<PAGE>
FORM 10-Q
__________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________.
Commission file number 0-21182
-------------
ORCHARD SUPPLY HARDWARE STORES CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4214109
--------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6450 Via Del Oro, San Jose, California 95119
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 281-3500
--------------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
At July 30, 1995 there were 6,983,400 shares of the registrant's Common Stock,
$0.01 par value, outstanding.
Page 1 of 13
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
------- ---------------------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
July 30, 1995 and January 29, 1995 3
Condensed Consolidated Statements of Income:
Three and Six Month Periods Ended July 30, 1995
and July 31, 1994 4
Condensed Consolidated Statements of Cash Flows:
Six Month Periods Ended July 30, 1995 and
July 31, 1994 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
-------- -----------------
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENT
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
July 30, January 29,
1995 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 22,033 $ 9,240
Investments - 3,000
Accounts receivable, net 17,392 14,417
Inventories 97,363 103,438
Prepaid expenses and other 7,440 8,221
Assets held for disposal 6,210 6,145
--------------- ---------------
Total current assets 150,438 144,461
PROPERTY AND EQUIPMENT, net 131,950 129,840
OTHER ASSETS, net 17,526 18,358
--------------- ---------------
Total assets $ 299,914 $ 292,659
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued and other liabilities $ 71,616 $ 70,919
Notes payable 840 773
Current portion of capital leases
and long term debt 1,991 1,720
--------------- ---------------
Total current liabilities 74,447 73,412
OTHER LIABILITIES, net of current portion 1,298 1,437
CAPITAL LEASES AND LONG-TERM DEBT,
net of current portion 133,655 135,232
--------------- ---------------
Total liabilities 209,400 210,081
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock 70 70
Preferred stock 8 8
Additional paid-in-capital 90,100 90,700
Less notes receivable from
sale of common stock (138) (151)
Retained earnings (accumulated deficit) 474 (8,049)
--------------- ---------------
Total equity 90,514 82,578
--------------- ---------------
Total liabilities and stockholders' equity $ 299,914 $ 292,659
=============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
--------------------------- --------------------------
July 30, July 31, July 30, July 31,
1995 1994 1995 1994
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 270,817 $ 222,121 $ 145,465 $ 125,566
Cost of goods sold 172,850 142,545 93,142 80,596
------------- ------------ ------------ -----------
Gross margin 97,967 79,576 52,323 44,970
Selling, general and administrative expenses 79,094 64,759 41,636 35,941
Pre-opening expenses 1,022 6,378 27 2,612
------------- ------------ ------------ -----------
Operating income 17,851 8,439 10,660 6,417
Interest expense 6,919 6,051 3,404 3,112
------------- ------------ ------------ -----------
Income before provision for income taxes 10,932 2,388 7,256 3,305
Income tax provision 2,409 - 1,655 -
------------- ------------ ------------ -----------
Net income 8,523 2,388 5,601 3,305
Preferred stock dividends 600 520 300 303
------------- ------------ ------------ -----------
Net income available to common stock $ 7,923 $ 1,868 $ 5,301 $ 3,002
============= ============ ============ ===========
Income per common share:
Primary $ 1.13 $ 0.27 $ 0.75 $ 0.43
============= ============ ============ ===========
Fully diluted $ 1.03 $ 0.27 $ 0.67 $ 0.40
============= ============ ============ ===========
Weighted average number of shares outstanding:
Primary 7,001 6,983 7,025 6,998
============= ============ ============ ===========
Fully diluted 8,302 6,983 8,330 8,278
============= ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
July 30, 1995 July 31, 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,523 $ 2,388
Non-cash adjustments to net income-
Depreciation and amortization 5,292 3,887
Loss on asset disposals 14 758
Changes in assets and liabilities-
Increase in accounts receivable (2,975) (2,494)
(Increase) decrease in inventories 6,075 (6,789)
(Increase) decrease in prepaid expenses and other 781 (2,638)
Increase in other noncurrent assets (125) -
Increase in accounts payable, accrued and other liabilities 558 9,992
------------- -------------
Total adjustments 9,620 2,716
------------- -------------
Net cash provided by operating activities 18,143 5,104
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (6,524) (19,846)
Redemption (purchase) of investments 3,000 (3,000)
------------- -------------
Net cash used in investing activities (3,524) (22,846)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 19,400
Common stock issued upon exercise of warrants and option - 439
Proceeds from issuance of notes payable, net 67 98
Payment of notes receivable from sale of capital stock 13 15
Principal payments on capital leases and long-term debt (1,306) (49,675)
Premium on redemption of long-term debt - (2,287)
Payment of preferred stock dividend (600) (360)
Transaction costs - (681)
------------- -------------
Net cash provided by (used in) financing activities (1,826) (33,051)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,793 (50,793)
CASH AND CASH EQUIVALENTS, beginning of period 9,240 75,588
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 22,033 $ 24,795
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE>
ORCHARD SUPPLY HARDWARE STORES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto for the year ended January
29, 1995 included in the Company's Form 10-K.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the full fiscal year.
2. EARNINGS PER SHARE
------------------
Net income per common and equivalent share is computed by dividing net income
available to common stock (net income less preferred stock dividend
requirements) by the weighted average number of common and equivalent shares.
Common and common equivalent shares include common stock issuable upon exercise
of stock options and warrants (using the treasury stock method) less shares
assumed repurchased with the proceeds from the management notes. Common
equivalents included in the weighted average number of shares assume the
conversion of options outstanding under the Nonqualified Stock Option Plan, the
1993 Stock Option Plan and the warrants, unless antidilutive. Certain options
granted to the President are excluded from the calculation due to their
contingent nature.
For purposes of the calculation of earnings per share on a fully-diluted basis,
outstanding shares of convertible preferred stock are assumed to be converted if
dilutive.
3. INCOME TAX PROVISION
--------------------
The effective tax rate for the quarter ended July 30, 1995 reflects the
estimated tax rate for the year ended January 28, 1996 based upon projected
income and other factors. This rate differs from the combined federal and state
of California statutory rates primarily due to expected reductions in the
previously established valuation allowance related to deferred tax assets,
primarily net operating loss carryforwards.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
-------
Since the Company's initial public offering in April 1993, new store expansion
has increased. In fiscal 1994 the Company opened 14 stores, nine through the
acquisition of former Builders Emporium store sites, on a base of 43 stores.
Current plans call for five store openings in fiscal 1995 and five to ten store
openings per year thereafter.
As the Company implements its new store opening program, operating expenses as a
percent of sales for the new stores will initially be higher, adversely
affecting overall operating margins until these new stores achieve sales
maturity. In addition, the Company expects that it will generally experience
higher marketing, distribution and occupancy costs in its new stores in the
metropolitan Los Angeles market where a significant amount of its future
expansion will be directed. The Company believes, however, that these higher
expenses will be offset by higher sales at these stores than are typical of
mature Orchard stores in Northern and Central California. The Company expects
that the impact of these factors will be to reduce operating margins so long as
the Company continues to open a large number of stores relative to its existing
store base.
The Company's results of operations exhibit some measure of seasonality. During
the three fiscal years ended January 29, 1995, approximately 28.0% of the
Company's annual sales and approximately 37.0% to 40.0% of its annual operating
income before pre-opening expenses were generated in the second fiscal quarter.
This is due primarily to increased sales of garden, nursery and related products
during the first and second quarters, which is the beginning of the
spring/summer gardening season. Weather conditions have the most impact on
sales of these outdoor related products during this period. Conversely, during
the three years ended January 29, 1995, approximately 24.0% of the Company's
annual sales and approximately 13.0% to 19.0% of its annual operating income
before pre-opening expenses were generated in the fourth fiscal quarter, due
primarily to decreased sales of garden, nursery and related products during this
quarter.
7
<PAGE>
RESULTS OF OPERATIONS
---------------------
The following table sets forth selected results of operations as percentages of
sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -----------------------------
JULY 30, JULY 31, JULY 30, JULY 31,
1995 1994 1995 1994
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Sales....................... 100.0% 100.0% 100.0% 100.0%
Gross margin................ 36.0 35.8 36.2 35.8
Selling general and
administrative expenses.... 28.6 28.6 29.2 29.2
Pre-opening expense......... 0.0 2.1 0.4 2.9
------- ----- ----- -------
Operating income............ 7.3 5.1 6.6 3.8
Interest expense, net....... 2.3 2.5 2.6 2.7
------- ----- ----- -------
Income before provision..... 5.0 2.6 4.0 1.1
Income tax provision........ 1.1 -- 0.9 --
------- ----- ----- -------
Net income.................. 3.9% 2.6% 3.1% 1.1%
======= ===== ===== =======
</TABLE>
THREE MONTHS ENDED JULY 30, 1995 AND JULY 31, 1994
--------------------------------------------------
Sales for the second quarter ended July 30, 1995 were $145.5 million, an
increase of 15.8% over sales of $125.6 million in the second quarter of fiscal
1994. This increase reflects a 6.5% comparable store sales gain during the
quarter as well as four new stores opened since the second quarter of last year.
The comparable store sales percentage benefitted from the diminishing effect of
eight competing warehouse home centers that opened primarily in the second half
of 1993, which now have passed their anniversary, the recent closing of four
competing warehouse home centers, and the sales gains achieved by 12 Orchard
stores opened during last year's second quarter which are now part of the
comparable store base.
Gross margin increased $7.4 million from $45.0 million for the second quarter of
fiscal 1994 to $52.3 million for the comparable period this year. Gross margin
as a percent of sales increased from 35.8% for the second quarter of fiscal 1994
to 36.0% for the second quarter of fiscal 1995. The increase in gross margin
percentage is attributable primarily to the reduction of inventory shrinkage and
warehouse operating costs as a percent of sales. Management believes that
programs instituted at the stores over the last two years have been beneficial
in controlling inventory shrinkage. These programs have included the
installation of tool corrals and electronic merchandise surveillance and
increased employee awareness. Improved systems and tight expense controls
coupled with the leveraging of fixed warehouse costs, as the number of stores
supplied has increased, have resulted in a lower ratio of warehouse expenses to
sales.
Selling, general and administrative expenses increased from $35.9 million for
the second quarter of fiscal 1994 to $41.6 million for the second quarter of
1995 and remained at 28.6% of sales for both periods. Increases as a percentage
of sales in occupancy expenses and provisions for bonuses and profit sharing
were offset primarily by a decrease in base payroll as a percentage of sales.
8
<PAGE>
Operating income for the second quarter of fiscal 1995 increased $4.3 million to
$10.7 million from $6.4 million in last year's second quarter. Operating income
before pre-opening expenses increased by 18.4% to $10.7 million in the current
year's second quarter from $9.0 million in the previous year's second quarter.
Increased sales and higher gross margin percentage contributed to the increase
in operating income.
Interest expense increased from $3.1 million for the second quarter of 1994 to
$3.4 million for the second quarter of 1995. The increase is due primarily to
reductions in the fiscal 1995 period of the amount of interest capitalized
during the construction period of new stores and interest income on investments,
as well as an increase in the amortization of deferred financing costs.
The Company recorded an income tax provision for the second quarter of fiscal
1995 at an effective tax rate of 22.8% based on the estimated annual tax rate
for fiscal 1995 which takes into account projected income and other factors. In
the second quarter of 1994, the Company did not record an income tax benefit as
a result of the benefit of net operating loss carry forwards against which a
valuation allowance had previously been provided. See Note 3 to the Condensed
Consolidated Financial Statements.
SIX MONTHS ENDED JULY 30, 1995 AND JULY 31, 1994
------------------------------------------------
Sales for the six months ended July 30, 1995 increased by 21.9% to $270.8
million from $222.1 million in the comparable period of fiscal 1994. The
increase is attributable to a 4.4% gain in comparable store sales and a portion
of the sales contributed by 16 stores opened since the beginning of 1994.
Gross margin increased $18.4 million from $79.6 million for the first six months
of 1994 to $98.0 million for the comparable period of 1995. As a percentage of
sales gross margin increased from 35.8% for the first six months of fiscal 1994
to 36.2% for the first six months of fiscal 1995. The increase in gross margin
resulted primarily from reduced inventory shrinkage and warehouse operating
costs as explained in the discussion of the second quarter results.
Selling, general and administrative expenses increased by $14.3 million from
$64.8 million for the first six months of 1994 to $79.1 million for the first
six months of 1995. These expenses were 29.2% of sales for both periods.
Increases in occupancy, bonuses and profit sharing expenses were offset
primarily by decreased base payroll as a percentage of sales.
Operating income increased by $9.4 million from $8.4 million in the first six
months of fiscal 1994 to $17.9 million in the first six months of fiscal 1995.
Operating income before pre-opening expenses for the first six months of 1995
increased by $4.1 million or 27.4 % from the comparable period of 1994.
Increased sales and higher gross margin percentage were largely responsible for
this increase.
Interest expense increased by $0.9 million from $6.1 million for the first six
months of fiscal 1994 to $6.9 million for the first six months of fiscal 1995.
A reduction of interest cost of $0.3 million resulted from a decrease in long-
term debt. However, in the first six months of 1994 the Company capitalized an
additional $0.8 million of construction period interest on new store
construction projects and realized $0.3 million more in interest income than in
the comparable period of 1995.
9
<PAGE>
The Company recorded an income tax provision for the first six months of fiscal
1995 at an effective tax rate of 22.0% based on the estimated annual tax rate
for fiscal 1995 which takes into account projected income and other factors. In
the first six months of 1994, the Company did not record an income tax benefit
as a result of the benefit of net operating loss carry forwards against which a
valuation allowance had previously been provided. See Note 3 to the Condensed
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's liquidity needs arise primarily from the funding of the Company's
capital expenditures, working capital requirements, ongoing expansion program,
and debt service on indebtedness.
The Company's wholly-owned subsidiary, Orchard Supply Hardware Corporation
("Orchard Supply"), has funded debt obligations as of July 30, 1995 including
(i) up to $20.0 million of revolving credit availability under Orchard Supply's
senior revolving credit facility (with an $8.0 million sublimit for guarantees
of letters of credit) of which no borrowings and $3.4 million of guarantees of
letters of credit were outstanding as of July 30, 1995, (ii) $20.3 million
outstanding under a store mortgage facility, (iii) $12.8 million aggregate
principal amount of warehouse mortgage notes, (iv) $1.0 million of store
mortgage assumed in connection with the acquisition of a former Builders
Emporium store site and (v) $100.0 million aggregate principal amount of 9 3/8%
senior notes due February 15, 2002. In August 1995, Orchard Supply replaced its
existing revolving credit facility with a new $40.0 million senior revolving
credit facility (the "Financing Agreement") with a $10.0 million sublimit for
guarantees of letters of credit. Orchard Supply's debt instruments contain
financial and operating covenants including, among other things, requirements
that Orchard Supply maintain certain financial ratios and satisfy certain
financial tests and limitations on Orchard Supply's ability to make capital
expenditures, to incur other indebtedness, and to pay dividends. As of July 30,
1995, the Company and Orchard Supply were in compliance with all covenants
contained in such debt instruments. Aggregate scheduled principal repayments on
Orchard Supply's long term debt instruments, including capital leases, for
fiscal 1995, 1996 and 1997 are $1.7 million, $2.0 million and $2.4 million,
respectively.
The Company's business strategy requires that it maintain broad product lines
and large inventories, however, the effect of this strategy on working capital
is somewhat minimized through the receipt of trade credit. The Company's
working capital is also affected by accounts receivable arising from its
proprietary credit card which had an average monthly balance for fiscal 1994 of
$11.1 million. The Company will fund its working capital needs through a
combination of funds from operations and borrowings under the Financing
Agreement. The Financing Agreement permits borrowings based on percentages of
the Company's eligible inventory and accounts receivable and is to be used for
working capital and general corporate purposes. The Financing Agreement remains
effective through May 1999.
In connection with Orchard's expansion plans, the Company anticipates capital
expenditures of approximately $900,000 for furniture, fixtures and equipment for
each new store opened, a portion of which may be leased under operating leases.
The Company expects that for its metropolitan Los Angeles stores, pre-opening
expenses will range from approximately $600,000 to $700,000 (compared to
$500,000 in its Northern and Central California markets). The initial inventory
requirement for new stores, net of trade credit, is estimated at $900,000 per
store. In the event that the Company is responsible for the renovation or
remodeling of the existing space to be leased, the Company anticipates incurring
additional capital expenditures of approximately $800,000 to $1,500,000 per
store. If the Company elects to purchase the real estate, the capital
expenditure would range from
10
<PAGE>
approximately $2,500,000 for owned store improvements constructed on leased land
to $4,000,000 - $6,000,000 if the entire property were to be owned by the
Company.
The Company's three-year capital expenditure plan for fiscal 1995, 1996 and 1997
provides for annual capital expenditures of $12.3 million, $16.2 million and
$17.0 million, respectively. This capital expenditure plan includes the
expenditures of approximately $4.0 million to $5.0 million annually for the
maintenance of existing facilities. The remainder of the annual budgeted
amounts will be used primarily for the opening of new stores, including fixtures
and leasehold improvements with respect to the new stores, and computer
equipment. The Company has historically obtained some of its equipment through
operating leases, and expects to be able to procure such arrangements in the
future. The inability of the Company to procure such arrangements for its
capital expenditure program may have a negative impact on the ability of the
company to make capital expenditures.
The Company believes that funds from operations, together with borrowings under
the Financing Agreement and financing through operating leases, will be adequate
to fund the Company's operating requirements and capital expenditure program and
meet its debt and dividend obligations for the next several years. Any material
shortfalls of operating cash flow could require the Company to reduce its
expansion plans.
EFFECT OF INFLATION
-------------------
The effect of inflation on the Company's result of operations has not been
material in the periods discussed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------
In March 1995, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of." This pronouncement requires that long-lived
assets and certain identifiable intangible assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss is to be recognized when
the sum of undiscounted cash flows is less than the carrying amount of the
asset. Measurement of the loss for assets that the entity expects to hold and
use are to be based on the fair value of the asset. Although management does
not expect this pronouncement to have a material impact on the Company's
financial condition or results of operations at adoption, its provisions, when
adopted, will be applicable to any future assessments of its long-lived assets.
SFAS No. 121 must be adopted no later than fiscal 1996.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On August 8, 1995, Orchard Supply entered into the Financing Agreement with
Bank of America National Trust and Savings Association. The Financing Agreement
refinanced Orchard Supply's existing credit facility (the "Prior Credit
Facility") and certain other indebtedness. A copy of the Financing Agreement is
attached hereto as Exhibit 10.1 and is hereby incorporated herein by this
reference. Although the Financing Agreement does not directly restrict the
Company's ability to pay dividends or make other distributions on, or to
repurchase, shares of the Company's capital stock, the Financing Agreement, like
the Prior Credit Facility, does restrict Orchard Supply's ability to pay
dividends or make advances to the Company for the purpose of allowing the
Company to engage in such transactions. Pursuant to the Financing Agreement,
Orchard Supply is permitted to expend not more than $10.0 million to purchase or
repay its 9 3/8% senior notes prior to maturity and to pay dividends to the
Company to enable the Company to fund the payment by the Company of dividends on
the Company's preferred stock not exceeding $300,000 in any fiscal quarter or
$1.2 million in any fiscal year, provided that after giving effect to such
dividend, no Event of Default (as defined therein) would be triggered under the
Financing Agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number
--------------
10.1 Financing Agreement dated as of August 8, 1995 by and between
Orchard Supply Hardware Corporation and Bank of America National
Trust and Savings Association.
10.2 Guaranty dated as of August 8, 1995 made by Orchard Supply
Hardware Stores Corporation, as Guarantor, in favor of Bank of
America National Trust and Savings Association as Agent.
27.1 Financial data schedule for the six months ended July 30, 1995.
(b) Reports on Form 8-K.
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORCHARD SUPPLY HARDWARE STORES CORPORATION
------------------------------------------
Date: September 12, 1995 By: /s/ Maynard Jenkins
------------------------ ----------------------------
Maynard Jenkins
Chief Executive Officer
Date: September 12, 1995 By:/s/ Stephen M. Hilberg
------------------------ --------------------------------
Stephen M. Hilberg
Chief Financial Officer and
Vice President-Finance
13
<PAGE>
EXHIBIT 10.1
--------------------------------------------------------------------------------
================================================================================
--------------------------------------------------------------------------------
CREDIT AGREEMENT
DATED AS OF AUGUST 8, 1995
BETWEEN
ORCHARD SUPPLY HARDWARE CORPORATION
AND
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
================================================================================
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
1. Definitions and Financial Requirements.................. 1
--------------------------------------
1.1 Definitions........................................ 1
-----------
1.2 Financial Requirements............................. 10
----------------------
2. The Credit Facilities................................... 11
---------------------
2.1 The Revolving Facility............................. 11
----------------------
2.2 Advances Under the Revolving Facility.............. 11
-------------------------------------
2.3 LIBOR Rate......................................... 11
----------
2.4 Letters of Credit.................................. 12
-----------------
2.5 Mandatory Payment.................................. 14
-----------------
2.6 Early Termination.................................. 14
-----------------
3. Fees and Expenses....................................... 15
-----------------
3.1 Unused Commitment Fee.............................. 15
---------------------
3.2 Waiver Fee......................................... 15
----------
3.3 Expenses........................................... 15
--------
4. Collateral.............................................. 16
----------
5. Extensions of Credit, Payments and Interest Calculations 16
--------------------------------------------------------
5.1 Requests for Credit................................ 16
-------------------
5.2 Oral Requests...................................... 16
-------------
5.3 Disbursements and Payments......................... 16
--------------------------
5.4 Branch Accounts.................................... 17
---------------
5.5 Evidence of Indebtedness........................... 17
------------------------
5.6 Debits to Borrower's Accounts...................... 17
-----------------------------
5.7 Banking Day........................................ 17
-----------
5.8 Taxes and Other Charges............................ 17
-----------------------
5.9 Increased Costs.................................... 17
---------------
5.10 Interest Calculation............................... 18
--------------------
5.11 Late Payments; Compounding......................... 18
--------------------------
5.12 Default Rate....................................... 18
------------
5.13 Overdrafts......................................... 18
----------
5.14 Proceeds of Receivables............................ 19
-----------------------
6. Conditions to Availability of Credit.................... 19
------------------------------------
6.1 Collateral Agreements.............................. 19
---------------------
6.2 Financing Statements............................... 19
--------------------
6.3 Evidence of Priority............................... 19
--------------------
6.4 Guaranty........................................... 19
--------
6.5 Evidence of Authority.............................. 19
---------------------
6.6 Other Agreements................................... 20
----------------
6.7 Consents........................................... 20
--------
6.8 Legal Opinion...................................... 20
-------------
6.9 Borrowing Certificate.............................. 20
---------------------
6.10 Insurance.......................................... 20
---------
6.11 Expenses........................................... 20
--------
6.12 Financial Information.............................. 20
---------------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section Page
<S> <C>
6.13 List of Locations.................................. 20
-----------------
6.14 Other Items........................................ 20
-----------
7. Representations and Warranties.......................... 21
------------------------------
7.1 Organization....................................... 21
------------
7.2 No Conflicts....................................... 21
------------
7.3 Enforceability..................................... 21
--------------
7.4 Good Standing...................................... 21
-------------
7.5 Compliance with Laws............................... 21
--------------------
7.6 Ownership of Collateral............................ 21
-----------------------
7.7 Permits, Franchises................................ 22
-------------------
7.8 Perfected Security Interest in Collateral.......... 22
-----------------------------------------
7.9 Litigation......................................... 22
----------
7.10 No Event of Default................................ 22
-------------------
7.11 Other Obligations.................................. 22
-----------------
7.12 Income Tax Returns................................. 23
------------------
7.13 Information Submitted.............................. 23
---------------------
7.14 No Material Adverse Effect......................... 23
--------------------------
7.15 Merchantable Inventory............................. 23
----------------------
7.16 ERISA Plan Compliance.............................. 23
---------------------
7.17 Location of Borrower............................... 24
8. Covenants............................................... 24
---------
8.1 Notices of Certain Events.......................... 24
-------------------------
8.2 Financial and Other Information.................... 25
-------------------------------
8.3 Books, Records, Audits and Inspections............. 26
--------------------------------------
8.4 Total Liabilities to Tangible Net Worth............ 26
---------------------------------------
8.5 Fixed Charge Coverage Ratio........................ 26
---------------------------
8.6 Other Indebtedness................................. 27
------------------
8.7 Liens.............................................. 28
-----
8.8 Contingent Obligations............................. 30
----------------------
8.9 Capital Expenditures............................... 30
--------------------
8.10 Acquisitions....................................... 31
------------
8.11 Loans and Investments.............................. 31
---------------------
8.12 Repurchase of Senior Notes......................... 31
--------------------------
8.13 Dividends.......................................... 32
---------
8.14 Disposition of Assets.............................. 32
---------------------
8.15 Existence and Properties........................... 32
------------------------
8.16 Liquidations....................................... 32
------------
8.17 Insurance.......................................... 33
---------
8.18 Compliance with Laws............................... 33
--------------------
8.19 Compliance with Material Contracts................. 33
----------------------------------
8.20 Accuracy of Financial Information.................. 33
---------------------------------
8.21 Additional Acts.................................... 33
---------------
8.22 Business Activities................................ 33
-------------------
8.23 Change in Name, Structure or Locations............. 34
9. Events of Default....................................... 34
-----------------
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Section Page
<S> <C>
9.1 Failure to Pay.................................... 34
--------------
9.2 Breach of Representation or Warranty.............. 34
------------------------------------
9.3 Falsity of Information............................ 34
----------------------
9.4 Security Interest................................. 34
-----------------
9.5 Failure to Pay Debts; Voluntary Bankruptcy........ 34
------------------------------------------
9.6 Involuntary Bankruptcy............................ 34
----------------------
9.7 Judgments......................................... 35
---------
9.8 Suspension of Business............................ 35
----------------------
9.9 Governmental Action............................... 35
-------------------
9.10 Default of Other Financial Obligations............ 35
--------------------------------------
9.11 Default under Guaranty............................ 35
----------------------
9.12 Default of Other Bank Obligations................. 35
---------------------------------
9.13 ERISA Plan Termination............................ 36
----------------------
9.14 Change in Control................................. 36
-----------------
9.15 Breach of Certain Covenants....................... 36
---------------------------
9.16 Other Breach under Agreement...................... 36
10. Miscellaneous.......................................... 36
-------------
10.1 Successors and Assigns........................... 37
----------------------
10.2 Consents and Waivers............................. 37
--------------------
10.3 Governing Law.................................... 37
-------------
10.4 Administration Costs............................. 37
--------------------
10.5 Attorneys' Fees.................................. 37
---------------
10.6 Integration...................................... 37
-----------
10.7 Disposition of Schedules, Reports, Etc. Delivered
-------------------------------------------------
by Borrower........................................ 37
-----------
10.8 Returned Merchandise............................. 38
--------------------
10.9 Verification of Receivables...................... 38
---------------------------
10.10 Assignments...................................... 38
-----------
10.11 Indemnification.................................. 38
---------------
10.12 Hazardous Waste Indemnification.................. 38
-------------------------------
10.13 Arbitration; Reference Proceeding................ 39
---------------------------------
10.14 Notices.......................................... 40
-------
10.15 Headings......................................... 40
--------
10.16 Severability..................................... 40
------------
10.17 Counterparts..................................... 40
------------
</TABLE>
iii
<PAGE>
CREDIT AGREEMENT
This Agreement is entered into as of August 8, 1995 between BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank") and ORCHARD SUPPLY
HARDWARE CORPORATION ("Borrower").
1. Definitions and Financial Requirements.
--------------------------------------
1.1 Definitions. In addition to the terms defined elsewhere in this
-----------
Agreement, the following terms have the meanings indicated for the purposes
hereof:
"Acceptable Inventory" means Inventory which:
(a) is owned by Borrower free and clear of all security
interests, liens, encumbrances, and rights of others, except (i) the
security interest in favor of Bank; and (ii) Supplier's Liens permitted
by Paragraph 8.7(h) below.
(b) is located as follows:
(i) the Inventory is located at locations identified in a
list provided to Bank prior to the date of this Agreement; at other
locations in California; or at additional locations acceptable to
Bank; or
(ii) the Inventory is being transported between Borrower's
locations permitted under (i); or
(iii) the Inventory is in transit from a supplier to
Borrower and is covered by a commercial letter of credit issued by
Bank requiring presentation of shipping and/or title documents as a
condition to payment.
(c) in Bank's opinion, is not obsolete, unsalable, damaged, or
unfit for further processing.
(d) does not consist of display items, packing and shipping
materials, discontinued or slow-moving items, work-in-process, or
finished goods of substandard quality.
(e) does not consist of live nursery inventory.
(f) with respect to retail store inventory, does not exceed a
fifty-two (52) week supply of such inventory; and with respect to
inventory held in a central warehouse location, does not exceed a one
hundred-eighty (180) day supply of such inventory.
-1-
<PAGE>
(g) is not placed by Borrower on consignment.
(h) is of a type held for sale, use or lease in the ordinary
course of Borrower's business.
(i) is not covered by a negotiable document of title unless such
document has been delivered to Bank.
(j) is otherwise acceptable to Bank in its reasonable
discretion.
"Acceptable Receivable" means an Account:
(a) arising from the sale of goods or the performance of
services by Borrower in the ordinary course of Borrower's business as
presently conducted.
(b) upon which Borrower's right to receive payment is absolute
and not contingent upon the fulfillment of any condition whatever.
(c) against which is asserted no defense, counterclaim or
setoff, whether well-founded or otherwise, except to the extent that it
exceeds the amount disputed by the Receivable Debtor.
(d) that is a true and correct statement of a bona fide
indebtedness incurred in the amount of the Account for merchandise sold
and accepted by, or for services performed for and accepted by, the
Receivable Debtor obligated upon such Account.
(e) with respect to which an invoice has been sent by Borrower
or a charge voucher has been signed by the Receivable Debtor.
(f) that is owned by Borrower and not subject to any right,
claim, or interest of another other than the security interest in favor
of Bank.
(g) that does not arise from a sale to or performance of
services for an employee, affiliate, parent, or subsidiary of Borrower,
or an entity which has common officers or directors with Borrower.
(h) that is not the obligation of a Receivable Debtor that is
the federal government or a political subdivision thereof unless Bank
has agreed to the contrary in writing and Borrower has complied with the
Federal Assignment of Claims Act of 1940, and any amendments thereto,
with respect to such obligation; provided, however, that in Bank's
discretion the amount
-2-
<PAGE>
of Accounts excluded under this subparagraph may be estimated by Bank
based upon the results of the most recent collateral audit conducted by
Bank.
(i) that is not the obligation of a Receivable Debtor that is
any state of the United States or any city, town, municipality or
division thereof; provided, however, that such Accounts may be included
to the extent that the outstanding amount of such Accounts does not
exceed One Hundred Thousand Dollars ($100,000) in the aggregate;
provided further that in Bank's discretion the amount of Accounts
excluded under this subparagraph may be estimated by Bank based upon the
results of the most recent collateral audit conducted by Bank.
(j) that is not the obligation of a Receivable Debtor located
in a foreign country.
(k) that is not the obligation of a Receivable Debtor who is an
individual purchasing goods or services for personal, family or
household purposes.
(l) that is not the obligation of a Receivable Debtor to whom
Borrower is or may become liable for goods sold or services rendered by
the Receivable Debtor to Borrower except to the extent that it exceeds
the amount of Borrower's obligation to such Receivable Debtor.
(m) that does not arise with respect to goods which are
delivered on a cash-on-delivery basis or placed on consignment,
guaranteed sale or other terms by reason of which the payment by the
Receivable Debtor may be conditional.
(n) that is not in default. An Account shall be deemed in
default upon the occurrence of any of the following:
(1) Any minimum monthly payment on the Account is not paid
within the sixty (60) day period starting on the date such minimum
monthly payment was due; provided, however, that the due date for
any minimum monthly payment shall be no later than thirty (30) days
from the date of the billing statement covering such payment.
(2) Any Receivable Debtor obligated upon such Account
suspends business, makes a general assignment for the benefit of
creditors, or fails to pay its debts generally as they come due; or
-3-
<PAGE>
(3) Any petition is filed by or against any Receivable
Debtor obligated upon such Account under any bankruptcy law or any
other law or laws for the relief of debtors.
(o) that is not the obligation of a Receivable Debtor who is in
default (as defined in subparagraph (n) above) on fifty percent (50%) or
more, measured by dollar value, of the Accounts upon which such
Receivable Debtor is obligated.
(p) that does not arise from the sale or lease of goods which
remain in Borrower's possession or under Borrower's control.
(q) that is otherwise acceptable to Bank in its reasonable
discretion.
In addition to the foregoing limitations, the following restrictions apply:
(r) the dollar amount of Acceptable Receivables included in the
Borrowing Base which are obligations of a single Receivable Debtor shall
not exceed the concentration limit established for that Receivable
Debtor. To the extent the total of such Acceptable Receivables exceeds
a Receivable Debtor's concentration limit, the amount of any such excess
shall be excluded. The concentration limit for each debtor shall be
equal to 10% of the total amount of Borrower's Acceptable Receivables as
of the time in question.
(s) for Accounts arising from sales under the Club Osh Card
program, two percent (2%) of the amount of the Account shall be excluded
from Acceptable Receivables.
"Account" means any right to the payment of money owned by Borrower
and arising out of the sale of goods or the rendering of services by
Borrower which is not evidenced by an instrument or chattel paper.
"Acquisition" means any transaction or series of related
transactions for the purpose of or resulting, directly or indirectly, in (a)
the acquisition of all or substantially all of the assets of a Person, or of
any business or division of a Person, (b) the acquisition of in excess of
50% of the capital stock, partnership interests, membership interests or
equity of any Person, or otherwise causing any Person to become a subsidiary
of Borrower, or (c) a merger or consolidation or any other combination with
-4-
<PAGE>
another Person, provided that Borrower is the surviving entity.
"Availability Period" means the period commencing on the date of
this Agreement and ending on May 31, 1999.
"Banking Day" means, unless otherwise defined in this Agreement, a
day other than a Saturday or a Sunday on which Bank is open for business in
California. For amounts bearing interest at the LIBOR Rate, a Banking Day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California, New York and London and dealing in offshore dollars.
"Borrowing Base" means the sum of:
----------------------------------
(a) seventy-five percent (75%) of the balance due on Acceptable
Receivables; and
(b) fifty percent (50%) of the value of Acceptable Inventory
held in a central warehouse location acceptable to the Bank; and
(c) forty percent (40%) of the value of Acceptable Inventory
not held in a central warehouse location and which does not exceed a
thirty (30) week supply of such Inventory; and
(d) twenty percent (20%) of the value of Acceptable Inventory
not held in a central warehouse location and which exceeds a thirty (30)
week supply but does not exceed a fifty-two (52) week supply of such
Inventory.
In Bank's discretion, the portion of Acceptable Inventory included in
subparagraphs (c) and (d), respectively, may be estimated by Bank based upon
the results of the most recent collateral audit conducted by Bank, which
shall include adjustments for seasonality. The value of Acceptable
Inventory shall be the lesser of Borrower's cost or the market value (based
on the value of similar goods being sold to the public by Borrower or its
competitors) of the Acceptable Inventory, as determined, if demanded by
Bank, by an independent appraiser acceptable to Bank. After multiplying the
value of Acceptable Inventory by the percentage rates specified above, Bank
will deduct the amount, if any, of Supplier Payables.
"Collateral" means the real or personal property described in the
Collateral Agreements.
-5-
<PAGE>
"Collateral Agreements" means the security agreement(s) required
under Section 4 of this Agreement.
"Contingent Obligation" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to any indebtedness, lease, dividend,
letter of credit or other obligation (the "primary obligations") of another
Person (the "primary obligor"), including any obligation of that Person (i)
to purchase, repurchase or otherwise acquire such primary obligations or any
security therefor, (ii) to advance or provide funds for the payment or
discharge of any such primary obligation, or to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth
or solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (iii) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation, or (iv) otherwise to assure or hold harmless the holder
of any such primary obligation against loss in respect thereof; (b) with
respect to any letters of credit (including standby and commercial),
banker's acceptances, bank guaranties, shipside bonds, surety bonds and
similar instruments issued for the account of that Person or as to which
that Person is otherwise liable for reimbursement of drawings or payments;
(c) to purchase any materials, supplies or other property from, or to obtain
the services of, another Person if the relevant contract or other related
document or obligation requires that payment for such materials, supplies or
other property, or for such services, shall be made regardless of whether
delivery of such materials, supplies or other property is ever made or
tendered, or such services are ever performed or tendered, or (d) in respect
of any Swap Contract.
"Credit Limit" means Forty Million Dollars ($40,000,000).
"EBITDA" means, for any fiscal period, the sum of the following,
without duplication: (a) net income, plus (b) interest expense, plus (c)
---- ----
provision for income taxes, plus (d) store operating lease expense, plus (e)
---- ----
depreciation expense, plus (f) amortization expense, minus (f) gains (or
---- -----
plus losses) on sales of fixed assets, minus (g) all extraordinary gains,
-----
plus (h) extraordinary losses which are not, in Borrower's reasonable
----
judgement, expected to be payable in cash at any time prior to the last day
of the Availability Period; provided, however, that if a particular loss is
added to net income in calculating EBITDA and is subsequently paid in cash,
such amount will reduce EBITDA for the period in which it is paid; provided
further, that any
-6-
<PAGE>
extraordinary cash losses which are not added to net income in calculating
EBITDA under the foregoing provisions may be reduced by the amount of
extraordinary cash gains in the same period.
"ERISA" means the Employee Retirement Income Act of 1974, as amended
from time to time.
"ERISA Plan" means any employee pension benefit plan maintained or
contributed to by Borrower and insured by the Pension Benefit Guaranty
Corporation under Title IV of ERISA.
"Event of Default" means any event listed in Article 9 of this
Agreement.
"Fixed Charge Coverage Ratio" means, for any fiscal period, the
ratio of (a) EBITDA minus an amount equal to seventy percent (70%) of
-----
depreciation expense minus cash income taxes payable to (b) Fixed Charges.
----- --
"Fixed Charges" means, with respect to any fiscal period, the sum of
------
(a) Interest Charges payable in cash, plus (b) scheduled principal payments
----
due on indebtedness (including capital leases), plus (c) scheduled payments
----
due on operating leases for Borrower's stores, plus (d) dividends paid by
----
Borrower to finance preferred dividends paid by Guarantor, as allowed under
Paragraph 8.13.
"Guarantor" means Orchard Supply Hardware Stores Corporation.
"Interest Charges" means, for any fiscal period, the sum of (a) all
------
interest, fees, charges and related expenses payable to a lender in
connection with borrowed money, or to a seller in connection with the
deferred purchase price of assets, that is treated as interest in accordance
with generally accepted accounting principles, plus (b) the portion of rent
----
payable under capital leases that should be treated as interest in
accordance with generally accepted accounting principles.
"Inventory" means all goods owned by Borrower and held for sale or
lease in Borrower's business, or to be furnished under a contract of
service, or consisting of materials and supplies to be used or consumed in
Borrower's business.
"LIBOR Rate" means for each LIBOR Rate Interest Period the rate of
interest (rounded upward, if necessary, to the nearest 1/100th of one
percent) determined pursuant to the following formula:
-7-
<PAGE>
LIBOR Rate = London Rate
-----------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward
to the nearest 1/16th of one percent) at which the Bank's London
Branch, London, Great Britain, would offer U.S. dollar deposits for
the applicable interest period to other major banks in the London
inter-bank market at approximately 11:00 a.m. London time two (2)
Banking Days before the commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D, rounded
upward to the nearest 1/100 of one percent. The percentage will be
expressed as a decimal, and will include, but not be limited to,
marginal, emergency, supplemental, special, and other reserve
percentages.
"LIBOR Rate Interest Period" means for each LIBOR Rate Portion
the period commencing on the date such portion shall begin to bear interest
at a rate related to the LIBOR Rate and ending one, two, three or six
months thereafter, as selected by Borrower at the time Borrower requests
the portion; provided, however, that the last day of each LIBOR Rate
Interest Period shall be determined in accordance with the practices of the
offshore Dollar inter-bank markets as from time to time in effect.
"LIBOR Rate Portion" means all or such part of the principal
balance of credit provided under this Agreement for which interest is
payable at the rate related to the LIBOR Rate.
"Material Adverse Effect" means (a) a material adverse change in,
or a material adverse effect upon, the operations, business, properties,
condition (financial or otherwise) or prospects of the Borrower; (b) a
material impairment of the ability of the Borrower to perform under this
Agreement and to avoid any Event of Default; or (c) a material adverse
effect upon the legality, validity, binding effect or enforceability
against the Company of this Agreement.
"Permitted Swap Obligations" means all obligations (contingent or
otherwise) of Borrower existing or arising under Swap Contracts, provided
that each of the following
-8-
<PAGE>
criteria is satisfied: (a) such obligations are (or were) entered into by
Borrower in the ordinary course of business for the purpose of directly
mitigating risks associated with liabilities, commitments or assets held or
reasonably anticipated by Borrower, or changes in the value of securities
issued by Borrower in conjunction with a securities repurchase program not
otherwise prohibited hereunder, and not for purposes of speculation or
taking a "market view;" and (b) such Swap Contracts do not contain (i) any
provision ("walk-away" provision) exonerating the non-defaulting party from
its obligation to make payments on outstanding transactions to the
defaulting party, or (ii) any provision creating or permitting the
declaration of an event of default, termination event or similar event upon
the occurrence of an Event of Default hereunder (other than a payment
default).
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, or joint venture.
"Receivables" means all rights to the payment of money owned by
Borrower, whether due or to become due and whether or not earned by
performance including, but not limited to, Accounts, contract rights,
chattel paper, instruments and documents.
"Receivable Debtor" means the person or entity obligated upon a
Receivable.
"Reference Rate" means the rate of interest publicly announced
from time to time by Bank in San Francisco, California, as its reference
rate. Any change in the Reference Rate shall take effect on the day
specified in the public announcement of such change. The Reference Rate is
set by Bank based on various factors, including Bank's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans. Bank may price loans at, above or
below the Reference Rate.
"Revolving Facility" means the line of credit described in
Paragraph 2.1 of this Agreement.
"Senior Notes" means Borrower's existing senior notes bearing an
interest rate of 9 3/8%.
"Swap Contract" means any agreement, whether or not in writing,
relating to any transaction that is a rate swap, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap
or option,
-9-
<PAGE>
bond, note or bill option, interest rate option, forward foreign exchange
transaction, cap, collar or floor transaction, currency swap, cross-
currency rate swap, swaption, currency option or any other, similar
transaction (including any option to enter into any of the foregoing) or
any combination of the foregoing, and, unless the context otherwise clearly
requires, any master agreement relating to or governing any or all of the
foregoing.
"Supplier Payables" means any amounts payable by Borrower to
suppliers of Inventory which amounts are secured by perfected Supplier's
Liens.
"Supplier's Liens" means liens on Inventory in favor of suppliers
of Inventory securing the purchase price of such Inventory.
"Tangible Net Worth" means the gross book value of the assets of
Borrower (exclusive of goodwill, patents, trademarks, trade names,
covenants not to compete, capitalized leasehold rights, organization
expense, treasury stock, unamortized debt discount and expense, deferred
charges and other like intangibles, monies due from affiliates, officers,
directors or shareholders of Borrower, and assets held for disposition for
more than one year) less (a) reserves applicable thereto, and (b) all
liabilities (including accrued and deferred income taxes).
1.2 Financial Requirements. Unless otherwise specified in this
----------------------
Agreement, all accounting terms used in this Agreement shall be interpreted, all
financial computations required under this Agreement shall be made, and all
financial information required under this Agreement shall be prepared in
accordance with generally accepted accounting principles consistently applied.
In the event of a change in generally accepted accounting principles which will
have a non-cash impact on the calculation of any financial covenant under this
Agreement, Bank and Borrower shall negotiate in good faith to amend the covenant
to take into account the effect of the change. If Borrower is in default of any
financial covenants of this Agreement solely as a result of a change in
generally accepted accounting principles, Borrower shall not be considered in
default if Borrower provides to Bank a calculation and reconciliation
demonstrating that Borrower would not be in default under generally accepted
accounting principles in effect prior to such change. The calculation and
reconciliation must be accompanied by a certificate from Borrower's independent
certified public accountants stating that the calculation and reconciliation
accurately reflects all changes in generally accepted accounting principles from
the date of this Agreement through the date of calculation, and such changes
have been applied correctly as required by this paragraph.
-10-
<PAGE>
2. The Credit Facilities
---------------------
2.1 The Revolving Facility. From time to time during the
----------------------
Availability Period Bank, on a revolving basis, will make advances to Borrower
and create and issue commercial and standby letters of credit for Borrower's
account as provided herein. The total of all advances, plus the undrawn and the
drawn and unreimbursed amount of all letters of credit, may not exceed at any
one time the lesser of the Borrowing Base or the Credit Limit.
2.2 Advances Under the Revolving Facility.
-------------------------------------
(a) Borrower shall use the proceeds of advances under the
Revolving Facility for the purpose of (i) ongoing working capital and
general corporate cash requirements; and (ii) the expenditure of up to Ten
Million Dollars ($10,000,000) to repurchase Senior Notes.
(b) Borrower shall repay the entire principal balance of
advances under the Revolving Facility on the last day of the Availability
Period.
(c) Advances under the Revolving Facility shall bear interest at
a rate per annum equal to the Reference Rate. Borrower shall pay interest
monthly on the first day of each month until the last day of the
Availability Period, on which date all accrued and unpaid interest shall be
due and payable.
2.3 LIBOR Rate. In lieu of the interest rate related to the
----------
Reference Rate, Borrower may elect to have all or portions of advances under the
Revolving Facility bear interest at the LIBOR Rate plus one and three-eighths
(1.375) percentage points during a LIBOR Rate Interest Period subject to the
following requirements:
(a) Borrower shall irrevocably request each LIBOR Rate
Portion no later than 10:30 a.m. three Banking Days prior to the first day
of the LIBOR Rate Interest Period.
(b) Each LIBOR Rate Portion shall be for an amount not less than
Five Hundred Thousand Dollars ($500,000).
(c) A LIBOR Rate Interest Period shall not end later than the
last day of the Availability Period.
(d) Borrower shall pay interest on each LIBOR Rate Portion on
the first day of each month following the first day of the LIBOR Rate
Interest Period for such portion
-11-
<PAGE>
and on the last day of the LIBOR Rate Interest period for such portion.
(e) A LIBOR Rate Portion shall not be converted to a different
interest rate during its LIBOR Rate Interest Period. Upon the expiration
of a LIBOR Rate Interest Period, the LIBOR Rate Portion shall thereafter
bear interest at the rate related to the Reference Rate unless Borrower
elects a new interest rate as provided hereunder.
(f) Borrower may prepay any LIBOR Rate Portion, in whole or in
part, upon notice to Bank at least three Banking Days in advance of the
prepayment.
(g) Any payment of a LIBOR Rate Portion prior to the last day of
the LIBOR Rate Interest Period for such portion, whether voluntary, by
reason of acceleration or otherwise, including any mandatory payments
required under this Agreement and applied by Bank to a LIBOR Rate Portion,
shall be accompanied by the amount of accrued interest on the amount repaid
and by the amount (if any) by which (i) the additional interest which would
have been payable on the amount repaid had it not been paid until the last
day of its LIBOR Rate Interest Period exceeds (ii) the interest which would
have been recoverable by Bank by placing the amount repaid on deposit in
the offshore Dollar inter-bank markets for a period starting on the date it
was repaid and ending on the last day of the LIBOR Rate Interest Period for
such portion.
(h) Bank shall have no obligation to accept an election for a
LIBOR Rate Portion if any of the following described events has occurred
and is continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the interest period, of a LIBOR Rate Portion are not
available in the offshore Dollar inter-bank markets; or
(ii) the LIBOR Rate does not accurately reflect the cost of
a LIBOR Rate Portion.
(i) Upon the occurrence of an Event of Default, Bank may
terminate the availability of the rate related to the LIBOR Rate for LIBOR
Rate Interest Periods commencing after the occurrence of the Event of
Default.
2.4 Letters of Credit.
-----------------
(a) The total of the undrawn and the drawn and unreimbursed
amount of all letters of credit outstanding at any one time under the
Revolving Facility may not exceed Ten
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<PAGE>
Million Dollars ($10,000,000). Any letters of credit which have been
issued by Bank for Borrower's account shall be deemed to be outstanding
under this Agreement and shall be subject to all the terms and conditions
stated in this Agreement.
(b) Each commercial letter of credit shall be issued pursuant to
the terms and conditions hereof and of a Bank standard form Application and
Agreement for Commercial Letter of Credit executed by Borrower. Each
standby letter of credit shall be issued pursuant to the terms and
conditions hereof and of a Bank standard form Application and Agreement for
Standby Letter of Credit executed by Borrower.
(c) Each commercial letter of credit shall:
(i) expire on or before one hundred eighty (180) days after
the date such letter of credit is issued, but in no event later than
ninety (90) days after the last day of the Availability Period.
(ii) require drafts payable at sight; and
(iii) be otherwise in form and substance satisfactory to
Bank, and in favor of beneficiaries satisfactory to Bank under the
Bank's standard policies.
(d) Each standby letter of credit shall:
(i) expire on or before three hundred sixty five (365) days
after the date such letter of credit is issued, but in no event later
than ninety (90) days after the last day of the Availability Period;
provided, however, that the letter of credit may have a provision
stating that it will automatically renew for additional periods unless
Bank provides notice to the beneficiary of non-renewal.
(ii) be otherwise in form and substance satisfactory to
Bank, and in favor of beneficiaries satisfactory to Bank under the
Bank's standard policies.
(e) Borrower shall pay Bank fees for letters of credit as
follows:
(i) For commercial letters of credit: a fee of one-eighth of
one percent (0.125%) upon issuance of the letter of credit, with a
minimum fee of One Hundred Twenty Five Dollars ($125), and a fee of
one-eighth of
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one percent (0.125%) upon drawing under the letter of credit, with a
minimum fee of One Hundred Ten Dollars ($110).
(ii) For standby letters of credit: a non-refundable fee
equal to one and one-quarter percent (1.25%) per annum of the
outstanding undrawn amount of each standby letter of credit, payable
quarterly in advance, and calculated on the basis of the face amount
outstanding on the day the fee is calculated; provided that the
minimum fee per quarter for any one standby letter of credit shall be
Sixty-Two Dollars and Fifty Cents ($62.50). It is provided, however,
that if an Event of Default occurs under this Agreement, at the option
of Bank, the amount of the fee shall be increased to three and one-
quarter percent (3.25%) per annum, commencing on the day Bank provides
notice of the increase to Borrower. Borrower shall also pay such
other fees and commissions at the times and in the amounts Bank
advises Borrower from time to time as being applicable to Borrower's
standby letters of credit.
(f) Any sum owed to Bank with respect to a letter of credit
issued for Borrower's account which is not paid when due shall, at the
option of Bank in each instance, be added to advances outstanding under the
Revolving Facility and shall thereafter bear interest at the rate
applicable to advances.
(g) In addition to any other rights or remedies which Bank may
have under this Agreement or otherwise, upon the occurrence of an Event of
Default Bank may require Borrower to prepay, or provide cash collateral to
secure, the amount of any letters of credit outstanding under this
Agreement.
2.5 Mandatory Payment. If at any time and for any reason the total
-----------------
amount of credit outstanding under this Agreement exceeds the limitations set
forth herein, Borrower shall pay to Bank, upon Bank's election and demand, the
amount of the excess. Payments under this Paragraph may be applied to the
obligations of Borrower to Bank in the order and manner as Bank in its
discretion may determine. Payments to be applied to outstanding letters of
credit and drafts accepted under letters of credit may, at Bank's option, be
used to prepay, or held as cash collateral to secure, Borrower's obligations to
Bank with respect thereto.
2.6 Early Termination. Borrower may at any time terminate this
-----------------
Agreement by providing written notice to Bank and paying in full the entire
amount of credit outstanding hereunder,
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<PAGE>
or may reduce the amount of the Credit Limit by providing written notice to Bank
and paying any amounts outstanding hereunder which exceed the new Credit Limit.
If the Agreement is terminated or the Credit Limit is reduced prior to the
second anniversary of this Agreement, then Borrower shall pay a fee equal to the
percentages specified below multiplied by the amount by which the Credit Limit
is reduced: (a) during the period from the date of this Agreement through the
first anniversary of this Agreement, one quarter of one percent (0.25%); and (b)
during the period from the first anniversary of this Agreement through the
second anniversary of this Agreement, one eighth of one percent (0.125%).
Payments to be applied to outstanding letters of credit and drafts accepted
under letters of credit may, at Bank's option, be used to prepay, or held as
cash collateral to secure, Borrower's obligations to Bank with respect thereto.
3. Fees and Expenses.
-----------------
3.1 Unused Commitment Fee. Borrower shall pay Bank a fee on any
---------------------
difference between the Credit Limit and the amount of credit Borrower actually
uses, determined by the weighted average of the unused portion of credit
provided under this Agreement during the specified period. The fee will be
calculated at the rate of one eighth of one percent (0.125%) per annum, and
shall be paid quarterly in arrears. For the purposes of this calculation, the
outstanding undrawn amount of letters of credit shall be deemed credit used
under this Agreement.
3.2 Waiver Fee. If Bank, at its discretion, agrees to waive or amend
----------
any terms of this Agreement, Borrower shall, if required by Bank, pay Bank a
waiver fee in such amount as may be determined by Bank in its discretion.
Nothing in this Paragraph shall imply that Bank is obligated to agree to any
waiver or amendment requested by Borrower. Bank may impose additional
requirements as a condition to any waiver or amendment.
3.3 Expenses.
--------
(a) Borrower agrees to pay to Bank, on demand, all out-of-pocket
costs and expenses incurred by Bank in connection with this Agreement,
including, but not limited to, filing, recording and search fees.
(b) Borrower agrees to pay to Bank, on demand, all costs and
expenses incurred by Bank in connection with the preparation of this
Agreement and any agreement or instrument required by this Agreement.
Expenses include, but are not limited to, reasonable attorneys' fees,
including any allocated costs of Bank's in-house counsel.
(c) Borrower agrees to reimburse Bank for the cost of periodic
audits and appraisals of the Collateral at
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such intervals as Bank may reasonably require; provided, however, that if
no Event of Default has occurred, Borrower shall not be required to
reimburse Bank for more than 3 audits and appraisals in any year. The
audits and appraisals may be performed by employees of Bank or by
independent auditors or appraisers.
4. Collateral.
----------
All obligations of Borrower under this Agreement shall be secured by
one or more security agreements executed by Borrower as debtor in favor of Bank
as secured party, granting Bank a security interest in Borrower's Receivables,
Inventory, related general intangibles and deposit accounts and cash proceeds
related to Receivables and Inventory. The personal property shall be more
particularly described in the security agreement(s) executed by Borrower.
5. Extensions of Credit, Payments and Interest Calculations
--------------------------------------------------------
5.1 Requests for Credit. Each request for an extension of credit
-------------------
shall be made in writing on a form acceptable to Bank or in any other manner
acceptable to Bank.
5.2 Oral Requests. At Bank's sole discretion in each instance, Bank
-------------
may honor telephone instructions for advances or repayments or for the
designation of optional interest rates. Advances will be deposited into and
repayments will be withdrawn from Borrower's commercial account number 14876-
02794 with Bank, or such other account(s) as may be specified in writing by
Borrower. Telephone requests may be made by any one of the individuals
authorized to sign loan agreements on behalf of Borrower, or any other
individual designated by any one of such authorized signers. Bank shall be
entitled to rely upon telephone instructions from persons it reasonably believes
to be authorized by Borrower to make such requests without making independent
inquiry. Borrower hereby indemnifies Bank for, and holds Bank harmless from,
any and all losses, damages, claims and expenses (including reasonable
attorneys' fees and allocated costs of Bank's in-house counsel), however
arising, which Bank suffers or incurs based on or arising out of extensions of
credit or payments made on any telephone request except that Bank shall not be
indemnified against its own gross negligence or wilful misconduct. The
provisions of this Paragraph shall survive termination of this Agreement.
5.3 Disbursements and Payments. Each disbursement by Bank and each
--------------------------
payment by Borrower under this Agreement shall be made in immediately available
funds, and at such branch of Bank as Bank may from time to time select.
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<PAGE>
5.4 Branch Accounts. Each extension of credit under this Agreement
---------------
shall be made for the account of such branch of Bank as Bank may from time to
time select.
5.5 Evidence of Indebtedness. Principal, interest and all other sums
------------------------
due Bank under this Agreement shall be evidenced by entries in records
maintained by Bank, and, if required by Bank, by a promissory note or notes.
Each payment on and any other credits with respect to principal, interest and
all other sums due under this Agreement shall be evidenced by entries to records
maintained by Bank.
5.6 Debits to Borrower's Accounts. Borrower hereby authorizes Bank
-----------------------------
to debit Borrower's account number 14876-02794 with Bank in the amount of
principal, interest, fees or any other amount due under this Agreement or under
any instrument or agreement required under this Agreement. Bank shall debit the
account on the date such amounts become due, or, if such due date is not a
Banking Day, on the next Banking Day after such due date. If there are
insufficient funds in the account to cover the amount debited to the account in
accordance with this Paragraph, such debit will be reversed and such amount will
remain unpaid.
5.7 Banking Day. Any sum payable by Borrower hereunder which
-----------
becomes due on a day which is not a Banking Day shall be due on the next Banking
Day after such due date. Any payments received by Bank on a day which is not a
Banking Day shall be deemed to be received on the next Banking Day after such
date of receipt.
5.8 Taxes and Other Charges. Borrower agrees to make all payments or
-----------------------
reimbursements under this Agreement free and clear of and without deduction for
any present or future taxes, levies, imposts, fees or other charges of any kind
which may be imposed by any governmental authority with respect to such payments
or reimbursements. If any such taxes are imposed by any governmental authority,
Borrower will pay such taxes and will also pay to Bank, at the time interest is
paid, any additional amount which Bank specifies as necessary to preserve the
after-tax yield Bank would have received if such taxes had not been imposed.
Upon request by Bank, Borrower will confirm payment of all such taxes by
delivery of official tax receipts or notarized copies thereof to Bank within
thirty (30) days after the due date for each tax payment. This Paragraph shall
not apply with respect to any taxes which are imposed on or measured by Bank's
net income by any jurisdiction.
5.9 Increased Costs. Borrower shall reimburse or compensate Bank,
---------------
upon demand by Bank, for all costs incurred, losses suffered or payments made by
Bank which are applied or allocated by Bank to this Agreement (all as determined
by Bank in
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<PAGE>
its reasonable discretion) by reason of any statute, regulation, or any request
or requirement of any regulatory agency, whether or not having the force of law,
which is applicable to all or a class of all national banks, including:
(a) any and all present or future reserve, deposit or similar
requirements applied against (or against any class of or change in or in
the amount of) assets or liabilities of, or commitments or extensions of
credit by, Bank; and
(b) any and all present or future capital or similar
requirements against (or against any class of or change in or in the amount
of) assets or liabilities of, or commitments or extensions of credit by,
Bank.
5.10 Interest Calculation. Except as otherwise stated in this
--------------------
Agreement, all interest and fees, if any, payable under this Agreement shall be
computed on the basis of a three hundred sixty (360) day year and actual days
elapsed, which results in more interest or a larger fee than if a three hundred
sixty-five (365) day year were used.
5.11 Late Payments; Compounding. Any sum payable by Borrower
--------------------------
hereunder (including unpaid interest) if not paid when due shall bear interest
(payable on demand) from its due date until payment in full at a rate per annum
equal to the Reference Rate plus two (2.0) percentage points. At the option of
Bank, in each instance, any sum payable hereunder which is not paid when due
(including unpaid interest) may be added to principal of the Revolving Facility
and shall thereafter bear interest at the rate applicable to principal.
5.12 Default Rate. Upon the occurrence and during the continuation
------------
of any Event of Default, and without constituting a waiver of any such Event of
Default, advances under the Revolving Facility shall at the option of Bank bear
interest at a rate per annum which is two (2.0) percentage points higher than
the rate of interest otherwise provided under this Agreement.
5.13 Overdrafts. At Bank's sole option in each instance, the Bank
----------
may do one of the following if Borrower overdraws any of its accounts with Bank:
(a) Bank may make advances under the Revolving Facility to
prevent or cover an overdraft on any account of Borrower with Bank. Each
such advance will accrue interest from the date of the advance or the date
on which the account is overdrawn, whichever occurs first, at the interest
rate applicable to advances under the Revolving Facility.
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<PAGE>
(b) Bank may reduce the amount of credit otherwise available
under this Agreement by the amount of any overdraft on any account of
Borrower with Bank.
This Paragraph shall not be deemed to authorize Borrower to create overdrafts on
any of Borrower's accounts with Bank.
5.14 Proceeds of Receivables. The proceeds of Inventory and
-----------------------
collections of Receivables shall be delivered to Bank in kind, or transferred to
Bank on each Banking Day, and shall be deposited into account number 14876-02794
(the "Collection Account"). Upon occurrence of an Event of Default, Bank may
require the following: withdrawals from the Collection Account by Borrower shall
no longer be permitted; Borrower shall direct all Receivable Debtors to direct
their payments to a lockbox under the control of Bank; and amounts collected on
Receivables shall be applied by Bank to the outstanding principal balance of the
Revolving Facility, with any excess balance credited to one of Borrower's other
deposit accounts with Bank.
6. Conditions to Availability of Credit.
------------------------------------
Bank's obligation to make the first extension of credit under this
Agreement is subject to Bank's receipt of the following, each of which must be
in form and substance satisfactory to Bank:
6.1 Collateral Agreements. The Collateral Agreements, together with
---------------------
all Collateral, if any, in which Bank wishes to have a possessory security
interest.
6.2 Financing Statements. Financing statements and such other
--------------------
documentation as Bank may reasonably request to perfect Bank's security interest
in the Collateral.
6.3 Evidence of Priority. Evidence that the security interests and
--------------------
liens in favor of Bank are valid, enforceable and prior to the rights and
interests of others except those consented to in writing by Bank or otherwise
permitted by this Agreement.
6.4 Guaranty. A continuing guaranty in favor of Bank executed by
--------
Guarantor, in a principal amount equal to the entire amount of credit extended
by Bank to Borrower, including the estimated credit exposure arising from any
Swap Contracts with Bank.
6.5 Evidence of Authority. Evidence that the execution, delivery,
---------------------
and performance by Borrower of this Agreement and the execution, delivery, and
performance by Borrower and Guarantor of any instrument or agreement required
under this Agreement, as appropriate, have been duly authorized.
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<PAGE>
6.6 Other Agreements. Copies of each agreement documenting
----------------
Borrower's other material indebtedness and preferred stock, with terms and
conditions acceptable to Bank.
6.7 Consents. Any consents to Borrower entering into this Agreement
--------
which, in Bank's reasonable opinion, may be necessary from (a) Metropolitan Life
Insurance Company as holder of the $19,410,330 promissory note from Borrower;
(b) Teachers Insurance and Annuity Association of America as holder of the
$13,721,000 note from Borrower; and (c) U.S. Trust Company of California, N.A.
as trustee for the Senior Notes.
6.8 Legal Opinion. An opinion of counsel to Borrower and Guarantor,
-------------
which counsel must be acceptable to Bank, with respect to (i) the organization,
authority and good standing of Borrower and Guarantor; (ii) the due execution,
delivery and enforceability of this Agreement and all other agreements and
instruments required by this Agreement; (iii) the validity and perfection of
Bank's security interests, as required by this Agreement; (iv) the receipt of
any required consents necessary for the completion of this transaction; and (v)
such other matters as may be reasonably required by Bank.
6.9 Borrowing Certificate. A borrowing certificate, in form and
---------------------
detail satisfactory to Bank, setting forth Borrower's Acceptable Receivables and
the Acceptable Inventory for the most recent month end, together with such
schedules and supporting information as may reasonably be required by Bank, and
including a calculation of the Borrowing Base in a sufficient amount to support
the first extension of credit. The Borrowing Certificate shall be reviewed and
verified by Bank at Borrower's location.
6.10 Insurance. Evidence that Borrower has obtained the insurance
---------
coverage required under Article 8 of this Agreement.
6.11 Expenses. Payment of any expenses due under paragraph 3.3 above.
--------
6.12 Financial Information. Copies of any final revisions made to the
---------------------
financial projections provided by Borrower to Bank on March 3, 1995; and such
other financial information as Bank may reasonably require.
6.13 List of Locations. A list of all of Borrower's locations where
-----------------
any Collateral will be located.
6.14 Other Items. Any other items reasonably requested by Bank.
-----------
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<PAGE>
7. Representations and Warranties
------------------------------
Borrower represents and warrants (and each request for an extension of
credit under this Agreement shall be deemed a representation and warranty made
on the date of such request) that:
7.1 Organization. Borrower is a corporation duly organized and
------------
existing under the laws of the state of its organization and the execution,
delivery, and performance of this Agreement and of any instrument or agreement
required by this Agreement are within Borrower's powers, have been duly
authorized, and are not in conflict with the terms of any charter, bylaw, or
other organization papers of Borrower.
7.2 No Conflicts. The execution, delivery, and performance of this
------------
Agreement and of any instrument or agreement required by this Agreement are not
in conflict with any law or any indenture, agreement, or undertaking to which
Borrower is a party or by which Borrower is bound or affected.
7.3 Enforceability. This Agreement is a legal, valid and binding
--------------
agreement of Borrower, enforceable against Borrower in accordance with its
terms, and any instrument or agreement required under this Agreement, when
executed and delivered, will be similarly legal, valid, binding and enforceable.
7.4 Good Standing. Borrower is properly licensed and in good
-------------
standing in California, and Borrower has qualified under, and complied with, if
required, the fictitious name statute of California. In addition, Borrower is
properly licensed and in good standing in each other state in which Borrower is
doing business and Borrower has qualified under, and complied with, where
required, the fictitious name statute of each state in which Borrower is doing
business; unless the failure to be licensed or otherwise comply would not have a
Material Adverse Effect.
7.5 Compliance with Laws. Borrower has complied with all federal,
--------------------
state, and local laws, rules, and regulations affecting the business of Borrower
including, but not limited to, laws regulating Borrower's sales or the
furnishing of services to Receivable Debtors and disclosures in connection
therewith; unless the failure to comply would not have a Material Adverse
Effect.
7.6 Ownership of Collateral. All Collateral is owned by Borrower
-----------------------
free and clear of all security interests, liens, encumbrances and rights of
others except the rights of Bank under any security agreements or deeds of trust
required under this Agreement and those consented to in writing by Bank or
otherwise permitted by this Agreement.
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<PAGE>
7.7 Permits, Franchises. Borrower possesses all permits,
-------------------
memberships, franchises, contracts and licenses required and all trademark
rights, trade name rights, patent rights and fictitious name rights necessary to
enable it to conduct the business in which it is now engaged; unless the failure
to possess such rights would not have a Material Adverse Effect.
7.8 Perfected Security Interest in Collateral. Except for the filing
-----------------------------------------
of a financing statement and/or the recording of a deed of trust with respect to
the Collateral and the delivery to Bank of any Collateral as to which possession
is the only method of perfecting a security interest therein, no further action
is necessary in order to establish and perfect Bank's lien on or security
interest in the Collateral.
7.9 Litigation. There is no litigation, tax claim, proceeding or
----------
dispute pending, or, to the knowledge of Borrower, threatened, against or
affecting Borrower or its property, the adverse determination of which might
impair Borrower's ability to perform its obligations hereunder or under any
instrument or agreement required hereunder, or might materially and adversely
affect Borrower's financial condition or operations.
7.10 No Event of Default. No event has occurred and is continuing or
-------------------
would result from the extension of credit under this Agreement which constitutes
or would constitute an Event of Default or which, upon a lapse of time or notice
or both, would become an Event of Default.
7.11 Other Obligations.
-----------------
(a) Borrower is not in default under any other agreement
involving the borrowing of money or the extension of credit (including
capital leases) in the aggregate amount of Five Hundred Thousand Dollars
($500,000) or more, to which Borrower is a party as borrower, guarantor, or
instalment purchaser; provided, however, that Borrower shall not be
considered in default on trade payables within the meaning of this
paragraph until they are at least ninety (90) days past due.
(b) Borrower is not in default of any operating lease of real
property to which Borrower is a party as lessee, where such default under
the lease gives the lessor the right to terminate the lease, and the total
operating income from the locations covered by such leases exceeds One
Million Dollars ($1,000,000) per year.
(c) Borrower is not in default of any operating lease of real or
personal property to which Borrower is a party as lessee, where such
default may have a Material Adverse Effect.
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<PAGE>
7.12 Income Tax Returns. Borrower has informed Bank that its Federal
------------------
income tax return for tax year 1989 is currently under audit. Borrower has
provided written notice to Bank of any pending assessments or adjustments of
which Borrower has knowledge in the amount of One Hundred Thousand Dollars
($100,000) or more in the aggregate with respect to its income tax liabilities
for any year, including 1989.
7.13 Information Submitted. All financial and other information that
---------------------
has been or will be submitted by Borrower to Bank, including Borrower's
financial statement dated as of April 30, 1995, is and will be:
(a) prepared in accordance with generally accepted accounting
principles consistently applied (with respect to financial information);
(b) true, complete and correct in all material respects;
(c) in form and content required by Bank; and
(d) in compliance with all government regulations applicable
thereto in all material respects.
7.14 No Material Adverse Effect. Since the date of the most recent
--------------------------
financial statements submitted to Bank, there has been no event or circumstance
that has resulted or could reasonably be expected to result in a Material
Adverse Effect.
7.15 Merchantable Inventory. All Inventory which is included in the
----------------------
Borrowing Base is of good and merchantable quality.
7.16 ERISA Plan Compliance.
---------------------
(a) Borrower has fulfilled its obligations, if any, under the
minimum funding standards of ERISA and the Internal Revenue Code of 1986,
as amended from time to time, (the "Code") with respect to each ERISA Plan
and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any ERISA Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of
ERISA for which the Pension Benefit Guaranty Corporation requires 30 day
notice.
(c) No action by Borrower to terminate or withdraw from any ERISA
Plan has been taken and no notice of
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<PAGE>
intent to terminate an ERISA Plan has been filed under Section 4041 of
ERISA.
(d) No proceeding has been commenced with respect to an ERISA
Plan under Section 4042 of ERISA, and no event has occurred or condition
exists which might constitute grounds for the commencement of such a
proceeding.
7.17 Location of Borrower. Borrower's place of business (or, if
--------------------
Borrower has more than one place of business, its chief executive office) is
located at the address listed under Borrower's signature on this Agreement.
8. Covenants
---------
So long as credit is available under this Agreement and until full and
final payment of all of Borrower's obligations under this Agreement and any
instrument or agreement required under this Agreement, Borrower shall, unless
Bank waives compliance in writing:
8.1 Notices of Certain Events. Promptly give written notice to Bank
-------------------------
of:
(a) all litigation affecting Borrower or Guarantor where the
amount claimed is Five Hundred Thousand Dollars ($500,000) or more.
(b) any substantial dispute which may exist between Borrower or
Guarantor and any governmental regulatory body or law enforcement
authority.
(c) any Event of Default or any event which, upon a lapse of
time or notice or both, would become an Event of Default.
(d) the occurrence of any reportable event under Section 4043(b)
of ERISA for which the Pension Benefit Guaranty Corporation requires thirty
(30) day notice; any action by Borrower to terminate or withdraw from an
ERISA Plan or the filing of any notice of intent to terminate under Section
4041 of ERISA; any notice of noncompliance made with respect to an ERISA
Plan under Section 4041(b) of ERISA; or the commencement of any proceeding
with respect to an ERISA Plan under Section 4042 of ERISA.
(e) any other matter which has resulted or might result in a
material adverse change in Borrower's or Guarantor's financial condition or
operations.
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<PAGE>
8.2 Financial and Other Information. Deliver to Bank in form and
-------------------------------
detail satisfactory to Bank, and in such number of copies as Bank may request:
(a) Within one hundred twenty (120) days after the end of each
fiscal year, Guarantor's consolidated financial statements for such year
audited by a certified public accountant acceptable to the Bank together
with an unqualified opinion of such certified public accountant and
including, at a minimum, Guarantor's balance sheet and statements of
income, retained earnings and cash flow. Any of the "Big 6" accounting
firms are acceptable to Bank.
(b) Within thirty (30) days after the end of each monthly
accounting period (or, if the month is the last month in a fiscal quarter,
within forty-five (45) days after the end of the month), Guarantor's
consolidated financial statements for such period prepared by Guarantor and
including, at a minimum, Guarantor's balance sheet and statements of
income, retained earnings and cash flow, and with a comparison to plan and
to the prior year.
(c) Within fifteen (15) days after the date of filing with the
Securities and Exchange Commission, copies of Guarantor's Form 10-K Annual
Report, Form 10-Q Quarterly Report and Form 8-K Current Report, and any
other filing with the SEC.
(d) Within thirty (30) days after Borrower's fiscal year end,
monthly projections for the next fiscal year and annual projections for all
subsequent fiscal years through the final maturity of this Agreement.
(e) Within thirty (30) days after the end of each monthly
accounting period, a borrowing certificate setting forth the respective
amounts of Acceptable Receivables and Acceptable Inventory as of the last
day of the preceding month, together with a calculation demonstrating
compliance with the requirement in the Indenture covering the Senior Notes
that the amount outstanding under this Agreement not exceed forty percent
(40%) of the amount of the Borrower's aggregate accounts receivable and
inventory as determined in accordance with generally accepted accounting
principles.
(f) Within thirty (30) days after the end of each monthly
accounting period, statements showing an aging and reconciliation of
Receivables.
(g) Within thirty (30) days after the end of each monthly
accounting period a schedule of Inventory itemizing and describing the
kind, type, quality and quantity of the Inventory, its cost, and such other
information as Bank may
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<PAGE>
reasonably request. The report currently provided to The CIT
Group/Business Credit, Inc. is in a format acceptable to Bank.
(h) Within thirty (30) days after the end of each monthly
accounting period a listing of all Supplier Payables.
(i) Within forty-five (45) days after the end of each fiscal
quarter, a compliance certificate, certified by a responsible officer of
Borrower, and including calculation of compliance with all financial
covenants of this Agreement and of any other secured or unsecured
indebtedness of Borrower.
(j) Promptly upon request of Bank, such other statements, lists
of property and accounts, budgets, forecasts or reports as to Borrower and
Guarantor as Bank may reasonably request.
8.3 Books, Records, Audits and Inspections. Maintain adequate books,
--------------------------------------
accounts and records in order to permit the preparation of the financial
statements required hereunder in accordance with generally accepted accounting
principles consistently applied, and in compliance with the regulations of any
governmental regulatory body having jurisdiction over Borrower or Borrower's
business and permit employees or agents of Bank at any reasonable time (upon
reasonable notice and during normal business hours, provided Borrower is not in
default hereunder) to inspect the Collateral and Borrower's properties, to
conduct appraisals of the Collateral, and to examine or audit Borrower's books,
accounts, and records and make copies and memoranda thereof. In the event any
Collateral, properties, books, accounts or records are in the possession of or
under the control of a third party, Borrower shall direct and hereby authorizes
such third party to permit access to Bank's employees or agents for the purpose
of performing the inspections, appraisals, examinations or audits permitted
under this Paragraph, and to respond to any requests from Bank for information
concerning the amount, status or condition of any Collateral in third party's
possession or control.
8.4 Total Liabilities to Tangible Net Worth. Not permit on a
---------------------------------------
consolidated basis Borrower's total liabilities to exceed four (4.0) times
Tangible Net Worth. For the purposes of this Paragraph, "total liabilities"
shall include all current and long term liabilities, plus fifty percent (50%) of
the face amount of all standby letters of credit issued for the account of
Borrower.
8.5 Fixed Charge Coverage Ratio. Achieve on a consolidated basis a
---------------------------
Fixed Charge Coverage Ratio of at least
-26-
<PAGE>
1.05:1.00. This ratio shall be calculated quarterly using the results of the
most recently concluded quarterly accounting period and each of the three (3)
immediately preceding quarterly accounting periods.
8.6 Other Indebtedness. Not create or incur any indebtedness for
------------------
borrowed money or for the deferred purchase price of property under capital
leases, or become liable as a surety, guarantor, accommodation endorser, or
otherwise for or upon the obligation of any other person, firm or corporation;
provided, however, that this Paragraph shall not be deemed to prohibit:
(a) direct or contingent obligations owed to Bank.
(b) the acquisition of goods, supplies or merchandise on normal
trade credit.
(c) the execution of bonds or undertakings in the ordinary
course of its business as presently conducted.
(d) the endorsement of negotiable instruments received in the
ordinary course of its business as presently conducted.
(e) Contingent Obligations permitted by Paragraph 8.8 below.
(f) indebtedness and capital lease obligations existing as of
the date of this Agreement and which have been disclosed to Bank in
writing.
(g) Purchase Money Indebtedness where the total principal amount
of such debt incurred does not exceed Ten Million Dollars ($10,000,000) in
any fiscal year and the aggregate amount outstanding does not exceed
Fifteen Million Dollars ($15,000,000) at any time. "Purchase Money
Indebtedness" means indebtedness (including the principal portion of
capital leases) incurred for the acquisition of real property or other
fixed or capital assets; indebtedness, including seller financing, to
finance Acquisitions (to the extent permitted by Paragraph 8.10); and
indebtedness incurred for the financing of new store construction or store
remodels, to the extent that such financing is obtained within twelve
months of the acquisition of the property or the assets financed or the
completion of the new store construction or remodel. Such Purchase Money
Indebtedness must be unsecured or only secured by the fixed assets or real
property acquired; no liens may be incurred on accounts receivable or
inventory or the proceeds thereof.
-27-
<PAGE>
(h) the refinancing of existing, or permitted future, indebtedness
provided that the replacement debt meets the following criteria: (i) the
principal amount of the replacement debt is not greater than the debt being
refinanced at the time of refinancing, plus reasonable fees, expenses and
call premiums not exceeding, in the aggregate, five percent (5%) of the
amount of the debt being refinanced, (ii) the maturity date is not earlier
than the maturity date of the debt being refinanced, (iii) the annual debt
service payments, including principal and interest, of the replacement debt
are not greater than those of the debt being refinanced, (iv) the
collateral required for the replacement debt shall be no more than required
by the debt being refinanced, and (v) the events of default and financial
covenants of the replacement debt may be no more onerous than those related
to the debt being refinanced; provided further, that if the principal
balance of any debt being refinanced is greater than Ten Million Dollars
($10,000,000), Borrower must deliver all related credit documents to Bank
prior to the date of refinancing, for review by Bank to confirm that no
Event of Default will occur under this paragraph or otherwise under this
Agreement by reason of the refinancing. In the event that the principal
amount of the replacement debt exceeds the limitations stated in
subparagraph 8.6(h)(i) above, the amount of such excess may be considered
permitted additional indebtedness to the extent permitted under the dollar
limit stated in paragraph 8.6(i) below.
(i) in addition to the foregoing, a maximum amount of Two
Million Five Hundred Thousand Dollars ($2,500,000) in unsecured obligations
outstanding at any one time, including any increases to indebtedness to
insurance companies for premium financing, and including the amount of any
excess as described in the last sentence of paragraph 8.6(h) above.
8.7 Liens. Not create, assume or suffer to exist any security
-----
interest, lien (including the lien of an attachment, judgment or execution) or
encumbrance, securing a charge or obligation, on or of any of its property, real
or personal, whether now owned or hereafter acquired, except:
(a) security interest(s) and deed(s) of trust in favor of Bank.
(b) liens, security interests and encumbrances in existence as
of the date of this Agreement which have been disclosed to Bank in writing.
(c) liens on Borrower's real and personal property (other than
the Collateral) for current taxes,
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<PAGE>
assessments or other governmental charges which are not delinquent or
remain payable without any penalty or which are being contested in good
faith by appropriate proceedings, if such reserve or other appropriate
provision, if any, as shall be required by generally accepted accounting
principles shall have been made therefor.
(d) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar liens arising in the ordinary
course of business which either (i) are not delinquent or remain payable
without penalty, or (ii) are in an aggregate amount not exceeding Five
Hundred Thousand Dollars ($500,000) and are being contested in good faith
and by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property subject thereto;
provided, however, that any reserve or other appropriate provision, if any,
as shall be required by generally accepted accounting principles shall have
been made therefor.
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of Borrower.
(f) security interests securing Purchase Money Indebtedness as
permitted by Paragraph 8.6(g).
(g) liens securing refinanced indebtedness as permitted by
Paragraph 8.6(h).
(h) Supplier's Liens arising in the ordinary course of
Borrower's business securing amounts Borrower owes to suppliers of
Inventory, provided such obligations are not past due.
(i) liens (other than any lien imposed by ERISA) consisting of
pledges or deposits required in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
social security legislation.
(j) liens on the property of the Borrower securing (i) the non-
delinquent performance of bids, trade contracts (other than for borrowed
money), leases, statutory obligations, (ii) contingent obligations on
surety and appeal bonds, and (iii) other non-delinquent obligations of a
like nature; in each case, incurred in the ordinary course
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<PAGE>
of business, provided all such liens in the aggregate would not (even if
enforced) cause a Material Adverse Effect.
(k) liens supporting the enforcement of judgments covering
property other than Collateral, provided that such judgment itself does not
constitute a default under Paragraph 9.7 below.
8.8 Contingent Obligations. Not to create, incur, assume or suffer
----------------------
to exist any Contingent Obligations except:
(a) endorsements for collection or deposit in the ordinary course
of business.
(b) Swap Contracts with Bank, or Permitted Swap Obligations with
counter-parties other than Bank.
(c) Contingent Obligations existing as of the date of this
Agreement and which have been disclosed to Bank in writing.
(d) Contingent Obligations to Bank.
(e) Contingent Obligations with respect to the payment of
workers' compensation insurance premiums, to the extent such Contingent
Obligations are supported by a letter of credit issued by Bank under this
Agreement.
8.9 Capital Expenditures. Not, in any of its fiscal years, expend or
--------------------
incur obligations for Capital Expenditures of more than the amounts specified
below for such fiscal year:
<TABLE>
<CAPTION>
Fiscal Year Ending: Maximum Amount
------------------- --------------
<S> <C>
January 31, 1996 $18,000,000
January 31, 1997 $18,000,000
January 31, 1998 $19,000,000
January 31, 1999 $20,000,000
January 31, 2000 $20,000,000
</TABLE>
If Borrower's Capital Expenditures in a particular fiscal year were less than
the Maximum Amount for that fiscal year, the unused portion of the Maximum
Amount, up to an amount not exceeding Eight Million Dollars ($8,000,000), may be
carried forward and spent in the next fiscal year, and such carried forward
expenditures shall increase the Maximum Amount for the next fiscal year.
"Capital Expenditures" means the sum of (a) all of Borrower's expenditures and
the total of all obligations incurred by Borrower during the fiscal year for the
acquisition of real property or other fixed or capital assets (including
obligations incurred under any capital leases), plus (b) the total
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<PAGE>
consideration paid by Borrower for any Acquisitions as permitted under paragraph
8.10 (including all debt assumed in connection with such Acquisitions as
permitted under paragraph 8.10), minus (c) an amount of up to Two Million
Dollars ($2,000,000) in sale-leaseback transaction proceeds received by Borrower
during the fiscal year, to the extent the transaction is completed within twelve
months of the date when the assets covered by the transaction were originally
purchased by Borrower.
8.10 Acquisitions. Not enter into any Acquisitions, nor enter into
------------
any consolidation, merger, partnership, joint venture or other combination,
without prior written approval of Bank; provided however, that Borrower may
complete Acquisitions of store facilities and related business assets as used in
the business presently conducted by Borrower for an annual aggregate purchase
price amount (including all liabilities assumed, excluding normal trade
financing of inventory, in connection with such Acquisitions) not to exceed Five
Million Dollars ($5,000,000) per fiscal year. In connection with stock
purchases, Borrower must submit to Bank, prior to closing, a copy of the
purchase agreement demonstrating, to the Bank's reasonable satisfaction, that
Borrower will not be assuming any contingent liabilities, other than operating
leases, in excess of Five Hundred Thousand Dollars ($500,000) in aggregate per
year for all stock purchases.
8.11 Loans and Investments. Not to purchase or acquire (or make any
---------------------
commitment therefor), any capital stock, equity interest, or any obligations or
other securities of, or any interest in, any Person, or make or commit to make
any advance, loan, extension of credit or capital contribution to or any other
investment in, any Person including any officer, shareholder or affiliate of
Borrower (together, "Investments"), except for:
-----------
(a) Investments held by Borrower in the form of cash equivalents
or short term marketable securities.
(b) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business.
(c) Acquisitions permitted by Paragraph 8.10.
(d) The existing stock purchase loans to Borrower's employees
disclosed to Bank in writing prior to the date of this Agreement, together
with additional stock purchase loans to employees not exceeding Five
Hundred Thousand Dollars ($500,000) in the aggregate.
8.12 Repurchase of Senior Notes. Not to expend more than Ten Million
--------------------------
Dollars ($10,000,000) to purchase or repay the
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<PAGE>
Senior Notes prior to maturity without Bank's prior written consent.
8.13 Dividends. Not declare or pay any dividends on any of its
---------
shares, and not purchase, redeem or otherwise acquire for value any of its
shares, or create any sinking fund in relation thereto; provided, however, that
Borrower may pay dividends to Guarantor to fund the payment by Guarantor of
dividends on preferred stock not exceeding Three Hundred Thousand Dollars
($300,000) in any fiscal quarter (One Million Two Hundred Thousand Dollars
($1,200,000) in any fiscal year); provided that no Event of Default exists or
would be caused by payment of the dividend from Borrower to Guarantor.
8.14 Disposition of Assets. Not to, directly or indirectly, sell,
---------------------
assign, lease, convey, transfer or otherwise dispose of (whether in one or a
series of transactions) any property (including accounts and notes receivable,
with or without recourse) or enter into any agreement to do any of the
foregoing, except:
(a) dispositions of inventory, or used, worn-out or surplus
equipment, or disposition of assets in connection with the closing of
individual store locations, all in the ordinary course of business.
(b) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied to
the purchase price of such replacement equipment.
(c) the sale of assets which, at the time this Agreement is
executed, are designated as held for sale by Borrower (i.e. Borrower's non-
operating warehouse and the land adjacent to Borrower's existing
warehouse).
(d) the sale/leaseback of assets.
8.15 Existence and Properties. Maintain and preserve Borrower's
------------------------
existence and all rights, privileges and franchises now enjoyed, to the extent
necessary or appropriate to the conduct of Borrower's business; conduct
Borrower's business in an orderly, efficient and customary manner, keep all
Borrower's properties in good working order and condition, ordinary wear and
tear excepted, and from time to time make all needed repairs, renewals or
replacements thereto and thereof so that any deterioration in such property
shall not have a Material Adverse Effect.
8.16 Liquidations. Not liquidate or dissolve.
------------
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<PAGE>
8.17 Insurance. Maintain and keep in force fire and hazard insurance
---------
policies covering the tangible property comprising the Collateral. Each such
insurance policy shall be in an amount equal to the full replacement value of
such Collateral, shall include a replacement cost endorsement, shall be issued
by an insurance company acceptable to Bank, and shall include a loss payable
endorsement in favor of Bank in a form acceptable to Bank. Borrower shall also
maintain and keep in force insurance covering property damage (include use and
occupancy) to any of Borrower's other properties, public liability insurance
including coverage for contractual liability, product liability, property damage
and workers' compensation, and any other insurance which is usual for Borrower's
business, all in such amounts and with such terms as may be consistent with
other companies in Borrower's line of business. Borrower shall deliver to Bank
upon Bank's request a copy of each insurance policy or, if permitted by Bank, a
certificate of insurance listing all insurance in force.
8.18 Compliance with Laws. At all times comply with, or cause to be
--------------------
complied with, all laws, statutes (including but not limited to any fictitious
name statute), rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Guarantor or Borrower's or
Guarantor's business, including but not limited to laws regulating Borrower's
sales to or performance of services for Receivable Debtors and disclosures in
connection therewith, where the failure to comply may cause a Material Adverse
Effect.
8.19 Compliance with Material Contracts. Comply with all terms of
----------------------------------
Material Contracts except where the failure to do so will not result in a
Material Adverse Effect. "Material Contract" means each contract to which
Borrower is now or hereafter a party involving aggregate consideration payable
to or by Borrower, contingent or otherwise, in excess of Five Hundred Thousand
Dollars ($500,000).
8.20 Accuracy of Financial Information. Cause all financial
---------------------------------
information, including information relating to the Collateral, upon submission
by Borrower to Bank to be true, complete and correct in all material respects.
8.21 Additional Acts. Perform, on request of Bank, such acts as may
---------------
be necessary or advisable to perfect any lien or security interest provided for
herein or otherwise to carry out the intent of this Agreement.
8.22 Business Activities. Not engage in any business activities or
-------------------
operations substantially different from or unrelated to present business
activities and operations.
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<PAGE>
8.23 Change in Name, Structure or Locations. Notify Bank in writing
--------------------------------------
prior to (a) the opening of any new store locations, (b) any change in
Borrower's name, (c) any change in Borrower's business or legal structure, or
(d) any change in Borrower's place of business or chief executive office if
Borrower has more than one place of business.
9. Events of Default
-----------------
The occurrence of any of the following Events of Default shall
terminate any obligation on the part of Bank to extend credit under this
Agreement and, at the option of Bank under all Paragraphs except Paragraphs 9.5
and 9.6, and automatically in the case of Paragraphs 9.5 and 9.6, shall make all
obligations of Borrower to Bank under or in respect of this Agreement and any
instrument or agreement required under this Agreement immediately due and
payable, without notice of default, presentment or demand for payment, protest
or notice of nonpayment or dishonor, or other notices or demands of any kind or
character:
9.1 Failure to Pay. Borrower fails to pay when due any instalment of
--------------
principal due under this Agreement, or fails to pay within five (5) days after
the date when due any instalment of interest or fees or any other sum due under
this Agreement in accordance with the terms hereof.
9.2 Breach of Representation or Warranty. Any representation or
------------------------------------
warranty herein or in any agreement, instrument or certificate executed pursuant
hereto or in connection with any transaction contemplated hereby proves to have
been false or misleading in any material respect when made.
9.3 Falsity of Information. Any financial or other information
----------------------
delivered by Borrower to Bank proves to be false or misleading in any material
respect.
9.4 Security Interest. Bank fails to have a valid and enforceable
-----------------
perfected security interest in or lien on the Collateral or such security
interest or lien fails to be prior to the rights and interest of others except
those consented to in writing by Bank or otherwise permitted by this Agreement.
9.5 Failure to Pay Debts; Voluntary Bankruptcy. Borrower or
------------------------------------------
Guarantor fails to pay Borrower's or Guarantor's debts generally as they come
due, or files any petition, proceeding, case, or action for relief under any
bankruptcy, reorganization, insolvency, or moratorium law, or any other law or
laws for the relief of, or relating to, debtors.
9.6 Involuntary Bankruptcy. An involuntary petition is filed under
----------------------
any bankruptcy or similar statute against Borrower
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<PAGE>
or Guarantor, or a receiver, trustee, liquidator, assignee, custodian,
sequestrator, or other similar official is appointed to take possession of the
properties of Borrower or Guarantor. Such Event of Default shall be deemed cured
if such petition or appointment is set aside or withdrawn or ceases to be in
effect within thirty (30) days from the date of said filing or appointment;
provided, however, that Bank shall not be obligated to extend any additional
credit to Borrower during such period.
9.7 Judgments. One or more judgments or arbitration awards are
---------
entered against Borrower or Guarantor, or Borrower or Guarantor enters into any
settlement agreements with respect to any litigation or arbitration, in the
aggregate amount of Five Hundred Thousand Dollars ($500,000) or more on a claim
or claims not covered by insurance, unless such judgment or award is discharged
or stayed pending appeal within thirty (30) days after the date of entry.
9.8 Suspension of Business. Borrower voluntarily suspends its
----------------------
business for more than seven (7) days in any thirty (30) day period.
9.9 Governmental Action. Any governmental regulatory authority takes
-------------------
or institutes action which, in the opinion of Bank, will cause a Material
Adverse Effect.
9.10 Default of Other Financial Obligations. Any default occurs under
--------------------------------------
any other agreement involving the borrowing of money or the extension of credit
(including capital leases) in the aggregate amount of Five Hundred Thousand
Dollars ($500,000) or more, to which Borrower or Guarantor may be a party as
borrower, guarantor or instalment purchaser, if such default consists of the
failure to pay any obligation when due (after the expiration of any grace
period) or if such default gives to the holder of the obligation concerned the
right to accelerate the obligation; provided, however, that Borrower shall not
be considered in default on trade payables within the meaning of this paragraph
until they are at least ninety (90) days past due.
9.11 Default under Guaranty. Any guaranty, subordination agreement or
----------------------
other agreement or instrument required hereunder is breached or becomes
ineffective or any default occurs under any such agreement or instrument.
9.12 Default of Other Bank Obligations. Any default occurs under any
---------------------------------
other obligation of Borrower or Guarantor to Bank or to any subsidiary or
affiliate of Bank, if such default consists of the failure to pay any obligation
when due (after the expiration of any grace period) or if such default gives to
the holder of the obligation concerned the right to accelerate the obligation.
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<PAGE>
9.13 ERISA Plan Termination. Any ERISA Plan termination or any full
----------------------
or partial withdrawal from an ERISA Plan occurs which could result in liability
of Borrower to the Pension Benefit Guaranty Corporation or to the ERISA Plan in
an aggregate amount which, in the reasonable opinion of Bank, will have a
material adverse effect on the financial condition of Borrower.
9.14 Change in Control. There is any Change in Control of Borrower.
-----------------
"Change in Control" means any of the following: (a) the sale, lease, or other
transfer (in one transaction or a series of transactions) of all or
substantially all of the assets of Borrower; or (b) Guarantor ceases to own,
beneficially and of record, 100% of the capital stock of Borrower; or (c) any
Person or group of Persons (other than Freeman Spogli & Co. Incorporated and its
affiliates) newly becomes the beneficial owner of 50% or more of the voting
power of the capital stock of Guarantor; or (d) Continuing Directors of Borrower
or Guarantor fail to maintain at least majority control of the Board of
Directors of Borrower or Guarantor, respectively; or (e) the shareholders of
Borrower or Guarantor approve any plan or proposal for the liquidation or
dissolution of Borrower or Guarantor. "Continuing Director" means a director
who either (i) was a member of the Board of Directors of a Person on the date of
this Agreement or (ii) became a director of a Person subsequent to such date and
who is either (A) an employee or representative of Borrower, Guarantor, or
Freeman Spogli & Co. Incorporated, or (B) is an outside director (i.e. not
covered by (A) above), who is replacing another outside director, and who was
appointed or nominated for election by a majority of the Continuing Directors
then in office.
9.15 Breach of Certain Covenants. Borrower breaches, or defaults
---------------------------
under, any term, condition, or provision contained in Paragraphs 8.2, 8.17,
8.20, 8.21 or 8.23 of this Agreement; provided, however, that if Borrower
delivers to Bank a written plan for curing such default in form and substance
satisfactory to Bank, such default shall not be considered an Event of Default
hereunder for a period of fourteen (14) days after the date the default first
occurred; provided, however, that in the case of defaults under subparagraphs
(e) through (h) of Paragraph 8.2, this cure period shall be five (5) days
instead of fourteen (14) days. It is further provided that, notwithstanding any
other provision of this Agreement, Bank shall be under no obligation to extend
additional credit under this Agreement following the occurrence of any default
hereunder unless and until such default has been cured.
9.16 Other Breach under Agreement. Borrower breaches, or defaults
----------------------------
under, any term, condition or provision contained in this Agreement not
specifically referred to in this Article.
10. Miscellaneous
-------------
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<PAGE>
10.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the parties hereto and their respective successors and assigns;
provided, however, that Borrower shall not assign this Agreement or any of the
rights, duties or obligations of Borrower hereunder without the prior written
consent of Bank.
10.2 Consents and Waivers. No consent or waiver under this Agreement
--------------------
shall be effective unless in writing. No waiver of any breach or default shall
be deemed a waiver of any breach or default thereafter occurring.
10.3 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of California.
10.4 Administration Costs. Borrower agrees to pay to Bank, on
--------------------
demand, all reasonable costs and expenses incurred by Bank in connection with
the administration of this Agreement and any instrument or agreement required
under this Agreement.
10.5 Attorneys' Fees. Borrower agrees to pay to Bank, on demand, all
---------------
reasonable costs, expenses and attorneys' fees (including allocated costs for
in-house legal services) incurred by Bank in connection with the enforcement and
preservation of any rights or remedies under this Agreement and any instrument
or agreement required under this Agreement, and including any amendment, waiver,
"workout" or restructuring under this Agreement. In the event a legal action or
arbitration proceeding is commenced in connection with the enforcement of this
Agreement or any instrument or agreement required under this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees (including
allocated costs for in-house legal services), costs and necessary disbursements
incurred in connection with such action or proceeding, as determined by the
court or arbitrator.
10.6 Integration. This Agreement and any instrument, agreement or
-----------
document attached hereto or referred to herein (a) integrate all the terms and
conditions mentioned herein or incidental hereto, (b) supersede all oral
negotiations and prior writings in respect to the subject matter hereof, and (c)
are intended by the parties as the final expression of the agreement with
respect to the terms and conditions set forth in this Agreement and any such
instrument, agreement or document and as the complete and exclusive statement of
the terms agreed to by the parties. In the event of any conflict between the
terms, conditions and provisions of this Agreement and any such instrument,
agreement, or document, the terms, conditions and provisions of this Agreement
shall prevail.
10.7 Disposition of Schedules, Reports, Etc. Delivered by Borrower.
-------------------------------------------------------------
Bank shall be under no obligation to return any schedules, invoices, statements,
budgets, forecasts, reports or
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<PAGE>
other papers delivered by Borrower and shall destroy or otherwise dispose of
same at such time as Bank, in its discretion, deems appropriate.
10.8 Returned Merchandise. Until Bank exercises its rights to
--------------------
collect the Receivables as provided under any security agreement required under
this Agreement, Borrower may continue its present policies (or any other
commercially reasonable policy) for returned merchandise and adjustments.
Credit adjustments with respect to returned merchandise shall be made
immediately upon receipt of the merchandise by Borrower or upon such other
disposition of the merchandise by the Receivable Debtor in accordance with
Borrower's instructions. If a credit adjustment is made with respect to any
Acceptable Receivable, the amount of such adjustment shall no longer be included
in the amount of such Acceptable Receivable in computing the Borrowing Base.
10.9 Verification of Receivables. Bank may at any time, either
---------------------------
orally or in writing, request confirmation from any Receivable Debtor of the
current amount and status of the Receivable upon which such Receivable Debtor is
obligated.
10.10 Assignments. Bank may at any time sell or assign to any
-----------
affiliate of Bank (an "Assignee") all or part of the obligations of Borrower
under this Agreement. Borrower agrees that each such disposition will give rise
to a direct obligation of Borrower to the Assignee. Borrower authorizes Bank
and each Assignee, upon the occurrence of an Event of Default, to proceed
directly by right of setoff, banker's lien, or otherwise, against any assets of
Borrower which may be in the hands of Bank or such Assignee, respectively.
Borrower authorizes Bank to disclose to any prospective Assignee and any
Assignee any and all information in Bank's possession concerning Borrower, this
Agreement and the Collateral.
10.11 Indemnification. Borrower agrees to indemnify Bank against, and
---------------
hold Bank harmless from, all claims, actions, losses, costs and expenses
(including attorneys' fees and allocated costs for in-house legal services)
incurred by Bank and arising from any contention, whether well-founded or
otherwise, that there has been a failure to comply with any law regulating
Borrower's sales to or performance of services for Receivable Debtors and
disclosures in connection therewith. The provisions of this Paragraph shall
survive termination of this Agreement.
10.12 Hazardous Waste Indemnification. Borrower shall indemnify
-------------------------------------
and hold harmless Bank, its parent company, subsidiaries and all of their
directors, officers, employees agents, successors, attorneys and assigns from
and against any loss, damage, cost, expense or liability directly or indirectly
arising out of or attributable to the use, generation,
-38-
<PAGE>
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a Hazardous Substance on, under or about Borrower's
property or operations or property leased to Borrower, including but not limited
to attorneys' fees (including the reasonable estimate of the allocated cost of
in-house counsel and staff). For purposes of this Agreement, "Hazardous
Substance" means any substance which is or becomes designated as "hazardous" or
"toxic" under any federal, state or local law. This indemnity shall survive
termination of this Agreement.
10.13 Arbitration; Reference Proceeding.
---------------------------------------
(a) Any controversy or claim between or among the parties,
including but not limited to those arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith and any claim based on or arising from an alleged tort,
shall at the request of any party be determined by arbitration. The
arbitration shall be conducted in accordance with the United States
Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law
provision in this Agreement, and under the Commercial Rules of the American
Arbitration Association ("AAA"). The arbitrator(s) shall give effect to
statutes of limitation in determining any claim. Any controversy
concerning whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in any
court having jurisdiction. The institution and maintenance of an action
for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff,
to submit the controversy or claim to arbitration if any other party
contests such action for judicial relief.
(b) Notwithstanding the provisions of subparagraph (a), no
controversy or claim shall be submitted to arbitration without the consent
of all parties if, at the time of the proposed submission, such controversy
or claim arises from or relates to an obligation to Bank which is secured
by real property collateral located in California. If all parties do not
consent to submission of such a controversy or claim to arbitration, the
controversy or claim shall be determined as provided in subparagraph (c).
(c) A controversy or claim which is not submitted to arbitration
as provided and limited in subparagraphs (a) and (b) shall, at the request
of any party, be determined by a reference in accordance with California
Code of Civil Procedure Sections 638 et seq. If such an election is made,
-- ---
the parties shall designate to the court a referee or referees selected
under the auspices of the AAA in the same
-39-
<PAGE>
manner as arbitrators are selected in AAA-sponsored proceedings. The
presiding referee of the panel, or the referee if there is a single
referee, shall be an active attorney or retired judge. Judgment upon the
award rendered by such referee or referees shall be entered in the court in
which such proceeding was commenced in accordance with California Code of
Civil Procedure Sections 644 and 645.
(d) No provision of this Paragraph shall limit the right of any
party to this Agreement to exercise self-help remedies such as setoff, to
foreclose against or sell any real or personal property collateral or
security, or to obtain provisional or ancillary remedies from a court of
competent jurisdiction before, after, or during the pendency of any
arbitration or other proceeding. The exercise of a remedy does not waive
the right of either party to resort to arbitration or reference. At Bank's
option, foreclosure under a deed of trust or mortgage may be accomplished
either by exercise of power of sale under the deed of trust or mortgage or
by judicial foreclosure.
10.14 Notices. All notices required hereunder shall be personally
-------
delivered or sent by first class mail, postage prepaid, to the addresses set
forth on the signature page of this Agreement, or to such other addresses as the
parties hereto may specify from time to time in writing. Notices sent by first
class mail shall be deemed received three Banking Days after deposit in the
mail.
10.15 Headings. Article and paragraph headings are for reference only
--------
and shall not affect the interpretation or meaning of any provisions of this
Agreement.
10.16 Severability. The illegality or unenforceability of any
------------
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
10.17 Counterparts. This Agreement may be executed in as many
------------
counterparts as may be deemed necessary or convenient, and by the different
parties hereto on separate counterparts each of which, when so executed, shall
be deemed an original but all
-40-
<PAGE>
such counterparts shall constitute but one and the same agreement.
In Witness Whereof, the parties hereto have executed this Agreement as
of the day and year first above written.
BANK OF AMERICA NATIONAL ORCHARD SUPPLY HARDWARE
TRUST AND SAVINGS ASSOCIATION CORPORATION
By By /s/ Maynard Jenkins
____________________________ _____________________________
Jeff Perkins Maynard Jenkins
Vice President President and Chief Executive
Officer
By /s/ John Plecque By /s/ Stephen Hilberg
___________________________ _____________________________
John Plecque Stephen Hilberg
Vice President Vice President-Finance and
Chief Financial Officer
Address where notices to Address where notices to
Bank are to be sent: Borrower are to be sent:
101 Park Center Plaza 6450 Via Del Oro
San Jose, CA 95113 San Jose, CA 95119
-41-
<PAGE>
EXHIBIT 10.2
CONTINUING GUARANTY
BORROWERS: ORCHARD SUPPLY HARDWARE CORPORATION
GUARANTORS: ORCHARD SUPPLY HARDWARE STORES CORPORATION
(1) For valuable consideration, the undersigned ("Guarantors") jointly
and severally unconditionally guarantee and promise to pay to Bank of America
National Trust and Savings Association ("Bank"), or order, on demand, in lawful
money of the United States, any and all indebtedness of Orchards Supply Hardware
Corporation ("Borrowers") to Bank. The word "indebtedness" is used herein in
its most comprehensive sense and includes any and all advances, debts,
obligations and liabilities of Borrowers or any one or more of them to Bank,
heretofore, now, or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether direct or acquired by Bank by
assignment or succession, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether Borrowers
may be liable individually or jointly with others, or whether recovery upon such
indebtedness may be or hereafter become barred by any statute of limitations, or
whether such indebtedness may be or hereafter become otherwise unenforceable.
(2) The liability of Guarantors under this Guaranty (exclusive of
liability under any other guaranties executed by Guarantors) shall not exceed at
any one time the total of (a) Forty One Million Five Hundred Seventy Five
Thousand Dollars ($41,575,000), for the principal amount of the indebtedness and
(b) all interest, fees, and other costs and expenses relating to or arising out
of the indebtedness or such part of the indebtedness as shall not exceed the
foregoing limitation. Bank may permit the indebtedness to exceed Guarantors'
liability, and may apply any amounts received from any source, other than from
Guarantors, to the unguaranteed portion of the indebtedness. This is a
continuing guaranty relating to any indebtedness, including that arising under
successive transactions which shall either continue the indebtedness or from
time to time renew it after it has been satisfied. Any payment by Guarantors
shall not reduce their maximum obligation hereunder, unless written notice to
that effect be actually received by Bank at or prior to the time of such
payment.
(3) If any Borrower is a partnership and any Guarantor is a general
partner of that partnership, then such Guarantor shall not be liable under this
Guaranty for any indebtedness of such Borrower which is secured by real
property; provided, however, that such Guarantor shall remain liable under
partnership law for all the indebtedness of such Borrower.
(4) The obligations hereunder are joint and several, and independent
of the obligations of Borrowers, and a separate action or actions may be brought
and prosecuted against Guarantors whether action is brought against Borrowers or
whether Borrowers be joined in any such action or actions; and Guarantors waive
the benefit of any statute of limitations affecting their liability hereunder.
(5) Guarantors authorize Bank, without notice or demand and without
affecting their liability hereunder, from time to time, either before or after
revocation hereof, to (a) renew, compromise, extend, accelerate or otherwise
change the time for payment of, or otherwise change the terms of the
indebtedness or any part thereof, including increase or decrease of the
<PAGE>
rate of interest thereon; (b) receive and hold security for the payment of this
Guaranty or any of the indebtedness, and exchange, enforce, waive, release, fail
to perfect, sell, or otherwise dispose of any such security; (c) apply such
security and direct the order or manner of sale thereof as Bank in its
discretion may determine; and (d) release or substitute any one or more of the
endorsers or guarantors.
(6) Guarantors waive any right to require Bank to (a) proceed against
Borrowers; (b) proceed against or exhaust any security held from Borrowers; or
(c) pursue any other remedy in Bank's power whatsoever. Guarantors waive any
defense arising by reason of any disability or other defense of Borrowers, or
the cessation from any cause whatsoever of the liability of Borrowers, or any
claim that Guarantors' obligations exceed or are more burdensome than those of
Borrowers. Until the indebtedness shall have been paid in full, even though the
indebtedness is in excess of Guarantors' liability hereunder, Guarantors waive
any right of subrogation, reimbursement, indemnification, and contribution
(contractual, statutory or otherwise), including without limitation, any claim
or right of subrogation under the Bankruptcy Code (Title 11 of the U.S. Code) or
any successor statute, arising from the existence or performance of this
Guaranty and Guarantors waive any right to enforce any remedy which Bank now has
or may hereafter have against Borrowers, and waive any benefit of, and any right
to participate in, any security now or hereafter held by Bank. Guarantors waive
all presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
Guaranty and of the existence, creation, or incurring of new or additional
indebtedness.
(7) (a) Guarantors understand and acknowledge that if Bank
forecloses, either by judicial foreclosure or by exercise of power of sale, any
deed of trust securing the indebtedness, that foreclosure could impair or
destroy any ability that Guarantors may have to seek reimbursement,
contribution, or indemnification from Borrowers or others based on any right
Guarantors may have of subrogation, reimbursement, contribution, or
indemnification for any amounts paid by Guarantors under this Guaranty.
Guarantors further understand and acknowledge that in the absence of this
paragraph, such potential impairment or destruction of Guarantors' rights, if
any, may entitle Guarantors to assert a defense to this Guaranty based on
Section 580d of the California Code of Civil Procedure as interpreted in Union
-----
Bank v. Gradsky, 265 Cal. App. 2d 40 (1968). By executing this Guaranty,
---------------
Guarantors freely, irrevocably, and unconditionally: (i) waive and relinquish
that defense and agree that Guarantors will be fully liable under this Guaranty
even though Bank may foreclose, either by judicial foreclosure or by exercise of
power of sale, any deed of trust securing the indebtedness; (ii) agree that
Guarantors will not assert that defense in any action or proceeding which Bank
may commence to enforce this Guaranty; (iii) acknowledged and agree that the
rights and defenses waived by Guarantors in this Guaranty include any right or
defense that Guarantors may have or be entitled to assert based upon or arising
out of any one or more of Sections 580a, 580b, 580d or 726 of the California
Code of Civil Procedure or Section 2848 of the California Civil Code; and (iv)
acknowledge and agree that Bank is relying on this waiver in creating the
2.
<PAGE>
indebtedness, and that this waiver is a material part of the consideration which
Bank is receiving for creating the indebtedness.
(b) Guarantors waive any rights and defenses available to Guarantors
by reason of Sections 2787 to 2855, inclusive, of the California Civil Code
including, without limitation, (1) any defenses Guarantors may have to their
obligations under this Guaranty by reason of an election of remedies by Bank and
(2) any rights or defenses Guarantors may have by reason of protection afforded
to Borrowers with respect to any of the indebtedness pursuant to the
antideficiency or other laws of California limiting or discharging any of the
indebtedness, including, without limitation, Sections 580a, 580b, 580d or 726 of
the California Code of Civil Procedure.
(c) Guarantors waive all rights and defenses arising out of an
election of remedies by Bank, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantors' rights of subrogation and reimbursement against
Borrowers by the operation of Section 580d of the California Code of Civil
Procedure or otherwise.
(d) No provision or waiver in this Guaranty shall be construed as
limiting the generality of any other waiver contained in this Guaranty.
(8) Guarantors acknowledge and agree that they shall have the sole
responsibility for obtaining from Borrowers such information concerning
Borrowers' financial conditions or business operations as Guarantors may
require, and that Bank has no duty at any time to disclose to Guarantors any
information relating to the business operations or financial conditions of
Borrowers.
(9) Any obligations of Borrowers to Guarantors, now or hereafter
existing, including but not limited to any obligations to Guarantors as
subrogees of Bank or resulting from Guarantors' performance under this Guaranty,
are hereby subordinated to the indebtedness. Such obligations of Borrowers to
Guarantors if Bank so requests shall be enforced and performance received by
Guarantors as trustees for Bank and the proceeds thereof shall be paid over to
Bank on account of the indebtedness, but without reducing or affecting in any
manner the liability of Guarantors under the provisions of this Guaranty.
(10) This Guaranty may be revoked at any time by Guarantors in respect
to future transactions, unless there is a continuing consideration as to such
transactions which Guarantors do not renounce. Such revocation shall be
effective upon actual receipt by Bank at the address shown below of written
notice of revocation. Revocation shall not affect any of Guarantors'
obligations or Bank's rights with respect to transactions which precede Bank's
receipt of such notice, regardless of whether or not the indebtedness related to
such transactions, before or after revocation, has been renewed, compromised,
extended, accelerated, or otherwise changed as to any of its terms, including
time for payment or increase or decrease of the rate of interest
3.
<PAGE>
thereon, and regardless of any other act or omission of Bank authorized
hereunder. Revocation by any one or more of Guarantors shall not affect any
obligations of any nonrevoking Guarantors. If this Guaranty is revoked,
returned, or canceled, and subsequently any payment or transfer of any interest
in property by Borrowers to Bank is rescinded or must be returned by Bank to
Borrowers, this Guaranty shall be reinstated with respect to any such payment or
transfer, regardless of any such prior revocation, return, or cancellation.
(11) Where any one or more of Borrowers are corporations or
partnerships it is not necessary for Bank to inquire into the powers of
Borrowers or of the officers, directors, partners or agents acting or purporting
to act on their behalf, and any indebtedness made or created in reliance upon
the professed exercise of such powers shall be guaranteed hereunder.
(12) Bank may, without notice to Guarantors and without affecting
Guarantors' obligations hereunder, assign the indebtedness and this Guaranty, in
whole or in part. Guarantors agree that Bank may disclose to any assignee or
purchaser or any prospective assignee or purchaser, of all or part of the
indebtedness any and all information in Bank's possession concerning Guarantors,
this Guaranty, and any security for this Guaranty.
(13) Guarantors agree to pay all reasonable attorneys' fees, including
allocated costs of Bank's in-house counsel, and all other costs and expenses
which may be incurred by Bank in the enforcement of this Guaranty.
(14) Any married person who signs this Guaranty hereby expressly
agrees that recourse may be had against such person's separate property for all
obligations under this Guaranty.
(15) Where there is but a single Borrower, or where a single Guarantor
executes this Guaranty, then all words used herein in the plural shall be deemed
to have been used in the singular where the context and construction so require;
and when there is more than one Borrower named herein, or when this Guaranty is
executed by more than one Guarantor, the words "Borrowers" and "Guarantors"
respectively shall mean all and any one or more of them.
(16) This Guaranty shall be governed by and construed according to the
laws of the State of California, to the jurisdiction of which the parties hereto
submit.
(17) (a) Any controversy or claim between or among the parties,
including but not limited to those arising out of or relating to this Guaranty
or any agreements or instruments relating hereto or delivered in connection
herewith and any claim based on or arising from an alleged tort, shall at the
request of any party be determined by arbitration. The arbitration shall be
conducted in accordance with the United States Arbitration Act (Title 9, U.S.
Code), notwithstanding any choice of law provision in this Guaranty, and under
the Commercial Rules of the American Arbitration Association ("AAA"). The
arbitrator(s) shall give effect to statutes of limitation in determining any
claim. Any controversy concerning whether an issue is arbitrable shall be
determined by the arbitrator(s). Judgment upon the arbitration award may
4.
<PAGE>
be entered in any court having jurisdiction. The institution and maintenance of
an action for judicial relief or pursuit of a provisional or ancillary remedy
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the controversy or claim to arbitration if any other party
contests such action for judicial relief.
(b) Notwithstanding the provisions of subparagraph (a), no
controversy or claim shall be submitted to arbitration without the consent of
all parties if, at the time of the proposed submission, such controversy or
claim arises from or relates to an obligation to Bank which is secured by real
property collateral located in California. If all parties do not consent to
submission of such a controversy or claim to arbitration, the controversy or
claim shall be determined as provided in subparagraph (c).
(c) A controversy or claim which is not submitted to arbitration as
provided and limited in subparagraphs (a) and (b) shall, at the request of any
party, be determined by a reference in accordance with California Code of Civil
Procedure Section 638 et seq. If such an election is made, the parties shall
------
designate to the court a referee or referees selected under the auspices of the
AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings.
The presiding referee of the panel, or the referee if there is a single referee,
shall be an active attorney or retired judge. Judgment upon the award rendered
by such referee or referees shall be entered in the court in which such
proceeding was commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.
(d) No provision of this paragraph shall limit the right of any
party to this Guaranty to exercise self-help remedies such as setoff, to
foreclose against or sell any real or personal property collateral or security,
or to obtain provisional or ancillary remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration or other
proceeding. The exercise of a remedy does not waive the right of either party to
resort to arbitration or reference. At Bank's option, foreclosure under a deed
of trust or mortgage may be accomplished either by exercise of power of sale
under the deed of trust or mortgage or by judicial foreclosure.
5.
<PAGE>
Executed this August 8, 1995
Witnessed ORCHARD SUPPLY HARDWARE STORES
CORPORATION
/s/ John Plecque /s/ Stephen M. Hilberg
------------------------ ------------------------------------------------
Witness By: Stephen M. Hilberg, Vice President-Finance and
Chief Financial Officer
101 Park Center Plaza
San Jose, CA 95113 /s/ Michael Seda
--------------------- ------------------------------------------------
Address By: Michael Seda, Controller and Secretary
6450 Via Del Oro
/s/ John Plecque San Jose, California 95119
------------------------
Witness
101 Park Center Plaza
San Jose, CA 95113
---------------------
Address
Address for notices to Bank:
BANK OF AMERICA N.T. & S.A.
San Jose Commercial Banking Office #01487
101 Park Center Plaza
P.O. Box 910
San Jose, California 95115
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-START> JAN-30-1995
<PERIOD-END> JUL-30-1995
<CASH> 22,033
<SECURITIES> 0
<RECEIVABLES> 18,759
<ALLOWANCES> 1,367
<INVENTORY> 97,363
<CURRENT-ASSETS> 150,438
<PP&E> 165,648
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<TOTAL-ASSETS> 299,914
<CURRENT-LIABILITIES> 74,447
<BONDS> 133,655
<COMMON> 70
0
8
<OTHER-SE> 90,436
<TOTAL-LIABILITY-AND-EQUITY> 299,914
<SALES> 270,817
<TOTAL-REVENUES> 270,817
<CGS> 172,850
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