U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to _________________
Commission file number: 000-22600
EMPLOYEE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0676898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6225 North 24th Street, Phoenix, Arizona 85016
(Address of principal executive offices)
Issuer's telephone number: (602) 955-5556
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: Name of each exchange on which registered:
- -------------------- ------------------------------------------
None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
No Par Value Common Stock
Rights to Purchase Shares of Series A Junior Participating Preferred Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 34,024,794 Common shares, no par value
were outstanding as of November 11, 1999.
<PAGE>
EMPLOYEE SOLUTIONS, INC.
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1999
INDEX
Page
PART I. Financial Information Number
------
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the
Quarters and Nine Months Ended September 30, 1999
and 1998 3
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1999 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosure about Market Risk 33
PART II. Other Information
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 5. Other Matters 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands of dollars, except share data) 1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,670 $ 39,287
Investments and marketable securities 2,571 9,997
Restricted cash and investments 1,000 1,088
Accounts receivable, net 51,474 38,742
Receivables from insurance companies 5,899 6,704
Prepaid expenses and deposits 4,893 2,303
Income taxes receivable -- 5,040
Deferred income taxes 1,012 811
--------- ---------
Total current assets 79,519 103,972
Property and equipment, net 3,953 4,543
Deferred income taxes 68 60
Goodwill and other assets, net 73,395 66,530
--------- ---------
Total assets $ 156,935 $ 175,105
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ -- $ 13,727
Accrued salaries, wages and payroll taxes 30,956 28,719
Accounts payable 6,249 5,898
Accrued workers' compensation and health insurance 9,542 9,617
Income taxes payable 240 751
Other accrued expenses 13,110 13,595
--------- ---------
Total current liabilities 60,097 72,307
--------- ---------
Deferred income taxes 1,080 871
--------- ---------
Long-term debt 85,000 85,000
--------- ---------
Other long-term liabilities 3,801 1,211
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock, nonvoting,
no par value, 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, no par value, 75,000,000 shares
authorized, 34,024,794 shares issued and
outstanding September 30, 1999, and 32,419,595
shares issued and outstanding December 31, 1998 36,513 35,800
Common stock to be issued 851 --
Accumulated deficit (30,406) (20,085)
Cumulative unrealized net gain on investment
securities (1) 1
--------- ---------
Total stockholders' equity 6,957 15,716
--------- ---------
Total liabilities and stockholders' equity $ 156,935 $ 175,105
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
(In thousands of dollars, ---------------------------- ----------------------------
except share and per share data) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 222,418 $ 231,636 $ 627,415 $ 706,965
------------ ------------ ------------ ------------
Cost of revenues:
Salaries and wages of worksite employees 188,702 193,768 526,970 587,509
Healthcare and workers' compensation 11,490 13,961 33,307 43,867
Payroll and employment taxes 12,944 14,937 41,546 48,682
------------ ------------ ------------ ------------
Cost of revenues 213,136 222,666 601,823 680,058
------------ ------------ ------------ ------------
Gross profit 9,282 8,970 25,592 26,907
Selling, general and administrative expenses 8,821 12,608 25,205 32,719
Depreciation and amortization 1,916 1,756 5,256 4,586
------------ ------------ ------------ ------------
Loss from operations (1,455) (5,394) (4,869) (10,398)
Other income (expense):
Interest income 170 386 937 1,532
Interest expense (2,139) (2,163) (6,426) (6,435)
Other 1 3 37 8
------------ ------------ ------------ ------------
Loss before provision for income taxes (3,423) (7,168) (10,321) (15,293)
Income tax benefit -- -- -- (1,498)
------------ ------------ ------------ ------------
Net loss $ (3,423) $ (7,168) $ (10,321) $ (13,795)
============ ============ ============ ============
Net loss per common and
common equivalent share:
Basic $ (.10) $ (.23) $ (.31) $ (.43)
Diluted $ (.10) $ (.23) $ (.31) $ (.43)
Weighted average number of common and
common equivalent shares outstanding:
Basic 34,534,260 31,792,787 33,415,237 31,753,815
============ ============ ============ ============
Diluted 34,534,260 31,792,787 33,415,237 31,753,815
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Unrealized Total
(In thousands of dollars, Common Stock To Accumulated Net Gain on Stockholders' Comprehensive
except share data) Stock Be Issued Deficit Investments Equity Loss
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 $ 35,800 $ -- $(20,085) $ 1 $ 15,716 $ --
Issuance of 1,668 shares of common
stock in connection with exercise of
common stock options 3 -- -- -- 3 --
Issuance of 895,020 shares of common
stock in connection with settlement of
litigation 710 -- -- -- 710 --
To be issued 851,149 shares of common
stock in connection with settlement of
shareholder litigation -- 851 -- -- 851 --
Change in unrealized net gains,
net of applicable taxes -- -- -- (2) (2) (2)
Net loss -- -- (10,321) -- (10,321) (10,321)
-------- -------- -------- -------- -------- --------
COMPREHENSIVE LOSS $(10,323)
========
BALANCE, SEPTEMBER 30, 1999 $ 36,513 $ 851 $(30,406) $ (1) $ 6,957
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
---------------------
(In thousands of dollars) 1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 614,683 $ 723,555
Cash paid to suppliers and employees (629,913) (724,995)
Cash paid in loss portfolio transfer -- (19,950)
Interest received 937 1,532
Interest paid (4,264) (4,163)
Income taxes paid, net 4,529 1,831
--------- ---------
Net cash used in operating activities (14,028) (22,190)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (381) (2,405)
Business acquisitions (5,895) (900)
Change in investments and marketable securities 7,426 (19,416)
Cash released from restricted cash and investments 88 19,000
Disbursements for deferred costs (103) (633)
--------- ---------
Net cash provided by (used in) investing activities 1,135 (4,354)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred loan costs -- (221)
Proceeds from issuance of common stock 3 199
Decrease in bank overdraft and other (13,727) 2,420
--------- ---------
Net cash (used in) provided by financing activities (13,724) 2,398
--------- ---------
Net decrease in cash and cash equivalents (26,617) (24,146)
CASH AND CASH EQUIVALENTS, beginning of period 39,287 40,110
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 12,670 $ 15,964
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Nine months ended
September 30,
--------------------
1999 1998
-------- --------
RECONCILIATION OF LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net loss $(10,321) $(13,795)
-------- --------
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization 5,256 4,586
Loss on sale of fixed assets -- --
(Increase) decrease in accounts receivable, net (12,732) 16,590
Decrease (increase) in insurance company receivables 805 (654)
Increase in prepaid expenses and deposits (2,590) (1,094)
Increase in deferred income taxes, net -- (627)
(Increase) decrease in other assets (2,479) 161
Increase (decrease) in accrued salaries,
wages and payroll taxes 2,237 (15,439)
Decrease in accrued workers'
compensation and health insurance (75) (16,434)
Increase in accounts payable, other accrued expenses
and other long term liabilities 1,342 5,476
Change in income taxes payable/receivable 4,529 (960)
-------- --------
(3,707) (8,395)
-------- --------
Net cash used in operating activities $(14,028) $(22,190)
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF CORPORATION
Employee Solutions, Inc. (together with its subsidiaries, "ESI" or the
"Company") is a leading professional employer organization (PEO) providing
employers throughout the United States with comprehensive employee payroll,
human resources and benefits outsourcing services. The Company's integrated
outsourcing services include payroll processing and reporting, human resources
administration, employment regulatory compliance management, risk
management/workers' compensation services, retirement and health care programs,
and other products and services provided directly to worksite employees. At
September 30, 1999, ESI serviced approximately 2,015 client companies with
approximately 37,300 worksite employees in 47 states.
The Company conducts its business on a national scale across many industries and
is not concentrated to any material extent within a single local market or
industry, although the transportation industry, at approximately 27%, represents
the largest concentration of clients.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. In the opinion of management the consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary in order to make the consolidated financial statements
not misleading. Results of operations for the quarter and nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the activities of Employee
Solutions, Inc. and its wholly owned subsidiaries from their respective
acquisition dates. All acquisitions were accounted for as purchases. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. The
nature of the Company's business requires significant estimates to be made in
the areas of workers' compensation and revenue recognized for retrospectively
rated insurance policies. The actual results of these estimates may be unknown
for a period of years. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND INVESTMENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash and highly liquid investments with
original maturities of three months or less when purchased. All cash equivalents
are invested in high quality investment grade instruments, such as commercial
paper, at September 30, 1999 and December 31, 1998, and are stated at fair
market value. Substantially all cash and cash equivalents, including restricted
cash and investments, are not insured at September 30, 1999.
RESTRICTED CASH AND INVESTMENTS
At September 30, 1999, restricted cash was $1.0 million, which represents a
short-term certificate of deposit held for securing a letter of credit.
7
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
INVESTMENTS AND MARKETABLE SECURITIES
At September 30, 1999, the Company maintained approximately $8.4 million of
investments in its cash and cash equivalents and investments and marketable
securities accounts. These securities are considered available-for-sale and,
accordingly, are recorded at market value. Securities with original maturities
of 90 days or less consisted of commercial paper, money market and mutual funds
that had an estimated fair value of $5.8 million at September 30, 1999.
Securities with original maturities greater than 90 days consisted of $985,000
in commercial paper, $1.5 million in corporate bonds and $100,000 in
certificates of deposit and had an estimated fair value of $2.6 million at
September 30, 1999.
BANK OVERDRAFT
Bank overdraft represents outstanding checks in excess of cash on hand at the
applicable bank, and generally result from timing differences in the transfer of
funds between banks. Historically, these checks are covered when presented for
payment through the transfer of funds from other Company cash accounts held in
other banks.
CREDIT RISK
The Company conducts only a limited credit investigation prior to accepting most
new clients and thus may encounter collection problems which could adversely
affect its cash flow. The nature of the Company's business is such that a small
number of client credit failures could have an adverse effect on its business
and financial condition.
8
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The computation of adjusted net loss and weighted average common and common
equivalent shares used in the calculation of net loss per common share is as
follows:
<TABLE>
<CAPTION>
Quarter ended September 30,
------------------------------------------------------------
1999 1998
(In thousands of dollars, ---------------------------- ----------------------------
except share and per share data) Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average of
common shares outstanding 34,534,260 34,534,260 31,792,787 31,792,787
Dilutive effect of options
and warrants outstanding -- -- -- --
------------ ------------ ------------ ------------
Weighted average of
common and common
equivalent shares 34,534,260 34,534,260 31,792,787 31,792,787
============ ============ ============ ============
Net loss $ (3,423) $ (3,423) $ (7,168) $ (7,168)
Adjustments to net loss -- -- -- --
------------ ------------ ------------ ------------
Adjusted net loss for
purposes of the income per
common share calculation $ (3,423) $ (3,423) $ (7,168) $ (7,168)
============ ============ ============ ============
Net loss per common and
common equivalent share $ (.10) $ (.10) $ (0.23) $ (0.23)
============ ============ ============ ============
</TABLE>
9
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------------------------------
1999 1998
(In thousands of dollars, ---------------------------- ----------------------------
except share and per share data) Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average of
common shares outstanding 33,415,237 33,415,237 31,753,815 31,753,815
Dilutive effect of options
and warrants outstanding -- -- -- --
------------ ------------ ------------ ------------
Weighted average of
common and common
equivalent shares 33,415,237 33,415,237 31,753,815 31,753,815
============ ============ ============ ============
Net loss $ (10,321) $ (10,321) $ (13,795) $ (13,795)
Adjustments to net loss -- -- -- --
------------ ------------ ------------ ------------
Adjusted net loss for
purposes of the income per
common share calculation $ (10,321) $ (10,321) $ (13,795) $ (13,795)
============ ============ ============ ============
Net loss per common and
common equivalent share $ (.31) $ (.31) $ (0.43) $ (0.43)
============ ============ ============ ============
</TABLE>
The calculation of weighted average common and common equivalent shares for
purposes of calculating the September 30, 1999 diluted earnings per share,
excludes approximately 3,307,174 weighted average shares of options, warrants,
and contingently issuable shares computed under the treasury stock method, as
their effects would be anti-dilutive.
(2) LONG-TERM DEBT:
NOTE OFFERING
On October 21, 1997, the Company issued $85 million of 10% Senior Notes due 2004
(the Notes) in an Offering (the Offering) exempt from registration under the
Securities Act of 1933 as amended (Securities Act). Interest under the Notes is
payable semi-annually commencing April 15, 1998, and the Notes are not callable
until October 2001 subject to the terms of the Indenture under which the Notes
were issued. In April 1998, the Company completed an exchange offer for these
notes which was registered under the Securities Act. The Notes contain certain
covenants which, among other things, limit the Company's ability to incur any
future indebtedness.
The Notes are general unsecured obligations of the Company and are
unconditionally guaranteed on a joint and several basis by certain of the
Company's wholly-owned current and future subsidiaries. The Company's
wholly-owned insurance subsidiary, which is a non-guarantor subsidiary, is
subject to certain statutory and contractual restrictions which limit its
ability to pay dividends or make loans to the Company or other subsidiaries. The
financial statements presented below include the separate or combined financial
position as of September 30, 1999 and December 31, 1998; the results of
operations for the quarters and nine months ended September 30, 1999 and
September 30, 1998 and the statements of cash flows for the nine months ended
September 30, 1999 and September 30, 1998, of Employee Solutions, Inc. (Parent),
the guarantor subsidiaries (Guarantors) and the subsidiaries which are not
guarantors (Non-guarantors).
10
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,956 $ 4,442 $ 4,272 $ -- $ 12,670
Investments and marketable securities 2,571 -- -- -- 2,571
Restricted cash and investments 1,000 -- -- -- 1,000
Accounts receivable, net 18,855 31,510 1,109 -- 51,474
Receivables from insurance companies -- -- 5,899 -- 5,899
Prepaid expenses and deposits 4,748 137 8 -- 4,893
Income taxes receivable -- -- -- -- --
Deferred income taxes 1,012 -- -- -- 1,012
Due from affiliates 8,052 2,643 (6,921) (3,774) --
--------- --------- --------- --------- ---------
Total current assets 40,194 38,732 4,367 (3,774) 79,519
Property and equipment, net 3,699 244 10 -- 3,953
Deferred income taxes 68 -- -- -- 68
Goodwill and other assets, net 42,032 31,105 258 -- 73,395
Investment in subsidiaries 44,302 -- -- (44,302) --
--------- --------- --------- --------- ---------
Total assets $ 130,295 $ 70,081 $ 4,635 $ (48,076) $ 156,935
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $ -- $ -- $ -- $ -- $ --
Accrued salaries, wages and payroll taxes 10,212 19,924 820 -- 30,956
Accounts payable 970 1,300 3,979 -- 6,249
Accrued workers' compensation
and healthcare 100 1,643 7,799 -- 9,542
Income taxes payable 242 (2) -- -- 240
Other accrued expenses 9,876 943 2,291 -- 13,110
Due to affiliates 13,268 12,565 (22,059) (3,774) --
--------- --------- --------- --------- ---------
Total current liabilities 34,668 36,373 (7,170) (3,774) 60,097
--------- --------- --------- --------- ---------
Deferred income taxes 1,080 -- -- -- 1,080
--------- --------- --------- --------- ---------
Long-term debt 85,000 -- -- -- 85,000
--------- --------- --------- --------- ---------
Other long-term liabilities 2,590 1,211 -- -- 3,801
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -- -- -- -- --
Common stock, no par value 36,513 2,622 771 (3,393) 36,513
Common stock to be issued 851 -- -- -- 851
Additional paid in capital -- 26,343 50 (26,393) --
(Accumulated deficit) retained earnings (30,406) 3,532 10,984 (14,516) (30,406)
Unrealized net gain on
investment securities (1) -- -- -- (1)
--------- --------- --------- --------- ---------
Total stockholders' equity 6,957 32,497 11,805 (44,302) 6,957
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 130,295 $ 70,081 $ 4,635 $ (48,076) $ 156,935
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,176 $ 24,503 $ 6,608 $ -- $ 39,287
Investments and marketable securities 9,997 -- -- -- 9,997
Restricted cash and
investments 1,088 -- -- -- 1,088
Accounts receivable, net 15,460 22,495 787 -- 38,742
Receivable from insurance
companies -- -- 6,704 -- 6,704
Prepaid expenses and deposits 1,532 753 18 -- 2,303
Income taxes receivable 5,040 -- -- -- 5,040
Deferred income taxes 811 -- -- -- 811
Due from affiliates 7,789 2,711 (6,726) (3,774) --
--------- --------- --------- --------- ---------
Total current assets 49,893 50,462 7,391 (3,774) 103,972
Property and equipment, net 4,213 314 16 -- 4,543
Deferred income taxes 60 -- -- -- 60
Goodwill and other assets, net 34,044 32,208 278 -- 66,530
Investment in subsidiaries 36,005 -- -- (36,005) --
--------- --------- --------- --------- ---------
Total assets $ 124,215 $ 82,984 $ 7,685 $ (39,779) $ 175,105
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 308 $ 13,419 $ -- $ -- $ 13,727
Accrued salaries, wages and
payroll taxes 5,932 22,167 620 -- 28,719
Accounts payable 1,584 1,051 3,263 -- 5,898
Accrued workers' compensation
and health insurance 3,141 618 5,858 -- 9,617
Income taxes payable 751 -- -- -- 751
Other accrued expenses 9,123 2,316 2,156 -- 13,595
Due to affiliates 1,789 16,030 (14,045) (3,774) --
--------- --------- --------- --------- ---------
Total current liabilities 22,628 55,601 (2,148) (3,774) 72,307
--------- --------- --------- --------- ---------
Deferred income taxes 871 -- -- -- 871
--------- --------- --------- --------- ---------
Long-term debt 85,000 -- -- -- 85,000
--------- --------- --------- --------- ---------
Other long-term liabilities -- 1,211 -- -- 1,211
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -- -- -- -- --
Common stock, no par value 35,800 2,622 771 (3,393) 35,800
Additional paid in capital -- 26,342 50 (26,392) --
(Accumulated deficit) retained earnings (20,085) (2,792) 9,012 (6,220) (20,085)
Unrealized net gain on
investments 1 -- -- -- 1
--------- --------- --------- --------- ---------
Total stockholders' equity 15,716 26,172 9,833 (36,005) 15,716
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 124,215 $ 82,984 $ 7,685 $ (39,779) $ 175,105
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1999
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 56,059 $ 160,990 $ 5,369 $ -- $ 222,418
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 47,450 136,605 4,647 -- 188,702
Healthcare and workers'
compensation 1,554 9,771 165 -- 11,490
Payroll and employment taxes 3,677 8,882 385 -- 12,944
--------- --------- --------- --------- ---------
Cost of revenues 52,681 155,258 5,197 -- 213,136
--------- --------- --------- --------- ---------
Gross profit 3,378 5,732 172 -- 9,282
Selling, general and
administrative expenses 5,950 2,838 33 -- 8,821
Intercompany selling, general
and administrative expense -- -- -- -- --
Depreciation and amortization 1,516 393 7 -- 1,916
--------- --------- --------- --------- ---------
Income (loss) from operations (4,088) 2,501 132 -- (1,455)
Other income (expense):
Interest income 72 65 33 -- 170
Interest expense and other (2,136) (2) -- -- (2,138)
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (6,152) 2,564 165 -- (3,423)
Income tax provision (benefit) -- -- -- -- --
--------- --------- --------- --------- ---------
(6,152) 2,564 165 -- (3,423)
Income from wholly-owned
subsidiaries 2,729 -- -- (2,729) --
--------- --------- --------- --------- ---------
Net income (loss) $ (3,423) $ 2,564 $ 165 $ (2,729) $ (3,423)
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1998
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 65,197 $ 157,531 $ 9,149 $ (241) $ 231,636
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 54,916 131,456 7,396 -- 193,768
Healthcare and workers'
compensation 1,254 11,013 1,694 -- 13,961
Payroll and employment taxes 4,823 9,523 591 -- 14,937
--------- --------- --------- --------- ---------
Cost of revenues 60,993 151,992 9,681 -- 222,666
--------- --------- --------- --------- ---------
Gross profit 4,204 5,539 (532) (241) 8,970
Selling, general and
administrative expenses 8,444 3,414 750 -- 12,608
Intercompany selling, general
and administrative expense 214 (1) 28 (241) --
Depreciation and amortization 1,343 406 7 -- 1,756
--------- --------- --------- --------- ---------
Income (loss) from operations (5,797) 1,720 (1,317) -- (5,394)
Other income (expense):
Interest income 289 86 11 -- 386
Interest expense and other (2,239) 4 75 -- (2,160)
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (7,747) 1,810 (1,231) -- (7,168)
Income tax provision (benefit) 776 (258) (518) -- --
--------- --------- --------- --------- ---------
(8,523) 2,068 (713) -- (7,168)
Income from wholly-owned
subsidiaries 1,355 -- -- (1,355) --
--------- --------- --------- --------- ---------
Net income (loss) $ (7,168) $ 2,068 $ (713) $ (1,355) $ (7,168)
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 163,260 $ 445,716 $ 18,439 $ -- $ 627,415
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 138,650 372,868 15,452 -- 526,970
Healthcare and workers'
compensation 4,939 28,543 (175) -- 33,307
Payroll and employment taxes 10,784 29,366 1,396 -- 41,546
--------- --------- --------- --------- ---------
Cost of revenues 154,373 430,777 16,673 -- 601,823
--------- --------- --------- --------- ---------
Gross profit 8,887 14,939 1,766 -- 25,592
Selling, general and
administrative expenses 17,543 7,548 114 -- 25,205
Intercompany selling, general
and administrative expense -- -- -- -- --
Depreciation and amortization 4,039 1,195 22 -- 5,256
--------- --------- --------- --------- ---------
Income (loss) from operations (12,695) 6,196 1,630 -- (4,869)
Other income (expense):
Interest income 491 104 342 -- 937
Interest expense and other (6,413) 24 -- -- (6,389)
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (18,617) 6,324 1,972 -- (10,321)
Income tax provision (benefit) -- -- -- -- --
--------- --------- --------- --------- ---------
(18,617) 6,324 1,972 -- (10,321)
Income from wholly-owned
subsidiaries 8,296 -- -- (8,296) --
--------- --------- --------- --------- ---------
Net income (loss) $ (10,321) $ 6,324 $ 1,972 $ (8,296) $ (10,321)
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 217,627 $ 463,259 $ 27,693 $ (1,614) $ 706,965
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 180,906 383,371 23,232 -- 587,509
Healthcare and workers'
compensation 9,240 32,421 2,206 -- 43,867
Payroll and employment taxes 16,795 29,796 2,091 -- 48,682
--------- --------- --------- --------- ---------
Cost of revenues 206,941 445,588 27,529 -- 680,058
--------- --------- --------- --------- ---------
Gross profit 10,686 17,671 164 (1,614) 26,907
Selling, general and
administrative expenses 22,893 8,966 860 -- 32,719
Intercompany selling, general
and administrative expense 704 820 90 (1,614) --
Depreciation and amortization 3,384 1,182 20 -- 4,586
--------- --------- --------- --------- ---------
Income (loss) from operations (16,295) 6,703 (806) -- (10,398)
Other income (expense):
Interest income 866 129 537 -- 1,532
Interest expense and other (6,656) 3 226 -- (6,427)
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (22,085) 6,835 (43) -- (15,293)
Income tax provision (benefit) (2,003) 669 (164) -- (1,498)
--------- --------- --------- --------- ---------
(20,082) 6,166 121 -- (13,795)
Income from wholly-owned
subsidiaries 6,287 -- -- (6,287) --
--------- --------- --------- --------- ---------
Net income (loss) $ (13,795) $ 6,166 $ 121 $ (6,287) $ (13,795)
========= ========= ========= ========= =========
</TABLE>
16
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
NET CASH USED IN
OPERATING ACTIVITIES:
Net income (loss) $ (10,321) $ 6,324 $ 1,972 $ (8,296) $ (10,321)
--------- --------- --------- --------- ---------
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
USED IN
OPERATING ACTIVITIES:
Depreciation and amortization 4,039 1,195 22 -- 5,256
Decrease in accounts receivable, net (3,395) (9,015) (322) -- (12,732)
Decrease in insurance
company receivable -- -- 805 -- 805
(Increase) decrease in prepaid
expenses and deposits (3,216) 616 10 -- (2,590)
Increase in deferred income taxes, net -- -- -- -- --
(Increase) decrease in other assets (2,490) 7 4 -- (2,479)
Increase (decrease) from inter-
company transactions 2,919 (3,395) (7,820) 8,296 --
Increase (decrease) in accrued salaries,
wages, and payroll taxes 4,280 (2,243) 200 -- 2,237
Increase (decrease) in accrued workers'
compensation and health insurance (3,041) 1,025 1,941 -- (75)
Change in income taxes payable/receivable 4,531 (2) -- -- 4,529
Increase (decrease) in accounts payable (614) 249 716 -- 351
(Decrease) increase in other accrued
expenses and long-term liabilities 2,229 (1,373) 135 -- 991
--------- --------- --------- --------- ---------
5,242 (12,936) (4,309) 8,296 (3,707)
--------- --------- --------- --------- ---------
Net cash used in
operating activities (5,079) (6,612) (2,337) -- (14,028)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (352) (30) 1 -- (381)
Business acquisitions (5,895) -- -- -- (5,895)
Change in investments
and marketable securities 7,426 -- -- -- 7,426
Cash released from restricted cash and
investments 88 -- -- -- 88
Disbursements for deferred costs (103) -- -- -- (103)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities 1,164 (30) 1 -- 1,135
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3 -- -- -- 3
Decrease in bank overdraft (308) (13,419) -- -- (13,727)
Payment of deferred
loan costs -- -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in
financing activities (305) (13,419) -- -- (13,724)
--------- --------- --------- --------- ---------
Net decrease in cash and cash
equivalents (4,220) (20,061) (2,336) -- (26,617)
CASH AND CASH EQUIVALENTS,
beginning of period 8,176 24,503 6,608 -- 39,287
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 3,956 $ 4,442 $ 4,272 $ -- $ 12,670
========= ========= ========= ========= =========
</TABLE>
17
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
--------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ (13,795) $ 6,166 $ 121 $ (6,287) $ (13,795)
--------- --------- --------- --------- ---------
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 3,384 1,182 20 -- 4,586
Decrease in accounts receivable, net 9,300 6,509 781 -- 16,590
Decrease (increase) in insurance
company receivable -- 5,430 (6,084) -- (654)
(Increase) decrease in prepaid
expenses and deposits (1,014) (290) 210 -- (1,094)
Increase in deferred income taxes, net (627) -- -- -- (627)
(Increase) decrease in other assets (2,370) 2,381 150 -- 161
Increase (decrease) from inter-
company transactions 19,032 (24,582) (737) 6,287 --
Decrease in accrued salaries,
wages, and payroll taxes (11,900) (2,844) (695) -- (15,439)
Increase (decrease) in accrued workers'
compensation and health insurance 98 (482) (16,050) -- (16,434)
Increase (decrease) in accounts payable 4,412 (2,064) 3,128 -- 5,476
Change in income taxes payable/receivable (960) -- -- -- (960)
--------- --------- --------- --------- ---------
19,355 (14,760) (19,277) 6,287 (8,395)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities 5,560 (8,594) (19,156) -- (22,190)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,203) (202) -- -- (2,405)
Business acquisitions (534) (344) (22) -- (900)
Deferred cost disbursements (633) -- -- -- (633)
Change in investments
and marketable securities (19,303) -- 18,887 -- (416)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities (22,673) (546) 18,865 -- (4,354)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 199 -- -- -- 199
Increase in bank overdraft -- 2,420 -- -- 2,420
Payment of deferred
loan costs (221) -- -- -- (221)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities (22) 2,420 -- -- 2,398
--------- --------- --------- --------- ---------
Net decrease in cash and cash
equivalents (17,135) (6,720) (291) -- (24,146)
CASH AND CASH EQUIVALENTS,
beginning of period 22,692 11,848 5,570 -- 40,110
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 5,557 $ 5,128 $ 5,279 $ -- $ 15,964
========= ========= ========= ========= =========
</TABLE>
18
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
(3) SEGMENT INFORMATION
The Company, in relation to SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information," has defined the following five reportable
segments: Core PEO services, Logistics Personnel Corp, TEAM Services,
Stand-Alone Workers' Compensation services and US Xpress.
The Company, through its Core PEO segment, provides a full-range of services and
products to its customers. Typically, ESI becomes the "employer of record" for
the client company's employees and provides payroll administration, workers'
compensation insurance and risk management administration, human resources
administration and benefits programs. Additionally, other products and services
are offered directly to worksite employees, such as employee payroll deduction
programs for disability and specialty health insurance, debit cards, prepaid
telephone cards and other personal financial services.
Formerly, the Company provided its Core PEO services to US Xpress, a large
transportation company. US Xpress was the Company's largest customer with
approximately 6,200 worksite employees. The Company terminated its subscriber
service agreement with US Xpress effective August 19, 1998.
Logistics Personnel Corp (LPC) provides specialized leasing of all types of
distribution personnel, including drivers, warehouse workers, mechanics,
dispatchers, forklift operators and administrators. A full range of services,
including employee recruiting, hiring and management; payroll administration;
claims and audit handling; workers' compensation insurance coverage; employee
benefits programs and tax reporting is provided to its customers.
TEAM Services specializes in leasing commercial talent (actors and actresses),
musicians and recording engineers to the music and advertising segments of the
entertainment industry. In addition, TEAM generates revenue from touring bands
with the entertainment industry.
The Company, formerly through its Stand-Alone Workers' Compensation segment,
provided its workers' compensation program to non-PEO customers on a stand-alone
basis. Based on a change in business strategy as of 1998, the Company will no
longer market new stand-alone policies. This change is the result of a
determination to emphasize other PEO marketing strategies and because of the
decreased profit opportunities resulting from increased price competition in the
overall workers' compensation market.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
19
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
Information concerning revenue, gross profit and assets by business segment was
as follows (in thousands):
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue
Core PEO $ 143,842 $ 145,955 $ 422,017 $ 411,024
US Xpress -- 25,128 -- 121,323
LPC 28,908 26,393 82,335 74,490
TEAM 49,668 33,470 123,063 97,860
Stand-Alone -- 690 -- 2,268
--------- --------- --------- ---------
Consolidated Total 222,418 231,636 627,415 706,965
--------- --------- --------- ---------
Gross Profit
Core PEO 6,254 6,163 17,380 19,280
US Xpress -- 133 -- (65)
LPC 2,098 2,854 6,282 7,261
TEAM 930 608 1,930 1,465
Stand-Alone -- (788) -- (1,034)
--------- --------- --------- ---------
Total 9,282 8,970 25,592 26,907
Selling, General
and Administrative Expense 8,821 12,608 25,205 32,719
Depreciation and Amortization 1,916 1,756 5,256 4,586
--------- --------- --------- ---------
Loss from Operations (1,455) (5,394) (4,869) (10,398)
--------- --------- --------- ---------
Other Income (expense)
Interest income 170 386 937 1,532
Interest expense (2,139) (2,163) (6,426) (6,435)
Other 1 3 37 8
--------- --------- --------- ---------
Loss before tax benefit (3,423) (7,168) (10,321) (15,293)
Income tax benefit -- -- -- (1,498)
--------- --------- --------- ---------
Net loss $ (3,423) $ (7,168) $ (10,321) $ (13,795)
========= ========= ========= =========
Depreciation and Amortization
Core PEO $ 1,644 $ 1,481 $ 4,422 $ 3,780
LPC 242 238 733 686
TEAM 30 36 101 117
Stand-Alone -- 1 -- 3
--------- --------- --------- ---------
Consolidated Total $ 1,916 $ 1,756 $ 5,256 $ 4,586
========= ========= ========= =========
September 30, December 30,
1999 1998
--------- ---------
Total assets
Core PEO $ 110,237 $ 94,540
LPC 34,902 35,192
TEAM 11,796 29,380
Stand-Alone -- 15,993
--------- ---------
Consolidated Total $ 156,935 $ 175,105
========= =========
20
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
(4) CONTINGENCIES:
The Company has received a letter from the Arizona Department of Economic
Security indicating that the Company has been assigned a higher state
unemployment tax rate for calendar year 1994 than the Company believes it is
entitled. In consultation with legal counsel the Company believes that based on
Arizona Revised Statutes it is entitled to the lower rate. If it was ultimately
determined that the higher rate applies, the Company would owe $500,000 (before
interest and the income tax effect) more than what is reflected in the Company's
financial statements. As of September 30, 1999, the compounded interest totaled
approximately $290,000.
The State of New York has asserted that the Company is a successor for state
unemployment insurance (SUI) purposes to certain entities from which the Company
acquired limited assets in connection with the Hazar acquisition effective
January 1996, and further asserted that the Company was subject to increased tax
rates during 1996 and 1997 as a result of its successor status. The Company has
settled the claim by agreeing to pay approximately $650,000, in increments of
$100,000 in September 1999, $100,000 in October 1999, and $25,000 per calendar
quarter commencing December 31, 1999 until the obligation, with interest, is
paid in full.
The State of Ohio has issued an assessment of $5.2 million (plus penalty)
relating to sales taxes potentially applicable to certain types of services.
While the Company believes that no tax ultimately will be payable based on the
preliminary assessment, there can be no assurance that this will be the case.
The State of Ohio issued a sales tax assessment in the amount of approximately
$16.5 million (including interest and penalties) in July 1999 against HDVT, Inc.
(the seller of certain assets acquired by the Company from Employers Trust in
February 1997) with respect to the operations of HDVT prior to the Company's
acquisition of certain assets of HDVT (then known as Employers Trust) in
February 1997. The State of Ohio concurrently issued an assessment in the same
amount against the Company as successor to HDVT. The Company believes that
meritorious defenses are available to the assessment. In addition, $6.0 million
of cash and 675,000 shares of the Company's Common Stock are being held in
escrow for payment of amounts, if any, ultimately determined to be due pursuant
to such assessment. If the Company is held to have liability pursuant to such
assessment, the escrowed assets prove insufficient to satisfy such liability,
and HDVT is unable to pay any such shortfall, the Company's maximum liability
with respect to the assessment is approximately $3.2 million.
The Company has been named as a defendant in an action filed by James E. Gorman
in Arizona Superior Court in August 1999 alleging breach of contract, fraud,
defamation and related matters in connection with the termination of Mr. Gorman
as the Company's president and chief executive officer in February 1999. The
complaint seeks contractual damages of approximately $588,000 plus unspecified
tort damages. The Company is contesting the claim vigorously.
International Color Services, L.L.C. filed for arbitration in December 1998
alleging breach of contract regarding fee issues under the PEO service agreement
between the parties. The Company has filed a complaint in Superior Court,
Maricopa County, Arizona in January 1999 seeking a declaratory judgment that the
dispute is not subject to arbitration. Plaintiff has filed a motion to compel
arbitration and a counterclaim seeking damages of over $400,000 plus attorneys
fees and costs and unspecified punitive damages. The Company is contesting the
claim vigorously.
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. These lawsuits are not expected to have a material
adverse effect on the Company's financial position or results of operations.
(5) SUBSEQUENT EVENTS:
The Company has entered into a loan and security agreement (the "Loan
Agreement") with Foothill Capital Corporation and Ableco Finance LLC (the
"Lenders") dated October 26, 1999 providing for a term loan of $10 million at an
interest rate of 13.5% and a revolving loan (based on eligible accounts
receivable) to a maximum of $10 million (including letters of credit drawn
thereunder) at an interest rate of prime plus 2%. The Company received the
proceeds of the term loan on October 29, 1999.
21
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere herein and in the Company's Report on Form 10-K for
the year ended December 31, 1998. Historical results are not necessarily
indicative of trends in operating results for any future period.
Except for the historical information contained herein, the discussion in this
Form 10-Q contains or may contain forward-looking statements (which include
statements in the future tense and statements using the terms "believe,"
"anticipate," "expect," "intend" or similar terms) that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this Management's Discussion
and Analysis (particularly in "Outlook: Issues and Risks") in addition to those
discussed in "Item 1 - Business" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Company's
Report on Form 10-K for the year ended December 31, 1998, as well as those
factors discussed elsewhere herein or in any document incorporated herein by
reference.
RESULTS OF OPERATIONS -- OVERVIEW
The following is a summary of certain factors which affect results of operations
and which have generally applied to the Company in all periods presented.
REVENUES
The most significant components of the Company's revenues are payments received
from customers for gross salaries and wages paid to PEO worksite employees and
the Company's service fee. The Company negotiates service fees on a
client-by-client basis based on factors such as market conditions, client needs
and services requested, the clients' workers' compensation and benefit plan
experience, Company administrative resources required, expected profit, and
other factors. These are generally expressed as a fixed percentage of the
client's gross salaries and wages except for certain costs, primarily employer's
healthcare contributions, which are billed to clients on an add-on basis.
Because the service fees are negotiated separately with each client and vary
according to circumstances, the Company's service fees, and therefore its gross
margin, will fluctuate based on the Company's client mix.
COSTS OF REVENUES
The Company's direct costs of revenues include salaries and wages paid to
worksite employees, employment related taxes, costs of health and welfare
benefit plans, and workers' compensation insurance costs.
The largest component of direct costs is salaries and wages to worksite
employees. Although this cost is generally directly passed through to clients,
the Company may be responsible for payment of these costs even if not reimbursed
by its clients.
Employment related taxes consist of the employer's portion of payroll taxes
required under FICA, which includes Social Security and Medicare, and federal
and state unemployment taxes. The federal tax rates are defined by the
appropriate federal regulations. State unemployment rates are subject to change
each year based on, among other matters, claims histories and vary from state to
state.
Workers' compensation liabilities are fully insured under a guaranteed cost
policy, subject to limited exceptions described below. Accordingly, workers'
compensation expense includes premiums paid to the Company's third party
insurance carriers for workers' compensation insurance. Workers' compensation
expense also includes the cost of a defined portfolio of stand-alone policies in
place at December 31, 1997 which expired at various dates during 1998 and as to
which the Company retains liability of $250,000 per occurrence plus certain
fees; and costs under the Company's self-insurance program in Ohio, with respect
to which the Company retains liability of $50,000 per occurrence.
22
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
Health care and other employee benefits costs consist of medical and dental
insurance premiums, payments of and reserves for claims subject to deductibles
and the costs of vision care, disability, life insurance and other similar
benefit plans. The Company's health care benefit plans consist of a mixture of
fully-insured programs and one self-insured program with a built-in maximum
coverage cap of $100,000 per person per year. The Company recognizes a liability
for self-insured health insurance claims at the time a claim is reported to the
Company by the third party claims administrator, and also provides for claims
incurred, but not reported based on industry-wide data and the Company's past
claims experience. The liability recorded may be more or less than the actual
amount of ultimate claims. While the Company believes that its reserves for
healthcare and workers' compensation claims are adequate for future claims
payments, there can be no assurance that this will be the case. See "Outlook:
Issues and Risks" herein.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's primary operating expenses are personnel expenses, other general
and administrative expenses, and sales and marketing expenses. Personnel
expenses include compensation, fringe benefits and other personnel expenses
related to the Company's internal employees. Other general and administrative
expenses include rent, office supplies and expenses, legal and accounting fees,
bad debt expenses, insurance and other operating expenses. Sales and marketing
expenses include commissions and salaries to sales personnel and related
expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization consists primarily of the amortization of goodwill
and the depreciation of property and equipment. The Company amortizes goodwill
over periods of three to thirty years, depending on the assets acquired, using
the straight-line method. Acquisitions generally result in considerable goodwill
because PEOs generally require few fixed assets to conduct their operations.
ACQUISITIONS
Period-to-period comparisons may be substantially affected by the Company's
acquisition of other companies providing PEO services. The Company has accounted
for its acquisitions using the "purchase" method of accounting, whereby the
results of such acquired companies are reflected in the Company's financial
statements prospectively from the date of acquisition. In addition to increasing
revenues, acquisition activity can affect gross profits and margins because the
industry mix of the acquired companies may differ from that of the Company.
Further, during the transition period after an acquisition the Company may act
to implement pricing changes where appropriate and to eliminate client
relationships which do not meet the Company's risk or profitability profiles.
Acquisition activity historically has increased the Company's workers'
compensation expense, primarily by accelerating the Company's overall growth
rate and accelerating its exposure in specific higher-risk segments, such as
transportation. The Company also seeks to eliminate certain general and
administrative costs of acquired companies although such results may not be
achieved.
OPERATING RESULTS
Margin comparisons are affected by the relative mix of stand-alone risk
management/workers' compensation services, full PEO services, TEAM Services
(TEAM) services, and driver leasing services acquired in the Leaseway
acquisition (LPC) in any particular period.
Certain employment-related taxes are based on the cumulative earnings of
individual employees up to a specified wage level. Therefore, these expenses
tend to decline over the course of a year. Also, fourth quarter revenues are
typically increased by year-end bonuses and distributions paid to worksite
employees, historically resulting in little to no revenue growth from fourth to
first quarter (excluding acquisitions). In addition, the Company's first quarter
revenues tend to be adversely affected by decreased activity by various of its
transportation clients due to seasonal factors.
23
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS--
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
Percent Percent
(In thousands of dollars) 1999 Change 1998 1999 Change 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 222,418 (4) $ 231,636 $ 627,415 (11) $ 706,965
Cost of revenues 213,136 (4) 222,666 601,823 (12) 680,058
Gross profit 9,282 3 8,970 25,592 (2) 26,207
Selling, general
and administrative 8,821 (30) 12,608 25,205 (23 32,719
Depreciation and amortization 1,916 9 1,756 5,256 15 4,586
Interest income 170 (56) 386 937 (39) 1,532
Interest expense 2,138 (1) 2,160 6,389 (1) 6,427
Income tax benefit -- -- -- -- -- (1,498)
Net loss (3,423) (52) (7,168) (10,321) (25) (13,795)
</TABLE>
REVENUES
Revenues decreased to $222.4 million for the quarter ended September 30, 1999
from $231.6 million for the quarter ended September 30, 1998, a decrease of 4%.
For the nine months ended September 30, 1999, revenue was $627.4 million
compared to $707.0 million for the nine months ended September 30, 1998, a
decrease of 11%. The primary contributing factor to the decline in 1999 revenues
over last year was the termination of US Xpress as a major customer in August of
1998. US Xpress was an unprofitable customer relationship that contributed $25.1
million to third quarter 1998 revenues and $121.3 million to revenues for the
first nine months of 1998. Excluding this revenue, 1999 revenues for the quarter
and nine months ended September 30, 1999 reflected increases of $15.9 million
and $41.8 million for each respective period. The number of worksite employees
decreased to approximately 37,300 covering approximately 2,015 client companies
at September 30, 1999 from approximately 42,600 covering 2,040 client companies
at September 30, 1998. The primary contributing factor to the decline in
employees was the loss of approximately 6,500 worksite employees from US Xpress.
The Company is agressively signing additional worksite employees primarily
through its national account program.
COST OF REVENUES
Cost of revenues decreased 4% to $213.1 million in the quarter ended September
30, 1999 from $222.7 million for the quarter ended September 30, 1998. For the
nine month period ended September 30, 1999, the cost of revenues was $601.8
million, a decrease of 12% over the $680.1 million for the nine month period
ended September 30, 1998. This decrease is primarily due to the decrease in the
Company's business related to the termination of US Xpress as described above.
Cost of revenues may increase in 2000 if the Company is unable to obtain
guaranteed cost workers' compensation insurance coverage on terms that are
comparable to the 1999 policy year. The Company currently is in the process of
completing negotiations for its 2000 workers' compensation program. See
"Outlook: Issues and Risks - Increases in Health Insurance Premiums,
Unemployment Taxes and Workers' Compensation Rates; Availability of Programs."
The Company's 2000 healthcare costs are expected to increase commensurate with
premium increases being implemented throughout the healthcare industry. While
most of the increase may be passed along to the customer, it is anticipated that
the Company will absorb a portion of the increase to minimize customer
attrition.
GROSS PROFIT
The Company's gross profit margin increased to 4.2% in the quarter ended
September 30, 1999 from 3.9% in the quarter ended September 30, 1998. For the
nine month period ended September 30, 1999, the gross profit margin was 4.1%
compared to 3.7% for the same period in 1998. This increase was attributable to
several factors including the impact of repricing existing customers to meet the
Company's minimum pricing standards, Company initiated terminations of other
unprofitable customers, and the favorable impact on heath insurance costs
associated with the settlement of the dispute with US Xpress.
24
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the quarter ended September 30,
1999 decreased approximately $3.8 million to $8.8 million, or 30%, from $12.6
million for the quarter ended September 30, 1998. Included in the quarter ended
September 30, 1999 was a provision for uncollectible accounts receivable of $1.2
million, of which $1.0 million related to a revised estimate of collectibility
for certain aged receivables. While the Company continues to aggressively pursue
collection of its aged accounts receivable, additional charges may be required
in the fourth quarter. For the nine month periods ended September 30, 1999 and
1998, respectively, selling, general and administrative expenses were $25.2
million and $32.7 million, a 23% decrease. The expense savings are primarily the
result of cost savings initiated during the fourth quarter of 1998, as well as
certain incremental initiatives implemented during 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization represents depreciation of property and equipment
and amortization of organizational costs, customer lists and goodwill. For the
quarter ended September 30, 1999, depreciation and amortization expense totaled
$1.9 million compared to $1.8 million for the quarter ended September 30, 1998.
Total depreciation and amortization expense for the nine months ended September
30, 1999 was $5.3 compared to $4.6 million for the nine month period ended
September 30, 1998. The increase is primarily due to additional purchase price
paid on the Employers Trust acquisition in 1999.
INTEREST
Interest expense for the quarter ended September 30, 1999 totaled $2.1 million
compared to $2.2 million for the quarter ended September 30, 1998. For the nine
month periods ended September 30, 1999 and 1998, interest expense totaled $6.4
million. Interest expense in future periods will increase as a result of the
Company obtaining a new $20 million term loan and revolving credit facility (see
"Liquidity and Capital Resources" below).
EFFECTIVE TAX RATE
The Company's effective tax rate provides for federal, state and local income
taxes. As of September 30, 1999, the Company has incurred losses in excess of
what can be carried back and applied against prior years' income to generate
federal income tax refunds. The remaining operating loss will be available for
carry-forward benefit only to the extent of any subsequently generated taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as the ability to mobilize cash to meet operating
and capital needs. The Company's primary use of cash in the nine months ended
September 30, 1999 was for the payment of interest and other operating
activities, the prepayment of workers' compensation premiums and the reduction
in bank overdrafts. The Company's liquidity position also was materially reduced
during the first nine months of 1999 due to the payment of $6.5 million of
additional purchase price for the Company's February 1997 acquisition of assets
from Employers Trust. One additional purchase price disbursement of $1.0 million
is due to be paid in the fourth quarter of 1999. The Ohio Bureau of Workers'
Compensation has requested a $1.8 million letter of credit to secure the
Company's contingent liability associated with its self insured Ohio workers'
compensation insurance, which the Company anticipates using a portion of a new
revolving line of credit to secure (see discussion below). See "Outlook: Issues
and Risks - Future Capital and Liquidity Needs; Uncertainty of Additional
Financing and Substantial Leverage."
The Company has entered into a loan and security agreement (the "Loan
Agreement") with Foothill Capital Corporation and Ableco Finance LLC (the
"Lenders") dated October 26, 1999 providing for a term loan of $10 million at an
interest rate of 13.5% and a revolving loan (based on eligible accounts
receivable) to a maximum of $10 million (including letters of credit drawn
thereunder) at an interest rate of prime plus 2%. The Company received the
proceeds of the term loan on October 29, 1999. The Company does not currently
intend to draw on the revolving loan facility except to the extent of a letter
of credit to be issued in favor of the State of Ohio (as discussed above). The
Company paid a closing fee of $800,000 and will pay a commitment fee of 50 basis
points on the unused portion of the revolving line, as well as letter of credit
fees of 2.0%. If the term loan then remains outstanding, the interest rate
thereon increases by 25 basis points per month beginning on July 29, 2000 and a
fee of $100,000 is payable on July 29, 2000 and on October 29, 2000. The Loan
Agreement matures on January 1, 2001. The principal loan covenants are as
follows: tangible net worth of ($72,390,000) at December 31, 1999, ($71,320,000)
at March 31, 2000, ($70,220,000) at June 30, 2000, ($68,270,000) at September
30, 2000 and ($66,090,000) at December 31, 2000; and EBITDA (as defined) of
25
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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$1,230,000 at December 31, 1999, $2,560,000 at March 31, 2000, $2,780,000 at
June 30, 2000, $3,410,000 at September 30, 2000 and $3,770,000 at December 31,
2000. The Loan Agreement also includes covenants relating to capital expenditure
limits and worksite employee headcount and average gross margin requirements.
The Loan Agreement further contains, among other limitations, restrictions on
mergers or the sale of significant assets or use of the proceeds thereof,
investments and business acquisitions, and additional indebtedness or liens. The
Loan Agreement includes certain other customary covenants, and is secured by
substantially all of the Company's assets (including pledges of the stock of the
Company's subsidiaries and control agreements over substantially all of the
Company's cash accounts).
Cash used by operating activities was $14.0 million for the nine months ended
September 30, 1999 compared to cash used by operating activities of $22.2
million for the nine months ended September 30, 1998. Operating cash flows are
derived from customers for full PEO services rendered by the Company. Payments
from PEO customers typically are received on or within a few days of the date on
which payroll checks are delivered to customers, and cover the cost of the
payroll, payroll taxes, insurance, other benefit costs and the Company's
administration fee. The Company's TEAM Services and LPC operations extend credit
terms generally from seven to 45 days as is customary in their respective market
segments. If the Company expands in these market segments or enters into new
market segments, or extends credit to additional clients, its working capital
requirements may increase. Included in other assets is a net receivable of
approximately $1.4 million from a single stand-alone client as to which disputes
have risen. The Company has initiated litigation against the former client
seeking, among other remedies, collection of the receivable. While the Company
believes that it will prevail in the litigation, there can be no assurance that
this will be the case and an adverse outcome could result in the write-off of
all or a substantial portion of the unreserved balance of the receivable.
Cash provided from investing activities was $1.1 million during the nine months
ended September 30, 1999, compared to $4.4 million used during the comparable
prior year period. Included in investing activities in 1999 is the sale of $7.4
million in marketable securities to fund the subsequent payment of additional
purchase price on the 1997 acquisition of Employer's Trust. Future acquisitions
are not expected to be a significant use of cash.
For the nine months ended September 30, 1999 and 1998, capital expenditures were
$381,000 and $2.4 million, respectively. Capital expenditures in 1998 consisted
primarily of computer equipment to enhance the Company's ability to support the
Company's increased client base and the centralization of payroll processing and
accounting systems. During 1999, the Company expects to continue to invest in
additional computer and technological equipment. Although the Company
continuously reviews its capital expenditure needs, management expects that 1999
capital expenditures will continue in order to meet the needs of the Company's
base of worksite employees.
Cash used in financing activities was $13.7 million for the nine months ended
September 30, 1999 compared to cash provided by financing activities of $2.4
million for the same period in 1998. Cash use in 1999 was primarily for the
reduction of bank overdrafts.
At September 30, 1999 and December 31, 1998, the Company had working capital of
$19.4 million and $31.7 million, respectively.
During the second quarter of 1999 the Company's primary bank asked it to
maintain collateral at the bank for the various transactions, such as payroll
checks, tax payments, and other transactions conducted through the bank in the
ordinary course of the Company's business. The Company agreed to maintain a
deposit of $5 million as collateral, which has subsequently been reduced to $2.5
million. The Company intends to provide a letter of credit collateralized by the
new revolving credit facility to eliminate the remaining cash collateral
requirement.
See "Outlook: Issues and Risks" below and, in particular, "Future Capital and
Liquidity Needs; Uncertainty of Additional Financing;" Substantial Leverage;"
and "Litigation and Other Contingencies" and "Credit Risks; Employer Liability."
OUTLOOK: ISSUES AND RISKS
The following issues and risks, among others (including those discussed
elsewhere herein), should also be considered in evaluating the Company's
outlook.
26
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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FUTURE CAPITAL AND LIQUIDITY NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources (including
the Loan Agreement described in "Liquidity and Capital Resources," above)
combined with anticipated funds from operations will be sufficient to meet its
presently anticipated working capital and capital expenditures requirements
under its 1999-2000 operating plan. The Company will need to raise additional
funds through public or private debt or equity financing if the revenue and cash
flow elements of its 1999-2000 operating plan are not met, to take advantage of
unanticipated opportunities, to respond to unanticipated competitive pressures
or adverse outcomes associated with litigation or other claims, or to deal with
unanticipated cash requirements, such as material customer payment defaults. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the then current shareholders of the Company will be
reduced, perhaps materially, and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's Common
Stock. There can be no assurance that additional financing will be available on
terms favorable to the Company, or at all. If adequate funds are not available
or are not available on acceptable terms, the Company's business, operating
results, financial condition and ability to operate will be materially adversely
affected.
SUBSTANTIAL LEVERAGE
The Company has incurred significant debt primarily in connection with its
October 1997 issuance of its 10% Senior Notes due 2004 (the "Notes") and the
October 1999 Loan Agreement. As of September 30, 1999, the Company had
outstanding senior indebtedness of $85.0 million and stockholders' equity of
approximately $7.0 million, respectively. On October 29, 1999, the Company
incurred additional indebtedness of $10.0 million upon receipt of the proceeds
of the term loan provided under the Loan Agreement.
The Company's ability to make scheduled principal payments in respect of, or to
pay the interest on, or to refinance, any of its indebtedness (including the
Loan Agreement and the Notes) will depend on its future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
regulatory and other factors beyond its control. Based upon the Company's
1999-2000 operating plan, management believes that cash flow from operations and
other available cash will be adequate to meet the Company's anticipated future
requirements for working capital expenditures, scheduled lease payments and
scheduled payments of interest on its indebtedness, including the Loan Agreement
and the Notes. However, the Company may not have sufficient liquidity to deal
with unanticipated cash needs. Also, the Company may need to refinance all or a
portion of the principal of the Loan Agreement or the Notes at or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated growth will occur or that
funds will be available from other sources or otherwise in an amount sufficient
to enable the Company to service or refinance its indebtedness, including the
Loan Agreement and the Notes, or make anticipated capital expenditures and lease
payments. In addition, there can be no assurance that the Company will be able
to effect any such refinancing (or any equity financing) on commercially
reasonable terms. See "Future Capital and Liquidity Needs; Uncertainty of
Additional Financing;" "Litigation and Other Contingencies" and "Liquidity and
Capital Resources."
The degree to which the Company is leveraged could have important consequences,
including, but not limited to, the following: (i) a substantial portion of the
Company's cash flow from operations will be dedicated to debt service, including
repayment of principal, and will not be available for other purposes; (ii) the
Company's ability to obtain additional financing in the future could be limited;
and (iii) the Loan Agreement and Notes indenture contain financial and
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds. Failure by the Company to comply with such
covenants could result in an event of default which, if not cured or waived,
could have a material adverse effect on the Company's business and financial
performance.
ISSUANCE OF ADDITIONAL SHARES
The Company is a party to several agreements that call for the issuance of
additional shares of its Common Stock during 1999. Under an agreement pursuant
to which securities class action litigation was settled, the Company is required
to issue 851,149 shares of Common Stock to members of the plaintiff class upon
receipt of appropriate instructions from plaintiffs' counsel. The Company also
is required to issue shares of Common Stock in payment of the purchase price for
the June 1996 acquisition of the Company's TEAM Services subsidiary. The number
of shares issuable was recently calculated (based on TEAM's results for the 12
months ended June 30, 1999) to be approximately 2,160,000 shares, though this
issuance may be reduced or cancelled under certain circumstances if the Company
completes the sale of TEAM Services (of which there can be no assurance; see
Part II, Item 5 -- "Other Matters"). The Company also is required to issue
shares of Common Stock in payment of the remaining purchase price for the
September 1997 acquisition of the ERC companies. The number of shares issuable
was recently agreed by the parties to be approximately 1,150,000 shares, though
the Company has the right to withhold such shares as security for indebtedness
owed to the Company by the seller of the ERC companies.
27
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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As part of the December 1998 acquisition of Fidelity Resources Corporation,
("Fidelity"), the Company issued 625,000 restricted shares of Common Stock in
December 1998 to two individuals who owned the acquired company. If the price of
the Company's Common Stock (based on the average price during the 20 days prior
to December 1, 1999 (the "Anniversary Price")) is less than $4.00, the Company
is required to provide additional cash consideration or issue additional
restricted shares (or any combination thereof, in the Company's discretion) in
an amount sufficient so that the aggregate value of the 625,000 shares (valued
at the Anniversary Price) plus such additional consideration equals $2.5
million. In view of recent closing prices of the Company's Common Stock, the
Company likely will be obligated to issue a significant number of shares of
Common Stock pursuant to this provision.
LITIGATION AND OTHER CONTINGENCIES
While certain significant litigation matters have been resolved recently, other
significant matters remain unresolved. For example, the State of Ohio has
assessed significant sales and use taxes against the Company that the Company
believes have been assessed erroneously and is contesting vigorously. The
Company faces other claims relating to prior contractual relationships and other
matters. While the Company will continue to seek vigorously to resolve these
matters favorably, there can be no assurance that the outcome of these matters,
or any of them, will not have a material adverse effect upon the Company's
results of operations or financial position.
RESTRUCTURING AND COST-REDUCTION PLAN; EFFECT ON CLIENT RETENTION
The Company recently effected a restructuring and cost-reduction plan primarily
involving the closing of remote payroll processing centers and other offices and
various other expense reduction strategies. Back office functions were
consolidated at the Company's corporate headquarters. While the Company believes
that completion of the plan will result in long-term improvements in its
operational and customer service capabilities (in addition to significant
operating expense reductions), the plan resulted in increases in client
attrition and decreases in internal sales due primarily to short-term
disruptions in client service. While the Company has recently taken measures to
improve customer service and reduce attrition, there can be no assurance that
the effectiveness of these measures can be maintained.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS'
COMPENSATION RATES; AVAILABILITY OF PROGRAMS
State unemployment taxes are, in part, determined by the Company's unemployment
claims experience. Medical claims experience also greatly impacts the Company's
health insurance rates and claims cost from year to year. Similarly, workers'
compensation costs are directly affected by experience. Should the Company
experience an increase in claims activity for unemployment, workers'
compensation and/or healthcare, or if other factors result in higher expenses in
these areas, the Company's costs in these areas would increase. In such a case,
the Company may not be able to pass these higher costs to its clients due to
contractual or competitive factors. In addition, the Company would have
difficulty competing with PEOs with lower rates that may offer lower rates to
clients.
The maintenance of health and workers' compensation insurance plans that cover
worksite employees is a significant part of the Company's business. While the
Company believes that replacements for its current contracts could be obtained
on competitive terms, if doing so became necessary, without causing significant
disruption to the Company's business, there can be no assurance in this regard.
TAX TREATMENT
The attractiveness to clients of a full-service PEO arrangement depends in part
upon the tax treatment of payments for particular services and products under
the Code (for example, the opportunity of employees to pay for certain benefits
under a cafeteria plan using pre-tax dollars). The Internal Revenue Service
(IRS) has formed a Market Segment Study Group to examine whether PEOs, such as
the Company, are for certain employee benefit and tax purposes the "employers"
of worksite employees under the Code. The Company cannot predict either the
timing or the nature of any final decision that may be reached by the IRS with
respect to the Market Segment Study Group or the ultimate outcome of any such
decision, nor can the Company predict whether the Treasury Department will issue
a policy statement with respect to its position on these issues or, if issued,
whether such statement would be favorable or unfavorable to the Company. If the
IRS were to determine that the Company is not an "employer" under certain
provisions of the Code, it could materially adversely affect the Company in
28
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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several ways. With respect to benefit plans, the tax qualified status of the
Company's 401(k) plans could be revoked, and the Company's cafeteria and medical
reimbursement plans may lose their favorable tax status. If an adverse IRS
determination were applied retroactively to disqualify benefit plans, employees'
vested account balances under 401(k) plans would become taxable, an
administrative employer such as the Company would lose its tax deductions to the
extent its matching contributions were not vested, a 401(k) plan's trust could
become a taxable trust and the administrative employer could be subject to
liability with respect to its failure to withhold applicable taxes and with
respect to certain contributions and trust earnings. In such event, the Company
also would face the risk of client dissatisfaction and potential litigation by
clients or worksite employees.
As the employer of record for many client companies and their worksite
employees, the Company must account for and remit payroll, unemployment and
other employment-related taxes to numerous federal, state and local tax, labor
and unemployment authorities, and is subject to substantial penalties for
failure to do so. From time to time, the Company has received notices or
challenges which may adversely affect its tax rates and payments. In light of
the IRS Market Segment Study Group and the general uncertainty in this area,
certain proposed legislation has been drafted to clarify the employer status of
PEOs in the context of the Code and benefit plans. However, there can be no
assurance that such legislation will be proposed and adopted or in what form it
would be adopted. Even if it were adopted, the Company may need to change
aspects of its operations or programs to comply with any requirements which may
ultimately be adopted. In particular, the Company may need to retain increased
sole or shared control over worksite employees if the legislation is passed in
its current form.
CREDIT RISKS; EMPLOYER LIABILITY
As the employer of record for its worksite employees, the Company may be
contractually obligated to pay their wages, benefit costs and payroll taxes
whether or not the Company receives payment from its customer. The Company
typically bills a client company for these amounts in advance of or at each
payroll date, and reserves the right to terminate its agreement with the client,
and thereby the Company's liability for future payrolls to the client's worksite
employees, if timely payment is not received. Limited extended payment terms are
offered in certain cases subject to local competitive conditions. The rapid
turnaround necessary to process and make payroll payments leaves the Company
vulnerable to client credit risks, some of which may not be identified prior to
the time payroll payments are made. There can be no assurance that the Company
will be able to timely terminate any delinquent accounts or that its contractual
termination rights will be judicially enforced.
By way of example, a group of employees filed suit against the Company in 1998
alleging that they were employees of the Company and that they had not been paid
certain wages. The maximum amount claimed could exceed $600,000, potentially
subject to trebling under applicable wage statutes. The Company does not believe
that it has any liability to the plaintiffs based on the facts of the case and
successfully obtained a dismissal of the suit. Plaintiffs have commenced an
appeal process.
In addition, the Company competes in several market segments in which PEOs
typically advance wages, benefit costs and payroll taxes to their clients. The
Company intends to continue this practice despite the potentially greater credit
risk posed by such practices. The Company conducts a limited credit review
before accepting new clients. However, the nature of the Company's business and
pricing margins is such that a small number of client credit failures could have
an adverse effect on its business and financial performance.
CUSTOMER RELATIONSHIPS
The Company's agreements with its customers generally may be canceled upon 30
days written notice of termination by either party, except where different
arrangements are required by applicable law. While the Company has commenced the
use of longer-term agreements, the short-term nature of most current customer
agreements means that customers could terminate a substantial portion of the
Company's business upon short notice. See "RESTRUCTURING AND COST-REDUCTION
PLAN; EFFECT ON CLIENT RETENTION."
Through acquisitions and internal growth, a significant percentage of the
Company's clients is in the transportation industry. Increased concentration in
a single industry could make the Company subject to risks and trends of that
industry. Also, certain aspects of the transportation industry may be subject to
particular risks, such as the risk of property damage, injury and death from
accidents inherent in the operation of a motor vehicle. In addition, the Company
is providing driver leasing services through LPC, in which the Company acts as
sole employer, which may increase risk to the Company as a result of the direct
nature of the employment relationship.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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UNCERTAINTY OF EXTENT OF PEO'S LIABILITY; GOVERNMENT REGULATION OF PEOS
Employers are regulated by numerous federal and state laws relating to labor,
tax and employment matters. Generally, these laws prohibit race, age, sex,
disability and religious discrimination, mandate safety regulations in the
workplace, set minimum wage rates and regulate employee benefits. Because many
of these laws were enacted prior to the development of non-traditional
employment relationships, such as PEO services, many of these laws do not
specifically address the obligations and responsibilities of non-traditional
"co-employers" such as the Company, and there are many legal uncertainties about
employee relationships created by PEOs, such as the extent of the PEO's
liability for violations of employment and discrimination laws. The Company may
be subject to liability for violations of these or other laws even if it does
not participate in such violations. As a result, interpretive issues concerning
the definition of the term "employer" in various federal laws have arisen
pertaining to the employment relationship. Unfavorable resolution of these
issues could have a material adverse effect on the Company's results of
operations or financial condition. The Company's standard forms of customer
service agreement establish the contractual division of responsibilities between
the Company and its clients for various personnel management matters, including
compliance with and liability under various governmental regulations. However,
because the Company acts as a co-employer, and in some instances acts as sole
employer (such as in the driver leasing program), the Company may be subject to
liability for violations of these or other laws despite these contractual
provisions, even if it does not participate in such violations. The
circumstances in which the Company acts as sole employer may expose the Company
to increased risk of such liabilities for an employee's actions. The Company has
been sued in tort actions alleging responsibility for employee actions (which it
considers to be incidental to its business). Although it believes it has
meritorious defenses, and maintains insurance (and requires its clients to
maintain insurance) covering certain of such liabilities, there can be no
assurances that the Company will not be found to be liable for damages in any
such suit, or that such liability would not have a material adverse effect on
the Company. In addition, the Company believes that a portion of its clients are
not maintaining the insurance coverage required under their service agreements
with the Company. Although the client generally is required to indemnify the
Company for any liability attributable to the conduct of the client or employee,
the Company may not be able to collect on such a contractual indemnification
claim and thus may be responsible for satisfying such liabilities. In addition,
employees of the client may be deemed to be agents of the Company, subjecting
the Company to liability for the actions of such employees.
While many states do not explicitly regulate PEOs, various states have passed
laws that have licensing or registration requirements and other states are
considering such regulation. Such laws vary from state to state but generally
provide for monitoring the fiscal responsibility of PEOs. There can be no
assurance that the Company will be able to satisfy licensing requirements or
other applicable regulations of any particular state from time to time.
ADEQUACY OF LOSS RESERVES
The Company obtained fully-insured guaranteed cost workers' compensation
coverage effective January 1, 1998, thereby eliminating, with certain
exceptions, the Company's risk retention on workers' compensation claims arising
after that date. The Company retained risk up to $250,000 per occurrence with
respect to a defined portfolio of stand-alone policies, which expired at various
dates during 1998. The Company also retained risk up to $50,000 per occurrence
for claims under Ohio's monopolistic workers' compensation structure, with an
aggregate liability limitation.
The Company's reserves for losses and loss adjustment expenses under the Ohio
and stand-alone programs referred to in the preceding paragraph are estimates of
amounts needed to pay reported and unreported claims and related loss adjustment
expenses. Loss reserves are inherently uncertain and are subject to a number of
circumstances that are highly variable and difficult to predict. If the
Company's reserves prove to be inadequate, the Company will be required to
increase reserves or corresponding loss payments with a corresponding reduction,
which may be material, to the Company's operating results in the period in which
the deficiency is identified.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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COMPETITION
The market for many of the services provided by the Company is highly
fragmented, with over 2,300 PEOs currently competing in the United States. Many
of these PEOs have limited operations with relatively few worksite employees,
though several are larger than or comparable to the Company in size. The Company
also competes with non-PEO companies, whose offerings overlap with some of the
Company's services, including payroll processing firms, insurance companies,
temporary personnel companies and human resource consulting firms. In addition,
the Company expects that as the PEO industry becomes better established,
competition will increase because existing PEO firms will likely consolidate
into fewer and better competitors and well organized new entrants with greater
resources than the Company, including some of the non-PEO companies described
above, have entered or will enter the PEO market.
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YEAR 2000 COMPLIANCE
Many computer programs process transactions based on using two digits for the
year of the transaction rather than a full four year digits (e.g. "98" for
1998). Systems that process Year 2000 transactions with the year "00" may
encounter significant processing inaccuracies or inoperability. Management has
determined that, like most other companies, it will be required to modify or
replace portions of its software so that its information systems will be able to
properly utilize dates subsequent to December 31, 1999.
STATE OF READINESS
The Company began developing its plan to address Year 2000 in 1997. The plan
includes hardware, software, electronic equipment and building systems, and
evaluates risk associated with vendor readiness. The plan includes (1)
inventorying Year 2000 items; (2) assigning priorities to identified items; (3)
assessing Year 2000 compliance of material items (whether internal or third
party-related); (4) repairing or replacing material items determined not to be
Year 2000 compliant; (5) testing material items; and (6) assessing contingency
plans.
At September 30, 1999, the inventory, priority assessment and internal
compliance assessment phases are substantially completed. Prioritization of
items has been based on the level of disruption to Company operations and client
service that would result from noncompliance. While Year 2000 issues present
significant risks for the Company due to the nature of its business, no
significant noncompliance issues were identified during these phases, though
there can be no assurance that such issues will not be identified in the future.
Due in part to the Company's relatively short operating history, the Company
operates only one so-called "legacy" system, limiting its exposure to certain
Year 2000 issues.
The repair and replacement phase of the Company's plan has been implemented
primarily through various systems upgrades that have been conducted in the
ordinary course of business, which upgrades primarily were implemented to meet
the Company's needs in view of its rapid growth and independently of Year 2000
considerations. The Company anticipates that repair and replacement
considerations relevant to its LPC subsidiary, if any, will be managed through a
transition of LPC functions onto the Company's core software platform, which
transition previously had been scheduled for operational reasons independent of
Year 2000 considerations. A limited amount of software has been purchased
primarily for Year 2000 compliance purposes.
The Company is completing the testing phase of its Year 2000 plan. The Company
is testing its systems for accuracy through the use of test data on a wide
variety of the Company's normal operating transactions under various date
conditions. The testing phase is approximately 90% complete.
The Company believes that it does not have material risks associated with Year
2000 issues for non-information technology systems due to the nature of its
operations.
The Company has also assessed its third party relationships and has identified a
list of vendors that it considers most significant to its operations. These
vendors primarily include third party hardware and software vendors, financial
institutions, taxing authorities, third party administrators and benefit
providers. The Company already has obtained compliance statements from a
substantial majority of its key vendors (generally through information publicly
available from such vendors), and is continuing the process of requesting
written information from designated key vendors regarding their Year 2000 plans
and state of readiness. Upon completion of the third-party evaluation and the
testing of its internal systems, the Company intends to test significant data
interfaces with third party vendors to verify their compliant status.
COSTS TO ADDRESS YEAR 2000 ISSUE
The Company has not incurred and does not expect to incur significant costs
related to Year 2000 issues other than the time of internal personnel to
complete the Company's Year 2000 plans. As referred to above, the Company has
expended significant resources to upgrade various systems in the ordinary course
of its business, which upgrades were implemented primarily to meet the Company's
32
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
needs in view of its rapid growth and independently of Year 2000 considerations.
A limited amount of software has been purchased primarily for Year 2000
compliance purposes. Total costs for Year 2000 upgrades are expected to be less
than $30,000.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES; CONTINGENCY PLANNING
The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, repair or replacement, and
testing are not effected timely with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issues will not
materially adversely impact the Company's results of operations or materially
adversely affect the Company's relationships with customers, vendors or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations. Among the problems which might occur without appropriate
planning and testing are: the inability to transmit direct deposit payroll
through banking systems to deposit funds into worksite employees' bank accounts;
the inability to collect funds electronically in payment of the Company's
service fees; the failure to properly calculate payroll information; the
untimely transmission of benefits enrollment or claims data to and from benefit
providers; and the inability to deliver payroll checks to employees due to
failure in transportation or courier systems.
The Company has begun, but not yet completed, an analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure by the Company and key third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not yet been finalized for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning during the second half of 1999.
The costs of the Company's Year 2000 efforts and the dates on which the Company
believes it will complete such efforts are based upon management's best
estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
compliance, and other factors. There can be no assurance that these estimates
will prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 issues, the ability of the Company and third
parties (including vendors, customers and, in particular, federal, state and
local governments) to identify, assess, replace or repair and test all relevant
items (including embedded technology), the ability of third parties to
communicate compliance issues to the Company on a timely basis, unforeseen
expenses, and similar uncertainties.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is primarily exposed to market risks from fluctuations in interest
rates and the effects of those fluctuations on the market values of its
investments and marketable securities that are classified as AVAILABLE-FOR-SALE
marketable securities. Cash equivalent short-term investments consist primarily
of high quality investment grade instruments, such as commercial paper, which
are not significantly exposed to interest rate risk, except to the extent that
changes in interest rates will ultimately affect the amount of interest income
earned on these investments. The available-for-sale marketable securities are
subject to interest rate risk because these securities generally include
financial instruments such as certificates of deposit, corporate bonds, and U.S.
Treasury securities and agency notes that have an original maturity of greater
than 90 days. Because these instruments are considered highly liquid, they are
not significantly exposed to interest rate risk. However, the market values of
these securities may be affected by changes in prevailing interest rates. The
Company attempts to limit its exposure to interest rate risk primarily through
diversification and strict adherence to the Company's investment policy. The
Company's investment policy is designed to maximize interest income while
preserving its principal investment.
33
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. See Part I, Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook: Issues and
Risks - Litigation and Other Contingencies; Uncertainty of Extent of PEO's
Liability; Government Regulation of PEOs; and Credit Risks - Employer
Liability." Reference is made to the Company's prior Reports on Form 10-Q during
1999 for information concerning certain legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(b) The Company has entered into a loan and security agreement (the "Loan
Agreement") with Foothill Capital Corporation and Ableco Finance LLC (the
"Lenders") dated October 26, 1999 providing for a term loan of $10 million
at an interest rate of 13.5% and a revolving loan (based on eligible
accounts receivable) to a maximum of $10 million (including letters of
credit drawn thereunder) at an interest rate of prime plus 2%. Among other
covenants and restrictions, the Loan Agreement prohibits the payment of
dividends and the repurchase of shares of the Company's Common Stock. For
additional information about the Loan Agreement, see Part I, Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
(c) The Company issued shares of its Common Stock in private placement
transactions pursuant to Section 4(2) of the Securities Act of 1933 in
settlement of separate litigation matters as follows: 547,368 shares to US
Xpress Enterprises, Inc. in June 1999; 675,000 shares to HDVT, Inc. in
August 1999; 25,000 shares to Ladenburg, Thalmann & Co., Inc. in August
1999; and 16,361 shares to Blanchard S. Marriott, Jr. in September 1999.
The Company issued a five-year warrant for the purchase of 75,000 shares of
its Common Stock at an exercise price of $1.00 to Silvermen Heller
Associates in August 1999 in connection with retaining such firm to provide
investor relations services.
ITEM 5. OTHER MATTERS
The Company previously reported that it had signed a letter of intent to sell
its TEAM Services subsidiary ("TEAM") to Jeffery A. Colby, TEAM's current
president and a member of the Company's Board of Directors. Such letter of
intent expires by its terms on November 15, 1999. The Company continues to
explore the sale of TEAM and is considering expressions of interest from other
potential purchasers. The Loan Agreement provides that the consent of the
Lenders is required for such sale if it is not completed by March 31, 2000.
The Company recently received a notice concerning the continued listing of its
Common Stock on the Nasdaq Smallcap Market because, based on the closing price
of the Company's Common Stock on certain trading days, the Company was not in
compliance on such days with Nasdaq's requirement to maintain a market
capitalization of at least $35 million. The Company has provided Nasdaq with a
written compliance plan and believes that any noncompliance that has occurred is
due to temporary market factors. If the Company's compliance plan is deemed
insufficient by Nasdaq, a hearing will be scheduled to consider the Company's
continued listing. ESI's Common Stock will continue to trade on Nasdaq pending
the conclusion of this process.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Loan and Security Agreement dated as of October 26, 1999 by and among
Employee Solutions, Inc. and certain of its subsidiaries, Foothill
Capital Corporation and Ableco Finance LLC
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not applicable.
34
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
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.
EMPLOYEE SOLUTIONS, INC.
Date: November 15, 1999 /s/ Quentin P. Smith, Jr.
----------------------------------------
Quentin P. Smith, Jr.
Chief Executive Officer
/s/ John V. Prince
----------------------------------------
John V. Prince
Chief Financial Officer
35
LOAN AND SECURITY AGREEMENT
BY AND AMONG
EMPLOYEE SOLUTIONS, INC. E.R.C. OF INDIANA, INC.
EMPLOYEE RESOURCES CORPORATION EMPLOYEE SOLUTIONS - EAST, INC.
EMPLOYEE SOLUTIONS - MIDWEST, INC. EMPLOYEE SOLUTIONS - OHIO, INC.
EMPLOYEE SOLUTIONS OF ALABAMA, INC. EMPLOYEE SOLUTIONS OF CALIFORNIA, INC.
EMPLOYEE SOLUTIONS OF TEXAS, INC. EMPLOYEE SOLUTIONS - NORTH AMERICA, INC.
EMPLOYEE SOLUTIONS - SOUTHEAST, INC. ERC OF MINN INC.
ERC OF OHIO, INC. ESI-NEVADA HOLDING COMPANY, INC.
ESI AMERICA, INC. ESI RISK MANAGEMENT AGENCY, INC.
ESI-MIDWEST, INC. ESI-NEW YORK, INC.
FIDELITY RESOURCES CORPORATION LOGISTICS PERSONNEL CORP.
PHOENIX CAPITAL MANAGEMENT, INC.
AS BORROWERS
AND
FOOTHILL CAPITAL CORPORATION AND
ABLECO FINANCE LLC
AS THE LENDERS,
AND
FOOTHILL CAPITAL CORPORATION,
AS AGENT
Dated as of October 26, 1999
<PAGE>
TABLE OF CONTENTS
PAGE(S)
-------
1. DEFINITIONS AND CONSTRUCTION ........................................ 1
1.1 Definitions .............................................. 1
1.2 Accounting Terms ......................................... 17
1.3 Code ..................................................... 17
1.4 Construction ............................................. 17
1.5 Schedules and Exhibits ................................... 18
2. LOAN AND TERMS OF PAYMENT ........................................... 18
2.1 Revolving Advances ....................................... 18
2.2 Letter of Credit Subfacility ............................. 25
2.3 Term Loan Facility ....................................... 29
2.4 Payments ................................................. 29
2.5 Overadvances ............................................. 30
2.6 Interest and Letter of Credit Fees: Rates, Payments,
and Calculations ......................................... 30
2.7 Collection of Accounts ................................... 31
2.8 Crediting Payments; Application of Collections ........... 32
2.9 Designated Account ....................................... 34
2.10 Maintenance of Loan Account; Statements of Obligations ... 34
2.11 Fees ..................................................... 34
3. CONDITIONS; TERM OF AGREEMENT ....................................... 35
3.1 Conditions Precedent to the Initial Advance, Term Loan
and Letters of Credit .................................... 35
3.2 Conditions Precedent to all Advances ..................... 37
3.3 Condition Subsequent ..................................... 38
3.4 Term ..................................................... 38
3.5 Effect of Termination .................................... 38
3.6 Early Termination by Borrower ............................ 38
3.7 Early Termination Premium ................................ 39
3.8 Termination Upon Event of Default ........................ 39
4. CREATION OF SECURITY INTEREST ....................................... 39
4.1 Grant of Security Interest ............................... 39
4.2 Negotiable Collateral .................................... 40
4.3 Collection of Accounts, General Intangibles,
and Negotiable Collateral ................................ 40
4.4 Delivery of Additional Documentation Required ............ 40
4.5 Power of Attorney ........................................ 40
4.6 Right to Inspect ......................................... 41
4.7 Control Agreements ....................................... 41
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5. REPRESENTATIONS AND WARRANTIES ...................................... 41
5.1 No Encumbrances .......................................... 41
5.2 Eligible Accounts ........................................ 41
5.3 [Intentionally omitted] .................................. 42
5.4 Equipment ................................................ 42
5.5 Location of Inventory and Equipment ...................... 42
5.6 Inventory Records ........................................ 42
5.7 Location of Chief Executive Office; FEIN ................. 42
5.8 Due Organization and Qualification; Subsidiaries ......... 42
5.9 Due Authorization; No Conflict ........................... 43
5.10 Litigation ............................................... 44
5.11 No Material Adverse Change ............................... 44
5.12 No Fraudulent Transfer ................................... 44
5.13 Employee Benefits ........................................ 44
5.14 Environmental Condition .................................. 45
5.15 Brokerage Fees ........................................... 45
5.16 Permits and other Intellectual Property .................. 45
5.17 Year 2000 Compliant ...................................... 45
5.18 ESI-Nevada Holding Company, Inc. ......................... 45
5.19 Repayment of Bank One .................................... 46
6. AFFIRMATIVE COVENANTS ............................................... 46
6.1 Accounting System ........................................ 46
6.2 Collateral Reporting ..................................... 46
6.3 Financial Statements, Reports, Certificates .............. 46
6.4 Tax Returns .............................................. 48
6.5 ACH Accounts ............................................. 48
6.6 Borrower's Cash. ......................................... 48
6.7 Title to Equipment ....................................... 48
6.8 Maintenance of Equipment ................................. 48
6.9 Taxes .................................................... 48
6.10 Insurance ................................................ 49
6.11 No Setoffs or Counterclaims .............................. 50
6.12 Location of Inventory and Equipment ...................... 50
6.13 Compliance with Laws ..................................... 51
6.14 Employee Benefits ........................................ 51
6.15 Leases ................................................... 51
6.16 Broker Commissions ....................................... 52
6.17 Collateral Access Agreement .............................. 52
7. NEGATIVE COVENANTS .................................................. 52
7.1 Indebtedness ............................................. 52
7.2 Liens .................................................... 53
7.3 Restrictions on Fundamental Changes ...................... 53
7.4 Disposal of Assets ....................................... 53
7.5 Change Name .............................................. 53
7.6 Guarantee ................................................ 54
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7.7 Nature of Business ....................................... 54
7.8 Prepayments and Amendments ............................... 54
7.9 Change of Control ........................................ 54
7.10 Change in Contract Terms ................................. 54
7.11 Distributions ............................................ 54
7.12 Accounting Methods ....................................... 54
7.13 Investments .............................................. 54
7.14 Transactions with Affiliates ............................. 55
7.15 Suspension ............................................... 55
7.16 Compensation ............................................. 55
7.17 Use of Proceeds .......................................... 55
7.18 Change in Location of Chief Executive Office;
Inventory and Equipment with Bailees ..................... 55
7.19 No Prohibited Transactions Under ERISA ................... 55
7.20 Financial Covenants ...................................... 56
7.21 Capital Expenditures ..................................... 56
7.22 Securities Accounts ...................................... 57
7.23 No Withdrawals from Multiemployer Plan ................... 57
8. EVENTS OF DEFAULT ................................................... 57
9. THE LENDER GROUP'S RIGHTS AND REMEDIES .............................. 59
9.1 Rights and Remedies ...................................... 59
9.2 Remedies Cumulative ...................................... 61
10. TAXES AND EXPENSES .................................................. 61
11. WAIVERS; INDEMNIFICATION ............................................ 62
11.1 Demand; Protest; etc. .................................... 62
11.2 The Lender Group's Liability for Collateral .............. 62
11.3 Indemnification .......................................... 62
12. NOTICES ............................................................. 63
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER .......................... 64
14. DESTRUCTION OF BORROWER'S DOCUMENTS ................................. 65
14.1 Destruction of Borrower's Documents ...................... 65
14.2 Confidentiality of Borrower's Information ................ 65
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS .......................... 66
15.1 Assignments and Participations ........................... 66
15.2 Successors ............................................... 68
16. AMENDMENTS; WAIVERS ................................................. 69
16.1 Amendments and Waivers ................................... 69
16.2 No Waivers; Cumulative Remedies .......................... 70
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17. AGENT; THE LENDER GROUP ............................................. 70
17.1 Appointment and Authorization of Agent ................... 70
17.2 Delegation of Duties ..................................... 71
17.3 Liability of Agent ....................................... 71
17.4 Reliance by Agent ........................................ 71
17.5 Notice of Default or Event of Default .................... 72
17.6 Credit Decision .......................................... 72
17.7 Costs and Expenses; Indemnification ...................... 73
17.8 Agent in Individual Capacity ............................. 73
17.9 Successor Agent .......................................... 74
17.10 Withholding Tax .......................................... 74
17.11 Collateral Matters ....................................... 75
17.12 Restrictions on Actions by Lenders; Sharing of Payments .. 76
17.13 Agency for Perfection .................................... 77
17.14 Payments by Agent to the Lenders ......................... 77
17.15 Concerning the Collateral and Related Loan Documents ..... 78
17.16 Field Audits and Examination Reports; Confidentiality;
Disclaimers by Lenders; Other Reports and Information .... 78
17.17 Several Obligations; No Liability ........................ 79
18. GENERAL PROVISIONS .................................................. 80
18.1 Effectiveness ............................................ 80
18.2 Section Headings ......................................... 80
18.3 Interpretation ........................................... 80
18.4 Severability of Provisions ............................... 80
18.5 Amendments in Writing .................................... 80
18.6 Counterparts; Telefacsimile Execution .................... 80
18.7 Revival and Reinstatement of Obligations ................. 80
18.8 Integration .............................................. 81
18.9 Joint and Several ........................................ 81
iv
<PAGE>
SCHEDULES AND EXHIBITS
Schedule A Excluded Accounts
Schedule C-1 Commitments
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule R-1 Real Property Collateral
Schedule 5.7 Federal Employment Identification Numbers
Schedule 5.8 Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Permitted Other Indebtedness
Schedule 7.14 Excluded Affiliate Transactions
Exhibit C-1 Form of Compliance Certificate
v
<PAGE>
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as of
October __, 1999, among Ableco Finance LLC, a Delaware limited liability
company, and Foothill Capital Corporation, a California corporation ("Foothill")
(such lenders, together with their respective successors and assigns, are
referred to hereinafter each individually as a "Lender" and collectively as the
"Lenders"), FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for
the Lenders ("Agent"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333 and Employee
Solutions, Inc., an Arizona corporation, E.R.C. of Indiana, Inc., an Indiana
corporation, Employee Resources Corporation, an Indiana corporation, Employee
Solutions East, Inc., a Georgia corporation, Employee Solutions - Midwest, Inc.,
a Michigan corporation, Employee Solutions - Ohio, Inc., an Indiana corporation,
Employee Solutions of Alabama, Inc., an Alabama corporation, Employee Solutions
of California, Inc., a Nevada corporation, Employee Solutions of Texas, Inc., a
Texas corporation, Employee Solutions - North America, Inc., a Delaware
corporation, Employee Solutions - Southeast, Inc., a Florida corporation, ERC of
Minn, Inc., a Minnesota corporation, ERC of Ohio, Inc., a Michigan corporation,
ESI - Nevada Holding Company, Inc., a Nevada corporation, ESI America, Inc., a
Nevada corporation, ESI Risk Management Agency, Inc., an Arizona corporation,
ESI - Midwest, Inc., a Nevada corporation, ESI - New York, Inc., an Arizona
corporation, Fidelity Resources Corporation, an Oklahoma corporation, Logistics
Personnel Corp., a Nevada corporation, Phoenix Capital Management, Inc., an
Indiana corporation, jointly and severally as co-borrowers (hereinafter,
individually and collectively, "Borrower"), with their chief executive offices
located at 6225 N. 24th Street, Phoenix, Arizona 85016.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, irrespective of whether earned by performance, and any and all credit
insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
"Affiliate" means, as applied to any Person, any other Person who
directly or indirectly controls, is controlled by, is under common control with
or is a director or officer of such Person. For purposes of this definition,
1
<PAGE>
"control" means the possession, directly or indirectly, of the power to vote 5%
or more of the securities having ordinary voting power for the election of
directors or the direct or indirect power to direct the management and policies
of a Person.
"Agent" means Foothill, solely in its capacity as agent for the
Lenders, and
shall include any successor agent.
"Agent Account" has the meaning set forth in Section 2.7.
"Agent Advances" has the meaning set forth in Section 2.1(g).
"Agent's Liens" has the meaning set forth in Section 4.1.
"Agent-Related Persons" means Agent and any successor agent,
together with their respective Affiliates, and the officers, directors,
employees, counsel, agents, and attorneys-in-fact of such Persons and their
Affiliates.
"Agreement" has the meaning set forth in the preamble hereto.
"Assignee" has the meaning set forth in Section 15.1(a).
"Assignment and Acceptance" has the meaning set forth in Section
15.1(a) and shall be substantially in the form of Exhibit A-1 attached hereto.
"Authorized Person" means any officer or other employee of
Borrower.
"Availability" means the amount that Borrower is entitled to
borrow as Advances under Section 2.1, such amount being the difference derived
when (a) the sum of the principal amount of Advances (including Agent Advances
and Foothill Loans) then outstanding (including any amounts that the Lender
Group may have paid for the account of Borrower pursuant to any of the Loan
Documents and that have not been reimbursed by Borrower) is subtracted from (b)
the lesser of (i) the Maximum Revolving Amount less the Letter of Credit Usage,
or (ii) the Borrowing Base less the Letter of Credit Usage.
"Average Unused Portion of Maximum Revolving Amount" means, as of
any date of determination, (a) the Maximum Revolving Amount, less (b) the sum of
(i) the average Daily Balance of Advances that were outstanding during the
immediately preceding month, plus (ii) the average Daily Balance of the Letter
of Credit Usage during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. section 101 et seq.), as amended, and any successor statute.
2
<PAGE>
"Benefit Plan" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) other than a Multiemployer Plan for which Borrower, any
Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as
defined in Section 3(5) of ERISA) within the past six years.
"Books" means all of Borrower's books and records including:
ledgers; records indicating, summarizing, or evidencing Borrower's properties or
assets (including the Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disk or tape files, printouts, runs, or other computer prepared
information.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrowing" means a borrowing hereunder consisting of Advances or
the Term Loan made on the same day by the Lenders to Borrower, or by Foothill in
the case of a Foothill Loan, or by Agent in the case of an Agent Advance.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close.
"Change of Control" shall be deemed to have occurred at such time
as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than 30% of the total voting power of all classes of stock
then outstanding of Borrower entitled to vote in the election of directors.
"Closing Date" means the date of the first to occur of the making
of the initial Advance or the funding of the Term Loan or the issuance of the
initial Letter of Credit.
"Code" means the New York Uniform Commercial Code.
"Collateral" means all of Borrower's right, title, and interest
in and to each of the following:
(a) the Accounts,
(b) the Books,
(c) the Equipment,
(d) the General Intangibles,
3
<PAGE>
(e) the Inventory,
(f) the Negotiable Collateral,
(g) the Real Property Collateral,
(h) any money, or other assets of Borrower that now or hereafter
come into the possession, custody, or control of any member of the Lender Group,
and
(i) the proceeds and products, whether tangible or intangible, of
any of the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, the Books, Equipment, General Intangibles,
Inventory, Negotiable Collateral, Real Property, money, deposit accounts, or
other tangible or intangible property resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or any portion thereof
or interest therein, and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver or consent,
mortgagee waiver or consent, bailee letter, or a similar acknowledgment
agreement of any warehouseman, processor, lessor, consignee, or other Person in
possession of, having a Lien upon, or having rights or interests in the
Equipment or Inventory, in each case, in form and substance satisfactory to
Agent.
"Collections" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds).
"Commitment" means, at any time with respect to a Lender, the
principal amount set forth beside such Lender's name under the heading
"Commitment" on Schedule C-1 attached hereto or on the signature page of the
Assignment and Acceptance pursuant to which such Lender became a Lender
hereunder in accordance with the provisions of Section 15.1, as such Commitment
may be adjusted from time to time in accordance with the provisions of Section
15.1, and "Commitments" means, collectively, the aggregate amount of the
commitments of all of the Lenders.
"Compliance Certificate" means a certificate substantially in the
form of Exhibit C-1 and delivered by the chief accounting officer of Borrower to
Agent.
"Control Agreement" means a control agreement, in form and
substance reasonably satisfactory to Agent, between Borrower, Agent, and the
applicable securities intermediary with respect to the applicable Securities
Account and related Investment Property.
"Daily Balance" means the amount of an Obligation owed at the end
of a given day.
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"deems itself insecure" means that the Person deems itself
insecure in accordance with the provisions of Section 1208 of the Code.
"Default" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.
"Defaulting Lender" means any Lender that fails to make any
Advance or Term Loan that it is required to make hereunder on any Funding Date
and that has not cured such failure by making such Advance or Term Loan within 1
Business Day after written demand upon it by Agent to do so.
"Defaulting Lenders Rate" means the Reference Rate for the first
3 days from and after the date the relevant payment is due and, thereafter, at
the interest rate then applicable to Advances.
"Designated Account" means account number 4296-915283 of Borrower
maintained with Borrower's Designated Account Bank, or such other deposit
account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Agent.
"Designated Account Bank" means Wells Fargo Bank, N.A., whose
office is located at 100 West Washington, Phoenix, AZ, and whose ABA number is
121000248.
"Dilution" means, in each case based upon the experience of the
immediately prior 90 days, the result of dividing the Dollar amount of (a) bad
debt write-downs, discounts, advertising, returns, promotions, credits, or other
dilution with respect to the Accounts (exclusive of those described in Schedule
A), by (b) Borrower's Collections (excluding extraordinary items and Collections
on the Accounts described in Schedule A) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an
amount sufficient to reduce the advance rate against Eligible Accounts hereunder
by one percentage point for each percentage point by which Dilution is in excess
of 3%.
"Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Agent regarding the extensions of credit to be made on
the Closing Date, the form and substance of which shall be satisfactory to
Agent.
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth in
Section 3.7.
"EBITDA" means, with respect to any period, the consolidated net
income of Borrower and its Subsidiaries for such period (a) plus all interest
expense, income tax expense, depreciation and amortization (including
amortization of any goodwill or other intangibles) for such period, (b) minus
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gains and plus losses attributable to any fixed asset sales in such period, and
(c) plus or minus any other non-cash charges or extraordinary income or expenses
which have been subtracted or added in calculating consolidated net income for
such period.
"Eligible Accounts" means those Accounts created by Borrower's
Core PEO services and Logistics Personnel Corp. (as those accounts have
historically been reflected in the financial records of Borrower) in the
ordinary course of business, that arise out of Borrower's sale of goods or
rendition of services, that strictly comply with each and all of the
representations and warranties respecting Accounts made by Borrower to Agent in
the Loan Documents, and that are and at all times continue to be acceptable to
Agent in all respects; provided, however, that standards of eligibility may be
fixed and revised from time to time by Agent in its reasonable credit judgment.
Eligible Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to pay within 30
days of invoice date;
(b) Accounts owed by an Account Debtor or its Affiliates where
50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are
deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Accounts that are not payable in Dollars or with respect to
which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Agent (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Agent and is directly
drawable by Agent, or (z) the Account is covered by credit insurance in form and
amount, and by an insurer, satisfactory to Agent;
(f) Accounts with respect to which the Account Debtor is either
(i) the United States or any department, agency, or instrumentality of the
United States (exclusive, however, of Accounts with respect to which Borrower
has complied, to the satisfaction of Agent, with the Assignment of Claims Act,
31 U.S.C. section 3727), or (ii) any State of the United States (exclusive,
however, of Accounts owed by any State that does not have a statutory
counterpart to the Assignment of Claims Act);
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(g) Accounts with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Account;
(h) Accounts with respect to an Account Debtor whose total
obligations owing to Borrower exceed 10% of all Eligible Accounts, to the extent
of the obligations owing by such Account Debtor in excess of such percentage;
(i) Accounts with respect to which the Account Debtor is subject
to any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts the collection of which Agent, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Accounts for which the services giving rise to such Account
have not been performed and accepted by the Account Debtor including without
limitation, invoices sent to Account Debtors for which payment has not yet been
paid by Borrower for the items invoiced, or the Account otherwise does not
represent a final sale and Accounts with respect to which the goods giving rise
to such Account have not been shipped and billed to the Account Debtor;
(l) Accounts with respect to which the Account Debtor is located
in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement;
(m) Accounts that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services;
(n) Accounts generated under a contract that has been terminated;
and
(o) Accounts relating to ESI Risk Management Agency, Inc., Team
Benefits Corp., Team Tours, Inc., and Talent, Entertainment and Media Services,
Inc. (dba TEAM & Team Music).
"Eligible Transferee" means: (a) a commercial bank organized
under the laws of the United States, or any state thereof, and having total
assets in excess of $100,000,000; (b) a commercial bank organized under the laws
of any other country which is a member of the Organization for Economic
Cooperation and Development or a political subdivision of any such country, and
having total assets in excess of $100,000,000; provided that such bank is acting
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through a branch or agency located in the United States; (c) a finance company,
insurance company or other financial institution or fund that is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business and having total assets in excess of $50,000,000; (d) any
Affiliate (other than individuals) of a pre-existing Lender or funds or accounts
managed by a pre-existing Lender; (e) so long as no Event of Default has
occurred and is continuing, any other Person approved by Agent and Borrower; and
(f) during the continuation of an Event of Default, any other Person approved by
Agent.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any interest of Borrower in any of the foregoing, and (b) all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, 29 U.S.C. sectionsection 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA Event" means (a) the institution by the PBGC of
proceedings to terminate a Benefit Plan or Multiemployer Plan, (b) any event or
condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of
ERISA for the termination of, or the appointment of a trustee to administer, any
Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a
Multiemployer Plan pursuant to Section 4041A of ERISA, or (c) the partial or
complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of
Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan.
"Event of Default" has the meaning set forth in Section 8.
"Excess Availability" means Borrower's unrestricted cash and cash
equivalents plus Borrower's Availability minus the amount of Borrower's accounts
payable that are aged in excess of levels approved by Agent in light of
historical levels of accounts payable.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and any successor statute thereto.
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"FEIN" means Federal Employer Identification Number.
"Foothill" means Foothill Capital Corporation, a California
corporation.
"Foothill Loans" has the meaning set forth in Section 2.1(f).
"Funding Date" means the date on which a Borrowing occurs.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, Permits, patents, trade names, trademarks, servicemarks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means, with respect to any Person, the
certificate or articles of incorporation, by-laws, or other organizational or
governing documents of such Person.
"Governmental Authority" means any nation or government, any
state, province, or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through Stock or capital ownership or otherwise, by any of the
foregoing.
"Hazardous Materials" means (a) substances that are defined or
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of Borrower for
borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
9
<PAGE>
of Borrower in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of Borrower under
capital leases, (d) all obligations or liabilities of others secured by a Lien
on any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of Borrower guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person.
"Indemnified Liabilities" has the meaning set forth in Section
11.3.
"Indemnified Person" has the meaning set forth in Section 11.3.
"Indenture" means that certain agreement dated as of October 15,
1997, by and between Borrower and The Huntington National Bank, as Trustee.
"Insolvency Proceeding" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Intangible Assets" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.
"Intellectual Property" has the meaning ascribed thereto in
Section 5.16.
"Inventory" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"Investment Property" means "investment property" as that term is
defined in Section 9-115 of the Code.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Legal Requirements" means all applicable international, foreign,
federal, state, and local laws, judgments, decrees, orders, statutes,
ordinances, rules, regulations, or Permits.
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"Lender" and "Lenders" have the respective meanings set forth in
the preamble to this Agreement, and shall include any other Person made a party
to this Agreement in accordance with the provisions of Section 15.1 hereof.
"Lender Group" means, individually and collectively, each of the
individual Lenders and Agent.
"Lender Group Expenses" means all: costs or expenses (including
taxes, and insurance premiums) required to be paid by Borrower under any of the
Loan Documents that are paid or incurred by the Lender Group; fees or charges
paid or incurred by the Lender Group in connection with the Lender Group's
transactions with Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC (or equivalent) searches and including
searches with the patent and trademark office, the copyright office, or the
department of motor vehicles), filing, recording, publication, appraisal
(including periodic Personal Property Collateral appraisals), real estate
surveys, real estate title policies and endorsements, and environmental audits;
costs and expenses incurred by Agent in the disbursement of funds to Borrower
(by wire transfer or otherwise); charges paid or incurred by Agent resulting
from the dishonor of checks; costs and expenses paid or incurred by the Lender
Group to correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale, or advertising to sell the Personal Property
Collateral or the Real Property Collateral, or any portion thereof, irrespective
of whether a sale is consummated; costs and expenses paid or incurred by Agent
in examining the Books; costs and expenses of third party claims or any other
suit paid or incurred by the Lender Group in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or the Lender Group's relationship with Borrower (or any of its
Subsidiaries party to one or more Loan Documents); and the Lender Group's
reasonable attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing (including
attorneys fees and expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning Borrower), defending, or
concerning the Loan Documents, irrespective of whether suit is brought.
"Lender-Related Persons" means, with respect to any Lender, such
Lender, together with such Lender's Affiliates, and the officers, directors,
employees, counsel, agents, and attorneys-in-fact of such Lender and such
Lender's Affiliates.
"Letter of Credit" means an L/C or an L/C Guaranty, as the
context requires.
"Letter of Credit Usage" means the sum of (a) the undrawn amount
of the Letters of Credit, plus, (b) the amount of unreimbursed drawings under
Letters of Credit.
"Lien" means any interest in property securing an obligation owed
to, or a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute, or contract, whether such
interest shall be recorded or perfected, and whether such interest shall be
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contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section 2.10.
"Loan Documents" means this Agreement, the Disbursement Letter,
the Letters of Credit, the Lockbox Agreements, the Mortgages, any note or notes
executed by Borrower and payable to the Lender Group, and any other agreement
entered into, now or in the future, in connection with this Agreement.
"Lockbox Account" shall mean a depositary account established
pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Agent, each of which is among Borrower, Agent, and
one of the Lockbox Banks.
"Lockbox Banks" means Wells Fargo Bank, N.A.
"Lockboxes" has the meaning set forth in Section 2.7.
"Material Adverse Change" means (a) a material adverse change in
the business, prospects, operations, results of operations, assets, liabilities
or condition (financial or otherwise) of Borrower, (b) the material impairment
of Borrower's ability to perform its obligations under the Loan Documents to
which it is a party or of the Lender Group to enforce the Obligations or realize
upon the Collateral, (c) a material adverse effect on the value of the
Collateral or the amount that the Lender Group would be likely to receive (after
giving consideration to delays in payment and costs of enforcement) in the
liquidation of the Collateral, or (d) a material impairment of the priority of
the Agent's Liens with respect to the Collateral.
"Maturity Date" means January 1, 2001.
"Maximum Revolving Amount" means $10,000,000.
"Maximum Term Loan Amount" means $10,000,000.
"Mortgages" means one or more mortgages, deeds of trust, or deeds
to secure debt, executed by Borrower in favor of Agent, the form and substance
of which shall be satisfactory to Agent, that encumber the Real Property
Collateral and the related improvements thereto.
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"Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.
"Negotiable Collateral" means all of a Person's present and
future letters of credit, notes, drafts, instruments, Investment Property,
documents, personal property leases (wherein such Person is the lessor), chattel
paper, and the Books relating to any of the foregoing.
"Obligations" means all loans, Advances, the Term Loan, debts,
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), premiums (including Early Termination
Premiums), liabilities (including all amounts charged to Borrower's Loan Account
pursuant hereto), obligations (including contingent obligations of Borrower with
respect to Letters of Credit), fees, charges, costs, or Lender Group Expenses
(including any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and duties
owing by Borrower to the Lender Group of any kind and description (whether
pursuant to or evidenced by the Loan Documents or pursuant to any other
agreement between the Lender Group and Borrower, and irrespective of whether for
the payment of money), whether direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to others that the Lender Group may
have obtained by assignment or otherwise, and further including all interest not
paid when due and all Lender Group Expenses that Borrower is required to pay or
reimburse by the Loan Documents, by law, or otherwise.
"Overadvance" has the meaning set forth in Section 2.5.
"Participant" has the meaning set forth in Section 15.1(e).
"PBGC" means the Pension Benefit Guaranty Corporation as defined
in Title IV of ERISA, or any successor thereto.
"Permits" of a Person shall mean all rights, franchises, permits,
authorities, licenses, certificates of approval or authorizations, including
licenses and other authorizations issuable by a Governmental Authority, which
pursuant to applicable Legal Requirements are necessary to permit such Person
lawfully to conduct and operate its business as currently conducted and to own
and use its assets.
"Permitted Liens" means (a) Liens held by Agent for the benefit
of the Lender Group, (b) Liens for unpaid taxes that either (i) are not yet due
and payable or (ii) are the subject of Permitted Protests, (c) Liens set forth
on Schedule P-1, (d) the interests of lessors under operating leases and
purchase money Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under Section 7.21 and
so long as the Lien only attaches to the asset purchased or acquired and only
secures the purchase price of the asset, (e) Liens arising by operation of law
in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers,
or suppliers, incurred in the ordinary course of business of Borrower and not in
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connection with the borrowing of money, and which Liens either (i) are for sums
not yet delinquent, or (ii) are the subject of Permitted Protests, (f) Liens
arising from deposits made in connection with obtaining workers compensation or
commercial auto, property and general liability insurance, (g) Liens or deposits
to secure performance of bids, tenders, contracts or leases (to the extent
permitted under this Agreement), incurred in the ordinary course of business of
Borrower and not in connection with the borrowing of money, (h) Liens arising by
reason of security for surety or appeal bonds in the ordinary course of business
of Borrower, (i) Liens of or resulting from any judgment or award that
reasonably could not be expected to result in a Material Adverse Change and as
to which the time for the appeal or petition for rehearing of which has not yet
expired, or in respect of which Borrower is in good faith prosecuting an appeal
or proceeding for a review and in respect of which a stay of execution pending
such appeal or proceeding for review has been secured, (j) Liens with respect to
the Real Property Collateral that are exceptions to the commitments for title
insurance issued in connection with the Mortgages, as accepted by Agent, and (k)
with respect to any Real Property that is not part of the Real Property
Collateral, easements, rights of way, zoning and similar covenants and
restrictions, and similar encumbrances that customarily exist on properties of
Persons engaged in similar activities and similarly situated and that in any
event do not materially interfere with or impair the use or operation of the
Collateral by Borrower or the value of any of the Agent's Liens thereon or
therein for the benefit of the Lender Group, or materially interfere with the
ordinary conduct of the business of Borrower.
"Permitted Protest" means the right of Borrower to protest any
Lien (other than any such Lien that secures the Obligations), tax or rental
payment, provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in an amount required by GAAP, (b) any such
protest is instituted and diligently prosecuted by Borrower in good faith, and
(c) Lenders are satisfied that, while any such protest is pending, there will be
no impairment of the enforceability, validity, or priority of any of the Agent's
Liens in and to the Collateral or that an appropriate bond satisfactory to
Lenders is posted in favor of Agent and Lenders providing security with respect
to any such impairment.
"Person" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Personal Property Collateral" means all Collateral other than
the Real Property Collateral.
"Plan" means any employee benefit plan, program, or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability.
"Pro Rata Share" means, with respect to a Lender, a fraction
(expressed as a percentage), the numerator of which is the amount of such
Lender's Commitment and the denominator of which is the aggregate amount of the
Commitments.
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"Real Property" means any estates or interests in real property
now owned or hereafter acquired by Borrower.
"Real Property Collateral" means any Real Property hereafter
acquired by Borrower.
"Reference Rate" means the variable rate of interest, per annum,
most recently announced by Wells Fargo Bank, N.A., located in San Francisco,
California, or any successor thereto, as its "prime rate," irrespective of
whether such announced rate is the best rate available from such financial
institution.
"Required Lenders" means, at any time, Lenders whose Pro Rata
Shares aggregate 662/3% or more of the Commitments, or, if the Commitments have
been terminated irrevocably, 662/3% of the Obligations then outstanding.
"Retiree Health Plan" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"Revolving Facility Usage" means, as of any date of
determination, the aggregate amount of Advances outstanding, plus the Letter of
Credit Usage.
"Revolving Loan Facility" means the revolving loan facility
provided in Section 2.1(a).
"SEC" means the United States Securities and Exchange Commission
and any successor Federal agency having similar powers.
"Securities Account" means a "securities account" as that term is
defined in Section 8-501 of the Code.
"Settlement" has the meaning set forth in Section 2.1(h)(i).
"Settlement Date" has the meaning set forth in Section 2.1(h)(i).
"Solvent" means, with respect to any Person on a particular date,
that on such date (a) at fair valuations, all of the properties and assets of
such Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and (e)
such Person is not engaged in business or a transaction, and is not about to
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engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"Stock" means all shares, options, warrants, interests,
participations, or other equivalents (regardless of how designated) of or in a
corporation or equivalent entity, whether voting or nonvoting, including common
stock, preferred stock, or any other "equity security" (as such term is defined
in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under
the Exchange Act).
"Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of Stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"Tangible Net Worth" means, as of any date of determination, the
difference of (a) Borrower's total stockholder's equity, minus (b) the sum of:
(i) all Intangible Assets of Borrower, (ii) all of Borrower's prepaid expenses,
and (iii) all amounts due to Borrower from Affiliates; provided, however, Team
Benefits Corp., Team Tours, Inc. and Talent, Entertainment and Media Services,
Inc. (collectively, "Team") shall not be deemed an Affiliate for the purposes
hereof by virtue of Team and Borrower having common directors after Borrower
sells all of its capital stock of Team.
"Term Loan" has the meaning set forth in Section 2.3.
"Voidable Transfer" has the meaning set forth in Section 18.7.
"Year 2000 Compliant" means, with respect to any Person, that all
software and goods produced or sold by, or utilized by and material to the
business operations or financial condition of, such Person is able to interpret
and manipulate data on and involving all calendar dates correctly and without
causing any abnormal ending scenario, including in relation to dates in and
after the Year 2000.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrower and its Subsidiaries on a
consolidated basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in the
Code shall be construed and defined as set forth in the Code unless otherwise
defined herein.
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1.4 CONSTRUCTION. Unless the context of this Agreement or any other
Loan Document clearly requires otherwise, references to the plural include the
singular, references to the singular include the plural, the term "including" is
not limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby," "hereunder," and similar terms in this Agreement or any
other Loan Document refer to this Agreement or any other Loan Documents, as the
case may be, as a whole and not to any particular provision of this Agreement or
such other Loan Document, as the case may be. An Event of Default shall
"continue" or be "continuing" until such Event of Default has been waived in
writing by Agent. Section, subsection, clause, schedule, and exhibit references
herein are to this Agreement unless otherwise specified. Any reference in this
Agreement or in the Loan Documents to this Agreement or any of the Loan
Documents shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, joinders, and supplements,
thereto and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached
to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this Agreement and
during the term of this Agreement, each Lender with a Commitment to make
Advances agrees to make advances ("Advances") to Borrower in an amount at any
one time outstanding not to exceed such Lender's Pro Rata Share of an amount
equal to the lesser of (i) the Maximum Revolving Amount less the Letter of
Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage. For
purposes of this Agreement, "Borrowing Base", as of any date of determination,
shall mean the result of:
(x) the lesser of (i) 85% of Eligible Accounts, less the
amount, if any, of the Dilution Reserve, and (ii) an amount equal to
Borrower's Collections with respect to Accounts (other than the
Accounts described in Schedule A) for the immediately preceding nine
(9) day period, minus
(y) the aggregate amount of reserves, if any, established by
Agent under Section 2.1(b).
The Lenders shall have no obligation to make further Advances hereunder to the
extent they would cause the outstanding Revolving Facility Usage to exceed the
Maximum Revolving Amount. In the event that the Obligations exceed Collections
with respect to Accounts (other than the Accounts described in Schedule A) for
the immediately preceding sixteen (16) day period, the outstanding Advances
(and, if and to the extent the amount of the outstanding Advances equals zero,
thereafter, the Term Loan) must be reduced by such excess amount. Amounts
borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms
and conditions of this Agreement, reborrowed at any time during the term of this
Agreement.
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(b) Advance Rate Adjustments and Reserves. Anything to the
contrary in Section 2.1(a) above notwithstanding, Agent may (i) reduce the
Lender Group's advance rate based upon Eligible Accounts without declaring an
Event of Default if it determines that there has occurred a Material Adverse
Change; and (ii) establish reserves against the Borrowing Base in such amounts
as Agent in its reasonable judgment (from the perspective of an asset-based
lender) shall deem necessary or appropriate, including reserves on account of
(w) the greater of any delinquent rent or 1 month's rent for the leased location
where Borrower maintains its chief executive office to the extent an acceptable
Collateral Access Agreement as described in Section 3.3 is not delivered to the
Agent within ten (10) days of the Closing Date; (x) sums that Borrower is
required to pay (such as taxes, including federal and state payroll withholding
taxes, assessments, insurance premiums, or, in the case of leased assets, rents
or other amounts payable under such leases) and has failed to pay under any
section of this Agreement or any other Loan Document; or (y) without duplication
of the foregoing, amounts owing by Borrower to any Person to the extent secured
by a Lien on, or trust over, any of the Collateral, which Lien or trust, in the
reasonable determination of Agent (from the perspective of an asset-based
lender), would be likely to have a priority superior to the Liens of Agent (such
as unpaid wages, landlord liens, ad valorem taxes, or sale taxes where given
priority under applicable law) in and to such item of the Collateral; or (z)
reserves sufficient to maintain the ratio of the aggregate amount of all accrued
but unbilled accounts ("Accrued Accounts") to Eligible Accounts at no greater
than 2.25:1. In addition, Agent shall establish reserves against the Borrowing
Base in amounts equal to the greater of (A) the amount of cash collateral held
in connection with any ACH or other cash management account, or (B) the amount
of credit exposure owed by Borrower from time to time with respect to such cash
management accounts less the undrawn amount of any Letter of Credit outstanding
supporting such credit exposure. In addition, the sum of (a) the amount of
outstanding Advances, plus (b) the Letter of Credit Usage shall not exceed the
difference between the Maximum Revolving Amount minus the aggregate amount of
the greater of (A) the amount of cash collateral held in connection with any ACH
or other cash management account, or (B) the amount of credit exposure owed by
Borrower from time to time with respect to any ACH or other cash management
account less the undrawn amount of any Letter of Credit outstanding supporting
such credit exposure. Borrower shall provide daily reports to Agent of the
aggregate amount of such credit exposure owing on that date with respect to any
such ACH or other cash management account. If Borrower fails to provide such
report on any day, the amount of the foregoing credit exposure shall be
$3,300,000. Without limiting the Agent's ability to make the foregoing reserves,
if there is any material adverse change in the circumstances as understood by
Agent on the Closing Date as to Borrower's liability or the State's associated
lien rights and remedies for sales taxes in Ohio or any other state, Agent may
also reserve such amounts as Agent in its reasonable judgment shall deem
necessary or appropriate from time to time with respect to Borrower's liability
for such taxes.
(c) Procedure for Borrowing. Each Borrowing shall be made upon
Borrower's irrevocable request therefor delivered to Agent (which notice must be
received by Agent no later than 10:00 a.m. (California time) on the Business Day
immediately preceding the requested Funding Date) specifying (i) the amount of
the Borrowing; and (ii) the requested Funding Date, which shall be a Business
Day.
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(d) Agent's Election. Promptly after receipt of a request for a
Borrowing pursuant to Section 2.1(c), Agent shall elect, in its discretion, (i)
to have the terms of Section 2.1(e) apply to such requested Borrowing, or (ii)
to request Foothill to make a Foothill Loan pursuant to the terms of Section
2.1(f) in the amount of the requested Borrowing; provided, however, that if
Foothill declines in its sole discretion to make a Foothill Loan pursuant to
Section 2.1(f), Agent shall elect to have the terms of Section 2.1(e) apply to
such requested Borrowing.
(e) Making of Advances.
(i) In the event that Agent shall elect to have the terms of
this Section 2.1(e) apply to a requested Borrowing as described in Section
2.1(d), then promptly after receipt of a request for a Borrowing pursuant to
Section 2.1(c), Agent shall notify the Lenders, not later than 1:00 p.m.
(California time) on the Business Day immediately preceding the Funding Date
applicable thereto, by telecopy, telephone, or other similar form of
transmission, of the requested Borrowing. Each Lender shall make the amount of
such Lender's Pro Rata Share of the requested Borrowing available to Agent in
immediately available funds, to such account of Agent as Agent may designate,
not later than 10:00 a.m. (California time) on the Funding Date applicable
thereto. After Agent's receipt of the proceeds of such Advances, upon
satisfaction of the applicable conditions precedent set forth in Section 3
hereof, Agent shall make the proceeds of such Advances available to Borrower on
the applicable Funding Date by transferring same day funds equal to the proceeds
of such Advances received by Agent to Borrower's Designated Account; provided,
however, that, subject to the provisions of Section 2.1(k), Agent shall not
request any Lender to make, and no Lender shall have the obligation to make, any
Advance if Agent shall have received written notice from any Lender, or
otherwise has actual knowledge, that (1) one or more of the applicable
conditions precedent set forth in Section 3 will not be satisfied on the
requested Funding Date for the applicable Borrowing unless such condition has
been waived, or (2) the requested Borrowing would exceed the Availability of
Borrower on such Funding Date (after giving effect to reserves established under
Section 2.1(b)).
(ii) Unless Agent receives notice from a Lender on or prior
to the Closing Date or, with respect to any Borrowing after the Closing Date, at
least 1 Business Day prior to the date of such Borrowing, that such Lender will
not make available as and when required hereunder to Agent for the account of
Borrower the amount of that Lender's Pro Rata Share of the Borrowing, Agent may
assume that each Lender has made or will make such amount available to Agent in
immediately available funds on the Funding Date and Agent may (but shall not be
so required), in reliance upon such assumption, make available to Borrower on
such date a corresponding amount. If and to the extent any Lender shall not have
made its full amount available to Agent in immediately available funds and Agent
in such circumstances has made available to Borrower such amount, that Lender
shall on the Business Day following such Funding Date make such amount available
to Agent, together with interest at the Defaulting Lenders Rate for each day
during such period. A notice submitted by Agent to any Lender with respect to
amounts owing under this subsection shall be conclusive, absent manifest error.
If such amount is so made available, such payment to Agent shall constitute such
Lender's Advance on the date of Borrowing for all purposes of this Agreement. If
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such amount is not made available to Agent on the Business Day following the
Funding Date, Agent will notify Borrower of such failure to fund and, upon
demand by Agent, Borrower shall pay such amount to Agent for Agent's account,
together with interest thereon for each day elapsed since the date of such
Borrowing, at a rate per annum equal to the interest rate applicable at the time
to the Advances composing such Borrowing. The failure of any Lender to make any
Advance on any Funding Date shall not relieve any other Lender of any obligation
hereunder to make an Advance on such Funding Date, but no Lender shall be
responsible for the failure of any other Lender to make the Advance to be made
by such other Lender on any Funding Date.
(iii) Agent shall not be obligated to transfer to a
Defaulting Lender any payments made by Borrower to Agent for the Defaulting
Lender's benefit; nor shall a Defaulting Lender be entitled to the sharing of
any payments hereunder. Amounts payable to a Defaulting Lender shall instead be
paid to or retained by Agent. Agent may hold and, in its discretion, re-lend to
Borrower the amount of all such payments received or retained by it for the
account of such Defaulting Lender. Solely for the purposes of voting or
consenting to matters with respect to the Loan Documents and determining Pro
Rata Shares, such Defaulting Lender shall be deemed not to be a "Lender" and
such Lender's Commitment shall be deemed to be zero (-0-). This section shall
remain effective with respect to such Lender until (x) the Obligations under
this Agreement shall have been declared or shall have become immediately due and
payable or (y) the non-Defaulting Lenders and Agent shall have waived such
Lender's default in writing. The operation of this section shall not be
construed to increase or otherwise affect the Commitment of any Lender, or
relieve or excuse the performance by Borrower of its duties and obligations
hereunder.
(f) Making of Foothill Loans.
(i) In the event Agent shall elect, with the consent of
Foothill as a Lender, to have the terms of this Section 2.1(f) apply to a
requested Borrowing as described in Section 2.1(d), Foothill as a Lender shall
make an Advance in the amount of such Borrowing (any such Advance made solely by
Foothill as a Lender pursuant to this Section 2.1(f) being referred to as a
"Foothill Loan" and such Advances being referred to collectively as "Foothill
Loans") available to Borrower on the Funding Date applicable thereto by
transferring same day funds to Borrower's Designated Account. Each Foothill Loan
is an Advance hereunder and shall be subject to all the terms and conditions
applicable to other Advances, except that all payments thereon shall be payable
to Foothill as a Lender solely for its own account (and for the account of the
holder of any participation interest with respect to such Advance). Subject to
the provisions of Section 2.1(k), Agent shall not request Foothill as a Lender
to make, and Foothill as a Lender shall not make, any Foothill Loan if Agent
shall have received written notice from any Lender, or otherwise has actual
knowledge, that (i) one or more of the applicable conditions precedent set forth
in Section 3 will not be satisfied on the requested Funding Date for the
applicable Borrowing unless such condition has been waived, or (ii) the
requested Borrowing would exceed the Availability of Borrower on such Funding
Date (after giving effect to reserves established under Section 2.1(b)).
Foothill as a Lender shall not otherwise be required to determine whether the
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applicable conditions precedent set forth in Section 3 have been satisfied on
the Funding Date applicable thereto prior to making, in its sole discretion, any
Foothill Loan.
(ii) The Foothill Loans shall be secured by the Collateral
and shall constitute Advances and Obligations hereunder, and shall bear interest
at the rate applicable from time to time to Advances pursuant to Section 2.6
hereof.
(g) Agent Advances.
(i) Subject to the limitations set forth in the proviso
contained in this Section 2.1(g), Agent hereby is authorized by Borrower and the
Lenders, from time to time in Agent's sole discretion, (1) after the occurrence
and during the continuance of a Default or an Event of Default, or (2) at any
time that any of the other applicable conditions precedent set forth in Section
3 have not been satisfied, to make Advances to Borrower on behalf of the Lenders
that Agent, in its reasonable business judgment, deems necessary or desirable
(A) to preserve or protect the Collateral, or any portion thereof, (B) to
enhance the likelihood of repayment of the Obligations, or (C) to pay any other
amount chargeable to Borrower pursuant to the terms of this Agreement, including
Lender Group Expenses and the costs, fees, and expenses described in Section 10
(any of the Advances described in this Section 2.1(g) being hereinafter referred
to as "Agent Advances"); provided, that the Agent shall not make an Agent
Advance to Borrower without the consent of the Required Lenders if the aggregate
outstanding sum of the Agent Advances plus the Overadvances under Section 2.1(k)
would exceed the lesser of $1 million or 10% of the amount of the Borrowing Base
at any one time.
(ii) Agent Advances shall be repayable on demand and secured
by the Collateral, shall constitute Advances and Obligations hereunder, and
shall bear interest at the rate applicable from time to time to the Advances
pursuant to Section 2.6 hereof.
(h) Settlement. It is agreed that each Lender's funded portion of
the Advances is intended by the Lenders to equal, at all times, such Lender's
Pro Rata Share of the outstanding Advances. Such agreement notwithstanding,
Agent, Foothill, and the other Lenders agree (which agreement shall not be for
the benefit of or enforceable by Borrower) that in order to facilitate the
administration of this Agreement and the other Loan Documents, settlement among
them as to the Advances, the Foothill Loans, and the Agent Advances shall take
place on a periodic basis in accordance with the following provisions, unless
otherwise agreed between Agent and the Lenders:
(i) Agent shall request settlement ("Settlement") with the
Lenders on a weekly basis, or on a more frequent basis if so determined by
Agent, (1) on behalf of Foothill, with respect to each outstanding Foothill
Loan, (2) for itself, with respect to each Agent Advance, and (3) with respect
to Collections received, as to each by notifying the Lenders by telecopy,
telephone, or other similar form of transmission, of such requested Settlement,
no later than 2:00 p.m. (California time) on the Business Day immediately prior
to the date of such requested Settlement (the date of such requested Settlement
being the "Settlement Date"). Such notice of a Settlement Date shall include a
summary statement of the amount of outstanding Advances, Foothill Loans, and
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Agent Advances for the period since the prior Settlement Date, the amount of
repayments received in such period, and the amounts allocated to each Lender of
the interest, fees, and other charges for such period. Subject to the terms and
conditions contained herein (including Section 2.1(e)(iii)): (y) if a Lender's
balance of the Advances, Foothill Loans, and Agent Advances exceeds such
Lender's Pro Rata Share of the Advances, Foothill Loans, and Agent Advances as
of a Settlement Date, then Agent shall by no later than 12:00 p.m (California
time) on the Settlement Date transfer in immediately available funds to the
account of such Lender as such Lender may designate, an amount such that each
such Lender shall, upon receipt of such amount, have as of the Settlement Date,
its Pro Rata Share of the Advances, Foothill Loans, and Agent Advances; and (z)
if a Lender's balance of the Advances, Foothill Loans, and Agent Advances is
less than such Lender's Pro Rata Share of the Advances, Foothill Loans, and
Agent Advances as of a Settlement Date, such Lender shall no later than 12:00
p.m. (California time) on the Settlement Date transfer in immediately available
funds to such account of Agent as Agent may designate, an amount such that each
such Lender shall, upon transfer of such amount, have as of the Settlement Date,
its Pro Rata Share of the Advances, Foothill Loans, and Agent Advances. Such
amounts made available to Agent under clause (z) of the immediately preceding
sentence shall be applied against the amounts of the applicable Foothill Loan or
Agent Advance and, together with the portion of such Foothill Loan or Agent
Advance representing Foothill's Pro Rata Share thereof, shall constitute
Advances of such Lenders. If any such amount is not made available to Agent by
any Lender on the Settlement Date applicable thereto to the extent required by
the terms hereof, Agent shall be entitled to recover for its account such amount
on demand from such Lender together with interest thereon at the Defaulting
Lenders Rate.
(ii) In determining whether a Lender's balance of the
Advances, Foothill Loans, and Agent Advances is less than, equal to, or greater
than such Lender's Pro Rata Share of the Advances, Foothill Loans, and Agent
Advances as of a Settlement Date, Agent shall, as part of the relevant
Settlement, apply to such balance the portion of payments actually received in
good funds by Agent or Foothill with respect to principal, interest, fees
payable by Borrower and allocable to the Lenders hereunder, and proceeds of
Collateral. To the extent that a net amount is owed to any such Lender after
such application, such net amount shall be distributed by Agent or Foothill to
that Lender as part of such next Settlement.
(iii) Between Settlement Dates, Agent, to the extent no
Agent Advances or Foothill Loans are outstanding, may pay over to Foothill any
payments received by Agent, that in accordance with the terms of this Agreement
would be applied to the reduction of the Advances, for application to Foothill's
Pro Rata Share of the Advances. If, as of any Settlement Date, Collections
received since the then immediately preceding Settlement Date have been applied
to Foothill's Pro Rata Share of the Advances other than to Foothill Loans or
Agent Advances, as provided for in the previous sentence, Foothill shall pay to
Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be
applied to the outstanding Advances of such Lenders, an amount such that each
Lender shall, upon receipt of such amount, have, as of such Settlement Date, its
Pro Rata Share of the Advances. During the period between Settlement Dates,
Foothill with respect to Foothill Loans, Agent with respect to Agent Advances,
and each Lender with respect to the Advances other than Foothill Loans and Agent
Advances, shall be entitled to interest at the applicable rate or rates payable
under this Agreement on the daily amount of funds employed by Foothill, Agent,
or the Lenders, as applicable.
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(i) Notation. Agent shall record on its books the principal
amount of the Advances owing to each Lender, including the Foothill Loans owing
to Foothill, and Agent Advances owing to Agent, and the interests therein of
each Lender, from time to time. In addition, each Lender is authorized, at such
Lender's option, to note the date and amount of each payment or prepayment of
principal of such Lender's Advances in its books and records, including computer
records, such books and records constituting rebuttably presumptive evidence,
absent manifest error, of the accuracy of the information contained therein.
(j) Lenders' Failure to Perform. All Advances (other than
Foothill Loans and Agent Advances) shall be made by the Lenders simultaneously
and in accordance with their Pro Rata Shares. It is understood that (i) no
Lender shall be responsible for any failure by any other Lender to perform its
obligation to make any Advances hereunder, nor shall any Commitment of any
Lender be increased or decreased as a result of any failure by any other Lender
to perform its obligation to make any Advances hereunder, and (ii) no failure by
any Lender to perform its obligation to make any Advances hereunder shall excuse
any other Lender from its obligation to make any Advances hereunder.
(k) Overadvances. Any contrary provision of this Agreement
notwithstanding, if the condition for borrowing under Section 3.2(d) cannot be
fulfilled, the Lenders nonetheless hereby authorize Agent or Foothill, as
applicable, and Agent or Foothill, as applicable, may, but is not obligated to,
knowingly and intentionally continue to make Advances (including Foothill Loans)
to Borrower such failure of condition notwithstanding, so long as, at any time,
(i) the outstanding Revolving Facility Usage (including, without limitation, the
Agent Advance) does not exceed the Borrowing Base by more than the lesser of $1
million or 10% of the Borrowing Base and (ii) the outstanding Revolving Facility
Usage (except for and excluding amounts charged to the Loan Account for
interest, fees, or Lender Group Expenses) does not exceed the Maximum Revolving
Amount. The foregoing provisions are for the sole and exclusive benefit of
Agent, Foothill, and the Lenders and are not intended to benefit Borrower in any
way. The Advances and Foothill Loans, as applicable, that are made pursuant to
this Section 2.1(k) shall be subject to the same terms and conditions as any
other Advance or Foothill Loan, as applicable, except that the rate of interest
applicable thereto shall be the rates set forth in Section 2.6(c)(i) hereof
without regard to the presence or absence of a Default or Event of Default.
In the event Agent obtains actual knowledge that Revolving
Facility Usage exceeds the amount permitted by the preceding paragraph,
regardless of the amount of or reason for such excess, Agent shall notify
Lenders as soon as practicable (and prior to making any (or any further)
intentional Overadvances (except for and excluding amounts charged to the Loan
Account for interest, fees, or Lender Group Expenses) unless Agent determines
that prior notice would result in imminent harm to the Collateral or its value),
and the Lenders thereupon shall, together with Agent, jointly determine the
terms of arrangements that shall be implemented with Borrower intended to
reduce, within a reasonable time, the outstanding principal amount of the
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Advances to Borrower to an amount permitted by the preceding paragraph. In the
event any Lender disagrees over the terms of reduction and/or repayment of any
Overadvance, the terms of reduction and/or repayment thereof shall be
implemented according to the determination of the Required Lenders.
Each Lender shall be obligated to settle with Agent as provided
in Section 2.1(h) for the amount of such Lender's Pro Rata Share of any
unintentional Overadvances by Agent reported to such Lender, any intentional
Overadvances made as permitted under this Section 2.1(k), and any Overadvances
resulting from the charging to the Loan Account of interest, fees, or Lender
Group Expenses.
(l) Effect of Bankruptcy. If a case is commenced by or against
Borrower under the U.S. Bankruptcy Code, or other statute providing for debtor
relief, then, unless otherwise agreed by Required Lenders in writing, Lenders
shall not make additional loans or provide additional financial accommodations
under the Loan Documents to Borrower as debtor or debtor-in-possession, or to
any trustee for Borrower, nor consent to the use of cash collateral (provided
that the Loan Account shall continue to be charged, to the fullest extent
permitted by law, for accruing interest Lender Group Expenses and fees).
2.2 LETTER OF CREDIT SUBFACILITY.
(a) Agreement to Cause Issuance; Amounts; Outside Expiration
Date. Subject to the terms and conditions of this Agreement, Agent agrees to
issue letters of credit for the account of Borrower (each, an "L/C") or to issue
or enter into guarantees, indemnities, participations, or other undertakings
(each such guaranty, indemnity, participation, or other undertaking an "L/C
Guaranty") with respect to letters of credit issued by an issuing bank for the
account of Borrower. Agent shall have no obligation to issue or enter into a
Letter of Credit if any of the following would result:
(i) the aggregate amount of the Letter of Credit Usage,
would exceed the Borrowing Base less the amount of outstanding Advances less the
aggregate amount of reserves established under Section 2.1(b); or
(ii) the aggregate amount of the Letter of Credit Usage
would exceed the lower of: (x) the Maximum Revolving Amount less the amount of
outstanding Advances less the aggregate amount of reserves established under
Section 2.1(b); or (y) $6,500,000; or
Borrower expressly understands and agrees that Agent shall have no obligation to
arrange for the issuance by issuing banks of the letters of credit that are to
be the subject of L/C Guarantees. Borrower and the Lender Group acknowledge and
agree that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
be terminable by Lenders or shall have an expiry date no later than 60 days
prior to the date on which this Agreement is scheduled to terminate under
Section 3.4 and all such Letters of Credit shall be in form and substance
acceptable to Agent in its sole discretion. If the Lender Group is obligated to
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advance funds under a Letter of Credit, Borrower immediately shall reimburse
such amount to Agent and, in the absence of such reimbursement, the amount so
advanced shall be immediately and automatically deemed to be an Advance
hereunder and, thereafter, shall bear interest at the rate then applicable to
such Advances under Section 2.6.
(b) Indemnification. Borrower hereby agrees to indemnify, save,
defend, and hold the Lender Group harmless from any loss, cost, expense, or
liability, including payments made by the Lender Group, expenses, and reasonable
attorneys fees incurred by the Lender Group arising out of or in connection with
any Letter of Credit. Borrower agrees to be bound by the issuing bank's
regulations and interpretations of any Letters of Credit guaranteed by the
Lender Group and opened to or for Borrower's account or by Agent's
interpretations of any L/C issued by the Lender Group to or for Borrower's
account, even though this interpretation may be different from Borrower's own,
and Borrower understands and agrees that the Lender Group shall not be liable
for any error, negligence or mistake, whether of omission or commission, in
following Borrower's instructions or those contained in the Letter of Credit or
any modifications, amendments or supplements thereto. Borrower understands that
the L/C Guarantees may require the Lender Group to indemnify the issuing bank
for certain costs or liabilities arising out of claims by Borrower against such
issuing bank. Borrower hereby agrees to indemnify, save, defend and hold the
Lender Group harmless with respect to any loss, cost, expense (including
reasonable attorneys fees), or liability incurred by the Lender Group under any
L/C Guaranty as a result of the Lender Group's indemnification of any such
issuing bank.
(c) Supporting Materials. Borrower hereby authorizes and directs
any bank that issues a letter of credit guaranteed by the Lender Group to
deliver to Agent all instruments, documents and other writings and property
received by the issuing bank pursuant to such letter of credit, and to accept
and rely upon Agent's instructions and agreements with respect to all matters
arising in connection with such letter of credit and the related application.
Borrower may or may not be the "applicant" or "account party" with respect to
such letter of credit.
(d) Compensation for Letters of Credit. Any and all charges,
commissions, fees, and costs incurred by Agent relating to the letters of credit
guaranteed by the Lender Group shall be considered Lender Group Expenses for
purposes of this Agreement and shall be immediately reimbursable by Borrower to
Agent.
(e) Cash Collateral. Immediately upon the termination of this
Agreement, Borrower agrees to either (i) provide cash collateral to be held by
Agent in an amount equal to 105% of the maximum amount of the Lender Group's
obligations under Letters of Credit, or (ii) cause to be delivered to Agent
releases of all of the Lender Group's obligations under outstanding Letters of
Credit. At Agent's discretion, any proceeds of Collateral received by Agent
after the occurrence and during the continuation of an Event of Default may be
held as the cash collateral required by this Section 2.2(e).
(f) Increased Costs. If by reason of (i) any change in any
applicable law, treaty, rule or regulation or any change in the interpretation
or application by any governmental authority of any such applicable law, treaty,
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rule or regulation, or (ii) compliance by the issuing bank or Agent with any
direction, request or requirement (irrespective of whether having the force of
law) of any governmental authority or monetary authority including, without
limitation, Regulation D of the Board of Governors of the Federal Reserve System
as from time to time in effect (and any successor thereto):
a. any reserve, deposit, or similar requirement is or shall
be imposed or modified in respect of any Letters of Credit issued hereunder, or
b. there shall be imposed on the issuing bank any tax (other
than income taxes), any other increased cost or any other condition regarding
any letter of credit, or Letter of Credit, as applicable, issued pursuant
hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or the Lender Group of issuing, making, guaranteeing or
maintaining any letter of credit or Letter of Credit, as applicable, or to
reduce the amount receivable in respect thereof by such issuing bank or the
Lender Group, then, and in any such case, the Lender Group may, at any time
within a reasonable period after the additional cost is incurred or the amount
received is reduced, notify Borrower, and Borrower shall pay on demand such
amounts as the issuing bank or Agent may specify to be necessary to compensate
the issuing bank or the Lender Group for such additional cost or reduced
receipt, together with interest on such amount from the date of such demand
until payment in full thereof at the rate set forth in Section 2.6(a)(i) or
(c)(i), as applicable. The determination by the issuing bank or Agent, as the
case may be, of any amount due pursuant to this Section 2.2(f), as set forth in
a certificate setting forth the calculation thereof in reasonable detail, shall,
in the absence of manifest or demonstrable error, be final and conclusive and
binding on all of the parties hereto.
(g) Participations.
(1) Purchase of Participations. Immediately upon issuance of
any Letter of Credit in accordance with this Section 2.2, each Lender shall be
deemed to have irrevocably and unconditionally purchased and received without
recourse or warranty, an undivided interest and participation in the credit
support or enhancement provided through Agent to such issuer in connection with
the issuance of such Letter of Credit, equal to such Lender's Pro Rata Share of
the face amount of such Letter of Credit (including, without limitation, all
obligations of Borrower with respect thereto, and any security therefor or
guaranty pertaining thereto).
(2) Documentation. Upon the request of any Lender, Agent
shall furnish to such Lender copies of any Letter of Credit, reimbursement
agreements executed in connection therewith, application for any Letter of
Credit and credit support or enhancement provided through Agent in connection
with the issuance of any Letter of Credit, and such other documentation as may
reasonably be requested by such Lender.
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(3) Obligations Irrevocable. The obligations of each Lender
to make payments to Agent with respect to any Letter of Credit or with respect
to any credit support or enhancement provided through Agent with respect to a
Letter of Credit, and the obligations of Borrower to make payments to Agent for
the account of the Lenders, shall be irrevocable, not subject to any
qualification or exception whatsoever, including any of the following
circumstances:
(i) any lack of validity or enforceability of this
Agreement or any of the other Loan Documents;
(ii) the existence of any claim, setoff, defense or
other right which Borrower may have at any time against a beneficiary named in a
Letter of Credit or any transferee of any Letter of Credit (or any Person for
whom any such transferee may be acting), any Lender, Agent, the issuer of such
Letter of Credit or any other Person, whether in connection with this Agreement,
any Letter of Credit, the transactions contemplated herein or any unrelated
transactions (including any underlying transactions between Borrower or any
other Person and the beneficiary named in any Letter of Credit);
(iii) any draft, certificate or any other document
presented under the Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) the surrender or impairment of any security for
the performance or observance of any of the terms of any of the Loan Documents
in accordance with the terms of this Agreement; or
(v) the occurrence of any Default or Event of Default.
(h) Recovery or Avoidance of Payments. In the event any payment
by or on behalf of Borrower received by Agent with respect to any Letter of
Credit (or any guaranty by Borrower or reimbursement obligation of Borrower
relating thereto) and distributed by the Agent to the Lenders on account of
their respective participations therein, is thereafter set aside, avoided or
recovered from Agent in connection with any receivership, liquidation or
bankruptcy proceeding, the Lenders shall, upon demand by Agent, pay to Agent
their respective Pro Rata Shares of such amount set aside, avoided or recovered,
together with interest at the rate required to be paid by Agent upon the amount
required to be repaid by it.
2.3 TERM LOAN FACILITY.
Term Loan. Subject to the terms and conditions of this Agreement,
each Lender with a Commitment to make the Term Loan agrees to make a term loan
(the "Term Loan") to Borrower on the Closing Date in an aggregate principal
amount equal to such Lender's Pro Rata Share of the Maximum Term Loan Amount.
The outstanding principal balance and all accrued and unpaid interest under the
Term Loan shall be due and payable upon the termination of this Agreement,
whether by its terms, by prepayment, by acceleration, or otherwise. So long as
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(i) no Event of Default has occurred which is continuing and (ii) Borrower has
no less than $15 million in Excess Availability (after giving effect to reserves
established under Section 2.1(b)) after making any prepayment on the Term Loan,
the unpaid balance of the Term Loan may be prepaid, in whole or in part: (i)
without penalty or premium at any time from and after April 29, 2000 upon 30
days prior written notice to the Agent; or (ii) subject to the Early Termination
Fee set forth in Section 3.7 if prepaid prior to April 29, 2000. All amounts
outstanding under the Term Loan shall constitute Obligations.
2.4 PAYMENTS.
(a) Payments by Borrower.
(i) All payments to be made by Borrower shall be made
without set-off, recoupment, deduction, or counterclaim, except as otherwise
required by law. Except as otherwise expressly provided herein, all payments by
Borrower shall be made to Agent for the account of the Lenders at Agent's
address set forth in Section 12, and shall be made in immediately available
funds, no later than 11:00 a.m. (California time) on the date specified herein.
Any payment received by Agent later than 11:00 a.m. (California time), at the
option of Agent, shall be deemed to have been received on the following Business
Day and any applicable interest or fee shall continue to accrue until such
following Business Day.
(ii) Whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
(iii) Unless Agent receives notice from Borrower prior to
the date on which any payment is due to the Lenders that Borrower will not make
such payment in full as and when required, Agent may assume that Borrower has
made such payment in full to Agent on such date in immediately available funds
and Agent may (but shall not be so required), in reliance upon such assumption,
distribute to each Lender on such due date an amount equal to the amount then
due such Lender. If and to the extent Borrower has not made such payment in full
to Agent, each Lender shall repay to Agent on demand such amount distributed to
such Lender, together with interest thereon at the Reference Rate for each day
from the date such amount is distributed to such Lender until the date repaid.
(b) Apportionment, Application, and Reversal of Payments. Except
as otherwise provided with respect to Defaulting Lenders, aggregate principal
and interest payments shall be apportioned ratably among the Lenders (according
to the unpaid principal balance of the Advances or the Term Loan to which such
payments relate held by each Lender) and payments of the fees (other than fees
designated for Agent's sole and separate account) shall, as applicable, be
apportioned ratably among the Lenders. All payments shall be remitted to Agent
and all such payments not relating to principal or interest of specific Advances
or the Term Loan, or not constituting payment of specific fees, and all proceeds
of Accounts or other Collateral received by Agent, shall be applied, first, to
pay any fees, or expense reimbursements then due to Agent from Borrower; second,
to pay any fees or expense reimbursements then due to the Lenders from Borrower;
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third, to pay interest due in respect of all Advances (including Foothill Loans
and Agent Advances) and the Term Loan; fourth, to pay or prepay principal of
Foothill Loans and Agent Advances; fifth, ratably to pay principal of the
Advances (other than Foothill Loans and Agent Advances); sixth, to be held by
Agent, for the ratable benefit of Agent and the Lenders, as cash collateral, in
accordance with the last sentence of Section 2.2(e), in an amount equal to 105%
of the maximum amount of the Lender Group's obligations under Letters of Credit
until paid in full; seventh, to repay the principal of the Term Loan; and
eighth, ratably to pay any other Obligations due to Agent or any Lender by
Borrower.
2.5 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations pursuant to Sections 2.1 or 2.2 is greater than either the Dollar or
percentage limitations set forth in Sections 2.1 or 2.2 (an "Overadvance"),
Borrower immediately shall pay to Agent, in cash, the amount of such excess,
which amount shall be used by Agent to reduce the Obligations in accordance with
the priorities set forth in Section 2.4(b).
2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS.
(a) Interest Rate. Except as provided in clause (c) below, (i)
all Obligations (except for the Term Loan and amounts undrawn under Letters of
Credit) shall bear interest at a per annum rate of two (2) percentage points
above the Reference Rate and (ii) the Term Loan shall bear interest at a rate of
13.50 percent per annum, increasing by twenty-five basis points per month
beginning on July 29, 2000 and on the twenty-ninth day of each month thereafter
for so long as any portion of the Term Loan remain outstanding.
(b) Letter of Credit Fee. Except as provided in clause (c) below,
Borrower shall pay Agent, for the ratable benefit of the Lender Group a fee (in
addition to the charges, commissions, fees and costs set forth herein) equal to
2% per annum times the amount of the undrawn Letters of Credit.
(c) Default Rate. Upon the occurrence and during the continuation
of an Event of Default, (i) all Obligations (except for the amounts undrawn
under Letters of Credit) shall bear interest at a per annum rate equal to four
(4) percentage points above the applicable per annum rate then in effect under
Section 2.6(a), and (ii) the letter of credit fees provided for in Section
2.6(b) shall be increased by four (4) percentage points;
(d) [intentionally omitted.]
(e) Payments. Interest payable hereunder shall be due and
payable, in arrears, on the first day of each month during the term hereof.
Borrower hereby authorizes Agent, at its option, without prior notice to
Borrower, to charge such interest and Letter of Credit fees, all Lender Group
Expenses (as and when incurred), the fees and charges provided for in Section
2.11 (as and when accrued or incurred), and all installments or other payments
due under the Term Loan or any Loan Document to Borrower's Loan Account, which
amounts thereafter shall accrue interest at the rate then applicable to Advances
hereunder. Any interest not paid when due shall be compounded and shall
thereafter accrue interest at the rate then applicable to Advances hereunder.
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(f) Computation. The Reference Rate as of the date of this
Agreement is 8.25% per annum. In the event the Reference Rate is changed from
time to time hereafter, the rate of interest provided for in Section 2.6(a)(i)
automatically and immediately shall be increased or decreased by an amount equal
to such change in the Reference Rate. All interest and fees chargeable under the
Loan Documents shall be computed on the basis of a 360 day year for the actual
number of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no event
shall the interest rates payable under this Agreement, plus any other amounts
paid in connection herewith, exceed the highest rate permissible under any law
that a court of competent jurisdiction shall, in a final determination, deem
applicable. Borrower and the Lender Group in executing and delivering this
Agreement, intend legally to agree upon the rate or rates of interest and manner
of payment stated within it; provided, however, that, anything contained herein
to the contrary notwithstanding, if said rate or rates of interest or manner of
payment exceeds the maximum allowable under applicable law, then, ipso facto as
of the date of this Agreement, Borrower is and shall be liable only for the
payment of such maximum as allowed by law, and payment received from Borrower in
excess of such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.
2.7 COLLECTION OF ACCOUNTS. Borrower shall at all times maintain
lockboxes (the "Lockboxes") and, immediately after the Closing Date, (i) shall
instruct all Account Debtors with respect to the Accounts, General Intangibles,
and Negotiable Collateral of Borrower to remit all Collections in respect
thereof to such Lockboxes, and (ii) shall deposit all other Collections received
by Borrower from any source immediately upon receipt in to the Lockboxes.
Borrower, Agent, and the Lockbox Banks shall enter into the Lockbox Agreements,
which among other things shall provide for the opening of a Lockbox Account for
the deposit of Collections at a Lockbox Bank. Borrower agrees that all
Collections and other amounts received by Borrower from any Account Debtor or
any other source immediately upon receipt shall be deposited into a Lockbox
Account; provided, however, that Borrower agrees that Agent may deposit all or
any portion of the proceeds of Collections that represent Estimated Tax/Benefit
Payments (except to the extent such Collections are remitted to the Borrower
pursuant to Section 2.8) to a separate account in Agent's name and not apply
such amounts to the Obligations. No Lockbox Agreement or arrangement
contemplated thereby shall be modified by Borrower without the prior written
consent of Agent. Upon the terms and subject to the conditions set forth in the
Lockbox Agreements, all amounts received in each Lockbox Account shall be wired
each Business Day into an account (the "Agent Account") maintained by Agent at a
depository selected by Agent.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. Upon the receipt
of any Collections by Agent (whether from transfers to Agent by the Lockbox
Banks pursuant to the Lockbox Agreements or otherwise)
(a) if (i) no Event of Default has occurred and is continuing,
and (ii) no Advances are outstanding, then the proceeds thereof shall be
remitted by Agent to Borrower's Designated Account on the same day if received
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into the Agent Account on or before 11:00 a.m. California time, and on the
opening of business on the immediately following Business Day if received into
the Agent Account after 11:00 a.m. California time on a Business Day,
(b) if (i) an Event of Default has occurred and is continuing,
(ii) no Advances are outstanding, and (iii) the Lenders have not elected to
accelerate the maturity of the Term Loan or otherwise exercise their rights and
remedies as secured creditors of Borrower (including the remedies set forth in
Section 9 hereof), then, from the proceeds of such Collections (y) the portion
thereof equal to the lesser of (A) Borrower's good faith, reasonable estimate of
the amount of such Collections that represents the reimbursement of payroll
taxes or health and welfare benefit payments (the "Estimated Tax/Benefit
Amount"), or (B) fifteen percent (15%) of such Collections, shall be remitted by
Agent to Borrower's Designated Account on the same day if received into the
Agent Account on or before 11:00 a.m. California time, and on the opening of
business on the immediately following Business Day if received into the Agent
Account after 11:00 a.m. California time on a Business Day, and (z) unless
waived by the Required Lenders, the balance of the proceeds of such Collections
shall be applied to the prepayment or repayment of the Term Loan,
(c) if (i) no Event of Default has occurred and is continuing,
and (ii) Advances are outstanding, then the proceeds thereof shall be (y)
applied to the repayment of the outstanding Advances, and (z) thereafter, the
balance, if any, remitted by Agent to Borrower's Designated Account on the same
day if received into the Agent Account on or before 11:00 a.m. California time,
and on the opening of business on the immediately following Business Day if
received into the Agent Account after 11:00 a.m. California time on a Business
Day,
(d) if (i) an Event of Default has occurred and is continuing,
(ii) Advances are outstanding, and (iii) the Lenders have not elected to refuse
to make further Advances to Borrower or to accelerate the maturity of the
Obligations or to otherwise exercise their rights and remedies as secured
creditors of Borrower (including the remedies set forth in Section 9 hereof),
then, from the proceeds of such Collections (y) as long as no Overadvance exists
or would result therefrom, an amount equal to the lesser of (A) the portion
thereof equal to the Estimated Tax/Benefit Amount of such Collections, or (B)
fifteen percent (15%) of such Collections, shall be remitted to Borrower's
Designated Account on the same day if received into the Agent Account on or
before 11:00 a.m. California time, and on the opening of business on the
immediately following Business Day if received into the Agent Account on a
non-Business Day or after 11:00 a.m. California time on a Business Day, and (z)
the balance of the proceeds of such Collections shall be applied in accordance
with Section 2.4(b), and
(e) if (i) an Event of Default has occurred and is continuing,
(ii) Obligations are outstanding, and (iii) the Lenders have elected to refuse
to make further Advances to Borrower or to accelerate the maturity of the
Obligations or to otherwise exercise their rights and remedies as secured
creditors of Borrower (including the remedies set forth in Section 9 hereof),
then, the proceeds of such Collections shall be applied in accordance with
Section 2.4(b) hereof.
All such proceeds of Collections applied on account of the Obligations shall be
applied provisionally to reduce the Obligations, but shall not be considered a
payment on account unless such Collection item is a wire transfer of immediately
available federal funds and is made to the Agent Account or unless and until
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such Collection item is honored when presented for payment; provided, however,
that Borrower agrees that (except to the extent Collections are remitted to
Borrower pursuant to the foregoing provisions) Agent may deposit all or any
portion of the proceeds of Collections that represent Estimated Tax/Benefit
Payments to a separate account in Agent's name and not apply such amount to the
Obligations. If, as of any date of determination, Borrower has not provided the
information required by Section 6.2(d) hereof in time sufficient to enable Agent
to apportion the proceeds of Collections as set forth above, then the parties
agree that the Estimated Tax/Benefit Amount of the applicable Collections
conclusively shall be presumed to be zero. From and after the Closing Date,
Agent, (for Agent's sole benefit), shall be entitled to charge Borrower for 1
Business Day of `clearance' or 2.6(b), as applicable, on all Collections that
are received by Agent (regardless of whether forwarded by the Lockbox Banks to
Agent, whether provisionally applied to reduce the Obligations under Section
2.1, or otherwise). This across-the-board 1 Business Day clearance or float
charge on all Collections is acknowledged by the parties to constitute an
integral aspect of the pricing of the Lender Group's financing of Borrower, and
shall apply irrespective of the characterization of whether receipts are owned
by Borrower or Agent, and whether or not there are any outstanding Advances, the
effect of such clearance or float charge being the equivalent of charging 1
Business Day of interest on such Collections. Should any Collection item not be
honored when presented for payment, then Borrower shall be deemed not to have
made such payment, and interest shall be recalculated accordingly. Anything to
the contrary contained herein notwithstanding, any Collection item shall be
deemed received by Agent only if it is received into the Agent Account on a
Business Day on or before 11:00 a.m. California time. If any Collection item is
received into the Agent Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have been received by
Agent as of the opening of business on the immediately following Business Day.
Anything contained herein to the contrary notwithstanding, the economic benefit
of the 1 Business Day clearance or float charge provided for in this Section 2.8
is not for the ratable benefit of the Lenders, but instead shall be for the sole
and separate account of Agent.
2.9 DESIGNATED ACCOUNT. Agent, Foothill, and the Lenders are
authorized to make the Advances and the Term Loan under this Agreement based
upon telephonic or other instructions received from anyone purporting to be an
Authorized Person, or without instructions if pursuant to Section 2.6(e).
Borrower agrees to establish and maintain the Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
Advances and the Term Loan requested by Borrower and made by Agent, Foothill or
the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any
Advance or the Term Loan requested by Borrower and made hereunder shall be made
to the Designated Account.
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Agent
shall maintain an account on its books in the name of Borrower (the "Loan
Account") on which Borrower will be charged with all Advances and the Term Loan
made by Agent, Foothill, or the Lenders to Borrower or for Borrower's account,
including, accrued interest, Lender Group Expenses, and any other payment
Obligations of Borrower. In accordance with Section 2.8, the Loan Account will
be credited with all payments received by Agent from Borrower or for Borrower's
account, including all amounts received in the Agent Account from any Lockbox
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Bank. Agent shall render statements regarding the Loan Account to Borrower,
including principal, interest, fees, and including an itemization of all charges
and expenses constituting Lender Group Expenses owing, and such statements shall
be conclusively presumed to be correct and accurate and constitute an account
stated between Borrower and the Lender Group unless, within 30 days after
receipt thereof by Borrower, Borrower shall deliver to Agent written objection
thereto describing the error or errors contained in any such statements.
2.11 FEES. Borrower shall pay to Agent, for the ratable benefit of the
Lenders (except as otherwise indicated) the following fees:
(a) Closing Fee. On the Closing Date, which shall be concurrent
with the funding of the Term Loan, in full, a closing fee of $800,000.
(b) Unused Line Fee. On the first day of each month during the
term of this Agreement, an unused line fee in an amount equal to 0.50% per annum
times the Average Unused Portion of the Maximum Revolving Amount.
(c) Financial Examination, Documentation, Electronic Reporting
Set-Up and Appraisal Fees. For the sole and separate account of Agent: (i)
Agent's customary fee of $750 per day per examiner, plus Agent's out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Agent; (ii) Agent's customary appraisal fee
of $1,500 per day per appraiser, plus Agent's out-of-pocket expenses for each
appraisal of the Collateral performed by personnel employed by Agent; (iii)
actual charges paid or incurred by Agent for an asset sale value appraisal of
Borrower; provided, however, that unless an Event of Default has occurred,
Borrower shall be obligated to reimburse Agent for only one such appraisal per
year; (iv) the actual charges paid or incurred by Agent if it elects to employ
the services of one or more third Persons to perform such financial analyses and
examinations (i.e., audits) of Borrower or to appraise the Collateral; and (v) a
one-time fee of $3,000 plus out of pocket expenses for setting up the electronic
reporting system for collateral of Borrower; and
(d) Servicing Fee. For the sole and separate account of Agent, on
the first day of each month during the term of this Agreement, and thereafter so
long as any Obligations are outstanding, a servicing fee in an amount equal to
$5,000 per month. If Borrower elects to utilize the electronic reporting system
in accordance with Section 2.11(c)(v) above, such servicing fee shall be $3,000
per month plus a one time set-up fee of $3,000.
(e) Term Loan Yield Maintenance Fees. On July 29, 2000 and on
October 29, 2000 yield maintenance fees of $100,000 each if on such date any
Obligations with respect to the Term Loan remain outstanding on such date, as
applicable.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE, TERM LOAN AND LETTERS
OF CREDIT. The obligation of the Lender Group (or any member thereof) to make
the initial Advance and the Term Loan, or to issue the initial Letter of Credit
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is subject to the fulfillment, to the satisfaction of Lenders and their counsel,
in their sole discretion of each of the following conditions on or before the
Closing Date:
(a) the Closing Date shall occur on or before October 29, 1999;
(b) Agent shall have received all financing statements and
fixture filings required by Agent, duly executed by Borrower, and Agent shall
have received searches reflecting the filing of all such financing statements
and fixture filings;
(c) Agent shall have received and reviewed such customer
contracts of Borrower as requested by Agent and such contracts shall be
satisfactory to Agent;
(d) Agent shall have received each of the following documents, in
form and substance satisfactory to Agent, duly executed, and each such document
shall be in full force and effect:
(i) the Lockbox Agreements;
(ii) the Disbursement Letter;
(iii) A letter from the Borrower to Trustee under the
Indenture in form and substance satisfactory to the Lenders, in their sole
discretion;
(iv) Stock Pledge Agreement; Stock Powers; and an
Irrevocable Proxy; and
(v) A Control Agreement executed by Agent, Borrower, and
Norwest Investment Services, Inc.
(e) An opinion of Borrower's counsel regarding Borrower's maximum
potential liability for delinquent Ohio sales taxes, including the timing (and
non-relation back) of any possible attachment of any liens on Borrower's assets
and the scope of any such liens.
(f) Agent shall have received a certificate from the Secretary of
Borrower attesting to the resolutions of Borrower's Board of Directors
authorizing its execution, delivery, and performance of this Agreement and the
other Loan Documents to which Borrower is a party and authorizing specific
officers of Borrower to execute the same;
(g) Agent shall have received copies of Borrower's Governing
Documents, as amended, modified, or supplemented to the Closing Date, certified
by the Secretary of Borrower;
(h) Agent shall have received a certificate of status with
respect to Borrower, dated within 10 days of the Closing Date, such certificate
to be issued by the appropriate officer of the jurisdiction of organization of
Borrower, which certificate shall indicate that Borrower is in good standing in
such jurisdiction;
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(i) Agent shall have received certificates of status with respect
to Borrower, each dated within 15 days of the Closing Date, such certificates to
be issued by the appropriate officer of the jurisdictions in which its failure
to be duly qualified or licensed would constitute a Material Adverse Change,
which certificates shall indicate that Borrower is in good standing in such
jurisdictions;
(j) Agent shall have received a side letter agreement from Ableco
in form and substance acceptable to Agent;
(k) Agent shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
form and substance of which shall be satisfactory to Agent and its counsel;
(l) Agent shall have received duly executed certificates of title
with respect to that portion of the Collateral that is subject to certificates
of title, if any;
(m) intentionally omitted;
(n) Agent shall have received an opinion of Borrower's counsel in
form and substance satisfactory to Lenders in their sole discretion;
(o) Agent shall have received satisfactory evidence that all tax
returns required to be filed by Borrower have been timely filed and all taxes
upon Borrower or its properties, assets, income, and franchises (including real
property taxes and payroll taxes) have been paid prior to delinquency, except
such taxes that are the subject of a Permitted Protest;
(p) on the Closing Date, Borrower must have Excess Availability
(after giving effect to reserves established under Section 2.1(b)) of not less
than $10,000,000; and
(q) all other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered, executed,
or recorded and shall be in form and substance satisfactory to Agent and its
counsel.
Execution and delivery to the Agent by a Lender of a counterpart of this
Agreement shall be deemed confirmation by such Lender that (i) all conditions
precedent in this Section 3.1 have been fulfilled to the satisfaction of such
Lender and (ii) the decision of such Lender to execute and deliver to the Agent
an executed counterpart of this Agreement was made by such Lender independently
and without reliance on the Agent or any other Lender as to the satisfaction of
any condition precedent set forth in this Section 3.1.
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3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The following shall be
conditions precedent to all Advances, to the issuance of any Letter of Credit,
or the making of the Term Loan hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
(b) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof;
(c) no injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the extending of such credit shall
have been issued and remain in force by any governmental authority against
Borrower, Agent, the Lender Group, or any of their Affiliates; and
(d) the amount of the Revolving Facility Usage, after giving
effect to the requested Advance or Letter of Credit, shall not exceed the
Availability (after giving effect to reserves established under Section 2.1(b)).
The foregoing conditions precedent are not conditions to each Lender (i)
participating in or reimbursing Agent for such Lenders' Pro Rata Share of any
drawings under Letters of Credit as provided herein, or (ii) participating in or
reimbursing Foothill or the Agent for such Lenders' Pro Rata Share of any Agent
Advance as provided herein.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial closing
hereunder, Borrower shall (the failure by Borrower to so perform or cause to be
performed constituting an Event of Default) (a) within 30 days of the Closing
Date, deliver to Agent the certified copies of the policies of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
form and substance of which shall be satisfactory to Agent and its counsel.
3.4 TERM.
(a) This Agreement shall become effective upon the execution and
delivery hereof by Borrower and the Lender Group and shall continue in full
force and effect for a term ending on the Maturity Date unless sooner terminated
pursuant to the terms of Section 3.6.
(b) The foregoing notwithstanding, the Lender Group shall have
the right to terminate its obligations under this Agreement immediately and
without notice upon the occurrence and during the continuation of an Event of
Default.
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3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations immediately shall become due and payable without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrower of Borrower's duties, Obligations, or covenants hereunder or
under the other Loan Documents, and Agent's continuing security interests in the
Collateral, for the benefit of the Lender Group, shall remain in effect until
all Obligations have been fully and finally discharged and the Lender Group's
obligations to provide additional credit hereunder have been terminated.
3.6 EARLY TERMINATION BY BORROWER. The provisions of Section 3.4 that
allow termination of this Agreement by Borrower only on the Maturity Date
notwithstanding, Borrower has the option, at any time upon 30 days prior written
notice to Agent, to terminate this Agreement by paying to Agent, for the ratable
benefit of the Lender Group, in cash, the Obligations (including an amount equal
to 105% of the undrawn amount of the Letters of Credit), in full, together with
an Early Termination Premium as set forth in Section 3.7, below. The Borrower
may only terminate this Agreement if it also satisfies all other Obligations
hereunder and may not terminate the Revolving Loan Facility or reduce the
Maximum Revolving Amount other than in connection with a termination of this
Loan Agreement.
3.7 EARLY TERMINATION PREMIUM. If Borrower terminates this Agreement
pursuant to Section 3.6, Borrower shall pay $25,000 for each whole or partial
month remaining through the Maturity Date. If the unpaid principal balance of
the Term Loan is prepaid in whole or in part prior to April 29, 2000, Borrower
shall pay an amount equal to one-eighth of one percent multiplied by the amount
prepaid multiplied by the number of months (including all partial or whole
months, other than January, 2001) remaining until the Maturity Date. Thereafter,
the Borrower may prepay the unpaid principal balance of the Term Loan, in whole
or in part, without penalty or premium at any time during the term of this
Agreement. Such fees are hereinafter referred to as an "Early Termination
Premium". Any such prepayment shall require 30 day prior written notice by
Borrower to Agent.
3.8 TERMINATION UPON EVENT OF DEFAULT. If the Lender Group terminates
this Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of the Lender
Group's lost profits as a result thereof, Borrower shall pay to Agent, for the
ratable benefit of the Lender Group, upon the effective date of such
termination, a premium in an amount equal to the Early Termination Premium. The
Early Termination Premium shall be presumed to be the amount of damages
sustained by the Lender Group as the result of the early termination and
Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Agent, for
the benefit of the Lender Group, continuing Liens on all right, title, and
interest of Borrower in and to all currently existing and hereafter acquired or
arising Personal Property Collateral in order to secure prompt repayment of any
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and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents (the "Agent's Liens").
The Agent's Liens in and to the Personal Property Collateral shall attach to all
Personal Property Collateral without further act on the part of the Lender Group
or Borrower. Anything contained in this Agreement or any other Loan Document to
the contrary notwithstanding, except for the sale of Inventory to buyers in the
ordinary course of business and except as permitted by Section 7.4 hereof,
Borrower has no authority, express or implied, to dispose of any item or portion
of the Personal Property Collateral or the Real Property Collateral. Subject to
Section 2.4(b), the secured claims of the Lender Group secured by the Collateral
shall be of equal priority, and ratable according to the respective Obligations
due each member of the Lender Group.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrower
promptly shall endorse and deliver physical possession of such Negotiable
Collateral to Agent.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time after the occurrence and during the continuation of an
Event of Default, Agent or Agent's designee may (a) notify customers or Account
Debtors that the Accounts, General Intangibles, or Negotiable Collateral have
been assigned to Agent for the benefit of the Lender Group, or that Agent, for
the benefit of the Lender Group, has a security interest therein and (b) collect
the Accounts, General Intangibles, and Negotiable Collateral directly and charge
the collection costs and expenses to the Loan Account. Borrower agrees that it
will hold in trust for the Lender Group, as the Lender Group's trustee, any
Collections that it receives and immediately will deliver said Collections to
Agent in their original form as received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon
the request of Agent, Borrower shall execute and deliver to Agent all financing
statements, collateral assignments, continuation financing statements, fixture
filings, security agreements, pledges, assignments, mortgages, leasehold
mortgages, deeds of trust, leasehold deeds of trust, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that Agent
reasonably may request, in form satisfactory to Agent, to perfect and continue
perfected the Agent's Liens on the Collateral (whether now owned or hereafter
arising or acquired, exclusive, however, of the 3.3 Million Dollars as defined
in Section 6.6), and in order to consummate fully all of the transactions
contemplated hereby and under the other the Loan Documents.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes, constitutes,
and appoints Agent (and any of Agent's officers, employees, or agents designated
by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower
refuses to, or fails timely to execute and deliver any of the documents
described in Section 4.4, sign the name of Borrower on any of the documents
described in Section 4.4, (b) at any time that an Event of Default has occurred
and is continuing or Agent deems itself insecure, sign Borrower's name on any
invoice or bill of lading relating to any Account, drafts against Account
Debtors, schedules and assignments of Accounts, verifications of Accounts, and
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notices to Account Debtors, (c) send requests for verification of Accounts, (d)
endorse Borrower's name on any Collection item that may come into the Lender
Group's possession, (e) at any time that an Event of Default has occurred and is
continuing, notify the post office authorities to change the address for
delivery of Borrower's mail to an address designated by Agent, to receive and
open all mail addressed to Borrower, and to retain all mail relating to the
Collateral and forward all other mail to Borrower, (f) at any time that an Event
of Default has occurred and is continuing, make, settle, and adjust all claims
under Borrower's policies of insurance and make all determinations and decisions
with respect to such policies of insurance, and (g) at any time that an Event of
Default has occurred and is continuing, settle and adjust disputes and claims
respecting the Accounts directly with Account Debtors, for amounts and upon
terms that Agent determines to be reasonable, and Agent may cause to be executed
and delivered any documents and releases that Agent determines to be necessary.
The appointment of Agent as Borrower's attorney, and each and every one of
Agent's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully and finally repaid and performed and the
Lender Groups' obligations to extend credit hereunder are terminated.
4.6 RIGHT TO INSPECT. Agent (through any of its officers, employees,
or agents) shall have the right, from time to time hereafter to inspect the
Books and to check, test, and appraise the Collateral in order to verify
Borrower's financial condition or the amount, quality, value, condition of, or
any other matter relating to, the Collateral.
4.7 CONTROL AGREEMENTS. Borrower agrees that it will not transfer
assets out of any Securities Accounts other than as permitted under Section 7.22
and, if to another securities intermediary, unless each of Borrower, Agent, and
the substitute securities intermediary have entered into a Control Agreement. No
arrangement contemplated hereby or by any Control Agreement in respect of any
Securities Accounts or other investment property shall be modified by Borrower
without the prior written consent of Agent. Upon the occurrence and during the
continuance of a Default or Event of Default, Agent may notify any securities
intermediary to liquidate or transfer the applicable Securities Account or any
related investment property maintained or held thereby and remit the proceeds
thereof to the Agent Account.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce the Lender Group to enter into this Agreement,
Borrower makes the following representations and warranties to the Lender Group
which shall be true, correct, and complete in all respects as of the date
hereof, and shall be true, correct, and complete in all respects as of the
Closing Date, and at and as of the date of the making of each Advance or Letter
of Credit made thereafter, as though made on and as of the date of the making of
such Advance or Letter of Credit (except to the extent that such representations
and warranties relate solely to an earlier date) and such representations and
warranties shall survive the execution and delivery of this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted Liens.
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5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing
obligations created by the sale of goods or the rendition of services to Account
Debtors in the ordinary course of Borrower's business, unconditionally owed to
Borrower without defenses, disputes, offsets, counterclaims, or rights of return
or cancellation. The property giving rise to such Eligible Accounts has been
delivered to the Account Debtor, or to the Account Debtor's agent for immediate
shipment to and unconditional acceptance by the Account Debtor. Borrower has not
received notice of actual or imminent bankruptcy, insolvency, or material
impairment of the financial condition of any Account Debtor regarding any
Eligible Account.
5.3 [Intentionally omitted]
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment
are not stored with a bailee, warehouseman, or similar party and are located
only at the locations identified on Schedule 6.12 or otherwise permitted by
Section 6.12.
5.6 INVENTORY RECORDS. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of the
Inventory, and Borrower's
cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is as set forth on Schedule 5.7.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is duly organized and existing and in good standing
under the laws of the jurisdiction of its incorporation and qualified and
licensed to do business in, and in good standing in, any state where the failure
to be so licensed or qualified reasonably could be expected to constitute a
Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and accurate
description of the authorized capital Stock of Borrower, by class, and, as of
the Closing Date, a description of the number of shares of each such class that
are issued and outstanding and the number of such shares that are held in
Borrower's treasury. All such outstanding shares have been validly issued and,
as of the Closing Date, are fully paid, nonassessable shares free of contractual
preemptive rights. The issuance and sale of all such shares have been in
compliance with all applicable federal and state securities laws. Other than as
described on Schedule 5.8, there are no subscriptions, options, warrants, or
calls relating to any shares of Borrower's capital Stock, including any right of
conversion or exchange under any outstanding security or other instrument.
Borrower is not subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital Stock or any
security convertible into or exchangeable for any of its capital Stock.
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(c) Set forth on Schedule 5.8, is a complete and accurate list of
Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of
their incorporation; (ii) the number of shares of each class of common and
preferred Stock authorized for each of such Subsidiaries; and (iii) the number
and the percentage of the outstanding shares of each such class owned directly
or indirectly by Borrower. All of the outstanding capital Stock of each such
Subsidiary has been validly issued and is fully paid and non-assessable.
(d) Except as set forth on Schedule 5.8, no capital Stock (or any
securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for capital Stock) of any direct or indirect Subsidiary of
Borrower is subject to the issuance of any security, instrument, warrant,
option, purchase right, conversion or exchange right, call, commitment or claim
of any right, title, or interest therein or thereto.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation (including
Regulations T, U, and X of the Federal Reserve Board) applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time or both)
a default under any material contractual obligation or material lease of
Borrower, (iii) result in or require the creation or imposition of any Lien of
any nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any material contractual obligation of Borrower.
(c) Other than the taking of any action expressly required under
this Agreement and the Loan Documents, the execution, delivery, and performance
by Borrower of this Agreement and the Loan Documents to which Borrower is a
party do not and will not require any registration with, consent, or approval
of, or notice to, or other action with or by, any federal, state, foreign, or
other Governmental Authority or other Person.
(d) This Agreement and the Loan Documents to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally.
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(e) The Agent's Liens granted by Borrower to Agent, for the
benefit of the Lender Group, in and to its properties and assets pursuant to
this Agreement and the other Loan Documents are validly created, perfected, and
first priority Liens, subject only to Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or belief of any pending or threatened litigation, governmental
investigations, or claims, complaints, actions, or prosecutions involving
Borrower or any guarantor of the Obligations, except for: (a) ongoing collection
matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule
5.10; and (c) matters arising after the date hereof that, if decided adversely
to Borrower, reasonably could not be expected to result in a Material Adverse
Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to
Borrower or any guarantor of the Obligations that have been delivered by
Borrower to the Lender Group have been prepared in accordance with GAAP (except,
in the case of unaudited financial statements, for the lack of footnotes and
being subject to year-end audit adjustments) and fairly present Borrower's (or
such guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
Material Adverse Change with respect to Borrower (or such guarantor, as
applicable) since the date of the latest financial statements submitted to the
Lender Group on or before the Closing Date.
5.12 NO FRAUDULENT TRANSFER.
(a) Borrower is Solvent.
(b) No transfer of property is being made by Borrower and no
obligation is being incurred by Borrower in connection with the transactions
contemplated by this Agreement or the other Loan Documents with the intent to
hinder, delay, or defraud either present or future creditors of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries, nor
any of their ERISA Affiliates has at any time on or prior to the Closing Date
maintained or contributed to any single employer defined benefit plan subject to
Title IV of ERISA; and without providing further assurances to Agent, which are
reasonably acceptable to Agent, will not maintain or contribute to a Benefit
Plan for so long as the Term Loan is outstanding. Each Multiemployer Plan to
which Borrower, any of its Subsidiaries, or any of their ERISA Affiliates,
contribute is listed on Schedule 5.13. Borrower, each of its Subsidiaries and
each ERISA Affiliate have satisfied the minimum funding standards of ERISA and
the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
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Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability that is not paid when due with respect to any Plan under any
applicable law, treaty, rule, regulation, or agreement (other than obligations
to provide benefits under or make contributions to Plans in accordance with
their terms and in the ordinary course of their administration). None of
Borrower or its Subsidiaries or any ERISA Affiliate is required to provide
security to any Plan under Section 401(a)(29) of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets
has ever been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators in the disposal of, or to produce, store, handle,
treat, release, or transport, any Hazardous Materials. None of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a Hazardous Materials
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No Lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned or
operated by Borrower. Borrower has not received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by Borrower resulting in
the releasing or disposing of Hazardous Materials into the environment.
5.15 BROKERAGE FEES. No brokerage commission or finders fees has or
shall be incurred or payable in connection with or as a result of Borrower's
obtaining financing from the Lender Group under this Agreement, and Borrower has
not utilized the services of any broker or finder in connection with Borrower's
obtaining financing from the Lender Group under this Agreement.
5.16 PERMITS AND OTHER INTELLECTUAL PROPERTY. Borrower owns or
possesses adequate licenses that are necessary for the operation of its business
taken as a whole or other rights to use all Permits, patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights, trade secrets and know-how (collectively,
the "Intellectual Property") that are necessary for the operation of its
business as currently conducted. No claim is pending or threatened to the effect
that Borrower infringes upon, or conflicts with, the asserted rights of any
other Person under any Intellectual Property, and to the best of Borrower's
knowledge there is no basis for any such claim (whether pending or threatened).
No claim is pending or threatened to the effect that any such Intellectual
Property owned or licensed by Borrower, or in which Borrower otherwise has the
right to use is invalid or unenforceable by Borrower, and to the best of
Borrower's knowledge there is not basis for any such claim (whether or not
pending or threatened).
5.17 YEAR 2000 COMPLIANT. Borrower is, or will be, Year 2000 Compliant
prior to October 31, 1999.
5.18 ESI-NEVADA HOLDING COMPANY, INC. ESI-Nevada Holding Company, Inc.
does not have and will not have any business activities and does not and will
not hold any assets other than the capital stock of Camelback Insurance Ltd.
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5.19 REPAYMENT OF BANK ONE. No proceeds of any sale of Borrower's
assets were paid to Bank One Arizona, N.A. on account of Indebtedness owed by
Borrower to Bank One Arizona, N.A.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
shall do all of the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral that contain
information as from time to time may be requested by Agent.
6.2 COLLATERAL REPORTING. Provide Agent with the following documents
at the following times in form satisfactory to Agent: (a) on each Business Day,
a sales journal, collection journal, and credit register since the last such
schedule and a calculation of the Borrowing Base as of such date, (b) on a
weekly basis and, in any event, by no later than the Tuesday of each month
during the term of this Agreement, (i) a detailed calculation of the Borrowing
Base, and (ii) a detailed aging, by total, of the Accounts, together with a
reconciliation to the detailed calculation of the Borrowing Base (including
calculating Accrued Accounts) previously provided to Agent, (c) on a monthly
basis and, in any event, by no later than the 10th day of each month during the
term of this Agreement, a summary aging, by vendor, of Borrower's accounts
payable and any book overdraft, (d) a weekly reporting of the status of
Borrower's federal and state payroll tax payments and benefit premium payments,
(e) on each Business Day, notice of all returns, disputes, or claims, (f) upon
request, copies of invoices in connection with the Accounts, customer
statements, credit memos, remittance advices and reports, deposit slips,
shipping and delivery documents in connection with the Accounts and Equipment
acquired by Borrower, purchase orders and invoices, (g) on a quarterly basis, a
detailed list of Borrower's customers, (h) on a monthly basis, a calculation of
the Dilution for the prior month; (i) on a monthly basis, summary reports for
all bank accounts and Securities Accounts and (j) such other reports (or the
same reports with greater frequency) as to the Collateral or the financial
condition of Borrower as Agent may request from time to time. Original sales
invoices evidencing daily sales shall be mailed by Borrower to each Account
Debtor and, at Agent's direction, after the occurrence of an Event of Default,
the invoices shall indicate on their face that the Account has been assigned to
the Lender Group and that all payments are to be made directly to Agent for the
benefit of the Lender Group.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Agent,
with copies to each Lender: (a) as soon as available, but in any event within 30
days after the end of each month during each of Borrower's fiscal years, a
company prepared balance sheet, income statement, and statement of cash flow
covering Borrower's operations during such period; and (b) as soon as available,
but in any event within 90 days after the end of each of Borrower's fiscal
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years, financial statements of Borrower for each such fiscal year, audited by
independent certified public accountants reasonably acceptable to Agent and
certified, without any qualifications, by such accountants to have been prepared
in accordance with GAAP, together with a certificate of such accountants
addressed to Agent stating that such accountants do not have knowledge of the
existence of any Default or Event of Default. Such audited financial statements
shall include a balance sheet, profit and loss statement, and statement of cash
flow and, if prepared, such accountants' letter to management. Borrower agrees
to deliver financial statements prepared on a consolidating basis so as to
present Borrower and each entity composing Borrower, and on a consolidated
basis.
Together with the above, Borrower also shall deliver to Agent,
with copies to each Lender, Borrower's Form 10-Q Quarterly Reports, Form 10-K
Annual Reports, and Form 8-K Current Reports, and any other filings made by
Borrower with the SEC, if any, as soon as the same are filed, or any other
information that is provided by Borrower to its shareholders, and any other
report reasonably requested by the Lender Group relating to the financial
condition of Borrower.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Agent, with copies to each
Lender, a certificate signed by its chief financial officer to the effect that:
(i) all financial statements delivered or caused to be delivered to any one or
more members of the Lender Group hereunder have been prepared in accordance with
GAAP (except, in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and fairly present
the financial condition of Borrower, (ii) the representations and warranties of
Borrower contained in this Agreement and the other Loan Documents are true and
correct in all material respects on and as of the date of such certificate, as
though made on and as of such date (except to the extent that such
representations and warranties relate solely to an earlier date), (iii) for each
month that also is the date on which a financial covenant in Sections 7.20 or
7.21 is to be tested, a Compliance Certificate demonstrating in reasonable
detail compliance at the end of such period with the applicable financial
covenants contained in Sections 7.20 or 7.21, and (iv) on the date of delivery
of such certificate to Agent there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of clauses (i), (ii),
or (iii), to the extent of any non-compliance, describing such non-compliance as
to which he or she may have knowledge and what action Borrower has taken, is
taking, or proposes to take with respect thereto).
Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to communicate with
Agent and to release to Agent whatever financial information concerning Borrower
that Agent may request. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other financial advisors to deliver to Agent, at
Borrower's expense, copies of Borrower's financial statements, papers related
thereto, and other accounting records of any nature in their possession, and to
disclose to Agent any information they may have regarding Borrower's business
affairs and financial conditions.
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6.4 TAX RETURNS. Deliver to Agent copies of each of Borrower's future
federal income tax returns, and any amendments thereto, within 30 days of the
filing thereof with the Internal Revenue Service.
6.5 ACH ACCOUNTS. By no later than December 3, 1999, Borrower shall
transfer all ACH accounts from Bank One, Arizona to another financial
institution acceptable to the Lender.
6.6 BORROWER'S CASH. Maintain all cash or cash equivalents of Borrower
in a Securities Account maintained at Norwest Investment Services, Inc., in
Minneapolis, Minnesota except for cash or cash equivalents up to a maximum
amount of $3,300,000 in the aggregate at any one time (the "3.3 Million
Dollars"), which 3.3 Million Dollars may be held in accounts at other depository
institutions. Borrower shall take all steps necessary to provide and maintain
for Agent on behalf of the Lender Group a first priority perfected security
interest in all of Borrower's present and future Securities Accounts and deposit
accounts, other than any deposit accounts that contain only the 3.3 Million
Dollars.
6.7 TITLE TO EQUIPMENT. Upon Agent's request, Borrower promptly shall
deliver to Agent, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Other than those items of Equipment that
constitute fixtures on the Closing Date, Borrower shall not permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and such Equipment shall at all times remain personal property.
6.9 TAXES.
(a) Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property or assets to be paid in full, before delinquency or
before the expiration of any extension period, except to the extent that the
validity of such assessment or tax shall be the subject of a Permitted Protest.
(b) Make due and timely payment or deposit of all such federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Agent, on demand, appropriate certificates attesting
to the payment thereof or deposit with respect thereto.
(c) Make timely payment or deposit of all tax payments and
withholding taxes required of it by applicable laws, including those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Agent with proof satisfactory to
Agent indicating that Borrower has made such payments or deposits.
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6.10 INSURANCE.
(a) At its expense, keep the Personal Property Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to Borrower's ownership and use of the Personal Property Collateral, as
well as insurance against larceny, embezzlement, and criminal misappropriation.
(b) At its expense, obtain and maintain (i) insurance of the type
necessary to insure the Improvements and Chattels (as such terms are defined in
the Mortgages), for the full replacement cost thereof, against any loss by fire,
lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle damage,
elevator collision, and other risks from time to time included under "extended
coverage" policies, in such amounts as Agent may require, but in any event in
amounts sufficient to prevent Borrower from becoming a co-insurer under such
policies, (ii) combined single limit bodily injury and property damages
insurance against any loss, liability, or damages on, about, or relating to each
parcel of Real Property Collateral, in an amount of not less than $2,000,000;
(iii) business rental insurance covering annual receipts for a 12 month period
for each parcel of Real Property Collateral; and (iv) insurance for such other
risks as Agent may require. Replacement costs, at Agent's option, may be
redetermined by an insurance appraiser, satisfactory to Agent, not more
frequently than once every 12 months at Borrower's cost.
(c) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to Agent.
All hazard insurance and such other insurance as Agent shall specify, shall
contain a Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement
satisfactory to Agent, showing Agent as sole lender loss payee thereof, except
with respect to specifically leased or financed Equipment. Every policy of
insurance referred to in this Section 6.10 shall contain an agreement by the
insurer that it will not cancel such policy except after 30 days prior written
notice to Agent (or 10 days prior written notice to Agent of failure to pay
premiums) and that any loss payable thereunder shall be payable notwithstanding
any act or negligence of Borrower or the Lender Group which might, absent such
agreement, result in a forfeiture of all or a part of such insurance payment and
notwithstanding (i) occupancy or use of the Real Property Collateral for
purposes more hazardous than permitted by the terms of such policy, (ii) any
foreclosure or other action or proceeding taken by the Lender Group pursuant to
the Mortgages upon the happening of an Event of Default, or (iii) any change in
title or ownership of the Real Property Collateral. Borrower shall deliver to
Agent certified copies of such policies of insurance and evidence of the payment
of all premiums therefor.
(d) Original policies or certificates thereof satisfactory to
Agent evidencing such insurance shall be delivered to Agent at least 10 days
prior to the expiration of the existing or preceding policies. Borrower shall
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give Agent prompt notice of any loss covered by such insurance, and Agent shall
have the right to adjust any loss. Agent shall have the exclusive right to
adjust all losses payable under any such insurance policies without any
liability to Borrower whatsoever in respect of such adjustments. Any monies
received as payment for any loss under any insurance policy including the
insurance policies mentioned above, that are payable to Borrower shall be paid
over to Agent to be applied at the option of the Required Lenders either to the
prepayment of the Obligations without premium, in such order or manner as the
Required Lenders may elect, or shall be disbursed to Borrower under stage
payment terms satisfactory to the Required Lenders for application to the cost
of repairs, replacements, or restorations. Notwithstanding the foregoing, any
monies received on account of any loss under any directors and officers policies
and errors and omissions policies or fiduciary and criminal policies that are
for the benefit of any third party shall not be required to be paid to Agent and
Agent shall not have the right to adjust any such loss. All repairs,
replacements, or restorations shall be effected with reasonable promptness and
shall be of a value at least equal to the value of the items or property
destroyed prior to such damage or destruction. In the event that Agent has
accelerated the Obligations hereunder, the Lender Group shall have the right to
apply all prepaid premiums to the payment of the Obligations in such order or
form as Agent shall determine; provided, however, Agent shall not have the right
to cancel any directors and officers policies or errors and omissions policies
or fiduciary and criminal policies that are for the benefit of any third party.
(e) Borrower shall not take out separate insurance concurrent in
form or contributing in the event of loss with that required to be maintained
under this Section 6.10, unless Agent is included thereon as named insured with
the loss payable to Agent under a standard 438BFU (NS) Mortgagee endorsement, or
its local equivalent. Borrower immediately shall notify Agent whenever such
separate insurance is taken out, specifying the insurer thereunder and full
particulars as to the policies evidencing the same, and originals of such
policies immediately shall be provided to Agent.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under
the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and
Equipment only at the locations identified on Schedule 6.12; provided, however,
that Borrower may amend Schedule 6.12 so long as such amendment occurs by
written notice to Agent not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary or advisable to perfect and continue perfected the Agent's
Liens on such assets and also provides to Agent a Collateral Access Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
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other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not result in and reasonably could not
be expected to result in a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(a) Cause to be delivered to Agent: (i) promptly, and in any
event within 10 Business Days after Borrower or any of its Subsidiaries knows or
has reason to know that an ERISA Event has occurred that reasonably could be
expected to result in a Material Adverse Change, a written statement of the
chief financial officer of Borrower describing such ERISA Event and any action
that is being taking with respect thereto by Borrower, any such Subsidiary or
ERISA Affiliate, and any action taken or threatened by the IRS, Department of
Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to
know all facts known by the administrator of any Benefit Plan of which it is the
plan sponsor, (ii) promptly, and in any event within 3 Business Days after the
filing thereof with the IRS, a copy of each funding waiver request filed with
respect to any Benefit Plan and all communications received by Borrower, any of
its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with
respect to such request.
(b) Cause to be delivered to Agent, upon Agent's request, each of
the following: (i) a copy of each Plan (or, where any such plan is not in
writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the three most recent plan years, annual reports on Form
5500 Series required to be filed with any governmental agency for each Benefit
Plan; (iv) a listing of all Multiemployer Plans, with the aggregate amount of
the most recent annual contributions required to be made by Borrower or any
ERISA Affiliate to each such plan and copies of the collective bargaining
agreements requiring such contributions; (v) any information that has been
provided to Borrower or any ERISA Affiliate regarding withdrawal liability under
any Multiemployer Plan; and (vi) the aggregate amount of the most recent annual
payments made to former employees of Borrower or its Subsidiaries under any
Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable under
any leases to which Borrower is a party or by which Borrower's properties and
assets are bound, unless such payments are the subject of a Permitted Protest.
To the extent that Borrower fails timely to make payment of such rents and other
amounts payable when due under its leases, Agent shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 BROKER COMMISSIONS. Pay any and all brokerage commission or
finders fees incurred or payable in connection with or as a result of Borrower's
obtaining financing from the Lender Group under this Agreement.
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6.17 COLLATERAL ACCESS AGREEMENT. Use its best efforts to deliver to
Agent an executed Collateral Access Agreement (in form and substance
satisfactory to Agent) executed by Borrower's landlord with respect to
Borrower's chief executive offices as soon as possible following the Closing
Date.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
will not do any of the following:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness while any Obligations remain owing hereunder, except:
(a) Indebtedness evidenced by this Agreement, together with
Indebtedness to issuers of Letters of Credit that are the subject of L/C
Guarantees;
(b) Indebtedness set forth on Schedule 7.1;
(c) Indebtedness secured by Permitted Liens;
(d) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to the Lender Group as those
applicable to the refinanced Indebtedness;
(e) Indebtedness for purposes of insurance premium financing in
the ordinary course of business not to exceed $1,180,000 at any one time
outstanding; and
(f) Unsecured indebtedness in the aggregate not to exceed
$50,000 at any one time outstanding.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
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7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES.
(a) Enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its capital Stock.
(b) Liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution).
(c) Convey, sell, assign, lease, transfer, or otherwise dispose
of, in one transaction or a series of transactions, all or any substantial part
of its property or assets.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or otherwise
dispose of any of Borrower's properties or assets; provided that (a) the
Borrower may sell tangible assets up to, but not in excess of $100,000 in the
aggregate (based upon net book value) during any fiscal year, and (b) Borrower
may sell Team provided that: (i) the amount of net cash proceeds of such sale
are supported by a fairness opinion rendered by an independent third party which
is approved by the Borrower's Board of Directors, (ii) a copy of the fairness
opinion is provided to the Lenders at the same time that it is presented to the
Borrower's Board of Directors, (iii) no Event of Default has occurred and is
continuing or would result therefrom, and (iv) such sale is consummated on or
before March 31, 2000. Notwithstanding the foregoing, if Borrower fails to
consummate such sale of Team by March 31, 2000, Borrower shall cause Team to
become a Borrower hereunder and Borrower and Team shall execute all documents
requested by Agent to make Team a Borrower hereunder and to require the proceeds
of any Accounts of Team to be deposited into the Lockbox Account. To the extent
Team becomes a Borrower hereunder, Agent will conduct an audit to determine (at
Lender's sole and absolute discretion based upon such audit) whether the
Accounts of Team may become Eligible Accounts.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate structure
(within the meaning of Section 9402(7) of the Code), or identity, or add any new
fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Agent.
7.7 NATURE OF BUSINESS. Make any change in the principal nature of
Borrower's business.
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7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by Section
7.1(d), prepay, redeem, retire, defease, purchase, or otherwise acquire any
Indebtedness owing to any third Person, other than the Obligations in accordance
with this Agreement, and
(b) Except as permitted by Section 7.1(d), directly or
indirectly, amend, modify, alter, increase, or change any of the terms or
conditions of any agreement, instrument, document, indenture, or other writing
evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), (d)
or (e).
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 CHANGE IN CONTRACT TERMS. Change the terms of its standard
contracts with its customers without the prior consent of Required Lenders.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital Stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital Stock, of any class,
whether now or hereafter outstanding.
7.12 ACCOUNTING METHODS. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau agreeing to provide Agent information
regarding the Collateral or Borrower's financial condition.
7.13 INVESTMENTS. Directly or indirectly make, acquire, or incur any
liabilities (including contingent obligations) for or in connection with (a) the
acquisition of the securities (whether debt or equity) of, or other interests
in, a Person, (b) loans, advances, capital contributions, or transfers of
property to a Person, except for (i) advances to employees, for business
purposes only, made in the ordinary course of business not to exceed $350,000
outstanding in the aggregate, provided that no employee advances (other than
advances made in the ordinary course of business against employee commissions of
up to $50,000 in the aggregate outstanding) may be made after the occurrence and
continuance of an Event of Default or (ii) loans to Camelback Insurance Ltd. of
up to $100,000 in the aggregate outstanding at anyone time, provided that no
such loans may be made after the occurrence and continuance of an Event of
Default, or (c) the acquisition of all or substantially all of the properties or
assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Agent, and that are
no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-Affiliate and except for the transactions specifically
described in Schedule 7.14.
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7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 COMPENSATION. [This section intentionally omitted].
7.17 USE OF PROCEEDS. Use the proceeds of the Advances and the Term
Loan made hereunder to make any earn-out payments in connection with any
acquisition by Borrower or for any other purpose other than (a) on the Closing
Date, to pay transactional fees, costs, and expenses incurred in connection with
this Agreement, and (b) thereafter, consistent with the terms and conditions
hereof, for its lawful and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Agent and so
long as, at the time of such written notification, Borrower provides any
financing statements or fixture filings necessary to perfect and continue
perfected the Agent's Liens and also provides to Agent a Collateral Access
Agreement with respect to such new location. The Inventory and Equipment shall
not at any time now or hereafter be stored with a bailee, warehouseman, or
similar party without Agent's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:
(a) engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to fail, to pay
timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) fail, or permit any Subsidiary of Borrower to fail, to make
any required contribution or payment to any Multiemployer Plan;
(e) fail, or permit any Subsidiary of Borrower to fail, to pay
any required installment or any other payment required under Section 412 of the
IRC on or before the due date for such installment or other payment;
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which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess
of $250,000.
7.20 FINANCIAL COVENANTS. Fail to maintain:
(a) Tangible Net Worth. Tangible Net Worth of at least the
following amounts as of the end of fiscal quarters ending on or about the
following dates:
Tangible Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
Net Worth: 1999 2000 2000 2000 2000
- ---------- ---- ---- ---- ---- ----
(72,390,000) (71,320,000) (70,220,000) (68,270,000) (66,090,000)
(b) EBITDA. EBITDA of at least the following amounts for each of
the fiscal quarters ending on or about the following dates:
Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 2000 2000 2000 2000
---- ---- ---- ---- ----
1,230,000 2,560,000 2,780,000 3,410,000 3,770,000
(c) Average Headcount: Minimum average active paid employee
headcount of 19,000 calculated on a trailing 12 month basis.
(d) Average Gross Margin: Minimum average gross margin of $625
per active paid employee calculated on a trailing 12 month basis.
7.21 CAPITAL EXPENDITURES. Make capital expenditures in the following
fiscal years ending on the following dates in excess of the amounts set forth
below:
Dec. 31, Dec. 31,
1999 2000
---- ----
1,500,000 2,000,000
7.22 SECURITIES ACCOUNTS. Borrower shall not establish or maintain any
Securities Account unless Agent shall have received a Control Agreement, duly
executed and in full force and effect, in respect of such Securities Account.
Borrower agrees that it will not transfer assets out of any Securities Accounts;
provided, however, that, so long as no Event of Default has occurred and is
continuing or would result therefrom, Borrower may use such assets to the extent
permitted by this Agreement.
7.23 NO WITHDRAWALS FROM MULTIEMPLOYER PLAN. Withdraw, or permit any
Subsidiary of Borrower to withdraw, from any Multiemployer Plan where Borrower
and any of its Subsidiaries would have a liability on account of such
Multiemployer Plan in excess of $250,000 in the aggregate.
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8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared due
and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts), fees and charges due the Lender Group,
reimbursement of Lender Group Expenses, or other amounts constituting
Obligations) provided, however, that in the case of Overadvances that are caused
by the charging of interest, fees, or Lender Group Expenses to the Loan Account,
or in the case of Overadvances that are caused by an advance rate adjustment or
modification of a reserve amount, such event shall not constitute an Event of
Default, if, within 3 Business Days from the creation of the Overadvance,
Borrower eliminates such Overadvance. Solely as an accommodation to the
Borrower, and without any obligation or liability on the part of Agent, Agent
shall use its reasonable best efforts to provide the Borrower with telephonic
notice of such an Overadvance;
8.2 If Borrower fails to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other present or future agreement between
Borrower and the Lender Group (provided, however, that with respect to a Default
arising under Sections 6.4, 6.9 and 6.15, Borrower shall have 10 days in which
to cure such Default and with respect to a Default arising under Sections 6.2 or
6.3, Borrower shall have 5 days in which to cure such Default before the Default
becomes an Event of Default;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower and any
of the following events occur: (a) Borrower consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 60 calendar days of the date of
the filing thereof; provided, however, that, during the pendency of such period,
Agent, Foothill, and any other member of the Lender Group shall be relieved of
its obligation to extend credit hereunder; (d) an interim trustee is appointed
to take possession of all or a substantial portion of the properties or assets
of, or to operate all or any substantial portion of the business of, Borrower;
or (e) an order for relief shall have been issued or entered therein;
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8.7 If Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its business
affairs;
8.8 Except with respect to a Permitted Protest, if a notice of Lien,
levy, or assessment is filed of record with respect to any of Borrower's
properties or assets by the United States Government, or any department, agency,
or instrumentality thereof, or by any state, county, municipal, or governmental
agency, or if any taxes or debts owing at any time hereafter to any one or more
of such entities becomes a Lien, whether choate or otherwise, upon any of
Borrower's properties or assets and the same is not paid on the payment date
thereof;
8.9 Except with respect to a Permitted Protest, if a judgment or other
claim becomes a Lien or encumbrance upon any material portion of Borrower's
properties or assets;
8.10 If there is a default in any material agreement including the
Indenture to which Borrower is a party with one or more third Persons and such
default (a) occurs at the final maturity of the obligations thereunder, or (b)
results in a right by such third Person(s), irrespective of whether exercised,
to accelerate the maturity of Borrower's obligations thereunder, to terminate
such agreement, or to refuse to renew such agreement pursuant to an automatic
renewal right therein;
8.11 If Borrower makes any payment on account of Indebtedness that has
been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
8.12 If any misstatement that is material or misrepresentation that is
material exists now or hereafter in any warranty, representation, statement, or
report made to the Lender Group by Borrower or any officer, employee, agent, or
director of Borrower, or if any such warranty or representation is withdrawn; or
8.13 If the obligation of any guarantor under its guaranty or other
third Person under any Loan Document is limited or terminated by operation of
law or by the guarantor or other third Person thereunder, or any such guarantor
or other third Person becomes the subject of an Insolvency Proceeding.
9. THE LENDER GROUP'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default, the Required Lenders (at their election
but without notice of their election and without demand) may, except to the
extent otherwise expressly provided or required below, authorize and instruct
Agent to do any one or more of the following on behalf of the Lender Group (and
Agent, acting upon the instructions of the Required Lenders, shall do the same
on behalf of the Lender Group), all of which are authorized by Borrower:
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(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and the Lender Group;
(c) Terminate this Agreement and any of the other Loan Documents
as to any future liability or obligation of the Lender Group, but without
affecting Agent's rights and security interests, for the benefit of the Lender
Group, in the Personal Property Collateral or the Real Property Collateral and
without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Agent considers advisable, and in such
cases, Agent will credit Borrower's Loan Account with only the net amounts
received by Agent in payment of such disputed Accounts after deducting all
Lender Group Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust for
the Lender Group, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of the Lender Group;
(f) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Agent considers necessary or reasonable
to protect its security interests in the Collateral. Borrower agrees to assemble
the Personal Property Collateral if Agent so requires, and to make the Personal
Property Collateral available to Agent as Agent may designate. Borrower
authorizes Agent to enter the premises where the Personal Property Collateral is
located, to take and maintain possession of the Personal Property Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or Lien that in Agent's determination appears to conflict with the
Agent's Liens and to pay all expenses incurred in connection therewith. With
respect to any of Borrower's owned or leased premises, Borrower hereby grants
Agent a license to enter into possession of such premises and to occupy the
same, without charge, for up to 120 days in order to exercise any of the Lender
Group's rights or remedies provided herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by the Lender Group (including any amounts received in the Lockbox Accounts), or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by the Lender Group;
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(h) Hold, as cash collateral, any and all balances and deposits
of Borrower held by the Lender Group, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Personal Property Collateral. Borrower hereby grants to Agent a
license or other right to use, without charge, Borrower's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar nature, as
it pertains to the Personal Property Collateral, in completing production of,
advertising for sale, and selling any Personal Property Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
the Lender Group's benefit;
(j) Sell the Personal Property Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Agent determines is commercially reasonable. It is not necessary that the
Personal Property Collateral be present at any such sale;
(k) Agent shall give notice of the disposition of the Personal
Property Collateral as follows:
(1) Agent shall give Borrower and each holder of a security
interest in the Personal Property Collateral who has filed with Agent a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Personal Property Collateral, then the time on or
after which the private sale or other disposition is to be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in Section 12, at least 10 days before
the date fixed for the sale, or at least 10 days before the date on or after
which the private sale or other disposition is to be made; no notice needs to be
given prior to the disposition of any portion of the Personal Property
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market. Notice to Persons other
than Borrower claiming an interest in the Personal Property Collateral shall be
sent to such addresses as they have furnished to Agent;
(3) If the sale is to be a public sale, Agent also shall
give notice of the time and place by publishing a notice one time at least 5
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(l) The Lender Group may credit bid and purchase at any public
sale;
(m) The Lender Group shall have all other rights and remedies
available to it at law or in equity pursuant to any other Loan Documents; and
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(n) Any deficiency that exists after disposition of the Personal
Property Collateral as provided above will be paid immediately by Borrower. Any
excess will be returned, without interest and subject to the rights of third
Persons, by Agent to Borrower.
9.2 REMEDIES CUMULATIVE. The rights and remedies of the Lender Group
under this Agreement, the other Loan Documents, and all other agreements shall
be cumulative. The Lender Group shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by the Lender Group of one right or remedy shall be deemed an election,
and no waiver by the Lender Group of any Event of Default shall be deemed a
continuing waiver. No delay by the Lender Group shall constitute a waiver,
election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Agent
determines that such failure by Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrower, Agent may do any
or all of the following: (a) make payment of the same or any part thereof; (b)
set up such reserves in Borrower's Loan Account as Agent deems necessary to
protect the Lender Group from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type described in Section 6.10,
and take any action with respect to such policies as Agent deems prudent. Any
such amounts paid by Agent shall constitute Lender Group Expenses. Any such
payments made by Agent shall not constitute an agreement by the Lender Group to
make similar payments in the future or a waiver by the Lender Group of any Event
of Default under this Agreement. Agent need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by the Lender Group on which Borrower may in any way be liable.
11.2 THE LENDER GROUP'S LIABILITY FOR COLLATERAL. Borrower hereby
agrees that: (a) so long as the Lender Group complies with its obligations, if
any, under Section 9207 of the Code, the Lender Group shall not in any way or
manner be liable or responsible for: (i) the safekeeping of the Collateral; (ii)
any loss or damage thereto occurring or arising in any manner or fashion from
any cause; (iii) any diminution in the value thereof; or (iv) any act or default
of any carrier, warehouseman, bailee, forwarding agency, or other Person; and
(b) all risk of loss, damage, or destruction of the Collateral shall be borne by
Borrower.
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11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold
the Agent-Related Persons, the Lender-Related Persons with respect to each
Lender, each Participant, and each of their respective officers, directors,
employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified
Person") harmless (to the fullest extent permitted by law) from and against any
and all claims, demands, suits, actions, investigations, proceedings, and
damages, and all reasonable attorneys fees and disbursements and other costs and
expenses actually incurred in connection therewith (as and when they are
incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person under this Section 11.3 with respect to any Indemnified
Liability that a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. This provision shall survive the termination of this Agreement and the
repayment of the other Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to the relevant party at
its address set forth below:
IF TO BORROWER: EMPLOYEE SOLUTIONS, INC.
6225 N. 24th Street
Phoenix, AZ 85016
Attn: John V. Prince, CFO
Fax No: 602-955-1235
WITH COPIES TO: QUARLES & BRADY
1 E. Camelback Road, Suite 400
Phoenix, Arizona 85012
Attn: Robert Bailes, Esq.
Fax No.: 602-230-5598
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EMPLOYEE SOLUTIONS, INC.
6225 N. 24th Street
Phoenix, Arizona 85016
Attn: Paul M. Gales, Esq.
Fax No: 602-955-1235
IF TO AGENT OR
THE LENDER GROUP
IN CARE OF AGENT: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310-478-9788
WITH COPIES TO: KATTEN MUCHIN & ZAVIS
1999 Avenue of the Stars, Suite 1400
Los Angeles, California 90071
Attn: Robert D. Goldschein, Esq.
Fax No. 310-788-4471
ABLECO FINANCE LLC
450 Park Avenue
28th Floor
New York, NY 10022
Attn: Kevin Genda
Fax No.: 212-891-1541
BROBECK, PHLEGER & HARRISON, LLP
550 S. Hope Street
Suite 2400
Los Angeles, CA 90071
Attn: John Hilson, Esq.
Fax No.: 213-745-3345
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to all
other parties. All notices or demands sent in accordance with this Section 12,
other than notices by the Lender Group in connection with Sections 9504 or 9505
of the Code, shall be deemed received on the earlier of the date of actual
receipt or 3 days after the deposit thereof in the mail. Borrower acknowledges
and agrees that notices sent by the Lender Group in connection with Sections
9504 or 9505 of the Code shall be deemed sent when deposited in the mail or
personally delivered, or, where permitted by law, transmitted telefacsimile or
other similar method set forth above.
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13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH
OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF
AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO
ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL
BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW
YORK, STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT
AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN
THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE
SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP
WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.
BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE
LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS/CONFIDENTIALITY OF BORROWER
INFORMATION.
14.1 DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered
to any one or more members of the Lender Group may be destroyed or otherwise
disposed of by such member of the Lender Group 4 months after they are delivered
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to or received by such member of the Lender Group, unless Borrower requests, in
writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrower's expense, for their return.
14.2 CONFIDENTIALITY OF BORROWER'S INFORMATION.
Lenders agree that material, non-public information and any
information specifically designated by Borrower in writing as confidential
regarding Borrower, its operations, assets, and existing and contemplated
business plans shall be treated by Lenders in a confidential manner, and shall
not be disclosed to Persons who are not parties to this Agreement, except that
Lenders may disclose such information (a) to counsel for and other advisors,
accountants, and auditors to Lenders, (b) as may be required by statute,
decision, or judicial or administrative order, rule, or regulation, (c) as may
be agreed to in advance by Borrower, (d) as to any such information that is or
becomes generally available to the public (other than as a result of prohibited
disclosure by Lenders), (e) to Lenders' respective Affiliates, and (f) in
connection with any assignment, prospective assignment, sale, prospective sale,
participation or prospective participation, or pledge or prospective pledge of
Lenders' respective interests under this Agreement; provided that any such
counsel, advisors, accountants, auditors and any such assignee, prospective
assignee, purchaser, prospective purchaser, participant, prospective
participant, pledgee, or prospective pledgee shall have agreed in writing to
take its interest hereunder subject to the terms hereof.
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.
15.1 ASSIGNMENTS AND PARTICIPATIONS.
(a) Any Lender may, with the written consent of Agent, assign and
delegate to one or more assignees (provided that no written consent of Agent
shall be required in connection with any assignment and delegation by a Lender
to an Eligible Transferee) (each an "Assignee") all, or any ratable part of all,
of the Obligations, the Commitments and the other rights and obligations of such
Lender hereunder and under the other Loan Documents, in a minimum amount of $2.5
million (provided that no such minimum amount shall be required in the case of
an Assignee that is an Affiliate of the assigning Lender or funds or accounts
managed by such Lender); provided, however, that Borrower and Agent may continue
to deal solely and directly with such Lender in connection with the interest so
assigned to an Assignee until (i) written notice of such assignment, together
with payment instructions, addresses and related information with respect to the
Assignee, shall have been given to Borrower and Agent by such Lender and the
Assignee; (ii) such Lender and its Assignee shall have delivered to Borrower and
Agent an Assignment and Acceptance ("Assignment and Acceptance") in form and
substance satisfactory to Agent; and (iii) other than with respect to an
assignment by an existing Lender to an Affiliate of the assignor Lender or funds
or accounts managed by such Lender, the assignor Lender or Assignee has paid to
Agent for Agent's sole and separate account a processing fee in the amount of
$5,000. Anything contained herein to the contrary notwithstanding, the consent
of Agent shall not be required (and payment of any fees shall not be required)
if such assignment is in connection with any merger, consolidation, sale,
transfer, or other disposition of all or any substantial portion of the business
or loan portfolio of such Lender.
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(b) From and after the date that Agent notifies the assignor
Lender that it has received an executed Assignment and Acceptance and payment of
the above-referenced processing fee, (i) the Assignee thereunder shall be a
party hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, shall have the rights
and obligations of a Lender under the Loan Documents, and (ii) the assignor
Lender shall, to the extent that rights and obligations hereunder and under the
other Loan Documents have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights (except with respect to Section 11.3 hereof)
and be released from its obligations under this Agreement (and in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement and the other Loan
Documents, such Lender shall cease to be a party hereto and thereto), and such
assignment shall effect a novation between Borrower and the Assignee.
(c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the Assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (1) other than as
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other Loan Document furnished
pursuant hereto; (2) such assigning Lender makes no representation or warranty
and assumes no responsibility with respect to the financial condition of
Borrower or the performance or observance by Borrower of any of its obligations
under this Agreement or any other Loan Document furnished pursuant hereto; (3)
such Assignee confirms that it has received a copy of this Agreement, together
with such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into such Assignment and
Acceptance; (4) such Assignee will, independently and without reliance upon
Agent, such assigning Lender or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement; (5)
such Assignee appoints and authorizes Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement as are delegated to
Agent by the terms hereof, together with such powers as are reasonably
incidental thereto; and (6) such Assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of this
Agreement are required to be performed by it as a Lender.
(d) Immediately upon each Assignee's making its processing fee
payment under the Assignment and Acceptance, this Agreement shall be deemed to
be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Lender pro tanto.
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(e) Any Lender may at any time, with the written consent of
Agent, sell to one or more commercial banks, financial institutions, or other
Persons not Affiliates of such Lender (a "Participant") participating interests
in the Obligations, the Commitment, and the other rights and interests of that
Lender (the "originating Lender") hereunder and under the other Loan Documents
(provided that no written consent of Agent shall be required in connection with
any sale of any such participating interests by a Lender to an Eligible
Transferee); provided, however, that (i) the originating Lender's obligations
under this Agreement shall remain unchanged, (ii) the originating Lender shall
remain solely responsible for the performance of such obligations, (iii)
Borrower and Agent shall continue to deal solely and directly with the
originating Lender in connection with the originating Lender's rights and
obligations under this Agreement and the other Loan Documents, (iv) no Lender
shall transfer or grant any participating interest under which the Participant
has the sole and exclusive right to approve any amendment to, or any consent or
waiver with respect to, this Agreement or any other Loan Document, except to the
extent such amendment to, or consent or waiver with respect to this Agreement or
of any other Loan Document would (A) extend the final maturity date of the
Obligations hereunder in which such Participant is participating; (B) reduce the
interest rate applicable to the Obligations hereunder in which such Participant
is participating; (C) release all or a material portion of the Collateral or
guaranties (except to the extent expressly provided herein or in any of the Loan
Documents) supporting the Obligations hereunder in which such Participant is
participating; (D) postpone the payment of, or reduce the amount of, the
interest or fees payable to such Participant through such Lender; or (E) change
the amount or due dates of scheduled principal repayments or prepayments or
premiums; and (v) all amounts payable by Borrower hereunder shall be determined
as if such Lender had not sold such participation; except that, if amounts
outstanding under this Agreement are due and unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under this Agreement to the same extent
as if the amount of its participating interest were owing directly to it as a
Lender under this Agreement. The rights of any Participant only shall be
derivative through the originating Lender with whom such Participant
participates and no Participant shall have any direct rights as to the other
Lenders, Agent, Borrower, the Collections, the Collateral, or otherwise in
respect of the Obligations. No Participant shall have the right to participate
directly in the making of decisions by the Lenders among themselves.
(f) In connection with any such assignment or participation or
proposed assignment or participation, a Lender may disclose all documents and
information which it now or hereafter may have relating to Borrower or
Borrower's business.
(g) Any other provision in this Agreement notwithstanding, any
Lender may at any time create a security interest in, or pledge, all or any
portion of its rights under and interest in this Agreement in favor of any
Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank
or U.S. Treasury Regulation 31 CFR section203.14, and such Federal Reserve Bank
may enforce such pledge or security interest in any manner permitted under
applicable law.
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15.2 SUCCESSORS. This Agreement shall bind and inure to the benefit of
the respective successors and assigns of each of the parties; provided, however,
that Borrower may not assign this Agreement or any rights or duties hereunder
without the Lenders' prior written consent and any prohibited assignment shall
be absolutely void ab initio. No consent to assignment by the Lenders shall
release Borrower from its Obligations. A Lender may assign this Agreement and
the other Loan Documents and its rights and duties hereunder and thereunder
pursuant to Section 15.1 hereof and, except as expressly required pursuant to
Section 15.1 hereof, no consent or approval by Borrower is required in
connection with any such assignment.
16. AMENDMENTS; WAIVERS.
16.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision
of this Agreement or any other Loan Document, and no consent with respect to any
departure by Borrower therefrom, shall be effective unless the same shall be in
writing and signed by the Required Lenders (or by Agent at the written request
of the Required Lenders) and Borrower and then any such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided, however, that no such waiver, amendment, or consent
shall, unless in writing and signed by all the Lenders and Borrower and
acknowledged by Agent, do any of the following:
(a) increase or extend the Commitment of any Lender;
(b) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment of principal, interest, fees or other
amounts due to the Lenders (or any of them) hereunder or under any other Loan
Document;
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or any fees or other amounts payable hereunder or under any
other Loan Document;
(d) change the percentage of the Commitments (or Obligations, as
applicable) that is required for the Lenders or any of them to take any action
hereunder;
(e) amend this Section or any provision of the Agreement
providing for consent or other action by all Lenders;
(f) release Collateral other than as permitted by Section 17.11;
(g) change the definition of "Required Lenders";
(h) release Borrower from any Obligation for the payment of
money; or
(i) amend any of the provisions of Article 17.
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and, provided further, however, that no amendment, waiver or consent shall,
unless in writing and signed by Agent, affect the rights or duties of Agent
under this Agreement or any other Loan Document; and, provided further, however,
that no amendment, waiver or consent shall, unless in writing and signed by
Foothill in its individual capacity as a Lender, affect the specific rights or
duties of Foothill in its individual capacity as a Lender (as contrasted with
rights or duties of Foothill as a member of the Lender Group) under this
Agreement or any other Loan Document. The foregoing notwithstanding, any
amendment, modification, waiver, consent, termination, or release of or with
respect to any provision of this Agreement or any other Loan Document that
relates only to the relationship of the Lender Group among themselves, and that
does not affect the rights or obligations of Borrower, shall not require consent
by or the agreement of Borrower.
16.2 NO WAIVERS; CUMULATIVE REMEDIES. No failure by Agent or any
Lender to exercise any right, remedy, or option under this Agreement, any other
Loan Document, or any present or future supplement hereto or thereto, or in any
other agreement between or among Borrower and Agent or any Lender, or delay by
Agent or any Lender in exercising the same, will operate as a waiver thereof. No
waiver by Agent or any Lender will be effective unless it is in writing, and
then only to the extent specifically stated. No waiver by Agent or the Lenders
on any occasion shall affect or diminish Agent's and each Lender's rights
thereafter to require strict performance by Borrower of any provision of this
Agreement. Agent's and each Lender's rights under this Agreement and the other
Loan Documents will be cumulative and not exclusive of any other right or remedy
which Agent or any Lender may have.
17. AGENT; THE LENDER GROUP.
17.1 APPOINTMENT AND AUTHORIZATION OF AGENT. Each Lender hereby
designates and appoints Foothill as its agent under this Agreement and the other
Loan Documents and each Lender hereby irrevocably authorizes Agent to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto. Agent agrees to
act as such on the express conditions contained in this Article 17. The
provisions of this Article 17 are solely for the benefit of Agent and the
Lenders, and Borrower shall have no rights as a third party beneficiary of any
of the provisions contained herein; provided, however, that certain of the
provisions of Section 17.10 hereof also shall be for the benefit of Borrower.
Any provision to the contrary contained elsewhere in this Agreement or in any
other Loan Document notwithstanding, Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall Agent have
or be deemed to have any fiduciary relationship with any Lender, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any other Loan Document or otherwise exist
against Agent; it being expressly understood and agreed that the use of the word
"Agent" is for convenience only, that Foothill is merely the representative of
the Lenders, and has only the contractual duties set forth herein. Except as
expressly otherwise provided in this Agreement, Agent shall have and may use its
sole discretion with respect to exercising or refraining from exercising any
discretionary rights or taking or refraining from taking any actions which Agent
is expressly entitled to take or assert under or pursuant to this Agreement and
the other Loan Documents. Without limiting the generality of the foregoing, or
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of any other provision of the Loan Documents that provides rights or powers to
Agent, Lenders agree that Agent shall have the right to exercise the following
powers as long as this Agreement remains in effect: (a) maintain, in accordance
with its customary business practices, ledgers and records reflecting the status
of the Advances, the Letters of Credit, the Term Loan, the Collateral, the
Collections, and related matters; (b) execute or file any and all financing or
similar statements or notices, amendments, renewals, supplements, documents,
instruments, proofs of claim, notices and other written agreements with respect
to the Loan Documents; (c) make Advances, the Letters of Credit, and the Term
Loan, for itself or on behalf of Lenders as provided in the Loan Documents; (d)
exclusively receive, apply, and distribute the Collections as provided in the
Loan Documents; (e) open and maintain such bank accounts and lock boxes as Agent
deems necessary and appropriate in accordance with the Loan Documents for the
foregoing purposes with respect to the Collateral and the Collections; (f)
perform, exercise, and enforce any and all other rights and remedies of the
Lender Group with respect to Borrower, the Obligations, the Collateral, the
Collections, or otherwise related to any of same as provided in the Loan
Documents; and (g) incur and pay such Lender Group Expenses as Agent may deem
necessary or appropriate for the performance and fulfillment of its functions
and powers pursuant to the Loan Documents.
17.2 DELEGATION OF DUTIES. Except as otherwise provided in this
section, Agent may execute any of its duties under this Agreement or any other
Loan Document by or through agents, employees or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
Agent shall not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects as long as such selection was made in
compliance with this section and without gross negligence or willful misconduct.
17.3 LIABILITY OF AGENT. None of the Agent-Related Persons shall (i)
be liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be responsible in any manner to any of the Lenders for any recital,
statement, representation or warranty made by Borrower or any Subsidiary or
Affiliate of Borrower, or any officer or director thereof, contained in this
Agreement or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by Agent
under or in connection with, this Agreement or any other Loan Document, or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Loan Document, or for any failure of Borrower or any
other party to any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of Borrower or any of
Borrower's Subsidiaries or Affiliates.
17.4 RELIANCE BY AGENT. Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine and
correct and to have been signed, sent, or made by the proper Person or Persons,
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and upon advice and statements of legal counsel (including counsel to Borrower
or counsel to any Lender), independent accountants and other experts selected by
Agent. Agent shall be fully justified in failing or refusing to take any action
under this Agreement or any other Loan Document unless it shall first receive
such advice or concurrence of the Lenders as it deems appropriate and until such
instructions are received, Agent shall act, or refrain from acting, as it deems
advisable. If Agent so requests, it shall first be indemnified to its reasonable
satisfaction by Lenders against any and all liability and expense that may be
incurred by it by reason of taking or continuing to take any such action. Agent
shall in all cases be fully protected in acting, or in refraining from acting,
under this Agreement or any other Loan Document in accordance with a request or
consent of the Lenders and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Lenders.
17.5 NOTICE OF DEFAULT OR EVENT OF DEFAULT. Agent shall not be deemed
to have knowledge or notice of the occurrence of any Default or Event of
Default, except with respect to defaults in the payment of principal, interest,
fees, and expenses required to be paid to Agent for the account of the Lenders,
except with respect to Events of Default of which Agent has actual knowledge,
unless Agent shall have received written notice from a Lender or Borrower
referring to this Agreement, describing such Default or Event of Default, and
stating that such notice is a "notice of default." Agent promptly will notify
the Lenders of its receipt of any such notice or of any Event of Default of
which Agent has actual knowledge. If any Lender obtains actual knowledge of any
Event of Default, such Lender promptly shall notify the other Lenders and Agent
of such Event of Default. Each Lender shall be solely responsible for giving any
notices to its Participants, if any. Subject to Section 17.4, Agent shall take
such action with respect to such Default or Event of Default as may be requested
by the Required Lenders in accordance with Section 9; provided, however, that
unless and until Agent has received any such request, Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable.
17.6 CREDIT DECISION. Each Lender acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by Agent hereinafter taken, including any review of the affairs of Borrower
and its Subsidiaries or Affiliates, shall be deemed to constitute any
representation or warranty by any Agent-Related Person to any Lender. Each
Lender represents to Agent that it has, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition and
creditworthiness of Borrower and any other Person (other than the Lender Group)
party to a Loan Document, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to Borrower. Each Lender also represents
that it will, independently and without reliance upon any Agent-Related Person
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigations as it deems necessary to inform itself as to the
business, prospects, operations, property, financial and other condition and
creditworthiness of Borrower and any other Person (other than the Lender Group)
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party to a Loan Document. Except for notices, reports and other documents
expressly herein required to be furnished to the Lenders by Agent, Agent shall
not have any duty or responsibility to provide any Lender with any credit or
other information concerning the business, prospects, operations, property,
financial and other condition or creditworthiness of Borrower and any other
Person party to a Loan Document that may come into the possession of any of the
Agent-Related Persons.
17.7 COSTS AND EXPENSES; INDEMNIFICATION. Agent may incur and pay
Lender Group Expenses to the extent Agent deems reasonably necessary or
appropriate for the performance and fulfillment of its functions, powers, and
obligations pursuant to the Loan Documents, including without limiting the
generality of the foregoing, court costs, reasonable attorneys fees and
expenses, costs of collection by outside collection agencies and auctioneer fees
and costs of security guards or insurance premiums paid to maintain the
Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders
for such expenses pursuant to the Loan Agreement or otherwise. Agent is
authorized and directed to deduct and retain sufficient amounts from Collections
to reimburse Agent for such out-of-pocket costs and expenses prior to the
distribution of any amounts to Lenders. In the event Agent is not reimbursed for
such costs and expenses from Collections, each Lender hereby agrees that it is
and shall be obligated to pay to or reimburse Agent for the amount of such
Lender's Pro Rata Share thereof. Whether or not the transactions contemplated
hereby are consummated, the Lenders shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower
and without limiting the obligation of Borrower to do so), according to their
Pro Rata Shares, from and against any and all Indemnified Liabilities; provided,
however, that no Lender shall be liable for the payment to the Agent-Related
Persons of any portion of such Indemnified Liabilities resulting solely from
such Person's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender shall reimburse Agent upon demand for its ratable share
of any costs or out-of-pocket expenses (including attorneys fees and expenses)
incurred by Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, any other Loan Document, or
any document contemplated by or referred to herein, to the extent that Agent is
not reimbursed for such expenses by or on behalf of Borrower. The undertaking in
this section shall survive the payment of all Obligations hereunder and the
resignation or replacement of Agent.
17.8 AGENT IN INDIVIDUAL CAPACITY. Foothill and its Affiliates may
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with Borrower and its
Subsidiaries and Affiliates and any other Person (other than the Lender Group)
party to any Loan Documents as though Foothill were not Agent hereunder and
without notice to or consent of the Lenders. The Lenders acknowledge that,
pursuant to such activities, Foothill or its Affiliates may receive information
regarding Borrower or its Affiliates and any other Person (other than the Lender
Group) party to any Loan Documents that is subject to confidentiality
obligations in favor of Borrower or such other Person and that prohibit the
disclosure of such information to the Lenders, and the Lenders acknowledge that,
in such circumstances (and in the absence of a waiver of such confidentiality
obligations, which waiver Agent will use its reasonable best efforts to obtain),
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Agent shall be under no obligation to provide such information to them. With
respect to the Foothill Loans and Agent Advances, Foothill shall have the same
rights and powers under this Agreement as any other Lender and may exercise the
same as though it were not Agent, and the terms "Lender" and "Lenders" include
Foothill in its individual capacity.
17.9 SUCCESSOR AGENT. Agent may resign as Agent upon 45 days notice to
the Lenders. If Agent resigns under this Agreement, the Required Lenders shall
appoint a successor Agent for the Lenders. If no successor Agent is appointed
prior to the effective date of the resignation of Agent, Agent may appoint,
after consulting with the Lenders, a successor Agent. If Agent has materially
breached or failed to perform any material provision of this Agreement or of
applicable law, the Required Lenders may agree in writing to remove and replace
Agent with a successor Agent from among the Lenders. In any such event, upon the
acceptance of its appointment as successor Agent hereunder, such successor Agent
shall succeed to all the rights, powers and duties of the retiring Agent and the
term "Agent" shall mean such successor Agent and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Section 17 shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Agent under this Agreement. If no successor Agent has accepted
appointment as Agent by the date which is 45 days following a retiring Agent's
notice of resignation, the retiring Agent's resignation shall nevertheless
thereupon become effective and the Lenders shall perform all of the duties of
Agent hereunder until such time, if any, as the Lenders appoint a successor
Agent as provided for above.
17.10 WITHHOLDING TAX. (a) If any Lender is a "foreign corporation,
partnership or trust" within the meaning of the IRC and such Lender claims
exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or
1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to
deliver to Agent and Borrower:
(i) if such Lender claims an exemption from, or a reduction
of, withholding tax under a United States tax treaty, properly completed IRS
Forms 1001 and W-8 before the payment of any interest in the first calendar year
and before the payment of any interest in each third succeeding calendar year
during which interest may be paid under this Agreement;
(ii) if such Lender claims that interest paid under this
Agreement is exempt from United States withholding tax because it is effectively
connected with a United States trade or business of such Lender, two properly
completed and executed copies of IRS Form 4224 before the payment of any
interest is due in the first taxable year of such Lender and in each succeeding
taxable year of such Lender during which interest may be paid under this
Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be required under the
IRC or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.
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Such Lender agrees promptly to notify Agent and Borrower of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Lender claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form 1001 and
such Lender sells, assigns, grants a participation in, or otherwise transfers
all or part of the Obligations of Borrower to such Lender, such Lender agrees to
notify Agent of the percentage amount in which it is no longer the beneficial
owner of Obligations of Borrower to such Lender. To the extent of such
percentage amount, Agent will treat such Lender's IRS Form 1001 as no longer
valid.
(c) If any Lender claiming exemption from United States
withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of
Borrower to such Lender, such Lender agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the IRC.
(d) If any Lender is entitled to a reduction in the applicable
withholding tax, Agent may withhold from any interest payment to such Lender an
amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to Agent, then Agent may withhold from any
interest payment to such Lender not providing such forms or other documentation
an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that Agent did not properly
withhold tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered, was not properly executed, or because such
Lender failed to notify Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any other
reason) such Lender shall indemnify Agent fully for all amounts paid, directly
or indirectly, by Agent as tax or otherwise, including penalties and interest,
and including any taxes imposed by any jurisdiction on the amounts payable to
Agent under this Section, together with all costs and expenses (including
attorneys fees and expenses). The obligation of the Lenders under this
subsection shall survive the payment of all Obligations and the resignation or
replacement of Agent.
17.11 COLLATERAL MATTERS.
(a) The Lenders hereby irrevocably authorize Agent, at its option
and in its sole discretion, to release any Lien on any Collateral (i) upon the
termination of the Commitments and payment and satisfaction in full by Borrower
of all Obligations; (ii) constituting property being sold or disposed of if a
release is required or desirable in connection therewith and if Borrower
certifies to Agent that the sale or disposition is permitted under Section 7 of
this Agreement or the other Loan Documents (and Agent may rely conclusively on
any such certificate, without further inquiry); (iii) constituting property in
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which Borrower owned no interest at the time the security interest was granted
or at any time thereafter; or (iv) constituting property leased to Borrower
under a lease that has expired or is terminated in a transaction permitted under
this Agreement. Except as provided above, Agent will not execute and deliver a
release of any Lien on any Collateral without the prior written authorization of
(y) if the release is of all or substantially all of the Collateral, of all of
the Lenders, or (z) otherwise, all of the Lenders. Upon request by Agent or
Borrower at any time, the Lenders will confirm in writing Agent's authority to
release any such Liens on particular types or items of Collateral pursuant to
this Section 17.11; provided, however, that (1) Agent shall not be required to
execute any document necessary to evidence such release on terms that, in
Agent's opinion, would expose Agent to liability or create any obligation or
entail any consequence other than the release of such Lien without recourse,
representation, or warranty, and (2) such release shall not in any manner
discharge, affect, or impair the Obligations or any Liens (other than those
expressly being released) upon (or obligations of Borrower in respect of) all
interests retained by Borrower, including, the proceeds of any sale, all of
which shall continue to constitute part of the Collateral.
(b) Agent shall have no obligation whatsoever to any of the
Lenders to assure that the Collateral exists or is owned by Borrower or is cared
for, protected, or insured or has been encumbered, or that the Agent's Liens
have been properly or sufficiently or lawfully created, perfected, protected, or
enforced or are entitled to any particular priority, or to exercise at all or in
any particular manner or under any duty of care, disclosure or fidelity, or to
continue exercising, any of the rights, authorities and powers granted or
available to Agent pursuant to any of the Loan Documents, it being understood
and agreed that in respect of the Collateral, or any act, omission or event
related thereto, subject to the terms and conditions contained herein, Agent may
act in any manner it may deem appropriate, in its sole discretion given Agent's
own interest in the Collateral in its capacity as one of the Lenders and that
Agent shall have no other duty or liability whatsoever to any Lender as to any
of the foregoing, except as otherwise provided herein.
17.12 RESTRICTIONS ON ACTIONS BY LENDERS; SHARING OF PAYMENTS. (a)
Each of the Lenders agrees that it shall not, without the express consent of
Agent, and that it shall, to the extent it is lawfully entitled to do so, upon
the request of Agent, set off against the Obligations, any amounts owing by such
Lender to Borrower or any accounts of Borrower now or hereafter maintained with
such Lender. Each of the Lenders further agrees that it shall not, unless
specifically requested to do so by Agent, take or cause to be taken any action,
including, the commencement of any legal or equitable proceedings, to foreclose
any Lien on, or otherwise enforce any security interest in, any of the
Collateral the purpose of which is, or could be, to give such Lender any
preference or priority against the other Lenders with respect to the Collateral.
(b) Subject to Section 17.8, if, at any time or times any Lender
shall receive (i) by payment, foreclosure, setoff or otherwise, any proceeds of
Collateral or any payments with respect to the Obligations arising under, or
relating to, this Agreement or the other Loan Documents, except for any such
proceeds or payments received by such Lender from Agent pursuant to the terms of
this Agreement, or (ii) payments from Agent in excess of such Lender's ratable
portion of all such distributions by Agent, such Lender promptly shall (1) turn
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the same over to Agent, in kind, and with such endorsements as may be required
to negotiate the same to Agent, or in same day funds, as applicable, for the
account of all of the Lenders and for application to the Obligations in
accordance with the applicable provisions of this Agreement, or (2) purchase,
without recourse or warranty, an undivided interest and participation in the
Obligations owed to the other Lenders so that such excess payment received shall
be applied ratably as among the Lenders in accordance with their Pro Rata
Shares; provided, however, that if all or part of such excess payment received
by the purchasing party is thereafter recovered from it, those purchases of
participations shall be rescinded in whole or in part, as applicable, and the
applicable portion of the purchase price paid therefor shall be returned to such
purchasing party, but without interest except to the extent that such purchasing
party is required to pay interest in connection with the recovery of the excess
payment.
17.13 AGENCY FOR PERFECTION. Agent and each Lender hereby appoints
each other Lender as agent for the purpose of perfecting the Agent's Liens in
assets which, in accordance with Article 9 of the UCC can be perfected only by
possession. Should any Lender obtain possession of any such Collateral, such
Lender shall notify Agent thereof, and, promptly upon Agent's request therefor
shall deliver such Collateral to Agent or in accordance with Agent's
instructions.
17.14 PAYMENTS BY AGENT TO THE LENDERS. All payments to be made by
Agent to the Lenders shall be made by bank wire transfer or internal transfer of
immediately available funds to:
If to Foothill: The Chase Manhattan Bank
ABA # 021-000-021
Credit: Foothill Capital Corporation
Account No. 323-266193
Re: Employee Solutions, Inc.
If to Ableco Finance LLC:
Chase Bank of Texas, N.A.
ABA # 113000609
AC: 00102619468
BNF: Wires-Clearing-Asset Backed Securities
OBI: Ref: Kevin Celestine/Ableco Finance
Acct. #2316401
17.15 CONCERNING THE COLLATERAL AND RELATED LOAN DOCUMENTS. Each
member of the Lender Group authorizes and directs Agent to enter into this
Agreement and the other Loan Documents relating to the Collateral, for the
benefit of the Lender Group. Each member of the Lender Group agrees that any
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action taken by Agent or all Lenders, as applicable, in accordance with the
terms of this Agreement or the other Loan Documents relating to the Collateral
and the exercise by Agent or all Lenders, as applicable, of their respective
powers set forth therein or herein, together with such other powers that are
reasonably incidental thereto, shall be binding upon all of the Lenders.
17.16 FIELD AUDITS AND EXAMINATION REPORTS; CONFIDENTIALITY;
DISCLAIMERS BY LENDERS; OTHER REPORTS AND INFORMATION. By signing this
Agreement, each Lender:
(a) is deemed to have requested that Agent furnish such Lender,
promptly after it becomes available, a copy of each field audit or examination
report (each a "Report" and collectively, "Reports") prepared by Agent, and
Agent shall so furnish each Lender with such Reports;
(b) expressly agrees and acknowledges that neither Foothill nor
Agent (i) makes any representation or warranty as to the accuracy of any Report,
or (ii) shall be liable for any information contained in any Report;
(c) expressly agrees and acknowledges that the Reports are not
comprehensive audits or examinations, that Agent or other party performing any
audit or examination will inspect only specific information regarding Borrower
and will rely significantly upon Borrower's books and records, as well as on
representations of Borrower's personnel;
(d) agrees to keep all Reports and other material, non-public
information regarding Borrower and its Subsidiaries and their operations,
assets, and existing and contemplated business plans in a confidential manner;
it being understood and agreed by Borrower that in any event such Lender may
make disclosures (a) to counsel for and other advisors, accountants, and
auditors to such Lender, (b) reasonably required by any bona fide potential or
actual Assignee, transferee, or Participant in connection with any contemplated
or actual assignment or transfer by such Lender of an interest herein or any
participation interest in such Lender's rights hereunder, (c) of information
that has become public by disclosures made by Persons other than such Lender,
its Affiliates, assignees, transferees, or participants, or (d) as required or
requested by any court, governmental or administrative agency, pursuant to any
subpoena or other legal process, or by any law, statute, regulation, or court
order; provided, however, that, unless prohibited by applicable law, statute,
regulation, or court order, such Lender shall notify Borrower of any request by
any court, governmental or administrative agency, or pursuant to any subpoena or
other legal process for disclosure of any such non-public material information
concurrent with, or where practicable, prior to the disclosure thereof; and
(e) without limiting the generality of any other indemnification
provision contained in this Agreement, agrees: (i) to hold Agent and any such
other Lender preparing a Report harmless from any action the indemnifying Lender
may take or conclusion the indemnifying Lender may reach or draw from any Report
in connection with any loans or other credit accommodations that the
indemnifying Lender has made or may make to Borrower, or the indemnifying
Lender's participation in, or the indemnifying Lender's purchase of, a loan or
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loans of Borrower; and (ii) to pay and protect, and indemnify, defend and hold
Agent and any such other Lender preparing a Report harmless from and against,
the claims, actions, proceedings, damages, costs, expenses and other amounts
(including, attorney costs) incurred by Agent and any such other Lender
preparing a Report as the direct or indirect result of any third parties who
might obtain all or part of any Report through the indemnifying Lender.
In addition to the foregoing: (x) Any Lender may from time to time request of
Agent in writing that Agent provide to such Lender a copy of any report or
document provided by Borrower to Agent that has not been contemporaneously
provided by Borrower to such Lender, and, upon receipt of such request, Agent
shall provide a copy of same to such Lender promptly upon receipt thereof from
Borrower; (y) To the extent that Agent is entitled, under any provision of the
Loan Documents, to request additional reports or information from Borrower, any
Lender may, from time to time, reasonably request Agent to exercise such right
as specified in such Lender's notice to Agent, whereupon Agent promptly shall
request of Borrower the additional reports or information specified by such
Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a
copy of same to such Lender; and (z) Any time that Agent renders to Borrower a
statement regarding the Loan Account, Agent shall send a copy of such statement
to each Lender.
17.17 SEVERAL OBLIGATIONS; NO LIABILITY. Notwithstanding that certain
of the Loan Documents now or hereafter may have been or will be executed only by
or in favor of Agent in its capacity as such, and not by or in favor of the
Lenders, any and all obligations on the part of Agent (if any) to make any
credit available hereunder shall constitute the several (and not joint)
obligations of the respective Lenders on a ratable basis, according to their
respective Commitments, to make an amount of such credit not to exceed, in
principal amount, at any one time outstanding, the amount of their respective
Commitments. Nothing contained herein shall confer upon any Lender any interest
in, or subject any Lender to any liability for, or in respect of, the business,
assets, profits, losses, or liabilities of any other Lender. Each Lender shall
be solely responsible for notifying its Participants of any matters relating to
the Loan Documents to the extent any such notice may be required, and no Lender
shall have any obligation, duty, or liability to any Participant of any other
Lender. Except as provided in Section 17.7, no member of the Lender Group shall
have any liability for the acts or any other member of the Lender Group. No
Lender shall be responsible to Borrower or any other Person for any failure by
any other Lender to fulfill its obligations to make credit available hereunder,
nor to advance for it or on its behalf in connection with its Commitment, nor to
take any other action on its behalf hereunder or in connection with the
financing contemplated herein.
18. GENERAL PROVISIONS.
18.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and each member of the Lender Group whose
signature is provided for on the signature pages hereof.
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18.2 SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
18.3 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against the Lender Group or
Borrower, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
18.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
18.5 AMENDMENTS IN WRITING. This Agreement can only be amended by a
writing signed by Agent, the requisite Lenders, and Borrower.
18.6 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement. The forgoing shall apply to each other Loan Document mutatis
mutandis.
18.7 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by either or both of such parties to the Lender Group of any
property of either or both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences, and other voidable or recoverable payments
of money or transfers of property (collectively, a "Voidable Transfer"), and if
the Lender Group is required to repay or restore, in whole or in part, any such
Voidable Transfer, or elects to do so upon the reasonable advice of its counsel,
then, as to any such Voidable Transfer, or the amount thereof that the Lender
Group is required or elects to repay or restore, and as to all reasonable costs,
expenses, and attorneys fees of the Lender Group related thereto, the liability
of Borrower or such guarantor automatically shall be revived, reinstated, and
restored and shall exist as though such Voidable Transfer had never been made.
18.8 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
18.9 JOINT AND SEVERAL. Each Borrower shall be jointly and severally
liable for all obligations under this Agreement and the other Loan Documents.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By:
------------------------------------
Title:
---------------------------------
E.R.C. OF INDIANA, INC.,
an Indiana corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE RESOURCES CORPORATION,
an Indiana corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE SOLUTIONS - EAST, INC.,
a Georgia corporation
By:
------------------------------------
Title:
---------------------------------
<PAGE>
EMPLOYEE SOLUTIONS - MIDWEST, INC.,
a Michigan corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE SOLUTIONS - OHIO, INC.,
an Indiana corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE SOLUTIONS OF ALABAMA, INC.,
an Alabama corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE SOLUTIONS OF CALIFORNIA, INC.,
a Nevada corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE SOLUTIONS OF TEXAS, INC.,
a Texas corporation
By:
------------------------------------
Title:
---------------------------------
<PAGE>
EMPLOYEE SOLUTIONS - NORTH AMERICA,
INC., a Delaware corporation
By:
------------------------------------
Title:
---------------------------------
EMPLOYEE SOLUTIONS - SOUTHEAST, INC.,
a Florida corporation
By:
------------------------------------
Title:
---------------------------------
ERC OF MINN INC.,
a Minnesota corporation
By:
------------------------------------
Title:
---------------------------------
ERC OF OHIO, INC.,
a Michigan corporation
By:
------------------------------------
Title:
---------------------------------
ESI-NEVADA HOLDING COMPANY, INC.,
a Nevada corporation
By:
------------------------------------
Title:
---------------------------------
<PAGE>
ESI AMERICA, INC.,
a Nevada corporation
By:
------------------------------------
Title:
---------------------------------
ESI RISK MANAGEMENT AGENCY, INC.,
an Arizona corporation
By:
------------------------------------
Title:
---------------------------------
ESI-MIDWEST, INC.,
a Nevada corporation
By:
------------------------------------
Title:
---------------------------------
ESI-NEW YORK, INC.,
an Arizona corporation
By:
------------------------------------
Title:
---------------------------------
FIDELITY RESOURCES CORPORATION,
an Oklahoma corporation
By:
------------------------------------
Title:
---------------------------------
<PAGE>
LOGISTICS PERSONNEL CORP.,
a Nevada corporation
By:
------------------------------------
Title:
---------------------------------
PHOENIX CAPITAL MANAGEMENT, INC.,
an Indiana corporation
By:
------------------------------------
Title:
---------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation, as Agent and a
Lender
By:
------------------------------------
Title:
---------------------------------
ABLECO FINANCE LLC,
a Delaware limited liability company
By:
------------------------------------
Title:
---------------------------------
<PAGE>
COMPLIANCE CERTIFICATE SAMPLE COPY
(LOAN AND SECURITY AGREEMENT SECTION 6.3)
Date __________________
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Santa Monica, California 90025-3333
RE: LOAN AND SECURITY AGREEMENT, DATED AS OF OCTOBER 26, 1999 (THE "LOAN
AGREEMENT") BY AND AMONG EMPLOYEE SOLUTIONS, INC., ET. AL., AS BORROWERS
(COLLECTIVELY, "BORROWER") AND FOOTHILL CAPITAL CORPORATION AND ABLECO
FINANCE LLC, AS LENDERS AND FOOTHILL CAPITAL CORPORATION, AS AGENT
("AGENT").
Dear ________________:
In accordance with Section 6.3 of the Loan Agreement, this letter shall serve as
certification to Agent that to the best of my knowledge: (i) all financial
statements have been prepared in accordance with GAAP and fairly represent the
financial condition of Borrower, (ii) the representations and warranties of
Borrower set forth in the Loan Agreement and other Loan Documents are true and
correct in all material respects on and as of the date of this certification,
(iii) as demonstrated on Exhibit 1 attached hereto, Borrowers are in compliance
with each of their financial covenants set forth in Section 7.21 of the
Agreement as of the date of this certification (to the extent applicable as of
such date), and (iv) there does not exist any condition or event that
constitutes a Default or Event of Default. Such certification is made as of the
fiscal quarter ending on ______________________.
Sincerely,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 13,670
<SECURITIES> 2,571
<RECEIVABLES> 57,373
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 79,519
<PP&E> 3,953
<DEPRECIATION> 0
<TOTAL-ASSETS> 156,935
<CURRENT-LIABILITIES> 60,097
<BONDS> 85,000
0
0
<COMMON> 37,364
<OTHER-SE> (30,407)
<TOTAL-LIABILITY-AND-EQUITY> 156,935
<SALES> 0
<TOTAL-REVENUES> 627,415
<CGS> 0
<TOTAL-COSTS> 601,823
<OTHER-EXPENSES> 23,955
<LOSS-PROVISION> 1,250
<INTEREST-EXPENSE> 6,426
<INCOME-PRETAX> (10,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,321)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
