken or omitted by such 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 from such
Agent's gross negligence or willful misconduct. The agreements in this
subsection shall survive the payment of the Loans and all other amounts payable
hereunder. Each Agent shall have the right to deduct any amount owed to it by
any Lender under this Agreement from any payment made by it to such Lender
hereunder.
10.8 AGENT IN ITS INDIVIDUAL CAPACITY. Each Agent and its Affiliates
may make loans to, issue letters of credit for the account of, accept deposits
from and generally engage in any kind of business with the Borrower as though
such Agent were not an Agent hereunder and under the other Loan Documents. With
respect to the Loans made by it or any Letter of Credit issued or participated
in by it, each Agent shall have the same rights and powers under this Agreement
and the other Loan Documents as any Lender and may exercise the same as though
it were not an Agent hereunder, and the terms "Lender" and "Lenders" shall
include such Agent in its individual capacity.
10.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may
resign as Administrative Agent upon 25 Business Days' notice to the Borrower and
the Lenders. If the Administrative Agent shall resign as Administrative Agent
under this Agreement and the other Loan Documents, then the Majority Lenders
shall appoint from among the Lenders a successor agent for the Lenders, which
successor agent (provided that it shall have been approved by the Borrower),
shall succeed to the rights, powers and duties of the Administrative Agent
hereunder. Effective upon such appointment and approval, the term
"Administrative Agent" shall mean such successor agent, and the former
Administrative Agent's rights, powers and duties as Administrative Agent shall
be terminated, without any other or further act or deed on the part of such
former Administrative Agent or any of the parties to this Agreement or any
holders of the Loans. After any retiring Administrative Agent's resignation as
Administrative Agent, the provisions of this Section 10 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
SECTION 11. MISCELLANEOUS
11.1 AMENDMENTS AND WAIVERS. Neither this Agreement nor any other
Loan Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this subsection. The
Majority Lenders may, or, with the written consent of the Majority Lenders or
the Administrative Agent, as applicable, may, from time to time, (a) enter into
with the applicable Loan Party or Parties written amendments, supplements or
modifications
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hereto and to the other Loan Documents for the purpose of adding, deleting or
revising any provisions to this Agreement or the other Loan Documents or
changing in any manner the rights of the Lenders or of the Borrower hereunder or
thereunder or (b) waive, on such terms and conditions as the Majority Lenders or
the Administrative Agent, as the case may be, may specify in such instrument,
any of the requirements of this Agreement or the other Loan Documents or any
Default or Event of Default and its consequences; provided, however, that no
such waiver and no such amendment, supplement or modification shall:
(i) reduce the amount or extend the scheduled date of maturity of any
Loan or of any installment thereof, or reduce the stated rate of any
interest or fee payable hereunder or extend the scheduled date of any
payment thereof or increase the amount or extend the expiration date of any
Lender's Commitments, in each case without the consent of each Lender
adversely affected thereby,
(ii) (A) amend, modify or waive any provision of this subsection or
consent to the assignment or transfer by the Borrower of any of its rights
and obligations under this Agreement and the other Loan Documents or any
other provision of any other Loan Document, or, except as set forth in the
Master Security Agreement, release or subordinate the interest of the
Administrative Agent in the Collateral or the Subsidiary Guarantors, except
that:
(x) the Administrative Agent may release or subordinate
the Administrative Agent's interest in up to $10,000,000 of the
Collateral, with the consent of the Agents,
(y) the Administrative Agent may release or subordinate
the Administrative Agent's interest in $10,000,001 to $50,000,000 of
the Collateral, with the consent of the Required Lenders, and
(z) the Administrative Agent may release or subordinate
the Administrative Agent's interest in more than $50,000,000 of the
Collateral, with the consent of all the Lenders, or
(B) reduce the percentage specified in the definition of Majority
Lenders or Required Lenders without the written consent of all the Lenders,
(iii) increase (A) any percentage set forth in the definition of
Borrowing Base, Available Inventory Amount or Available Accounts Receivable
Amount or Available L/C Amount without the consent of all the Lenders,
provided, the Agents may increase the percentages set forth in the
definition of Borrowing Base, Available Inventory Amount, Available
Accounts Receivable Amount or Available L/C Amount by up to an additional
5% above the percentages as of the Effective Date with the consent of the
Required Lenders, (B) the amount set forth in clause (ii) of the definition
of Available Mortgaged Real Estate Amount without the consent of the
Required Lenders and the Agents or (C) the maximum aggregate amount of
Commitments hereunder without the consent of the Required Lenders,
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(iv) amend or modify the amount set forth in the definition of
Interim Reserve Amount without the consent of the Required Lenders and the
Agents,
(v) amend, modify or waive any provision of Section 2 or subsection
4.1(c) without the written consent of the Majority Term Loan Lenders or
reduce the percentage specified in the definition of Majority Term Loan
Lenders without the consent of all the Term Loan Lenders,
(vi) amend, modify or waive any provision of Section 3 or of
subsection 6.2 without the prior written consent of the Majority Revolving
Credit Lenders or reduce the percentage specified in the definition of
Majority Revolving Credit Lenders without the consent of all the Revolving
Credit Lenders,
(vii) amend, modify or waive any provision of subsection 4.7(c) of
this Agreement or of subsection 3.5(a) or 3.5(b) of the Master Security
Agreement without the written consent of the Majority Term Loan Lenders and
the Majority Revolving Credit Lenders,
(viii) amend, modify or waive any provision of subsections 3.6
through 3.13 without the consent of each Issuing Bank adversely affected in
any material respect thereby,
(ix) amend, modify or waive any provision of subsections 3.14, 3.15
or 3.16 without the consent of the Swing Line Lender, or
(x) amend, modify or waive any provision of Section 10 without the
written consent of the Agent adversely affected thereby.
Any such waiver and any such amendment, supplement or modification shall apply
equally to each of the Lenders and shall be binding upon the Borrower, the
Lenders, the Administrative Agent and all future holders of the Loans. In the
case of any waiver, the Borrower, the Lenders, and the Administrative Agent
shall be restored to their former positions and rights hereunder and under the
other Loan Documents, and any Default or Event of Default waived shall be deemed
to be cured and not continuing; no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon. If, in
connection with any proposed amendment, supplement, modification, consent or
waiver of any provisions of this Agreement or any other Loan Documents as
contemplated by this subsection 11.1, the consent of Lenders whose Voting
Percentages aggregate at least 90% is obtained but the consent of one or more of
the other Lenders is not obtained, then the Borrower may replace each such
non-consenting Lender or Lenders with one or more replacement Lenders pursuant
to subsection 11.7 so long as at the time of such replacement, each replacement
Lender consents to the proposed amendment, supplement, modification, consent or
waiver, provided that the Borrower shall not have the right to replace any
Lender solely as a result of the exercise of such Lender's rights (and the
withholding of any required consent of such Lender) pursuant to clauses (i),
(ii) or (iii) of the first proviso of this subsection 11.1.
11.2 NOTICES. Unless otherwise expressly provided herein, all
notices, requests and demands to or upon the respective parties hereto to be
effective shall be in writing (including by facsimile transmission) and shall be
deemed to have been duly given or made (a) in the case of delivery by hand
(including by overnight courier), when delivered, (b) in the case of delivery by
mail, three days
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after being deposited in the mails, postage prepaid, or (c) in the case of
delivery by facsimile transmission, when sent and receipt has been confirmed,
addressed as follows in the case of the Borrower and the Agents, and as set
forth in Schedule 11.2 in the case of the other parties hereto, or to such other
address as may be hereafter notified by the respective parties hereto:
The Borrower: Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37027
Attention: Treasurer and Chief Financial Officer
Fax: (615) 660-3667
Telephone: (615) 660-3477
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: John Wm. Butler, Jr., Esq.
Lawrence Frishman, Esq.
Fax: (212) 735-2000
Telephone: (212) 735-3000
The Collateral
Monitoring Agent: BankBoston, N.A.
40 Broad Street
Boston, Massachusetts 02109
Attention: Betsy Ratto
Fax: (617) 434-4339
Telephone: (617) 434-4113
The Administrative
Agent: Citicorp USA, Inc.
399 Park Avenue
6th Floor
New York, New York 10043
Attention: Keith R. Karako
Claudia Slacik
Fax: (212) 793-1290
Telephone: (212) 559-3149
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With a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Ronald F. Daitz, Esq.
John J. Rapisardi, Esq.
Fax: (212) 310-8007
Telephone: (212) 310-8337
provided that any notice, request or demand to or upon the Agents or the Lenders
pursuant to subsections 3.2, 3.4, 3.6, 3.15, 4.1, 4.2 or 4.7 shall not be
effective until received. Whenever either Agent sends a notice by mail, such
Agent will use reasonable efforts to also send such notice by one of the other
means of notice permitted hereunder, provided that the failure to do so shall
not affect in any way the validity of any delivery by mail pursuant to this
subsection or otherwise result in any liability to the Agents or the Lenders.
11.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Administrative Agent or any Lender, any
right, remedy, power or privilege hereunder or under the other Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.
11.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans hereunder.
11.5 PAYMENT OF EXPENSES AND TAXES; INDEMNITY. The Borrower agrees
(a) to pay or reimburse the Agents for all their reasonable
out-of-pocket costs and expenses incurred in connection with the development,
preparation and execution of, and any amendment, supplement or modification to,
this Agreement and the other Loan Documents and any other documents prepared in
connection herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, including, without limitation, the
reasonable fees and disbursements of one counsel for all of the Agents together,
(b) (i) to pay or reimburse the Agents for all their reasonable
out-of-pocket costs and expenses incurred in connection with (A) the
enforcement or preservation of any rights under this Agreement, the other
Loan Documents and any such other documents, including, without limitation,
costs and expenses which the Administrative Agent may incur in enforcing or
protecting its Liens on or rights and interest in the Collateral, and the
fees and disbursements of counsel to the Agents, and (B) any review of
pleadings and documents related to the
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Reorganization Cases, attendance at meetings related to the Reorganization
Cases, general monitoring of the Reorganization Cases and any subsequent
chapter 7 case, and
(ii) to pay or reimburse each Lender for all its reasonable
out-of-pocket costs and expenses incurred in connection with the
enforcement or preservation of any rights under this Agreement, the other
Loan Documents and any such other documents following the occurrence and
during the continuation of a Default or an Event of Default, including,
without limitation, the fees and disbursements of counsel to each Lender,
(c) to pay, indemnify, and hold each Lender and the Agents (and their
respective directors, officers, employees and agents) harmless from, any and all
recording and filing fees and any and all liabilities with respect to, or
resulting from any delay in paying, stamp, excise (other than excise taxes
imposed in lieu of net income taxes) and other similar taxes, if any, which may
be payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the other Loan Documents and
any such other documents, and
(d) to pay, indemnify, and hold each Lender and the Agents (and their
respective directors, officers, employees and agents) harmless from and against
any and all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits and reasonable out-of-pocket costs, expenses or disbursements
(including, without limitation, the reasonable fees and expenses of the same
counsel for all of the Lenders or the Agents (absent a conflict of interest or
inability to join the relevant actions or proceedings, in which additional
counsel may be retained by the Agents and Lenders)) of any kind or nature
whatsoever with respect to any claim, litigation, investigation or proceeding
relating to the execution, delivery, enforcement, performance and administration
of this Agreement and the other Loan Documents and any such other documents or
any use of any of the Extensions of Credit, including, without limitation, any
of the foregoing relating to the violation of, noncompliance with or liability
under, any Environmental Law applicable to the operations of the Borrower, any
of its Subsidiaries or any of the Properties (all the foregoing in this clause
(d), collectively, the "Indemnified Liabilities"), provided that the Borrower
shall have no obligation hereunder to the Agents or any Lender (or their
respective directors, officers, employees or agents) with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of the
Agents or any such Lender (or their respective directors, officers, employees or
agents, as the case may be), provided, however, that in connection with the
enforcement or preservation of any rights under this Agreement or the other Loan
Documents, the Borrower shall not be required to pay or reimburse the Lenders
for more than one counsel to all of the Lenders and for one counsel to each of
the Agents. The agreements in this subsection shall survive the termination of
this Agreement and the repayment of the Loans and all other amounts payable
hereunder.
11.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS.
(a) This Agreement shall be binding upon and inure to the benefit of
the Borrower, the Lenders, the Agents and their respective successors and
assigns, except that the Borrower may not assign or transfer any of its rights
or obligations under this Agreement without the prior written consent of each
Lender.
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(b) Any Lender may, in the ordinary course of its commercial banking
business and in accordance with applicable law, at any time sell to one or more
banks or other entities ("Participants") participating interests in any Loan
owing to such Lender, any interest of such Lender in any Letter of Credit, any
Commitment of such Lender or any other interest of such Lender hereunder and
under the other Loan Documents. In the event of any such sale by a Lender of a
participating interest to a Participant, such Lender's obligations under this
Agreement to the other parties to this Agreement shall remain unchanged, such
Lender shall remain solely responsible for the performance thereof, such Lender
shall remain the holder of any such Loan for all purposes under this Agreement
and the other Loan Documents, and the Borrower and the Agents shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement and the other Loan Documents. No
Lender shall be entitled to create in favor of any Participant, in the
participation agreement pursuant to which such Participant's participating
interest shall be created or otherwise, any right to vote on, consent to or
approve any matter relating to this Agreement or any other Loan Document except
for those specified in clauses (i) and (ii) of the proviso to subsection 11.1.
The Borrower agrees that if amounts outstanding under this Agreement are due or
unpaid, or shall have been declared or shall have become due and payable upon
the occurrence of an Event of Default, each Participant shall, to the maximum
extent permitted by applicable law, be deemed to have the right of setoff in
respect of its participating interest in amounts owing under this Agreement to
the same extent as if the amount of its participating interest were owing
directly to it as a Lender under this Agreement, provided that, in purchasing
such participating interest, such Participant shall be deemed to have agreed to
share with the Lenders the proceeds thereof as provided in subsection 11.8(a) as
fully as if it were a Lender hereunder. The Borrower also agrees that each
Participant shall be entitled to the benefits of subsections 4.9, 4.10 and 4.11
with respect to its participation in the Commitments and the Loans outstanding
from time to time as if it were a Lender; provided that, in the case of
subsection 4.10, such Participant shall have complied with the requirements of
said subsection and provided, further, that no Participant shall be entitled to
receive any greater amount pursuant to any such subsection than the transferor
Lender would have been entitled to receive in respect of the amount of the
participation transferred by such transferor Lender to such Participant had no
such transfer occurred. Each Lender promptly shall notify the Administrative
Agent in writing of the sale of any participating interest in a Loan to any
Participant.
(c) Any Lender may, in the ordinary course of its business of making
or investing in loans and in accordance with applicable law, at any time and
from time to time assign to any Lender or any affiliate thereof or, with the
consent of the Agents (which shall not be unreasonably withheld), to an
additional bank, financial institution or other entity that is then engaged in
the business of lending money (an "Assignee") all or any part of its rights and
obligations under this Agreement and the other Loan Documents pursuant to an
Assignment and Acceptance, substantially in the form of Exhibit A, executed by
such Assignee and such assigning Lender (and, in the case of an Assignee that is
not then a Lender or an affiliate thereof, by the Borrower and the Agents) and
delivered to the Agents for its acceptance and recording in the Register, with a
copy thereof to the Borrower, provided that (a) in the case of any such
assignment (other than to a Lender or an Affiliate of a Lender), the sum of the
aggregate principal amount of the Loans, the aggregate amount of the L/C
Obligations and the aggregate amount of the unused Commitments being assigned
and, if such assignment is of less than all of the rights and obligations of the
assigning Lender, the sum of the aggregate principal amount of the Loans, the
aggregate amount of the L/C Obligations and the aggregate amount of the unused
Commitments remaining with the assigning Lender are each not less than
$5,000,000 (or such lesser amount as may be
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agreed to by the Borrower and the Agents), (b) assignments shall not be
required to be made on a ratable basis between the Commitments and/or Loans held
by any Lender, (c) assignments by a Revolving Credit Lender of all or a portion
of its Revolving Loans and/or Revolving Credit Commitment must be to either (i)
a commercial bank having total assets in excess of $5,000,000,000 or any of its
Affiliates, or (ii) a finance company, insurance company or other financial
institution or fund which is regularly engaged in the making of, purchasing or
investing in loans and having total assets in excess of $300,000,000 ("Eligible
Assignee"), (d) any Lender may make an assignment consisting solely of Term
Loans (without regard to the requirements of clause (a) above) so long as the
aggregate principal amount of Term Loans so assigned is at least $5,000,000, and
(e) the consent of the Borrower shall be required in connection with any
assignment to a Lender or an Affiliate of a Lender solely to the extent that
after giving effect thereto such Lender or Affiliate would be entitled to
receive any greater payment under subsection 4.9, 4.10 or 4.11 at such time than
the assigning Lender is entitled to receive at such time. Upon such execution,
delivery, acceptance and recording, from and after the effective date determined
pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be
a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder with a Commitment as set
forth therein, and (y) the assigning Lender thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all or the remaining portion of an assigning Lender's rights and obligations
under this Agreement, such assigning Lender shall cease to be a party hereto).
Notwithstanding any provision of this paragraph (c) and paragraph (e) of this
subsection, the consent of the Borrower shall not be required (other than as to
the minimum amount of any assignment required under this paragraph).
(d) The Administrative Agent, on behalf of the Borrower, shall
maintain at the address of the Administrative Agent referred to in subsection
11.2 a copy of each Assignment and Acceptance delivered to it and a register
(the "Register") for the recordation of the names and addresses of the Lenders
and the Commitments of, and principal amounts of the Loans owing to, each Lender
from time to time. The entries in the Register shall be conclusive, in the
absence of manifest error, and the Borrower, the Administrative Agent and the
Lenders may (and, in the case of any Loan or other obligation hereunder not
evidenced by a Note, shall) treat each Person whose name is recorded in the
Register as the owner of a Loan or other obligation hereunder as the owner
thereof for all purposes of this Agreement and the other Loan Documents,
notwithstanding any notice to the contrary. Any assignment of any Loan or other
obligation hereunder shall be effective only upon appropriate entries with
respect thereto being made in the Register. The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee (and, in the case of an Assignee that is not
then a Lender or an affiliate thereof, by the Borrower and the Administrative
Agent) together with payment to the Administrative Agent of a registration and
processing fee of $5,000, the Administrative Agent shall (i) promptly accept
such Assignment and Acceptance and (ii) on the effective date determined
pursuant thereto record the information contained therein in the Register and
give notice of such acceptance and recordation to the Lenders and the Borrower;
provided, however, that no such registration and processing fee shall be paid in
connection with the initial syndication of the Loans.
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<PAGE> 111
(f) The Borrower authorizes each Lender to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee,
subject to the provisions of subsection 11.17, any and all financial information
in such Lender's possession concerning the Borrower and its Affiliates which has
been delivered to such Lender by or on behalf of the Borrower pursuant to this
Agreement or which has been delivered to such Lender by or on behalf of the
Borrower in connection with such Lender's credit evaluation of the Borrower and
its Affiliates prior to becoming a party to this Agreement.
(g) For avoidance of doubt, the parties to this Agreement acknowledge
that the provisions of this subsection do not prohibit any pledge or assignment
by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with
Regulation A of the Board of Governors or other applicable law or the creation
of a security interest by any Lender other than a commercial bank.
(h) So long as no Default or Event of Default shall have then
occurred and be continuing, no assignment by a Lender pursuant to this
subsection 11.6 shall be permitted without the consent of the Administrative
Agent and the Borrower if, after giving effect thereto, any Lender other than
the Agents would hold in excess of 20% of the aggregate Voting Percentages at
any such time.
11.7 REPLACEMENT OF LENDERS UNDER CERTAIN CIRCUMSTANCES. The Borrower
shall be permitted to replace any Lender which (a) requests reimbursement for
amounts owing pursuant to subsection 4.9 or 4.10, (b) has received a written
notice from the Borrower of an impending change in law that would entitle such
Lender to payment of additional amounts under subsection 4.9 or 4.10(a), unless
such Lender designates a different lending office before such change in law
becomes effective and such alternate lending office obviates the need for the
Borrower to make payments of additional amounts under subsection 4.9 or 4.10(a),
(c) is affected in the manner described in subsection 4.6(b) or 4.8 and as a
result thereof any of the actions described in subsection 4.6 or 4.8, as the
case may be, are required to be taken, (d) does not consent to any proposed
amendment, supplement, modification, consent or waiver of any provisions of this
Agreement or any other Loan Document as contemplated by the last sentence of
subsection 11.1, or (e) defaults in its obligation to make Loans or issue, or
participate in, any Letter of Credit, provided that (i) such replacement does
not conflict with any Requirement of Law, (ii) no Event of Default shall have
occurred and be continuing at the time of such replacement, (iii) the Borrower
shall repay (or the replacement bank or institution shall purchase, at par) all
Loans and other amounts owing to such replaced Lender prior to the date of
replacement, (iv) the Borrower shall be liable to such replaced Lender under
subsection 4.11 if any Eurodollar Loan owing to such replaced Lender shall be
prepaid (or purchased) other than on the last day of the Interest Period
relating thereto, (v) the replacement bank or institution, if not already a
Lender, and the terms and conditions of such replacement, shall be reasonably
satisfactory to the Administrative Agent, (vi) the replaced Lender shall be
obligated to make such replacement in accordance with the provisions of
subsection 11.6 (provided that the Borrower or replacement Lender shall be
obligated to pay the registration and processing fee referred to therein), (vii)
until such time as such replacement shall be consummated, the Borrower shall pay
all additional amounts (if any) required pursuant to subsection 4.9 or 4.10, as
the case may be, and (viii) any such replacement shall not be deemed to be a
waiver of any rights which the Borrower, the Administrative Agent or any other
Lender shall have against the replaced Lender.
11.8 ADJUSTMENTS. If any Lender (a "benefited Lender") shall at any
time receive any payment of all or part of its Loans or the Reimbursement
Obligations owing to it, or interest thereon, or receive any collateral in
respect thereof (whether voluntarily or involuntarily, by set-off, or
otherwise),
105
<PAGE> 112
and, after giving effect to any such payment or the receipt of any such
collateral, such benefited Lender shall have received a greater proportionate
payment (determined in accordance with subsection 4.7) or interest in collateral
than that received by any other relevant Lender, if any, in respect of such
other relevant Lender's relevant Loans or, if applicable, the Reimbursement
Obligations owing to it, or interest thereon, such benefited Lender shall
purchase for cash from the other relevant Lenders a participating or other
similar interest in such portion of each such other relevant Lender's relevant
Loans or, if applicable, the Reimbursement Obligations owing to it, or shall
provide such other relevant Lenders with the benefits of any such collateral, or
the proceeds thereof, as shall be necessary to cause such benefited Lender to
share the excess payment or benefits of such collateral or proceeds ratably with
each of the Lenders entitled to the same under this subsection, provided,
however, that if all or any portion of such excess payment or benefits is
thereafter recovered from such benefited Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest.
11.9 COUNTERPARTS. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. A set of the copies of this
Agreement signed by all the parties shall be lodged with the Borrower and the
Administrative Agent.
11.10 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.11 INTEGRATION. This Agreement and the other Loan Documents
represent the entire agreement of the Borrower, the Agents and the Lenders with
respect to the subject matter hereof and thereof, and there are no promises,
undertakings, representations or warranties by the Agents or any Lender relative
to the subject matter hereof or thereof not expressly set forth or referred to
herein or in the other Loan Documents.
11.12 TERMINATION. This Agreement shall terminate when the
Commitments have terminated or expired, no Loan or Letter of Credit is
outstanding (other than Letters of Credit which have been cash collateralized in
a manner substantially the same as the manner described pursuant to the
penultimate paragraph of Section 9) and the other then unpaid or accrued Credit
Agreement Obligations have been paid in full.
11.13 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
11.14 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
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<PAGE> 113
(b) neither the Agents nor any Lender has any fiduciary relationship
with or fiduciary duty to the Borrower arising out of or in connection with this
Agreement or any of the other Loan Documents, and the relationship between the
Agents and the Lenders, on the one hand, and the Borrower, on the other hand, in
connection herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among the
Lenders or among the Borrower and the Lenders or among the Borrower and the
Agents.
11.15 WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT
AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
11.16 CONFIDENTIALITY. Each of the Administrative Agent, the
Collateral Monitoring Agent and the Lenders agrees to keep confidential all
information provided to it by the Borrower or the Administrative Agent pursuant
to or in connection with this Agreement that is designated by the Borrower in
writing as confidential (the "Confidential Information"); provided that nothing
herein shall prevent any Lender or the Administrative Agent or the Collateral
Monitoring Agent from disclosing any such Confidential Information (i) to the
Administrative Agent, the Collateral Monitoring Agent or any other Lender, (ii)
to any Transferee or prospective Transferee which receives such Confidential
Information having been made aware of the confidential nature thereof and which
has agreed in writing to be bound by the terms of this subsection 11.16, (iii)
to its directors, officers, employees, employees of affiliates, examiners and
professional advisers who have a need to know such Confidential Information in
accordance with customary banking practices and who receive such Confidential
information having been made aware of the restrictions of this subsection and,
in the case of professional advisers, having agreed to be bound thereby, (iv)
upon the request or demand of any Governmental Authority having jurisdiction
over such Lender, (v) in response to any order of any court or other
Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, (vi) in connection with the exercise of any remedy
hereunder, (vii) which is now or hereafter becomes generally available to the
public other than as a result of a disclosure by such Lender, the Collateral
Monitoring Agent or the Administrative Agent or a disclosure known to such
Lender, the Collateral Monitoring Agent or the Administrative Agent to have been
made by any person or entity to which such Lender or the Administrative Agent
has delivered such Confidential Information, (viii) which was available to such
Lender, the Collateral Monitoring Agent or the Administrative Agent prior to its
disclosure to such Lender or the Administrative Agent by the Borrower, or (ix)
which becomes available to such Lender or the Administrative Agent from a source
other than the Borrower, provided that such source is not (1) known to such
Lender, the Collateral Monitoring Agent or the Administrative Agent to be bound
by a confidentiality agreement with the Borrower or (2) known to such Lender,
the Collateral Monitoring Agent or the Administrative Agent to be otherwise
prohibited from transmitting the information to such Lender, the Collateral
Monitoring Agent or the Administrative Agent by a contractual, legal or
fiduciary obligation.
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11.17 SECTION HEADINGS. The Section and subsection headings in this
Agreement are for convenience in reference only and shall not deemed to alter or
affect the interpretation of any provisions hereof.
11.18 JUDGMENT CURRENCY. The obligation of the Borrower under this
Agreement to make payments in respect of each Reimbursement Obligation in the
currency in which it is outstanding (the "Agreement Currency") shall not be
discharged or satisfied by any tender or recovery pursuant to any judgment
expressed in or converted into any other currency (the "Judgment Currency")
except to the extent that such tender or recovery of the Judgment Currency
results in the effective receipt by the Lenders or the relevant Issuing Banks,
as the case may be, of the full amount of the Agreement Currency payable under
this Agreement and the Borrower agrees to indemnify the Lenders or the relevant
Issuing Banks, as the case may be (and the Lenders or the relevant Issuing
Banks, as the case may be, shall have an additional legal claim) for any
difference between such full amount and the amount effectively received by such
Lenders or such Issuing Banks, as the case may be, pursuant to any such tender
or recovery. Each Lender's or Issuing Bank's determination of amounts
effectively received by such Lender or Issuing Bank shall be presumed correct
absent manifest error. If a judgment in respect of the obligations of the
Borrower hereunder is rendered in a currency other than the Agreement Currency
and if, upon receipt of the full amount of such judgment in such currency and
the conversion into, and receipt of such amount in the Agreement Currency, such
amount of the Agreement Currency exceeds the obligations of the Borrower
hereunder, such excess amount shall be remitted to the Borrower by the Lenders
or the relevant Issuing Banks, as the case may be. The obligations of the
Borrower under this subsection shall survive the termination of this Agreement
and the repayment of the Loans and all other amounts payable hereunder.
11.19 REVIEW OF BUSINESS PLAN. Promptly after delivery of the
Business Plan to the Administrative Agent pursuant to subsection 7.1(e), the
Administrative Agent will (i) review the Business Plan and (ii) use reasonable
efforts to facilitate the Borrower's presentation thereof to the Lenders. In the
event the Administrative Agent does not accept the Business Plan as submitted
(which consent will not unreasonably be withheld), the Administrative Agent
promptly will provide the Borrower with an explanation of the reasons for such
rejection.
11.20 NEGOTIATION OF REVISED COVENANTS. As soon as practicable after
the Administrative Agent's acceptance of the Business Plan, the Borrower and the
Agents will (i) review the provisions of Sections 7 and 8, (ii) negotiate in
good faith to determine whether any of such provisions should be revised as a
result of the acceptance of the Business Plan and (iii) negotiate in good faith
additional provisions or covenants, including EBITDA or similar cash flow
covenants appropriate for this facility, as a result of the acceptance of the
Business Plan. Any such revised or additional provisions or covenants must be
approved by the Majority Lenders.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Second
Amended and Restated Credit Agreement to be duly executed and delivered by their
proper and duly authorized officers as of the day and year first above written.
SERVICE MERCHANDISE COMPANY, INC.,
as the Borrower
By: /s/ C. Steven Moore
----------------------------------------
Name:
Title:
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 116
CITICORP USA, INC.,
as Administrative Agent, as a Lender
By: /s/ Claudia Slacik
----------------------------------------
Claudia Slacik
Vice President
CITIBANK, N.A.,
as an Issuing Bank
By: /s/ Claudia Slacik
----------------------------------------
Claudia Slacik
Vice President
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 117
BANKBOSTON, N.A.,
as Documentation Agent and Collateral
Monitoring Agent, as a Lender, and as an
Issuing Bank
By: /s/ Betsy Ratto
----------------------------------------
Betsy Ratto
Vice President
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 118
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as a Lender
By: /s/ Thomas R. Poe
----------------------------------------
Name: Thomas R. Poe
Title: President/CEO
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 119
HELLER FINANCIAL, INC.
as a Lender
By: /s/ Thomas W. Bukowski
----------------------------------------
Name: Thomas W. Bukowski
Title: Sr. Vice President
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 120
FOOTHILL CAPITAL CORPORATION
as a Lender
By: /s/ Michael P. Baranowski
----------------------------------------
Name: Michael P. Baranowski
Title: Vice President
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 121
JACKSON NATIONAL LIFE INSURANCE COMPANY,
as a Lender
By: PPM FINANCE, INC.,
its Attorney-in-Fact
By: /s/ Jeffrey J. Podwika
----------------------------------------
Name: Jeffrey J. Podwika
Title: Vice President
SIGNATURE PAGE TO SERVICE MERCHANDISE COMPANY, INC.
POST-PETITION CREDIT AGREEMENT
<PAGE> 122
Schedule 1.1(a)
TO CREDIT AGREEMENT
COMMITMENTS
<TABLE>
<CAPTION>
====================================================================================================
LENDER TOTAL REVOLVER TERM LOAN
====================================================================================================
<S> <C> <C> <C>
Citicorp USA, Inc. 175,000,000 151,666,667 23,333,333
- ----------------------------------------------------------------------------------------------------
BankBoston, N.A. 175,000,000 151,666,667 23,333,333
- ----------------------------------------------------------------------------------------------------
National City Commercial Finance Inc. * 100,000,000 86,666,667 13,333,333
- ----------------------------------------------------------------------------------------------------
Heller Financial, Inc. * 100,000,000 86,666,667 13,333,333
- ----------------------------------------------------------------------------------------------------
Foothill Capital Corporation * 50,000,000 43,333,333 6,666,667
- ----------------------------------------------------------------------------------------------------
Jackson National Life Insurance 150,000,000 130,000,000 20,000,000
Company *
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
TOTAL 750,000,000 650,000,000 100,000,000
====================================================================================================
</TABLE>
* Managing Agents
SCHEDULE 7.10(C) TO
SERVICE MERCHANDISE COMPANY, INC.
POST PETITION CREDIT AGREEMENT
<PAGE> 123
Schedule 11.2
TO CREDIT AGREEMENT
ADDRESS OF OTHER PARTIES
<TABLE>
<CAPTION>
===============================================================================================================
Name of Lender Address for Notices Contact
===============================================================================================================
<S> <C> <C>
Heller Financial, Inc. 150 East 42nd Street Attn: Tom Bukowski
New York, NY 10017 Fax: (212) 880-7002
- ---------------------------------------------------------------------------------------------------------------
National City Commercial Finance, Inc. 1965 East 6th Street Attn: Kevin Grogelny
Suite 400 Fax: (770) 613-5349
Cleveland, Ohio 44114
- ---------------------------------------------------------------------------------------------------------------
Foothill Capital Corporation 11111 Santa Monica Blvd Attn: Mike Baranowski
Suite 1500 Fax: (310) 479-8952
Los Angeles, CA 90025
- ---------------------------------------------------------------------------------------------------------------
Jackson National Life Insurance Company 225 West Wacker Drive Attn: Jeffrey J. Podwika
c/o PPM Finance, Inc. Suite 1100 Fax: (312) 634-0815
Chicago, Il 60606
- ---------------------------------------------------------------------------------------------------------------
===============================================================================================================
</TABLE>
SCHEDULE 11.2 TO
SERVICE MERCHANDISE COMPANY, INC.
POST PETITION CREDIT AGREEMENT
<PAGE> 1
Exhibit 4.18
EXECUTION COPY
================================================================================
MASTER SECURITY AGREEMENT
by and among
SERVICE MERCHANDISE COMPANY, INC.,
a debtor and debtor-in-possession
and
THE GUARANTORS,
each a debtor and debtor-in-possession
as Grantors
and
CITICORP USA, INC.
as Administrative Agent
Dated: as of March 29, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1 DEFINED TERMS
1.1 Definitions....................................................................................2
1.2 Other Definitional Provisions..................................................................8
SECTION 2 GUARANTEE
2.1 Guarantee......................................................................................8
2.2 Deferral of Subrogation........................................................................9
2.3 Amendments, etc. with Respect to the Obligations; Waiver of Rights.............................9
2.4 Guarantee Absolute and Unconditional..........................................................10
SECTION 3 GRANT OF SECURITY INTEREST
3.1 Security......................................................................................11
3.2 Perfection of Security Interests..............................................................12
3.3 Rights of Lenders; Limitations on Lenders' Obligations........................................13
3.4 Performance by the Lenders of Grantors' Obligations...........................................14
3.5 Limitation on Lenders' Duty in Respect of Collateral..........................................14
3.6 Remedies, Rights Upon Default.................................................................14
3.7 Automatic Stay................................................................................16
3.8 Administrative Agent's Appointment as Attorney-in-Fact........................................16
3.9 Super-Priority Claims.........................................................................18
SECTION 4 INVESTMENT PROPERTY
4.1 Pledge........................................................................................18
4.2 After-Acquired Pledged Securities.............................................................19
4.3 Cash Dividends; Exercise of Rights............................................................20
4.4 Rights of the Administrative Agent and the Secured Parties....................................20
4.5 Remedies and Rights Upon Event of Default.....................................................21
4.6 Registration Rights...........................................................................22
4.7 Possession of Pledged Securities..............................................................23
4.8 Cash Equivalents..............................................................................23
SECTION 5 CASH DOMINION SYSTEM; COLLATERAL ACCOUNT; DISTRIBUTIONS
5.1 Cash Dominion System..........................................................................25
5.2 The Collateral Account........................................................................26
5.3 Control of Collateral Account.................................................................26
5.4 Investment of Funds Deposited in Collateral Account...........................................27
5.5 Application of Moneys.........................................................................27
5.6 Amounts Held for Contingent Obligations.......................................................28
5.7 Administrative Agent's Calculations...........................................................29
5.8 Pro Rata Sharing..............................................................................29
SECTION 6 POSSESSION AND USE OF COLLATERAL; PARTIAL RELEASES
6.1 Use Prior to Notice of Acceleration...........................................................29
6.2 Releases......................................................................................30
6.3 Insurance and Condemnation Proceeds; Liquidating Dividends....................................30
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 7 GRANTOR REPRESENTATIONS AND WARRANTIES REGARDING COLLATERAL
7.1 Representations in Credit Agreement...........................................................31
7.2 Title; No Other Liens.........................................................................31
7.3 Perfected First Priority Liens................................................................31
7.4 Chief Executive Office........................................................................31
7.5 Inventory and Equipment.......................................................................31
7.6 Farm Products.................................................................................31
7.7 Pledged Securities............................................................................31
7.8 Intellectual Property.........................................................................32
SECTION 8 GRANTOR COVENANTS REGARDING COLLATERAL
8.1 Covenants in Credit Agreement.................................................................32
8.2 Delivery of Instruments and Chattel Paper.....................................................32
8.3 Insurance.....................................................................................33
8.4 Maintenance of Perfected Security Interest; Further Documentation.............................33
8.5 Changes in Locations, Name, etc...............................................................33
8.6 Receivables...................................................................................33
8.7 Intellectual Property.........................................................................33
8.8 Maintenance of Records........................................................................34
8.9 Further Assurances............................................................................35
SECTION 9 CERTAIN REMEDIAL PROVISIONS
9.1 Notice of Default; Notice of Acceleration.....................................................35
9.2 Right to Initiate Judicial Proceedings........................................................36
9.3 Right to Appoint a Receiver...................................................................36
9.4 Exercise of Powers; Instructions of Majority Secured Parties..................................36
9.5 Remedies Not Exclusive, Etc...................................................................37
9.6 Waiver and Estoppel...........................................................................37
9.7 Limitation on Administrative Agent's Duty in Respect of Collateral............................38
9.8 Limitation by Law.............................................................................38
9.9 Rights of Secured Parties under Secured Instruments...........................................38
9.10 Overdrafts....................................................................................39
9.11 Set-Off.......................................................................................39
SECTION 10 THE ADMINISTRATIVE AGENT
10.1 Exculpatory Provisions........................................................................39
10.2 Delegation of Duties..........................................................................40
10.3 Reliance by Administrative Agent..............................................................40
10.4 Limitations on Duties of the Administrative Agent.............................................41
10.5 Resignation and Removal of the Administrative Agent...........................................42
10.6 Merger of the Administrative Agent............................................................42
10.7 Co-Collateral Administrative Agent; Separate Administrative Agents............................42
10.8 Treatment of Payee or Indorsee by Administrative Agent; Representatives of Secured Parties....43
10.9 Indemnification...............................................................................44
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 11 MISCELLANEOUS
11.1 Amendments, Supplements and Waivers...........................................................44
11.2 Notices.......................................................................................45
11.3 No Waiver by Course of Conduct; Cumulative Remedies...........................................45
11.4 Enforcement Expenses, Indemnification.........................................................45
11.5 Successors and Assigns........................................................................45
11.6 Counterparts..................................................................................46
11.7 Severability..................................................................................46
11.8 Integration...................................................................................46
11.9 GOVERNING LAW.................................................................................46
11.10 Certain Waivers...............................................................................46
11.11 Acknowledgments...............................................................................46
11.12 Termination...................................................................................47
11.13 WAIVER OF JURY TRIAL..........................................................................47
11.14 Section Headings..............................................................................47
11.15 Conflicts.....................................................................................47
SCHEDULES:
Schedule 1 Notice Addresses
Schedule 2 Pledged Securities and Partnership Interests
Schedule 3 Uniform Commercial Code Filings
Schedule 4 Location of Offices
Schedule 5 Locations of Inventory and Equipment
Schedule 6 Intellectual Property
EXHIBITS:
Exhibit A Form of Lockbox Agreement
Exhibit B Form of Blocked Account Agreement
Exhibit C Form of Custody and Control Agreement
</TABLE>
iii
<PAGE> 5
MASTER SECURITY AGREEMENT
MASTER SECURITY AGREEMENT, dated as of March 29, 1999, among
SERVICE MERCHANDISE COMPANY, INC., a Tennessee corporation and a debtor and
debtor-in-possession under chapter 11 of the Bankruptcy Code (as hereinafter
defined) (the "Borrower"), the subsidiaries of the Borrower which are listed on
the signature pages hereto under the heading "Guarantors", each a debtor and
debtor-in-possession under chapter 11 of the Bankruptcy Code (the "Guarantors"
and, together with the Borrower, the "Grantors"), and CITICORP USA, INC.
("Citicorp"), as Administrative Agent (as hereinafter defined).
W I T N E S S E T H:
WHEREAS, on March 15, 1999, an involuntary petition under
chapter 11 of the Bankruptcy Code was filed against the Borrower in the United
States Bankruptcy Court for the Middle District of Tennessee; and
WHEREAS, the Board of Directors of the Borrower authorized the
Borrower to commence a voluntary chapter 11 case and on March 27, 1999 (the
"Petition Date"), the Borrower and the Guarantors filed voluntary petitions for
under chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Middle District of Tennessee; and
WHEREAS, the Borrower and the Guarantors are continuing to
operate their business and manage their property as debtors and debtors in
possession under sections 1107 and 1108 of the Bankruptcy Code; and
WHEREAS, an immediate and ongoing need exists for the Borrower
and the Guarantors to obtain additional funds in order to continue the operation
of their business as debtors and debtors in possession under the Bankruptcy Code
and, accordingly, the Borrower has requested that the Lenders extend
post-petition financing; and
WHEREAS, the Lenders are willing to make funds available to
the Borrower pursuant to sections 364(c)(1), (c)(2) and (c)(3) of the Bankruptcy
Code, but only for the purposes and upon the terms and subject to the conditions
set forth in that certain Post-Petition Credit Agreement dated as of the date
hereof, by and among the Borrower, the financial institutions and other entities
from time to time party thereto (collectively, the "Lenders" and each
individually, a "Lender"), Citicorp, as collateral agent and administrative
agent for the Lenders (in such capacity, the "Administrative Agent"), and
BankBoston, N.A., as collateral monitoring agent and documentation agent for the
Lenders (as amended, modified, supplemented, extended, renewed or refinanced
from time to time, the "Credit Agreement"); and
WHEREAS the Borrower is a member of an affiliated group of
companies that includes each Guarantor, each of which is engaged in related
businesses, and each Guarantor will derive substantial direct and indirect
benefit from the making of the extensions of credit under the Credit Agreement;
and
WHEREAS, it is a condition precedent to the effectiveness of
the Credit Agreement that the Grantors and the Administrative Agent shall have
executed and delivered this Agreement;
NOW, THEREFORE, in consideration of the premises and to induce
the Administrative Agent and the Lenders to enter into the Credit Agreement and
to induce the Lenders to make their respective extensions of credit thereunder
to the Borrower and the Issuing Banks to issue Letters of Credit thereunder,
each Grantor hereby agrees with the Administrative Agent for the ratable benefit
of the Secured Parties, as follows:
<PAGE> 6
SECTION 1 DEFINED TERMS
1.1 DEFINITIONS.
(a) Capitalized terms used herein and not otherwise defined herein
are used herein as defined in the Credit Agreement.
(b) The following capitalized terms used herein are defined herein to
have the following respective meanings:
"Administrative Agent": as defined in the fifth recital.
"Agreement": this Master Security Agreement, as the same may be
amended, supplemented or otherwise modified from time to time.
"Blocked Account Agreement": any Blocked Account Agreement entered
into among any Grantor, a Depositary Bank and the Administrative Agent (i)
pursuant to any of the Previous Credit Agreements and in effect on the
Petition Date, (ii) pursuant to any instructions delivered by the Borrower
or a Subsidiary Guarantor to a Depositary Bank pursuant to subsection 5.1
hereof, or (iii) otherwise entered into pursuant to subsection 5.1 hereof
and substantially in the form of Exhibit B to this Agreement, with such
changes as may be agreed upon by the relevant Grantor, the Administrative
Agent and the relevant Depositary Bank, in each case as the same may be
amended, modified, supplemented, extended or renewed from time to time.
"Borrower": as defined in the introductory paragraph.
"Cash Dominion System": as defined in paragraph (a) of subsection 5.1
hereof.
"Cash Proceeds": all proceeds of Collateral consisting of cash,
checks, credit card proceeds, money orders or commercial paper of any kind
whatsoever.
"Citicorp": as defined in the introductory paragraph.
"Collateral": as defined in subsection 3.1 hereof.
"Collateral Account": as defined in subsection 5.2 hereof.
"Contract": as defined in the UCC, including all leases, contracts,
undertakings or other agreements (other than Chattel Paper, Documents or
Instruments) in or under which any Grantor may now or hereafter have any
right, title or interest, including without limitation any agreement
relating to the terms of payment or the terms of performance thereof.
2
<PAGE> 7
"Copyrights": (i) all copyrights, in the United States or any other
country, whether registered or unregistered, or published or unpublished
(including, without limitation, those listed in Schedule 6), all
registrations and recordings thereof, and all applications in connection
therewith, including, without limitation, all registrations, recordings and
applications in the United States Copyright Office, and (ii) the right to
obtain all renewals thereof.
"Copyright Licenses": any written agreement naming any Grantor as
licensor or licensee (including, without limitation, those listed in
Schedule 6), granting any right under any Copyright, including, without
limitation, the grant of rights to manufacture, distribute, exploit and
sell materials derived from any Copyright.
"Credit Agreement": as defined in the fifth recital.
"Creditors' Committee": a committee appointed under section 1102 of
the Bankruptcy Code.
"Custody and Control Agreement": any Custody and Control Agreement
entered into among any Grantor, an Intermediary (as therein defined) and
the Administrative Agent (i) pursuant to any of the Previous Credit
Agreements and in effect on the Petition Date, (ii) pursuant to any
instructions delivered by the Borrower or a Subsidiary Guarantor to an
Intermediary pursuant to paragraph (e) of subsection 4.8 hereof, or (iii)
entered into pursuant to paragraph (e) of subsection 4.8 hereof and
substantially in the form of Exhibit C to this Agreement with such changes
as may be agreed upon by such Grantor, the Administrative Agent and the
Intermediary, in each case as the same may be amended, modified,
supplemented, extended or renewed from time to time.
"Default": a "Default" under the Credit Agreement.
"Depositary Account": as defined in paragraph (a) of subsection 5.1
hereof.
"Depositary Bank": as defined in paragraph (a) of subsection 5.1
hereof.
"Distribution Date": each date fixed by the Administrative Agent for a
distribution to the Secured Parties of funds in the Collateral Account.
"Entitlement Holder": a person identified in the records of a
Securities Intermediary as the person having a Security Entitlement against
the Securities Intermediary. If a Person acquires a Security Entitlement by
virtue of Section 8501(b)(2) or (3) of the UCC, such Person is the
Entitlement Holder.
"Event of Default": an "Event of Default" under the Credit Agreement.
"Financial Asset": as defined in the UCC, including (a) a Security,
(b) an obligation of a Person or a share, participation or other interest
in a person or in property or an enterprise of a Person, which is, or is of
a type, dealt with in or traded on financial markets, or which is
recognized in any area in which it is issued or dealt in as a medium for
investment or (c) any property that is held by a Securities Intermediary
for another Person in a Securities Account if the Securities Intermediary
has expressly agreed with the other Person that the property is to be
treated as a Financial Asset under Article 8 of the UCC. As the context
requires, the term
3
<PAGE> 8
Financial Asset shall mean either the interest itself or the means by which
a person's claim to it is evidenced, including a certificated or
uncertificated Security, a certificate representing a Security or a
Security Entitlement.
"Fixtures": as defined in the UCC, including all items of Equipment,
whether now owned or hereafter acquired, of any Grantor that become so
related to particular real estate that an interest in them arises under any
real estate law applicable thereto.
"General Intangibles": as defined in the UCC, including, with respect
to any Grantor, all contracts, agreements, limited partnership interests,
limited liability company interests, instruments and indentures in any
form, and portions thereof, to which such Grantor is a party or under which
such Grantor has any right, title or interest or to which such Grantor or
any property of such Grantor is subject, as the same may from time to time
be amended, supplemented or otherwise modified, including, without
limitation, (i) all rights of such Grantor to receive moneys due and to
become due to it thereunder or in connection therewith, (ii) all rights of
such Grantor to damages arising thereunder and (iii) all rights of such
Grantor to perform and to exercise all remedies thereunder, in each case to
the extent the grant by such Grantor of a security interest pursuant to
this Agreement in its right, title and interest in such contract,
agreement, instrument or indenture is not prohibited by such contract,
agreement, instrument or indenture without the consent of any other party
thereto, would not give any other party to such contract, agreement,
instrument or indenture the right to terminate its obligations thereunder,
or is permitted with consent if all necessary consents to such grant of a
security interest have been obtained from the other parties thereto (it
being understood that the foregoing shall not be deemed to obligate such
Grantor to obtain such consents), provided that the foregoing limitation
shall not affect, limit, restrict or impair the grant by such Grantor of a
security interest pursuant to this Agreement in any Receivable or any money
or other amounts due or to become due under any such contract, agreement,
instrument or indenture.
"Grantors": as defined in the introductory paragraph.
"Guarantee": the guarantee of the Guarantors pursuant to Section 2
hereof.
"Guarantors": the collective reference to each Grantor other than the
Borrower.
"Guarantor Obligations": with respect to any Guarantor, the collective
reference to (i) the Credit Agreement Obligations and (ii) all obligations
and liabilities of such Guarantor which may arise under or in connection
with this Agreement or any other Loan Document to which such Guarantor is a
party, in each case whether on account of guarantee obligations,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all fees and disbursements of counsel to
the Administrative Agent or to the Secured Parties that are required to be
paid by such Guarantor pursuant to the terms of this Agreement or any other
Loan Document.
"Guarantors": as defined in the introductory paragraph.
"Intellectual Property": the collective reference to the Copyrights,
the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks
and the Trademark Licenses.
4
<PAGE> 9
"Investment Property": as defined in the UCC, including all Securities
(whether certificated or uncertificated), Security Entitlements and
Securities Accounts of any Grantor, whether now owned or hereafter acquired
by any Grantor.
"Issuers": the collective reference to each issuer of a Pledged
Security or Pledged Partnership Interest.
"Lenders": as defined in the fifth recital.
"License": any Patent License, Trademark License, Copyright License or
other license or sublicense to which any Grantor is a party, including
without limitation those listed on Schedule 6.
"Lockbox Agreement": any Lockbox Agreement entered into among any
Grantor, a Depositary Bank and the Administrative Agent (i) pursuant to any
of the Previous Credit Agreements and in effect on the Petition Date, (ii)
pursuant to any instructions delivered by the Borrower or a Subsidiary
Guarantor to a Depositary Bank pursuant to subsection 5.1 hereof, or (iii)
otherwise entered into pursuant to subsection 5.1 hereof and substantially
in the form of Exhibit A to this Agreement, with such changes as may be
agreed upon by such Grantor, the Administrative Agent and the Depositary
Bank, in each case as the same may be amended, modified, supplemented,
extended or renewed from time to time.
"Notice of Acceleration": a notice delivered by the Administrative
Agent to the Borrower stating that the Administrative Agent has declared
the Loans and other amounts owing under the Credit Agreement to be due and
payable and has terminated the Commitments pursuant to Section 9 of the
Credit Agreement and stating that such notice is a "Notice of Acceleration"
for the purposes of this Agreement.
"Notice of Default": a notice delivered by the Administrative Agent to
the Borrower stating that an Event of Default has occurred and is
continuing and stating that such notice is a "Notice of Default" for the
purposes of this Agreement.
"Obligations": (i) in the case of the Borrower, the Secured
Obligations in respect of the Borrower, and (ii) in the case of each
Guarantor, the Secured Obligations in respect of such Guarantor.
"Opinion of Counsel": an opinion in writing signed by legal counsel
satisfactory to the Administrative Agent, who may, but need not, be an
employee of any of the Grantors or counsel regularly retained by the
Borrower or the Administrative Agent.
"Overdraft": at any time, the amount by which the aggregate amount
debited from any deposit, concentration, operating or disbursement account
maintained by the Borrower or any other Guarantor with any Lender or any
Affiliate of any Lender, as a result of processing of payment orders issued
by the Borrower or such Grantor or otherwise, exceeds the aggregate funds
on deposit in such account.
"Patents": (i) all letters patent of the United States or any other
country and all reissues and extensions thereof, including, without
limitation, any of the foregoing referred to in Schedule 6, (ii) all
applications for letters patent of the United States or any other country
and all divisions,
5
<PAGE> 10
continuations and continuations-in-part thereof, including, without
limitation, any of the foregoing referred to in Schedule 6, and (iii) all
rights to obtain any reissues or extensions of the foregoing.
"Patent License": all agreements, whether written or oral, providing
for the grant by or to any Grantor of any right to manufacture, use or sell
any invention covered in whole or in part by a Patent, including, without
limitation, any of the foregoing referred to in Schedule 6.
"Petition Date": as defined in the first recital.
"Pledged Collateral": collectively, the Pledged Debt Securities, the
Pledged Partnership Interests and the Pledged Stock.
"Pledged Debt Securities": (i) the debt securities listed opposite the
name of each Grantor on Schedule 2 and, (ii) any debt securities in the
future issued to any Grantor and the promissory notes and any other
instruments evidencing such debt securities.
"Pledged Partnership Interests": as defined in paragraph (a)(i) of
subsection 4.1 hereof.
"Pledged Securities": as defined in paragraph (a) of subsection 4.1
hereof.
"Pledged Stock": as defined in paragraph (a)(i) of subsection 4.1
hereof.
"Pre-Petition Collateral": the "Collateral" as defined in and as
granted to the Administrative Agent to secure the Pre-Petition Obligations.
"Pre-Petition Obligations": the obligations of each of the obligors
under the Previous Loan Documents.
"Previous Loan Documents": the "Loan Documents" as defined in the
Previous Credit Agreements.
"Proceeds": all "proceeds" as such term is defined in Section 9306(l)
of the Uniform Commercial Code in effect in the State of New York on the
date hereof and, in any event, shall include, without limitation, all
dividends or other income from the Pledged Collateral, collections thereon
or distributions or payments with respect thereto.
"Real Property": all of those plots, pieces or parcels of land now
owned or hereafter acquired by any Grantor (the "Land"), together with the
right, title and interest of such Grantor, if any, in and to the streets,
the land lying in the bed of any streets, roads or avenues, opened or
proposed, in front of, the air space and development rights pertaining to
the Land and the right to use such air space and development rights, all
rights of way, privileges, liberties, tenements, hereditaments and
appurtenances belonging or in any way appertaining thereto, all fixtures,
all easements now or hereafter benefiting the Land and all royalties and
rights appertaining to the use and enjoyment of the Land, including,
without limitation, all alley, vault, drainage, mineral, water, oil and gas
rights, together with all of the buildings and other improvements now or
hereafter erected on the Land, and any fixtures appurtenant thereto, and
including, without limitation, all leasehold interests of any Grantor under
any lease agreement ("Lease").
6
<PAGE> 11
"Receivable": any right to payment for goods sold or leased or for
services rendered, whether or not such right is evidenced by an Instrument
or Chattel Paper and whether or not it has been earned by performance
(including, without limitation, any Account).
"Reorganization Cases": the collective reference to the cases of the
Grantors pursuant to chapter 11 of the Bankruptcy Code pending in the
Bankruptcy Court.
"Secured Instrument": at any time, the Credit Agreement and any other
agreement or instrument evidencing Obligations or under which Obligations
arise.
"Secured Parties": (a) the Lenders, (b) the Administrative Agent, (c)
the Collateral Monitoring Agent, (d) the Issuing Banks, (e) each
counterparty to any Derivative Agreement entered into with the Borrower if
such counterparty was a Lender at the time the Derivative Agreement was
entered into, (f) the beneficiaries of each indemnification obligation
undertaken by any Grantor under any Loan Document and (g) the successors
and assigns of each of the foregoing.
"Securities": as defined in the UCC, including any obligations of an
issuer or any shares, participations or other interests in an issuer or in
property or an enterprise of an issuer which (a) are represented by a
certificate representing a security in bearer or registered form, or the
transfer of which may be registered upon books maintained for that purpose
by or on behalf of the issuer, (b) are one of a class or series or by its
terms is divisible into a class or series of shares, participations,
interests or obligations and (c)(i) are, or are of a type, dealt with or
trade on securities exchanges or securities markets or (ii) are a medium
for investment and by their terms expressly provide that they are a
security governed by Article 8 of the UCC.
"Securities Account": as defined in paragraph (a) of subsection 4.8
hereof.
"Securities Act": as defined in paragraph (a) of subsection 4.6
hereof.
"Security Entitlements": the rights and property interests of an
Entitlement Holder with respect to a Financial Asset.
"Superior Lien": a lien that is a Lien permitted under subsection 8.3
of the Credit Agreement.
"Trademark License": any agreement, whether written or oral, providing
for the grant by or to any Grantor of any right to use any Trademark,
including, without limitation, any of the foregoing referred to in
Schedule 6.
"Trademarks": (i) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and all
goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State
thereof or any other country or any political subdivision thereof, or
otherwise, and all common-law rights related thereto, including, without
limitation, any of the foregoing referred to in Schedule 6, and (ii) the
right to obtain all renewals thereof.
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<PAGE> 12
"Undelivered Instruments": any Instrument or Chattel Paper that has
not been delivered to the Administrative Agent.
1.2 OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereof," "herein", "hereto" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. Section and
Schedule references are to this Agreement unless otherwise specified.
(b) Other terms contained in this Agreement shall have, when the
context so indicates, the meanings provided for by the UCC to the extent the
same are used or defined therein, including the following terms: Documents, Farm
Products.
(c) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
(d) Where the context requires, terms relating to the Collateral or
any part thereof, when used in relation to a Grantor, shall refer to the
Collateral in which such Grantor has an interest or the relevant part thereof.
(e) The word "including" shall mean "including, without limitation"
unless the context otherwise requires.
SECTION 2 GUARANTEE
2.1 GUARANTEE.
(a) Each of the Guarantors hereby, jointly and severally,
unconditionally and irrevocably, guarantees to the Administrative Agent, for the
benefit of the Secured Parties, the prompt and complete payment and performance
by the Borrower when due (whether at the stated maturity, by acceleration or
otherwise) of the Credit Agreement Obligations.
(b) Each Guarantor further agrees to pay any and all reasonable
out-of-pocket expenses (including, without limitation, the reasonable fees and
disbursements of counsel) which may be paid or incurred by the Administrative
Agent (or, following the occurrence and during the continuance of a Default or
an Event of Default, any Lender) in connection with the enforcement or
preservation of any rights with respect to any or all of the Credit Agreement
Obligations and/or against such Guarantor under this Guarantee. This Guarantee
shall remain in full force and effect until the Loans, accrued interest thereon
and all other then accrued and unpaid Credit Agreement Obligations are paid in
full, the Commitments are terminated and no Letters of Credit are outstanding
(or all outstanding Letters of Credit are fully cash-collateralized in
accordance with the Credit Agreement), notwithstanding that from time to time
prior thereto the Borrower may be free from any of the Credit Agreement
Obligations.
(c) No payment or payments made by the Borrower, any of the
Guarantors, any other guarantor or any other Person or received or collected by
the Administrative Agent or any Lender from the Borrower, any of the Guarantors,
any other guarantor or any other Person by virtue of any action or proceeding or
any set-off or appropriation or application at any time or from time to time in
reduction
8
<PAGE> 13
of or in payment of the Credit Agreement Obligations shall be deemed
to modify, reduce, release or otherwise affect the liability of any Guarantor
hereunder which shall, notwithstanding any such payment or payments other than
payments made by such Guarantor in respect of the Credit Agreement Obligations
or payments received or collected from such Guarantor in respect of the Credit
Agreement Obligations, remain liable for the Obligations up to the maximum
liability of such Guarantor hereunder until the Loans, accrued interest thereon
and all other then accrued and unpaid Credit Agreement Obligations are paid in
full, the Commitments are terminated and no Letters of Credit are outstanding
(or all outstanding Letters of Credit are fully cash-collateralized in
accordance with the Credit Agreement).
(d) Each Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Administrative Agent or any Lender on
account of its liability hereunder, it will notify the Administrative Agent in
writing that such payment is made under this Guarantee for such purpose.
2.2 DEFERRAL OF SUBROGATION. Notwithstanding any payment or payments
made hereunder by any of the Guarantors or any set-off or application of funds
of any of the Guarantors by any Lender, no Guarantor shall be entitled to be
subrogated to any of the rights of the Administrative Agent or any Lender
against the Borrower or any other Guarantor or any collateral security or
guarantee or right of offset held by the Administrative Agent or any Lender for
the payment of the Credit Agreement Obligations, nor shall any Guarantor seek or
be entitled to seek any contribution or reimbursement from the Borrower or any
other Guarantor in respect of payments made hereunder by such Guarantor, until
all amounts owing to the Administrative Agent and the Lenders by the Borrower on
account of the Loans, accrued interest thereon and all other then accrued and
unpaid Credit Agreement Obligations are paid in full, the Commitments are
terminated and no Letter of Credit is outstanding (or all outstanding Letters of
Credit are fully cash-collateralized in accordance with the Credit Agreement).
If, notwithstanding the foregoing, any amount shall be paid to any Guarantor on
account of such subrogation rights at any time prior thereto, such amount shall
be held by such Guarantor in trust for the Administrative Agent and the Lenders,
segregated from other funds of such Guarantor, and shall, forthwith upon receipt
by such Guarantor, be turned over to the Administrative Agent in the exact form
received by such Guarantor (duly indorsed by such Guarantor to the
Administrative Agent, if required), to be applied against the Credit Agreement
Obligations, whether matured or unmatured, in such order as the Administrative
Agent and the Lenders may determine.
2.3 AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS; WAIVER OF
RIGHTS. Each Guarantor shall remain obligated hereunder notwithstanding that,
without any reservation of rights against any Guarantor and, to the extent
permitted by applicable law, without notice to or further assent by any
Guarantor, (a) any demand for payment of any of the Credit Agreement Obligations
made by the Administrative Agent or any Lender may be rescinded by such party
and any of the Credit Agreement Obligations continued, (b) the Credit Agreement
Obligations, or the liability of any other party upon or for any part thereof,
or any collateral security or guarantee therefor or right of offset with respect
thereto, may from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by
the Administrative Agent or any Lender, (c) the Credit Agreement, the Notes and
the other Loan Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Administrative Agent (or the relevant Lenders, as the
case may be) may deem advisable from time to time, and (d) any collateral
security, guarantee or right of offset at any time held by the Administrative
Agent or any Lender for the payment of the Obligations may be sold, exchanged,
waived, surrendered or released. Neither the Administrative Agent nor any Lender
shall have any obligation to perfect or insure
9
<PAGE> 14
any Lien at any time held by it as security for the Credit Agreement Obligations
or for this Guarantee or any property subject thereto. When making any demand
hereunder against any of the Guarantors, the Administrative Agent or any Lender
may, but shall be under no obligation to, make a similar demand on the Borrower
or any other Guarantor or guarantor, and any failure by the Administrative Agent
or such Lender to make any such demand or to collect any payments from the
Borrower or any such other Guarantor or guarantor or any release of the Borrower
or such other Guarantor or guarantor shall not relieve any of the Guarantors in
respect of which a demand or collection is not made or any of the Guarantors not
so released of their several obligations or liabilities hereunder, and shall not
impair or affect the rights and remedies, express or implied, or as a matter of
law, of the Administrative Agent or any Lender against any of the Guarantors.
For the purposes hereof "demand" shall include the commencement and continuance
of any legal proceedings.
2.4 GUARANTEE ABSOLUTE AND UNCONDITIONAL. Each Guarantor waives, to
the extent permitted by applicable law, any and all notice of the creation,
renewal, extension or accrual of any of the Credit Agreement Obligations and
notice of or proof of reliance by the Administrative Agent or any Lender upon
this Guarantee or acceptance of this Guarantee, and the Credit Agreement
Obligations, and any of them, shall conclusively be deemed to have been created,
contracted or incurred, or renewed, extended, amended or waived, in reliance
upon this Guarantee; and all dealings between the Borrower and any of the
Guarantors, on the one hand, and the Administrative Agent and the Lenders, on
the other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon this Guarantee. Each Guarantor waives to the extent
permitted by applicable law diligence, presentment, protest, demand for payment
and notice of default or nonpayment to or upon the Borrower or any of the
Guarantors with respect to the Obligations. Each Guarantor understands and
agrees that this Guarantee shall be construed as a continuing, absolute and
unconditional guarantee of payment without regard to:
(i) the validity, regularity or enforceability of (A) the Credit
Agreement, any Note or any other Loan Document, any of the Obligations as
to any other obligor on the Obligations, or any collateral security
therefor or other guarantee or right of offset with respect thereto at any
time or from time to time held by the Administrative Agent or any Lender;
(ii) any defense, set-off or counterclaim (other than a defense of
payment or performance) which may at any time be available to or be
asserted by the Borrower or any other Loan Party against the Administrative
Agent or any Lender; or
(iii) any other circumstance whatsoever (with or without notice to or
knowledge of the Borrower or such Guarantor) which constitutes, or might be
construed to constitute, an equitable or legal discharge of the Borrower
for the Credit Agreement Obligations, or of such Guarantor under this
Guarantee, in bankruptcy or in any other instance.
When pursuing its rights and remedies hereunder against any Guarantor, the
Administrative Agent or any Lender may, but shall be under no obligation to,
pursue such rights and remedies as it may have against the Borrower or any other
Person or against any collateral security or guarantee for the Credit Agreement
Obligations or any right of offset with respect thereto, and any failure by the
Administrative Agent or any Lender to pursue such other rights or remedies or to
collect any payments from the Borrower or any such other Person or to realize
upon any such collateral security or guarantee or to exercise any such right of
offset, or any release of the Borrower or any such other Person or any such
collateral security, guarantee or right of offset, shall not relieve such
Guarantor of any liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
Administrative
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Agent and the Lenders against such Guarantor. Except as otherwise set forth in
this Agreement, this Guarantee shall remain in full force and effect and be
binding in accordance with and to the extent of its terms upon each Guarantor
and the successors and assigns thereof, and shall inure to the benefit of the
Administrative Agent and the Lenders, and their respective successors,
indorsees, transferees and assigns, until all the Loans, accrued interest
thereon and all other then accrued and unpaid Credit Agreement Obligations and
the obligations of each Guarantor under this Guarantee shall have been satisfied
by payment in full and the Commitments shall have been terminated and no Letter
of Credit is outstanding (or all outstanding Letters of Credit shall have been
fully cash-collateralized in accordance with the Credit Agreement),
notwithstanding that from time to time during the term of the Credit Agreement
the Borrower may be free from any of the Credit Agreement Obligations.
SECTION 3 GRANT OF SECURITY INTEREST
3.1 SECURITY.
(a) To induce the Lenders to make the Loans and to incur obligations
with respect to Letters of Credit, each Grantor hereby (i) reaffirms the
validity, perfection and first priority of the Liens previously granted to the
Administrative Agent and the Lenders in the Pre-Petition Collateral under the
Previous Loan Documents and (ii) grants to the Administrative Agent, for the
benefit of the Secured Parties, to secure the due and punctual performance and
payment of each of the Obligations, howsoever created, arising or evidenced,
whether direct, indirect, absolute or contingent, now or hereafter existing or
due or to become due, in accordance with the terms thereof, a continuing first
priority lien and security interest (subject only to Permitted Expenses and
Superior Liens), in accordance with sections 364(c)(2) and (3) of the Bankruptcy
Code, in and to all of the property and assets of such Grantor and its estates,
real and personal, tangible and intangible, whether now owned or existing or
hereafter acquired or arising and regardless of where located (hereinafter
referred to as the "Collateral"), including but not limited to:
(i) all Accounts of such Grantor;
(ii) all Chattel Paper of such Grantor;
(iii) all Contracts of such Grantor;
(iv) all Documents of such Grantor;
(v) all Equipment of such Grantor;
(vi) all Fixtures of such Grantor;
(vii) all General Intangibles of such Grantor;
(viii) all Instruments of such Grantor;
(ix) all Intellectual Property of such Grantor;
(x) all Inventory of such Grantor;
(xi) all Investment Property of such Grantor;
(xii) all Leases to which such Grantor is a party;
(xiii) all Licenses of such Grantor;
(xiv) all Real Property owned by such Grantor;
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(xv) all Receivables owned by such Grantor;
(xvi) all causes of action of such Grantor;
(xvii) each Depositary Account and Collateral Account in which such
Grantor has an interest;
(xviii) all other goods, real and personal property of such Grantor,
whether tangible or intangible and whether now owned or hereafter acquired
and wherever located;
(xix) to the extent not otherwise included, all monies and other
property of any kind and nature recovered by such Grantor in accordance
with the provisions of the Bankruptcy Code, including, without limitation,
sections 542, 553, 544, 547 and 548 thereof, or other applicable law;
(xx) to the extent not otherwise included, all monies and other
property of any kind which, after the Petition Date, is received by such
Grantor in connection with any refund with respect to taxes, assessments
and governmental charges imposed on such Grantor or any of its property or
income; and
(xxi) to the extent not otherwise included, all Proceeds of each of
the foregoing and all accessions to, substitutions and replacements for,
and rents, profits and products of each of the foregoing.
(b) As further adequate protection for the use by the Grantors of
Pre-Petition Collateral and for any diminution in the value of the interest of
the Lenders in the Pre-Petition Collateral, the Administrative Agent for the
benefit of the Lenders under the Previous Credit Agreements is hereby granted,
under sections 361 and 364 of the Bankruptcy Code, a valid, binding, enforceable
and perfected security interest in and lien on the Collateral subject and
subordinate only to (i) the lien and security interest granted to the
Administrative Agent for the benefit of the Lenders under this Agreement and the
other Loan Documents securing the Obligations, (ii) Permitted Expenses and (iii)
Superior Liens. The lien and security interest granted hereunder to the
Administrative Agent for the benefit of the Lenders under the Previous Credit
Agreements shall not be subject and subordinate to any security interest or lien
that is avoided and preserved for the benefit of the estates of the Grantors
under section 551 of the Bankruptcy Code or, except as set forth in clauses (i),
(ii) and (iii) above, be made on a parity with, or subordinated to, any other
Lien under section 364(d) of the Bankruptcy Code or otherwise.
3.2 PERFECTION OF SECURITY INTERESTS.
(a) The liens and security interests granted herein shall be deemed
valid, enforceable and perfected by entry of the Emergency Order and the
Permanent Order, as the case may be. No financing statement, notice of lien or
similar instrument in any jurisdiction or filing office need be filed or any
other action taken in order to validate or perfect the liens and security
interests granted by or pursuant to this Agreement, the Emergency Order or the
Permanent Order.
(b) The liens and security interests, lien priority, administrative
priorities and other rights and remedies granted to the Administrative Agent for
the benefit of the Secured Parties pursuant to this Agreement, the Emergency
Order and/or the Permanent Order (specifically including but not limited to the
existence, perfection and priority of the Liens and security interests provided
herein and the administrative priority provided herein) shall not be modified,
altered or impaired in any manner by any other financing or extension of credit
or incurrence of debt by the Grantors (pursuant to section 364 of the Bankruptcy
Code or otherwise), or by any dismissal or conversion of the Reorganization
Cases, or by any
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other act or omission whatever. Without limitation, notwithstanding any such
other financing, extension, incurrence, dismissal, conversion, act or omission:
(i) except for the Permitted Expenses having priority over the
Obligations, no costs or expenses of administration which have been or may
be incurred in the Reorganization Cases or any conversion of the same or in
any other proceedings related thereto, and no priority claims, are or will
be prior to or on a parity with any claim of the Administrative Agent or
the Lenders against the Grantors in respect of any Obligation;
(ii) the liens and security interests set forth in subsection 3.1
hereof shall constitute valid and perfected first priority liens and
security interests, subject only to the Permitted Expenses and Superior
Liens, and shall be prior to all other liens and security interests, other
than the Permitted Expenses and Superior Liens, now existing or hereafter
arising, in favor of any other creditor or any other Person whatever; and
(iii) the liens and security interests granted hereunder shall
continue valid and perfected without the necessity that financing
statements be filed or that any other action be taken under applicable
nonbankruptcy law.
3.3 RIGHTS OF LENDERS; LIMITATIONS ON LENDERS' OBLIGATIONS.
(a) Subject to Grantors' rights and duties under the Bankruptcy Code,
it is expressly agreed by the Grantors that, anything herein to the contrary
notwithstanding, each Grantor shall remain liable under each of its Contracts to
observe and perform all the conditions and obligations to be observed and
performed by it thereunder. Neither the Administrative Agent nor any of the
Lenders shall have any obligation or liability under any Contract by reason of
or arising out of this Agreement, the other Loan Documents, the Previous Loan
Documents or the granting to the Administrative Agent for the benefit of the
Lenders of a Lien therein or the receipt by the Administrative Agent or the
Lenders of any payment relating to any Contract pursuant hereto, nor shall the
Administrative Agent or any of the Lenders be required or obligated in any
manner to perform or fulfill any of the obligations of any Grantor under or
pursuant to any Contract, or to make any payment, or to make any inquiry as to
the nature or the sufficiency of any payment received by it or the sufficiency
of any performance by any party under any Contract, or to present or file any
claim, or to take any action to collect or enforce any performance or the
payment of any amounts which may have been assigned to it or to which it may be
entitled at any time or times.
(b) The Administrative Agent may at any time, upon the occurrence and
during the continuation of any Event of Default, after first complying with
subsection 3.7, notify Account Debtors, parties to the Contracts of the
Grantors, obligors of Instruments of the Grantors and obligors in respect of
Chattel Paper of the Grantors that the right, title and interest of the Grantors
in and under such Accounts, such Contracts, such Instruments and such Chattel
Paper have been assigned to the Administrative Agent for the benefit of the
Lenders and that payments shall be made directly to the Administrative Agent.
Upon the request of the Administrative Agent, the Grantors will so notify such
Account Debtors, such parties to Contracts, obligors of such Instruments and
obligors in respect of such Chattel Paper. During the continuation of an Event
of Default, the Administrative Agent may in its own name or in the name of
others communicate with such parties to such Accounts, such Contracts, such
Instruments and such Chattel Paper to verify with such Persons to Administrative
Agent's satisfaction the existence, amount and terms of any such Accounts,
Contracts, Instruments or Chattel Paper.
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(c) The Administrative Agent shall have the right to make test
verifications of the Accounts and physical verifications of the Inventory in any
manner and through any medium that it considers advisable, and the Grantors
agree to furnish all such assistance and information as the Administrative Agent
may require in connection therewith. The Grantors, at their expense, will cause
certified independent public accountants satisfactory to the Administrative
Agent to prepare and deliver to the Administrative Agent at any time and from
time to time, promptly upon the Administrative Agent's request, the following
reports: a reconciliation of all Accounts of the Grantors, an aging of all
Accounts of the Grantors, trial balances and a test verification of such
Accounts as the Administrative Agent may request. The Grantors, at their
expense, will cause certified independent public accountants satisfactory to the
Administrative Agent to prepare and deliver to the Administrative Agent the
results of the annual physical verification of their Inventory made or observed
by such accountants.
(d) To the extent required by the Credit Agreement, the Grantors will
keep and maintain the Equipment in good operating condition sufficient for the
continuation of the business conducted by the Grantors on a basis consistent
with past practices and the Grantors will provide all maintenance and service
and all repairs necessary for such purpose.
3.4 PERFORMANCE BY THE LENDERS OF GRANTORS' OBLIGATIONS. If the
Grantors fail to perform or comply with any of their agreements contained herein
and the Administrative Agent, as provided for by the terms of this Agreement,
shall perform or comply, or otherwise cause performance or compliance, with such
agreements, the reasonable expenses of the Administrative Agent incurred in
connection with such performance or compliance, together with interest thereon
at the rate then in effect in respect of the Revolving Loans, shall be payable
by the Grantors to the Administrative Agent on demand and shall constitute
Obligations secured by the Collateral. Performance of the Grantors' obligations
as permitted under this subsection 3.4 shall in no way constitute a violation of
the automatic stay provided by section 362 of the Bankruptcy Code and the
Grantors hereby waive applicability thereof. Moreover, neither the
Administrative Agent nor any of the Lenders shall in any way be responsible for
the payment of any costs incurred in connection with preserving or disposing of
Collateral pursuant to section 506(c) of the Bankruptcy Code and the Collateral
may not be charged for the incurrence of any such cost.
3.5 LIMITATION ON LENDERS' DUTY IN RESPECT OF COLLATERAL. Neither the
Administrative Agent nor any of the Lenders shall have any duty as to any
Collateral in its possession or control or in the possession or control of any
of its agents or nominees of or any income thereon or as to the preservation of
rights against prior parties or any other rights pertaining thereto, except that
the Administrative Agent and the Lenders shall use reasonable care with respect
to the Collateral in their possession or under their control. Upon request of
the Grantors, the Administrative Agent and the Lenders shall account for any
moneys received by them in respect of any foreclosure on or disposition of the
Collateral.
3.6 REMEDIES, RIGHTS UPON DEFAULT.
(a) If any Event of Default shall occur and be continuing, the
Administrative Agent may, and on the direction of the Majority Lenders will,
exercise in addition to all other rights and remedies granted to it in this
Agreement and in any other Loan Document, all rights and remedies of a secured
party under the UCC and other applicable law, subject in each case to compliance
with subsection 3.7. Without limiting the generality of the foregoing, each
Grantor expressly agrees that in
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any such event the Administrative Agent, without demand of performance or other
demand, advertisement or notice of any kind (except the notice specified below
of time and place of public or private sale and the notice provided in
subsection 3.7 hereof) to or upon such Grantor or any other Person (all and each
of which demands, advertisements and/or notices are hereby expressly waived to
the maximum extent permitted by the UCC or other applicable law), may forthwith
collect, receive, appropriate and realize upon the Collateral, or any part
thereof, and/or may forthwith sell, lease, assign, give an option or options to
purchase, or sell or otherwise dispose of and deliver the Collateral (or
contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange or broker's board or at any of the
Administrative Agent's offices or elsewhere at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Administrative Agent shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of said Collateral so sold, free of any right
or equity of redemption, which equity of redemption the Grantors hereby release.
The Grantors further agree, at the Administrative Agent's request, to assemble
the Collateral and make it available at places which the Administrative Agent
shall reasonably select, whether at the Grantors' premises or elsewhere. The
Administrative Agent shall apply the proceeds of any such collection, recovery,
receipt, appropriation, realization or sale (net of all expenses incurred by the
Administrative Agent and the Lenders in connection therewith, including, without
limitation, attorney's fees), first to the Obligations in any order deemed
appropriate by the Administrative Agent and then to the Pre-Petition
Obligations, the Grantors remaining liable for any deficiency remaining unpaid
after such application, and only after so paying over such net proceeds and
after the payment by the Administrative Agent of any other amount required by
any provision of law, including Section 9504(1)(c) of the UCC, need the
Administrative Agent account for the surplus, if any, to the Grantors. To the
maximum extent permitted by applicable law, each Grantor waives all claims,
damages, and demands against the Administrative Agent and the Lenders arising
out of the repossession, retention or sale of the Collateral except such as
arise out of the gross negligence or willful misconduct of the Administrative
Agent or the Lenders. As provided in the Emergency Order and the Permanent Order
(as applicable), each Grantor agrees that the Administrative Agent and the
Lenders need not give more than five days' notice (which notification shall be
deemed given when mailed or delivered on an overnight basis, postage prepaid,
addressed to such Grantor as provided in subsection 11.2 hereof) of the time and
place of any public sale or of the time after which a private sale may take
place and that such notice is reasonable notification of such matters. The
Grantors shall remain liable for any deficiency if the proceeds of any sale or
disposition of the Collateral are insufficient to pay all Obligations and
Pre-Petition Obligations. The Grantors are also liable for the reasonable fees
of any attorneys employed by the Administrative Agent and the Lenders to collect
such deficiency.
(b) In addition to the rights granted to the Administrative Agent and
the Lenders under paragraph (a) of this subsection 3.6, if any Event of Default
shall occur and be continuing, the Administrative Agent may transfer and
register in its name or in the name of its nominee the whole or any part of the
Pledged Collateral, exercise the voting rights with respect thereto, collect and
receive all cash dividends and other distributions made thereon and otherwise
act with respect to the Pledged Collateral as though the Lenders were the
outright owner thereof, provided, that the Administrative Agent shall not have
any duty to exercise any such right or to preserve the same and shall not be
liable for any failure to do so or for any delay in doing so.
(c) Each Grantor agrees to pay all reasonable costs of the
Administrative Agent and the Lenders, including, without limitation, attorneys'
fees, incurred in connection with the enforcement of
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any of their rights and remedies hereunder to the same extent as the Borrower is
so obligated pursuant to subsection 11.5 of the Credit Agreement.
(d) Except for any presentments, demands, protests and notices
otherwise specifically provided for herein, each Grantor hereby waives
presentment, demand, protest or any notice (to the maximum extent permitted by
applicable law) of any kind in connection with this Agreement or any Collateral.
In no event shall prior recourse to any Collateral be a prerequisite to the
Administrative Agent's right to demand payment of any of the Obligations or the
Pre-Petition Obligations.
3.7 AUTOMATIC STAY. During the continuance of an Event of Default,
upon five days' notice to the Borrower, any Creditors' Committee and the United
States Trustee from the Administrative Agent to the effect that the
Administrative Agent and the Lenders intend to exercise any and all of their
rights under the Loan Documents, the automatic stay provided under section 362
of the Bankruptcy Code shall be deemed automatically vacated to permit the
Administrative Agent and the Lenders immediately to take any remedial action
permitted under this Agreement, the other Loan Documents, the Bankruptcy Code,
the UCC or other applicable law with respect to the Collateral or otherwise;
provided, that no such notice shall be required for the actions described in
subsection 9.1 hereof, each of which actions may be undertaken without such
notice.
3.8 ADMINISTRATIVE AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Each of the Grantors hereby irrevocably constitutes and appoints
the Administrative Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of such Grantor and in the name of
such Grantor or in its own name, from time to time in the Administrative Agent's
discretion, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute and deliver any and all documents
and instruments which may be necessary and desirable to accomplish the purposes
of this Agreement and the transactions contemplated hereby and, without limiting
the generality of the foregoing, hereby gives the Administrative Agent the power
and right, on behalf of such Grantor, without notice to or assent by any of the
Grantors to do the following:
(i) to ask, demand, collect, receive and give acquittances and
receipts for any and all moneys due and to become due under any Collateral
and, in the name of such Grantor or its own name or otherwise, to take
possession of and endorse and collect any checks, drafts, notes,
acceptances or other Instruments for the payment of moneys due under any
Collateral and to file any claim or to take any other action or proceeding
in any court of law or equity or otherwise deemed appropriate by the
Administrative Agent for the purpose of collecting any and all such moneys
due under any Collateral whenever payable and to file any claim or to take
any other action or proceeding in any court of law or equity or otherwise
deemed appropriate by the Administrative Agent for the purpose of
collecting any and all such moneys due under any Collateral whenever
payable;
(ii) to pay or discharge taxes, liens, security interests or other
encumbrances levied or placed on or threatened against the Collateral, to
effect any repairs or any insurance called for by the terms of this
Agreement and to pay all or any part of the premiums therefor and the costs
thereof; and
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(iii) (A) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due, and to become due
thereunder, directly to the Administrative Agent or as the Administrative
Agent shall direct; (B) to receive payment of and receipt for any and all
moneys, claims and other amounts due, and to become due at any time, in
respect of or arising out of any Collateral; (C) to sign and indorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications and notices in
connection with accounts and other documents constituting or relating to
any of the Collateral; (D) to commence and prosecute any suits, actions or
proceedings at law or equity in any court of competent jurisdiction to
collect the Collateral or any part thereof and to enforce any other right
in respect of any Collateral; (E) to defend any suit, action or proceeding
brought against such Grantor with respect to any Collateral; (F) to settle,
compromise or adjust any suit, action or proceeding described above and, in
connection therewith, to give such discharges or releases as the
Administrative Agent may deem appropriate; (G) to license or, to the extent
permitted by an applicable license, sublicense, whether general, special or
otherwise, and whether on an exclusive or non-exclusive basis, any
Trademark, throughout the world for such term or terms, on such conditions,
and in such manner, as the Administrative Agent shall in its sole
discretion determine; and (H) generally to sell, transfer, pledge, make any
agreement with respect to or otherwise deal with any of the Collateral as
fully and completely as though the Administrative Agent were the absolute
owner thereof for all purposes, and to do, at the Administrative Agent's
option and the Grantors' expense, at any time, or from time to time, all
acts and things which the Administrative Agent reasonably deems necessary
to protect, preserve or realize upon the Collateral and the Administrative
Agent's liens and security interests therein in order to effect the intent
of this Agreement, all as fully and effectively as such Grantor might do.
(b) The Administrative Agent agrees that, except as otherwise provided
in this Agreement, it will forbear from exercising the power of attorney or any
rights granted to the Administrative Agent pursuant to this subsection 3.8
except upon the occurrence and during the continuation of an Event of Default
and after compliance with subsection 3.7. The Grantors hereby ratify, to the
extent permitted by law, all that said attorneys shall lawfully do or cause to
be done by virtue hereof. Subject to compliance with subsection 3.7, exercise by
the Administrative Agent or any Lender of the powers granted hereunder is not a
violation of the automatic stay provided in section 362 of the Bankruptcy Code
and the Grantors waive applicability thereof. The power of attorney granted
pursuant to this subsection 3.8 is a power coupled with an interest and shall be
irrevocable until the Obligations are indefeasibly paid in full.
(c) The powers conferred on the Administrative Agent hereunder are
solely to protect the Administrative Agent's and the Lenders' interests in the
Collateral and shall not impose any duty upon it or them to exercise any such
powers. The Administrative Agent shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and neither it nor
the Lenders nor any of their respective officers, directors, employees or agents
shall be responsible to the Grantors for any act or failure to act, except for
their own gross negligence or willful misconduct.
(d) The Grantors also authorize the Administrative Agent, at any time
and from time to time upon the occurrence and during the continuation of any
Event of Default or as otherwise expressly permitted by this Agreement and
subject to compliance with subsection 3.7, (i) to communicate in its own name
with any party to any Contract with regard to the assignment of the right, title
and interest of the
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Grantors in and under the Contracts hereunder and other matters relating thereto
and (ii) to execute any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
3.9 SUPER-PRIORITY CLAIMS. The Loans, the Obligations with respect to
Letters of Credit and all other Obligations shall constitute, in accordance with
section 364(c)(1) of the Bankruptcy Code, claims against each of the Grantors in
their respective Reorganization Cases which are administrative expense claims
having priority over any and all administrative expenses of the kind specified
in sections 503(b) or 507(b) of the Bankruptcy Code, except for Permitted
Expenses.
SECTION 4 INVESTMENT PROPERTY
4.1 PLEDGE.
(a) Without limiting any of the provisions of subsection 3.1 hereof,
to secure the due and punctual payment of all of the Obligations, howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, now or hereafter existing or due or to become due, in accordance
with the terms thereof, each Grantor hereby pledges to the Administrative Agent
for the benefit of the Secured Parties, and hereby grants to the Administrative
Agent for the benefit of the Secured Parties a security interest in, all of such
Grantor's right, title and interest in and to the following:
(i) the shares of capital stock and partnership interests set forth on
Schedule 2 hereto and other shares of capital stock and partnership
interests pledged hereunder from time to time hereafter pursuant to
paragraph (d) of subsection 4.2 hereof (all such shares being herein
collectively called the "Pledged Stock"; and all of such partnership
interests being herein collectively called the "Pledged Partnership
Interests");
(ii) all Investment Securities;
(iii) all Cash Equivalents (including any Permitted Book-Entry
Securities) and all funds held or on deposit from time to time in any
Securities Accounts(as defined below); and
(iv) all Proceeds, except as provided for in subsection 4.3 hereof,
of any and all of the foregoing items described in clauses (i) through
(iii) above.
The items described in clauses (i) through (iv) above are herein collectively
called the "Pledged Securities."
(b) Each Grantor hereby delivers or causes to be delivered to the
Administrative Agent the stock certificates representing the Pledged Stock
pledged by it as set forth on Schedule 2, together with related undated stock
powers duly executed in blank. Each Grantor agrees to deliver or cause to be
delivered to the Administrative Agent related undated stock powers or bond
powers, as appropriate, duly executed in blank for the Pledged Securities (other
than checks, Permitted Book Entry Securities, any Pledged Securities in a
Securities Account and any Excepted Cash Equivalents (as defined below)) pledged
by it hereunder from time to time hereafter.
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4.2 AFTER-ACQUIRED PLEDGED SECURITIES.
(a) If, after the date hereof, any Grantor shall become entitled to
receive or shall receive any Investment Securities, such Grantor agrees to
accept the same as the Administrative Agent's agent and to hold the same in
trust on behalf of and for the benefit of the Administrative Agent and to
deliver the same (except for Investment Securities not required to be delivered
pursuant to paragraph (c) of subsection 7.11 of the Credit Agreement) forthwith
to the Administrative Agent in the exact form received, with the appropriate
undated powers as provided in paragraph (b) of subsection 4.1 hereof, to be held
by the Administrative Agent as Pledged Securities, subject to the terms of this
Agreement, as additional collateral security for the Obligations.
(b) If, while this Agreement is in effect, any Grantor shall become
entitled to receive or shall receive any stock certificate (including any
certificate representing a stock dividend or a distribution in connection with
any reclassification, increase or reduction of capital, or issued in connection
with any reorganization), or any instrument, certificate or other writing
representing or constituting an option or right to acquire securities, whether
as an addition to, in substitution of, or in exchange for, any shares of any
Pledged Stock (other than shares of stock or instruments or other property of
third parties delivered to such Grantor as collateral for the obligations of
such third parties), such Grantor agrees to accept the same as the
Administrative Agent's agent and to hold the same in trust on behalf of and for
the benefit of the Administrative Agent and to deliver the same forthwith to the
Administrative Agent in the exact form received, with appropriate undated powers
as provided in paragraph (b) of subsection 4.1 hereof, to be held by the
Administrative Agent as Pledged Securities, subject to the terms of this
Agreement, as additional collateral security for the Obligations, and the same
shall constitute "Pledged Stock" for all purposes of this Agreement.
(c) If, while this Agreement is in effect, any Grantor shall become
entitled to receive any note, bond, debenture, instrument, stock certificate or
any instrument, certificate or other writing representing or constituting an
option or right to acquire securities (other than any of the foregoing
constituting property of third parties which is delivered to such Grantor as
collateral for the obligations of such third parties), whether as an addition
to, in substitution of or in exchange for any Investment Securities, or in
payment of the principal of any Investment Securities, such Grantor agrees to
accept the same on behalf of and for the benefit of the Administrative Agent and
to deliver the same (except for Investment Securities not required to be
delivered pursuant to paragraph (c) of subsection 7.11 of the Credit Agreement)
forthwith to the Administrative Agent in the exact form received, with
appropriate undated powers as provided in paragraph (b) of subsection 4.1
hereof, to be held by the Administrative Agent as Pledged Securities, subject to
the terms of this Agreement, as additional collateral security for the
Obligations, and the same shall constitute "Investment Securities" for all
purposes of this Agreement.
(d) If, after the Effective Date, any Grantor shall be required to
pledge the shares of a Subsidiary which have not previously been pledged
hereunder, such Grantor shall pledge such shares to the Administrative Agent and
shall deliver to the Administrative Agent stock certificates representing all of
such shares of capital stock of such Subsidiary, together with appropriate
undated powers as provided in paragraph (b) of subsection 4.1 hereof, to be held
by the Administrative Agent as Pledged Securities, subject to the terms of this
Agreement, as additional collateral security for the Obligations.
(e) Notwithstanding anything to the contrary herein, no Grantor shall
be required to pledge (i) any stock or other equity securities issued by any
Person if the stock of such Person does not constitute Pledged Stock on the
Effective Date (except to the extent required by the Credit Agreement) or
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if in respect of a Foreign Subsidiary or Foreign Holding Company, the aggregate
portion of stock of such Person that is Pledged Stock would exceed 65% of the
outstanding Capital Stock of such Person or (ii) any note, debenture, bond or
other instrument delivered to any Grantor by any Subsidiary that is not a Loan
Party evidencing indebtedness of such Subsidiary to such Grantor.
(f) Notwithstanding anything to the contrary contained herein or in
the Credit Agreement, the Grantors shall not be required to pledge any Excepted
Cash Equivalents and may utilize such Excepted Cash Equivalents in accordance
with the terms of the Credit Agreement.
4.3 CASH DIVIDENDS; EXERCISE OF RIGHTS.
(a) Unless a Notice of Acceleration is in effect, each Grantor shall
be entitled, except as provided in subsection 4.5 or 4.8 hereof, to receive all
distributions (including dividends and interest payments) in respect of the
Pledged Securities (as long as such distributions are promptly transferred to
the Administrative Agent for deposit in the Collateral Account pursuant to
subsection 5.2 hereof) and to vote the Pledged Securities and to exercise any
and all rights and options included in the Pledged Securities and to give
consents, waivers and ratifications in respect of the Pledged Securities,
provided that (i) no vote shall be cast or consent, waiver or ratification given
or action taken which would materially impair the value of the Pledged
Securities or be inconsistent with or violate any provision of this Agreement
and (ii) all cash distributions shall be immediately deposited into the
Collateral Account or one or more Depositary Accounts in accordance with this
Agreement.
(b) In order to permit each Grantor to exercise the powers of voting
and/or consent retained by such Grantor under paragraph (a) of subsection 4.3
hereof, the Administrative Agent shall, if necessary, upon the written request
of such Grantor, from time to time execute and deliver to such Grantor
appropriate proxies. The Administrative Agent shall have no responsibilities for
the manner in which any such proxy is exercised. In order to permit the
Administrative Agent to receive all distributions to which it is entitled under
this Agreement, each Grantor shall, if necessary, from time to time execute and
deliver to the Administrative Agent, upon its request, appropriate dividend or
payment orders. If any Grantor shall not have executed and delivered any such
dividend or payment order within three Business Days after it receives a written
request from the Administrative Agent to do so, the Administrative Agent may
execute the same on behalf of such Grantor . Each Grantor hereby appoints the
Administrative Agent as its agent and attorney to act for it as provided in the
preceding sentence.
4.4 RIGHTS OF THE ADMINISTRATIVE AGENT AND THE SECURED PARTIES. While
a Notice of Acceleration is in effect, without notice except as provided in
subsection 3.7 hereof, the Administrative Agent may transfer or register or have
registered in the name of the Administrative Agent or its nominee any and all of
the Pledged Securities which are in registerable form. If a Notice of
Acceleration is in effect and the Administrative Agent has complied with the
provision of subsection 3.7, the Administrative Agent or its nominee may
thereafter, after delivery of notice to the relevant Grantor, exercise all
voting and corporate rights at any meeting of any corporation or other entity
issuing any of the Pledged Securities and any and all rights of conversion,
exchange, subscription or any other rights, privileges or options pertaining to
any shares of the Pledged Securities as if it were the absolute owner thereof,
including the rights to exchange at its discretion any and all of the Pledged
Securities upon the merger, consolidation, reorganization, recapitalization or
other readjustment of any corporation or other entity issuing any of such shares
or upon the exercise by any such issuer or the Administrative Agent or any
right, privilege or option pertaining to any of the Pledged Securities, and in
connection therewith, to deposit and deliver any and all of the Pledged
Securities with any committee, depositary, transfer agent,
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registrar or other designated agency upon such terms and conditions as it may
determine, all without liability except to account for property actually
received by it, but the Administrative Agent shall have no duty to exercise and
neither the Administrative Agent nor any Secured Party shall have any duty to
request the exercise of any of the aforesaid rights, privileges or options, and
neither the Administrative Agent nor any Secured Party shall be responsible for
any failure to do so or delay in so doing.
4.5 REMEDIES AND RIGHTS UPON EVENT OF DEFAULT.
(a) As long as a Notice of Default is in effect, the Administrative
Agent may at any time, without notice to any Grantor except as provided in
subsection 3.7 hereof, notify Persons whose obligations to any Grantor have been
assigned hereunder that such obligations have been assigned to the
Administrative Agent and that payments thereunder or in respect thereof shall be
made directly to the Administrative Agent. If requested by the Administrative
Agent the relevant Grantor will (at such Grantor's own expense) so notify such
Persons. The Administrative Agent may in its own name or in the name of others
communicate with such Persons.
(b) As long as a Notice of Acceleration is in effect:
(i) All payments received by any Grantor under or in connection with
any of the Pledged Securities shall be held by such Grantor in trust for
the Administrative Agent, shall be segregated from other funds of such
Grantor and shall, forthwith upon receipt by such Grantor, be turned over
to the Administrative Agent, in the same form as received by such Grantor
(duly indorsed to the Administrative Agent, if required) for deposit in the
Collateral Account.
(ii) Any and all such payments so received by the Administrative Agent
(whether from any Grantor or otherwise) shall be deposited by the
Administrative Agent in the Collateral Account and shall be held by the
Administrative Agent as part of the Collateral. Any Proceeds which are
Pledged Securities, when collected, whether consisting of checks, notes,
drafts, bills of exchange, money orders, or commercial paper of any kind
whatsoever shall be held or deposited in the Collateral Account and held as
part of the Collateral subject to withdrawal or application as provided in
this Agreement.
(c) If a Notice of Acceleration is in effect, the Administrative Agent
may exercise, in addition to all other rights and remedies granted to it in this
Agreement, all rights and remedies of a secured party under the UCC, subject in
each case to compliance with subsection 3.7. Without limiting the generality of
the foregoing, each Grantor expressly agrees that in any such event the
Administrative Agent, without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale and as provided in subsection 3.7 hereof) to
or upon any Grantor or any other Person (all and each of which demands,
advertisements and/or notices are hereby expressly waived), may forthwith
collect, receive, appropriate and realize upon the Pledged Securities, or any
part thereof, and/or may forthwith sell, assign, give option or options to
purchase, or sell or otherwise dispose of and deliver said Pledged Securities
(or contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange, broker's board or at any of the
Administrative Agent's offices or elsewhere at such prices as they may deem
best, for cash or on credit or for future delivery without assumption of any
credit risk. The Administrative Agent or any Secured Party shall have the right
upon any such public sale or sales, and, to the extent permitted by law, upon
any such private sale or sales, to purchase the whole or any part of the Pledged
Securities so sold, free of any right or equity of redemption in any Grantor,
which right or equity is hereby expressly waived
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and released. The Administrative Agent shall deposit the net proceeds of any
such collection, recovery, receipt, appropriation, realization or sale in the
Collateral Account. To the extent permitted by applicable law, each Grantor
waives all claims, damages and demands against the Agents or any other Secured
Party arising out of the repossession, retention or sale of the Pledged
Securities. Each Grantor agrees that the Administrative Agent need not give any
notice of any sale on a recognized public market or give more than 10 Business
Days' notice (which notification shall be deemed given when mailed, postage
prepaid, addressed to such Grantor at its address determined pursuant to
subsection 11.2 hereof) specifying the time and place of any other public sale
or of the time after which a private sale may take place and that such notice is
reasonable notification of such matters.
4.6 REGISTRATION RIGHTS.
(a) If the Administrative Agent shall reasonably determine to exercise
its right to sell any or all of the Pledged Securities (other than Investment
Securities) pursuant to subsection 4.5 hereof, and if in the opinion of counsel
for the Administrative Agent it is necessary, or if in the reasonable opinion of
the Administrative Agent under applicable law it is advisable, to have the
Pledged Securities or that portion thereof to be sold, registered under the
provisions of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act"), each relevant Grantor
will use its best efforts to cause the issuers of the Pledged Securities
contemplated to be sold, to execute and deliver, and cause the directors and
officers of each thereof to execute and deliver, all at such Grantor 's expense,
all such instruments and documents, and to do or cause to be done all such other
acts and things as may be reasonably necessary or, in the opinion of the
Administrative Agent, advisable to register the Pledged Securities or that
portion thereof to be sold, under the provisions of the Securities Act and to
cause the registration statement relating thereto to become effective and to
remain effective for such period as the Administrative Agent may reasonably deem
appropriate to facilitate the sale or other disposition of such Pledged
Securities from the date of the first public offering of the Pledged Securities
or that portion thereof to be sold, and to make all amendments thereto and/or to
the related prospectus which, in the opinion of the Administrative Agent, are
necessary or advisable, all in conformity with the requirements of the
Securities Act. Each relevant Grantor agrees to use its best efforts to cause
each such issuer to comply with the provisions of the securities or "Blue Sky"
laws of any jurisdiction which the Administrative Agent shall designate and to
cause each such issuer to make available to its security holders, as soon as
practicable, an earnings statement (which need not be audited) which will
satisfy the provisions of Section 11(a) of the Securities Act.
(b) Each Grantor recognizes that the Administrative Agent may be
unable to effect a public sale of any or all the Pledged Securities by reason of
certain prohibitions contained in the Securities Act and applicable state
securities laws, but may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers who will be obliged to agree, among
other things, to acquire such securities for their own account for investment
and not with a view to the distribution or resale thereof. Each Grantor
acknowledges and agrees that any such private sale may result in prices and
other terms less favorable to the seller than if such sale were a public sale
and, notwithstanding such circumstances, agrees that any such private sale shall
not for such reason alone be deemed to have been made in a commercially
unreasonable manner. Neither the Administrative Agent nor any of the Secured
Parties shall be under any obligation to delay a sale of any of the Pledged
Securities for the period of time necessary to permit the issuer of such
securities to register such securities for public sale under the Securities Act,
or under applicable state securities laws, even if the issuer would agree to do
so.
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(c) Each Grantor further agrees to use its best efforts to do or cause
to be done all such other acts and things as may be reasonably necessary to make
such sale or resales of any portion or all of the Pledged Securities valid and
binding and in compliance with any and all applicable laws, regulations, orders,
writs, injunctions, decrees or awards of any and all courts, arbitrators or
governmental instrumentalities, domestic or foreign, having jurisdiction over
any such sale or resales, all at such Grantor's expense.
(d) If the Administrative Agent determines to exercise its right to
sell all or any of the Pledged Securities, upon written request, each Grantor
shall from time to time furnish to the Administrative Agent all such information
as the Administrative Agent may reasonably request in order to determine the
Pledged Securities which may be sold by such Grantor as exempt transactions
under the Securities Act.
(e) At the request of the Administrative Agent, each Grantor agrees to
indemnify and hold harmless, and each relevant Grantor agrees to use its best
efforts to cause the issuer or issuers whose stock or securities are to be sold
pursuant to subsection 4.5 hereof to agree to indemnify and hold harmless, the
Administrative Agent and each Secured Party (and any Person controlling any
thereof) from and against any loss, liability, claim, damage and reasonable
expense (and reasonable counsel fees incurred in connection therewith) under the
Securities Act or otherwise insofar as such loss, liability, claim, damage or
expense arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact contained in any registration statement, prospectus
or offering memorandum or in any preliminary prospectus or preliminary offering
memorandum or any amendment or supplement to any thereof, or arises out of or is
based upon any omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, such indemnification to remain operative regardless of any
investigation made by or on behalf of the Administrative Agent or any Secured
Party (or any Person controlling any thereof), provided that such Grantor and
any such issuer shall not be liable in any case to the extent that any such
loss, liability, claim, damage or expense arises out of or is based on an untrue
statement or alleged untrue statement or an omission or an alleged omission made
by, or in reliance upon and in conformity with written information furnished by,
the Administrative Agent, any Secured Party or any other Person not under the
control of such Grantor.
4.7 POSSESSION OF PLEDGED SECURITIES. The Administrative Agent shall
be entitled to hold in its possession or under its control all Pledged
Securities pledged, assigned or transferred hereunder and from time to time
constituting a portion of the Collateral, except for any documents or
instruments which from time to time are certified by the relevant Grantor to be
required for recordation or for the purpose of enforcing or realizing upon any
right or value thereby represented or for the purpose of substituting new
Pledged Securities evidencing Pledged Securities then in possession of the
Administrative Agent or as may be required in the administration of a Grantor's
business in the ordinary course (subject to such requirements as the
Administrative Agent or any custodian shall reasonably request) and except as
otherwise permitted by the Credit Agreement or this Agreement. The
Administrative Agent may, from time to time, in its sole discretion, appoint one
or more agents or nominees (which in no case shall be a Grantor or an affiliate,
employee or agent of a Grantor ) to hold physical custody, for the account of
the Administrative Agent, of any or all Pledged Securities.
4.8 CASH EQUIVALENTS.
(a) The Administrative Agent shall establish, in the Administrative
Agent's name, one or more accounts (individually, a "Securities Account") which
may be maintained with the
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Administrative Agent or any agent thereof in accordance with paragraph (e) of
this subsection 4.8 and in each of which the Administrative Agent shall have a
perfected first priority security interest. As long as no Notice of Acceleration
is in effect and except as otherwise permitted by the Credit Agreement or this
Agreement, all Pledged Securities which are Cash Equivalents (other than
Excepted Cash Equivalents) shall be held by the Administrative Agent or a
custodian or other agent of the Administrative Agent in a Securities Account
subject to release upon request by the relevant Grantor strictly in accordance
with paragraph (c) of this subsection 4.8. As long as a Notice of Acceleration
is in effect, the Administrative Agent may transfer or cause to be transferred
for deposit in the Collateral Account all Cash Equivalents and all funds in the
Securities Accounts, subject to compliance with subsection 3.7.
(b) Unless a Notice of Acceleration is in effect, the purchase, sale
or presentation for payment of Cash Equivalents in a Securities Account, the
receipt by any Grantor of the proceeds of the sale or collection thereof and any
interest paid thereon and the release upon request by any Grantor of funds or
Cash Equivalents on deposit therein shall all occur as provided in this
paragraph (b) and in paragraph (c) of this subsection 4.8. To initiate the
purchase of Cash Equivalents with funds from time to time on deposit in a
Securities Account under the control of the Administrative Agent or a custodian
or other agent of the Administrative Agent, the relevant Grantor will instruct
the Administrative Agent or such custodian or agent, as the case may be, as to
the particulars of such purchase. The Administrative Agent or such custodian or
agent will make arrangements (either directly or through one or more agents) for
the purchase of such Cash Equivalents, including the payment of the purchase
price thereof in accordance with such instructions. Except as otherwise
permitted by the Credit Agreement, all Cash Equivalents (other than Permitted
Book-Entry Securities and, at the Borrower's option, Excepted Cash Equivalents)
purchased by the Administrative Agent or such custodian or agent, as the case
may be, as aforesaid (and all securities (other than Permitted Book-Entry
Securities and, at the Borrower's option, Excepted Cash Equivalents) subject to,
together with all confirmations relating to, repurchase agreements) will be
delivered to (or, in the case of eurodollar deposits, made in the name of) the
Administrative Agent or such custodian or agent and, subject to the following
sentence, held in the Securities Accounts. To initiate the sale or presentation
for payment of Cash Equivalents, the relevant Grantor will instruct the
Administrative Agent or such custodian or agent as to the particulars of such
sale or presentation, whereupon the Administrative Agent or such custodian or
agent will make arrangements (either directly or through the appropriate agents)
for the sale or presentation of such Cash Equivalents in accordance with such
instructions. Funds received by the Administrative Agent or such custodian or
agent on the sale or collection of Cash Equivalents (including interest payable
in respect thereof) which are not released pursuant to a request by a Grantor in
accordance with paragraph(c) of this subsection 4.8 shall be reinvested by the
Administrative Agent or such custodian or agent in Cash Equivalents in
accordance with the instructions of the relevant Grantor. While a Notice of
Acceleration is in effect, no Grantor shall have the right to give instructions
to the Administrative Agent or such custodian or agent pursuant to this
paragraph(b). Instructions to the Administrative Agent or such custodian or
agent pursuant to this paragraph(b) may be given in writing, by facsimile, by
computer transmission or orally (confirmed in writing).
(c) As long as no Notice of Acceleration is in effect, each Grantor
may obtain the release of funds in any Securities Account for transfer to the
Administrative Agent for deposit in the Collateral Account on the same terms and
conditions as apply to the release of funds from the Collateral Account and, for
this purpose, such funds on deposit in the Securities Account shall be deemed to
be on deposit in the Collateral Account, it being understood that each request
by such Grantor for such a release of funds shall be made to the Administrative
Agent.
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(d) Any written or oral request or instructions by any Grantor
pursuant to paragraph (b) or (c) of this subsection 4.8 shall be full authority
for the Administrative Agent or applicable custodian or agent of the
Administrative Agent to make the requested release or investment, as the case
may be.
(e) The Administrative Agent shall from time to time appoint, as its
agent or agents, one or more Persons (which in no case shall be a Grantor or an
affiliate, employee or agent of a Grantor ) designated by a Grantor and
reasonably acceptable to the Administrative Agent, located in New York (or such
other jurisdictions within the United States (other than Florida) as may be
designated by a Grantor ) with whom a Securities Account shall be established
and maintained. Prior to establishing such a Securities Account, the Person so
appointed shall deliver to the Administrative Agent a Custody and Control
Agreement acknowledging that (i) in opening such Securities Accounts and holding
Cash Equivalents therein, such Person is acting as agent of the Administrative
Agent and will conduct transactions in Cash Equivalents in such account in the
name of the Administrative Agent (with any confirmations of such transactions
sent by such Person to reflect that fact) and (ii) such Person shall in no event
deliver any Cash Equivalents (other than Excepted Cash Equivalents) held in such
Securities Account to any Grantor or any affiliate, employee or agent of any
Grantor . The provisions of clause (ii) of this paragraph (e) shall also apply
to any Securities Account maintained with the Administrative Agent.
(f) Upon the sale or disposition of any Cash Equivalents pursuant to
this Section other than a transfer thereof to the Collateral Account, the
Administrative Agent's security interest therein (but not in the Proceeds
arising from such sale or disposition) shall, without any further action on the
part of the Administrative Agent, be released.
SECTION 5 CASH DOMINION SYSTEM; COLLATERAL ACCOUNT; DISTRIBUTIONS
5.1 CASH DOMINION SYSTEM.
(a) Each Grantor has established a system of depositary accounts
(together with accounts opened from time to time pursuant to paragraph (b) below
of this subsection 5.1 ("Depositary Accounts") into which each such Grantor
promptly deposits or causes to be deposited (and shall continue promptly to
deposit or cause to be deposited) all Cash Proceeds received by it or any other
Person on its behalf, other than Cash Proceeds in a Securities Account, pursuant
to which such funds are remitted promptly to the Administrative Agent for
deposit in the Collateral Account referred to in subsection 5.2 hereof (the
"Cash Dominion System"). The Grantor represent that Schedule 5.23 to the Credit
Agreement contains a true and complete list of all depositary accounts
maintained by any Grantor with any bank or financial institution as of the
Closing Date into which Cash Proceeds are currently deposited (collectively, the
"Depositary Banks"). Each Grantor further agrees that (x) all amounts received
by it from any Credit Card Subsidiary (whether as a dividend, loan or otherwise)
shall be deposited directly into a Depositary Account and (y) it shall (and
shall cause the relevant Credit Card Subsidiary to) execute and deliver such
notices and agreements as the Administrative Agent may reasonably require (and
which, in the case of the Credit Card Subsidiaries, do not violate the terms of
the relevant Credit Card Program) with respect to such amounts. Each Grantor
shall, within 30 days after the entry of the Emergency Order, deliver to each
Depositary Bank instructions reasonably satisfactory to the Administrative Agent
(i) informing each such Depositary Bank of the Reorganization Cases and (ii)
informing each such Depositary Bank of the Bankruptcy Court's directing that all
of the Grantors' cash continue to be sent to the Administrative Agent pursuant
to the existing arrangements.
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(b) Subject to paragraph (f) below of this subsection 5.1, each
Grantor agrees that it shall not open or maintain a bank or similar account into
which Cash Proceeds are deposited unless the relevant Depositary Bank and such
Grantor shall have executed and delivered a Blocked Account Agreement or Lockbox
Agreement, as appropriate, with respect to such Depositary Account.
(c) Each Grantor agrees that it has instructed and will continue to
instruct all Account Debtors in respect of Accounts owed to such Grantor to make
payments in respect of such Accounts to one or more Depositary Accounts to be
subject to the Blocked Account Agreements or Lockbox Agreements executed and
delivered pursuant to paragraph (a) or (b) above of this subsection 5.1
(d) Without prejudice to paragraph (a), (b) or (c) above or paragraph
(f) below, whether or not an Event of Default has occurred, each Grantor agrees
that any Cash Proceeds (including Cash Proceeds received in payment of any
Account or in payment for any Inventory or otherwise but excluding any Cash
Proceeds in a Securities Account) that are not deposited directly into a
Depositary Account, when collected by such Grantor, shall be promptly deposited
by such Grantor in a Depositary Account, in precisely the form received, except
for its endorsement when required, and until so turned over, shall be deemed to
be held in trust by such Grantor for and as the Administrative Agent's property,
and shall be held separately from such Grantor's other funds.
(e) The Administrative Agent shall credit to the Collateral Account
the proceeds of Depositary Accounts which have been received through the Cash
Dominion System, which amounts shall then be applied in accordance with
subsection 5.5 hereof.
(f) Notwithstanding anything to the contrary contained herein or in
any other Loan Document: (i) cash and Cash Equivalents of up to $15,000,000 at
any one time outstanding (including cash at stores) and cash in transit in the
ordinary course of business, (ii) cash consisting of cash in the Consignment
Inventory Account and (iii) cash which is subject to a Lien or deposit
arrangement permitted under paragraph (s) of subsection 8.3 of the Credit
Agreement shall not be required to be subject to the Cash Dominion System.
5.2 THE COLLATERAL ACCOUNT. On the Effective Date there shall be
established and, at all times thereafter until repayment in full of all the
Obligations, there shall be maintained with the Administrative Agent at the
office of the Administrative Agent located in New York an account which shall be
entitled the "Citicorp USA, Inc. - as Administrative Agent: Service Merchandise
Company, Inc., debtor and debtor-in-possession - Collateral Account" (the
"Collateral Account"). All moneys which are required by this Agreement or any
other Security Document to be delivered to the Administrative Agent or which are
received by the Administrative Agent or any agent or nominee of the
Administrative Agent in respect of the Collateral, including without limitation
in connection with the exercise of the remedies provided in this Agreement or
any Security Document, shall be deposited in the Collateral Account and applied
in accordance with the terms of this Agreement.
5.3 CONTROL OF COLLATERAL ACCOUNT. All right, title and interest in
and to the Collateral Account shall be vested in the Administrative Agent. Funds
on deposit in the Collateral Account shall be under the sole dominion and
control of the Administrative Agent. The Grantors' rights to payments from the
Collateral Account are part of the Collateral.
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5.4 INVESTMENT OF FUNDS DEPOSITED IN COLLATERAL ACCOUNT. The
Administrative Agent shall invest and reinvest moneys on deposit in the
Collateral Account at any time in any of the following:
(i) marketable obligations of the United States having a maturity of
not more than three months from the date of acquisition;
(ii) marketable obligations directly and fully guaranteed by the
United States having a maturity of not more than three months from the date
of acquisition;
(iii) bankers' acceptances and certificates of deposit and other
interest-bearing obligations issued by Citibank N.A., or any bank organized
under the laws of the United States or any state thereof with capital,
surplus and undivided profits aggregating at least $125,000,000, in each
case having a maturity of not more than three months from the date of
acquisition;
(iv) repurchase obligations with a term of not more than one day for
underlying securities of the types described in clauses (i), (ii) and (iii)
above entered into with Citibank N.A., or any bank meeting the
qualifications specified in clause (iii) above; and
(v) commercial paper (except commercial paper issued by the Borrower
or its affiliates) rated at least A-1 or P-1 by at least one nationally
recognized rating organization and maturing within three months after the
date of acquisition;
provided, that the aggregate amount invested in obligations of the types
described in clauses (iii), (iv) and (v) above of any one issuer shall not
exceed $50,000,000 at any time and provided, further, that, unless a Notice of
Acceleration is in effect, the Administrative Agent shall not make any such
investment except at the direction of the Borrower. All such investments and the
interest and income received thereon and the net proceeds realized on the sale
or redemption thereof shall be held in the Collateral Account as part of the
Collateral and shall be under the sole dominion and control of the
Administrative Agent.
5.5 APPLICATION OF MONEYS.
(a) Unless a Notice of Acceleration is in effect, all money held by
the Administrative Agent in the Collateral Account shall be applied or disbursed
as set forth in paragraph (d) of subsection 4.1 of the Credit Agreement.
(b) While a Notice of Acceleration is in effect, all moneys held by
the Administrative Agent in the Collateral Account or received by the
Administrative Agent shall, to the extent available for distribution (it being
understood that the Administrative Agent may, subject to compliance with
subsection 3.7, liquidate investments prior to maturity in order to make a
distribution pursuant to this subsection 5.5), be distributed by the
Administrative Agent on each Distribution Date in the following order of
priority:
First: to the payment of all unpaid fees and expenses of the Agents
payable under this Agreement, the Credit Agreement or any other Loan
Document;
Second: subject to subsection 5.6 hereof, to the Secured Parties in an
amount equal to (i) the unpaid principal amount of, and unpaid interest on,
and premium or fees, if any, in respect of, the Obligations then
outstanding whether or not then due and payable, including the aggregate
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undrawn amounts available to be drawn (assuming compliance with all
conditions to drawing) under all bonds, guarantees, letters of credit,
acceptances, insurance, reimbursement and indemnity agreements or similar
obligations with respect to which the Borrower is obligated to reimburse
the issuer thereof for any drawings thereunder, (ii) the aggregate
estimated amount of payment liabilities of the Borrower under Derivative
Agreements assuming immediate termination of all such agreements and (iii)
the outstanding amount of any Overdrafts; and, if such moneys shall be
insufficient to pay the amounts specified in clauses (i), (ii) and (iii) in
full, then ratably (without priority of any one over any other) to the
Secured Parties in proportion to the unpaid amounts thereof on such
Distribution Date;
Third: to the Secured Parties, amounts equal to all other sums which
constitute Obligations, including the costs and expenses of the Secured
Parties and their representatives which are due and payable under the
relevant Secured Instruments and which constitute Obligations as of such
Distribution Date, and, if such moneys shall be insufficient to pay such
sums in full, then ratably to the Secured Parties in proportion to such
sums; and
Fourth: any surplus then remaining shall be paid to the Grantors or
their successors or assigns or to whomsoever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may direct.
(c) The term "unpaid" as used in clause Second of paragraph (b) of
this subsection 5.5 refers to all amounts allowed by the Bankruptcy Court in
respect of Obligations as a basis for distribution (including estimated amounts,
if any, allowed in respect of contingent claims), to the extent that prior
distributions (whether actually distributed or set aside pursuant to subsection
5.6 hereof) have not been made in respect thereof.
(d) The Administrative Agent shall make all payments and distributions
under this subsection 5.5: on account of Credit Agreement Obligations in
accordance with the provisions of the Credit Agreement, on account of any other
Obligation (other than Overdrafts), to the relevant Secured Party based on the
information supplied to the Administrative Agent by the Borrower pursuant to
paragraph (a) of subsection 9.1 hereof, and on account of Overdrafts, to the
relevant Lender based on information supplied to the Administrative Agent by
such Lender.
5.6 AMOUNTS HELD FOR CONTINGENT OBLIGATIONS. In the event any Secured
Party shall be entitled to receive any moneys pursuant to clause Second of
paragraph (b) of subsection 5.5 hereof in respect of the unliquidated unmatured
or contingent portion of the outstanding Obligations (including obligations
under then outstanding letters of credit, guarantees and termination liabilities
with respect to Derivative Agreements and obligations which are not determinable
or are unmatured), then the Administrative Agent shall invest such moneys in
obligations of the kinds referred to in clauses (i) and (ii) of subsection 5.4
hereof maturing within three months after they are acquired by the
Administrative Agent and shall hold all such amounts so distributable, and all
such investments and the net proceeds thereof, solely for such Secured Party and
for no other purpose until (i) such Secured Party shall have notified the
Administrative Agent that all or part of such unliquidated, unmatured or
contingent claim shall have become matured or fixed, in which case the
Administrative Agent shall distribute from such investments and the proceeds
thereof an amount equal to such matured or fixed claim to such Secured Party for
application to the payment of such matured or fixed claim, and shall promptly
give notice thereof to the Borrower or (ii) all or part of such unliquidated
unmatured or contingent claim shall have been extinguished, whether as the
result of an expiration without drawing of any letter of credit, payment
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of amounts secured or covered by any letter of credit other than by drawing
thereunder, payment of amounts covered by any guarantee or otherwise, in which
case (x) such Secured Party shall, as soon as practicable thereafter, notify the
Borrower and the Administrative Agent and (y) such investments, and the proceeds
thereof, shall be held in the Collateral Account, in trust for all Secured
Parties pending application in accordance with the provisions of subsection 5.5
hereof.
5.7 ADMINISTRATIVE AGENT'S CALCULATIONS. In making the determinations
and allocations required by subsection 5.5 hereof, the Administrative Agent may
conclusively rely upon information supplied by the holder of any Obligation or
the Borrower as to the amounts payable with respect to any Obligation, and the
Administrative Agent shall have no liability to any of the Secured Parties for
actions taken in reliance on any such information, provided that nothing in this
sentence shall prevent any Grantor from contesting in good faith, subject to the
terms of the relevant Secured Instrument, any amount claimed by any Secured
Party in any information so supplied. All distributions made by the
Administrative Agent pursuant to subsection 5.5 hereof shall be (subject to any
decree of any court of competent jurisdiction) final (absent manifest error),
and the Administrative Agent shall have no duty to inquire as to the application
by any Person of any amounts distributed to it.
5.8 PRO RATA SHARING. If, in connection with or as a result of the
Reorganization Cases or otherwise, the Administrative Agent's security interest
hereunder and under the Security Documents is enforced with respect to some, but
not all, of the Obligations then outstanding, the Administrative Agent shall
nonetheless apply the proceeds of the Collateral for the benefit of the holders
of all Obligations in the proportions and subject to the priorities specified
herein. To the extent that the Administrative Agent distributes Proceeds
collected with respect to Obligations held by one holder to or on behalf of
Obligations held by a second holder, the first holder shall be deemed to have
purchased a participation in the Obligations held by the second holder, or shall
be subrogated to the rights of the second holder to receive any subsequent
payments and distributions made with respect to the portion thereof paid or to
be paid by the application of such Proceeds.
SECTION 6 POSSESSION AND USE OF COLLATERAL; PARTIAL RELEASES
6.1 USE PRIOR TO NOTICE OF ACCELERATION.
(a) As long as no Notice of Acceleration is in effect, the Grantors
shall have the right: (i) to remain in possession and retain exclusive control
of the Collateral (except the Pledged Securities and the Collateral Account and
except as otherwise provided in subsection 5.1 hereof) with power freely and
without hindrance on the part of the Administrative Agent or the Secured Parties
to operate, manage, develop, use, apply, liquidate and enjoy the Collateral and
to receive and use the rents, issues, tolls, profits, royalties, revenues and
other income thereof; (ii) to sell or otherwise dispose of, free and clear of
the lien and security interest created by the Security Documents, or encumber
any Collateral if such sale or other disposition is not prohibited by the Credit
Agreement or has been expressly approved in accordance with the terms of the
Credit Agreement or if any Person is legally empowered to take any Collateral
under the power of condemnation or eminent domain; and (iii) to require the
release of any Lien created pursuant to the Security Documents in connection
with a transaction permitted under paragraphs (k) or (q) of subsection 8.3 of
the Credit Agreement. The Administrative Agent shall have no duty to monitor the
exercise by the Grantors of their rights under this subsection 6.1.
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(b) Cash Proceeds received by the Administrative Agent or any Grantor
in connection with the sale or other disposition of Collateral shall be
deposited in the Collateral Account. Any such Proceeds received by any Grantor
shall be held by such Grantor in trust for the Administrative Agent, shall be
segregated from other funds of such Grantor and shall, forthwith upon receipt by
such Grantor, be turned over to the Administrative Agent, in the same form as
received by such Grantor (duly indorsed to the Administrative Agent, if
required) for deposit in the Collateral Account.
6.2 RELEASES.
(a) Releases of Collateral which is sold or otherwise disposed of as
permitted by paragraph (c) of subsection 4.8 hereof or by subsection 6.1 hereof,
and releases, consents and subordinations pursuant to subsection 6.1 hereof
shall be automatic and shall not require any affirmative action on the part of
the Administrative Agent. Nevertheless, any Grantor may request that the
Administrative Agent execute and deliver to it or any purchaser, transferee or
assignee of Collateral or any such real property, or other affected party, a
written consent, release, discharge, disclaimer, quitclaim or subordination, as
applicable, in recordable form if necessary, of the Administrative Agent's
interest in any Collateral under the Security Documents, and such purchaser,
transferee, assignee or other affected party shall be entitled to rely
conclusively on such consent, release, discharge, disclaimer, quitclaim or
subordination. Such request shall be in writing, shall describe the subject
property in reasonable detail, and, except in the case of releases of funds
pursuant to paragraph (c) of subsection 4.8 hereof, shall state that such action
is or will be in accordance with the Credit Agreement. Promptly following any
such request, the Administrative Agent shall execute such requested documents,
provided that the transaction giving rise to such request is permitted by
subsection 6.1 hereof.
(b) If any Collateral which is being sold or otherwise disposed of
pursuant to this Section 6 is in the possession of the Administrative Agent or
any agent or nominee thereof, the Administrative Agent or such agent or nominee
shall promptly (and in any event within two Business Days after the request
therefor) release such Collateral to the relevant Grantor in connection with
such sale or disposition.
(c) The notices, statements, directions and certificates requested
under or required by this subsection 6.2 shall be full authority for the
Administrative Agent to execute and deliver the releases, disclaimers,
quitclaims and other instruments referred to in this subsection 6.2. The
Administrative Agent in so doing shall have no liability to any Person.
6.3 INSURANCE AND CONDEMNATION PROCEEDS; LIQUIDATING DIVIDENDS. Any
insurance proceeds in respect of any Collateral, any Proceeds from the exercise
of rights of eminent domain or condemnation in respect of any Collateral and any
liquidating dividends paid in respect of Pledged Stock received by any of the
Grantors or the Administrative Agent shall be deposited in the Collateral
Account to be held therein and applied in accordance with Section 5. If for any
reason any Grantor shall receive or hold any insurance proceeds, condemnation
proceeds or liquidating dividends that are required to be held by the
Administrative Agent pursuant to this subsection 6.3, such Grantor shall hold
such proceeds or dividends in trust for the Administrative Agent and the Secured
Parties and shall, as promptly as practicable, deliver such proceeds or
dividends to the Administrative Agent to be held in the Collateral Account and
applied in accordance with Section 5.
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SECTION 7 GRANTOR REPRESENTATIONS AND WARRANTIES REGARDING COLLATERAL
To induce the Administrative Agent and the other Secured Parties to
enter into the Credit Agreement and to induce the Lenders to make their
respective extensions of credit thereunder to the Borrower, each Grantor hereby
represents and warrants to the Administrative Agent and each other Secured Party
that:
7.1 REPRESENTATIONS IN CREDIT AGREEMENT. In the case of each Grantor,
the representations and warranties set forth in Section 5 of the Credit
Agreement as they relate to such Grantor or to the Loan Documents to which such
Grantor is a party, each of which is hereby incorporated herein by reference,
are true and correct, and the Administrative Agent and each Secured Party shall
be entitled to rely on each of them as if they were fully set forth herein,
provided that each reference in each such representation and warranty to the
Borrower's knowledge shall, for the purposes of this subsection 7.1, be deemed
to be reference to such Grantor's knowledge.
7.2 TITLE; NO OTHER LIENS. Except for the security interest granted to
the Administrative Agent for the ratable benefit of the Secured Parties pursuant
to this Agreement, the Permitted Expenses and the Superior Liens, such Grantor
owns each item of the Collateral free and clear of any and all Liens or claims
of others. No effective financing statement or other public notice with respect
to all or any part of the Collateral is on file or of record in any public
office, except such as have been filed (i) in favor of the Administrative Agent,
for the benefit of the Secured Parties pursuant to this Agreement or (ii)
pursuant to the Superior Liens.
7.3 PERFECTED FIRST PRIORITY LIENS. The security interests granted
pursuant to this Agreement are prior to all other Liens on the Collateral in
existence on the date hereof except for Permitted Expenses and Superior Liens.
7.4 CHIEF EXECUTIVE OFFICE. On the date hereof, each Grantor's
jurisdiction of organization and the location of such Grantor's chief executive
office is specified on Schedule 4.
7.5 INVENTORY AND EQUIPMENT. On the date hereof, each Grantor's
Inventory and Equipment (other than mobile goods) are kept at the locations
listed on Schedule 5.
7.6 FARM PRODUCTS. None of the Collateral constitutes, or is the
Proceeds of, Farm Products.
7.7 PLEDGED SECURITIES.
(a) The shares of Pledged Stock pledged by such Grantor hereunder and
delivered to the Administrative Agent on the Closing Date constitute all the
issued and outstanding shares of all classes of the Capital Stock of each Issuer
as of such date.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) The Pledged Debt Securities pledged hereunder by such Grantor, the
Instruments or certificates of which have been delivered to the Administrative
Agent on the Closing Date, constitute all of the Pledged Debt Securities held by
such Grantor as of such date.
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(d) The Pledged Debt Securities in existence on the date hereof are
set forth in Schedule 2.
(e) Each of the Pledged Debt Securities constitutes, to the knowledge
of such Grantor if such Grantor is the payee thereof, the legal, valid and
binding obligation of such Grantor if such Grantor to, enforceable in accordance
with its terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing.
(f) The Pledged Partnership Interests pledged by such Grantor
hereunder constitutes all the outstanding Capital Stock of each Issuer of such
Pledged Partnership Interests.
7.8 INTELLECTUAL PROPERTY.
(a) Schedule 6 lists all material Intellectual Property owned or
licensed by such Grantor in its own name on the date hereof.
(b) To such Grantor's knowledge, all material Intellectual Property is
on the date hereof valid, subsisting, unexpired, enforceable and has not been
abandoned.
(c) Except as set forth in Schedule 6, none of the material
Intellectual Property is on the date hereof the subject of any licensing or
franchise agreement pursuant to which such Grantor is the licensor or
franchisor.
(d) No holding, decision or judgment has been rendered by any
Governmental Authority which would limit, cancel or question the validity of, or
such Grantor's rights in, any Intellectual Property in any respect that could
reasonably be expected to have a Material Adverse Effect.
(e) No action or proceeding is pending on the date hereof seeking to
limit, cancel or question the validity, or such Grantor's ownership, of any
Intellectual Property which, if adversely determined, would have a Material
Adverse Effect.
SECTION 8 GRANTOR COVENANTS REGARDING COLLATERAL
Each Grantor covenants and agrees with the Administrative Agent and
the other Secured Parties that, from and after the date of this Agreement until
the Obligations shall have been paid in full, no Letter of Credit shall be
outstanding (or all outstanding Letters of Credit shall have been fully cash
collateralized in accordance with the Credit Agreement) and the Commitments
shall have terminated:
8.1 COVENANTS IN CREDIT AGREEMENT. Such Grantor shall take, or shall
refrain from taking, and shall cause its Subsidiaries to take or refrain from
taking, each action that is necessary to be taken or not taken, as the case may
be, so that no Default or Event of Default is caused by the failure to take such
action or to refrain from taking such action by such Grantor or any of its
Subsidiaries.
8.2 DELIVERY OF INSTRUMENTS AND CHATTEL PAPER. If the aggregate of all
amounts payable to the Grantors pursuant to Undelivered Instruments shall exceed
$200,000, such Undelivered Instruments, to the extent necessary to eliminate
such excess, shall be immediately delivered to the
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Administrative Agent duly indorsed in a manner satisfactory to the
Administrative Agent to be held as Collateral pursuant to this Agreement.
8.3 INSURANCE. Each Grantor shall maintain insurance policies
insuring Inventory and Equipment pursuant to and in accordance with subsection
7.5 of the Credit Agreement.
8.4 MAINTENANCE OF PERFECTED SECURITY INTEREST; FURTHER
DOCUMENTATION.
(a) Such Grantor shall maintain the security interest created by this
Agreement as a perfected security interest having at least the priority
described in subsection 7.3 hereof and shall defend such security interest
against the claims and demands of all Persons whomsoever.
(b) Upon reasonable written request of the Administrative Agent, such
Grantor will furnish to the Administrative Agent and the Lenders from time to
time statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Administrative
Agent may reasonably request, all in reasonable detail.
8.5 CHANGES IN LOCATIONS, NAME, ETC. Such Grantor will not, except
upon not less than 15 days' prior written notice to the Administrative Agent.
(a) permit any of the Inventory or Equipment (other than (i)
immaterial Inventory and Equipment and (ii) Inventory and Equipment in transit
in the ordinary course of business) to be kept at a location other than those
listed on Schedule 5;
(b) change the location of its chief executive office or sole place of
business from that referred to in subsection 7.4 hereof; or
(c) change its name, identity or corporate structure to such an extent
that any financing statement filed by the Administrative Agent in connection
with this Agreement would become misleading.
8.6 RECEIVABLES.
(a) Other than in the ordinary course of business or as otherwise
permitted by the Loan Documents, such Grantor will not (i) grant any extension
of the time of payment of any Receivable, (ii) compromise or settle any
Receivable for less than the full amount thereof, (iii) release, wholly or
partially, any Person liable for the payment of any Receivable, (iv) allow any
credit or discount whatsoever on any Receivable or (v) amend, supplement or
modify any Receivable in any manner that could materially and adversely affect
the value thereof.
(b) Such Grantor will take all actions necessary to give notice
pursuant to the United States Assignment of Claims Act of 1940, as amended, or
such other analogous law if a material portion of the total amount of the
Receivables is owing from Governmental Authorities.
8.7 INTELLECTUAL PROPERTY.
(a) Such Grantor (either itself or through licensees or agents) will
continue to use each material Trademark on each and every trademark class of
goods applicable to its current line as reflected in its then-current catalogs,
brochures and price lists in order to maintain such Trademark in full
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force free from any claim of abandonment for non-use, (ii) maintain as in the
past the quality of products and services offered under each material Trademark,
(iii) use such Trademark with all appropriate notices of registration and (iv)
not (and not permit any licensee or sublicensee thereof or agent to) do any act
or knowingly omit to do any act whereby any material Trademark may become
invalidated or impaired in any way.
(b) Such Grantor (either itself or through licensees or agents) will
not do any act, or omit to do any act, whereby any material Patent may become
forfeited, abandoned or dedicated to the public.
(c) Such Grantor (either itself or through licensees or agents) will
not (and will not permit any licensee or sublicensee thereof or agent to) do any
act or knowingly omit to do any act whereby any material portion of the
Copyrights may become invalidated. Such Grantor will not (either itself or
through licensees or agents) do any act whereby any material portion of the
Copyrights may fall into the public domain.
(d) Such Grantor (either itself or through licensees or agents) will
not do any act that knowingly uses a material Intellectual Property to infringe
the Intellectual Property rights of a third party.
(e) Such Grantor will notify the Administrative Agent and the other
Secured Parties immediately if it knows, or has reason to know, that any
application or registration relating to any material Patent, Copyright or
Trademark may become abandoned or dedicated to the public, or of any adverse
determination or development (including, without limitation, the institution of,
or any such determination or development in, any proceeding in the United States
Patent and Trademark Office, the U.S. Copyright Office or any court or tribunal
in any country) regarding such Grantor's ownership of, or the validity of, any
material Intellectual Property or such Grantor's right to register the same or
to own and maintain the same.
(f) Whenever such Grantor, either by itself or through any agent
employee, licensee or designee, shall file an application for any Patent or
Trademark with the United States Patent and Trademark Office or any Copyright in
the U.S. Copyright Office or any similar office or agency in any other country
or any political subdivision thereof, such Grantor shall report such filing to
the Administrative Agent within five Business Days after the last day of the
fiscal quarter in which such filing occurs.
(g) Such Grantor (either itself or through licensees or agents) will
take all reasonable and necessary steps, including, without limitation, in any
proceeding before the United States Patent and Trademark Office, the U.S.
Copyright Office or any similar office or agency in any other country or any
political subdivision thereof, to maintain each registration of the material
Intellectual Property, including, without limitation, filing of applications for
renewal, affidavits of use and affidavits of incontestability.
(h) In the event that any material Intellectual Property is infringed,
misappropriated or diluted by a third party, such Grantor (either itself or
through licensees or agents) shall (i) take such actions as such Grantor shall
reasonably deem appropriate under the circumstances to protect such Intellectual
Property and (ii) if such Intellectual Property is of material economic value,
promptly notify the Administrative Agent and the Secured Parties after it learns
thereof.
8.8. MAINTENANCE OF RECORDS. Such Grantors will keep and maintain, at
its own cost and expense, satisfactory and complete records of the Collateral,
in all material respects, including,
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without limitation, a record of all payments received and all credits granted
with respect to the Collateral and all other dealings concerning the Collateral.
Upon the Administrative Agent's request such Grantors will mark its books and
records pertaining to the Collateral to evidence this Agreement and the security
interests granted hereby and all Chattel Paper will be marked with the following
legend: "This writing and the obligations evidenced or secured hereby are
subject to the security interest granted to Citicorp USA, Inc., as
Administrative Agent under that certain Post-Petition Credit Agreement dated as
of March 29, 1999." For the Administrative Agent's further security, such
Grantor agrees that the Administrative Agent shall have a property interest in
all of such Grantor's books and records pertaining to the Collateral and, upon
the occurrence and during the continuation of an Event of Default, such Grantor
shall deliver and turn over any such books and records to the Administrative
Agent or to its representatives at any time on demand of the Administrative
Agent.
8.9 FURTHER ASSURANCES. At any time and from time to time, upon the
written request of the Administrative Agent, and at the expense of the Grantors,
each Grantor will promptly execute and deliver any and all such further
instruments and documents and take such further action as is necessary or
reasonably requested to obtain the full benefits of this Agreement and the other
Security Documents and of the rights and powers herein and therein granted
(consistent with any exclusions or time periods provided for taking such action,
as contemplated by the Credit Agreement or the Security Documents).
SECTION 9 CERTAIN REMEDIAL PROVISIONS
9.1 NOTICE OF DEFAULT; NOTICE OF ACCELERATION.
(a) At any time after the occurrence and during the continuation of an
Event of Default, the Administrative Agent may and, at the request of the
Majority Lenders, shall deliver a Notice of Default to the Borrower. At any time
after the Loans and other amounts owing under the Credit Agreement shall have
been declared due and payable and the Commitments shall have been terminated
pursuant to Section 9 of the Credit Agreement, the Administrative Agent may and,
at the request of the Majority Lenders, shall deliver a Notice of Acceleration
to the Borrower.
(b) A Notice of Default and a Notice of Acceleration shall become
effective upon delivery thereof to the Borrower. A Notice of Default and a
Notice of Acceleration, once effective, shall remain in effect unless and until
it is cancelled as provided in paragraph (c) of this subsection 9.1 or, in the
case of a Notice of Default only, the Event of Default giving rise to the
delivery of the same has been waived or is otherwise no longer continuing.
(c) The Administrative Agent shall be entitled, with the consent of
the Majority Lenders, to cancel any Notice of Default or Notice of Acceleration
by delivering a written notice of cancellation to the Borrower at any time.
(d) Upon the occurrence and during the continuation of any Event of
Default the automatic stay under section 362 of the Bankruptcy Code shall be
deemed vacated so as to permit the Administrative Agent to take the actions
permitted under this subsection 9.1, and the Grantors hereby acknowledge and
agree that any actions taken by the Administrative Agent hereunder shall not
constitute a violation of the automatic stay provided by section 362 of the
Bankruptcy Code and the Grantors hereby waive the automatic stay to the extent
applicable.
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(e) The Borrower shall deliver to the Administrative Agent from time
to time while a Notice of Default is in effect, upon request of the
Administrative Agent, a list setting forth as of a date not more than 30 days
prior to the date of such delivery (i) the aggregate unpaid principal or face
amount of the Extensions of Credit and (ii) the aggregate unpaid or notional
amount of each other Obligation (other than Overdrafts) and the name and address
of each Secured Party thereunder.
9.2 RIGHT TO INITIATE JUDICIAL PROCEEDINGS. As long as a Notice of
Default (and, to the extent required by this Agreement or any Security Document,
a Notice of Acceleration) is in effect and subject to compliance with subsection
3.7, the Administrative Agent shall have the right and power to institute and
maintain such suits and proceedings as it may deem appropriate to protect and
enforce the rights vested in it by this Agreement and each Security Document. As
long as a Notice of Acceleration is in effect and subject to compliance with
subsection 3.7, the Administrative Agent may either after entry, or without
entry, proceed by suit or suits at law or in equity to enforce such rights and
to foreclose upon the Collateral and to sell all or, from time to time, any of
the Collateral under the judgment or decree of a court of competent
jurisdiction.
9.3 RIGHT TO APPOINT A RECEIVER. As long as a Notice of Acceleration
is in effect and subject to compliance with subsection 3.7, upon the filing of a
bill in equity or other commencement of judicial proceedings to enforce the
rights of the Administrative Agent under this Agreement or any Security
Document, the Administrative Agent shall, to the extent permitted by law, with
notice to the Borrower but without notice to any party claiming through the
Grantors, without regard to the solvency or insolvency at the time of any Person
then liable for the payment of any of the Obligations, without regard to the
then value of the Collateral, and without requiring any bond from any
complainant in such proceedings, be entitled as a matter of right to the
appointment of a receiver or receivers (who may be the Administrative Agent) of
the Collateral, or any part thereof, and of the rents, issues, tolls, profits,
royalties, revenues and other income thereof, pending such proceedings, with
such powers as the court making such appointment shall confer, and to the entry
of an order directing that the rents, issues, tolls, profits, royalties,
revenues and other income of the property constituting the whole or any part of
the Collateral be segregated, sequestered and impounded for the benefit of the
Administrative Agent and the other Secured Parties, and each Grantor irrevocably
consents to the appointments of such receiver or receivers and to the entry of
such order, provided that, notwithstanding the appointment of any receiver, the
Administrative Agent shall be entitled to retain possession and control of all
cash and Cash Equivalents held by or deposited with it pursuant to this
Agreement or any Security Document.
9.4 EXERCISE OF POWERS; INSTRUCTIONS OF MAJORITY SECURED PARTIES.
(a) All of the powers, remedies and rights of the Administrative Agent
as set forth in this Agreement may be exercised by the Administrative Agent in
respect of any Security Document as though set forth in full therein and all of
the powers, remedies and rights of the Administrative Agent and the other
Secured Parties as set forth in any Security Document may be exercised from time
to time as herein and therein provided.
(b) The Majority Lenders shall have the right, by one or more
instruments in writing executed and delivered to the Administrative Agent, to
direct the time, method and place of conducting any proceeding for any right or
remedy available to the Administrative Agent, or of exercising any trust or
power conferred on the Administrative Agent, or for the appointment of a
receiver, or to direct the taking or the refraining from taking of any action
authorized by this Agreement or any Security Document, provided that (i) such
direction shall not conflict with the provisions of law, this Agreement,
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any Security Document or any other Loan Document and (ii) the Administrative
Agent shall be adequately indemnified to its satisfaction in the exercise of
reasonable judgment. Nothing in this paragraph (b) shall impair the right of the
Administrative Agent in its discretion to take any action which it deems proper
and which is not inconsistent with such direction by the Majority Lenders. In
the absence of such direction, the Administrative Agent shall have no duty to
take or refrain from taking any action unless explicitly required herein.
(c) Subject to compliance with subsection 3.7, exercise by the
Administrative Agent of the powers granted hereunder is not a violation of the
automatic stay provided by section 362 of the Bankruptcy Code and the Grantors
waive applicability thereof.
9.5 REMEDIES NOT EXCLUSIVE, ETC.
(a) No remedy conferred upon or reserved to the Administrative Agent
herein or in the Security Documents is intended to be exclusive of any other
remedy or remedies, but every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or in any Security Document or
now or hereafter existing at law or in equity or by statute.
(b) No delay or omission by the Administrative Agent to exercise any
right, remedy or power hereunder or under any Security Document shall impair any
such right, remedy or power or shall be construed to be a waiver thereof, and
every right, power and remedy given by this Agreement or any Security Document
to the Administrative Agent may be exercised from time to time and as often as
may be deemed expedient by the Administrative Agent.
(c) If the Administrative Agent shall have proceeded to enforce any
right, remedy or power under this Agreement or any Security Document and the
proceeding for the enforcement thereof shall have been discontinued or abandoned
for any reason or shall have been determined adversely to the Administrative
Agent, then the Grantors, the Administrative Agent and the Secured Parties
shall, subject to any determination in such proceeding, severally and
respectively be restored to their former positions and rights hereunder or
thereunder with respect to the Collateral and in all other respects, and
thereafter all rights, remedies and powers of the Administrative Agent shall
continue as though no such proceeding had been taken.
(d) To the extent permitted by applicable law, all rights of action
and of asserting claims upon or under this Agreement and the Security Documents
may be enforced by the Administrative Agent without the possession of any
Secured Instrument or instrument evidencing any Obligation or the production
thereof at any trial or other proceeding relative thereto, and any suit or
proceeding instituted by the Administrative Agent shall be, subject to clause
(ii) of paragraph (b) of subsection 10.7 hereof, brought in its name as
Administrative Agent and any recovery of judgment shall be held as part of the
Collateral.
9.6 WAIVER AND ESTOPPEL.
(a) Each Grantor agrees, to the extent it may lawfully do so, that it
will not at any time in any manner whatsoever claim or take the benefit or
advantage of any appraisement, valuation, stay of execution, extension,
moratorium, turnover or redemption law, or any law permitting it to direct the
order in which the Collateral shall be sold, now or at any time hereafter in
force, which may delay, prevent or otherwise affect the performance or
enforcement of this Agreement or any Security Document and hereby waives all
benefit or advantage of all such laws and covenants that it will not hinder,
delay or
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impede the execution of any power granted to the Administrative Agent in this
Agreement or any Security Document but will suffer and permit the execution of
every such power as though no such law were in force.
(b) Each Grantor, to the extent it may lawfully do so, on behalf of
itself and all who may claim through or under it, waives and releases all rights
to demand or to have any marshalling of the Collateral upon any sale, whether
made under any power of sale granted herein or in any Security Document or
pursuant to judicial proceedings or upon any foreclosure or any enforcement of
this Agreement or any Security Document and consents and agrees that all the
Collateral may at any such sale be offered and sold as an entirety.
(c) Each Grantor waives, to the extent permitted by applicable law,
presentment, demand, protest and any notice of any kind (except notices
explicitly required hereunder or under the Credit Agreement or any Security
Document) in connection with this Agreement and the Security Documents and any
action taken by the Administrative Agent with respect to the Collateral.
9.7 LIMITATION ON ADMINISTRATIVE AGENT'S DUTY IN RESPECT OF
COLLATERAL. Beyond its duties as to the custody thereof expressly provided
herein or in any other Security Document and to account to the other Secured
Parties and the Grantors for moneys and other property received by it hereunder
or under any Security Document, the Administrative Agent shall not have any duty
to the Grantors or to the other Secured Parties as to any Collateral in its
possession or control or in the possession or control of any of its agents or
nominees, or any income thereon or as to the preservation of rights against
prior parties or any other rights pertaining thereto except to treat such
Collateral in its possession and control with the same degree of care as it
accords its own property and as may be required by applicable law.
Notwithstanding the foregoing, the Administrative Agent shall be responsible and
accountable for damages occasioned by such taking of possession or control which
are the direct result of the Administrative Agent's gross negligence or willful
misconduct.
9.8 LIMITATION BY LAW. All rights, remedies and powers provided in
this Agreement or any Security Document may be exercised only to the extent that
the exercise thereof does not violate any applicable provision of law (including
the Bankruptcy Code), and all the provisions hereof and of the Security
Documents are intended to be subject to all applicable mandatory provisions of
law which may be controlling and (subject to subsection 11.7 hereof) to be
limited to the extent necessary so that they will not render this Agreement
invalid, unenforceable in whole or in part or not entitled to be recorded,
registered or filed under the provisions of any applicable law.
9.9 RIGHTS OF SECURED PARTIES UNDER SECURED INSTRUMENTS.
Notwithstanding any other provision of this Agreement or any Security Document,
the right of each Secured Party to receive payment of the Obligations held by
such Secured Party when due (whether at the stated maturity thereof, by
acceleration or otherwise) as expressed in the related Secured Instrument or
other instrument evidencing or agreement governing a Obligation or to institute
suit for the enforcement of such payment on or after such due date, and the
obligation of the relevant Grantor to pay such Obligation when due, shall not be
impaired or affected without the consent of such Secured Party. Notwithstanding
the foregoing, no Secured Party shall institute or commence any proceeding in
the State of Alaska, Arizona, California, Nevada, Utah or Washington to collect
any Obligations owed to it or shall otherwise exercise any remedies against the
Collateral with respect to the Obligations owed to it or exercise any right of
setoff unless such Secured Party shall have first obtained the consent of the
Majority Lenders.
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9.10 OVERDRAFTS. Each Grantor agrees to repay any such Grantor's
Overdrafts in accordance with the terms of the relevant Secured Instrument.
9.11 SET-OFF. In addition to any rights and remedies of the
Administrative Agent and the other Secured Parties provided by law, the
Administrative Agent, each other Secured Party and each affiliate of a Secured
Party shall have the right, without prior notice to any Grantor other than the
notice provided for in subsection 3.7 hereof (but subject to the prior consent
of the Administrative Agent and the Majority Lenders), upon any Obligation
becoming due and payable by any Grantor (whether at the stated maturity, by
acceleration or otherwise) to set off and appropriate and apply against the
amount of such Obligations any and all deposits (general or special, time or
demand, provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by such Secured Party or any branch or agency or affiliate thereof to or
for the credit or the account of such Grantor. The Administrative Agent and each
Secured Party agrees promptly to notify such Grantor and (if applicable) the
Administrative Agent after any such set off and application, provided that the
failure to give such notice shall not affect the validity of such setoff and
application. The rights of each Secured Party under this subsection 9.11 are in
addition to the other rights and remedies (including, without limitation, other
rights of set-off) which such Secured Party may have.
SECTION 10 THE ADMINISTRATIVE AGENT
10.1 EXCULPATORY PROVISIONS.
(a) The Administrative Agent shall not be responsible in any manner
whatsoever for the correctness of any recitals, statements, representations or
warranties herein, all of which are made solely by the Grantors. The
Administrative Agent makes no representations as to the value or condition of
the Collateral or any part thereof, or as to the title of the Grantors thereto
or as to the security or perfection afforded by this Agreement or any Security
Document, or as to the validity, execution (except its own execution),
enforceability, legality or sufficiency of this Agreement, the other Security
Documents or the Obligations, and the Administrative Agent shall incur no
liability or responsibility in respect of any such matters. The Administrative
Agent shall not be responsible for insuring the Collateral or for the payment of
taxes, charges or assessments or discharging of liens upon the Collateral or
otherwise as to the maintenance of the Collateral, except that if the
Administrative Agent takes possession of any Collateral, the Administrative
Agent shall use the care accorded its own assets in the preservation of the
Collateral in its possession and as required by any applicable law.
Notwithstanding the foregoing, the Administrative Agent shall be responsible and
accountable for damages occasioned by such taking of possession or control which
are the direct result of the Administrative Agent's gross negligence or willful
misconduct.
(b) The Administrative Agent shall not be required to ascertain or
inquire as to the performance by any Grantor of any of the covenants or
agreements contained herein or in any Security Document or Secured Instrument.
Whenever it is necessary, or in the opinion of the Administrative Agent
advisable, for the Administrative Agent to ascertain the amount of Obligations
then held by any Secured Party, the Administrative Agent may conclusively rely
on a certificate of such Secured Party, in the case of any Obligations and, if
such Secured Party shall not give such information to the Administrative Agent,
such Person shall not be entitled to receive distributions hereunder (in which
case distributions to those Persons who have supplied such information to the
Administrative Agent shall be
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calculated by the Administrative Agent using, for those Persons who have not
supplied such information, the list then most recently delivered by the Borrower
pursuant to paragraph (e) of subsection 9.1 hereof, and the amount so calculated
to be distributed to the Person who fails to give such information shall be held
in trust for such Person until such Person does supply such information to the
Administrative Agent, whereupon on the next Distribution Date the amount
distributable to such Person shall be recalculated using such information and
distributed to it. Nothing in the preceding sentence shall prevent any Grantor
from contesting amounts claimed by any Secured Party in any certificate so
supplied.
(c) The Administrative Agent. shall be obligated to perform such
duties and only such duties as are specifically set forth in this Agreement and
the other Security Documents, and no implied covenants or obligations shall be
read into this Agreement or any other Security Document against the
Administrative Agent except as may be required by applicable law.
(d) Notwithstanding any other provision of this Agreement (other than
those relating to the care of the Collateral in its possession), the
Administrative Agent shall not be personally liable for any action taken or
omitted to be taken by it in accordance with this Agreement or the Security
Documents except for its own gross negligence or willful misconduct.
(e) The Lender which is the Administrative Agent shall have the same
rights with respect to any Obligation held by it as any other Secured Party and
may exercise such rights as though it were not the Administrative Agent
hereunder, and it and its affiliates may accept deposits from, lend money to,
and generally engage in any kind of banking or trust business with, any of the
Grantors as if it were not the Administrative Agent.
10.2 DELEGATION OF DUTIES. The Administrative Agent may execute any
of the powers granted to it herein and perform any duty hereunder either
directly or by or through agents or attorneys-in-fact, who may include officers
and employees of any of the Grantors. The Administrative Agent shall be entitled
to advice of counsel concerning all matters pertaining to such powers and
duties. The Administrative Agent shall not be responsible for the negligence or
misconduct of any agent or attorney-in-fact selected by it with reasonable care.
The Administrative Agent may enter into agreements with such agents or
attorneys-in-fact in such form as it may reasonably deem necessary or advisable,
and shall be entitled to amend, modify, or waive the provisions of such
agreements from time to time, provided that no amendment, modification or waiver
to any bailment, custodial or similar agreement executed in connection herewith
affecting the Borrower or any other Grantor shall be effective unless consented
to in writing by the Borrower, which consent shall not be unreasonably withheld.
10.3 RELIANCE BY ADMINISTRATIVE AGENT.
(a) Whenever in the administration of this Agreement or the other
Security Documents the Administrative Agent shall deem it necessary or desirable
that a factual matter be proved or established in connection with the
Administrative Agent taking, suffering or omitting any action hereunder or
thereunder, such matter (unless other evidence in respect thereof is herein
specifically prescribed) may be deemed to be conclusively proved or established
by a certificate of a Responsible Officer delivered to the Administrative Agent,
and such certificate shall be full warrant to the Administrative Agent for any
action taken, suffered or omitted in reliance thereon.
(b) The Administrative Agent may consult with counsel, and any Opinion
of Counsel shall be full and complete authorization and protection in respect of
any action taken or suffered by it
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hereunder or under any Security Document in accordance therewith. The
Administrative Agent shall have the right at any time to seek instructions
concerning the administration of this Agreement and the Security Documents from
any court of competent jurisdiction.
(e) The Administrative Agent may rely, and shall be fully protected in
acting, upon any resolution, statement, certificate, instrument, opinion,
report, notice, request, consent, order, bond or other paper or document which
it has no reason to believe to be other than genuine and to have been signed or
presented by the proper party or parties or, in the case of cables, facsimiles
and telexes, to have been sent by the proper party or parties. In the absence of
its gross negligence or willful misconduct, the Administrative Agent may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon any certificates or opinions furnished to the
Administrative Agent and conforming to the requirements of this Agreement.
(d) The Administrative Agent shall not be under any obligation to
exercise any of the rights or powers vested in the Administrative Agent by this
Agreement and the Security Documents, at the request or direction of the
Majority Lenders pursuant to this Agreement or otherwise, unless the
Administrative Agent shall have been provided adequate security and indemnity
against the costs, expenses and liabilities which may be incurred by it in
compliance with such request or direction, including such reasonable advances as
may be requested by the Administrative Agent.
(e) Upon any application or demand by any of the Grantors (except any
such application or demand which is expressly permitted to be made orally) to
the Administrative Agent to take or permit any action under any of the
provisions of this Agreement or any other Security Document, the Borrower shall
furnish to the Administrative Agent a certificate of a Responsible Officer
stating that all conditions precedent, if any, provided for in this Agreement,
in any relevant Security Document or in the Credit Agreement or any other
Secured Instrument relating to the proposed action have been or will be (in the
case of application of proceeds from sales of assets) complied with, and in the
case of any such application or demand as to which the furnishing of any
document is specifically required by any provision of this Agreement or other
Security Document relating to such particular application or demand, such
additional document shall also be furnished.
(f) Any Opinion of Counsel may be based, insofar as it relates to
factual matters, upon a certificate of a Responsible Officer or representations
made by a Responsible Officer in a writing attached to such Opinion of Counsel
or filed with the Administrative Agent.
10.4 LIMITATIONS ON DUTIES OF THE ADMINISTRATIVE AGENT.
(a) The Administrative Agent shall be obligated to perform such duties
and only such duties as are specifically set forth in this Agreement and the
other Security Documents, and no implied covenants or obligations shall be read
into this Agreement or any other Security Document against the Administrative
Agent except as may be required by applicable law.
(b) No provision of this Agreement or of any other Security Document
shall be deemed to impose any duty or obligation on the Administrative Agent to
perform any act or acts or exercise any right, power, duty or obligation
conferred or imposed on it, in any jurisdiction in which it shall be illegal, or
in which the Administrative Agent shall be unqualified or incompetent, to
perform any such act or acts or to exercise any such right, power, duty or
obligation or if such performance or exercise
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would constitute doing business by the Administrative Agent in such jurisdiction
or imposes a tax on the Administrative Agent by reason thereof.
10.5 RESIGNATION AND REMOVAL OF THE ADMINISTRATIVE AGENT. The
Administrative Agent may resign and a successor Administrative Agent may be
appointed in accordance with the terms of the Credit Agreement applicable to
resignations of the Administrative Agent.
10.6 MERGER OF THE ADMINISTRATIVE AGENT. Any corporation into which
the Administrative Agent may be merged, or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the
Administrative Agent shall be a party, shall be Administrative Agent under this
Agreement and the other Security Documents without the execution or filing of
any paper or any further act on the part of the parties hereto.
10.7 CO-COLLATERAL ADMINISTRATIVE AGENT; SEPARATE ADMINISTRATIVE
AGENTS.
(a) If at any time or times it shall be necessary or prudent in order
to conform to any law of any jurisdiction in which any of the Collateral shall
be located, or to avoid any violation of law or imposition on the Administrative
Agent of taxes by such jurisdiction not otherwise imposed on the Administrative
Agent, or the Administrative Agent shall be advised by counsel, satisfactory to
it, that it is necessary or prudent in the interest of the Secured Parties, or
the Administrative Agent shall reasonably deem it desirable for its own
protection in the performance of its duties hereunder or under any other
Security Document, the Administrative Agent and each of the Grantors shall
execute and deliver all instruments and agreements necessary or proper to
constitute another bank or trust company, or one or more persons approved by the
Administrative Agent and the Grantors, either to act as co-collateral agent or
co-collateral agents of all or any of the Collateral under this Agreement or
under any of the Security Documents, jointly with the Administrative Agent
originally named herein or therein or any successor Administrative Agent, or to
act as separate collateral agent or collateral agents of any of the Collateral.
If any of the Grantors shall not have joined in the execution of such
instruments and agreements within 20 Business Days (or, if a Notice of Default
is in effect, 10 Business Days) after it receives a written request from the
Administrative Agent to do so, or if a Notice of Acceleration is in effect, the
Administrative Agent may act under the foregoing provisions of this paragraph
(a) without the concurrence of such Grantors and execute and deliver such
instruments and agreements on behalf of such Grantors. Each of the Grantors
hereby appoints the Administrative Agent as its agent and attorney to act for it
under the foregoing provisions of this paragraph (a) in either of such
contingencies.
(b) Every separate collateral agent and every cocollateral agent,
other than any successor Administrative Agent appointed pursuant to the Credit
Agreement, shall, to the extent permitted by law, be appointed and act and be
such, subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred upon the
Administrative Agent in respect of the custody, control and management of
moneys, papers, Chattel Paper, Instruments, or securities shall be
exercised solely by the Administrative Agent or any agent appointed by the
Administrative Agent;
(ii) all rights, powers, duties and obligations conferred or
imposed upon the Administrative Agent hereunder and under the relevant
Security Document or Documents shall be conferred or imposed and exercised
or performed by the Administrative Agent and such separate collateral agent
or separate collateral agents or co-collateral agent or co-collateral
agents,
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jointly, as shall be provided in the instrument appointing such separate
collateral agent or separate collateral agents or co-collateral agent or
co-collateral agents, except to the extent that under any law of any
jurisdiction in which any particular act or acts are to be performed the
Administrative Agent shall be incompetent or unqualified to perform such
act or acts, or unless the performance of such act or acts would result in
the imposition of any tax on the Administrative Agent which would not be
imposed absent such joint act or acts, in which event such rights, powers,
duties and obligations shall be exercised and performed by such separate
collateral agent or separate collateral agents or co-collateral agent or
co-collateral agents at the direction of the Administrative Agent;
(iii) no power given hereby or by the relevant Security Documents
to, or which it is provided herein or therein may be exercised by, any such
co-collateral agent or co-collateral agents or separate collateral agent or
separate collateral agents, shall be exercised hereunder or there by such
co-collateral agent or co-collateral agents or separate collateral agent or
separate collateral agents except jointly with, or with the consent or
direction in writing of, the Administrative Agent anything contained herein
to the contrary notwithstanding;
(iv) no collateral agent hereunder shall be personally liable by
reason of any act or omission of any other collateral agent hereunder,
except in connection with its own gross negligence or willful misconduct;
and
(v) the Borrower and the Administrative Agent, at any time by an
instrument in writing executed by them jointly, may accept the resignation
of or remove any such separate collateral agent or co-collateral agent and,
in that case by an instrument in writing executed by them jointly, may
appoint a successor to such separate collateral agent or co-collateral
agent, as the case may be, anything contained herein to the contrary
notwithstanding. If the Borrower shall not have joined in the execution of
any such instrument within 20 Business Days (or, if a Notice of Default is
in effect, 10 Business Days) after it receives a written request from the
Administrative Agent to do so, or if a Notice of Acceleration is in effect,
the Administrative Agent shall have the power to accept the resignation of
or remove any such separate collateral agent or co-collateral agent and to
appoint a successor without the concurrence of the Borrower, the Borrower
hereby appointing the Administrative Agent its agent and attorney to act
for it in such connection in such contingency. If the Administrative Agent
shall have appointed a separate collateral agent or separate collateral
agents or co-collateral agent or co-collateral agents as above provided,
the Administrative Agent may at any time, by an instrument in writing,
accept the resignation of or remove any such separate collateral agent or
co-collateral agent and the successor to any such separate collateral agent
or co-collateral agent shall be appointed by the Borrower and the
Administrative Agent, or by the Administrative Agent alone pursuant to this
paragraph (b).
10.8 TREATMENT OF PAYEE OR INDORSEE BY ADMINISTRATIVE AGENT;
REPRESENTATIVES OF SECURED PARTIES.
(a) The Administrative Agent may treat the registered holder or, if
none, the payee or indorsee of any promissory note or debenture evidencing a
Extension of Credit as the absolute owner thereof for all purposes and shall not
be affected by any notice to the contrary, whether such promissory note or
debenture shall be past due or not.
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(b) Any Person (other than the Administrative Agent), which shall be
designated as the duly authorized representative of one or more Secured Parties
to act as such in connection with any matters pertaining to this Agreement or
the Collateral shall present to the Administrative Agent such documents,
including Opinions of Counsel, as the Administrative Agent may reasonably
require, in order to demonstrate to the Administrative Agent the authority of
such Person to act as the representative of such Secured Parties (it being
understood that the holders of Credit Agreement Obligations are represented
hereunder by the Administrative Agent).
10.9 INDEMNIFICATION. The Grantors agree to pay, indemnify, and hold
the Administrative Agent harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits and
reasonable out-of-pocket costs, expenses (including the reasonable fees of
counsel) or disbursements of any kind or nature whatsoever with respect to the
enforcement of this Agreement and the Security Documents, except to the extent
arising from the gross negligence or willful misconduct of any indemnified
party. The Grantors agree to pay, indemnify, and hold the Administrative Agent
harmless from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits and reasonable out-of-pocket costs,
expenses (including the reasonable fees of counsel and other professional
advisors) or disbursements of any kind or nature whatsoever with respect to the
violation by any Grantor of, noncompliance with or remediation obligations under
any laws, rules or regulations regulating, relating to or imposing liabilities
or standards of conduct concerning environmental protection matters directly
relating to the Grantors or their real property (except to the extent that the
same results from the gross negligence or willful misconduct of the
Administrative Agent or its employees, officers or agents). The agreements in
this subsection 10.9 shall survive the termination of the other provisions of
this Agreement.
SECTION 11 MISCELLANEOUS
11.1 AMENDMENTS, SUPPLEMENTS AND WAIVERS.
(a) Subject to subsection 11.1 of the Credit Agreement, the
Administrative Agent and each of the Grantors may, from time to time, enter into
written agreements supplemental hereto or to any other Security Document for the
purpose of adding to, or waiving any provisions of, this Agreement or any such
other Security Document or changing in any manner the rights or obligations of
the Administrative Agent, the Secured Parties or the Grantors hereunder or
thereunder, provided that no such supplemental agreement shall (i) amend, modify
or waive any provision of subsection 3.5 hereof or the definition of Obligations
or any of the defined terms contained in such definition without the written
consent of each Secured Party whose rights would be adversely affected thereby
or (ii) amend, modify or waive any provision of Section 10 or alter the duties,
rights or obligations of the Administrative Agent hereunder or under the other
Security Documents without the written consent of the Administrative Agent. Any
such supplemental agreement shall be binding upon the Grantors, the
Administrative Agent and the Secured Parties and their respective successors and
assigns.
(b) Without the consent of any Secured Party, the Administrative Agent
and any of the Grantors, at any time and from time to time, may enter into one
or more agreements supplemental hereto or to any Security Document, in form
satisfactory to the Administrative Agent, to mortgage or pledge to the
Administrative Agent, or grant a security interest in favor of the
Administrative Agent in, any property or assets as additional security for the
Secured Obligations.
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11.2 NOTICES. All notices, requests and demands to or upon the
Administrative Agent or any Grantor hereunder shall be effected in the manner
provided for in subsection 11.2 of the Credit Agreement, provided that any such
notice, request or demand to or upon any Guarantor shall be addressed to such
Guarantor at its notice address set forth on Schedule 1.
11.3 NO WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES. Neither the
Administrative Agent nor any Secured Party shall by any act (except by a written
instrument pursuant to subsection 11.1 hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default. No failure to exercise, nor any
delay in exercising, on the part of the Administrative Agent or any Secured
Party, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Administrative Agent or
any Secured Party of any right or remedy hereunder on any one occasion shall not
be construed as a bar to any right or remedy which the Administrative Agent or
such Secured Party would otherwise have on any future occasion. The rights and
remedies herein provided are cumulative, may be exercised singly or concurrently
and are not exclusive of any other rights or remedies provided by law.
11.4 ENFORCEMENT EXPENSES, INDEMNIFICATION.
(a) Each Guarantor agrees to pay or reimburse the Administrative Agent
and each other Secured Party for all its costs and expenses incurred in
collecting against such Guarantor under the guarantee contained in Section 2 or
otherwise enforcing or preserving any rights under this Agreement and the other
Loan Documents to which such Guarantor is a party, including, without
limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent, to the same extent the Borrower would be required to do so
pursuant to subsection 11.5 of the Credit Agreement, mutatis mutandis.
(b) Each Grantor agrees to pay, and to save the Administrative Agent
and the Secured Parties harmless from, any and all liabilities with respect to,
or resulting from any delay in paying, any and all stamp, excise, sales or other
taxes and recording and registration fees which may be payable or determined to
be payable with respect to any of the Collateral, any Security Document, any
Secured Instrument or any of the transactions contemplated by this Agreement.
(c) Each Grantor agrees to pay, and to save the Administrative Agent
and the Secured Parties harmless from any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance and administration of this Agreement to the
same extent the Borrower would be required to do so pursuant to subsection 10.7
of the Credit Agreement.
(d) The agreements in this subsection 11.4 shall survive repayment of
the Obligations and termination of the other provisions of this Agreement.
11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
successors and assigns of each Grantor and shall inure to the benefit of the
Administrative Agent and the other Secured Parties and their respective
successors and assigns; provided that no Grantor may assign, transfer or
delegate any of its rights or obligations under this Agreement without the prior
written consent of the Administrative Agent.
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11.6 COUNTERPARTS. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. A set of the copies of this Agreement
signed by all the parties shall be lodged with the Borrower and the
Administrative Agent.
11.7 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.8 INTEGRATION. This Agreement and the other Loan Documents
represent the entire agreement of the Grantors, the Administrative Agent and the
other Secured Parties with respect to the subject matter hereof and thereof, and
there are no promises, undertakings, representations or warranties of the
Administrative Agent or any other Secured Party relative to subject matter
hereof and thereof not expressly set forth or referred to herein or in the other
Loan Documents.
11.9 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
11.10 CERTAIN WAIVERS. The Borrower and each Guarantor hereby
irrevocably and unconditionally:
(a) agrees that service of process in any legal action or proceeding
relating to this Agreement or other Security Documents may be effected by
mailing a copy thereof by registered or certified mail (or any substantially
similar form of mail), postage prepaid, to such party at its address referred to
in subsection 11.2 hereof or at such other address of which the Administrative
Agent shall have been notified pursuant thereto;
(b) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law; and
(c) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to in
this subsection 11.10 any special, exemplary, punitive or consequential damages.
11.11 ACKNOWLEDGMENTS. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Administrative Agent nor any other Secured Party has
any fiduciary relationship with or duty to the Grantors arising out of or in
connection with this Agreement or any of the other Loan Documents, and the
relationship between Administrative Agent and other Secured Parties, on one
hand, and the Grantors, on the other hand, in connection herewith or therewith
is solely that of debtor and creditor; and
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(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among the
Secured Parties or among the Grantors and the Secured Parties.
11.12 TERMINATION. (a) Upon the (i) release of the Liens on the
Collateral in accordance with the Credit Agreement or (ii) the termination of
the Credit Agreement in accordance with subsection 11.12 of the Credit
Agreement, the Administrative Agent will promptly, at the Borrower's written
request and expense, terminate all Lockbox Agreements and Blocked Account
Agreements and (x) execute and deliver to the Grantors such documents and other
instruments as the Borrower shall reasonably request to evidence the release of
Liens on the Collateral, (y) deliver or cause to be delivered to the Grantors
all property of such Grantors then held by the Administrative Agent or any agent
thereof and (z) transfer all amounts on deposit in the Collateral Account to an
account designated by the Person lawfully entitled to receive the same.
Concurrently with any such release or termination, this Agreement and each of
the other Security Documents shall automatically terminate. The provisions of
this paragraph (a) of subsection 11.12 shall survive the termination of this
Agreement.
(b) Upon the sale of all or a portion of the Capital Stock of a
Grantor to a third party in accordance with and as permitted under the Credit
Agreement such that such Grantor ceases to be a Subsidiary, (i) such Grantor and
each Subsidiary of such Grantor which is included in such sale (such Grantor and
each such Subsidiary being referred to herein as "Included Grantors") shall
cease to be a Grantor hereunder or a party to any Security Document and shall be
released from its obligations pursuant hereto and thereto, (ii) the Liens
created by the Security Documents entered into by such Included Grantors in all
right, title and interest of such Included Grantors in the Collateral shall
terminate, in each case only with respect to such Included Grantors, (iii) all
right, title and interest of the Administrative Agent in and to the Collateral
subject to such Liens shall revert to such Included Grantors, their successors
and assigns and (iv) any obligations of such Included Grantors shall, unless
otherwise expressly notified by the Borrower to the Administrative Agent in
writing, cease to be Obligations. Upon any such termination, the Administrative
Agent will promptly, at the Borrower's written request, (x) execute and deliver
to such Included Grantors such documents and other instruments as the Borrower
shall reasonably request to evidence the release of the Liens on such Collateral
and (y) deliver or cause to be delivered to such Included Grantors all property
of such Included Grantors then held by the Administrative Agent or any agent
thereof.
11.13 WAIVER OF JURY TRIAL. THE GRANTORS AND THE SECURED PARTIES
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION
OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
11.14 SECTION HEADINGS. The Section and subsection headings used in
this Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
11.15 CONFLICTS. In the event of a conflict between the terms and
conditions of this Agreement and the terms and conditions of the Credit
Agreement, the terms and conditions of the Credit Agreement shall control.
47
<PAGE> 52
IN WITNESS WHEREOF, each of the undersigned has caused this Master
Security Agreement to be duly executed and delivered as of the date first above
written.
SERVICE MERCHANDISE COMPANY, INC.,
as the Borrower
By: /s/ C. Steven Moore
-----------------------------------
Name:
Title:
SIGNATURE PAGE TO
MASTER SECURITY AGREEMENT
<PAGE> 53
B.A. PARGH, INC.
H.J. WILSON CO., INC.
H.J. WILSON CO. REALTY, INC.
HOMEOWNERS WAREHOUSE, INC.
SERVICE MERCHANDISE CO. BROAD, INC.
SERVICE MERCHANDISE COMPANY OF IOWA, INC.
SERVICE MERCHANDISE COMPANY OF KANSAS, INC.
SERVICE MERCHANDISE CO. NO 30, INC.
SERVICE MERCHANDISE CO. NO 34, INC.
SERVICE MERCHANDISE CO. NO 35, INC.
SERVICE MERCHANDISE CO. NO 51, INC.
SERVICE MERCHANDISE CO. NO 93, INC.
SERVICE MERCHANDISE CO. NO 99, INC.
SERVICE MERCHANDISE FINANCIAL CO., INC.
SERVICE MERCHANDISE INDIANA PARTNERS (by its Partners,
Service Merchandise Co. No. 34, Inc., and Service Merchandise Co.
No. 35, Inc.)
SERVICE MERCHANDISE OF TENNESSEE LIMITED PARTNERSHIP
(by its General Partner, Service Merchandise Company, Inc.)
SERVICE MERCHANDISE OF TEXAS LIMITED PARTNERSHIP
(by its General Partner, Service Merchandise Company, Inc.)
SMC-HC, INC.
THE TOY STORE, INC.
WHOLESALE SUPPLY COMPANY, INC.
A.F.S. MARKETING SERVICES, INC.
SERVICE MERCHANDISE CO. OF NEW YORK, INC.
SERVICE MERCHANDISE OFFICE SUPPLY, INC.
SERVICE MERCHANDISE SHOWROOMS, INC.
SERVICE MERCHANDISE RM, INC.
THE McNALLY SUPPLY COMPANY
TRAVEL MANAGEMENT CONSULTANTS, INC.
PROMOTABLES, INC.
as the Guarantors
By: /s/ C. Steven Moore
---------------------------------
Name:
Title:
SIGNATURE PAGE TO
MASTER SECURITY AGREEMENT
<PAGE> 54
CITICORP USA, INC.,
as Administrative Agent
By:
---------------------------------
Claudia Slacik
Vice President
SIGNATURE PAGE TO
MASTER SECURITY AGREEMENT
<PAGE> 55
Schedule 1
NOTICE ADDRESS OF EACH GRANTOR
SCHEDULE 1 TO
MASTER SECURITY AGREEMENT
<PAGE> 56
Schedule 2
DESCRIPTION OF PLEDGED STOCK
DESCRIPTION OF PLEDGED DEBT SECURITIES
PLEDGED PARTNERSHIP INTERESTS
SCHEDULE 3 TO
MASTER SECURITY AGREEMENT
<PAGE> 57
Schedule 4
JURISDICTION OF ORGANIZATION
AND LOCATION OF CHIEF EXECUTIVE OFFICE
Grantor Jurisdiction
Location for all Grantors:
SCHEDULE 4 TO
MASTER SECURITY AGREEMENT
<PAGE> 58
Schedule 5
LOCATION OF INVENTORY AND EQUIPMENT
Grantor Locations
SCHEDULE 5 TO
MASTER SECURITY AGREEMENT
<PAGE> 59
Schedule 6
COPYRIGHTS AND COPYRIGHT LICENSES
PATENTS AND PATENT LICENSES
TRADEMARK AND TRADEMARK LICENSES
SCHEDULE 6 TO
MASTER SECURITY AGREEMENT
<PAGE> 1
EXHIBIT 10.8
[Jay Alix & Associates letterhead]
January 8, 1999
Board of Directors
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37202-4600
Re: Interim Management and Financial Consulting Services
Gentlemen:
This letter outlines the understanding between Jay Alix & Associates, a Michigan
corporation ("JA&A") and Service Merchandise Company, Inc., a Tennessee
corporation (the "Company") of the objective, tasks, work product and fees for
the engagement of JA&A to provide interim management and financial consulting
services to the Company.
OBJECTIVE
To provide services to the Company customarily provided by a Chief Executive
Officer of the Company and to assist the Board of Directors in stabilization of
the Company and management, as well as in the development of an operating and
business plan, and in exploring strategic alternatives on behalf of the Company
to maximize its value.
TASKS
- - Assume management responsibility as the Company's Chief Executive
Officer for the Company's operations. In this regard, it is understood
and agreed that no member of the Company's Board of Directors shall
fill an operating role at the Company and that in our role as Chief
Executive Officer we shall report to the Board of Directors or a
Committee of the Board (consisting of no less than three members).
- - Assist in the assessment of the current financial position of the
Company.
- - Meet with Company management to review their assessment of the current
situation and evaluate their input for the Company's turnaround.
- - Assist in the development of intermediate and long-term operating
plans.
<PAGE> 2
Board of Directors Page 2
Service Merchandise Company, Inc. January 8, 1999
- - Meet with lenders and other outside parties as may be required from
time to time.
- - Report to and attend all meetings of the Board of Directors.
- - Perform such other tasks as may normally be associated with the
position of Chief Executive Officer or as may be mutually agreed upon.
WORK PRODUCT
Our work product will be in the form of:
- - Services normally provided by the Company's Chief Executive Officer.
- - Information to be discussion with you and others, as you may direct.
- - Written reports and analysis worksheets to support our suggestions as
we deem necessary or as you may request.
STAFFING
Bettina Whyte will be the principal responsible for the overall engagement. She
will be assisted by a staff of consultants as various levels, all of whom have a
wide range of skills and abilities related to this type of assignment. In
addition, we have relationships with and periodically retain independent
contractors with specialized skills and abilities to assist us. If JA&A
concludes that an independent contractor is appropriate to the assignment, we
will obtain the Board's consent (or such other individual or committee as may be
designated by the Board) before doing so; it is agreed, however, that such
consent will not be unreasonably withheld.
In addition to Ms. Whyte we anticipate that at least one additional principal
will be required full-time. Depending on the situation, additional staff might
also be required with the tasks that they perform and their duration on the
engagement appropriate to the Company's factual circumstances.
TIMING, FEES AND EXPENSES
We will commence this engagement immediately upon receipt of a signed engagement
letter and retainer.
RETAINER. We will require a retainer of $500,000 to be applied against the time
charges, excluding expenses, specific to the engagement. We will submit
semi-monthly invoices for services rendered and expenses incurred as described
above, and we will offset such invoices against the retainer. Payment will be
due upon receipt of the invoices to replenish the retainer to the agreed upon
<PAGE> 3
Board of Directors Page 3
Service Merchandise Company, Inc. January 8, 1999
amount. Any unearned portion of the retainer will be returned to you at the
termination of the engagement.
HOURLY FEES. This engagement will be staffed with professionals at various
levels, as the tasks require. For purposes of semi-monthly billings, our fees
will be based on the hours charged at our prevailing hourly rates, which are:
<TABLE>
<S> <C>
Principals $450 to $530
Senior Associates $350 to $375
Associates $295 to $335
Accountants and Consultants $190 to $225
</TABLE>
JA&A periodically reviews rates charged for our services and makes appropriate
adjustments. However, no such review will become effective before January 1,
2000.
CONTINGENT SUCCESS FEES. In addition to hourly fees, the Company agrees that it
will pay JA&A the following contingent success fees:
- - A bonus based upon improvement in Earnings Before Interest,
Depreciation, Amortization and Restructuring Charges ("EBITDAR").
EBITDAR shall be determined after deduction of JA&A professional fees.
This shall be an annual calculation that compares the EBITDAR as
actually earned for 1998 v. the EBITDAR actually earned for 1999.
The bonus shall be payable quarterly where year-to-date results for
1998 are compared to year-to-date results for 1999, the bonus payable
year to date is calculated and the amount owning from that calculation
is paid to JA&A after first deducting year to date payments. It is
possible that a calculation of year to date bonus owing may decline
from one quarter to the next in which case JA&A shall have been
overpaid. If this occurs, then JA&A shall promptly refund any such
overpayment, provided that:
(1) In no case shall the contingent success fee earned hereby be less
than zero, and
(2) If the Company files for or is placed into bankruptcy than no
amounts paid to JA&A pre-petition shall be refundable.
The bonus earned by JA&A in the year our engagement terminates shall be
determined by computing the bonus that would be payable to JA&A for the
entire year multiplied by a fraction, the numerator of which is the
month of the year in which our engagement
<PAGE> 4
Board of Directors Page 4
Service Merchandise Company, Inc. January 8, 1999
terminates and the denominator of which is 12. The result of that
calculation is the contingent success fee payable for the final year of
the engagement.
The quarterly computations shall be based upon financial data used to
prepare the Company's Form 10-Q that is filed with the Securities and
Exchange Commission ("SEC"). The annual computation shall be based on
audited financial data that is used to prepare the Company's Form 10-K
that is filed with the SEC.
Following is the basis for the EBITDAR contingent success fee:
<TABLE>
<CAPTION>
IMPROVEMENT IN EBITDAR PERCENT PAID
<S> <C>
First $4 million 2%
From $4 million to $8 million 3%
From $8 million to $12 million 4%
From $12 million to $16 million 5%
From $16 million to $20 million 6%
From $20 million to $40 million 7%
From $40 million to $44 million 6%
From $44 million to $48 million 5%
From $48 million to $52 million 4%
From $52 million to $56 million 3%
More Than $56 million 2%
</TABLE>
- - A contingent success fee equal to 2% of the proceeds of asset sales
that do not occur in the ordinary course of business including but not
limited to sales of assets from store closings including inventories,
store fixtures, store properties and leases thereon.
The contingent success fees outlined in this section are additive and not
exclusive. Therefore, it is possible for JA&A to earn a contingent success fee
under more than one alternative.
OUT-OF-POCKET CASH EXPENSES. In addition to the fees set forth above, the
Company shall pay directly or reimburse JA&A upon receipt of periodic billings,
for all reasonable out-of-pocket expenses incurred in connection with this
assignment such as travel, lodging, postage, telephone and facsimile charges.
<PAGE> 5
Board of Directors Page 5
Service Merchandise Company, Inc. January 8, 1999
RELATIONSHIP OF THE PARTIES
The parties intend that an independent contractor relationship will be created
by this agreement. JA&A is not to be considered an employee or agent of the
Company and the employees of JA&A are not entitled to any of the benefits that
the Company provides for the Company's employees.
The Company also agrees not to solicit, recruit or hire any employees or agents
of JA&A for a period of two years subsequent to the completion and/or
termination of this agreement.
CONFIDENTIALITY
JA&A agrees to keep confidential all information obtained from the Company. JA&A
agrees that neither it nor its directors, officers, principals, employees,
agents or attorneys will disclose to any other person or entity, or use of any
purpose other than specified herein, any information pertaining to the Company
or any affiliate thereof which is either non-public, confidential or proprietary
in nature ("Information") which it obtains or is given access to during the
performance of the services provided hereunder. JA&A may make reasonable
disclosures of Information to third parties in connection with their performance
of their obligations and assignments hereunder. In addition, JA&A will have the
right to disclose to others in the normal course of business its involvement
with the Company.
Information includes data, plans, reports, schedules, drawings, accounts,
records, calculations, specifications, flow sheets, computer programs, source or
object codes, results, models, or any work product relating to the business of
the Company, its subsidiaries, distributors, affiliates, vendors, customers,
employees, contractors and consultants.
The Company acknowledges that all advice (written or oral) given by JA&A to the
Company in connection with JA&A's engagement is intended solely for the benefit
and use of the Company (limited to its management and employees) in considering
the transactions to which it relates. The Company agrees that no such advice
shall be used for any other purpose or reproduced, disseminated, quoted or
referred to at any time in any manner or for any purpose other than
accomplishing the tasks and programs referred to herein or in discussions with
the Company's lenders or debt holders, without JA&A's prior approval (which
shall not be unreasonably withheld) except as required by law. The agreement
will survive the termination of the engagement.
FRAMEWORK OF THE ENGAGEMENT
The Company acknowledges that it is hiring JA&A purely to provide
interim management and to assist and advise the Company in business planning and
restructuring. JA&A's engagement shall not constitute an audit, review or
compilation, or any other type of financial statement
<PAGE> 6
Board of Directors Page 6
Service Merchandise Company, Inc. January 8, 1999
reporting engagement that is subject to the rules of the AICPA or other such
state and national professional bodies.
INDEMNIFICATION OF JA&A
In engagements of this nature where we act as crisis managers, it is our
practice to receive indemnification. Accordingly, in consideration of our
agreement to act on your behalf in connection with this engagement, you agree to
indemnify, hold harmless, and defend us (including our principals, employees and
agents) from and against all claims, liabilities, losses, damages and reasonable
expenses as they are incurred, including reasonable legal fees and disbursements
of counsel, and the costs of our professional time (our professional time will
be reimbursed at our rates in effect when such future time is required),
relating to or arising out of the engagement, including any legal proceeding in
which we may be required or agree to participate but in which we are not a
party. We, our principals, employees and agents may, but are not required to,
engage a single firm of separate counsel of our choice in connection with any of
the matters to which this indemnification agreement relates. This
indemnification agreement does not apply to gross negligence or willful
misconduct.
INDEMNIFICATION OF OFFICERS
In addition to the foregoing indemnification, Bettina Whyte shall be deemed to
be an officer of the Company and shall, along with other JA&A personnel who
serve as officers of the Company, be individually covered by the same
indemnification and directors' and officers' liability insurance as is
applicable to other officers of the Company. Such directors' and officers'
insurance must be with an unaffiliated insurance company and provide for
coverage of at least $10 million, unencumbered by claims.
The Company agrees that it will use its best efforts to specifically include and
cover any JA&A appointees under the Company's policy for directors' and
officers' insurance. In the event that the Company is unable to include JA&A
appointees under the Company's policy or does not have first dollar coverage as
outlined in the preceding paragraph in effect for at least $10 million, it is
agreed that JA&A will attempt to purchase a separate directors' and officers'
policy that will cover its employees and agents only and that the cost of same
shall be invoiced to the Company as an out of pocket cash expense. If JA&A is
unable to purchase such directors' and officers' insurance then we reserve the
right to terminate this agreement.
TERMINATION AND SURVIVAL
The agreement may be terminated at any time by written notice by one party to
the other; provided, however, that notwithstanding such termination JA&A will be
entitled to any fees and expenses due under the provisions of the agreement. It
is further understood and agreed that unless the Company acts in bad faith or
has not remained current with its payment obligations to
<PAGE> 7
Board of Directors Page 7
Service Merchandise Company, Inc. January 8, 1999
our firm as articulated in this letter, JA&A will not terminate the engagement
without providing at least 90 days notice. Such payment obligation shall inure
to the benefit of any successor or assignee of JA&A.
It is further understood and agreed that if the Company elects to terminate this
agreement before JA&A has been paid an aggregate of at least $2,500,000 in fees
that 150% of any shortfall between $2,500,000 and amounts paid to JA&A shall be
paid to JA&A as a "break-up fee". A material diminution of engagement scope or
responsibility shall be a termination hereunder unless such change is agreed to
in writing by JA&A.
The obligations of the parties under the Indemnification of JA&A,
Indemnification of Officers, Confidentiality and Termination and Survival
sections of this agreement shall survive the termination of the agreement as
well as the other sections of this agreement which expressly provide that they
shall survive termination of this agreement.
GOVERNING LAW
This letter agreement is governed by and construed in accordance with the laws
of New York with respect to contracts made and to be performed entirely therein
and without regard to choice of law or principles thereof.
If we have a dispute with respect to any of the provisions of this agreement and
are unable to agree on a mutually satisfactory resolution within 30 days, either
party may require the matter to be settled by binding arbitration. If such
arbitration shall occur, it shall be in New York City. We shall attempt for two
weeks to agree on a single arbitrator. If that effort shall fail, each party
shall appoint one arbitrator. The two arbitrators so chosen shall attempt for
two weeks to select a third. If they are unable to agree, the American
Arbitration Association in New York City shall choose the third. The arbitration
shall occur using the rules and procedures of the American Arbitration
Association. The decision of the arbitrator(s) shall be final, binding and
non-appealable.
CONFLICTS
We know of no fact of situation that would represent a conflict of interest for
us with regard to the Company. However, this is a large company and there are
many parties involved. Accordingly, it is possible that there are relationships
either past or currently existing that we may wish to bring to your attention,
as we become familiar with the different parties who are involved.
SEVERABILITY
If any portion of the letter agreement shall be determined to be invalid or
unenforceable, we each agree that the remainder shall be valid and enforceable
to the maximum extent possible.
<PAGE> 8
ENTIRE AGREEMENT
All of the above contains the entire understanding of the parties relating to
the services to be rendered by JA&A and may not be amended or modified in any
respect except in writing signed by the parties. JA&A will not be responsible
for performing any services not specifically described in this letter or in a
subsequent writing signed by the parties.
NOTICES
All notices required or permitted to be delivered under this letter agreement
shall be sent, if to us, to the address set forth at the head of this letter, to
the attention of Mr. Melvin R. Christiansen, and if to you, to the address for
you set forth above, to the attention of your General Counsel, or to such other
name or address as may be given in writing to the other party. All notices under
the agreement shall be sufficient if delivered by facsimile or overnight mail.
Any notice shall be deemed to be given only upon actual receipt.
If these terms meet with you approval, please sign and return the enclosed copy
of this proposal and wire transfer the amount to establish the retainer.
We look forward to working with you.
Sincerely yours,
Jay Alix & Associates
/s/ Bettina M. Whyte
Bettina M. Whyte
Principal
Acknowledged and Agreed to:
Service Merchandise Company, Inc.
By: /s/Raymond Zimmerman
-------------------------------------
Its: Chairman
-------------------------------------
Dated: 1/8/99
-------------------------------------
<PAGE> 1
EXHIBIT 10.9
[Jay Alix & Associates letterhead]
March 23, 1999
Board of Directors
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37202-4600
Re: Financial Advisory and Restructuring Consultant Services
Gentlemen:
This letter (sometimes referred to herein as "Letter II") outlines the
understanding between Jay Alix & Associates ("JA&A") and Service Merchandise
Company, Inc., a Tennessee corporation (the "Company") of the objective, tasks,
work product and fees for the engagement of JA&A to provide financial consulting
services to the Company. The Company has terminated the predecessor engagement
letter ("Letter I") that was dated and executed by JA&A and the Company on
January 8, 1999. As part of the inducement for JA&A to agree to Letter 11, the
Company acknowledges and agrees that JA&A has satisfactorily performed its
duties and obligations under Letter 1. The retainer, which has been reduced by
the unpaid fees as of March 23, 1999 of $180,560.59, has a current balance of
$319,439.41 and will be carried over and subject to the terms contained in
Letter II. The Company acknowledges that if JA&A's retention is not approved by
the Bankruptcy Court, JA&A shall be entitled to assert a claim in the bankruptcy
case in connection with Letter I.
OBJECTIVE
To provide the Company and its Board of Directors with assistance, as financial
advisor and restructuring consultant, during the Company's reorganization under
Chapter 11 of the U.S. Bankruptcy Code.
TASKS
The tasks that JA&A will undertake will include, but are not limited to, the
following activities:
- - Report to senior management of the Company and participate in meetings
with management of the Company and with the Board of Directors, in
order to provide insight into, as well as contribute to, various
aspects of the Company's reorganization.
<PAGE> 2
Board of Directors Page 2
Service Merchandise Company, Inc. March 23, 1999
- - Assist with communications and negotiations with the DIP Bank Group and
the Unsecured Creditors Committee and their respective legal and
financial advisors.
- - Assist with Company's development of a business plan, including
assistance with the development of detailed financial projections and
in the development of intermediate and long-term operating plans.
- - Assist with developing the Company's Plan of Reorganization that seeks
to maximize value for all the Company's stakeholders.
- - Assist with asset sales and/or the management of certain assets (e.g.,
real estate), to the extent required during the case.
- - Provide advice regarding retail-industry specific business and
operating issues, relevant to the Chapter 11 case.
- - Assist with the preparation of the Company's statements and schedules
in conjunction with the Chapter 11 filing.
- - Assist in identifying opportunities to improve the Company's business
and operations and, as mutually agreed, assist in implementing changes.
- - Provide information technology cost reduction and efficiency
enhancement services in support of the business plan and its execution.
Perform such other tasks which the Company and its Board of Directors may
request and which are mutually agreed upon.
WORK PRODUCT
Our work product will be in the form of:
- - Information to be discussed with you and others, as you may direct.
- - Written reports and analysis worksheets to support our suggestions as
we deem necessary or as you may request.
STAFFING
Peter Fitzsimmons will be the principal responsible for the overall engagement.
He will be assisted by a staff of consultants at various levels, all of whom
have a wide range of skills and abilities related to this type of assignment. In
addition, we have relationships with and periodically retain
<PAGE> 3
Board of Directors Page 3
Service Merchandise Company, Inc. March 23, 1999
independent contractors with specialized skills and abilities to assist us. If
JA&A concludes that an independent contractor is appropriate to the assignment,
we will obtain the CEO's consent before doing so; it is agreed, however, that
such consent will not be unreasonably withheld. In addition to Mr. Fitzsimmons
additional staff will also be required with the tasks that they perform and
their duration on the engagement appropriate to the Company's factual
circumstances.
TIMING, FEES AND EXPENSES
We commenced our work with Service Merchandise Company on January 8, 1999,
pursuant to Letter I, and on March 23, 1999, pursuant to Letter II.
RETAINER. We acknowledge receipt of a retainer of $500,000 which has a current
balance of $319,439.41 to be applied against the time charges, excluding
expenses, specific to the engagement. We will submit semi-monthly invoices for
services rendered and expenses incurred as described above. Payment will be due
upon receipt. Any unearned portion of the retainer will be returned to you at
the termination of the engagement.
HOURLY FEES. This engagement will be staffed with professionals at various
levels, as the tasks require. For purposes of semi-monthly billings, our fees
will be based on the hours charged at our prevailing hourly rates, which are:
<TABLE>
<S> <C>
Principals $450 to $530
Senior Associates $350 to $375
Associates $295 to $335
Accountants and Consultants $190 to $225
</TABLE>
JA&A periodically reviews rates charged for our services and makes appropriate
adjustments. However, no such review will become effective before January 1,
2000.
CONTINGENT SUCCESS FEES. In addition to hourly fees, the Company agrees that it
will pay JA&A the following contingent success fees:
A basic contingent success fee of $3,500,000 (as may be adjusted upwards or
downwards as described below) upon: (1) the substantial consummation of a plan
of reorganization that enables the business to emerge from bankruptcy as a going
concern or (2) the sale of substantially all of the Company's assets such that
it continues as a going concern.
<PAGE> 4
Board of Directors Page 4
Service Merchandise Company, Inc. March 23, 1999
The basic contingent success fee shall be adjusted upwards or downwards as
follows:
- - The amount payable shall be 125% of the basic contingent success fee if
the event giving rise to its payment occurs on or before December 31,
2000.
- - The amount payable shall be 100% of the basic contingent success fee if
the event giving rise to its payment occurs between January 1, 2001 and
June 30, 2001.
- - The amount payable shall be 75% of the basic contingent success fee if
the event giving rise to its payment occurs after June 30, 2001.
JA&A's entitlement to receipt of a contingent success fee is not contingent upon
its continued engagement pursuant to this engagement letter unless the decision
to terminate the engagement was the decision of JA&A for reasons other than the
Company's breach of this agreement. Accordingly, for example, if JA&A's
engagement is terminated by the Company and an event giving rise to JA&A's
entitlement to receive a contingent success fee subsequently occurs, then JA&A
shall be entitled to receive the contingent success fee pursuant to this
engagement letter.
OUT-OF-POCKET CASH EXPENSES. In addition to the fees set forth above, the
Company shall pay directly or reimburse JA&A upon receipt of periodic billings,
for all reasonable out-of-pocket expenses incurred in connection with this
assignment such as travel, lodging, postage, telephone and facsimile charges.
RELATIONSHIP OF THE PARTIES
The parties intend that an independent contractor relationship will be created
by this agreement. JA&A is not to be considered an employee or agent of the
Company and the employees of JA&A are not entitled to any of the benefits that
the Company provides for the Company's employees.
The Company also agrees not to solicit, recruit or hire any employees or agents
of JA&A for a period of two years subsequent to the completion and/or
termination of this agreement.
CONFIDENTIALITY
JA&A agrees to keep confidential all information obtained from the Company. JA&A
agrees that neither it nor its directors, officers, principals, employees,
agents or attorneys will disclose to any other person or entity, or use for any
purpose other than specified herein, any information pertaining to the Company
or any affiliate thereof which is either non-public, confidential or proprietary
in nature ("Information") which it obtains or is given access to during the
performance of the services provided hereunder. JA&A may make reasonable
disclosures of Information to third parties in connection with their performance
of their obligations and assignments hereunder. In addition,
<PAGE> 5
Board of Directors Page 5
Service Merchandise Company, Inc. March 23, 1999
JA&A will have the right to disclose to others in the normal course of business
its involvement with the Company.
Information includes data, plans, reports, schedules, drawings, accounts,
records, calculations, specifications, flow sheets, computer programs, source or
object codes, results, models, or any work product relating to the business of
the Company, its subsidiaries, distributors, affiliates, vendors, customers,
employees, contractors and consultants.
The Company acknowledges that all advice (written or oral) given by JA&A to the
Company in connection with JA&A's engagement is intended solely for the benefit
and use of the Company (limited to its management and employees) in considering
the transactions to which it relates. This agreement will survive the
termination of the engagement.
FRAMEWORK OF THE ENGAGEMENT
The Company acknowledges that it is hiring JA&A to assist and advise the Company
in business planning and restructuring. JA&A's engagement shall not constitute
an audit, review or compilation, or any other type of financial statement
reporting engagement that is subject to the rules of the AICPA or other such
state and national professional bodies.
INDEMNIFICATION
In engagements of this nature, it is our practice to receive indemnification.
Accordingly, in consideration of our agreement to act on your behalf in
connection with this engagement, you agree to indemnify, hold harmless, and
defend us (including our principals, employees and agents) from and against all
claims, liabilities, losses, damages and reasonable expenses as they are
incurred, including reasonable legal fees and disbursements of counsel, and the
costs of our professional time (our professional time will be reimbursed at our
rates in effect when such future time is required), relating to or arising out
of the engagement, including any legal proceeding in which we may be required or
agree to participate but in which we are not a party. We, our principals,
employees and agents may, but are not required to, engage a single firm of
separate counsel of our choice in connection with any of the matters to which
this indemnification agreement relates. This indemnification agreement does not
apply to gross negligence, intentional misconduct or bad faith.
TERMINATION AND SURVIVAL
The agreement may be terminated at any time by written notice by one party to
the other; provided, however, that notwithstanding such termination JA&A will be
entitled to any fees and expenses due under the provisions of the agreement. It
is further understood and agreed that unless the Company acts in bad faith or
has not remained current with its payment obligations to our firm as articulated
in this letter, JA&A will not terminate the engagement without providing at
least 90 days notice. Such payment obligation shall inure to the benefit of any
successor assignee of JA&A.
<PAGE> 6
Board of Directors Page 6
Service Merchandise Company, Inc. March 23, 1999
It is further understood and agreed that if the Company elects to terminate this
agreement before JA&A has been paid an aggregate of at least $3,500,000 in fees
(on account of both Letter I and Letter II, in the aggregate) that any shortfall
between $3,500,000 and amounts paid to JA&A shall be paid to JA&A as an
additional compensation.
The obligations of the parties under the Indemnification, Confidentiality and
Termination and Survival sections of this agreement shall survive the
termination of the agreement as well as the other sections of this agreement
which expressly provide that they shall survive termination of this agreement.
GOVERNING LAW
This letter agreement is governed by and construed in accordance with the laws
of New York with respect to contracts made and to be performed entirely therein
and without regard to choice of law or principles thereof.
If we have a dispute with respect to any of the provisions of this agreement and
are unable to agree on a mutually satisfactory resolution within 30 days, either
party may require the matter to be settled by binding arbitration. If such
arbitration shall occur, it shall be in New York City. We shall attempt for two
weeks to agree on a single arbitrator. If that effort shall fail, each party
shall appoint one arbitrator. The two arbitrators so chosen shall attempt for
two weeks to select a third. If they are unable to agree, the American
Arbitration Association in New York City shall choose the third. The arbitration
shall occur using the rules and procedures of the American Arbitration
Association. The decision of the arbitrator(s) shall be final, binding and
non-appealable.
CONFLICTS AND DISCLOSURES
We know of no fact or situation that would represent a conflict of interest for
us with regard to the Company. We do wish to disclose the following information:
- - Jay Alix, a principal in Jay Alix & Associates, is also the Managing
Principal of Questor Partners Fund, L.P. ("QPF") and Questor Partners
Fund II, L.P. ("QPF II"), an $840 million fund, both investing in
special situations and under performing companies.
[ ] All of the principals of JA&A, including Jay Alix, own general and/or
limited partnership interests in QPF, QPF II, Questor Side-by-Side
Partners, L.P., Questor Side-by-Side Partners II, L.P., and Questor
Side-by-Side Partners II 3(c)(1), L.P., all related entities.
[ ] Chase is a limited partner in QPF and QPF II.
[ ] National City Commercial Finance, Inc., a member of the bank group, has
an affiliate that is a limited partner in QPF II.
<PAGE> 7
Board of Directors Page 7
Service Merchandise Company, Inc. March 23, 1999
[ ] G.E. Financial Assurance, through one of its affiliates, General
Electric Capital Corporation, is a limited partner in QPF II.
[ ] CitiCorp USA, Inc., through one of its affiliates, Salomon Smith
Barney, is a limited partner in QPF and QPF II.
- - L.G. Electronics, a vendor to Service Merchandise, is a major
shareholder of Zenith Electronics, a client of JA&A.
- - JA&A has been retained in a case, Bucyrus-Erie & Jackson National Life
v. Milbank, Tweed, Hadley & Malloy. Jackson National Life is in the
bank group for Service Merchandise. The individuals working on the
Bucyrus case will have no involvement with Service Merchandise.
SEVERABILITY
If any portion of the letter agreement shall be determined to be invalid or
unenforceable, we each agree that the remainder shall be valid and enforceable
to the maximum extent possible.
ENTIRE AGREEMENT
All of the above contains the entire understanding of the parties relating to
the services to be rendered by JA&A and may not be amended or modified in any
respect except in writing signed by the parties. JA&A will not be responsible
for performing any services not specifically described in this letter or in a
subsequent writing signed by the parties.
NOTICES
All notices required or permitted to be delivered under this letter agreement
shall be sent, if to us, to the address set forth at the head of this letter, to
the attention of Mr. Melvin R. Christiansen, and if to you, to the address for
you set forth above, to the attention of your General Counsel, or to such other
name or address as may be given in writing to the other party. All notices under
the agreement shall be sufficient if delivered by facsimile or overnight mail.
Any notice shall be deemed to be given only upon actual receipt.
The Company agrees to petition the Bankruptcy Court to affirm this agreement as
part of its first day motions.
If these terms meet with your approval, please sign and return the enclosed copy
of this letter.
<PAGE> 8
Board of Directors Page 8
Service Merchandise Company, Inc. March 23, 1999
We look forward to working with you.
Sincerely yours,
JAY ALIX & ASSOCIATES
/s/ Peter D. Fitzsimmons
Peter D. Fitzsimmons
Principal
Enclosure
2012355.1
Acknowledged and Agreed to:
SERVICE MERCHANDISE COMPANY, INC.
By:
-------------------------------------
Its:
------------------------------------
Dated:
----------------------------------
<PAGE> 1
Exhibit 10.10
AGREEMENT
This Agreement, as amended and restated the _____ day of _____________,
1998 (the Agreement"), by and between Service Merchandise Company, Inc., a
Tennessee corporation (the "Company"), and _______________________ (the
"Executive").
RECITALS
WHEREAS, the Executive is currently employed by the Company;
WHEREAS, the Company and the Executive wish to set forth their
respective rights and obligations in the event the Executive's employment is
terminated and to provide for salary continuation on the terms and under the
circumstances set forth herein; and
WHEREAS, the Company and the Executive wish to amend and to restate
this Agreement as of the date set forth above;
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. Compensation on Termination of Employment (Except Within Two Years
Following a Change of Control).
This Section 1 shall apply to termination of the Executive's employment
prior to a Change of Control (as hereinafter defined in Section 2) and to
termination of the Executive's Employment more than two (2) years following a
Change of Control. This Section 1 shall not apply to termination of Executive's
employment during the Change of Control Period (as hereinafter defined in
Section 2):
(a) Disability. If the Executive's employment with the Company is
terminated by the Executive or the Company due to the Executive's
inability to perform Executive's duties as a result of physical or
mental incapacity ("Disability"), the Executive shall be paid such
amounts, if any, as the Executive is entitled to receive under the
Company's disability insurance policies then in effect for Company
officers, but shall be entitled to no further compensation or benefits
(unless previously accrued under the Company's benefit plans).
(b) Other Termination Not Giving Rise to Salary Continuation. If the
Executive's employment shall be terminated for Cause (as hereinafter
defined) or if the Executive dies or if the Executive terminates
Executive's employment for any reason, the Company shall pay the
Executive any installments of Executive's base salary as then in effect
that would
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otherwise be due through the date on which Executive's employment is
terminated. The Company shall then have no further obligations to the
Executive under this Agreement except that in the event of termination
by death, the Executive's estate or beneficiaries, as the case may be,
shall be paid such amounts as may be payable to the Executive under the
Company's insurance policies and/or other benefit plans. For the
purposes of this Agreement, the Company shall have "Cause" to terminate
the Executive's employment upon (i) the willful engaging by the
Executive in misconduct materially injurious to the Company, (ii) acts
of dishonesty or fraud by the Executive, or (iii) the willful violation
by the Executive of the provisions of Section 4 or Section 5 hereof.
(c) Termination Giving Rise to Salary Continuation. If the Company
shall terminate the Executive's employment with the Company for any
reason other than due to the Executive's death or Disability or for
Cause, then, subject to the compliance by the Executive with the
provisions of Sections 4 and 5 hereof, the Company shall pay, as salary
continuation, to the Executive an amount equal to two (2) times the
Executive's maximum annual salary paid during the prior five (5) year
period (inclusive of bonuses paid to Executive during the 12-month
period preceding the date of termination, but excluding unearned
bonuses negotiated by Executive at the time of the Executive's
employment with the Company), payable, at Company's option, (A) in a
lump sum or (B) in twenty-four (24) equal monthly installments, but no
other compensation or benefits (unless accrued under the Company's
benefit plans prior to the date of termination of employment or as
provided in Section 1(d) hereof) shall be paid to the Executive.
(d) Healthcare Coverage. If the Executive's employment with the
Company is terminated by the Company for any reason other than due to
the Executive's death or Disability or for Cause, the Company will
reimburse the Executive for the premium paid by the Executive for
continued coverage for the Executive (and any dependents of the
Executive covered by the Company's healthcare plans at the time the
Executive's employment was terminated) under the Company's healthcare
plan pursuant to "COBRA" (or any other mandatory healthcare
continuation law then in effect), such coverage then being
substantially similar to that provided by the Company to its senior
executives and their eligible dependents. The Executive will be
entitled to reimbursement for such coverage for the period commencing
with the date of termination of employment and ending on the earlier of
(i) the second anniversary of termination of employment, or (ii) the
date the Executive becomes eligible to receive any healthcare coverage
from another employer of the Executive or Executive's spouse, or any
governmental entity, that does not contain any exclusion or limitation
with respect to any pre-existing condition of the Executive or
Executive's covered dependents. If the Executive (or Executive's
dependents covered at the time of termination of employment) elects not
to continue coverage under COBRA (or any other mandatory healthcare
continuation law then in effect) or is not eligible to continue
coverage under such healthcare continuation law, and is otherwise
eligible under this Section l(d), the Company will reimburse the
Executive for the cost of purchasing substantially similar coverage or
a supplement required to achieve substantially similar coverage under
another arrangement
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<PAGE> 3
approved by the Company for the same period; however, such
reimbursement shall be limited to the then current premium charged to
others by the Company for substantially similar coverage under COBRA
(or other mandatory healthcare continuation law then in effect). Any
amount payable to the Executive shall be subject to withholding of
applicable taxes as provided in Section 9 hereof. In the event of
Executive's death following termination giving rise to the benefit
described in this Section l(d), but before the expiration of such
benefits, Executive's dependents shall be entitled to such benefits.
(e) Sole Remedy. The Executive hereby agrees that amounts payable
under this Section 1 shall be Executive's sole and exclusive remedy
against the Company on account of termination of employment prior to a
Change of Control and on account of termination of employment more than
two (2) years following a Change of Control.
2. Compensation on Termination of Employment Within Two Years Following
A Change of Control.
This Section 2 shall apply to termination of Executive's employment
during the "Change of Control Period" (as defined in this Section 2). This
Section 2 shall not apply to termination of Executive's employment prior to a
Change of Control or more than two (2) years following a Change of Control:
(a) Definition of Certain Terms.
(i) "Good Reason" shall mean the occurrence or continuation,
without consent of Executive, after a Change of Control, of any of
the following events within the Change of Control Period:
(A) the assignment to Executive of any duties inconsistent
with the customary powers and duties that Executive held
immediately prior to the Change of Control, or an adverse change
in the status, position or conditions of Executive's employment
or the nature of Executive's responsibilities in effect
immediately prior to such Change of Control, or any removal of
Executive from, or any failure to re-elect Executive to, any of
such positions;
(B) a reduction by the Company in Executive's annual base
salary as in effect immediately prior to such Change of Control;
(C) the relocation of Executive's principal office to a
location outside a 35 mile radius from Executive's principal
office immediately prior to such Change of Control, except for
required travel on the Company's business to an extent
substantially consistent
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<PAGE> 4
with Executive's business travel obligations immediately prior
to such Change of Control;
(D) the failure by the Company to continue in effect any
benefit or compensation plan in which Executive participates
immediately prior to the Change of Control which is material to
Executive's total compensation, including but not limited to any
stock or stock option, employee stock ownership, bonus,
insurance, disability and vacation plans which the Company
currently has or any substitute or additional plans adopted
prior to the Change of Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan or plans)
has been made with respect to such plan, or the failure by the
Company to continue Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits provided
and the level of Executive's participation relative to other
participants, as in existence immediately prior to such Change
of Control; or
(E) the failure of the Company to obtain an agreement from
any successor to assume and agree to perform this Agreement as
contemplated herein.
(ii) A "Change of Control" shall be deemed to have taken place
if (i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Securities and Exchange Act of 1934, other
than Company or a wholly-owned subsidiary thereof or any employee
benefit plan of Company or any of its it subsidiaries, becomes the
beneficial owner of the Company securities having 20% or more of the
combined voting power of the then outstanding securities of the
Company that may be cast for the election of directors of the
Company (other than as a result of an in issuance of securities
initiated by the Company in the ordinary course of business); or
(ii) as the result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing
transactions less than a majority of the combined voting power of
the then outstanding securities of the Company or any successor
corporation or entity entitled to vote generally in the election of
the directors of the Company or such other corporation or entity
after such transaction are held in the aggregate by the holders of
the Company's securities entitled to vote generally in the election
of directors of the Company immediately prior to such transaction;
or (iii) during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board of
Directors of the Company cease for any reason to constitute at least
a majority thereof, unless the election, or the nomination for
election by the Company's shareholders, of each director of the
Company first elected during such
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<PAGE> 5
period was approved by a vote of at least two-thirds of the
directors of the Company then still in office who were directors of
the Company at the beginning of any such period.
(iii) "Change of Control Period" shall mean the two (2) year
period following a Change of Control.
(iv) "Change of Control Severance Benefits" shall mean all of
the following payments:
(A) any installments of Executive's base salary through the
date of termination of employment at the rate in effect at the
time the Notice of Termination is given,
(B) the Special Termination Payment; and
(C) the Medical Benefits.
(v) "Change of Control Date" shall mean the date on which a
Change of Control occurs.
(vi) "Medical Benefits" shall mean the reimbursement for
continued medical coverage for Executive and Executive's dependents
described in Section 1(d) hereof.
(vii) "Notice of Termination" shall refer to written notice
described in Section 2(d) indicating the specific termination
provision of this Agreement relied upon, setting forth in reasonable
detail the facts and circumstances claimed to provide the basis for
termination of Executive's employment under the provision so
indicated and stating the date of termination.
(viii) "Special Termination Payment" shall mean an amount
payable in a single lump sum equal to the product of (x) the sum of
the Executive's maximum annual salary paid during the five (5) year
period preceding the date of termination (inclusive of bonuses paid
to Executive during the 12-month period preceding the date of
termination, but excluding unearned bonuses negotiated by Executive
at the time of Executive's employment with the Company), multiplied
by (y) the number three (3).
(b) Termination Not Giving Rive To Special Termination Payments or
Medical Benefits. If Executive's employment is terminated during the Change of
Control Period for Cause (as defined in Section 1(b), or on account of
Disability (as defined in Section 1(a)), or if Executive dies during the Change
of Control Period, or if Executive terminates Executive's employment during the
Change
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<PAGE> 6
of Control Period without Good Reason, the Company shall pay to Executive any
installments of Executive's base salary as then in effect that would otherwise
be due through the date on which Executive's employment is terminated. The
Company shall then have no further obligations to the Executive under this
Agreement (unless accrued under the Company's benefit plans) except that in the
event of termination by death, the Executive's estate or beneficiaries, as the
case may be, shall be paid such amounts as may be payable to the Executive under
the Company's insurance policies and/or other benefit plans, and except that in
the event of termination by Disability, the Executive shall be paid such amounts
as Executive is entitled to receive under the Company's disability insurance
policies and plans then in effect covering the Executive.
(c) Termination Giving Rise to Change of Control Severance Benefits. If
the Executive's employment is terminated by the Company during the Change of
Control Period for any reason other than Cause, death of the Executive or
Disability, or if the Executive terminates his employment during the Change of
Control Period for Good Reason, then Executive shall be entitled to receive the
Change of Control Severance Benefits, all of which (except the Medical Benefits)
shall be paid to Executive within ten (10) days following the date of
termination.
(d) Notice of Termination. Any termination of Executive's employment by
the Company or by Executive pursuant to this Section 2 shall be communicated by
written notice of termination (the "Notice of Termination") to the other party
hereto, which shall indicate the specific termination provision in the Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment and shall
state the date of termination.
(e) Sole Remedy. The Executive hereby agrees that the Change of Control
Severance Benefits shall be Executive's sole and exclusive remedy against the
Company or any successor on account of termination of employment during the
Change of Control Period.
3. Certain Reduction in Payments by the Company.
(a) Definition of Certain Terms.
(i) A "Payment" shall mean any payment or distribution in the
nature of compensation to or for the benefit of Executive, whether paid or
payable pursuant to this Agreement or otherwise.
(ii) An "Agreement Payment" shall mean a Payment paid or payable on
account of termination of employment during the Change in Control Period
pursuant to Section 2 of this Agreement (disregarding the reduction
provided by Section 3(b)).
(iii) "Net After Tax Receipt" shall mean the Present Value (as
defined below) of all Payments that are contingent on a Change of Control
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), net of all taxes imposed on
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<PAGE> 7
Executive with respect thereto under Sections 1 and 4999 of the Code,
determined by applying the highest marginal rate under Section 1 of the
Code which applied to Executive's taxable income for the immediately
preceding taxable year.
(iv) "Present Value" shall mean such value determined in
accordance with Section 280G(d)(4) of the Code.
(v) "Reduced Amount" shall mean the smallest aggregate amount
of Agreement Payments which (a) is less than the sum of all Agreement
Payments and (b) results in aggregate Net After Tax Receipts which are
equal to or greater than the Net After Tax Receipts which would result
if the aggregate Agreement Payments were any other amount less than the
sum of all Agreement Payments.
(b) Limitation on Agreement Payments. It is intended that all
Agreement Payments hereunder, together with all other Payments to
Executive contingent upon or in connection with a Change of Control,
are reasonable compensation for Executive's service to Company and its
subsidiaries. Notwithstanding the foregoing, should Company determine,
based upon the opinion of the independent accounting advisors of
Company immediately prior to the Change of Control ("Accounting Firm"),
that the Agreement Payments and other Payments, together with any other
amounts received by Employee that must be included in such
determination, would result in the payment of an "excess parachute
payment" as defined in Section 280G of the Code, then Company will
reduce the Agreement Payments to a Reduced Amount which cannot be less
than the maximum amount that would permit a determination that Employee
has not received an excess parachute payment under the foregoing Code
provision. Such reduction will be made if, but only if, the amount
payable to Employee hereunder without regard for the foregoing
reduction would result in Net After Tax Receipts which are less than
the Net After Tax Receipts that would result after taking into account
any such reduction.
(c) Opinion of Accounting Firm. Company may reduce the Agreement
Payments pursuant to this Section 3 only if within thirty (30) days of
Executive's termination it provides Executive with an opinion of the
Accounting Firm that Executive will be considered to have received
"excess parachute payments" as defined in Section 280G of the Code if
Executive were to receive the full amounts owing pursuant to the terms
of this Agreement and that the Reduced Amount proposed to be paid by
the Company will result in Net After Tax Receipts that are equal to or
greater than the Net After Tax Receipts which would result from
reduction in the Agreement Payments by any other amount.
4. Unauthorized Disclosure.
(a) During the period in which the Executive is employed by the
Company, the Executive shall not, without the prior written consent of
the Board of Directors, or a person authorized thereby, disclose to
any person, other than a person to whom disclosure is
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<PAGE> 8
necessary or appropriate in connection with the performance by the
Executive of Executive's duties as an officer of the Company, or its
subsidiaries or its affiliates, any confidential information obtained
by Executive while in the employ of the Company with respect to any of
the Company's products, improvements, formulae, designs or styles,
processes, customers, methods of marketing or distribution, systems,
procedures, plans, proposals, policies or methods of manufacture, the
disclosure of which Executive knows, or should have reason to know,
will be damaging to the Company or its subsidiaries or its affiliates,
nor shall Executive make any false statements regarding the Company or
its subsidiaries or its affiliates or take any other action which
Executive knows, or should have reason to know, will be damaging to the
Company or its subsidiaries or its affiliates; provided, however, that
confidential information shall not include any information known
generally to the public (other than as a result of unauthorized
disclosures by the Executive) or any information of a type not
otherwise considered confidential by persons engaged in the same
business or a business similar to that conducted by the Company.
Following the termination of the Executive's employment with the
Company for any reason, the Executive shall not disclose any
confidential information of the type described above or take any action
of type described above except as may be required in the opinion of the
Executive's counsel in connection with any judicial or administrative
proceeding or inquiry. The provisions of this Section 4 shall be
binding upon the Executive's heirs, successors and legal
representatives.
(b) Company agrees to refrain from making derogatory or defamatory
statements about or concerning Executive.
5. Non-Competition. During the period in which the Executive is
employed by the Company and for a period of one (1) year following any
termination giving rise to salary continuation payments pursuant to Section 1(c)
or to Change of Control Severance Benefits pursuant to Section 2(c), the
Executive will not (a) directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
business which is in substantial competition with any business conducted by the
Company or by any group, division or subsidiary of the Company in any area where
such business is being conducted at the time of such termination (provided that
ownership of five percent (5%) or less of the voting stock of any publicly held
corporation shall not constitute a violation hereof) or (b) directly or
indirectly employ, solicit for employment, or advise or recommend to any other
persons that they employ or solicit for employment, any employee of the Company
or any of its subsidiaries or affiliates.
6. Specific Performance. The Executive acknowledges and agrees that, in
the event of a breach of Section 4 or Section 5 hereof by the Executive, the
Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.
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<PAGE> 9
7. Binding Agreement. This Agreement and all obligations of the Company
hereunder shall be binding upon the successors and assigns of the Company. This
Agreement and all rights of the Executive hereunder shall inure to the benefit
of and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
[Name]
[Address]
If to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attn: General Counsel
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement, all federal, state, city or other taxes as shall
be required pursuant to any law or government regulation or ruling.
10. Governing Law. This Agreement shall be construed according to the
laws of Tennessee, without giving effect to the principles of conflicts of laws
of such State.
11. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by Executive and the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
However, notwithstanding anything in this Agreement to the contrary, if in the
opinion of the Company's accountants, any provision of this Agreement would
preclude the use of "pooling of interest" accounting treatment for a Change of
Control transaction
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<PAGE> 10
that (i) would otherwise qualify for such accounting treatment and (ii) is
contingent upon qualifying for such accounting treatment, then to the extent any
provision of this Agreement disqualifies the transaction as a "pooling of
interest" transaction (including, if applicable, the entire Agreement), such
provision(s) shall be null and void as of the date hereof.
12. Binding Effect. This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Executive's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
otherwise, other than by a transfer by his will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
13. Entire Contract. This Agreement constitutes the entire agreement
and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Agreement, including, without limitation, any employment
agreement or any severance or indemnification, by and between the Company and
the Executive, all of such agreements being rendered null and void by this
Agreement.
14. Term. This Agreement shall be terminable only upon the occurrence
of any one of the following events: (a) the termination of Executive with
payment in full of all the payments/benefits described in Sections 1 or 2 hereof
as appropriate; or (b) the Company (or its successor in interest) and Executive
so agree in writing; provided, however, that the provisions of Sections 4 and 5
hereof shall survive without limitation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SERVICE MERCHANDISE COMPANY, INC.
By:
-------------------------------------
Accepted and Agreed:
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Exhibit 10.11
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the "Agreement") is
entered into between Service Merchandise Company, Inc., a Tennessee corporation
(the "Company"), and Gary M. Witkin, a resident of Brentwood, Tennessee (the
"Executive"), originally effective as of November 1, 1994, with the effective
date of this amendment and restatement being December 16, 1998. The Company and
the Executive are sometimes referred to herein as the "parties."
ARTICLE I
EMPLOYMENT
The Company hereby employs the Executive and the Executive hereby
accepts employment with the Company upon the terms and conditions set forth
herein.
ARTICLE II
DUTIES AND RESPONSIBILITIES
2.1 Scope of Service. The Executive shall, during the term of this
Agreement, devote all of his business time and attention and exert his best
efforts in the performance of his duties hereunder and, in performing such
duties, shall promote the profit, benefit and advantage of the Company and its
business. The Executive shall not, during the term of this Agreement, engage in
any other business activity (whether or not such business activity is pursued
for gain, profit or other pecuniary advantage) if such business activity would
impair the Executive's ability to carry out his duties hereunder; provided,
however, that this paragraph shall not be construed to prevent the Executive
from investing his personal assets as a passive investor.
2.2 Position and Duties. Subject to the power of the Board of Directors
of the Company (the "Board") to elect and remove officers, the Executive shall,
during the term of this Agreement, serve as President and Chief Executive
Officer or in any other comparable position as the Board of Directors may from
time to time determine, shall report directly to the Chairman of the Company,
and shall have such powers and duties as may be prescribed by the Board. Subject
to the power of the Board to designate and define the powers and duties of
officers of the Company, the Executive's initial areas of responsibility at the
Company shall include responsibility for the following areas: Merchandising,
Marketing, Advertising, Store Operations and Human Resources. The Executive
agrees to serve without additional compensation in one or more offices or as a
director of any of the Company's subsidiaries or affiliates. The Executive shall
faithfully and diligently perform the services and functions relating to his
office (or reasonably incident thereto) as may be designated from time to time
by the Board. It is acknowledged that a condition to the effectiveness of this
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Agreement is that, as of the Executive's Employment Date, the Board shall have
acted to create a vacancy on the Board of Directors and shall have appointed the
Executive to fill that vacancy.
2.3 Term of Employment. The Executive's employment with the Company
hereunder shall commence on the date of first employment indicated on the
records of the Company, but no later than November 21, 1994 (the "Employment
Date") and shall continue until terminated by either of the parties upon ninety
(90) days' written notice to the other in accordance with Section 7.5 of this
Agreement.
2.4 Resignation as Director. If the Executive's employment with the
Company is terminated for any reason, whether such termination is voluntary or
involuntary, the Executive shall resign his position as a director of the
Company, such resignation to be effective no later than the date of termination
of the Executive's employment with the Company.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 Annual Base Salary. As compensation for services performed by the
Executive during the term of his employment hereunder, the Company agrees to pay
and the Executive agrees to accept an annual base salary ("Base Salary"),
payable in accordance with the then current payroll policies of the Company
(currently, on a weekly basis), of not less than seven hundred thousand dollars
($700,000), subject to applicable withholding taxes. Such Base Salary shall be
subject to annual review by the Board of Directors (or by the Compensation
Committee or such other appropriate committee of the Board as the Board may from
time to time determine) at the meeting of the Board held in April of each year,
with the first such review to occur at the 1996 April Board meeting. The Board
(or the appropriate committee thereof) may determine, as a result of any annual
review, to provide an increase in the Executive's Base Salary.
3.2 Incentive Compensation. During the term of his employment
hereunder, the Executive shall be entitled to receive the following incentive
compensation in addition to his Base Salary:
(a) Bonus Plan. The Executive shall be entitled to participate
in the Company's Key Management Incentive Plan (the "Incentive Plan")
(a copy of which is attached hereto as Exhibit A), subject to
shareholder approval of such Plan, under which the Executive may
receive an annual bonus amount, based upon a percentage of the
Executive's Base Salary and contingent upon the Company's attainment of
certain goals as described in the Incentive Plan. The Executive's
eligibility for such bonus shall be subject to, and determined in
accordance with, the terms and conditions of the Incentive Plan, with
the following exceptions:
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(i) Substitution of Performance Grid. In determining
the Executive's bonus in any given year, the following
performance grid shall be substituted in lieu of the
performance grid provided in the Incentive Plan:
<TABLE>
<S> <C> <C> <C> <C> <C>
Company
Achievement 100% 110% 125% 140% 150%
Bonus Percentage
Base Pay 20% 25% 35% 50% 60%
</TABLE>
(ii) Minimum Bonus. With respect to fiscal years 1994
through 1996, the Executive shall be entitled to a minimum
bonus of not less than fifteen percent (15%) of his Base
Salary for such year ("Minimum Bonus"), which Minimum Bonus
shall be payable to the Executive at such time as bonuses are
generally paid to executives of the Company. Any bonus earned
in accordance with the performance grid with respect to any
year for which a Minimum Bonus is payable shall be offset by
such Minimum Bonus.
(iii) No Proration for 1994 Bonus. The bonus payable
to the Executive with respect to the 1994 fiscal year shall
not be prorated to reflect only a partial year of service by
the Executive during such year.
(b) Employee Stock Incentive Plan. The Executive shall be
entitled to participate in the Company's 1989 Employee Stock Incentive
Plan (the "Stock Incentive Plan") (a copy of which is attached hereto
as Exhibit B) and, pursuant to and in accordance with the terms and
conditions of the Stock Incentive Plan, the Company shall grant to the
Executive the awards described below:
(i) Restricted Stock.
(A) Grant of Stock. Pursuant to and in accordance
with the terms of the Stock Incentive Plan, the
Company shall grant to the Executive, on the
Executive's Employment Date, the following shares
of Restricted Stock (defined in the Stock Incentive
Plan as Common Stock, $.50 par value per share, of
the Company, that is subject to restrictions under
Section 7 of such Plan):
(I) Shares of Restricted Stock with a market
value of $2.1 million as of the date of execution
of this Agreement by the last party to execute
the Agreement. The Executive shall make a current
and timely election under Section 83(b) of the
Internal Revenue Code of 1986, as amended (the
"Code"), with respect to the Restricted Stock
granted to the Executive under this subparagraph
(I); and
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(II) One hundred twenty-five thousand
(125,000) shares of Restricted Stock.
(B) Terms and Conditions of Grant. In addition to
applicable terms and conditions of the Stock Incentive Plan with
respect to the Company's grant of Restricted Stock to the
Executive hereunder, such grant shall be subject to the following
terms and conditions:
(I) The applicable "Restriction Period" referenced
in the Stock Incentive Plan with respect to a grant of
Restricted Stock shall (1) with respect to the grant
of Restricted Stock to the Executive under
subparagraph (b)(i)(A)(I) above, commence on the
Executive's Employment Date and end on the third
anniversary thereof (the "Three-Year Restriction
Period"), at which time the Restricted Stock shall
immediately vest in the Executive and the restrictions
thereon shall immediately lapse; and (2) with respect
to the grant of Restricted Stock to the Executive
under subparagraph (b)(i)(A)(II) above, commence on
the Executive's Employment Date and end in
installments ("Installment Restriction Periods"), as
follows:
<TABLE>
<CAPTION>
Expiration Date of Installment Restriction Period Number of Shares
------------------------------------------------- ----------------
<S> <C>
First Anniversary of Executive's Employment Date 12,500 shares
Second Anniversary of Executive's Employment Date 12,500 shares
Third Anniversary of Executive's Employment Date 12,500 shares
Fourth Anniversary of Executive's Employment Date 17,500 shares
Fifth Anniversary of Executive's Employment Date 25,000 shares
Sixth Anniversary of Executive's Employment Date 45,000 shares
</TABLE>
At the end of each Installment Restriction Period, the Restricted
Stock subject to such Period shall immediately vest in the
Executive and the restrictions thereon shall immediately lapse.
(II) Upon the occurrence of a Trigger Date (as
defined in subparagraph (b) of Section 4.2 of this
Agreement) prior to expiration of the Three-Year
Restriction Period, the Executive's Restricted Stock
described in subparagraph (b)(i)(A)(I) shall
immediately vest in the Executive and the restrictions
thereon shall immediately lapse. If the Executive's
employment with the Company is terminated for any
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reason prior to expiration of the Three-Year Restriction
Period, and such termination does not cause a Trigger Date
to occur, all rights to the Executive's Restricted Stock
described in subparagraph (b)(i)(A)(I) shall be forfeited
by the Executive as of the date of termination of his
employment.
(III) If the Executive's employment with the
Company is terminated for any reason prior to expiration
of any Installment Restriction Period, whether or not such
termination causes a Trigger Date (as defined in
subparagraph (b) of Section 4.2 of this Agreement) to
occur, all rights to the Executive's Restricted Stock
described in subparagraph (b)(i)(A)(II) shall be forfeited
by the Executive as of the date of termination of his
employment.
(C) Payment of Taxes. In accordance with and subject to the
conditions provided in subparagraph (a) of Section 3.7 of this
Agreement, the Company shall pay certain taxes actually payable by the
Executive with respect to the Restricted Stock granted to the
Executive pursuant to subparagraph (b)(i)(A)(I) of this Section 3.2
but shall not pay any taxes payable with respect to the Restricted
Stock granted to the Executive pursuant to subparagraph (b)(i)(A)(II)
of this Section 3.2.
(ii) Non-Qualified Stock Options.
(A) Grant of Option. Pursuant to and in accordance with the terms
of the Stock Incentive Plan, the Company shall grant to the Executive,
as of the Executive's Employment Date, a Non-Qualified Stock Option
(as that term is defined in the Stock Incentive Plan) to purchase one
hundred twenty-five thousand (125,000) shares of Common Stock, $.50
par value per share, of the Company.
(B) Terms and Conditions of Grant. In addition to applicable
terms and conditions of the Stock Incentive Plan with respect to the
Company's grant of a NonQualified Stock Option to the Executive, such
grant shall be subject to the following terms and conditions:
(I) The Option Price (as defined in the Stock Incentive Plan)
per share of the Common Stock purchasable under the Executive's
Non-Qualified Stock Option shall be the Fair Market Value
(defined in the Stock Incentive Plan) of such stock as of the
date of execution of this Agreement by the last party to execute
the Agreement.
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(II) Except as provided in subparagraph (III) below, the
Executive's Non-Qualified Stock Option shall be exercisable
in installments, as follows:
<TABLE>
<CAPTION>
Earliest Date Exercisable Number of Shares
------------------------- ----------------
<S> <C>
First Anniversary of Executive's Employment Date 12,500 shares
Second Anniversary of Executive's Employment Date 12,500 shares
Third Anniversary of Executive's Employment Date 12,500 shares
Fourth Anniversary of Executive's Employment Date 17,500 shares
Fifth Anniversary of Executive's Employment Date 25,000 shares
Sixth Anniversary of Executive's Employment Date 45,000 shares
</TABLE>
(III) No portion of the Executive's Non-Qualified Stock
Option shall be exercisable more than ten (10) years after the
date such option was granted to the Executive.
3.3 Other Compensation. The Company shall pay the Executive additional
compensation in the amount of thirty thousand dollars ($30,000) during each year
of his employment hereunder, which amount shall be treated as paid under a
"nonaccountable plan" pursuant to Section 1.62-2(c)(3) of the Treasury
Regulations.
3.4 Other Benefits.
(a) Standard Benefit Plans. During the term of his employment
hereunder, the Executive shall be entitled to participate in all
standard benefit plans of the Company (including without limitation any
life, accident, medical, hospitalization, disability, pension or profit
sharing plan afforded by the Company to its employees generally), if
and to the extent that the Executive is eligible to so participate in
accordance with the terms of any such plan, provided, however, that
both parties understand and agree that the termination benefits
provided under the terms of this Agreement are in lieu of any severance
benefits to which the Executive may otherwise be entitled under the
Company's Severance Pay Plan. Notwithstanding any of the above, nothing
herein is intended, or shall be construed, to affect the Company's
right to amend or terminate any of its standard benefit plans or to
require the Company to institute any particular plan or benefit except
as otherwise specifically required in this Agreement. The benefit plans
that the Company currently provides for its employees generally and in
which the Executive shall be entitled to participate include, without
limitation, the following:
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SMC Health Care Plan
Business Travel Accident Plan
Group Life Insurance Plan (currently provides life insurance
equal to two (2) times Base Salary)
Long-Term Disability Plan
Restated Retirement Plan
Savings and Investment Plan (which is a 401(k) plan)
(b) Additional Benefits. In addition to participation in the
benefit plans described in subparagraph (a) above, the Company shall
provide the Executive with the following benefits during the term of
the Executive's employment hereunder:
(i) Participation in the Company's Executive Medical
Plan, subject to and in accordance with the terms of such Plan
(which, generally, provides an annual ten thousand dollar
($10,000) family benefit to cover deductibles and co-payments
under the SMC Health Care Plan referenced in subparagraph (a)
above and any other medical, dental or vision expenses that
are not covered by the SMC Health Care Plan or any other
health plan sponsored by the Company, but only to the extent
any such expenses are deductible under Section 213 of the
Code);
(ii) Payment of all premiums for individual and dependent
coverage under the SMC Health Care Plan;
(iii) Reimbursement of any premiums payable by the
Executive for coverage of the Executive and/or his eligible
dependents pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), to the
extent such coverage is required in order to continue the
Executive's prior health care coverage from the date of the
Executive's termination of employment with his current
employer through the first ninety (90) days of his employment
with the Company hereunder;
(iv) In accordance with and subject to the conditions
provided in subparagraph (a) of Section 3.7 of this Agreement,
payment by the Company of certain taxes actually payable by
the Executive with respect to any premium payment or
reimbursement provided to the Executive under subparagraphs
(ii) and (iii) above;
(v) Four weeks' paid vacation granted on the Employment
Date, and accrued thereafter at the rate of four (4) weeks per
year, subject to the terms of the Company's currently existing
vacation policy, as from time to time amended; and
(vi) The use of a vehicle to be provided by the Company,
which vehicle shall be an American brand of the Executive's
choice with a fair market value no greater than forty-five
thousand dollars ($45,000), subject to and in accordance
with the terms of the Company's currently existing policy,
as from time to time amended,
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with respect to executive use of Company vehicles, including
without limitation the terms of such policy relating to the
Company's periodic replacement of such vehicles with new vehicles.
3.5 Reimbursement of Relocation Expenses. The Company shall reimburse
the Executive for expenses in connection with the Executive's move from
Connecticut to Tennessee as described below, with the exception that certain
real estate expenses may be provided through the services of a third party
relocation service, the cost of which shall be borne by the Company. The choice
between the foregoing alternatives as to certain real estate expenses shall be
at the sole option of the Company.
(a) Temporary Housing. The Company shall provide the Executive
with a two-bedroom condominium of the Executive's choice, with maid
service, for a period beginning on the Employment Date and ending no
later than nine (9) months thereafter, provided, however, that the
amount paid by the Company for any temporary housing provided hereunder
(including any amount paid for maid service) shall not exceed three
thousand dollars ($3,000) per month.
(b) Duplicate Mortgage Payments. In the event that and so long
as the Executive owns both a new residence and his old residence during
the transition period following his Employment Date, the Company shall
reimburse the Executive for the lesser of (i) his monthly mortgage
payment for his new residence in Tennessee or (ii) his monthly mortgage
payment for his former residence in Connecticut, provided, however,
that the Company shall reimburse the Executive only for one such
mortgage payment each month during the transition period, which period
shall commence with the first month during which the Executive is
required to make duplicate mortgage payments (one for his new residence
in Tennessee and one for his old residence in Connecticut) and shall
end with the earlier of (i) the month during which the Executive sells
his old residence in Connecticut or (ii) the fourth month during which
the Executive is required to make the duplicate mortgage payments
described above.
(c) Real Estate Expenses. The Company shall reimburse the
Executive for the following real estate expenses associated with the
sale of his current residence and the acquisition of a new residence:
(i) Normal and customary closing costs, up to one percent (1%)
of the sale price, on the sale of the Executive's current residence
and also on his acquisition of a new residence;
(ii) Any sales commission paid by the Executive, up to five
percent (5%) of the sale price, upon the sale of the Executive's
current residence; and
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(iii) The excess, if any, of
(A) the original purchase price plus capital
improvements for the Executive's current residence
(subject to a maximum amount of $1.85 million), over
(B) the amount received by the Executive upon the
sale of such residence as the gross sale price therefore,
such excess amount to be paid to the Executive as soon as
reasonably practicable after the closing of the sale of
such residence; provided, however, that receipt of such
amount by the Executive from the Company is contingent
upon receipt by the Company from the Executive of
documentation, satisfactory to the Company, substantiating
the amount of the original purchase price and capital
improvements for such residence, and is subject to the
right of the Company to approve any sales contract for the
sale of such residence and to elect to purchase such
residence itself or to provide a third party buyer
(approved by the Company) to purchase such residence.
Notwithstanding any of the above, nothing in this
subparagraph (c) shall be construed to require the Company
to purchase, or to provide a third party purchaser for,
the Executive's current residence.
(d) Moving Expenses. The Company shall reimburse the Executive
for all reasonable expenses related to moving the Executive's household
and personal items, including any expenses incurred to move antique
cars, boats or other collectibles.
(e) Commuting Expenses. The Company shall reimburse the
Executive for reasonable travel expenses consistent with current
Company policy necessary for the Executive to return to his home in
Connecticut each weekend until his relocation is complete, for a period
beginning on the Employment Date and ending as soon as his relocation
is complete (but, in any event, no later than nine (9) months after his
Employment Date).
(f) Payment of Taxes. In accordance with and subject to the
conditions provided in subparagraph (a) of Section 3.7 of this
Agreement, the Company shall pay certain taxes actually payable by the
Executive with respect to any reimbursed relocation expenses provided
to the Executive under this Section 3.5, if and to the extent such
relocation expenses are considered to be taxable income.
3.6 Legal Fees. The Company shall reimburse the Executive for any
reasonable legal fees incurred by the Executive for review and negotiation of
this Agreement, provided, however, that such reimbursement is contingent upon
receipt by the Company from the Executive (or his attorney) of documentation,
satisfactory to the Company, substantiating such fees and itemizing the services
rendered therefor, and provided further, that such reimbursement shall not
exceed five thousand dollars ($5,000).
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3.7 Payment of Taxes.
(a) In accordance with and subject to the following terms and
conditions, the Company shall pay certain taxes actually payable by
the Executive with respect to certain amounts paid to the Executive
under this Agreement:
(i) Provided that the Executive makes a current and timely
election under Section 83(b) of the Code, the Company shall pay
any federal income and payroll withholding taxes and, provided
that the Executive complies with subparagraph (v) below, any
Connecticut state and local income taxes, to the extent such
federal and state and local taxes are actually payable by the
Executive with respect to the Restricted Stock granted to the
Executive pursuant to subparagraph (b)(i)(A)(I) of Section 3.2
of this Agreement and also with respect to the amount of taxes
paid hereunder, computed in the manner described in subparagraph
(iv) below.
(ii) The Company shall pay any federal income and payroll
withholding taxes and, provided that the Executive complies
with subparagraph (v) below, any Connecticut state and local
income taxes, to the extent such federal and state and local
taxes are actually payable by the Executive with respect to
any premium payment or reimbursement provided to the Executive
under subparagraphs (b)(ii) and (b)(iii) of Section 3.4 of this
Agreement and also with respect to the amount of taxes paid
hereunder, computed in the manner described in subparagraph
(iv) below.
(iii) The Company shall pay any federal income and payroll
withholding taxes and, provided that the Executive complies
with subparagraph (v) below, any Connecticut state and local
income taxes, to the extent such federal and state and local
taxes are actually payable by the Executive with respect to
any reimbursed relocation expenses provided to the Executive
under Section 3.5 of this Agreement and also with respect to
the amount of taxes paid hereunder, if and to the extent
such relocation expenses are considered to be taxable
income, computed in the manner described in subparagraph (iv)
below.
(iv) Any calculation of taxes payable by the Company under
this Agreement shall be computed at the marginal rate of tax
applicable to the Executive (currently 39.6% for federal
income tax on taxable income in excess of $250,000, 1.45%
for payroll tax on wages in excess of $135,000, and 4.5% for
Connecticut state and local income tax on all taxable
income); provided, however, that any calculation of taxes
payable by the Company under this Agreement shall assume the
full deductibility of state and local income taxes for
purposes of computing federal income tax liability.
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(v) The Executive shall take such reasonable steps as
may be necessary to minimize the applicability of
Connecticut state and local income taxes to any amounts
payable to the Executive under this Agreement, including
without limitation such reasonable steps as may be necessary
to enable the Executive to claim Tennessee residency for the
Executive and his family as promptly as practicable
following his termination of employment with his current
employer. The Executive shall also permit the Company to
review any Connecticut state or local tax return, prior to
the time it is filed by the Executive, to the extent such
return relates to any amounts paid to the Executive under
this Agreement.
(b) To the extent required by law, federal, state and local income
and payroll withholding taxes shall be withheld on all cash and
in-kind payments made by the Company to the Executive.
ARTICLE IV
TERMINATION OF EMPLOYMENT
4.1 Termination of Agreement. All of the terms of this Agreement shall
cease upon termination of the Executive's employment, except to the extent
otherwise provided by the terms of this Agreement or any benefit plan documents
and policies described herein.
4.2 Rights of Executive Upon a Trigger Date.
(a) Upon the occurrence of a Trigger Date (as defined in
subparagraph (b) below), in addition to any Standard Termination
Amounts (as defined in subparagraph (c) below), the Executive shall be
entitled to the following termination benefits, provided, however, that
the Executive's right to any such benefits is expressly conditioned
upon his compliance in all respects with Section 4.5 (Non-Competition)
and Section 4.6 (Unauthorized Disclosure; Adverse Statements) of this
Agreement at all times prior to each payment of a benefit (or, in the
case of the vesting of Restricted Stock, at all times prior to the
Trigger Date):
(i) as salary continuation, payment of (A) an amount equal to
two (2) times the Executive's Base Salary in effect immediately
prior to the Trigger Date, plus (B) an amount equal to any unpaid
Minimum Bonus that would otherwise be payable to the Executive
pursuant to and in accordance with subparagraph (a)(ii) of
Section 3.2 of this Agreement (in the aggregate, the "salary
continuation payment"), which salary continuation payment shall
be payable, at the Company's option, either in a lump sum or over
a thirteen (13) month period commencing on the Trigger Date and
ending on the thirteenth monthly anniversary thereof (the
"severance period"), with one half of such salary continuation
payment payable in equal monthly
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installments over the first twelve (12) months of the
severance period, and the remaining one half payable on the
thirteenth monthly anniversary of the Trigger Date;
(ii) reimbursement for the premium paid by the
Executive for continued coverage for the Executive (and any
dependents of the Executive covered by the Company's health
care plans as of the Trigger Date) under the Company's health
care plan pursuant to COBRA (or any other mandatory health
care continuation law then in effect), such coverage then
being substantially similar to that provided by the Company to
its senior executives and their eligible dependents, subject
to the following terms and conditions:
(A) The Executive will be entitled to the
reimbursement provided hereunder for the period
commencing with the Trigger Date and ending on the
earlier of (I) the second anniversary of the Trigger
Date, or (II) the date the Executive becomes eligible
to receive any health care coverage from another
employer of the Executive or his spouse that does not
contain any exclusion or limitation with respect to
any pre-existing condition of the Executive or his
covered dependents;
(B) If the Executive (or his dependents
covered by the Company's health care plans as of the
Trigger Date) elects not to continue coverage under
COBRA (or any other mandatory health care
continuation law then in effect) or is not eligible
to continue coverage under such law and is otherwise
eligible for the benefits provided under this
subparagraph (a)(ii), the Company will reimburse the
Executive for the cost of purchasing substantially
similar coverage or a supplement required to achieve
substantially similar coverage under another
arrangement approved by the Company for the period
described in subparagraph (A) above; provided,
however, that such reimbursement shall be limited to
the then current premium charged by the Company to
others for substantially similar coverage under COBRA
(or any other mandatory health care continuation law
then in effect); and
(C) Any amount payable to the Executive
hereunder shall be subject to withholding of
applicable taxes as provided in Section 3.7 of this
Agreement; and
(iii) the immediate vesting of, and the lapse of any
restrictions on, any Restricted Stock granted to the Executive
in accordance with subparagraph (b)(i)(A)(I) of Section 3.2 of
this Agreement.
(b) For purposes of this Agreement, "Trigger Date" shall be
the date upon which any of the following events occurs:
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(i) termination of the Executive's employment hereunder by
the Company for any reason other than for Cause or
Disability (each of which is defined in Section 4.3 below)
or as a result of the Executive's death; or
(ii) termination of the Executive's employment hereunder
by the Executive for Good Reason (as hereinafter defined)
pursuant to a Notice of Termination (as hereinafter
defined). For all purposes of this Agreement, "Good Reason"
shall mean the occurrence, without the Executive's express
written consent, of any of the following circumstances
unless, in the case of subparagraph (A) or (B), such
circumstances are fully corrected prior to the Date of
Termination (as defined below) specified in the Notice of
Termination (defined below) given in respect thereof:
(A) other than for Cause or Disability (each of which
is defined in Section 4.3 below), or by reason of his
election as Chief Executive Officer of the Company, (I)
assignment by the Company to the Executive of any duties
that are materially inconsistent with the customary powers
and duties of a president and chief executive officer of a
company of the size, type and nature of the Company; (II)
the Company's removal of the Executive from his position
as President and Chief Executive Officer of the Company;
or (III) any material diminution by the Company in the
nature of the Executive's responsibilities as President
and Chief Executive Officer of the Company;
(B) failure of the Company, prior to the
effectiveness of any acquisition of the Company or
substantially all of the Company's assets, to obtain an
agreement from the successor to assume and agree to
perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if
no such acquisition had taken place;
(C) any material breach of this Agreement by the
Company which is not cured within thirty (30) days after
delivery to the Company of the Notice of Termination (as
defined below);
(D) failure of the Board of Directors to elect the
Executive as its Chief Executive Officer within ninety
(90) days following the earlier of the following dates:
(I) the date of resignation, retirement or
termination of Raymond Zimmerman from his position
as Chief Executive Officer of the Company, or
(II) April 30, 1998; or
(E) following a Change of Control (as defined in
Section 5.2),
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(I) a reduction by the Company in Executive's
annual base salary as is effective immediately prior
to a Change of Control,
(II) the relocation of Executive's principal
office to a location outside a 35 mile radius from
Executive's principal office immediately prior to
such Change of Control, except for required travel
on the Company's business to an extent
substantially consistent with Executive's business
travel obligations immediately prior to such Change
of Control, or
(III) the failure by the Company to continue
in effect any benefit or compensation plan in which
Executive participates immediately prior to the
Change of Control which is material to Executive's
total compensation, including but not limited to any
stock or stock option, employee stock ownership,
bonus, insurance, disability and vacation plans
which the Company currently has or any substitute
or additional plans adopted prior to the Change of
Control, unless an equitable arrangement (embodied
in an ongoing substitute or alternative plan or
plans) has been made with respect to such plan, or
the failure by the Company to continue Executive's
participation therein (or in such substitute
or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits
provided and the level of Executive's participation
relative to other participants, as in existence
immediately prior to such Change of Control.
Any purported termination of the Executive's employment
hereunder by the Executive for Good Reason (as defined
above) shall be pursuant to a written Notice of
Termination delivered to the Company in accordance with
Section 7.5 of this Agreement. For purposes of this
subparagraph (ii), a "Notice of Termination" shall mean a
notice which shall expressly indicate the specific
termination provisions in this Agreement upon which the
Executive is relying; shall set forth in reasonable detail
the facts and circumstances claimed by the Executive to
provide a basis for termination of the Executive's
employment under the provisions so indicated; and shall
specify a Date of Termination (which shall not be less
than ninety (90) days from the date such Notice of
Termination is given).
(c) For purposes of this Agreement, "Standard Termination
Amounts" shall mean, as of the date of termination of the Executive's
employment hereunder, prorated as appropriate, the following: (i) any
earned but unpaid installments of the Executive's Base Salary (as then
in effect) that would otherwise be due through the date of his
termination; (ii) any earned but unpaid installments of the additional
compensation provided under Section 3.3 of this Agreement to the extent
such installments would otherwise be due through the
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Executive's date of termination; and (iii) any payments or benefits
otherwise due to the Executive under and in accordance with the terms
of any benefit plan documents and policies described in this Agreement.
4.3 Rights of Executive Upon Other Voluntary Termination or Termination
for Cause, Disability or Death.
(a) Except as otherwise provided in Section 4.2, above, if (i)
the Company terminates the Executive's employment hereunder for Cause
or Disability (each of which is defined below), (ii) the Executive
voluntarily resigns for any reason (other than termination under
subparagraph (b)(ii) of Section 4.2 above), or (iii) the Executive
dies, then, in each case, the Executive (or his estate or
beneficiaries, as the case may be) shall be entitled to receive only
any Standard Termination Amounts (as defined in subparagraph (c) of
Section 4.2 above) payable to the Executive. The Company shall then
have no further obligations to the Executive under this Agreement.
(b) For purposes of this Agreement, the following definitions of
"Cause" and "Disability" shall apply:
(i) "Cause" shall include the following:
(A) a felony conviction of the Executive, the failure
of the Executive to contest prosecution for a felony, or
the Executive's willful misconduct or dishonesty, any of
which is directly and materially harmful to the business
or reputation of the Company or its Subsidiaries or
Affiliates (as defined in the Stock Incentive Plan); for
this purpose, no act, or failure to act, on the part of
the Executive shall be considered "willful" unless done,
or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action or omission
was in the best interest of the Company;
(B) any violation by the Executive of
Section 4.5 (Non-Competition) of this Agreement; or
(C) any material breach of this Agreement by the
Executive which is not cured within thirty (30) days after
delivery to the Executive of written notice of such breach
provided in accordance with Section 5.5 of this Agreement,
which notice shall set forth in reasonable detail the
facts and circumstances claimed by the Company to
constitute a material breach of this Agreement by the
Executive.
(ii) "Disability" shall have the same meaning as is
provided under the Company's long-term disability plan.
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4.4 Employment Rights. Nothing expressed or implied in this Agreement
shall create any right or duty on the part of the Company or the Executive to
employ the Executive or to have the Executive remain in the employment of the
Company. If this Agreement or the employment of the Executive is terminated
under circumstances in which the Executive is not entitled to the termination
benefits provided in Section 4.2 of this Agreement, and except for any right or
employee benefit that the Executive may have pursuant to the terms of any other
agreement, policy, plan, program or arrangement of the Company, including any
right to indemnification provided by contract, state law or the charter or
by-laws of the Company, neither the Company nor the Executive shall have any
further obligation or liability to the other hereunder or otherwise with respect
to the Executive's prior or future employment by the Company.
4.5 Non-Competition. During the period in which the Executive is
employed by the Company hereunder and during the severance period (as defined in
subparagraph (a)(i) of Section 4.2 above), the Executive will not:
(a) directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or
be connected as an officer, employee, partner, director or otherwise
with, or have any financial interest in, or aid or assist anyone else
in the conduct of, any of the following types of businesses: catalog
showroom retail business, national jewelry-only specialty business,
national electronics-only specialty business, or national
houseware/giftware-only retail business, in any area where such
business is being conducted at the time of such termination (provided
that ownership of five percent (5%) or less of the voting stock of any
publicly held corporation shall not constitute a violation hereof); or
(b) directly or indirectly employ, solicit for employment, or
advise or recommend to any other persons that they employ or solicit
for employment, any person who, at the time of such employment,
solicitation, advice or recommendation, is an employee of the Company
or any of its subsidiaries or affiliates, provided, however, that this
subparagraph (b) shall not be construed to prevent the Executive from
engaging in generic nontargeted advertising for employees generally.
4.6 Unauthorized Disclosure; Adverse Statements.
(a) During the period in which the Executive is employed by the
Company hereunder, the Executive shall not, without the prior written
consent of the Board of Directors, or a person authorized thereby,
disclose to any person, other than a person to whom disclosure is
necessary or appropriate in connection with the performance by the
Executive of his duties as an officer of the Company, or its
subsidiaries or its affiliates, any confidential information obtained
by him while in the employ of the Company with respect to any of the
Company's products, improvements, formulae, designs or styles,
processes, customers, methods of marketing or distribution, systems,
procedures, plans, proposals, policies or methods of manufacture, the
disclosure of which he knows, or should have reason to know, will be
damaging to the Company or its subsidiaries or its affiliates;
provided,
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however, that confidential information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosures by the Executive) or any information of a type
not otherwise considered confidential by persons engaged in the same
business or a business similar to that conducted by the Company.
Following the termination of the Executive's employment with the
Company for any reason, the Executive shall not disclose any
confidential information of the type described above except as may be
required in the opinion of the Executive's counsel in connection with
any judicial or administrative proceeding or inquiry.
(b) During the period in which the Executive is employed by
the Company hereunder and thereafter, the Executive shall not make any
false statements regarding the Company or its subsidiaries or its
affiliates, or make any statement or take any other action which he
knows, or should have reason to know, will be damaging to the Company
or its subsidiaries or its affiliates.
(c) The provisions of this Section 4.6 shall be binding upon
the Executive's heirs, successors and legal representatives.
4.7 Specific Performance. The Executive acknowledges and agrees that,
in the event of a breach of Section 4.5 or Section 4.6 hereof by the Executive,
the Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that, in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.
ARTICLE V
OTHER COMPENSATION
5.1 Compensation on Termination of Employment Within Two Years
Following A Change of Control. This Article 5 shall apply to termination of
Executive's employment during the "Change of Control Period" (as defined in
Section 5.2). This Article 5 shall not apply to termination of Executive's
employment prior to a Change of Control or more than two (2) years following a
Change of Control.
5.2 Certain Definitions.
(a) A "Change of Control" shall be deemed to have taken place
if (i) any person or entity, including a "group" as defined in Section
13(d)(3) of the Securities and Exchange Act of 1934, other than the
Company or a wholly-owned subsidiary thereof or any employee benefit
plan of the Company or any of its it subsidiaries, becomes the
beneficial owner of the Company's securities having 20% or more of the
combined voting power of the then outstanding securities of the Company
that may be cast for the election of directors of the Company (other
than as a result of an in issuance of securities initiated by the
Company in the ordinary course of business); or (ii) as the result of,
or in connection with, any cash tender
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or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transactions
less than a majority of the combined voting power of the then
outstanding securities of the Company or any successor corporation or
entity entitled to vote generally in the election of the directors of
the Company or such other corporation or entity after such transaction
are held in the aggregate by the holders of the Company's securities
entitled to vote generally in the election of directors of the Company
immediately prior to such transaction; or (iii) during any period of
two consecutive years, individuals who at the beginning of any such
period constitute the Board of Directors of the Company cease for any
reason to constitute at least a majority thereof, unless the election,
or the nomination for election by the Company's shareholders, of each
director of the Company first elected during such period was approved
by a vote of at least two-thirds of the directors of the Company then
still in office who were directors of the Company at the beginning of
any such period.
(b) "Change of Control Period" shall mean the two (2) year
period following a Change of Control.
(c) "Change of Control Severance Benefits" shall mean all of
the following benefits:
1. any other benefits to which Executive is otherwise
entitled by virtue of this Agreement, including the Standard
Termination Amount and any benefits described in Section
4.2; and
2. the Special Termination Payment.
(d) "Special Termination Payment" shall mean an amount payable
in a single lump sum equal to the Executive's maximum annual salary
paid during the five (5) year period preceding the date of termination
(inclusive of bonuses paid to Executive during the 12-month period
preceding the date of termination, but excluding unearned bonuses
negotiated by Executive at the time of Executive's employment with the
Company).
5.3 Termination Not Giving Rive To Change of Control Severance
Benefits. If Executive's employment is terminated during the Change of Control
Period for Cause (as defined in Section 4.3), or on account of Disability (as
defined in Section 4.3), or if Executive dies during the Change of Control
Period, or if Executive terminates Executive's employment during the Change of
Control Period without Good Reason, no Special Termination Payment shall be due
or payable and Executive shall receive only the Standard Termination Amounts.
5.4 Termination Giving Rise to Special Termination Payment. If the
Executive's employment is terminated by the Company during the Change of Control
Period for any reason other than Cause, death of the Executive or Disability, or
if the Executive terminates his employment during the Change of Control Period
for Good Reason (as defined in Section 4.2(b)(ii)), then Executive shall be
entitled to receive the Change of Control Severance Benefits, all of which
(except
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the medical benefits described in Section 4.2(a)(ii)(B))shall be paid to
Executive within ten (10) days following the date of termination, provided,
however, that the Executive's right to any such benefits is expressly
conditioned upon his compliance in all respects with Section 4.5 and Section 4.6
of this Agreement.
5.5 Notice of Termination. Any termination of Executive's employment by
the Company or by Executive pursuant to this Article 5 shall be pursuant to a
written Notice of Termination delivered to the other party in accordance with
Section 7.5 of this Agreement. For purposes of this Section 5.5, a "Notice of
Termination" shall mean a notice which shall expressly indicate the specific
termination provision in the Agreement relied upon; shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provisions so indicated; and
shall state the date of termination.
5.6 Sole Remedy. The Executive hereby agrees that the Change of Control
Severance Benefits shall be Executive's sole and exclusive remedy against the
Company or any successor on account of termination of employment during the
Change of Control Period under the circumstances described in Section 5.4 of
this Agreement.
ARTICLE SIX
CERTAIN REDUCTIONS IN PAYMENTS BY THE COMPANY
6.1 Certain Reduction in Payments by the Company.
(a) Definition of Certain Terms.
(1) A "Payment" shall mean any payment or distribution in the
nature of compensation to or for the benefit of the Executive,
whether paid or payable pursuant to this Agreement or otherwise.
(2) An "Agreement Payment" shall mean a Payment paid or payable
on account of termination of employment during the Change in
Control Period pursuant to Article 5 of this Agreement
(disregarding the reduction provided by Section 6.2).
(3) "Net After Tax Receipts" shall mean the Present Value (as
defined below) of all Payments that are contingent on a Change of
Control within the meaning of Section 280G of the Code, net
of all taxes imposed on the Executive with respect thereto
under Sections 1 and 4999 of the Code, determined by applying the
highest marginal rate under Section 1 of the Code which applied to
the Executive's taxable income for the immediately preceding
taxable year.
(4) "Present Value" shall mean such value determined in
accordance with Section 280G(d)(4) of the Code.
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(5) "Reduced Amount" shall mean the smallest aggregate amount
of Agreement Payments which (a) is less than the sum of all
Agreement Payments and (b) results in aggregate Net After Tax
Receipts which are equal to or greater than the Net After Tax
Receipts which would result if the aggregate Agreement Payments
were any other amount less than the sum of all Agreement Payments.
6.2 Limitation on Agreement Payments. It is intended that all Agreement
Payments hereunder, together with all other Payments to the Executive contingent
upon or in connection with a Change of Control, are reasonable compensation for
the Executive's service to the Company and its subsidiaries. Notwithstanding the
foregoing, should the Company determine, based upon the opinion of the
independent accounting advisors of the Company immediately prior to the Change
of Control ("Accounting Firm"), that the Agreement Payments and other Payments,
together with any other amounts received by the Executive that must be included
in such determination, would result in the payment of an "excess parachute
payment" as defined in Section 280G of the Code, then the Company will reduce
the Agreement Payments to a Reduced Amount which cannot be less than the maximum
amount that would permit a determination that the Executive has not received an
excess parachute payment under the foregoing Code provision. Such reduction will
be made if, but only if, the amount payable to the Executive hereunder without
regard for the foregoing reduction would result in Net After Tax Receipts which
are less than the Net After Tax Receipts that would result after taking into
account any such reduction.
6.3 Opinion of Accounting Firm. The Company may reduce the Agreement
Payments pursuant to this Section 6 only if within thirty (30) days of the
Executive's termination it provides Executive with an opinion of the Accounting
Firm that the Executive will be considered to have received "excess parachute
payments" as defined in Section 280G of the Code if the Executive were to
receive the full amounts owing pursuant to the terms of this Agreement and that
the Reduced Amount proposed to be paid by the Company will result in Net After
Tax Receipts that are equal to or greater than the Net After Tax Receipts which
would result from reduction in the Agreement Payments by any other amount.
ARTICLE VII
MISCELLANEOUS
7.1 Construction and Amendment. This Agreement contains all the
material terms and conditions governing the Company's continued employment of
the Executive, and shall supersede any and all prior oral and written
understandings and agreements and all contemporaneous oral understandings and
agreements between the Company and the Executive. In this respect, the Executive
acknowledges and agrees that the Company's sole obligations to the Executive
with respect to the future termination of the Executive's employment by the
Company (for whatever reason and under whatever circumstances) are set forth in
this Agreement. No amendment of the terms and conditions of this Agreement shall
be effective unless agreed to in writing by the Company and the Executive.
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7.2 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
7.3 Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Tennessee.
7.4 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns, and the Executive and
his heirs, executors, administrators and legal representatives. The Executive's
rights and benefits under this Agreement are personal and, except as otherwise
provided herein, no such right or benefit shall be subject to voluntary or
involuntary alienation, assignment or transfer without the prior written consent
of the Company.
7.5 Notice. Any notice or other communication required or permitted
under, or given by reason of, this Agreement shall be in writing and shall be
deemed to have been duly given when delivered in person or when mailed, by
certified mail (return receipt requested), postage prepaid, addressed as follows
(or to such other address as the party may specify by notice pursuant to this
provision, except that notices of change of address shall be effective only upon
receipt):
(a) To the Company:
Service Merchandise Company
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
(b) To the Executive:
Gary M. Witkin
---------------------------
---------------------------
7.6 Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled by arbitration in Nashville,
Tennessee. In the proceeding, the Executive shall select one arbitrator, the
Company shall select one arbitrator, and the two arbitrators so selected shall
select a third arbitrator. The decision of a majority of the arbitrators shall
be binding on the Executive and on the Company. Should one party fail to select
an arbitrator within five days after notice of the appointment of an arbitrator
by the other party or should the two arbitrators selected by the Executive and
the Company fail to select a third arbitrator within ten days after the date of
the appointment of the last of such two arbitrators, any person sitting as a
judge of the United States District Court for the Middle District of Tennessee,
Nashville Division, upon application of the Executive or the Company, shall
appoint an arbitrator to fill such space with the same force and effect as
though such arbitrator had been appointed in accordance with the first sentence
of this paragraph. Any arbitration proceeding pursuant to this paragraph shall
be conducted in accordance
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with the rules of the American Arbitration Association. Judgment may be entered
on the arbitrators' award in any court having jurisdiction. Each of the parties
hereto shall pay its own expenses of arbitration and one half of the expenses of
the arbitrators. If any position by either party hereunder, or any defense or
objection thereto, is deemed by the arbitrators to have been unreasonable, the
arbitrators shall assess, as part of their award against the unreasonable party
or reduce the award to the unreasonable party, all or part of the arbitration
expenses (including reasonable attorneys' fees) of the other party and of the
arbitrators.
7.7 Additional Instruments. The parties shall execute and deliver any
and all additional instruments and agreements that may be necessary or proper to
carry out the purposes of this Agreement.
7.8 Execution. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute one
and the same instrument.
7.9 Waiver of Breach. No waiver at any time by either party hereto of
any breach by the other of, or compliance by the other with, any condition or
provision of this Agreement to be performed by such other party shall operate or
be construed as a waiver of similar or dissimilar provisions at the same or at
any prior or subsequent time.
7.10 Condition Subsequent. Within ten (10) days following execution of
this Agreement by both the Executive and the Company, (a) the Company shall have
the opportunity to obtain certain background information about the Executive,
including without limitation information from the Executive's former and current
employers; and (b) if the Company discovers any material adverse information
about the Executive of which the Company was not aware prior to its execution of
this Agreement and which adverse information relates to activities of the
Executive while an employee or director of Saks & Company ("Saks") constituting
one or more of the following:
(i) conduct in violation of law reasonably related to the
Executive's ability to perform his duties to Saks; or
(ii) gross negligence or gross misconduct in the performance of
the Executive's duties, or a documented record of incompetent
performance, as an employee or director of Saks;
the Company shall have the right, at its sole option, to rescind this Agreement
and, if so rescinded by the Company, this Agreement shall have no force or
effect.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates indicated below.
SERVICE MERCHANDISE COMPANY
Date: 12/16/98 By: /s/ C. Steven Moore
-------------------- -----------------------------
Name:
Title:
EXECUTIVE
Date: 12/16/98 /s/ Gary M. Witkin
--------------------- --------------------------------
Gary M. Witkin
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Exhibit 10.12
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37027
January 7, 1999
Gary M. Witkin
1235 Hidden Valley Road
Brentwood, TN 37027
Dear Gary:
This letter agreement (the "Agreement") sets forth our mutual agreement
concerning your resignation as a director, executive officer and employee of
Service Merchandise Company, Inc., a Tennessee corporation (the "Company").
1. Resignation. Your employment with the Company and its affiliates
will terminate in all capacities as of January 7, 1999 (the "Effective Date").
In that regard, you hereby resign, effective as of the Effective Date, from your
positions as President and Chief Executive Officer and a director of the Company
and from all other officer, directorships and positions that your currently hold
with the Company or any of its subsidiaries or affiliates.
2. Severance Benefits. The Company will provide you with the following
severance payments and benefits.
(a) Salary Continuation. The Company will pay you an amount equal to
$1,545,260 which will be paid in a lump sum on January 12, 1999. The Company
will pay you an additional amount equal to $772,630 which will be paid in a lump
sum on the day following the expiration of the Revocation Period (as defined
below).
(b) Continuation of Health Insurance. The Company will reimburse you
for (or at its option pay directly) the premium paid by you for continued
coverage for you (and any of your dependents covered by the Company's health
care plans as of the Effective Date) under the Company's health care plans
pursuant to COBRA (or any other mandatory health care continuation law then in
effect); such coverage then begin substantially similar to that provided by the
Company to its senior executives and their eligible dependents, subject to the
following terms and conditions:
(i) You will be entitled to the reimbursement (or direct payment
by the Company) provided hereunder for the period commencing on the
Effective Date and
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ending on the earlier of (I) the second anniversary of the Effective
Date, or (II) the date you become eligible to receive any health care
coverage from another employer that does not contain any exclusion or
limitation with respect to any pre-existing condition of your's or your
covered dependents;
(ii) If you (or your dependents covered by the Company's
health care plans as of the Effective date) elect not to continue
coverage under COBRA (or any other mandatory health care continuation
law then in effect) or are not eligible to continue coverage under
such law and are otherwise eligible for the benefits provided under
this subparagraph (b), the Company will reimburse you for the cost of
purchasing substantially similar coverage or a supplement required to
achieve substantially similar coverage under another arrangement
approved by the Company for the period described in clause (i) above;
provided, however, that such reimbursement will be limited to the then
current premium charged by the Company to others for substantially
similar coverage under COBRA (or any other mandatory health care
continuation law then in effect). You agree to notify the Company
promptly in writing in the event you become eligible for coverage
under another employer's health care plan.
(c) Retirement Plans. You will be entitled to receive your
vested accrued benefits under the Company's Savings and Investment Plan (the
"Savings Plan"), in accordance with the terms and conditions of the Savings
Plan.
(d) Automobile. The Company will transfer to you on the day
following the expiration of the Revocation Period the certificate of title (free
and clear of liens and encumbrances) to the Porsche automobile currently
provided to you by the Company for your business and personal use. You
acknowledge that after transfer of the title of the automobile to you, the
Company will no longer be responsible for the vehicle in any manner and you will
be responsible for all costs associated with the vehicle from the date of
transfer forward.
(e) Accrued Compensation. You will be entitled to receive (i)
your accrued but unpaid base salary for periods through the Effective Date, (ii)
payment for any unused vacation in accordance with the Company's vacation policy
and (iii) reimbursement for any business expenses incurred by you for periods
through the Effective Date in accordance with Company policy.
(f) No Other Compensation or Benefits. Except as otherwise
specifically provided herein, you will not be entitled to any compensation or
benefits or to participate in any past, present or future employee benefit
programs or arrangements of the Company or any of its subsidiaries or affiliates
(including, without limitation any compensation or benefits under any severance
plan, program or arrangement) on or after the Effective Date.
3. Company Restricted Stock. You will forfeit as of the Effective Date
without any payment therefor any shares of restricted stock of the Company
("Restricted Stock") that were granted to you pursuant to the Amended and
Restated Employment Agreement dated as of December 16, 1998 (the "Employment
Agreement") between you and the Company, the Company's
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Amended and Restated 1989 Employee Stock Incentive Plan (the "1989 Plan") or any
other plan or agreement, which shares of Restricted Stock have not vested as of
the Effective Date. Your shares of Restricted Stock that have vested as of the
Effective Date will be retained by you in accordance with their terms.
4. Company Stock Options. Your options to purchase shares of the
Company's common stock, whether or not vested as of the Effective Date, will be
forfeited as of the Effective Date without any payment therefor.
5. Restrictive Covenants. Your covenants contained in Sections 4.5 and
4.6 of the Employment Agreement are incorporated herein by reference as if such
covenants were set forth herein in full.
6. Cooperation. From and after the date hereof, you will (i) cooperate
in all reasonable aspects (after taking into account any employment obligations
you may have) with the Company and its affiliates and their respective
directors, officers, attorneys and experts in connection with the conduct of any
action, proceeding, investigation or litigation involving the Company or any of
its affiliates, including any such action, proceeding, investigation or
litigation in which you are called to testify and (ii) promptly respond to all
reasonable requests by the Company and its affiliates relating to information
concerning actual or prospective customers of the Company which may be in your
possession. The Company will reimburse you for any reasonable out-of-pocket
expenses incurred by you in connection with your compliance with this Section 6,
provided that such expenses have been approved in writing in advance by the
Chief Executive Officer of the Company.
7. Return of Property. On or prior January 11, 1999, you will surrender
to the Company all property of the Company and its affiliates in your possession
and all property made available to you in connection with your employment by the
Company, including, without limitation, any and all records, manuals, customer
lists, notebooks, computers, computer programs and files, papers, electronically
stored information and documents kept or made by you in connection with your
employment.
8. Breach of Agreement. Without intending to limit the remedies
available to the Company, you acknowledge that any breach by you of any
provision of Section 5 or 6 of this Agreement or Sections 4.5 or 4.6 of the
Employment Agreement may result in material and irreparable injury to the
Company and its subsidiaries and affiliates for which there is no adequate
remedy at law, that it will not be possible to measure damages for such injuries
precisely and that, in the event of such breach or threat thereof, the Company
will be entitled to seek a temporary restraining order and/or a preliminary or
permanent injunction restraining you from engaging in activities prohibited by
Section 5 or 6 of this Agreement or Section 4.5 or 4.6 of the Employment
Agreement. In addition to the foregoing, in the event of any material breach by
you of any provision of Section 4.6(b) of the Employment Agreement, which
breach, if susceptible to cure, is not cured by you within 10 days following
written notice from the Company detailing such breach, in addition to any other
remedies available to the Company, the Company will have the right to
immediately
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institute suit against you for the return of up to $772,630 of the payments and
benefits provided to you hereunder.
9. Release.
(a) General Release. (a) In consideration of the payments and
benefits provided to you under this Agreement, you hereby release and forever
discharge the Company, its subsidiaries and affiliates and each of their
respective officers, employees, directors and agents from any and all claims,
actions and causes of action (collectively, "Claims"), including, without
limitation, any Claims arising under any applicable federal, state, local or
foreign law, that you may have, or in the future may possess, arising out of (x)
your employment relationship with and service as a director, employee or officer
of the Company or any of is subsidiaries or affiliates, and the termination of
such relationship or service, or (y) any event, condition, circumstance or
obligation that occurred, existed or arose on or prior to the date hereof;
provided, however, that the release set forth in this Section 9(a)(i) will not
apply to (A) the obligations of the Company under this Agreement and (B) the
obligations of the Company and its subsidiaries to continue to provide director
and officer indemnification, including, without limitation, under the provisions
of the Indemnification Agreement dated as of November 28, 1994 (the
"Indemnification Agreement") between you and the Company. You further agree that
the payments and benefits described in this Agreement will be in full
satisfaction of any and all claims for payments or benefits, whether express or
implied, that you may have against the Company or any of its subsidiaries or
affiliates arising out of your employment relationship, your service as a
director, employee or officer of the Company or any of its subsidiaries or
affiliates and the termination thereof.
(ii) The Company and its subsidiaries and affiliates hereby
release and forever discharge you, your estate and your legal representatives
from any and all Claims, including, without limitation, any Claims arising under
any applicable federal, state, local or foreign law, that it may have, or in the
future may possess, arising out of (x) your employment relationship with and
service as a director, employee or officer of the Company or any of its
subsidiaries or affiliates, and the termination of such relationship or service,
or (y) any event, condition, circumstance or obligation that occurred, existed
or arose on or prior to the date hereof; provided, however, that the release set
forth in this Section 9(a)(ii) will not apply (unless the Company has actual
knowledge of any of the following as of the date hereof) to (A) your obligations
under this Agreement, Sections 4.5 and 4.6 of the Employment Agreement and the
plans and agreements referred to herein, (B) any act or omission of yours which
is in violation of any applicable civil law or regulation which is reasonably
expected to result in a liability or liabilities to the Company or any of its
subsidiaries or affiliates in excess of $100,000 in the aggregate, (C) any act
or omission of yours which you knew or reasonably should have been expected to
know would constitute a violation of any applicable criminal law or regulation
and (D) any statement made by you to any governmental agency or customer,
distributor or supplier of the Company or any of its subsidiaries or affiliates
which you knew or reasonably should have been expected to know was materially
false or misleading when it was made.
(b) Specific Release of ADEA Claims. In consideration of the
payments and benefits provided to you under this Agreement, you hereby release
and forever discharge the
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Company, each of its subsidiaries and affiliates and each of their respective
officers, employees, directors and agents from any and all claims, actions and
causes of action that you may have as of the date you sign this Agreement
arising under the Federal Age Discrimination in Employment Act of 1967, as
amended, and the applicable rules and regulations promulgated thereunder
("ADEA"). By signing this Agreement, you hereby acknowledge and confirm the
following: (i) you were advised by the Company in connection with your
termination to consult with an attorney of your choice prior to signing this
Agreement and to have such attorney explain to you the terms of this Agreement,
including, without limitation, the terms relating to your release of claims
arising under ADEA; (ii) you have been given a period of not fewer than 21 days
to consider the terms of this Agreement and to consult with an attorney of your
choosing with respect thereto; and (iii) you are providing the release and
discharge set forth in this Section 9(b) only in exchange for consideration in
addition to anything of value to which you are already entitled.
10. Miscellaneous.
(a) Entire Agreement. This Agreement, the Indemnification
Agreement and Sections 4.5, 4.6, 4.7 and 7.2 of the Employment Agreement set
forth the entire agreement and understanding of the parties hereto with respect
to the matters covered hereby and supersede and replace any express or implied
prior agreement with respect to the terms of your employment and the termination
thereof which you may have had with the Company or any of its subsidiaries or
affiliates (including, without limitation, all Sections of the Employment
Agreement not previously referred to in this sentence). This Agreement may be
amended only by a written document signed by the parties hereto.
(b) Governing Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of Tennessee.
(c) Withholding Taxes. Any payments made or benefits provided
to you under this Agreement will be reduced by any applicable withholding taxes.
(d) Legal Fees. The Company will reimburse you for any reasonable
legal fees incurred by you in connection with the review and negotiation of this
Agreement, up to a maximum of $10,000 in the aggregate.
(e) Notices. Any notices required or made pursuant to this
Agreement will be in writing and will be deemed to have been given when
delivered or mailed by United States certified mail, return receipt requested,
postage prepaid, as follows:
if to Gary M. Witkin:
1235 Hidden Valley Road
Brentwood, TN 37027
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with a copy to:
Mark Manner
Harwell Howard Hyne
Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
if to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attn: General Counsel
with a copy to:
Jeffrey P. Crandall
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
or to such other address as either party may furnish to the other in writing in
accordance with this Section 10(e). Notices of change of address will be
effective only upon receipt.
11. Revocation. This Agreement may be revoked by you within the 7-day
period commencing on the date you sign this Agreement (the "Revocation Period").
In the event of any such revocation by you, all obligations of the Company under
this Agreement will terminate and be of no further force and effect as of the
date of such revocation, and you will be obligated to promptly repay or return
any payments or benefits provided to you under this Agreement; provided,
however, that you will not be obligated to repay any amounts paid to you
pursuant to the first sentence of Section 2(a) of this Agreement if you waive
any rights you may obtain as a result of such revocation to receive any payments
under Section 4.2(a)(i) of the Employment Agreement. No such revocation by you
will be effective unless it is in writing and signed by you and received by the
Company prior to the expiration of the Revocation Period.
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SERVICE MERCHANDISE COMPANY, INC.
By: /s/ C. Steven Moore
------------------------------------
Name: C. Steven Moore
Title: V.P., General Counsel
Accepted and Agreed
/s/ Gary M. Witkin
- ------------------------------
Gary M. Witkin
Dated: January 11, 1999
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Exhibit 10.13
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37027
January 8, 1999
Mr. James Poole
Poole Enterprises, Inc.
4701 Trousdale Road
Nashville, TN 37220
Dear Mr. Poole:
This letter agreement (the "Agreement") sets forth our mutual agreement
concerning your resignation as a director of Service Merchandise Company, Inc.,
a Tennessee corporation ("SMC" or the "Company").
1. Resignation. Your service as a director with SMC and its affiliates
will terminate in all capacities as of January 7, 1999 (the "Effective Date"),
although you may continue to maintain an office at the SMC corporate
headquarters for a period of no longer than two (2) weeks from the Effective
Date as defined herein. In that regard, you hereby resign, as of the Effective
Date, from your position as Chairman of the Board of Directors of SMC and from
all other officer, directorships and other positions that you currently hold
with SMC or any of its subsidiaries or affiliates.
2. Severance Benefits. SMC will provide you with the following
severance payments and benefits:
(a) Compensation. The Company will pay a lump sum payment of Two
Hundred Fifty Thousand and no/100 ($250,000.00) on January 11, 1999.
(b) No Other Compensation or Benefits. Except as otherwise specifically
provided herein, you will not be entitled to any compensation or benefits or to
participate in any past, present or future compensation or benefit programs of
SMC or any of its subsidiaries or affiliates after the Effective Date.
3. Cooperation. From and after the date hereof, you will (i) cooperate
in all reasonable respects (after taking into account any employment obligations
you may have) with SMC and its affiliates and subsidiaries and their respective
directors, officers, attorneys and experts in connection with the conduct of any
action, proceeding, investigation or litigation involving SMC or any of its
subsidiaries and affiliates, including any such action, proceeding,
investigation or litigation in which you are called to testify and (ii) promptly
respond to all reasonable requests by SMC and its
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subsidiaries and affiliates relating to information concerning the operations
and activities of SMC, its Board of Directors and subsidiaries and affiliates.
The Company will reimburse you for any reasonable out-of-pocket expenses
incurred by you in connection with your compliance with this Section 3, provided
that such expenses have been approved in writing in advance by the Chief
Executive Officer of the Company.
4. Return of Property. On or prior to the date hereof, you will
surrender all property of SMC, its subsidiaries and affiliates in your
possession and all property, information or data made available to you in
connection with your association with SMC, including, without limitation, any
and all records, manuals, customer lists, marketing, vendor or financial
information, notebooks, computers, computer programs and files, papers,
electronically stored information and documents kept or made by you in
connection with your position as a director.
5. Confidentiality/No Public Comment. This Agreement is confidential.
Except as required by legal process, you agree that you will not disclose,
publicize, or discuss this Agreement or any of its terms or conditions with
anyone, except a spouse, if any, attorney, and/or accountant. In the event you
disclose this Agreement or any of its terms or conditions to your spouse,
attorney, and/or accountant, it shall be your duty, responsibility and
obligation to advise said individual(s) of the confidential nature of this
Agreement and direct them not to disclose, publicize, or discuss this Agreement
or any of its terms and conditions with anyone else. In the event you disclose
this Agreement or any of its terms or conditions to any person or entity, not
authorized by this Agreement, SMC shall be entitled to a full return of all
amounts paid under this Agreement. You and SMC agree to refrain from making,
directly or indirectly, now or at any time in the future (i) any derogatory
comment(s) concerning the other party or any of such other party's subsidiaries
or affiliates, current or former directors, officers or employees or (ii) any
other comment(s) that could reasonably be expected to be detrimental to the
business or financial prospects or operations of the other party or any of such
other party's subsidiaries or affiliates; to the news or other media; any
employees of such other party or any of its subsidiaries or affiliates; or any
individual or entity with whom such other party or any of its subsidiaries or
affiliates has or may reasonably expect to have a business relationship.
6. Breach of Agreement. In the event of any material breach by you of
any provision of Section 3, 4 or 5 of this Agreement, SMC will cease to have any
obligation to make payments or provide benefits to you under this Agreement.
7. Release.
(a) General Release. In consideration of the payment and benefits
provided to you under this Agreement, you hereby release and forever discharge
SMC, its subsidiaries and affiliates and each of their respective officers,
employees, directors and agents from any and all claims, actions and causes of
action (collectively "Claims"), including without limitation, any Claims arising
under any applicable federal, state or local or foreign law, that you may have,
or in the future may possess, arising out of (i) your association or employment
relationship with and service as a director, employee or officer of SMC or any
of its subsidiaries or affiliates, and the termination of such
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relationship or service or (ii) any event, condition, circumstance or obligation
that occurred, existed or arose on or prior to the date hereof; provided
however, that the release set forth in this section will not apply to (A) the
obligations of SMC under this Agreement and (B) the obligations of SMC and its
subsidiaries to continue to provide director and officer indemnification. You
further agree that the payments and benefits described in this Agreement will be
in full satisfaction of any and all claims for payments or benefits, whether
express or implied, that you may have against SMC or any of its subsidiaries or
affiliates arising out of your service as a director of SMC or any of
subsidiaries or affiliates and the termination thereof.
(b) Specific Release for ADEA Claims. In consideration of the payments
and benefits provided to you under this Agreement, you hereby release and
forever discharge SMC, each of its subsidiaries and affiliates and each of their
respective officers, employees, directors and agents from any and all claims,
actions and causes of action that you may have as of the date you sign this
Agreement arising under the Federal Age Discrimination in Employment Act of
1967, as amended, and the applicable rules and regulations promulgated
thereunder ("ADEA"). By signing this Agreement, you hereby acknowledge and
confirm the following: (i) you were advised by SMC in connection with your
resignation to consult with an attorney of your choice prior to signing this
Agreement and to have such attorney explain to you the terms of the Agreement,
including, without limitation, the terms relating to your release of claims
under the ADEA; (ii) you have been given a period of not fewer than 21 days to
consider the terms of this Agreement and to consult with an attorney of your
choosing with respect thereto; and (iii) you are providing the release and
discharge set forth in this Section only in exchange for consideration in
addition to anything of value to which you are already entitled.
8. Miscellaneous.
(a) Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the matters covered
hereby and supersedes and replaces any express or implied prior agreement with
respect to the terms of your service as a director with SMC (including, without
limitation, that certain letter addressed to you, dated February 11, 1998)
(b) Governing Law. This Agreement will be governed by, and construed in
accordance with the laws of the state of Tennessee.
(c) Withholding Taxes. Any payments made or benefits provided to you
under this Agreement will be reduced by any applicable withholding taxes.
(d) Notices. Any notices required or made pursuant to this Agreement
will be in writing and will be deemed to have been given when delivered or
mailed by U. S. certified mail, return receipt requested, postage prepaid, as
follows:
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If to James E. Poole:
Poole Enterprises, Inc.
4701 Trousdale Road
Nashville, TN 37220
with a copy to:
If to SMC:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37027
Attention: General Counsel
or to such other address as either party may furnish to the other in writing in
accordance with this Section. Notices of change of address will be effective
only upon receipt.
9. Revocation. You may revoke this Agreement at any time during the
seven (7) day period beginning on the date signed (the "Revocation Period"). In
the event of any such revocation by you, all obligations of SMC under this
Agreement will terminate and be of no further force and effect as of the date of
such revocation. No such revocation by you will be effective unless it is in
writing and signed by you and received by SMC prior to the expiration of the
Revocation Period.
SERVICE MERCHANDISE COMPANY, INC.
BY: /s/ Owen E. Dorsey
------------------------------------
Name: Owen E. Dorsey
----------------------------
Title: Senior Vice President
--------------------------
ACCEPTED AND AGREED TO:
/s/ James E. Poole
- --------------------------------
JAMES E. POOLE
Date: 1/11/99
-----------------
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SERVICE MERCHANDISE COMPANY, INC.
7100 SERVICE MERCHANDISE DRIVE
BRENTWOOD, TN 37027
January 11, 1999
Mr. James Poole
Poole Enterprises, Inc.
4701 Trousdale Road
Nashville, TN 37220
Dear Mr. Poole:
This letter shall amend and does hereby amend that certain letter
agreement, dated January 8, 1999 (the "Letter Agreement"), which sets forth the
agreement concerning your resignation as a director of Service Merchandise
Company, Inc., a Tennessee corporation ("SMC" or the "Company". In addition to
the matters set forth in the Letter Agreement, SMC hereby agrees to the
following:
1. Moving Expenses. SMC agrees to arrange for the moving of your
personal furnishings and belongings, from your current office at the SMC
corporate headquarters and pay any and all moving expenses related thereto.
2. Discount Card. As consistent with SMC policy, SMC will provide you
with an associate identification card ("One Card") for use in purchasing
merchandise at all SMC stores, at the discount applicable to other associates at
the time of purchase, for the remainder of your life. In the event that SMC
discontinues discount privileges to associates or otherwise discontinues use of
the One Card for any reason, your discount privileges shall immediately cease.
This letter is supplemental to the Letter Agreement, which is made a
part by reference hereto, and all terms, conditions and provisions of the Letter
Agreement, unless specifically modified, are to apply to this letter and are
made a part hereof as though expressly rewritten, incorporated and included
herein.
SERVICE MERCHANDISE COMPANY, INC.
BY: /s/ C. Steven Moore
----------------------------------
Name: C. Steven Moore
----------------------------
Title: V.P., General Counsel
---------------------------
ACCEPTED AND AGREED TO:
/s/ James E. Poole
- ---------------------------
JAMES E. POOLE
Date: 1/12/99
-------------
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Exhibit 10.14
AGREEMENT
This AGREEMENT, as amended and restated as of the first day of
February, 1999 (hereinafter the "Agreement"), by and between Service Merchandise
Company, Inc., a Tennessee corporation (hereinafter the "Company"), and Sam
Cusano (hereinafter the "Executive").
RECITALS
WHEREAS, the Executive is currently employed by the Company.
WHEREAS, the Company and the Executive wish to set forth their
respective rights and obligations during the period of the Executive's
employment pursuant to the terms of this Agreement, and to provide for
incentives, salary continuations, and benefits on the terms and conditions set
forth herein.
WHEREAS, the Company and the Executive wish to amend and restate this
Agreement as of the date set forth above, this Agreement supersedes and replaces
any prior agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the premises and other mutual
agreements contained herein, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. Resignation. The execution of this Agreement by Executive shall
serve as notice to the Company's board of directors of the resignation by
Executive from the board effective May 20, 1999.
2. Employment. The Company agrees to continue the employment of the
Executive, and the Executive agrees to remain employed as the Chief Financial
Officer of the Company (hereinafter "CFO"), for a period beginning on the date
hereof and ending May 20, 1999 (the
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"Employment Period"). The Executive will devote his time, energy and effort to
the discharge of his duties as CFO. During the Employment Period, the Company
agrees that the Executive will have all rights, responsibilities and obligations
currently vested on him or exercised by him as CFO, and it will not diminish his
duties, responsibilities or professional stature in any way.
3. Term. The term of this Agreement shall commence on the date hereof
and expire at the close of business on the last day of the Employment Period,
subject to earlier termination as hereinafter provided.
4. Salary. As compensation for the services contemplated by this
Agreement, the Company shall continue to pay the Executive his current weekly
salary based on his annual of Four Hundred Sixty Thousand Dollars ($460,000) per
year, payable in weekly increment (the "Salary").
5. Incentives. The Company agrees to provide the Executive incentives
to remain with the Company because (a) his employment is critical to the Company
during the recent change in control of the Chief Executive Officer ("CEO"); (b)
his employment will help the Company to develop its business plan; and (c) for
executing the settlement of Executive's claims for severance and other matters
described in his severance agreement existing on the date hereof.
a. Cash Payment. The Company shall pay the Executive, on the
date of this Agreement, a cash payment in the amount of Six Hundred
Forty-Four Thousand Dollars ($644,000.00), subject however, to
applicable withholding pursuant to Section 8 hereof.
b. Letter of Credit. The Company shall provide Executive an
irrevocable draw or direct-pay letter of credit from a reputable United
States bank assuring payment to the Executive of four equal
installments in the amount of One Hundred Sixty-One Thousand Dollars
($161,000.00). The first payment shall be due on March 1, 1999. The
second
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payment shall be due on March 19, 1999. The third payment shall be due
on April 20, 1999. The final payment shall be due on May 20, 1999. In
the event the Company files a voluntary bankruptcy petition, has an
involuntary bankruptcy petition filed against it, or is the subject of
any insolvency proceeding of any sort, the Executive shall be entitled
to all amounts set forth in this Agreement, when due, and the Executive
shall be entitled to draw upon the letter of credit consistent with the
terms of this Agreement.
c. Stock. The Company shall cause all unvested stock options
currently held by the Executive to be fully vested as of the last day
of the Employment Period.
d. Automobile. The Company shall execute a transfer of title
to the Company automobile which is currently assigned to the Executive,
in the Executive's name on the date of execution of this Agreement. The
value of the benefit received by Executive pursuant to this Section
5(d) shall be subject to applicable withholding pursuant to Section 8
hereof.
e. Attorneys' Fees. The Company shall reimburse to Executive
any and all reasonable fees incurred for legal services for the
negotiation and execution of this Agreement.
f. Indemnity. Contemporaneously with the execution of this
Agreement, the Company will execute an indemnification agreement in
the form set forth on Exhibit A.
6. Benefits. During the Employment Period, the Company shall continue
to provide Executive the same benefits that are made available to all other
senior executives of the Company upon the same terms that are offered to other
senior executives of the Company.
7. Termination. The Company shall have the right at any time during
the Employment Period to terminate Executive without Cause (as defined below),
provided that Company shall
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immediately pay to Executive in full all amounts identified in Sections 4 and 5
of this Agreement. In addition, the Company shall have the right to terminate
Executive for "Cause" at any time. Upon termination for Cause, the Company shall
(i) no longer be required to pay to Executive the amounts due under Section 4
hereof, and (ii) be entitled to recoup from Executive all money paid to, or
benefits bestowed upon, Executive pursuant to Sections 5(a), 5(b), and 5(d) of
this Agreement. "Cause" as used in this Agreement shall mean, (A) the willful
engaging by the Executive in misconduct materially injurious to the Company, (B)
acts of dishonesty or fraud by Executive, or (C) the willful violation by the
Executive of the provisions of Sections 10 or 11 hereof.
a. Disability or Death. In the event Executive's employment
with the Company is terminated because of his death or inability to
perform his duties as a result of a physical or mental incapacity
("Disability"), the Executive or his estate shall be paid such amounts,
if any, as the Executive is entitled to receive under the Company's
insurance policies and/or other benefit plans then in effect for
Company officers, and all salary and other benefits and incentives
described hereunder.
b. Healthcare Coverage. At the expiration of the term of this
Agreement or if the Executive's employment with the Company is
terminated for any reason other than due to the Executive's Death or
Disability, the Company will reimburse the Executive for any premium
paid by the Executive for the continued coverage for the Executive (and
any dependents of the Executive covered by the Company's healthcare
plans at the time the Executive's employment was terminated) under the
Company's healthcare plan pursuant to "COBRA" (or any other mandatory
healthcare continuation law then in effect), such coverage then being
substantially similar to that provided by the Company to its senior
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executives and their eligible dependents. The Executive will be
entitled to reimbursement for such coverage for a period commencing
with the date of termination from employment and ending on the earlier
of (i) the second anniversary of termination of employment, or (ii) the
date the Executive becomes eligible to receive any healthcare coverage
from another employer of the Executive or the Executive's spouse, or
any governmental entity, that does not contain any exclusion or
limitation with respect to any pre-existing condition of the Executive
or the Executive's covered dependents. If the Executive (or the
Executive's dependents covered at the time of termination from
employment) elects not to continue coverage under COBRA (or any other
mandatory healthcare continuation law), and is otherwise eligible under
this Section, the Company will reimburse the Executive for the cost of
purchasing substantially similar coverage or a supplement required to
achieve substantially similar coverage under another arrangement
approved by the Company for the same time period; however, such
reimbursement shall be limited to the then current premium charged to
others by the Company for substantially similar coverage under COBRA
(or other mandatory healthcare continuation law then in effect). Any
amount payable to the Executive shall be subject to withholding of
applicable taxes as provided in Section 8 hereof. In the event of the
Executive's death following termination giving rise to the benefit
described in this Section, but before the expiration of such benefits,
Executive's dependents shall be entitled to such benefits.
c. Right to Terminate. In the event the Company breaches this
Agreement, then the Executive has the immediate right to terminate
this Agreement and shall be relieved of
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all duties and obligations contained herein. The Company shall
immediately pay or provide to Executive all salary, incentives, and
other benefits provided hereunder.
8. Withholding. All payments hereunder shall be subject to all
applicable withholding and payroll taxes.
9. Binding Effect. This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided herein. Without limiting the foregoing, Executive's right to
receive payments hereunder shall not be assignable, transferable or delegable
whether by pledge, creation of a security interest or otherwise, other than by a
transfer by his will or by the laws of descent and distribution and, in the
event of any attempted assignment or transfer contrary to this paragraph, the
Company shall have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
10. Unauthorized Disclosure. During the period in which the Executive
is employed by the Company, the Executive shall not, without the prior written
consent of the Board of Directors, or a person authorized thereby, disclose to
any person, other than a person to whom disclosure is necessary or appropriate
in connection with the performance by the Executive of Executive's duties as an
officer of the Company, or its subsidiaries or its affiliates, any confidential
information obtained by the Executive while in the employ of the Company with
respect to any of the Company's products, improvements, formulae, designs or
styles, processes, customers, methods of marketing or distribution, systems,
procedures, plans, proposals, policies or methods of manufacture, the disclosure
of which Executive knows, or should have reason to know, will be damaging to the
Company or its subsidiaries or its affiliates, nor shall Executive make any
false statements regarding
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the Company or its subsidiaries or its affiliates or take any other action which
Executive knows, or should have reason to know, will be damaging to the Company
or its subsidiaries or its affiliates; provided, however, that confidential
information shall not include any information known generally to the public
(other than as a result of unauthorized disclosures by the Executive) or any
information of a type not otherwise considered confidential by persons engaged
in the same business or a business similar to that conducted by the Company.
Following the termination of the Executive's employment with the Company for any
reason, the Executive shall not disclose any confidential information of the
type described above or take any action of the type described above except as
may be required in the opinion of the Executive's counsel in connection with any
judicial or administrative proceeding or inquiry. The provision of this Section
shall be binding upon the Executive's heirs, successors and legal
representatives.
Company shall not make any derogatory remarks or defamatory statements
about or concerning the Executive during or after the term of this Agreement.
The Executive shall have the right to review and approve any public statement
made on behalf of the Company, its Board of Directors or officers in connection
with the Executive's separation from the Company, unless the Company terminates
the Executive for Cause.
11. Non-Competition. During the period of this Agreement, the Executive
will not (a) directly or indirectly own, manage, operate, control or participate
in the ownership, management, operation or control of, or be connected as an
officer, employee, partner, director or otherwise with, or have any financial
interest in, or aid or assist anyone else in the conduct of, any business which
is in substantial competition with any business conducted by the Company or by
any group, division, or subsidiary of the Company in any area where such
business is being conducted during the term
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of this Agreement (provided that ownership of five percent (5%) or less of the
voting stock of any publicly held corporation shall not constitute a violation
hereof) or (b) directly or indirectly employ, solicit for employment, or advise
or recommend to any other persons that they employ or solicit for employment,
any employee of the Company or its affiliates or subsidiaries.
12. Specific Performance. The Executive acknowledges and agrees that,
in the event of a breach of Section 10 or Section 11 hereof by the Executive,
the Company would be irreparable harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.
13. Binding Agreement. This Agreement and all obligations of the
Company hereunder shall be binding upon the successors and assigns of the
Company. This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representative, executors, administrators, successors, heirs, distributees,
devisees and legatees.
14. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered by United States registered mail,
return receipt requested, postage prepaid, addresses as follows:
If to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attention: General Counsel
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If to the Executive:
Sam Cusano
562 Grand Oaks Drive
Brentwood, Tennessee 37027
With a copy to:
Byron R. Trauger, Esquire
Doramus, Trauger & Ney
The Southern Turf Building
222 Fourth Avenue North
Nashville, Tennessee 37219
or to such other address as either party may be furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
15. Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Tennessee.
16. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by the Executive and the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or any prior or subsequent time.
17. Headings. The headings herein are for convenience of reference only
and shall not be deemed to be part of the substance of this Agreement.
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18. Entire Agreement. This Agreement sets forth the entire agreement
between the parties with respect to the subject matter hereof and may be changed
or supplemented only by a written agreement signed by the Executive and the
Company.
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IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
SERVICE MERCHANDISE COMPANY, INC.
By: /s/ C. Steven Moore
----------------------------------------
Accepted and Agreed:
/s/ Sam Cusano
------------------------------------------
Sam Cusano
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Exhibit 10.15
SERVICE MERCHANDISE COMPANY, INC.
SECOND AMENDED AND RESTATED
DIRECTORS' EQUITY PLAN
Service Merchandise Company, Inc., a Tennessee corporation (the
"Company") hereby amends and restates its First Amended and Restated 1991
Directors' Equity Plan (the "Plan"), as provided below.
1. PURPOSE. The purpose of the Plan is to establish the Company's
shares of common stock, par value $.50 per share (the "Common Stock") as a
component of the annual compensation package for non-employee directors of the
Company (the "Participating Directors") in order to:
(i) Strengthen the commonality of interest between Participating
Directors and shareholders; and
(ii) Improve the Company's ability to attract and retain talented
individuals to serve as Company directors.
2. ANNUAL STOCK AWARDS TO EACH PARTICIPATING DIRECTOR. On the date of
each Annual Meeting of Shareholders of the Company, each Participating Director
will receive an option to purchase three thousand (3,000) shares of Common Stock
at an exercise price per share equal to the Fair Market Value (as defined in the
Company's Amended and Restated 1989 Stock Incentive Plan, as amended (the "1989
Plan")) per share of Common Stock on the date of the Annual Meeting (the "Annual
Stock Option").
3. ELECTION TO RECEIVE OPTIONS IN LIEU OF CASH RETAINER. A
Participating Director may elect, for any calendar year, to receive all or any
portion of such Participating Director's quarterly retainer in the form of an
option to purchase shares of Common Stock (a "Retainer Stock Option") to be
granted as of the date such payment would otherwise be due (the "Quarterly
Payment Date"). The number of shares covered by a Retainer Stock Option shall be
determined as of the Quarterly Payment Date pursuant to the following formula:
Amount of quarterly retainer deferred
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Number of Shares = 75% of the Fair Market Value of one share of Common Stock
The aggregate exercise price per share for such Retainer Stock Option
shall be the Fair Market Value per share of Common Stock as of the Quarterly
Payment Date. The amount of the quarterly retainer deferred will be applied by
the Company on the date of exercise to the payment of seventy-five percent (75%)
of the aggregate exercise price of such Retainer Stock Option, with
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the remaining twenty-five percent (25%) of the exercise price to be paid by the
grantee at the time of exercise. If no exercise is made, no payment will be made
by the Company with respect to the deferred quarterly retainer. The election to
receive Retainer Stock Options in lieu of all or any portion of the quarterly
retainer payments to be received in any calendar year may be made for such
calender year by giving written notice to the Secretary of the Company of such
election and the portion of the retainer with respect to which such election is
made at any time prior to any Quarterly Payment Date. Any election to receive
Retainer Stock Options shall be made on a form provided by the Company for such
purpose and shall be effective only to the extent that there are sufficient
shares of Common Stock reserved under the Plan. An election may be revoked for
the remainder of any calendar year by giving written notice to the Secretary of
the Company at least ten (10) business days prior to the Quarterly Payment Date.
No Retainer Stock Option shall be granted for fractional shares. The amount of
any retainer that would otherwise be paid in the form of an option to purchase
fractional shares will be paid in cash promptly following the Quarterly Payment
Date. For purposes of this Plan, the date of grant of any Retainer Stock Option
shall be deemed to be the Quarterly Payment Date.
4. STOCK OPTION TERMS.
(a) Vesting, Forfeiture and Expiration. Each Annual Stock
Option will vest in annual increments of twenty percent (20%)
commencing on the first anniversary of the date of grant, except as
otherwise provided in this Plan. If a Participating Director's service
as a member of the Board of Directors of the Company terminates for any
reason other than death, disability or a Change in Control, the
unvested portion of the Annual Stock Option will be forfeited and the
Participating Director will have no further rights with respect to such
unvested portion of the Annual Stock Option. Each Annual Stock Option
will expire, if unexercised, on the tenth anniversary of the date of
grant. Each Retainer Stock Option will vest on the date of grant. Each
Retainer Stock Option will expire, if unexercised, on the later of the
tenth anniversary of the date of grant or December 31 next following
the respective Participating Director's seventy-fifth birthday (the
"Standard Expiration Date"). However, in the event the respective
Participating Director ceases to serve as a member of the Board of
Directors of the Company, each Retainer Stock Option will expire, if
unexercised, upon the earlier of the Standard Expiration Date or five
(5) years from the date of termination of service as a member of the
Board of Directors of the Company.
(b) Exercise. Any Annual Stock Option or Retainer Stock Option
(each such stock option, a "Stock Option") portion thereof, if vested,
may be exercised by delivering written notice of exercise to the
Secretary of the Company, accompanied by payment of the aggregate
exercise for the Stock Option or portion thereof to be exercised. Such
payment may be made in cash, by personal check, or in shares of Common
Stock already owned by the individual at their Fair Market Value on the
date of exercise, or a combination of such payment methods. The Board,
however, may deny the exercise of Stock Options during a period of time
that it deems necessary to prevent any possible violation of federal
securities laws or other laws. As soon as practicable after notice of
exercise and receipt of full payment for shares of Common Stock being
acquired, the Company will deliver to the individual a
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certificate representing the shares of Common Stock so purchased on the
exercise of the Stock Option.
5. TERMINATION OF SERVICE. On termination of a Participating Director's
service as a member of the Board of Directors of the Company due to death,
disability or retirement, the following terms and conditions shall apply, if
applicable:
(a) Participant's Death or Disability. If a Participating Director's
service as a director terminates because of death or permanent
disability, all Annual Stock Options granted to such Participating
Director will immediately vest and all such Annual Stock Options will
remain exercisable for a one-year period from the date of termination
of service. Should the Participating Director die during such one-year
post-termination exercise period applicable to Annual Stock Options,
the Annual Stock Options may be exercised until the later of (i) the
expiration of the one-year post-termination exercise period; or (ii)
one year from the date of death. Retainer Stock Options may be
exercised until the earlier of the Standard Expiration Date or five (5)
years from the date of termination of service as a member of the Board
of Directors of the Company. Should the Participating Director die
during such exercise period applicable to the Retainer Stock Option,
the Retainer Stock Option will remain exercisable until the later of
(a) the expiration of such exercise period, or (b) one year from the
date of death.
The determination of permanent disability will be made in the
judgment, with medical advice, of the Company's Senior Vice President
of Human Resources. Participating Directors should complete the
Beneficiary Designation Form on or prior to the date of the first award
received by them under the Plan. Participating Directors may change the
beneficiary(ies) named at any time by filing another Beneficiary
Designation Form with the Senior Vice President of Human Resources or
the Secretary of the Company.
(b) Retirement. Upon a Participating Director's retirement from the
Board of Directors, the then exercisable portion of any Annual Stock
Option granted to such Participating Director will remain exercisable
for two (2) years from such termination date. Each Retainer Stock
Option will expire, if unexercised, upon the earlier of the Standard
Expiration Date or five (5) years from the date of termination of
service as a member of the Board of Directors of the Company.
6. CHANGE OF CONTROL. Upon the occurrence of a Change in Control, each
Stock Option, if not already exercisable, will become immediately exercisable
and, except as otherwise provided below, each Annual Stock Option will remain
exercisable for a two year period. Each Retainer Stock Option may be exercised
until such Retainer Stock Option expires upon the earlier of the Standard
Expiration Date or five (5) years from the date such Change in Control is deemed
to occur. If the vesting of awards to executive officers of the Company under
the 1989 Plan is accelerated following a Potential Change in Control (as defined
in the 1989 Plan), then all Stock Options will become immediately exercisable.
If any awards to executive officers under the 1989 Plan are cashed
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out upon a Change in Control or Potential Change in Control, the Stock Options
will also be cashed out in the same manner.
7. CHANGES IN CAPITALIZATION. In the event of any changes in the
capitalization of the Company which requires an adjustment in the stock options
awards under the 1989 Plan, a corresponding adjustment will be made to the Stock
Options.
8. EFFECT ON OTHER COMPANY PROVIDED BENEFITS. The value of a
Participating Director's Stock Option will not be included in determining the
amount of coverage or level of benefit a Participating Director is entitled to
receive under any other Company-sponsored program or plan.
9. AUTHORIZED SHARES. The maximum number of authorized shares which may
be issued under this Plan shall be 296,875, subject to adjustment as described
Section 7 above. If any shares of Common Stock that have been optioned cease to
be subject to a Stock Option due to forfeiture, such shares will again be
available for issuance in connection with future awards under the Plan.
10. GENERAL PROVISIONS.
(a) Transferability of Awards. Stock Options shall not be
transferable or assignable other than (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic
relations order; or (iii) by gift or other transfer to either (a) any
trust or estate in which the original award recipient or such person's
spouse or other immediate relative has a substantial beneficial
interest, or (b) a spouse or other family member, provided that such a
transfer would continue to require such awards to be disclosed pursuant
to Item 403 of Regulation S-K promulgated by the Securities and
Exchange Commission, as such Regulation may be amended from time to
time.
(b) Award Documentation. Each award granted under the Plan shall be
evidenced by written documentation which shall contain the terms and
conditions governing such award. Participating Directors need not
execute any instrument or acknowledgment of notice of an award under
the Plan, in which case acceptance of such an award by the respective
participating Director will constitute agreement to the terms of the
award.
(c) No Right to Service. Neither participation in the Plan nor any
action under the Plan shall be construed to give any Participating
Director a right to be retained in the service of the Company.
(d) Administration. This Plan shall be administered by the Board of
Directors of the Company. Determinations of the Board of Directors of
the Company shall be final and binding on Participating Directors and
the Company.
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(e) Amendment and Termination. The Board of Directors of the
Company may at any time amend, alter or discontinue the Plan; provided,
however, that, without the approval of the Company's shareholders no
amendment may be made that would (i) increase the number of shares that
may be issued under the Plan or (ii) make any change for which
applicable law or regulatory authority (including the regulatory
authority of the New York Stock Exchange or any other market or
exchange on which the Common Stock is traded) would require shareholder
approval. No amendment, alteration or discontinuation of a Plan shall
be made which would impair the rights of a Participating Director under
a Stock Option theretofore granted, without the Participating
Director's consent.
(f) Other Compensation Arrangements. Nothing contained in this
Plan shall prevent the Board of Directors from adopting other or
additional compensation arrangements, subject to shareholder approval
if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(g) Governing Law. The Plan and all awards made and actions
taken thereunder shall be governed by and construed in accordance with
the laws of the State of Tennessee.
(h) Indemnification. The members of the Board of Directors
shall not be liable to any employee or other person with respect to any
determination made hereunder in a manner that is not inconsistent with
their legal obligations as members of the Board of Directors. In
addition to such other rights of indemnification as they may have as
directors or as members of the Board, the members of the Board shall be
indemnified by the Company against the reasonable expenses, including
attorneys' fees actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with
any appeal therein, to which they or any of them may be a party by
reason of any action taken or failure to act under or in connection
with the Plan or any option granted thereunder, and against all amounts
paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid
by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such Board of
Directors member is liable for negligence or misconduct in the
performance of his duties; provided that within sixty (60) days after
institution of any such action, suit or proceeding, the Committee
member shall in writing offer the Company the opportunity, at its own
expense, to handle and defend the same.
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Exhibit 10.16
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of the 23rd day of March, 1999
(the "Agreement") by and between Service Merchandise Company, Inc., a Tennessee
corporation (the "Company"), and Sam Cusano (the "Executive").
RECITALS
WHEREAS, the Executive is currently employed by the Company;
WHEREAS, the Company desires to provide for the employment of the
Executive in accordance with the terms and conditions provided herein;
WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein; and
WHEREAS, this Agreement shall supersede the Agreement dated December 3,
1998 between the Executive and the Company (the "Prior Agreement").
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to perform services for the Company, on the terms
and conditions set forth herein.
2. Term. The term of employment of the Executive by the Company
hereunder shall commence effective as of March 23, 1999 (the "Effective Date"),
and shall end on March 23, 2002, unless further extended or sooner terminated as
hereinafter provided. Commencing on March 23, 2003, and on each anniversary
thereafter (each such date, an "Anniversary Date"), the term of the Executive's
employment shall automatically be extended for one additional year unless, not
later than the December 31, immediately preceding an Anniversary Date, either
party shall have given notice to the other party that it does not wish to extend
this Agreement (a "Notice of Non-Renewal"). References herein to the "Term" of
this Agreement shall refer to both the initial term and any extended term of the
Executive's employment hereunder. Notwithstanding the foregoing, if a Change of
Control (as defined in Section 6) occurs during the Term, in no event shall the
Term end prior to the end of the twenty-fourth (24th) month following the month
in which such Change of Control occurs.
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3. Position and Duties.
(a) The Executive shall serve as Chief Executive Officer of the
Company, shall have such responsibilities, duties and authority as are generally
consistent and customary with such a position and shall report solely to the
Board of Directors of the Company (the "Board"). The Executive shall also serve,
if requested by the Board, as a director or officer of any of the Company's
present or future direct or indirect subsidiaries. During the Term, the Company
shall cause the Executive to be included in the slate of persons nominated to
serve as directors on the Board and shall use its best efforts (including,
without limitation, the solicitation of proxies) to have the Executive elected
and re-elected to the Board during the Term. The Executive shall, during the
Term, be the chairman of both the Executive Committee and the Operating
Committee.
(b) During the Term, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive shall devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive under this Agreement, use the
Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic or charitable
boards or committees, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
(c) The Executive shall be based primarily and reside in the general
area of Nashville, Tennessee, except for such reasonable travel obligations as
do not materially exceed the Executive's travel obligations immediately prior to
the Effective Date.
4. Compensation.
(a) Base Salary. During the Term, the Executive shall receive an
annual base salary ("Annual Base Salary") of $650,000. The Annual Base Salary
shall be payable in accordance with the Company's regular payroll practice for
its senior executives, as in effect from time to time. During the Term, the
Annual Base Salary shall be reviewed by the Compensation Committee of the Board
for possible increase at least annually. Any increase in the Annual Base Salary
shall not limit or reduce any other obligation of the Company under this
Agreement. The Annual Base Salary shall not be reduced after any such increase,
and the term "Annual Base Salary" shall thereafter refer to the Annual Base
Salary as so increased.
(b) Annual Bonus; February Payments. During the Term, the Executive
shall be entitled to receive an annual bonus ("Annual Bonus") pursuant to the
Company's annual bonus plan, as in effect from time to time, offset by any
payments (the "February Payments") received by the Executive pursuant to
paragraph 5 (a) and (b) of that certain agreement dated February 1, 1999 between
the Company and the Executive (the "February 1999 Agreement"); provided,
however, that any such offset shall not exceed in any one year an amount equal
to one-third of the aggregate February Payments. The Executive shall have no
obligation to pay back to the Company any portion
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of the February Payments unless the Executive is terminated for Cause (as
defined in Section 5(b) hereof) on or prior to May 20, 1999. In the event that
the Executive is terminated for Cause on or prior to May 20, 1999, the Company
shall be entitled to recoup from the Executive the February Payments and the
automobile given to the Executive pursuant to the February 1999 Agreement;
provided, however, that the Company shall, not be entitled to recoup from the
Executive the February Payments pursuant to this sentence if and to the extent a
portion of the February Payments has been offset against the Executive's Annual
Bonus pursuant to this Section 4(b),
(c) Other Benefits. During the Term, the Executive shall be entitled
to participate in other employee benefit plans, programs and arrangements of the
Company, other than Annual Bonus plans (covered by Section 4(b) above) (the
"Benefit Plans"), now or hereinafter in effect, that are Applicable to the
Company's employees generally or to its executive officers, as the case may be,
subject to and on a basis consistent with the terms, conditions and overall
administration of the Benefit Plans. During the Term, the Company shall provide
to the Executive all of the fringe benefits and perquisites that are provided to
senior executives of the Company, and the Executive shall be entitled to
participate in and receive any other fringe benefits or perquisites that become
available to the Company's senior executives.
(d) Vacation and Other Leaves. The Executive shall be entitled to
vacation in accordance with the Company's vacation policy (and to compensation
in respect of earned but unused vacation days) and all paid holidays and
personal leave days that are available generally to executive officers of the
Company.
(e) Expenses; Attorneys' Fees. During the Term, the Executive shall
be entitled to receive prompt reimbursement for all reasonable and customary
expenses incurred by the Executive in performing his services hereunder,
including all expenses of travel and accommodations while engaged in business of
the Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company. The
Company shall reimburse the Executive for all reasonable legal fees and expenses
incurred in connection with the negotiation and execution of this Agreement
(f) Services Furnished. The Company shall furnish the Executive with
office space, secretarial and/or administrative assistance, office supplies,
support services and such other facilities and services as shall be suitable to
the Executive's position and adequate for the performance of his duties
hereunder.
5. Compensation on Termination of Employment (Except Within Two Years
Following a Change of Control). This Section 5 shall apply to termination of the
Executive's employment during the Term and prior to a Change of Control (as
hereinafter defined in Section 6) and to termination of the Executive's
employment more than two (2) years following a Change of Control. This Section 5
shall not apply to termination of Executive's employment during the Change of
Control Period (as hereinafter defined in Section 6):
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(a) Disability. If the Executive's employment with the Company
is terminated by the Executive or the Company due to the Executive's inability
to perform Executive's duties as a result of physical or mental incapacity
("Disability"), the Executive shall be paid such amounts, if any, as the
Executive is entitled to receive under the Company's disability insurance
policies then in effect for Company offices, but shall be entitled to no further
compensation or benefits (unless previously accrued under the Company's benefit
plans).
(b) Other Termination Not Giving Rise to Salary Continuation.
If the Executive's employment shall be terminated for Cause (as hereinafter
defined) or if the Executive dies or if the Executive terminates Executive's
employment for any reason other than for a material breach of this Agreement by
the Company, the Company shall pay the Executive any installments of Executive's
Annual Base Salary as then in effect that would otherwise be due through the
date on which Executive's employment is terminated. The Company shall then have
no further obligations to the Executive under this Agreement except that in the
event of termination by death, the Executive's estate or beneficiaries, as the
case may be, shall be paid such amounts as may be payable to the Executive under
the Company's insurance policies and/or other benefit plans. For the purposes of
this Agreement, the Company shall have "Cause" to terminate the Executive's
employment upon (i) the willful engaging by the Executive in misconduct
materially injurious to the Company, (ii) acts of dishonesty or fraud by the
Executive, or (iii) the willful violation by the Executive of the provisions of
Section 8 or Section 9 hereof.
(c) Termination Giving Rise to Salary Continuation. If the
Company shall terminate the Executives employment with the Company or shall
provide a Notice of Non-Renewal for any reason other than due to the Executive's
death or Disability or for Cause, or if the Executive terminates this Agreement
because of a material breach of this Agreement by the Company, then, subject to
the compliance by the Executive with the provisions of Sections 8 and 9 hereof,
the Company shall pay, as salary continuation, to the Executive an amount equal
to two (2) times the Executive's maximum Annual Base Salary paid during the
prior five (5) year period (inclusive of the Annual Bonus paid to Executive
during the 12-month period preceding the date of termination or the Annual Bonus
earned by the Executive with respect to the fiscal year immediately preceding
the date of termination, whichever Annual Bonus is higher, but excluding
unearned bonuses negotiated by Executive at the time of the Executive's
employment with the Company), payable in a lump sum, less an amount equal to any
portion of the February Payments which has not been previously offset pursuant
to Section 4(b) hereof, but no other compensation or benefits (unless accrued
under the Company's benefit plans prior to the date of termination of employment
or as provided in Section 4(d) hereof) shall be paid to the Executive. For
purposes of this Section 5(c), Executive's Annual Bonus shall be determined
without regard to the offset described in Section 4(b) hereof. In addition, the
Company shall cause all unvested stock options held by the Executive to be fully
vested as of the date of termination under this Section 5(c).
(d) Healthcare Coverage. If the Executive's employment with
the Company is terminated by the Company for any reason other than due to the
Executive's death or Disability or for Cause, the Company will reimburse the
Executive for the premium paid by the Executive for continued coverage for the
Executive (and any dependents of the Executive covered by the
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Company's healthcare plans at the time the Executive's employment was
terminated) under the Company's healthcare plan pursuant to "COBRA" (or any
other mandatory healthcare continuation law then in effect), such coverage then
being substantially similar to that provided by the Company to its senior
executives and their eligible dependents. The Executive will be entitled to
reimbursement for such coverage for the period commencing with the date of
termination of employment and ending on the earlier of (i) the second
anniversary of termination of employment or (ii) the date the Executive becomes
eligible to receive any healthcare coverage from another employer of the
Executive or Executive's spouse, or any governmental entity, that does not
contain any exclusion or limitation with respect to any pre-existing condition
of the Executive or Executive's covered dependents. If the Executive (or
Executive's dependents covered at the time of termination of employment) elects
not to continue coverage under COBRA (or any other mandatory healthcare
continuation law then in effect) or is not eligible to continue coverage under
such healthcare continuation law, and is otherwise eligible under this Section
5(d), the Company will reimburse the Executive for the cost of purchasing
substantially similar coverage or a supplement required to achieve substantially
similar coverage under another arrangement approved by the Company for the same
period; however, such reimbursement shall be limited to the then current premium
charged to others by the Company for substantially similar coverage under COBRA
(or other mandatory healthcare continuation law then in effect). Any amount
payable to the Executive shall be subject to withholding of applicable taxes as
provided in Section 13 hereof. In the event of Executive's death following
termination giving rise to the benefit described in this Section 5(d), but
before the expiration of such benefits, Executive's dependents shall be entitled
to such benefits.
(e) Sole Remedy. The Executive hereby agrees that amounts payable
under this Section 5 and under paragraph 5(a) and (b) of the February 1999
Agreement shall be Executive's sole and exclusive remedy against the Company on
account of termination of employment during the Term and prior to a Change of
Control and on account of termination of employment more than two (2) years
following a Change of Control.
6. Compensation on Termination of Employment Within Two Years Following
A Change in Control. This Section 6 shall apply to termination of Executive's
employment during the "Change of Control Period" (as defined in this Section 6).
This Section 6 shall not apply to termination of Executive's employment prior to
a Change of Control or more than two (2) years following a Change of Control:
(a) Definition of Certain Terms.
(i) "Good Reason" shall mean the occurrence or
continuation, without consent of Executive, after a Change of
Control, of any of the following events within the Change of
Control Period:
(A) the assignment to Executive of any duties inconsistent
with the customary powers and duties that Executive held
immediately prior to the Change of Control, or an adverse
change in the status, position or conditions of Executive's
employment or the nature of Executive's responsibilities in
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effect immediately prior to such Change of Control, or any
removal of Executive from, or any failure to reelect Executive
to, any of such positions;
(B) a reduction by the Company in Executive's Annual Base
Salary as in effect immediately prior to such Change of Control;
(C) the relocation of Executive's principal office to a
location outside a 35 mile radius from Executive's principal
office immediately prior to such Change of Control, except for
required travel on the Company's business to an extent
substantially consistent with Executive's business travel
obligations immediately prior to such Change of Control;
(D) the failure by the Company to continue in effect any
benefit or compensation plan in which Executive participates
immediately prior to the Change of Control which is material to
Executive's total compensation, including but not limited to any
stock or stock option, employee stock ownership, bonus,
insurance, disability and vacation plans which the Company
currently has or any substitute or additional plans adopted
prior to the Change of Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan or plans)
has been made with respect to such plan, or the failure by the
Company to continue Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits provided
and the level of Executive's participation relative to other
participants, as in existence immediately prior to such Change
of Control; or
(E) the failure of the Company to obtain an agreement from
any successor to assume and agree to perform this Agreement as
contemplated herein.
(ii) A "Change of Control" shall be deemed to have taken
place if (i) any person or entity, including a "group" as
defined in Section 13(d)(3) of the Securities and Exchange Act
of 1934, other than Company or a wholly-owned subsidiary thereof
or any employee benefit plan of Company or any of its
subsidiaries, becomes the beneficial owner of the Company
securities having 20% or more of the combined voting power of
the then outstanding securities of the Company that may be cast
for the election of directors of the Company (other than as a
result of an in issuance of securities initiated by the Company
in the ordinary course of business); or (ii) as the result of or
in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested
election, or any combination of the foregoing transactions, less
than a majority of the combined voting power of the then
outstanding securities of the Company or any successor
corporation or entity entitled to vote generally in the election
of the directors of the
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Company or such other corporation or entity after such
transaction is held in the aggregate by the holders of the
Company's securities entitled to vote generally in the election
of directors of the Company immediately prior to such
transaction; or (iii) the following individuals cease for any
reason to constitute a majority of the number of directors then
serving: individuals who, as of the Effective Date, constitute
the Board and any new director (other than a director whose
initial assumption of office is m connection with an actual or
threatened election contest including but not limited to, a
consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders, was
approved or recommended by a vote of at least two-thirds of the
directors of the Company then still in office who were directors
of the Company on the Effective Date or whose appointment,
election or nomination for election was previously so approved
or recommended.
(iii) "Change of Control Period" shall mean the two (2)
year period following a Change of Control.
(iv) "Change of Control Severance Benefits" shall mean
all of the following payments:
(A) any installments of Executive's Annual Base
Salary through the date of termination of employment at
the rate in effect at the time the Notice of Termination
is given,
(B) the Special Termination Payment; and
(C) the Medical Benefits.
(v) "Change of Control Date" shall mean the date on which
a Change of Control occurs.
(vi) "Medical Benefits" shall mean the reimbursement for
continued medical coverage for Executive and Executive's
dependents described in Section 5(d) hereof.
(vii) "Notice of Termination" shall refer to written
notice described in Section 6(d) indicating the specific
termination provision of this Agreement relied upon, setting
forth in reasonable detail the facts and circumstances claimed
to provide the basis for terminations of Executive's employment
under the provision so indicated and stating the date of
termination.
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(viii) "Special Termination Payment" shall mean an amount
payable in a single lump sum equal to the product of (x) the sum
of the Executive's maximum Annual Base Salary paid during the
five (5) year period preceding the date of termination
(inclusive of the Annual Bonus paid to Executive during the
12-month period preceding the date of termination or the Annual
Bonus earned by the Executive with respect to the. fiscal year
immediately preceding the date of termination, whichever Annual
Bonus is higher, but excluding unearned bonuses negotiated by
Executive at the time of Executive's employment with the
Company), multiplied by (y) the number three (3), less an amount
equal to any portion of the February Payments which has not been
previously offset pursuant to Section 4(b). For purposes of this
Section 6(a)(viii), Executive's Annual Bonus shall be determined
without regard to the offset described in Section 4(b) hereof.
(b) Termination Not Giving Rise To Special Termination Payments or
Medical Benefits. If Executive's employment is terminated during the Change of
Control Period for Cause (as defined in Section 5(b), or on account of
Disability (as defined in Section 5(a)), or if Executive dies during the Change
of Control Period, or if Executive terminates Executive's employment during the
Change of Control Period without Good Reason, the Company shall pay to Executive
any installments of Executive's Annual Base Salary as then in effect that would
otherwise be due through the date on which Executive's employment is terminated.
The Company shall then have no further obligations to the Executive under this
Agreement (unless accrued under the Company's benefit plans) except that in the
event of termination by death, the Executive's estate or beneficiaries, as the
case may be, shall be paid such amounts as may be payable to the Executive under
the Company's insurance policies and/or other benefit plans, and except that in
the event of termination by Disability, the Executive shall be paid such amounts
as Executive is entitled to receive under the Company's disability insurance
policies and plans then in effect covering the Executive.
(c) Termination Giving Rise to Change of Control Severance Benefits.
If the Executive's employment is terminated or a Notice of Non-Renewal is given
by the Company during the Change of Control Period for any reason other than
Cause, death of the Executive or Disability, or if the Executive terminates his
employment during the Change of Control Period for Good Reason, then Executive
shall be entitled to receive the Change of Control Severance Benefits, all of
which (except the Medical Benefits) shall be paid to Executive within ten (10)
days following the date of termination. In addition, the Company shall cause all
unvested stock options held by the Executive to be fully vested as of the date
of termination.
(d) Notice of Termination. Any termination of Executive's employment
by the Company or by Executive pursuant to this Section 6 shall be communicated
by written notice of termination (the "Notice of Termination") to the other
party hereto, which shall indicate the specific termination provision in the
Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment and shall state the date of termination.
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(e) Sole Remedy. The Executive hereby agrees that the Change
of Control Severance Benefits and the amounts due, if any, under paragraph 5(a)
and (b) of the February 1999 Agreement shall be Executive's sole and exclusive
remedy against the Company or any successor on account of termination of
employment during the Change of Control Period.
7. Certain Reduction in Payments by the Company.
(a) Definition of Certain Terms.
(i) A "Payment" shall mean any payment or distribution in the
nature of compensation to or for the benefit of Executive, whether
paid or payable pursuant to this Agreement or otherwise.
(ii) An "Agreement Payment" shall mean a Payment paid or payable
on account of termination of employment during the Change in
Control Period pursuant to Section 6 of this Agreement (disregarding
the reduction provided by Section 7(b)).
(iii) "Net After Tax Receipt" shall mean the Present Value (as
defined below) of all Payments that are contingent on a Change of
Control within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), net of all taxes
imposed on Executive with respect thereto under Sections 1 and
4999 of the Code, determined by applying the highest marginal rate
under Section 1 of the Code which applied to Executive's taxable
income for immediately preceding taxable year.
(iv) "Present Value" shall mean such value determined in
accordance with Section 280G(d)(4) of the Code.
(b) Limitation on Agreement Payments. It is intended that all Agreement
Payments hereunder, together with all other Payments to Executive contingent
upon or in connection with a Change of Control, are reasonable compensation for
Executive's service to Company and its subsidiaries. Notwithstanding the
foregoing, should Company determine, based upon the opinion of the independent
accounting advisors of Company immediately prior to the Change of Control
("Accounting Firm"), that the Agreement Payments and other Payments, together
with any other amounts received by Employee that must be included in such
determination, would result in the payment of an "excess parachute payment" as
defined in Section 280G of the Code, then Company will reduce the Agreement
Payments to the minimum extent necessary so that no portion of the aggregate
Payments would result in the payment of an "excess parachute payment;" provided,
however, that such reduction will be made if, but only if, the value of all such
Payments (without regard to the foregoing reduction) would result in Net After
Tax Receipts which are less than the Net After Tax Receipts that would result
after taking into account any such reduction.
(c) Opinion of Accounting Firm. Company may reduce the Agreement
Payments pursuant to this Section 7 only if within thirty (30) days of
Executive's termination it provides
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Executive with an opinion of the Accounting Firm that Executive will be
considered to have received "excess parachute payments" as defined in Section
280G of the Code if Executive were to receive the fall amounts owing pursuant to
the terms of this Agreement and that the reduced amount proposed to be paid by
the Company will result in Net After Tax Receipts that are equal to or greater
than the Net After Tax Receipts which would result from reduction in the
Agreement Payments by any other amount.
8. Unauthorized Disclosure.
(a) During the period in which the Executive is employed by the
Company, the Executive shall not, without the prior written consent of the
Board, or a person authorized thereby, disclose to any person, other than a
person to whom disclosure is necessary or appropriate in connection with the
performance by the Executive of Executive's duties as an officer of the Company,
or its subsidiaries or its affiliates, any confidential information obtained by
Executive while in the employ of the Company with respect to any of the
Company's products, improvements, formulae, designs or styles, processes,
customers, methods of marketing or distribution, system, procedures, plans,
proposals, policies or methods of manufacture, the disclosure of which Executive
knows, or should have reason to know, will be damaging to the Company or its
subsidiaries or its affiliates, nor shall Executive make any false statements
regarding the Company or its subsidiaries or its affiliates or take any other
action which Executive knows, or should have reason to know, will be damaging to
the Company or its subsidiaries or its affiliates; provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of unauthorized disclosures by the Executive)
or any information of a type not otherwise considered confidential by persons
engaged in the same business or a business similar to that conducted by the
Company. Following the termination of the Executive's employment with the
Company for any reason, the Executive shall not disclose any confidential
information of the type described above or take any action of type described
above except as may be required in the opinion of the Executive's counsel in
connection with any judicial or administrative proceeding or inquiry. The
provisions of this Section 8 shall be binding upon the Executive's heirs,
successors and legal representatives.
(b) Company agrees to refrain from making derogatory or defamatory
statements about or concerning Executive.
9. Non-Competition. During the period in which the Executive is
employed by the Company and for a period of one (1) year following any
termination giving rise to salary continuation payments pursuant to Section 5(c)
or to Change of Control Severance Benefits pursuant to Section 6(c), the
Executive will not (a) directly or indirectly own, manage, operate, control or
participate in the ownership, management operation or control of, or be
connected as an officer, employee, partner, director or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
business which is in substantial competition with any business conducted by the
Company or by an group, division or subsidiary of the Company in any area where
such business is being conducted at the time of such termination (provided that
ownership of five percent (5%) or less of the voting stock of any publicly held
corporation shall not constitute a violation hereof or (b) directly or
indirectly employ, solicit for employment or advise or recommend to any
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other persons that they employ or solicit for employment, any employee of the
Company or any of its subsidiaries or affiliates.
10. Specific Performance. The Executive acknowledges and agrees that,
in the event of a breach of Section 8 or Section 9 hereof by the Executive, the
Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.
11. Binding Agreement. This Agreement and all obligations of the
Company hereunder shall be binding upon the successors and assigns of the
Company. This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Mr. Sam Cusano
562 Grand Oaks Drive
Brentwood, Tennessee 37027
If to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attn: General Counsel
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
13. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.
14. Governing Law. This Agreement shall be construed according to the
laws of Tennessee, without giving effect to the principles of conflicts of laws
of such State.
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15. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by Executive and the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
However, notwithstanding anything in this Agreement to the contrary, if in the
opinion of the Company's accountants, any provision of this Agreement would
preclude the use of "pooling of interest" accounting treatment for a Change of
Control transaction that (i) would otherwise qualify for such accounting
treatment and (ii) is contingent upon qualifying for such accounting treatment
then to the extent any provision of this Agreement disqualifies the transaction
as a "pooling of interest" transaction (including, if applicable, the entire
Agreement), such provision(s) shall be null and void as of the date hereof
16. Binding Effect. This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Executive's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
otherwise, other than by a transfer by his will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
17. Entire Contract. Except with respect to paragraphs 1, 2, 3, 4,
5(c), 6, 7, 10 and 11 of the February 1999 Agreement, the February 1999
Agreement and Appendix A thereto and this Agreement constitute the entire
agreement and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Agreement, including, without limitations the Prior
Agreement and any employment agreement or any severance or indemnification, by
and between the Company and the Executive, all of such agreements being rendered
null and void by this Agreement.
18. Termination. This Agreement shall be terminable only upon the
occurrence of any one of the following events: (a) expiration of the Term
without Executive's employment having been previously terminated; (b) the
termination of Executive with payment in full of all the payments/benefits
described in Sections 5 or 6 hereof as appropriate; or (c) the Company (or its
successor in interest) and Executive so agree in writing; provided, however,
that the provisions of Sections 8 and 9 hereof shall survive without limitation.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SERVICE MERCHANDISE COMPANY, INC.
By: /s/ C. Steven Moore
---------------------------------------
Accepted and Agreed:
/s/ Sam Cusano
- ------------------------------
Sam Cusano
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Exhibit 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of the 23rd day of March, 1999
(the "Agreement") by and between Service Merchandise Company, Inc., a Tennessee
corporation (the "Company"), and Charles Septer (the "Executive").
RECITALS
WHEREAS, the Executive is currently employed by the Company;
WHEREAS, the Company desires to provide for the employment of the
Executive in accordance with the terms and conditions provided herein;
WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein; and
WHEREAS, this Agreement shall supersede the Agreement dated December
21, 1998 between the Executive and the Company (the "Prior Agreement").
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to perform services for the Company, on the terms
and conditions set forth herein.
2. Term. The term of employment of the Executive by the Company
hereunder will commence effective as of March 23, 1999 (the "Effective Date"),
and shall end on March 23, 2002, unless further extended or sooner terminated as
hereinafter provided. Commencing on March 23, 2003, and on each anniversary
thereafter (each such date, an "Anniversary Date"), the term of the Executive's
employment shall automatically be extended for one additional year unless, not
later than the December 31 immediately preceding an Anniversary Date, either
party shall have given notice to the other party that it does not wish to extend
this Agreement (a "Notice of Non-Renewal"). References herein to the "Term" of
this Agreement shall refer to both the initial term and any extended term of the
Executive's employment hereunder. Notwithstanding the foregoing, if a Change of
Control (as defined in Section 6) occurs during the Term, in no event shall the
Term end prior to the end of the twenty-fourth (24th) month following the month
in which such Change of Control occurs.
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3. Position and Duties.
(a) The Executive shall serve as President and Chief Operating
Officer of the Company and shall have such responsibilities, duties and
authority as are generally consistent and customary with such positions. The
Executive shall report solely to the Chief Executive Officer and the Board of
Directors (the "Board") of the Company. The Executive shall also serve, if
requested by the Board, as a director or officer of any of the Company's present
or future direct or indirect subsidiaries. During the Term, the Company shall
cause the Executive to be included in the slate of persons nominated to serve as
directors on the Board and shall use its best efforts (including, without
limitation, the solicitation of proxies). The Executive shall, during the Term,
be a member of both the Executive Committee and the Operating Committee.
(b) During the Term, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive shall devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive under this Agreement, use the
Executive's reasonable best efforts to carry out such responsibilities fairly
and efficiently. It shall not be considered a violation of the foregoing for the
Executive to serve on corporate, industry, civic or charitable boards or
committees, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
(c) The Executive shall be based primarily and reside in the general
area of Nashville, Tennessee, except for such reasonable travel obligations as
do not materially exceed the Executive's travel obligations immediately prior to
the Effective Date.
4. Compensation.
(a) Base Salary. During the Term, the Executive shall receive an
annual base salary ("Annual Base Salary") of $500,000. The Annual Base Salary
shall be payable in accordance with the Company's regular payroll practice for
its senior executives, as in effect from time to time. During the Term, the
Annual Base Salary shall be reviewed by the Compensation Committee of the Board
for possible increase at least annually. Any increase in the Annual Base Salary
shall not limit or reduce any other obligation of the Company under this
Agreement. The Annual Base Salary shall not be reduced after any such increase,
and the term "Annual Base Salary" shall hereafter refer to the Annual Base
Salary as so increased.
(b) Bonuses; Special Bonus. On each of March 26, 1999 and April 23,
1999, Executive shall be paid a special bonus in the amount of $250,000 (such
bonuses referred to herein collectively as the "Special Bonus"). During the
Term, the Executive shall be entitled to receive an annual bonus ("Annual
Bonus") pursuant to the Company's annual bonus plan as in effect from time to
time, offset by the Special Bonus; provided, however, that any such offset shall
not exceed in any one year an amount equal to one-third of the Special Bonus;
provided further that in no event shall
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the Executive be required to remit to the Company any amount(s) of the Special
Bonus which has been previously paid.
(c) Other Benefits. During the Term, the Executive shall be entitled
to participate in other employee benefit plans, programs and arrangements of the
Company, other than Annual Bonus plans (covered by Section 4(b) above) (the
"Benefit Plans"), now or hereinafter in effect, that are applicable to the
Company's employees generally or to its executive officers, as the case may be,
subject to and on a basis consistent with the terms, conditions and overall
administration of the Benefit Plans. During the Term, the Company shall provide
to the Executive all of the fringe benefits and perquisites that are provided to
senior executives of the Company, and the Executive shall be entitled to
participate in and receive any other fringe benefits or perquisites that become
available to the Company's senior executives.
(d) Vacation and Other Leaves. The Executive shall be entitled to
vacation in accordance with the Company's vacation policy (and to compensation
in respect of earned but unused vacation days) and all paid holidays and
personal leave days that are available generally to executive officers of the
Company.
(e) Expenses; Attorneys' Fees. During the Term, the Executive shall
be entitled to receive prompt reimbursement for all reasonable and customary
expenses incurred by the Executive in performing his services hereunder,
including all expenses of travel and accommodations while engaged in business of
the Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company. The
Company shall reimburse the Executive for all reasonable legal fees and expenses
incurred in connection with the negotiation and execution of this Agreement.
(f) Services Furnished. The Company shall furnish the Executive with
office space, secretarial and/or administrative assistance, office supplies,
support services and such other facilities and services as shall be suitable to
the Executive's position and adequate for the performance of his duties
hereunder.
(g) Automobile. The Company shall execute a transfer of title to
the company automobile, which is currently assigned to the Executive, in the
Executive's name on the date of this Agreement.
5. Compensation on Termination of Employment (Except Within Two Years
Following a Change of Control). This Section 5 shall apply to termination of the
Executive's employment during the Term and prior to a Change of Control (as
hereinafter defined in Section 6) and to termination of the Executive's
employment more than two (2) years following a Change of Control. This Section 5
shall not apply to termination of Executive's employment during the Change of
Control Period (as hereinafter defined in Section 6):
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(a) Disability. If the Executive's employment with the Company
is terminated by the Executive or the Company due to the Executive's inability
to perform Executive's duties as a result of physical or mental incapacity
("Disability"), the Executive shall be paid such amounts, if any, as the
Executive is entitled to receive under the Company's disability insurance
policies then in effect for Company officers, but shall be entitled to no
further compensation or benefits (unless previously accrued under the Company's
benefit plans).
(b) Other Termination Not Giving Rise to Salary Continuation.
If the Executive's employment shall be terminated for Cause (as hereinafter
defined) or if the Executive dies or if the Executive terminates Executive's
employment for any reason other than for a material breach of this Agreement by
the Company, the Company shall pay the Executive any installments of Executive's
Annual Base Salary as then in effect that would otherwise be due through the
date on which Executive's employment is terminated. The Company shall then have
no further obligations to the Executive under this Agreement except that in the
event of termination by death, the Executive's estate or beneficiaries, as the
case may be, shall be paid such amounts as may be payable to the Executive under
the Company's insurance policies and/or other benefit plans. For the purposes of
this Agreement, the Company shall have "Cause" to terminate the Executive's
employment upon (i) the willful engaging by the Executive in misconduct
materially injurious to the Company, (ii) acts of dishonesty or fraud by the
Executive, or (iii) the willful violation by the Executive of the provisions of
Section 8 or Section 9 hereof.
(c) Termination Giving Rise to Salary Continuation. If the
Company shall terminate the Executive's employment with the Company or shall
provide a Notice of Non-Renewal for any reason other than due to the Executive's
death or Disability or for Cause, or if the Executive terminates this Agreement
because of a material breach of this Agreement by the Company, then, subject to
the compliance by the Executive with the provisions of Sections 8 and 9 hereof,
the Company shall pay, as salary continuation, to the Executive an amount equal
to two (2) times the Executive's maximum Annual Base Salary paid during the
prior five (5) year period (inclusive of the Annual Bonus paid to Executive
during the 12-month period preceding the date of termination or the Annual Bonus
earned by the Executive with respect to the fiscal year immediately preceding
the date of termination, whichever Annual Bonus is higher, but excluding
unearned bonuses negotiated by Executive at the time of the Executive's
employment with the Company), payable in a lump sum, less an amount equal to any
portion of the Special Bonus which has not been previously offset pursuant to
Section 4(b) hereof, but no other compensation or benefits (unless accrued under
the Company's benefit plans prior to the date of termination of employment or as
provided in Section 4(d) hereof) shall be paid to the Executive. For purposes of
this Section 5(c), Executive's Annual Bonus shall be determined without regard
to the proviso set forth in Section 4(b) hereof. In addition, the Company shall
cause all unvested stock options held by the Executive to be fully vested as of
the date of termination under this Section 5(c).
(d) Healthcare Coverage. If the Executive's employment with
the Company is terminated by the Company for any reason other than due to the
Executive's death or Disability or for Cause, the Company will reimburse the
Executive for the premium paid by the Executive for
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continued coverage for the Executive (and any dependents of the Executive
covered by the Company's healthcare plans at the time the Executive's employment
was terminated) under the Company's healthcare plan pursuant to "COBRA" (or any
other mandatory healthcare continuation law then in effect), such coverage then
being substantially similar to that provided by the Company to its senior
executives and their eligible dependents. The Executive will be entitled to
reimbursement for such coverage for the period commencing with the date of
termination of employment and ending on the earlier of (i) the second
anniversary of termination of employment, or (ii) the date the Executive becomes
eligible to receive any healthcare coverage from another employer of the
Executive or Executive's spouse, or any governmental entity, that does not
contain any exclusion or limitation with respect to any pre-existing condition
of the Executive or Executive's covered dependents. If the Executive (or
Executive's dependents covered at the time of termination of employment) elects
not to continue coverage under COBRA (or any other mandatory healthcare
continuation law then in effect) or is not eligible to continue coverage under
such healthcare continuation law, and is otherwise eligible under this Section
5(d), the Company will reimburse the Executive for the cost of purchasing
substantially similar coverage or a supplement required to achieve substantially
similar coverage under another arrangement approved by the Company for the same
period; however, such reimbursement shall be limited to the then current premium
charged to others by the Company for substantially similar coverage under COBRA
(or other mandatory healthcare continuation law then in effect). Any amount
payable to the Executive shall be subject to withholding of applicable taxes as
provided in Section 13 hereof. In the event of Executive's death following
termination giving rise to the benefit described in this Section 5(d), but
before the expiration of such benefits, Executive's dependents shall be entitled
to such benefits.
(e) Sole Remedy. The Executive hereby agrees that amounts payable
under this Section 5 shall be Executive's sole and exclusive remedy against the
Company on account of termination of employment during the Term and prior to a
Change of Control and on account of termination of employment more than two (2)
years following a Change of Control.
6. Compensation on Termination of Employment Within Two Years Following
A Change of Control. This Section 6 shall apply to termination of Executive's
employment during the "Change of Control Period" (as defined in this Section 6).
This Section 6 shall not apply to termination of Executive's employment prior to
a Change of Control or more than two (2) years following a Change of Control:
(a) Definition of Certain Terms.
(i) "Good Reason" shall mean the occurrence or continuation,
without consent of Executive, after a Change of Control, of any of
the following events within the Change of Control Period:
(A) the assignment to Executive of any duties inconsistent with
the customary powers and duties that Executive held immediately
prior to the Change of Control, or an adverse change in the, status,
position or conditions
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of Executive's employment or the nature of Executive's
responsibilities in effect immediately prior to such Change of
Control, or any removal of Executive from, or any failure to
re-elect Executive to, any of such positions;
(B) a reduction by the Company in Executive's Annual Base Salary
as in effect immediately prior to such Change of Control;
(C) the relocation of Executive's principal office to a location
outside a 35 mile radius from Executive's principal office
immediately prior to such Change of Control except for required
travel on the Company's business to an extent substantially
consistent with Executive's business travel obligations immediately
prior to such Change of Control;
(D) the failure by the Company to continue in effect any benefit
or compensation plan in which Executive participates immediately
prior to the Change of Control which is material to Executive's
total compensation, including but not limited to any stock or
stock option, employee stock ownership, bonus, insurance,
disability and vacation plans which the Company currently has or
any substitute or additional plans adopted prior to the Change of
Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan or plans) has been made with respect
to such plan, or the failure by the Company to continue Executive's
participation therein (or in such substitute or alternative plan)
on a basis not materially less favorable, both in terms of the
amount of benefits provided and the level of Executive's
participation relative to other participants, as in existence
immediately prior to such Change of Control; or
(E) the failure of the Company to obtain an agreement from any
successor to assume and agree to perform this Agreement as
contemplated herein.
(ii) A "Change of Control" shall be deemed to have taken place
if (i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Securities and Exchange Act of 1934,
other than Company or a wholly-owned subsidiary thereof or any
employee benefit plan of Company or any of its it subsidiaries,
becomes the beneficial owner of the Company securities having 20%
or more of the combined voting power of the then outstanding
securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an in issuance
of securities initiated by the Company in the ordinary course of
business); or (ii) as the result of, or in connection with, any
cash tender or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the
foregoing transactions, less than a majority of the combined
voting power of
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the then outstanding securities of the Company or any successor
corporation or entity entitled to vote generally in the election
of the directors of the Company or such other corporation or
entity after such transaction is held in the aggregate by the
holders of the Company's securities entitled to vote generally in
the election of directors of the Company immediately prior to
such transaction; or (iii) the following individuals cease for
any reason to constitute a majority of the number of directors
then serving: individuals who, as of the Effective Date,
constitute the Board and any new director (other than a director
whose initial assumption of office is in connection with an actual
or threatened election contest, including but not limited to, a
consent solicitation, relating to the election of directors of
the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders, was approved
or recommended by a vote of at least two-thirds of the directors
of the Company then still in office who were directors of the
Company on the Effective Date or whose appointment, election or
nomination for election was previously so approved or recommended.
(iii) "Change of Control Period" shall mean the two (2)
year period following a Change of Control.
(iv) "Change of Control Severance Benefits shall mean all
of the following payments:
(A) any installments of Executive's Annual Base
Salary through the date of termination of employment at the rate in
effect at the time the Notice of Termination is given,
(B) the Special Termination Payment; and
(C) the Medical Benefits.
(v) "Change of Control Date" shall mean the date on which a
Change of Control occurs.
(vi) "Medical Benefits" shall mean the reimbursement for
continued medical coverage, for Executive and Executive's
dependents described in Section 5(d) hereof.
(vii) "Notice of Termination" shall refer to written notice
described in Section 6(d) indicating the specific termination
provision of this Agreement relied upon, setting forth in
reasonable detail the facts and circumstances claimed to provide
the basis for termination of Executive's
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employment under the provision so indicated and stating
the date of termination.
(viii) "Special Termination Payment" shall
mean an amount payable in a single lump sum equal to the
product of (x) the sum of the Executive's maximum Annual
Base Salary paid during the five (5) year period preceding
the date of termination (inclusive of the Annual Bonus
paid to Executive during the 12-month period preceding the
date of termination or the Annual Bonus earned by the
Executive with respect to the fiscal year immediately
preceding the date of termination, whichever Annual Bonus
is higher, but excluding unearned bonuses negotiated by
Executive at the time of Executive's employment with the
Company), multiplied by (y) the number three (3), less an
amount equal to any portion of the Special Bonus which has
not be previously offset pursuant to Section 4(b) hereof.
For purposes of this Section 6(a)(viii), Executive's
Annual Bonus shall be determined without regard to the
provision set forth in Section 4(b) hereof.
(b) Termination Not Giving Rise To Special Termination
Payments or Medical Benefits. If Executive's employment is terminated during the
Change of Control Period for Cause (as defined in Section 5(b), or on account of
Disability (as defined in Section 5(a)), or if Executive dies during the Change
of Control Period, or if Executive terminates Executive's employment during the
Change of Control Period without Good Reason, the Company shall pay to Executive
any installments of Executive's Annual Base Salary as then in effect that would
otherwise be due through the date on which Executive's employment is terminated.
The Company shall then have no further obligations to the Executive under this
Agreement (unless accrued under the Company's benefit plans) except that in the
event of termination by death, the Executive's estate or beneficiaries, as the
case may be, shall be paid such amounts as may be payable to the Executive under
the Company's insurance policies and/or other benefit plans, and except that in
the event of termination by Disability, the Executive shall be paid such amounts
as Executive is entitled to receive under the Company's disability insurance
policies and plans then in effect covering the Executive.
(c) Termination Giving Rise to Change of Control Severance
Benefits. If the Executive's employment is terminated or a Notice of Non-Renewal
is given by the Company during the Change of Control Period for any reason other
than Cause, death of the Executive or Disability, or if the Executive terminates
his employment during the Change of Control Period for Good Reason, then
Executive shall be entitled to receive the Change of Control Severance Benefits,
all of which (except the Medical Benefits) shall be paid to Executive within ten
(10) days following the date of termination. In addition, the Company shall
cause all unvested stock options held by the Executive to be fully vested as of
the date of termination.
(d) Notice of Termination. Any termination of Executive's
employment by the Company or by Executive pursuant to this Section 6 shall be
communicated by written notice of termination (the "Notice of Termination") to
the other party hereto, which shall indicate the specific
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termination provision in the Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment and shall state the date of termination.
(e) Sole Remedy. The Executive hereby agrees that the Change
of Control Severance Benefits shall be Executive's sole and exclusive remedy
against the Company or any successor on account of termination of employment
during the Change of Control Period.
7. Certain Reduction in Payments by the Company.
(a) Definition of Certain Terms.
(i) A "Payment" shall mean any payment or distribution in the
nature of compensation to or for the benefit of Executive,
whether paid or payable pursuant to this Agreement or otherwise.
(ii) An "Agreement Payment" shall mean a Payment paid or payable
on account of termination of employment during the Change in
Control Period pursuant to Section 6 of this Agreement (disregarding
the reduction provided by Section 7(b)).
(iii) "Net After Tax Receipt" shall mean the Present Value (as
defined below) of all Payments that are contingent on a Change of
Control within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), net of all taxes
imposed on Executive with respect thereto under Sections 1 and
4999 of the Code, determined by applying the highest marginal rate
under Section 1 of the Code which applied to Executive's taxable
income for the immediately preceding taxable year.
(iv) "Present Value" shall mean such value determined in
accordance with Section 280G(d)(4) of the Code.
(b) Limitation on Agreement Payments. It is intended due all
Agreement Payments hereunder, together with all other Payments to Executive
contingent upon or in connection with a Change of Control, are reasonable
compensation for Executive's service to Company and its subsidiaries.
Notwithstanding the foregoing, should Company determine, based upon the opinion
of the independent accounting advisors of Company immediately prior to the
Change of Control ("Accounting Firm"), that the Agreement Payments and other
Payments, together with any other amounts received by Employee that must be
included in such determination, would result in the payment of an "excess
parachute payment" as defined in Section 280G of the Code, then Company will
reduce the Agreement Payments to the minimum extent necessary so that no portion
of the aggregate Payments would result in the payment of an "excess parachute
payment;" provided, however, that such reduction will be made if, but only if,
the value of all such Payments (without
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regard to the foregoing reduction) would result in Net After Tax Receipts which
are less than the Net After Tax Receipts that would result after taking into
account any such reduction.
(c) Opinion of Accounting Firm. Company may reduce the Agreement
Payments pursuant to this Section 7 only if within thirty (30) days of
Executive's termination it provides Executive with an opinion of the Accounting
Firm that Executive will be considered to have received "excess parachute
payments" as defined in Section 280G of the Code if Executive were to receive
the full amounts owing pursuant to the terms of this Agreement and that the
reduced amount proposed to be paid by the Company will result in Net After Tax
Receipts that are equal to or greater than the Net After Tax Receipts which
would result from reduction in the Agreement Payments by any other amount.
8. Unauthorized Disclosure.
(a) During the period in which the Executive is employed by
the Company, the Executive shall not, without the prior written consent of the
Board, or a person authorized thereby, disclose to any person, other than a
person to whom disclosure is necessary or appropriate in connection with the
performance by the Executive of Executive's duties as an officer of the Company,
or its subsidiaries or its affiliates, any confidential information obtained by
Executive while in the employ of the Company with respect to any of the
Company's products, improvements, formulae, design or styles, processes,
customers, methods of marketing or distribution, systems, procedures, plans,
proposals, policies or methods of manufacture, the disclosure of which Executive
knows, or should have reason to know, will be damaging to the Company or its
subsidiaries or its affiliates, nor shall Executive make any false statements
regarding the Company or its subsidiaries or its affiliates or take any other
action which Executive knows, or should have reason to know, will be damaging to
the Company or its subsidiaries or its affiliates; provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of unauthorized disclosures by the Executive)
or any information of a type not otherwise considered confidential by persons
engaged in the same business or a business similar to that conducted by the
Company. Following the termination of the Executive's employment with the
Company for any reason, the Executive shall not disclose any confidential
information of the type described above or take any action of type described
above except as may be required in the opinion of the Executive's counsel in
connection with any judicial or administrative proceeding or inquiry. The
provisions of this Section 8 shall be binding upon the Executive's heirs,
successors and legal representatives.
(b) Company agrees to refrain from making derogatory or defamatory
statements about or concerning Executive.
9. Non-Competition. During the period in which the Executive is
employed by the Company and for a period of one (1) year following any
termination giving rise to salary continuation payments pursuant to Section 5(c)
or to Change of Control Severance Benefits pursuant to Section 6(c), the
Executive will not (a) directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected as an officer,
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employee, partner, director or otherwise with, or have any financial interest
in, or aid or assist anyone else in the conduct of, any business which is in
substantial competition with any business conducted by the Company or by any
group, division or subsidiary of the Company in any area where such business is
being conducted at the time of such termination (provided that ownership of five
percent (5%) or less of the voting stock of any publicly held corporation shall
not constitute a violation hereof) or (b) directly or indirectly employ, solicit
for employment or advise or recommend to any other persons that they employ or
solicit for employment, any employee of the Company or any of its subsidiaries
or affiliates.
10. Specific Performance. The Executive acknowledges and agrees that,
in the event of a breach of Section 8 or Section 9 hereof by the Executive, the
Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.
11. Binding Agreement. This, Agreement and all obligations of the
Company hereunder shall be binding upon the successors and assigns of the
Company. This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
12. Notice. For the purposes of this Agreement notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Mr. Charles Septer
5208 Harpeth Ridge Drive
Brentwood, Tennessee 37027
If to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attn: General Counsel
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
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13. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement, all federal, state, city or other taxes as shall
be required pursuant to any law or government regulation or ruling.
14. Governing Law. This Agreement shall be construed according to the
laws of Tennessee, without giving effect to the principles of conflicts of laws
of such State.
15. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by Executive and the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
However, notwithstanding anything in this Agreement to the contrary, if in the
opinion of the Company's accountants, any provision of this Agreement would
preclude the use of "pooling of interest" accounting treatment for a Change of
Control transaction that (i) would otherwise qualify for such accounting
treatment and (ii) is contingent upon qualifying for such accounting treatment,
then to the extent any provision of this Agreement disqualifies the transaction
as a "pooling of interest" transaction (including, if applicable, the entire
Agreement), such provision(s) shall be null and void as of the date hereof.
16. Binding Effect. This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Executive's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
otherwise, other than by a transfer by his will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
17. Entire Contract. This Agreement constitutes the entire agreement
and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Agreement, including, without limitation, the Prior
Agreement and any employment agreement or any severance or indemnification, by
and between the Company and the Executive, all of such agreements being rendered
null and void by this Agreement.
18. Termination. This Agreement shall be terminable only upon the
occurrence of any one of the following events: (a) expiration of the Term
without Executive's employment having been previously terminated; (b) the
termination of Executive with payment in full of all the payments/benefits
described in Sections 5 or 6 hereof as appropriate; or (c) the Company (or its
successor in interest) and Executive so agree in writing; provided, however,
that the provisions of Sections 8 and 9 hereof shall survive without limitation.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SERVICE MERCHANDISE COMPANY, INC.
By: /s/ C. Steven Moore
-------------------------------------
Accepted and Agreed:
/s/ Charles Septer
- -----------------------------------
Charles Septer
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Exhibit 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of the 23rd day of March, 1999
(the "Agreement") by and between Service Merchandise Company, Inc., a Tennessee
corporation (the "Company"), and Steven Moore (the "Executive").
RECITALS
WHEREAS, the Executive is currently employed by the Company;
WHEREAS, the Company desires to provide for the employment of the
Executive in accordance with the terms and conditions provided herein; and
WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein.
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to perform services for the Company, on the terms
and conditions set forth herein.
2. Term. The term of employment of the Executive by the Company
hereunder shall commence effective as of March 23, 1999 (the "Effective Date"),
and shall end on March 23, 2002, unless further extended or sooner terminated as
hereinafter provided. Commencing on March 23, 2003, and on each anniversary
thereafter (each such date, an "Anniversary Date"), the term of the Executive's
employment shall automatically be extended for one additional year unless, not
later than the December 31, immediately preceding an Anniversary Date, either
party shall have given notice to the other party that it does not wish to extend
this Agreement (a "Notice of Non-Renewal"). References herein to the "Term" of
this Agreement shall refer to both the initial term and any extended term of the
Executive's employment hereunder. Notwithstanding the foregoing, if a Change of
Control (as defined in Section 6) occurs during the Term, in no event shall the
Term end prior to the end of the twenty-fourth (24th) month following the month
in which such Change of Control occurs.
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3. Position and Duties.
(a) The Executive shall serve as Senior Vice President, General
Counsel and Chief Administrative Officer of the Company and shall have
such responsibilities, duties and authority as are generally
consistent and customary with such positions. Executive shall report
solely to the Chief Executive Officer of the Company. The Executive
shall also serve, if requested by the Board, as a director or officer
of any of the Company's present or future direct or indirect
subsidiaries. The Executive shall, during the Term, be a member of the
Operating Committee.
(b) During the Term, and excluding any periods of vacation and sick
leave to which the Executive is entitled, the Executive shall devote
reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive under this
Agreement, use the Executive's reasonable best efforts to carry out
such responsibilities faithfully and efficiently. It shall not be
considered a violation of the foregoing for the Executive to serve on
corporate, industry, civic or charitable boards or committees, so long
as such activities do not significantly interfere with the performance
of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
(c) The Executive shall be based primarily and reside in the
general area of Nashville, Tennessee, except for such reasonable
travel obligations as do not materially exceed the Executive's travel
obligations immediately prior to the Effective Date.
4. Compensation.
(a) Base Salary. During the Term, the Executive shall receive an
annual base salary ("Annual Base Salary") of $350,000. The Annual Base
Salary shall be payable in accordance with the Company's regular
payroll practice for its senior executives, as in effect from time to
time. During the Term, the Annual Base Salary shall be reviewed by the
Compensation Committee of the Board for possible increase at least
annually. Any increase in the Annual Base Salary shall not limit or
reduce any other obligation of the Company under this Agreement. The
Annual Base Salary shall not be reduced after any such increase, and
the term "Annual Base Salary" shall thereafter refer to the Annual
Base Salary as so increased.
(b) Annual Bonus. During the Term, the Executive shall be entitled
to receive an annual bonus ("Annual Bonus") pursuant to the Company's
annual bonus plan, as in effect from time to time.
(c) Other Benefits. During the Term, the Executive shall be entitled
to participate in other employee benefit plans, programs and
arrangements of the Company, other than Annual Bonus plans (covered by
Section 4(b) above) (the "Benefit Plans"), now or
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hereinafter in effect that are applicable to the Company's employees
generally or to its executive officers, as the case may be, subject to
and on a basis consistent with the terms, conditions and overall
administration of the Benefit Plans. During the Term, the Company shall
provide to the Executive all of the fringe benefits and perquisites
that are provided to senior executives of the Company, and the
Executive shall be entitled to participate in and receive any other
fringe benefits or perquisites that become available to the Company's
senior executives.
(d) Vacation and Other Leaves. The Executive shall be entitled to
vacation in accordance with the Company's vacation policy (and to
compensation in respect of earned but unused vacation days) and all
paid holidays and personal leave days that are available generally to
executive officers of the Company.
(e) Expenses. During the Term, the Executive shall be entitled to
receive prompt reimbursement for all reasonable and customary expenses
incurred by the Executive in performing his services hereunder,
including all expenses of travel and accommodations while engaged in
business of the Company, provided that such expenses are incurred and
accounted for in accordance with the policies and procedures
established by the Company.
(f) Services Furnished. The Company shall furnish the Executive with
office space, secretarial and/or administrative assistance, office
supplies, support services and such other facilities and services as
shall be suitable to the Executive's position and adequate for the
performance of his duties hereunder.
5. Compensation on Termination of Employment (Except Within Two Years
Following a Change of Control).
This Section 5 shall apply to termination of the Executive's employment
during the Term and prior to a Change of Control (as hereinafter defined in
Section 6) and to termination of the Executive's employment more than two (2)
years following a Change of Control. This Section 5 shall not apply to
termination of Executive's employment during the Change of Control Period (as
hereinafter defined in Section 6):
(a) Disability. If the Executive's employment with the Company
is terminated by the Executive or the Company due to the Executive's
inability to perform Executive's duties as a result of physical or
mental incapacity ("Disability"), the Executive shall be paid such
amounts, if any, as the Executive is entitled to receive under the
Company's disability insurance policies then in effect for Company
officers, but shall be entitled to no further compensation or benefits
(unless previously accrued under the Company's benefit plans)
(b) Other Termination Not Giving Rise to Salary Continuation. If the
Executive's employment shall be terminated for Cause (as hereinafter
defined) or if the Executive dies or if the Executive terminates
Executive's employment for any reason other than for a
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material breach of this Agreement by the Company, the Company shall pay
the Executive any installments of Executive's Annual Base Salary as
then in effect that would otherwise be due through the date on which
Executive's employment is terminated. The Company shall then have no
further obligations to the Executive under this Agreement except that
in the event of termination by death, the Executive's estate or
beneficiaries, as the case may be, shall be paid such amounts as may be
payable to the Executive under the Company's insurance policies and/or
other benefit plans. For the purposes of this Agreement, the Company
shall have "Cause" to terminate the Executive's employment upon (i) the
willful engaging by the Executive in misconduct materially injurious to
the Company, (ii) acts of dishonesty or fraud by the Executive, or
(iii) the willful violation by the Executive of the provisions of
Section 8 or Section 9 hereof.
(c) Termination Giving Rise to Salary Continuation. The
Company shall terminate the Executive's employment with the Company or
shall provide a Notice of Non-Renewal for any reason other than due to
the Executive's death or Disability or for Cause, or if the Executive
terminates this Agreement because of a material breach of this
Agreement by the Company, then, subject to the compliance by the
Executive with the provisions of Sections 8 and 9 hereof, the Company
shall pay, as salary continuation, to the Executive an amount equal to
two (2) times the Executive's maximum Annual Base Salary paid during
the prior five (5) year period (inclusive of the Annual Bonus paid to
Executive during the 12-month period preceding the date of termination
or the Annual Bonus earned by the Executive with respect to the fiscal
year immediately preceding the date of termination, whichever Annual
Bonus is higher, but excluding unearned bonuses negotiated by Executive
at the time of the Executive's employment with the Company), payable in
a lump sum, but no other compensation or benefits (unless accrued under
the Company's benefit plans prior to the date of termination of
employment or as provided in Section 4(d) hereof) shall be paid to the
Executive. In addition, the Company shall cause all unvested stock
options held by the Executive to be fully vested as of the date of
termination under this Section 5(c).
(d) Healthcare Coverage. If the Executive's employment with
the Company is terminated by the Company for any reason other than due
to the Executive's death or Disability or for Cause, the Company will
reimburse the Executive for the premium paid by the Executive for
continued coverage for the Executive (and any dependents of the
Executive covered by the Company's healthcare plans at the time the
Executive's employment was terminated) under the Company's healthcare
plan pursuant to "COBRA" (or any other mandatory healthcare
continuation law then in effect), such coverage then being
substantially similar to that provided by the Company to its senior
executives and their eligible dependents. The Executive will be
entitled to reimbursement for such coverage for the period commencing
with the date of termination of employment and ending on the earlier of
(i) the second anniversary of termination of employment, or (ii) the
date the Executive becomes eligible to receive any healthcare coverage
from another employer of the Executive or Executive's spouse, or any
governmental entity, that does not contain any exclusion or limitation
with respect to any pre-existing condition of the Executive or
Executive's covered
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dependents. If the Executive (or Executive's dependents covered at the
time of termination of employment) elects not to continue coverage
under COBRA (or any other mandatory healthcare continuation law then in
effect) or is not eligible to continue coverage under such healthcare
continuation law, and is otherwise eligible under this Section 5(d),
the Company will reimburse the Executive for the cost of purchasing
substantially similar coverage or a supplement required to achieve
substantially similar coverage under another arrangement approved by
the Company for the same period; however, such reimbursement shall be
limited to the then current premium charged to others by the Company
for substantially similar coverage under COBRA (or other mandatory
healthcare continuation law then in effect). Any amount payable to the
Executive shall be subject to withholding of applicable taxes as
provided in Section 13 hereof. In the event of Executive's death
following termination giving rise to the benefit described in this
Section 5(d), but before the expiration of such benefits, Executive's
dependents shall be entitled to such benefits.
(e) Sole Remedy. The Executive hereby agrees that amounts payable
under this Section 5 shall be Executive's sole and exclusive remedy
against the Company on account of termination of employment during the
Term and prior to a Change of Control and on account of termination of
employment more than two (2) years following a Change of Control.
6. Compensation on Termination of Employment Within Two Years Following
A Change of Control.
This Section 6 shall apply to termination of Executive's employment
during the "Change of Control Period" (as defined in this Section 6). This
Section 6 shall not apply to termination of Executive's employment prior to a
Change of Control or more than two (2) years following a Change of Control:
(a) Definition of Certain Terms.
(i) "Good Reason" shall mean the occurrence or continuation,
without consent of Executive, after a Change of Control, of any
of the following events within the Change of Control Period:
(A) the assignment to Executive of any duties
inconsistent with the customary powers and duties that
Executive held immediately prior to the Change of Control, or
an adverse change in the status, position or conditions of
Executive's employment or the nature of Executive's
responsibilities in effect immediately prior to such Change
of Control, or any removal of Executive from, or any failure
to re-elect Executive to, any of such positions;
(B) a reduction by the Company in Executive's Annual Base
Salary as in effect immediately prior to such Change of
Control;
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(C) the relocation of Executive's principal office to a
location outside a 35 mile radius from Executive's principal
office immediately prior to such Change of Control, except
for required travel on the Company's business to an extent
substantially consistent with Executive's business travel
obligations immediately prior to such Change of Control;
(D) the failure by the Company to continue in effect any
benefit or compensation plan in which Executive participates
immediately prior to the Change of Control which is material
to Executive's total compensation, including but not limited
to any stock or stock option, employee stock ownership,
bonus, insurance, disability and vacation plans which the
Company currently has or any substitute or additional plans
adopted prior to the Change of Control, unless an equitable
arrangement (embodied in an ongoing substitute or
alternative plan or plans) has been made with respect to
such plan, or the failure by the Company to continue
Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the
level of Executive's participation relative to other
participants, as in existence immediately prior to such
Change of Control; or
(E) the failure of the Company to obtain an agreement
from any successor to assume and agree to perform this
Agreement as contemplated herein.
(ii) A "Change of Control" shall be deemed to have taken
place if (i) any person or entity, including a "group" as defined
in Section 13(d)(3) of the Securities and Exchange Act of 1934,
other than Company or a wholly-owned subsidiary thereof or any
employee benefit plan of Company or any of its subsidiaries,
becomes the beneficial owner of the Company securities having 20%
or more of the combined voting power of the then outstanding
securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an in
issuance of securities initiated by the Company in the ordinary
course of business); or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, less than a majority
of the combined voting power of the then outstanding securities
of the Company or any successor corporation or entity entitled to
vote generally in the election of the directors of the Company or
such other corporation or entity after such transaction is held
in the aggregate by the holders of the Company's securities
entitled to vote generally in the election of directors of the
Company immediately prior to such transaction; or (iii) the
following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, as of the Effective Date, constitute the Board and any new
director (other than a director whose initial assumption of
office is in connection with an
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actual or threatened election contest, including but not limited
to, a consent solicitation, relating to the election of directors
of the Company) whose appointment or election by the Board or
nomination for election by the Company's shareholders, was
approved or recommended by a vote of at least two-thirds of the
directors of the Company then still in office who were directors
of the Company on the Effective Date or whose appointment,
election or nomination for election was previously so approved or
recommended.
(iii) "Change of Control Period" shall mean the two (2)
year period following a Change of Control.
(iv) "Change of Control Severance Benefits" shall mean all
of the following payments:
(A) any installments of Executive's Annual Base
Salary through the date of termination of employment at
the rate in effect at the time the Notice of Termination
is given,
(B) the Special Termination Payment; and
(C) the Medical Benefits.
(v) "Change of Control Date" shall mean the date on which
a Change of Control occurs.
(vi) "Medical Benefits" shall mean the reimbursement for
continued medical coverage for Executive and Executive's
dependents described in Section 5(d) hereof
(vii) "Notice of Termination" shall refer to written
notice described in Section 6(d) indicating the specific
termination provision of this Agreement relied upon, setting
forth in reasonable detail the facts and circumstances claimed to
provide the basis for termination of Executive's employment under
the provision so indicated and stating the date of termination.
(viii) "Special Termination Payment" shall mean an amount
payable in a single lump sum equal to the product of (x) the sum
of the Executive's maximum Annual Base Salary paid during the
five (5) year period preceding the date of termination (inclusive
of the Annual Bonus paid to Executive during the 12-month period
preceding the date of termination or the Annual Bonus earned by
the Executive with respect to the fiscal year immediately
preceding the date of termination, whichever Annual Bonus is
higher, but excluding unearned bonuses
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negotiated by Executive at the time of Executive's employment
with the Company), multiplied by (y) the number three (3).
(b) Termination Not Giving Rise To Special Termination
Payments or Medical Benefits. If Executive's employment is terminated
during the Change of Control Period for Cause (as defined in Section
5(b), or on account of Disability (as defined in Section 5(a)), or if
Executive dies during the Change of Control Period, or if Executive
terminates Executive's employment during the Change of Control Period
without Good Reason, the Company shall pay to Executive any
installments of Executive's Annual Base Salary as then in effect that
would otherwise be due through the date on which Executive's employment
is terminated. The Company shall then have no further obligations to
the Executive under this Agreement (unless accrued under the Company's
benefit plans) except that in the event of termination by death, the
Executive's estate or beneficiaries, as the case may be, shall be paid
such amounts as may be payable to the Executive under the Company's
insurance policies and/or other benefit plans, and except that in the
event of termination by Disability, the Executive shall be paid such
amounts as Executive is entitled to receive under the Company's
disability insurance policies and plans then in effect covering the
Executive.
(c) Termination Giving Rise to Change of Control Severance
Benefits. If the Executive's employment is terminated or a Notice of
Non-Renewal is given by the Company during the Change of Control Period
for any reason other than Cause, death of the Executive or Disability,
or if the Executive terminates his employment during the Change of
Control Period for Good Reason, then Executive shall be entitled to
receive the Change of Control Severance Benefits, all of which (except
the Medical Benefits) shall be paid to Executive within ten (10) days
following the date of termination. In addition, the Company shall cause
all unvested stock options held by the Executive to be fully vested as
of the date of termination.
(d) Notice of Termination. Any termination of Executives
employment by the Company or by Executive pursuant to this Section 6
shall be communicated by written notice of termination (the "Notice of
Termination") to the other party hereto, which shall indicate the
specific termination provision in the Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment and shall
state the date of termination.
(e) Sole Remedy. The Executive hereby agrees that the Change
of Control Severance Benefits shall be Executive's sole and exclusive
remedy against the Company or any successor on account of termination
of employment during the Change of Control Period.
8
<PAGE> 9
7. Certain Reduction in Payments by the Company.
(a) Definition of Certain Terms.
(i) A "Payment" shall mean any payment or distribution in the
nature of compensation to or for the benefit of Executive,
whether paid or payable pursuant to this Agreement or otherwise.
(ii) An "Agreement Payment" shall mean a Payment paid or payable
on account of termination of employment during the Change in
Control Period pursuant to Section 6 of this Agreement
(disregarding the reduction provided by Section 7(b)).
(iii) "Net After Tax Receipt" shall mean the Present Value (as
defined below) of all Payments that are contingent on a Change of
Control within the meaning of Section 28OG of the Internal
Revenue Code of 1986, as amended (the "Code"), net of all taxes
imposed on Executive with respect thereto under Sections 1 and
4999 of the Code, determined by applying the highest marginal
rate under Section 1 of the Code which applied to Executive's
taxable income for the immediately preceding taxable year.
(iv) "Present Value" shall mean such value determined in
accordance with Section 28OG(d)(4) of the Code.
(b) Limitation on Agreement Payments. It is intended that all
Agreement Payments hereunder, together with all other Payments to
Executive contingent upon or in connection with a Change of Control
are reasonable compensation for Executive's service to Company and its
subsidiaries. Notwithstanding the foregoing, should Company determine,
based upon the opinion of the independent accounting advisors of
Company immediately prior to the Change of Control ("Accounting
Firm"), that the Agreement Payments and other Payments, together with
any other amounts received by Employee that must be included in such
determination, would result in the payment of an "excess parachute
payment" as defined in Section 2800 of the Code, then Company will
reduce the Agreement Payments to the minimum extent necessary so that
no portion of the aggregate Payments would result in the payment of an
"excess parachute payment;" provided, however, that such reduction
will be made if, but only if, the value of all such Payments (without
regard to the foregoing reduction) would result in Net After Tax
Receipts which are less than the Net After Tax Receipts that would
result after taking into account any such reduction.
(c) Opinion of Accounting Firm. Company may reduce the Agreement
Payments pursuant to this Section 7 only if with in thirty (30) days
of Executive's termination it provides Executive with an opinion of
the Accounting Firm that Executive will be considered to have received
"excess parachute payments" as defined in Section 2800 of the Code if
Executive were to receive the full amounts owing pursuant to the terms
of this
9
<PAGE> 10
Agreement and that the reduced amount proposed to be paid by the
Company will result in Net After Tax Receipts that are equal to or
greater than the Net After Tax Receipts which would result from
reduction in the Agreement Payments by any other amount.
8. Unauthorized Disclosure.
(a) During the period in which the Executive is employed by the
Company, the Executive shall not, without the prior written consent of
the Board, or a person authorized thereby, disclose to any person,
other than a person to whom disclosure is necessary or appropriate in
connection with the performance by the Executive of Executive's duties
as an officer of the Company, or its subsidiaries or its affiliates,
any confidential information obtained by Executive while in the employ
of the Company with respect to any of the Company's products,
improvements, formulae, designs or styles, processes, customers,
methods of marketing or distribution, systems, procedures, plans,
proposals, policies or methods of manufacture, the disclosure of which
Executive knows, or should have reason to know, will be damaging to
the Company or its subsidiaries or its affiliates, nor shall Executive
make any false statements regarding the Company or its subsidiaries or
its affiliates or take any other action which Executive knows, or
should have reason to know, will be damaging to the Company or its
subsidiaries or its affiliates; provided, however, that confidential
information shall not include any information known generally to the
public (other than as a result of unauthorized disclosures by the
Executive) or any information of a type not otherwise considered
confidential by persons engaged in the same business or a business
similar to that conducted by the Company. Following the termination of
the Executive's employment with the Company for any reason, the
Executive shall not disclose any confidential information of the type
described above or take any action of type described above except as
may be required in the opinion of the Executive's Counsel in
connection with any judicial or administrative proceeding or inquiry.
The provisions of this Section 8 shall be binding upon the Executive's
heirs, successors and legal representatives.
(b) Company agrees to refrain from making derogatory or defamatory
statements about or concerning Executive.
9. Non-Competition. During the period in which the Executive is
employed by the Company and for a period of one (1) year following any
termination giving rise to salary continuation payments pursuant to Section 5(c)
or to Change of Control Severance Benefits pursuant to Section 6(c), the
Executive will not (a) directly or indirectly own, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director or otherwise with, or have
any financial interest in, or aid or assist anyone else in the conduct of, any
business which is in substantial competition with any business conducted by the
Company or by any group, division or subsidiary of the Company in any area where
such business is being conducted at the time of such termination (provided that
ownership of five percent (5%) or less of the voting stock of any publicly held
corporation shall not constitute a violation hereof) or (b) directly or
indirectly employ, solicit for employment, or advise or recommend to any
10
<PAGE> 11
other persons that they employ or solicit for employment, any employee of the
Company or any of its subsidiaries or affiliates.
10. Specific Performance. The Executive acknowledges and agrees that,
in the event of a breach of Section 8 or Section 9 hereof by the Executive, the
Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.
11. Binding Agreement. This Agreement and all obligations of the
Company hereunder shall be binding upon the successors and assigns of the
Company. This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Mr. Steven Moore
104 Tilbury Court
Brentwood, Tennessee 37027
If to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee 37027
Attn: Chief Executive Officer
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
13. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement, all federal, state, city or other taxes as shall
be required pursuant to any law or government regulation or ruling.
14. Governing Law. This Agreement shall be construed according to the
laws of Tennessee, without giving effect to the principles of conflicts of laws
of such State.
11
<PAGE> 12
15. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by Executive and the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
However, notwithstanding anything in this Agreement to the contrary, if in the
opinion of the Company's accountants, any provision of this Agreement would
preclude the use of "pooling of interest" accounting treatment for a Change of
Control transaction that (i) would otherwise qualify for such accounting
treatment and (ii) is contingent upon qualifying for such accounting treatment,
then to the extent any provision of this Agreement disqualifies the transaction
as a "pooling of interest" transaction (including, if applicable, the entire
Agreement), such provision(s) shall be null and void as of the date hereof.
16. Binding Effect. This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Executive's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
otherwise, other than by a transfer by his will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
17. Entire Contract. This Agreement constitutes the entire agreement
and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Agreement, including, without limitation, any employment
agreement or any severance or indemnification, by and between the Company and
the Executive, all of such agreements being rendered null and void by this
Agreement.
18. Termination. This Agreement shall be terminable only upon the
occurrence of any one of the following events: (a) expiration of the Term
without Executive's employment having been previously terminated; (b) the
termination of Executive with payment in full of all the payments/benefits
described in Sections 5 or 6 hereof as appropriate; or (c) the Company (or its
successor in interest) and Executive so agree in writing; provided, however,
that the provisions of Sections 8 and 9 hereof shall survive without limitation.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SERVICE MERCHANDISE COMPANY, INC.
By: /s/ Sam Cusano
--------------------------------------
Sam Cusano
Accepted and Agreed:
/s/ Steven Moore
- --------------------------------
Steven Moore
13
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the Registrant as of January 3, 1999
all of which are wholly-owned:
<TABLE>
<CAPTION>
PARENT STATE OF
INCORPORATION
Service Merchandise Company, Inc. Tennessee
<S> <C>
SUBSIDIARIES
Service Merchandise Co. Broad, Inc. Tennessee
Service Credit Corp. Tennessee
Service Merchandise Co. No. 34, Inc. Tennessee
Service Merchandise Co. No. 35, Inc. Tennessee
Service Merchandise Co. No. 51, Inc. Illinois
Service Merchandise Co. No. 93, Inc. Tennessee
Service Merchandise Co. No. 30, Inc. Tennessee
Service Merchandise Co. No. 99, Inc. Nevada
Service Merchandise Company of Iowa, Inc. Tennessee
Service Merchandise Company of Kansas, Inc. Tennessee
The Toy Store, Inc. Tennessee
B. A. Pargh Co., Inc. Tennessee
Service Merchandise Showrooms, Inc. Tennessee
Wholesale Supply Company, Inc. Tennessee
Homeowners Warehouse, Inc. Florida
Service Merchandise RM, Inc. Tennessee
The McNally Supply Company Tennessee
SMC Aviation, Inc. New Hampshire
H. J. Wilson Co., Inc. Louisiana
Service Merchandise Co. of New York, Inc. Tennessee
Travel Management Consultants, Inc. Tennessee
A. F. S. Marketing Services, Inc. Tennessee
Service Merchandise Financial Co., Inc. Tennessee
Service Merchandise Indiana Partners Indiana
Service Merchandise of Tennessee, Limited Partnership Delaware
Service Merchandise of Texas, Limited Partnership Delaware
Service Merchandise Co., SPE-1, Inc. Delaware
Service Merchandise Co., SPE-2, Inc. Delaware
Service Merchandise Co., HC, Inc. Delaware
Promotables, Inc. Tennessee
Service Merchandise Office Supply, Inc. Tennessee
Surplus Assurance Company, Ltd. Bermuda
H. J. Wilson Co. Realty, Inc. Texas
</TABLE>
1
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-60201, 33-7079, 33-11340, 33-30983 and 33-50185 on Form S-8 of our report
dated March 5, 1999 (March 31, 1999 as to Note B) (which expresses an
unqualified opinion and includes an explanatory paragraph relating to
substantial doubt about the Company's ability to continue as a going concern),
appearing in the Annual Report on Form 10-K of Service Merchandise Company, Inc.
for the fiscal year ended January 3, 1999.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 2, 1999
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<EXCHANGE-RATE> 1
<CASH> 133,749
<SECURITIES> 0
<RECEIVABLES> 38,098
<ALLOWANCES> 2,999
<INVENTORY> 896,303
<CURRENT-ASSETS> 1,103,298
<PP&E> 1,093,675
<DEPRECIATION> 632,668
<TOTAL-ASSETS> 1,626,895
<CURRENT-LIABILITIES> 847,318
<BONDS> 508,385
0
0
<COMMON> 100,340<F1>
<OTHER-SE> 175,725
<TOTAL-LIABILITY-AND-EQUITY> 1,626,895
<SALES> 3,169,525
<TOTAL-REVENUES> 3,169,525
<CGS> 2,415,256
<TOTAL-COSTS> 2,415,256
<OTHER-EXPENSES> 809,236<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,255
<INCOME-PRETAX> (110,400)
<INCOME-TAX> (93)
<INCOME-CONTINUING> (110,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (110,307)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
<FN>
<F1>AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK ISSUED
AND OUTSTANDING.
<F2>AMOUNT INCLUDES (I) DEPRECIATION AND AMORTIZATION AND (II) SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES, AND (III) IMPAIRMENT OF ASSETS.
</FN>
</TABLE>
