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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(as amended)
For the period ended January 27, 1996. Commission File Number 0-21910
KIDS MART, INC.
(F/K/A FROST HANNA ACQUISITION GROUP, INC.)
(Exact name of registrant as specified in its charter)
Florida 65-0406710
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 Sentous Avenue, City of Industry, California 91748
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 854-3166
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, par value $0.0001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES. [ X ] NO. [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
AS OF SEPTEMBER 4, 1996, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE ISSUER BASED ON THE AVERAGE BID AND ASK PRICES OF $1.50
AND $2.75, RESPECTIVELY, OF SUCH COMMON STOCK IS $6,916,161 BASED UPON AN
AVERAGE PRICE OF $2.125 MULTIPLIED BY 3,254,664 SHARES OF COMMON STOCK
OUTSTANDING ON SUCH DATE HELD BY NON-AFFILIATES.
AS OF SEPTEMBER 4, 1996, THE ISSUER HAD A TOTAL OF 4,943,000 SHARES OF COMMON
STOCK, PAR VALUE $0.0001 PER SHARE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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The Registrant hereby amends its Annual Report on Form 10-K for the
fiscal year ended January 27, 1996 in its entirety as follows:
KIDS MART, INC.
10-K/A
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security-Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 8. Financial Statements 16
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 16
PART III
Item 10. Directors and Executive Officers 17
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 20
Item 14. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
FINANCIAL STATEMENTS F-1
EXHIBITS
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PART I
ITEM 1. BUSINESS
INTRODUCTION
INTRODUCTORY NOTE. This Annual Report on Form 10-K contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. See "--Private Securities Litigation Reform Act."
THE COMPANY. Kids Mart, Inc. (together with its subsidiaries, the "Company"), a
Florida corporation, is a value oriented chain of children's specialty apparel
stores generally located in strip shopping centers. At January 27, 1996, it
operated 296 children's apparel stores in 20 states under the names Little Folks
(14 stores) and Kids Mart (282 stores). See "--Recent Developments --Store
Closure Plan" for information regarding the closure of approximately 100 of the
Company's stores during the third quarter of fiscal year 1996.
The Company (then known as Frost Hanna Acquisition Group, Inc.) was
formed in April 1993 to serve as a vehicle to effect a merger, exchange of
capital stock, asset acquisition or other similar business combination with an
operating business. In September 1993, the Company consummated an initial public
offering of its equity securities from which it derived net proceeds of
approximately $6.6 million. Approximately $5.7 million (representing
approximately 80% of proceeds from the initial public offering, inclusive of
interest earned thereon) was held in escrow, pending the consummation of the
Acquisition (as hereinafter defined) described below and was released to the
Company upon consummation of the Merger (as hereinafter defined) also described
below.
LFS Acquisition Corp. ("LFS") purchased the Little Folks and Kids Mart
business from Woolworth Corporation and Kinney Shoe Corporation (collectively
"Woolworth") in May 1995 (the "Acquisition"). On January 3, 1996, the Company
merged with LFS. See "--Organization, Acquisition and Merger."
In January 1996, the Company changed its fiscal year from a calendar
basis ending on December 31 to a 52/53 week fiscal year ending on the Saturday
nearest January 31 and changed its name to Kids Mart, Inc.
See "--Organization, Acquisition and Merger" and "Item 3. Legal
Proceedings."
RECENT DEVELOPMENTS
CONTINUING LOSSES AND CASH FLOW CONSTRAINTS. The Company has experienced
substantial losses and cash flow constraints since the Acquisition. Net losses
were $5.7 million for the eight months ended January 27, 1996, and $8.6 million
for the six months ended July 27, 1996 (unaudited). No assurance can be given
as to when, if ever, the Company will become profitable. See "--Private
Securities Litigation Reform Act."
The Company has experienced difficulties in obtaining adequate credit
support from its factors. As a result, the Company has been required to operate
on shortened payment terms from its vendors, creating significant cash flow
constraints. Through early May 1996, the Company had been able to obtain
sufficient merchandise to satisfy its requirements. However, during late May,
June, July and August 1996, the Company was unable to obtain adequate credit
support to achieve its planned level of inventory purchases, which severely
impacted its 1996 back-to-school season. The Company relies heavily on inventory
purchased during these months to generate sales during the back-to-school season
in August and September. The Company's failure to achieve adequate sales levels
in the 1996 back-to-school and holiday seasons would have a material adverse
effect on its business.
The Company's recurring losses, cash flow constraints, and anticipated
loan covenant violations (see "--Other Developments") raise substantial doubt
about its ability to continue as a going concern. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Item 14. Financial Statements." The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
successfully renegotiate its loan covenants, to obtain additional financing or
equity as may be required, and ultimately, to attain profitable operations. In
the event that the Company is not successful in, among other things, arranging
interim and permanent financing such that the Company will be able to purchase
inventory for the 1996 holiday season and thereafter, and attain credit
support from its factors,
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it will consider alternate means of continuing the business including further
expense reductions, negotiations with landlords and vendors to reach agreement
on delaying payments, closing additional stores, as well as any other options
available to the Company. In the event these efforts are unsuccessful, as a last
resort, the Company may consider the possible filing of a petition for
reorganization under Chapter 11 of the Federal bankruptcy laws. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
STORE CLOSURE PLAN. In response to the Company's going concern issues,
management implemented a store closure plan (the "Store Closure Plan") during
the third quarter of fiscal year 1996 that immediately closed approximately 100
stores (the "Closed Stores") and reduced staff at its distribution center and
administrative offices. The Store Closure Plan will require, during the third
quarter of fiscal year 1996, an estimated charge to operations of approximately
$5.4 million, principally related to store rent liability, closing costs, and
separation pay. See "--Personnel." The Company has received the consent of
Foothill Capital Corporation ("Foothill"), the Company's principal lender, to
the Store Closure Plan.
Management based its decision on which stores to close by reviewing
each store's performance for the twelve-month period from the Acquisition
through May 31, 1996, with respect to sales, gross margins, occupancy costs, and
store contribution. The worst performing stores were identified for closure.
Certain other Closed Stores were determined based on geographic or other market
and cost considerations.
The aggregate rent liability for the Closed Stores is approximately
$13.2 million and the average remaining lease term is approximately 30 months.
In connection with the Store Closure Plan, the Company will undertake to
negotiate with the various landlords the outstanding lease liability of the
Closed Stores. There can be no assurance that such negotiations will be
successful. Failure to reach acceptable agreements with these landlords would
have a material adverse effect on the Company.
The Company transferred the remaining inventory from the Closed Stores
to the remaining open stores. Prior to the Store Closure Plan, average store
retail inventory was approximately $78.3 thousand, which was $25.7 thousand
below planned retail store inventory for September 1996. The inventory
consolidation brought the average retail store inventory up to approximately
$112.1 thousand. However, there can be no assurance that the increased inventory
levels will improve the Company's sales and operating results or that the
Company's inventory levels will not drop below acceptable levels in the future.
In connection with the Store Closure Plan, the Company reduced staff at
its distribution center and administrative offices, with a corresponding
annualized reduction in payroll and benefits expense of approximately $1.4
million.
There are a number of risks associated with the Store Closure Plan,
including, but not limited to, the inability of the Company to successfully
negotiate favorable terms with respect to the lease terminations, the inability
of the Company to generate adequate revenues to cover expenses and generate
profits, and the possibility that due to the staff reductions and store
closings, the Company may not be able to attract or retain qualified personnel.
In addition to the Store Closure Plan, since May 1995, management has taken the
following steps to improve the Company's operations:
- implemented a coordinated merchandising plan with a discernible
style and fashion;
- increased the percentage to total inventory of higher margin
private label merchandising;
- reduced its work force;
- identified and closed unprofitable stores (37 were closed during
the eight months ended January 27, 1996, and an additional 14 were
closed by July 27, 1996);
- renegotiated certain store leases;
- instituted a markdown strategy to support the Company's inventory
turnover goals;
- targeted marketing efforts to "Preferred Customer" cardholders;
- added a limited number of unique toys and stuffed animals to most
of its stores; and
- improved customer service to create a friendly, neighborhood store
atmosphere
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INTERIM FINANCING. The Company requires immediate financing to purchase
inventory for the 1996 holiday sales season. Failure to achieve adequate sales
levels in the 1996 holiday season would have a material adverse effect on the
Company's business. Management has held discussions with financial advisors and
potential investors with respect to interim financing through short-term
subordinated debt, equity investment, or debt restructuring. The Company has
raised approximately $0.9 million through a sale/leaseback transaction and
conversion of a vendor account payable to shares of the Company's common stock,
par value $.0001 per share, (the "Common Stock"). See "--Other Developments."
However, the Company has not yet entered into any agreements with respect to
additional interim financing, and accordingly, there can be no assurance that
the Company can obtain such financing, that such financing would be timely, or
that such financing, if obtained, would be sufficient to enable the Company to
continue as a going concern for a reasonable period of time.
PERMANENT FINANCING. The Company also requires substantial long-term investment
so that it can meet its obligations and sustain operations. Toward this end, the
Company has entered into an engagement letter with a financial advisor and
placement agent with respect to a proposed $10 million to $15 million private
placement of the Company's securities. The placement agent's obligations under
the engagement letter are subject to a number of qualifications, including, but
not limited to, the placement agent's successful completion of its due diligence
review and the successful negotiation of a definitive placement agent agreement.
There can be no assurance that such private placement will be consummated, that
it would be on terms favorable to the Company or that it would be sufficient to
enable the Company to continue as a going concern for a reasonable period of
time.
OTHER DEVELOPMENTS. The Company anticipates violation of certain of its loan
covenants under its credit facility with Foothill during the remainder of fiscal
year 1996. The Company is currently in negotiations with Foothill to waive or
amend these covenants. There can be no assurance that Foothill will waive or
amend the covenants or that the Company will not violate other covenants in the
future. If the Company does violate any such covenants, there can be no
assurance that Foothill will not declare the Company in default under the credit
facility and seek to exercise its remedies under the credit facility, including
foreclosure of the Company's assets. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company has arranged an overdraft facility for up to $2.0 million
with Foothill during the period from June 10, 1996 to February 15, 1997. In
conjunction with arranging the overdraft facility, the Company's credit facility
was amended to require the Company to raise at least $2.0 million in
subordinated debt or common stock equity on or before September 30, 1996, or to
have substantially completed a private placement of the Company's securities by
that date (the "Covenant").
As of September 16, 1996, the Company has raised approximately
$0.9 million of the $2.0 million needed through the transactions discussed
below.
On July 24, 1996, the Company entered into a sale/leaseback transaction
whereby it sold certain equipment to a leasing company for $0.3 million, and
leased it back under an operating lease for 24 months. As consideration for this
transaction, the Company issued a warrant to the leasing company to purchase
50,000 shares of Common Stock at $7 per share.
On September 11, 1996, the Company entered into an agreement pursuant
to which one of its vendors converted $0.65 million of amounts due to the vendor
to 433,333 shares of Common Stock. In exchange, the Company will use its best
efforts to purchase annually a minimum of $10 million of merchandise
inventories, as defined, from this vendor. Further, the vendor shall have the
right to have its nominee installed as a director to the Company's Board
of Directors within three months of execution of the agreement. Thereafter,
unless the vendor has reduced its investment in the Company by more than
50% the Company shall nominate said nominee to the Board of Directors to be
voted upon by the shareholders of the Company at each annual meeting.
There can be no assurance that the Company will raise the additional
$1.1 million necessary to avoid a violation of the Covenant, that the Company
will not violate other covenants under its credit facility, or that if a
violation occurs, that Foothill will not declare the Company in default and
seek to exercise its remedies under the credit facility, including
foreclosure of the Company's assets.
PRIVATE SECURITIES LITIGATION REFORM ACT. The Private Securities Litigation
Reform Act of 1995 provides a "safe harbor" for forward-looking statements.
Certain information included in "Item 1. Business --Recent Developments" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in other parts of this Form 10-K and other materials filed or
to be filed by the Company with the Securities and Exchange Commission contains
statements that are forward-looking, such as statements relating to the
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Company's Store Closure Plan, statements relating to the Company's need for
additional financing and statements regarding the Company's anticipated
potential loan covenant violations, among others. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future, and accordingly, such results may
differ from those expressed in any forward-looking statements made by or on
behalf of the Company. These risks and uncertainties include, but are not
limited to, the risk of continuing losses and cash flow constraints despite the
Company's efforts to improve operations, including the Store Closure Plan, the
inability to obtain interim financing or permanent financing such that the
Company will be able to purchase inventory for the 1996 holiday season and
thereafter, and attain credit support from its factors, failure to negotiate
acceptable payment terms with vendors and landlords, and failure to negotiate
waivers or amendments to loan covenants.
BUSINESS
MERCHANDISING. The Company positions itself in the market by offering children's
fashions with a coordinated and stylish look at moderate prices. It accomplishes
this by consistently offering customers value at a reasonable price and
utilizing its position as a large retailer in the children's specialty store
apparel market.
The Company seeks store sites that are highly visible, well-signed and
provide easy customer access. The Company favors locations in strip centers with
established anchor tenants next to heavily trafficked roads and within
convenient reach of its customer base. Management prefers strip center locations
over mall locations because occupancy costs are less expensive, and these
locations match its core customer's shopping needs.
The Company's stores carry a full range of clothing and accessories
for children from infants to 11 years of age, including pants, jeans, tops,
skirts, dresses, coveralls, sweaters, shorts, socks, belts, hats, outerwear,
backpacks, sunglasses and many other items carried both on a seasonal and
year-round basis. Management has increased inventory levels for infant
merchandise because this category typically generates higher gross margins.
Currently, approximately 32% of the merchandise sold by the Company is
private label, primarily under the Way Cool, U BET and Bebe Terrifique labels.
The Company plans to gradually increase the percentage of private label
merchandise to 65% over the next three years, if warranted. This emphasis on
private label merchandise should result in better gross profit margins, better
direct sourcing from manufacturers and better control over styles, fabrics and
colors. The use of private label merchandise, however, brings with it the
associated burdens of quality control and unfavorable delivery schedules. The
Company monitors both these issues closely. The Company currently has a
product development department that is responsible for working with
manufacturers, both domestic and overseas, to design merchandise to be sold
under the Company's private labels.
The Company offers a small selection of creative toys and unique
stuffed animals. These toys are designed for newborn children to 11 year olds.
Presently the Company is generating approximately one-half of toy sales from
impulse items under $5 each, and the remainder from more expensive toys
primarily carried during the fourth quarter.
The success of the Company's merchandising strategy will be dependent
on its ability to generate sufficient cash flow to sustain operations.
See "--Recent Developments."
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MARKETING AND ADVERTISING. The Company maintains a "Preferred Card" program that
had approximately 607,000 card holders as of January 27, 1996. Of these,
approximately 498,000 holders had shopped at one or more of the Company's stores
during the past 18 months. Sales of the card, which can be purchased on a yearly
basis for $6 per card, resulted in revenue of $2.3 million for the eight months
ended January 27, 1996. Purchase of the card entitles the holder to a 10%
discount on all regular price purchases and other special privileges. The
Company maintains a data base that includes demographic and purchasing data on
these cardholders. The Company conducts periodic targeted marketing campaigns
utilizing this list.
The Company historically spent significant amounts of its advertising
dollars on national programs. Current management has reduced national
advertising in favor of local and point of purchase programs which it believes
are more effective and less costly.
The Company operates an in-house advertising and marketing department
with a staff of five. The department creates all of the Company's printed
materials, including mailers, newspaper advertisements, and in-store displays.
The Company's marketing strategy is aimed at attracting customers to the store
by stressing promotional pricing, value, and fashion. Many of the Company's
sales are at the beginning of the important selling seasons, including
Christmas, back-to-school, and spring and summer. The Company's stores feature
wall and selling-floor displays that coordinate merchandise in order to promote
multiple sales.
MARKET. The Company's largest market is California where it maintained 43% of
its stores and derived approximately 45% of its revenue during the eight months
ended January 27, 1996. Sales of apparel and accessories represented 87% and 13%
of the Company's revenue, respectively during the eight months ended January 27,
1996. After giving effect to the Store Closure Plan, the Company's largest
market remained California where 52% of its stores are located. See "--Recent
Developments."
PRODUCT SOURCING AND MANUFACTURING. The Company has no in-house manufacturing
capability. Approximately 32% of the Company's merchandise is currently
manufactured to its private label specifications by independent factories
located in the United States and throughout the world. The Company utilizes a
buying agent in Hong Kong to coordinate overseas production. Approximately 35%
of the Company's private label capacity is produced by fewer than 30
manufacturers. On September 11, 1996, the Company entered into an agreement with
one of its vendors to use its best efforts to purchase annually a minimum of $10
million of merchandise inventory, as defined, from this vendor. As part of the
agreement, the vendor has converted $0.65 million of amounts owed to it by the
Company into 433,333 shares of Common Stock. See "Recent Developments --Other
Developments."
TRADEMARKS AND PRIVATE LABELS. The Company owns the right to the following
trademarks: Bebe Terrifique, Kids Mart, Kidsmart (pending), Little Folk, Little
Folks, Little Folk Shop, Little Folk Shops, Way Cool, U Bet and others.
RESTRICTION ON IMPORTS. The Company's operations are subject to the customary
risks of doing business abroad, including fluctuations in the value of
currencies, customs duties and related fees, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, work stoppages and
political instability in certain parts of the world. However, the Company
believes that it has reduced these risks by diversifying its offshore purchases
among various countries and factories. These risks have not had a material
adverse impact upon the Company's operations to date.
Imports into the United States are also affected by the cost of
transportation, the imposition of import duties and increased competition for
greater production abroad. The countries from which the Company's products are
imported may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duty or tariff levels,
which could affect the Company's operations and its ability to import products
at current or increased levels. The Company cannot predict the likelihood or
frequency of any such events occurring. The Company's imported products are
subject to United States customs duties and, in the ordinary course of its
business, the Company may be subject to claims for duties and other charges.
WAREHOUSING AND DISTRIBUTION. The Company leases a warehouse and distribution
center, approximately 118,500 square feet, located in City of Industry,
California. Management believes that the warehouse has current capacity to serve
as many as 500 stores and is therefore sufficient for the Company's needs. The
facility also contains the Company's executive, administrative and buying
offices.
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Merchandise purchased by the Company is received at this facility and
prepared for distribution to its stores. The functions performed at the facility
include quality control inspection, ticketing, packing and shipping. The
facility's automated sorting system ensures the proper flow of merchandise from
receipt to shipment. Shipments to each store are made by trucks operated
principally by common carriers. The Company ships to stores two to five times
per week, depending on seasonal volume.
PERSONNEL. At January 27, 1996, the Company had 831 full-time equivalent
employees comprised of 148 full-time employees in the administrative offices and
distribution center, 21 full-time field supervision personnel, and 661 full-time
and 1,223 part-time employees at the stores. After giving effect to the Stores
Closure Plan and staff reductions, the Company will have approximately:
511 full-time equivalent employees comprised of 136 employees in the
administrative offices and distribution center, 11 full-time field supervision
personnel, and 364 full-time and 728 part-time employees at the stores.
See "--Recent Developments."
TRANSITIONAL SERVICES. The Company receives information systems, accounting and
administrative services from Woolworth pursuant to the terms of a transition
service agreement (the "Service Agreement"). In return, the Company pays certain
fees to Woolworth. The initial term of the Service Agreement expired on May 31,
1996. In connection with a settlement reached under a Mutual Release and
Settlement Agreement (the "Settlement Agreement"), the Service Agreement was
extended to October 26, 1996, at which time the Service Agreement can be
extended on a month-to-month basis unless terminated by either party upon a
30-day notice. See "--Organization, Acquisition and Merger" and "Item 3. Legal
Proceedings."
The Company is currently upgrading its management information systems.
These systems will offer greater functionality and flexibility than systems
currently available to the Company under the Service Agreement with Woolworth.
Implementation of these systems is a high priority of management. Management had
originally estimated that the cost of this upgrade would be up to $5.5 million,
which includes financial and merchandise system software, main system hardware,
and POS (point-of-sale) hardware and software. As a result of the Store Closure
Plan, the POS hardware requirements have been reduced, and the estimated cost of
the upgrade is approximately $4.1 million. Approximately $0.9 million of systems
upgrade costs had been incurred as of July 27, 1996. The Company has entered
into an operating lease agreement for a significant portion of this equipment
and will fund the remaining portion from internally generated sources of funds
or additional financing. The Company may not establish its own systems by the
expiration date of the Service Agreement and may incur significant expenses in
excess of the budgeted amounts in developing such systems.
IMPACT OF COMPETITION. All aspects of the children's apparel specialty retail
industry are highly competitive. The Company competes with a number and variety
of retailers, mass merchandisers and warehouse clubs, including several national
chains, some of which have greater financial and marketing resources than the
Company. The principal competitors of the Company include Baby Gap/Gap Kids,
Gymboree, Kids "R" Us, Children's Place, Little Things, Mervyns, Wal-Mart, J.C.
Penney, Ross Stores, Target, Venture and Marshall's. Competition exists
primarily in the areas of price, product selection and service. Competitive
factors could require price reductions or increases in expenditures for
marketing and customer service that could adversely affect the Company's
operating results.
SEASONALITY. The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its sales and operating results. A
disproportionate amount of the Company's sales and operating income are realized
during the months of August, September, November and December. The Company has
also experienced periods of increased sales activity in early spring and early
fall. Furthermore, sales and operating results are generally weakest during the
second quarter. Because of the seasonality of the Company's business, results
for any quarter are not necessarily indicative of results that may be achieved
for a full fiscal year.
ORGANIZATION, ACQUISITION AND MERGER
The Company was formed in April 1993 to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other similar business
combination with an operating business. In September 1993, the Company
consummated an initial public offering of its equity securities from which it
derived net proceeds of approximately $6.6 million. Approximately $5.7 million
(representing approximately 80% of proceeds from the initial public offering,
inclusive of interest earned thereon) was held in escrow, pending the
consummation of the Acquisition described below and was released to the
Company upon consummation of the Merger also described below.
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On January 3, 1996, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated May 31, 1995, FH Sub Delaware,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company merged
with and into LFS (the "Merger"). As a result of the Merger, LFS became a wholly
owned subsidiary of the Company. Thereupon, the Company issued an aggregate of
2,678,000 shares (the "Shares") of Common Stock to the owners of all the issued
and outstanding shares of capital stock of LFS. The Shares constituted
approximately 54% of the outstanding shares of Common Stock of the Company.
Additional shares of Common Stock issuable upon the exercise of certain warrants
are held by a) the underwriter of the Company's initial public offering (110,000
shares) and b) the initial LFS investors (1,094,300 shares). Assuming full
exercise of all of the outstanding warrants to purchase shares of the Company's
Common Stock, the former LFS security holders would own approximately 61.4% of
the outstanding shares of the Company's Common Stock. Since the former LFS
investors own the controlling interest of the Company's Common Stock, the Merger
has been accounted for as a "reverse acquisition" as if LFS recapitalized its
ownership interest and then acquired the Company under the purchase method of
accounting by the issuance of 2,265,000 shares of its Common Stock. These
2,265,000 shares were valued at $6.2 million which represented the estimated
fair market value of the Company's net assets acquired at the date of the
Merger. For purposes of the Merger, LFS is the "accounting acquirer" and the
Company is the "legal acquirer."
LFS was formed on May 26, 1995, for the purpose of acquiring the
Holtzman's Little Folk Shop, Inc. ("Holtzman's") business from Woolworth. On May
31, 1995, LFS acquired all of the outstanding shares of capital stock of
Holtzman's from Woolworth and certain of Holtzman's operating assets and
liabilities from Kinney Shoe Corporation, a wholly owned subsidiary of Woolworth
("Kinney"). Prior to this transaction, Holtzman's had transferred certain of its
assets and liabilities to Kinney. The preliminary purchase price of the
Acquisition was $21.0 million, which was financed with a $5.0 million promissory
note to Woolworth, $4.3 million of current liabilities to Woolworth, a borrowing
of $4.4 million under the Company's revolving credit facility, $4.3 million of
short-term bridge loans advanced by a group of private lenders, including
Woolworth, and $3.0 million of cash on hand.
Subsequent to the Acquisition, disagreements arose between LFS and
Woolworth regarding the determination of the final purchase price of Holtzman's
net assets at May 31, 1995. Such disagreements resulted in LFS filing a lawsuit
against Woolworth, and a cross-complaint filed by Woolworth against LFS.
On May 30, 1996, the Company and Woolworth reached a settlement under
the Settlement Agreement. Pursuant to the Settlement Agreement, Woolworth agreed
to release to the Company $1.7 million placed in escrow at the closing of the
Acquisition, cancel the $9.3 million of Company debt and liabilities incurred in
connection with the Acquisition, and also cancel $4.4 million of other amounts
advanced by Woolworth on behalf of the Company during the eight months ended
January 27, 1996. In exchange, the Company issued one million shares of Series A
convertible nonvoting preferred stock to Woolworth. The adjusted purchase price
for the Acquisition was $11.1 million. See "Item 3. Legal Proceedings."
ITEM 2. PROPERTIES
At January 27, 1996, the Company operated 296 stores in 20 states,
consisting of 14 Little Folks Stores and 282 Kids Mart stores. Stores that are
located in strip shopping centers are open eleven hours each day, Monday through
Saturday, and seven hours on Sunday; stores located in enclosed malls conform to
mall hours. Store hours are longer during the Christmas holiday season and
during back-to-school programs. After giving effect to the Store Closure Plan,
the Company will operate approximately 182 stores in 18 states consisting of
approximately 11 Little Folks Stores and approximately 171 Kids Mart Stores.
The Company's stores range in size from 1,800 to 6,000 square feet,
averaging approximately 2,600 square feet and are designed to maximize selling
space.
The Company seeks store sites which are highly visible, well-signed and
provide easy customer access. The Company has favored locations in strip centers
with established anchor tenants next to heavily trafficked roads and within
convenient reach of its customer base. Management prefers strip locations over
mall locations because
7
<PAGE> 10
occupancy costs are less expensive, strip center leases are typically more
favorable than mall leases, and these locations match its core customer's
shopping needs.
The table below sets forth the location of the Little Folks and Kids
Mart stores by state:
<TABLE>
<CAPTION>
CLOSED STORES
AND OTHER CLOSED STORES (a)
----------------------------------------
NUMBER OF STORES LITTLE FOLK KIDS MART ADJUSTED
STATE AT JANUARY 27, 1996 STORES STORES STORE COUNT
- ------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C>
California 127 (2) (30) 95
Texas 31 (12) 19
Illinois 24 (18) 6
Ohio 18 (12) 6
Florida 17 (5) 12
Louisiana 12 (2) 10
Maryland 10 (1) (6) 3
Michigan 9 (4) 5
Arizona 8 (4) 4
Missouri 6 (2) 4
Virginia 6 (2) 4
Indiana 5 (3) 2
Utah 4 (1) 3
Washington 4 (3) 1
Nevada 3 (2) 1
New Mexico 3 3
Oklahoma 3 (1) 2
Oregon 3 (1) 2
Wisconsin 2 (2) --
Kentucky 1 (1) --
- ------------------------------------------------ ----------------------------------------
Total 296 (3) (111) 182
================================================ ========================================
</TABLE>
(a) 97 stores have been closed with respect to the Store Closure Plan;
17 additional stores have been closed since January 27, 1996. Up to 10
additional stores may be closed with respect to the Store Closure
Plan pending review of such stores by management.
The following table sets forth the types and number of store leases to which the
Company is a party as of the date of this filing giving effect to the Closed
Stores and other closed stores.
<TABLE>
<CAPTION>
No. of Leases Closed Stores & Adjusted
Type of lease at January 27, 1996 other closed stores (a) lease count
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term (12 months or less) 39 (13) 26
Month-to-Month 57 (22) 35
Long-Term 200 (79) 121
------------------------------------------------------------------------------------------------
TOTAL 296 (114) 182
================================================================================================
</TABLE>
(a) 97 stores have been closed with respect to the Store Closure
Plan; 17 additional stores have been closed since January 27,
1996. Up to 10 additional stores may be closed with
respect to the Store Closure Plan pending review of such
stores by management.
Lease payments for the six months ended July 27, 1996 were $5.8
million, which included approximately $1.8 million for the Closed Stores. The
aggregate rent liability for the Closed Stores is approximately $13.2 million
8
<PAGE> 11
and the average remaining lease term is approximately 30 months. In connection
with the Store Closure Plan, the Company will undertake to negotiate with the
various landlords the outstanding lease liability of the Closed Stores. There
can be no assurance that such negotiations will be successful. Failure to reach
acceptable agreements with these landlords would have a material adverse effect
on the Company's business.
The Company leases a warehouse and distribution center, approximately
118,500 square feet, located in City of Industry, California. Management
believes that the warehouse has current capacity to serve as many as 500 stores
and is therefore sufficient for the Company's needs. The facility also contains
the Company's executive, administrative and buying offices.
Lease payments for the eight months ended January 27, 1996 were $8.3
million, which included approximately $1.1 million of rent for 37 unprofitable
stores closed during the eight months ended January 27, 1996. Since the date of
the Acquisition, the Company has successfully renegotiated leases on 81 stores
and the distribution center, and intends to renegotiate the leases on the
remaining stores during the next 12 months. However, there is no assurance that
the Company will be successful in its effort to renegotiate the remaining leases
or that if it is successful, that the new leases will be on terms more
beneficial to the Company.
Within the context of the lease renegotiations described above, with
respect to the stores currently operating on month-to-month or short term
leases, the Company will attempt to secure longer term leases on terms favorable
to the Company, for those stores which fit the Company's performance
requirements. In the event landlords representing these centers refuse to extend
terms on these leases, the Company would experience a significant reduction in
sales volume with a resulting negative impact on earnings.
During the eight months ended January 27, 1996, the Company closed 37
unprofitable stores, nine of which had lease terms remaining when the Company
ceased store operations. The remaining lease terms on these stores varied from
less than six months to over three years. As of January 27, 1996, the total rent
liability associated with these leases was $0.5 million. Based on favorable
negotiations with the landlord at one of the stores, the Company recorded a
provision as of January 27, 1996, of $0.4 million to reflect the impact of these
closures. As of July 27, 1996, three of the nine stores' leases had been
terminated. The six remaining stores have a total rent liability of $0.2
million, which approximates the remaining accrued balance. The Company is
attempting to negotiate favorable terms with the other landlords but it is
possible that because the Company has ceased operations in these nine locations,
the individual landlords may declare the Company in default under the terms of
these leases.
See "Recent Developments."
ITEM 3. LEGAL PROCEEDINGS
On December 5, 1995, LFS filed a complaint against Woolworth in
Superior Court for the County of Los Angeles. The complaint alleged fraud,
negligent misrepresentation, and breach of contract in connection with the
Acquisition. LFS contended that before the Acquisition, Woolworth conducted
extended clearance sales which damaged the Company's consumer base, failed to
disclose to LFS the financial impact resulting from inventory markdowns and
purchased excess inventory which LFS acquired in the Acquisition. In addition,
LFS claimed that Woolworth breached the Service Agreement.
Woolworth filed a general denial of all of the material allegations of
the complaint and served a cross-complaint against LFS. Woolworth sought
recovery of a minimum of $5.6 million for payroll taxes, sales and use taxes,
customs duties and other taxes, charges and expenses paid by Woolworth on behalf
of LFS. LFS filed a general denial to this cross-complaint and asserted several
affirmative defenses.
On May 30, 1996, the Company and Woolworth entered into the Settlement
Agreement. Pursuant to the Settlement Agreement, Woolworth agreed to release to
the Company $1.7 million placed in escrow at the closing of the Acquisition,
cancel the $9.3 million of Company debt and liabilities incurred in connection
with the Acquisition, and also cancel $4.4 million of other amounts advanced by
Woolworth on behalf of the Company during the eight months ended January 27,
1996. In exchange, the Company issued one million shares of Series A convertible
nonvoting preferred stock to Woolworth. These shares were valued at $3.5
million, representing their fair market value at the date of issuance. The
Company has reflected the impact of the Settlement Agreement on its consolidated
financial statements as of May 31, 1995, the date of the Acquisition.
9
<PAGE> 12
Woolworth has refused to pay the Company $0.5 million for amounts
collected on behalf of the Company under the terms of the Service Agreement. In
its consolidated balance sheet as of January 27, 1996, the Company reported a
receivable from Woolworth for $0.5 million, which it has deducted from payments
owed to Woolworth under the terms of the Service Agreement. If it is determined
that the Company must release Woolworth from the $0.5 million liability, there
could be a material adverse impact on the Company's results of operations and
cash flows. The Company has not recorded a loss provision in its consolidated
financial statements for the eight months ended January 27, 1996, based upon
management's belief that the possibility of such loss is remote.
The Company has been notified that certain stores that it leases in
California have materials containing asbestos. The asbestos material is
generally in trace quantities, and no remediation is expected to be required on
the understanding that such material is properly secured.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 3, 1996, the Company held a special meeting of stockholders.
At that meeting the stockholders voted on the proposals described below. The
results of the stockholder vote on each proposal is set forth after such
description.
1. To approve the Merger, including an amendment to the Articles
of Incorporation of the Company to change the Company's name
to "Little Folks Shops, Inc."
FOR: 1,342,100 shares. AGAINST: 9,900 shares. ABSTAIN: 3,200
shares.
2. To approve and adopt the Company's Restated Articles of
Incorporation.
FOR: 1,316,750 shares. AGAINST: 25,200 shares. ABSTAIN: 13,250
shares.
3. To approve and adopt the 1995 Frost Hanna Acquisition Group,
Inc. Stock Option Plan.
FOR: 1,300,016 shares. AGAINST: 42,234 shares. ABSTAIN: 12,950
shares.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market in which the Company's Common Stock, is traded is
the over-the-counter market under the symbol KIDM. The Common Stock commenced
trading on September 7, 1993. The following table shows the reported low bid and
high bid quotations per share of Common Stock for the periods indicated. The
high and low bid prices for the periods indicated are inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. These quotations have been obtained from the OTC
Bulletin Board.
<TABLE>
<CAPTION>
Low Bid High Bid
<S> <C> <C>
Year ended December 31, 1994
First quarter $7.375 $ 8.25
Second quarter 6.75 8.25
Third quarter 5.50 7.25
Fourth quarter 4.50 6.50
Year ended December 31, 1995
First quarter 3.00 5.25
Second quarter 5.00 7.00
Third quarter 4.75 7.50
Fourth quarter 3.375 6.25
Interim period (due to change in fiscal year end)
January 1, 1996 through January 27, 1996 4.375 5.125
Year ending February 3, 1997
First quarter 3.88 4.40
Second quarter 2.00 6.125
Third quarter (through September 4, 1996) 0.50 2.75
</TABLE>
On September 4, 1996, the closing bid and ask prices of the Common
Stock were $2.00 and $2.75, respectively. On September 5, 1996, there were 87
recorded holders of Common Stock, inclusive of those brokerage firms and/or
clearing houses holding shares of Common Stock for their clientele (with each
such brokerage house and/or clearing house being considered as one holder).
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition and such other factors as the Board
of Directors may consider. Under the Company's lending arrangements, the Company
will not be permitted to declare any dividends without the lender's prior
consent.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data as of and
for the eight months ended January 27, 1996, and should be read in conjunction
with the audited consolidated financial statements included elsewhere in this
report. The table also sets forth summarized unaudited consolidated financial
data as of and for the six months ended July 27, 1996.
<TABLE>
<CAPTION>
January 27, July 27,
INCOME STATEMENT DATA 1996 1996
- -----------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts) (eight months ended) (six months ended)
(unaudited)
<S> <C> <C>
Net sales $87,698 $47,370
Gross profit $34,402 $17,708
Loss from operations $(4,212) $(7,775)
Net loss $(5,696) $(8,563)
Net loss per common share $ (1.15) $ (1.73)
Dividends per common share None None
Average shares 4,943 4,943
=====================================================================================================
<CAPTION>
BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------
(in thousands) (at fiscal year end) (six months ended)
(unaudited)
<S> <C> <C>
Working capital (deficiency) $ 1,010 $(7,883)
Total assets $27,609 $23,374
Borrowings under credit facility $ 8,849 $ 9,422
Redeemable common stock $ 50 $ 50
Stockholders' equity (deficiency) $ 7,087 $(1,470)
=====================================================================================================
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT. This Annual Report on Form 10-K
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby. See "Item 1. Business --Private Securities
Litigation Reform Act."
OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for the eight months ended January 27, 1996. This information
should be read in conjunction with the audited consolidated financial statements
of the Company and the notes thereto. Information presented as of and for the
six months ended July 27, 1996 is unaudited. See "Item 1. Business --Recent
Developments."
The Company reported a net loss of $5.7 million for the eight months
ended January 27, 1996. The net loss reflected $1.0 million of goodwill
impairment write-off related to the Acquisition, and a charge against cost of
sales for $1.2 million for markdown reserves. Also 37 unprofitable stores were
closed during the eight months ended January 27, 1996. Net sales for the eight
months ended January 27, 1996 were $87.7 million.
The Company has continued to experience operating losses and cash flow
constraints subsequent to January 27, 1996. Unaudited net losses were $8.6
million for the six months ended July 27, 1996, unaudited current liabilities
exceeded unaudited current assets by $7.9 million, and the Company has an
unaudited stockholders' deficiency of $1.5 million, respectively, as of July 27,
1996. The Company also anticipates violation of certain of its loan covenants
under its credit facility for the remainder of fiscal year 1996. These
conditions have raised substantial doubt about the Company's ability to continue
as a going concern for a reasonable period of time.
In response to the Company's going concern issues, management
implemented the Store Closure Plan during the third quarter of fiscal year 1996
that immediately closed the Closed Stores and reduced staff at its
distribution center and
12
<PAGE> 15
administrative offices. The Store Closure Plan will require, during the third
quarter of fiscal year 1996, an estimated charge to operations of approximately
$5.4 million, principally related to store rent liability, closing costs, and
separation pay. The Company has received the consent of Foothill, the Company's
principal lender, to the Store Closure Plan.
FINANCIAL CONDITION. The Company's working capital was $1.0 million as of
January 27, 1996, and a deficiency of $(7.9) million as of July 27, 1996
(unaudited). Its current ratio and debt-to-equity ratios were 1.05 and 3.54,
respectively, at January 27, 1996, and 0.68 and (7.35), respectively, at
July 27, 1996 (unaudited).
On the Acquisition date of May 31, 1995, average store inventory at
retail was approximately $152.2 thousand. New management's 1996 plan called for
average store inventory of approximately $135.3 thousand for May. This average
store inventory surplus aggregated approximately $5.6 million in excess
inventory at the date of the Acquisition.
Woolworth also had significant merchandise inventory orders outstanding
at the Acquisition. Management canceled approximately $30 million at retail of
these orders. Despite these order cancellations, merchandise purchases during
June, July and August 1995, were approximately $62.5 million, as compared to the
1996 plan for merchandise purchases of approximately $44.2 million for the same
three months during 1996.
The excessive levels of inventory and merchandise purchases as of the
Acquisition and immediately following it resulted in high levels of aged
inventory at January 27, 1996. Aged inventory (that is, merchandise on-hand
greater than nine months) was 10.9% of total inventory at January 27, 1996. The
Company recorded purchase accounting adjustments to the beginning inventory
balance and inventory markdown reserves against the year-end inventory balance
for approximately $22.1 million, at retail, during the eight months ended
January 27, 1996.
Pursuant to the Store Closure Plan, the Company transferred the
remaining inventory from the Closed Stores to the remaining open stores. Prior
to the Store Closure Plan, average store retail inventory was approximately
$78.3 thousand, which was $25.7 thousand below planned retail store inventory
for September 1996. The inventory consolidation brought the average retail store
inventory up to approximately $112.1 thousand. However, there can be no
assurance that the increased inventory levels will improve the Company's sales
and operating results or that the Company's inventory levels will not drop below
acceptable levels in the future.
Woolworth has refused to pay the Company $0.5 million for amounts
collected on behalf of the Company under the terms of the Service Agreement. In
its consolidated balance sheet as of January 27, 1996, the Company reported a
receivable from Woolworth for $0.5 million, which it has deducted from payments
owed to Woolworth under the terms of the Service Agreement. If it is determined
that the Company must release Woolworth from the $0.5 million liability, there
could be a material adverse impact on the Company's results of operations and
cash flows. The Company has not recorded a loss provision in its consolidated
financial statements for the eight months ended January 27, 1996, based upon
management's belief that the possibility of such loss is remote.
LIQUIDITY AND CAPITAL RESOURCES. The Company's cash requirements are primarily
related to the need to purchase and pay for inventory prior to its sales, lease
payments for store rent, the costs associated with computer system hardware and
software installation, and the funding of normal operating expenses. The
Company's cash requirements fluctuate based on the seasonality of its sales and
the required build up of inventory in advance of peak sale periods. The Company
funds its operations from retail sales; it does not offer its customers credit
terms.
The Company is party to a revolving credit facility with Foothill for
up to $20 million for working capital advances, of which as much as $10 million
can be used for obligations under letters of credit. Aggregate borrowings are
limited to the lesser of $20 million or specified percentages of eligible
merchandise inventories, as defined. All loans made pursuant to the credit
facility are secured by substantially all of the Company's assets and bear
interest at a reference rate plus 2 percent. The credit facility expires on May
31, 1999, and can then be renewed for successive one-year periods unless
terminated by either party pursuant to the terms of such agreement. The credit
facility contains various restrictions concerning the Company's ability to
assume additional indebtedness and specifies limits on capital expenditures. The
credit facility also contains various covenants that require the Company to
maintain certain minimum levels of working capital and tangible net worth, as
defined, and to maintain certain minimum financial ratios, among others.
13
<PAGE> 16
At January 27, 1996, the Company had drawn down approximately $8.8
million at 9.75% under the credit facility and had approximately $1.1 million of
remaining availability. The Company's average interest rate on borrowings under
its credit facility was 11.37% during the eight months ended January 27, 1996.
Following the date of the Acquisition, the Company experienced substantial
losses in connection with inventory writedowns recorded prior to the Settlement
Agreement adjustments, which resulted in a violation of certain covenants under
its credit facility as of January 27, 1996. Subsequent to January 27, 1996, the
Company has experienced losses and cash flow constraints that resulted in
uncertainty regarding the Company's ability to continue as a going concern.
As a result, the Company's auditors have included an emphasis paragraph
regarding the uncertainty of the Company's ability to continue as a going
concern in their report on the Company's audited consolidated financial
statements as of and for the eight months ended January 27, 1996. The going
concern qualification was a violation of one of the credit facility covenants as
of January 27, 1996. However, the Company obtained waivers of the first covenant
violation through April 1996, and of the second violation on September 4, 1996.
The Company also anticipates potential violation of certain other covenants for
the remainder of fiscal year 1996.
During April and June 1996, the Company amended its revolving credit
facility with Foothill. These amendments modified certain covenants, extended
the term of the agreement from May 31, 1998 to May 31, 1999, and granted the
Company additional borrowings for up to $2.0 million during the period from June
10, 1996 to February 15, 1997. In conjunction with arranging the overdraft
facility, the Company's credit facility was amended to require the Company to
raise at least $2.0 million in subordinated debt or common stock equity on or
before September 30, 1996, or to have substantially completed a private
placement of the Company's securities by that date (the "Covenant"). To date,
the Company has raised $0.9 million of the $2.0 million needed. There can be no
assurance that the Company will raise the additional $1.1 million necessary to
avoid a violation of the Covenant, that the Company will not violate other
covenants under its credit facility, or that if a violation occurs, that
Foothill will not declare the Company in default and seek to exercise its
remedies under the credit facility, including foreclosure of the Company's
assets. The Company must also achieve certain performance criteria. The
Company issued to Foothill warrants to purchase 100,000 shares of Common Stock
at $6 per share as consideration for these amendments.
As of July 27, 1996, approximately $7.9 million was outstanding at
10.25% under the credit facility. There was no credit available as of that date.
Further, the Company had borrowed $1.5 million and had $0.5 million available
under its overdraft facility.
The Company has experienced difficulties in obtaining adequate credit
support from its factors. As a result, the Company has been required to operate
on shortened payment terms from its vendors, creating significant cash flow
constraints. Through early May 1996, the Company had been able to obtain
sufficient merchandise to satisfy its requirements. However, during late
May, June, July and August 1996, the Company was unable to obtain adequate
credit support to achieve its planned level of inventory purchases, which
severely impacted its 1996 back-to-school season. The Company relies heavily on
inventory purchased during these months to generate sales during the
back-to-school season in August and September. The Company's failure to achieve
adequate sales levels in the 1996 back-to-school and holiday seasons would
have a material adverse effect on its business.
The Company's recurring losses, cash flow constraints, and anticipated
loan covenant violations (see "Item 1. Business --Other Developments")
raise substantial doubt about its ability to continue as a going concern. See
"Item 14. --Financial Statements." The Company's continuation as a going concern
is dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to successfully renegotiate its loan covenants,
to obtain additional financing or equity as may be required, and ultimately, to
attain profitable operations. In the event that the Company is not successful
in, among other things, arranging interim and permanent financing such that the
Company will be able to purchase inventory for the 1996 holiday season and
thereafter, and attain credit support from its factors, it will consider
alternate means of continuing the business including further expense reductions,
negotiations with landlords and vendors to reach agreement on delaying payments,
closing additional stores, as well as any other options available to the
Company. In the event these efforts are unsuccessful, as a last resort, the
Company may consider the possible filing of a petition for reorganization under
Chapter 11 of the Federal bankruptcy laws.
The Company requires immediate financing to purchase inventory for the
1996 holiday sales season. Failure to achieve adequate sales levels in the
1996 holiday season would have a material adverse effect on the Company's
business. Management has held discussions with financial advisors and
potential investors with respect to interim financing through short-term
subordinated debt, equity investment, or debt restructuring. The Company has
raised approximately $0.9 million through a sale/leaseback transaction and
conversion of a vendor account payable to shares of Common Stock. See "Item 1.
Business --Other Developments." However, the Company has not yet entered into
any agreements with respect to additional interim financing, and accordingly,
there can be no assurance that the Company can obtain
14
<PAGE> 17
such financing, that such financing would be timely, or that such financing, if
obtained, would be sufficient to enable the Company to continue as a going
concern for a reasonable period of time.
The Company also requires substantial long-term investment so that it
can meet its obligations and sustain operations. Toward this end, the Company
has entered into an engagement letter with a financial advisor and placement
agent with respect to a proposed $10 million to $15 million private placement of
the Company's securities. The placement agent's obligations under the engagement
letter are subject to a number of qualifications, including, but not limited to,
the placement agent's successful completion of its due diligence review and the
successful negotiation of a definitive placement agent agreement. There can be
no assurance that such private placement will be consummated, that it would be
on terms favorable to the Company or that it would be sufficient to enable the
Company to continue as a going concern for a reasonable period of time.
RESULTS OF OPERATIONS. The Company reported a net loss of $5.7 million on net
sales of $87.7 million for the eight months ended January 27, 1996. The Company
operated 296 stores at January 27, 1996.
The Company reported an unaudited net loss of $8.6 million on unaudited
net sales of $47.4 million for the six months ended July 27, 1996. After giving
effect to the Store Closure Plan, the Company will operate approximately 182
stores.
Selling, general and administrative expenses were $36.1 million for the
eight months ended January 27, 1996, and included $1.4 million of charges
related to the Service Agreement. Selling, general and administrative expenses
were $24.5 million, unaudited, for the six months ended July 27, 1996.
Depreciation and amortization was $1.5 million for the eight months
ended January 27, 1996. The Company also recorded a charge for goodwill
impairment for approximately $1.0 million. Depreciation and amortization was
$1.0 million, unaudited, for the six months ended July 27, 1996.
Interest expense was $1.5 million for the eight months ended January
27, 1996. Interest expense included approximately $0.6 million of interest
payments on the Acquisition debt. Interest expense was $0.8 million, unaudited,
for the six months ended July 27, 1996.
In response to the Company's going concern issues, management
implemented the Store Closure Plan during the third quarter of fiscal year 1996
that immediately closed the Closed Stores and reduced staff at its distribution
center and administrative offices. The Store Closure Plan will require, during
the third quarter of fiscal year 1996, an estimated charge to operations of
approximately $5.4 million, principally related to store rent liability, closing
costs, and separation pay. The Company has received the consent of Foothill, the
Company's principal lender, to the Store Closure Plan. See "Item 1. Business
- --Recent Developments."
Management based its decision on which stores to close by reviewing
each store's performance for the twelve-month period from the Acquisition
through May 31, 1996, with respect to sales, gross margins, occupancy costs, and
store contribution. The worst performing stores were identified for closure.
Certain other Closed Stores were determined based on geographic or other market
and cost considerations.
The aggregate rent liability for the Closed Stores is approximately
$13.2 million and the average remaining lease term is approximately 30 months.
In connection with the Store Closure Plan, the Company will undertake to
negotiate with the various landlords the outstanding lease liability of the
Closed Stores. There can be no assurance that such negotiations will be
successful. Failure to reach acceptable agreements with these landlords would
have a material adverse effect on the Company's business.
The Company transferred the remaining inventory from the Closed Stores
to the remaining open stores. Prior to the Store Closure Plan, average store
retail inventory was approximately $78.3 thousand, which was $25.7 thousand
below planned retail store inventory for September 1996. The inventory
consolidation brought the average retail store inventory up to approximately
$112.1 thousand. However, there can be no assurance that the increased inventory
levels will improve the Company's sales and operating results or that the
Company's inventory levels will not drop below acceptable levels in the future.
15
<PAGE> 18
In connection with the Store Closure Plan, the Company reduced staff at
its distribution center and administrative offices, with a corresponding
annualized reduction in payroll and benefits expense of approximately $1.4
million.
There are a number of risks associated with the Store Closure Plan,
including, but not limited to, the inability of the Company to successfully
negotiate favorable terms with respect to the lease terminations, the inability
of the Company to generate adequate revenues to cover expenses and generate
profits, and the possibility that due to the staff reductions and store
closings, the Company may not be able to attract or retain qualified personnel.
See "Item 1. Business --Recent Developments."
ITEM 8. FINANCIAL STATEMENTS
The consolidated balance sheet as of January 27, 1996, and consolidated
statements of operations, stockholders' equity, and cash flows for the eight
months ended January 27, 1996 are set forth in the pages indicated in Item 14.
Balance sheets for Holtzman's as of January 29, 1994 and January 28,
1995, and statements of operations, stockholders' equity, and cash flows for the
fiscal years ended January 30, 1993, January 29, 1994, and January 28, 1995, and
the four months ended May 31, 1995, (the "Disputed Financial Statements") have
not been reported. Preparation and delivery of the Disputed Financial Statements
was an issue in the Company's dispute with Woolworth described in "Item 3.
Legal Proceedings."
Currently, Woolworth is preparing and its certified public accountants,
KPMG Peat Marwick, LLP, are auditing the Disputed Financial Statements, which
have not been completed as of the date of this filing. When the Company receives
the Disputed Financial Statements from Woolworth, the Company intends to include
them in an amendment to the Company's Annual Report on Form 10-K for the fiscal
year ended January 27, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the Merger, Deloitte & Touche LLP ("Deloitte") was
appointed as the independent auditors of the Company replacing Arthur Andersen,
LLP ("Arthur Andersen"). During the Company's fiscal years ended December 31,
1995, and December 31, 1994, and the interim period preceding the change in
accountants, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which disagreements, if not resolved to the satisfaction of
Arthur Andersen, would have caused Arthur Andersen to make reference to the
subject matter of the disagreements in connection with its reports. The Company
has authorized Arthur Andersen to respond fully to the inquiries of Deloitte or
any other successor accountant concerning the subject matter described above.
16
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE OFFICERS AND DIRECTORS. Pursuant to the Merger Agreement the persons
identified below were appointed to the Board of Directors of the Company on
January 3, 1996, to serve until their successors are duly elected and qualified.
Set forth below is certain information concerning each person who is presently
an executive officer or director of the Company.
<TABLE>
<CAPTION>
Name Age Position
-----------------------------------------------------------------------
<S> <C> <C>
Bernard Tessler 46 Chairman of the Board, President,
Chief Executive Officer
Robert S. Kelleher 47 Vice President, Chief Financial Officer,
Chief Operating Officer
Jeffrey Koffman 31 Director
Eric M. Specter 38 Director
Stephen L. Pistner 64 Director
Donald S. Rosenberg 62 Director
</TABLE>
Bernard Tessler has been Director, Chairman, President and Chief
Executive Officer of the Company since January 3, 1996. From 1991 to 1993, Mr.
Tessler was Vice President-General Merchandise Manager (Children's Apparel,
Sporting Goods, Seasonal, "Crafts and More") of Ames Department Stores Inc.
("Ames"). Mr. Tessler was responsible for the $700 million children's division
of Ames. From 1987 to 1991, Mr. Tessler was President and Chief Executive
Officer of Children's Creative Workshop, Ltd., a publicly held consulting firm,
where he worked with diverse retailers in developing new children's and toy
store concepts. From 1983 to 1987, Mr. Tessler was Chairman of the Board and
President of Enchanted Village Stores, Inc., a publicly held company with 23
children's toy stores.
Robert Kelleher joined the Company on July 3, 1995, as Chief
Administrative Officer and Chief Financial Officer. Mr. Kelleher has been
appointed Chief Operating Officer of the Company effective April 1, 1996; he
will continue to hold the position of Chief Financial Officer. Prior to joining
the Company, Mr. Kelleher was employed from 1980 to 1995 by Contempo Casuals,
Inc., a subsidiary of the Neiman Marcus Group. Contempo Casuals was a chain of
over 240 junior women's apparel specialty stores. Since 1993, Mr. Kelleher held
the position of President and Chief Operating Officer of Contempo Casuals, Inc.;
prior to that he was Executive Vice President and Chief Financial Officer.
Jeffrey Koffman served as a financial analyst with Security Pacific
from 1987 to 1989. In 1989, Mr. Koffman became Vice President of Pilgrim
Industries and in 1990, he became the President of that company. From 1994 to
present, Mr. Koffman has served in the capacities of Executive Vice President of
Tech Aerofoam Products and Executive Vice President, and more recently,
President of Apparel America, Inc.
Eric M. Specter has been Vice President and Chief Financial Officer of
Charming Shoppes, Inc. since December 1995 and, prior to that time he served as
Vice President Corporate Controller since 1985 and has been employed by that
company since 1983. Prior to that he was an associate in the accounting firm of
Touche Ross & Company.
Stephen L. Pistner currently operates the consulting firm of Pistner
and Associates. From April 1990 to December 1992, Mr. Pistner was Chairman of
the Board and Chief Executive Officer of Ames Department Stores, Inc. From 1981
to 1985, Mr. Pistner was Chairman and Chief Executive Officer of Montgomery Ward
and Company, and later served as Chairman of McCrory Corporation.
Donald S. Rosenberg is an attorney and a partner in Rosenberg, Reisman
& Stein, Miami, Florida, where he has worked since 1956. Mr. Rosenberg is a
member of the Board of Directors of the Skylake State Bank and Chairman of its
Audit Committee. He serves as a member of the Board of Trustees, Executive
Committee, Finance
17
<PAGE> 20
Committee and Investment Committee of Barry University, Miami, Florida and is a
member of the Board of Trustees of the Zoological Society of Florida.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the fiscal year ended January 27, 1996, and Form
5 and amendments thereto furnished to the Company with respect to the fiscal
year ended January 27, 1996, and certain representations made to the Company, no
person required to file such forms failed to do so on a timely basis, as
disclosed in such Forms, during the fiscal year ended January 27, 1996, or prior
years.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the Company's most highly paid executive
officer.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term
Annual Compensation Compensation Awards Payouts
------------------- ------------ ---------------------------- ------------
Other Annual Restricted Options/SARS All Other
Name and Principal Position Year Salary Bonus Compensation Stock Awards (# of shares) LTIP Payouts Compensation
- --------------------------- ---- ------ ----- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bernard Tessler, CEO 1995 $300,000 $-- $-- $-- $-- $-- $168,375 *
Robert Kelleher, CFO/COO 1995 $245,000 $-- $-- $-- $-- $-- $ 3,600 **
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Pursuant to an agreement with the Company (then LFS), Mr. Tessler
received short-term advances in the amount of $19,313 to cover expenses
related to his relocation to California on behalf of the Company. In
addition, Mr. Tessler received compensation in respect of the fiscal
year ended January 27, 1996, in the amount of $49,062, representing
housing allowance and car allowance, and $100,000 of compensation
related to the Acquisition.
** Car allowance.
COMPENSATION OF DIRECTORS. Directors of the Company receive no compensation for
their services as directors; however, they will be entitled to receive stock
options under the Company's Stock Option Plan and may receive monetary
compensation in the future.
EMPLOYMENT ARRANGEMENTS. The Company (then LFS) entered into an employment
agreement, dated as of May 31, 1995, with Bernard Tessler, pursuant to which the
Company has agreed to employ Mr. Tessler as President and Chief Executive
Officer for a term which commenced on May 31, 1995, and will continue through
May 31, 1999, unless sooner terminated in accordance with its terms. Thereafter,
Mr. Tessler's employment with the Company would continue until terminated by the
Company upon not less than one year's notice. For compensation for his services,
Mr. Tessler will receive, among other things, an annual salary of $300,000 and
any bonus to which he will be entitled under the Company's Management Incentive
Plan (see below). If Mr. Tessler's employment with the Company is terminated
without cause by the Company or by Mr. Tessler for good reason, Mr. Tessler will
be entitled, among other things, to a termination payment equal to the greater
of (i) the balance due under the remainder of the term of the employment
agreement or (ii) one year's compensation. Mr. Tessler is also entitled to a
$5,000 per month housing allowance. Mr. Tessler is prohibited from competing
with the Company for a period of one year following termination.
MANAGEMENT INCENTIVE PLAN. The Company is in the process of instituting a
performance based incentive award program. While specific details of the plan
have not been finalized, achievement of profitability targets will be a primary
factor in determining bonus compensation. It is contemplated that a substantial
number of employees will participate in this plan.
1995 STOCK OPTION PLAN. The stockholders of the Company approved the adoption of
the 1995 Stock Option Plan at a meeting on January 3, 1996. No grants were made
pursuant to such plan in the year ended December 31, 1995. Members of the Board
of Directors who are not employees of the Company, are automatically entitled to
receive options to purchase 2,000 shares for each year they serve on the Board.
18
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 5, 1996,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of its outstanding shares of Common
Stock, (ii) each director and (iii) all executive officers and directors as a
group:
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner (1) Beneficial Ownership (2) Percent of Common Stock
- -------------------------------------------------------------------------------------
<S> <C> <C>
CSHC, Inc. (3) 783,040 15.8%
450 Winks Lane
Philadelphia, PA 19020
Donald S. Rosenberg (4) 22,500 0.5%
1 S.E. 3rd Avenue
Suite 2600
Miami, FL 33131
Bernard Tessler 773,025 15.6%
801 Sentous Avenue
City of Industry, CA 91748
Jeffrey Koffman (5) 109,771 2.2%
150 E. 52nd Street
New York, NY 10022
Robert S. Kelleher (6) * *
Eric M. Specter (6) * *
Stephen L. Pistner (6) * *
801 Sentous Avenue
City of Industry, CA 91748
All executive officers and
directors as a group (6 persons) 1,688,336 34.2%
</TABLE>
- --------------
(1) Unless otherwise noted, all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned by them. No persons named in the table are acting as
nominees for any persons or are otherwise under the control of any
person or group of persons.
(2) Excludes Common Stock issuable upon exercise of outstanding warrants.
If such warrants were exercised, the percentage of ownership of all
outstanding Common Stock would be as follows: CSHC, Inc., 12.7%, Donald
S. Rosenberg, 0.4%, Bernard Tessler, 16.7%, Jeffrey Koffman, 2.6%, and
all executive officers and directors as a group, 32.4%.
(3) CSHC, Inc. is controlled by Charming Shoppes, Inc. of which Mr. Eric M.
Specter, a director of the Company, is a Vice President and Chief
Financial Officer. Mr. Specter disclaims beneficial ownership of these
shares.
(4) Members of Mr. Rosenberg's immediate family own 218,000 additional
shares of Common Stock. Mr. Rosenberg, a director of the Company,
disclaims beneficial ownership of such shares.
(5) Members of the Koffman family or entities controlled by the Koffman
family own an additional aggregate 582,331 shares of Common Stock. Mr.
Jeffrey Koffman, a director of the Company, disclaims beneficial
interest in these shares.
(6) Messrs. Pistner and Specter, directors of the Company, and Mr.
Kelleher, an executive officer of the Company do not beneficially own
shares of Common Stock.
19
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between December 1993 and January 1996, the Company maintained its
executive offices in approximately 1,100 square feet of office space located at
7700 West Camino Real, Suite 222, Boca Raton, Florida 33431. The Company leased
this space from an unaffiliated third party for approximately $1,260 per month.
In January 1994, an affiliate of the Company ("FHM") agreed to sublease from the
Company approximately one half of such office space for approximately $630 per
month. Upon consummation of the Merger, the Company assigned to FHM, and FHM
assumed, the Company's obligations under the lease.
Mr. Jeffrey Koffman, a director of the Company, acted as a consultant
to the Company for which he was paid $4,166 per month from June 1, 1995 until
May 31, 1996. Rosenberg, Reisman & Stein, a law firm of which Donald S.
Rosenberg, a director of the Company, is a partner, has represented the Company
in certain legal matters for which he was paid $54,829 from May 31, 1995, to
December 31, 1995. From December 31, 1995, to January 27, 1996, Rosenberg,
Reisman & Stein has been paid $2,053. Rosenberg, Reisman & Stein may continue to
provide legal services to the Company in the future.
The Company purchases merchandise from apparel manufacturers owned by
members of the Koffman family. These purchases amounted to $36,882 for the eight
months ended January 27, 1996.
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Financial Statements
<S> <C>
Report of Management F-1
Independent Auditors' Report F-2
Consolidated Balance Sheet F-4
Consolidated Statement of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
The registrant is not required to file supplemental
schedules to its consolidated financial statements.
(b) Exhibits
(c) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated January
8, 1996, relating to the Merger, a change in certifying
accountants and the change in the Company's fiscal year end.
The Company filed a current report on Form 8-K dated May 31,
1996, relating to the settlement of its litigation against
Woolworth Corporation and Kinney Shoe Corporation.
The Company filed a current report on Form 8-K dated September
6, 1996, relating to the engagement letter with a financial
advisor and placement agent with respect to a proposed $10
million to $15 million private placement of the Company's
securities.
20
<PAGE> 23
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KIDS MART, INC.
By /s/ BERNARD TESSLER
-----------------------
Bernard Tessler,
Chief Executive Officer
Date: September 16, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ---------------------------------------- ------------------
<S> <C> <C>
/s/ BERNARD TESSLER Chairman, Chief Executive Officer, September 16, 1996
- --------------------------------------- and Director
Bernard Tessler
/s/ ROBERT S. KELLEHER Vice President, Chief Operating Officer, September 16, 1996
- --------------------------------------- and Chief Financial Officer
Robert S. Kelleher
/s/ JEFFREY KOFFMAN Director September 16, 1996
- ---------------------------------------
Jeffrey Koffman
/s/ STEPHEN L. PISTNER Director September 16, 1996
- ---------------------------------------
Stephen L. Pistner
/s/ ERIC M. SPECTER Director September 16, 1996
- ---------------------------------------
Eric M. Specter
/s/ DONALD S. ROSENBERG Director September 16, 1996
- ---------------------------------------
Donald S. Rosenberg
</TABLE>
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- ----
<S> <C> <C>
2.1 Agreement and Plan of Merger and Reorganization dated
May 31 1995, by and between the Company and LFS
Acquisition Corp. (incorporated by reference to Exhibit
A-1 to the Company's Proxy Statement dated December 14,
1995).
3.1 Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's
Registration Statement on Form SB-2, File No.
33-63736-A, filed with the Securities and Exchange
Commission on July 2, 1993).
3.2 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit C-1 to
the Company's Proxy Statement dated December 14, 1995).
3.3 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form SB-2, File No. 33-63736-A, filed with the
Securities and Exchange Commission on July 2, 1993).
9 Stockholders' Agreement, dated May 30, 1995, among LFS
Acquisition Corp., Bernard Tessler, Sentani Trading
Ltd., Jeffrey Koffman, Allison Koffman, Jack Koffman,
Janice Payson, Barbara Koffman, Tech Aerofoam, Inc.,
David Koffman, Ruthanne Koffman, Whitehorn, Inc.,
Financo, Inc. and Marvin Traub (incorporated by
reference to Exhibit 9 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31,
1995).
10.1 1995 Stock Option Plan of the Company (incorporated by
reference to Exhibit B-1 to the Company's Proxy
Statement dated December 14, 1995).
10.2 Employment Agreement between LFS Acquisition Corp. and
Bernard Tessler dated May 31, 1995, (incorporated by
reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1995).
10.3 Transitional Services Agreement between LFS Acquisition
Corp. and Woolworth Corporation dated as of May 31,
1995 (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995).
10.4 Settlement Agreement between LFS Acquisition Corp. and
Woolworth Corporation and Kinney Shoe Corporation dated
as of May 30, 1996.
10.5 Loan and Security Agreement by and between LFS
Acquisition Corp. and Foothill Capital Corporation
dated as of May 31, 1995, and amendments thereto.
10.6 Sale/leaseback agreement between Kids Mart, Inc. and
Computer Sales International, Inc. dated as of July 24,
1996.
10.7 Agreement between Kids Mart, Inc. and Be Bop Clothing, Inc.
dated September 11, 1996.
10.8 Exchange Agreement and Investment representation Agreement
between Kids Mart, Inc. and Be Bop Clothing, Inc. dated
September 11, 1996.
27 Financial Data Schedule
</TABLE>
22
<PAGE> 25
REPORT OF MANAGEMENT
The management of the Company is responsible for the preparation, integrity,
and objectivity of the data included in this report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. The consolidated financial statements are audited by
independent auditors, through the application of generally accepted auditing
standards.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded against loss, that the
financial records reflect fairly the transactions of the Company, and that
established policies and procedures are followed. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
accounting controls must be related to the benefits derived.
The Audit Committee, composed of two members of the Company's Board of
Directors who are not employees of the Company, meet with representatives of
management and the independent auditors to monitor the functioning of the
accounting and control systems, and to review the results of auditing
activities. The Audit Committee also recommends independent auditors for
appointment by the Board. The independent auditors have full and free access
to the Audit Committee.
/s/ BERNARD TESSLER /s/ ROBERT S. KELLEHER
- ------------------------ ---------------------------
Bernard Tessler Robert S. Kelleher
Chairman, President and Vice President,
Chief Executive Officer Chief Operating Officer and
Chief Financial Officer
F-1
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Kids Mart, Inc.:
We have audited the accompanying consolidated balance sheet of Kids Mart, Inc.
(the "Company") and subsidiaries as of January 27, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the eight months ended January 27, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As discussed in Note 2 of the notes to the consolidated financial statements,
on January 3, 1996, the Company consummated a transaction to acquire
substantially all the assets and assume all the liabilities of LFS Acquisition
Corp. ("LFS"). After the acquisition, the original stockholders of LFS hold
approximately 54% of the voting power of the Company stock. The acquisition has
been accounted for as a reverse acquisition of the Company by LFS.
As discussed in Note 3 of the notes to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be disposed of," as of January 27, 1996.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries
at January 27, 1996, and the results of their operations and their cash flows
for the eight months ended January 27, 1996 in conformity with generally
accepted accounting principles.
F-2
<PAGE> 27
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses raise
substantial doubts about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
Consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Los Angeles, California
June 17, 1996 (July 24, 1996, September 11, 1996, and September 13, 1996 as to
paragraph one, two, and three, respectively, of Note 15)
F-3
<PAGE> 28
KIDS MART, INC.
CONSOLIDATED BALANCE SHEET
JANUARY 27, 1996
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
ASSETS (NOTE 8)
<S> <C>
CURRENT ASSETS:
Cash $ 502
Receivable from Woolworth Corporation (Note 2) 1,670
Merchandise inventories (Note 4) 17,144
Prepaid expenses and other current assets 1,888
-------
Total current assets 21,204
Property and equipment, net (Note 5) 6,106
Deferred financing costs, net of accumulated amortization of $85 299
-------
Total $27,609
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under credit facility (Note 8) $ 8,849
Accounts payable 5,562
Accrued expenses and other current liabilities (Note 7) 4,546
Deferred revenue 1,237
-------
Total current liabilities 20,194
-------
Deferred rent 278
-------
Redeemable common stock (Note 9) 50
-------
Commitments and contingencies (Notes 8, 12, 14 and 15)
STOCKHOLDERS' EQUITY (Notes 10, 14, and 15):
Preferred stock, par value $.0001 per share; 100,000,000 shares authorized;
1,000,000 issued and outstanding; liquidation preference of $10,000,000
Common stock, $.0001 par value; 100,000,000 shares authorized;
4,943,000 shares issued and outstanding
Additional paid-in capital 12,783
Accumulated deficit (5,696)
-------
Total stockholders' equity 7,087
-------
Total $27,609
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 29
KIDS MART, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
EIGHT MONTHS ENDED JANUARY 27, 1996
(In thousands, except per share amounts)
<TABLE>
<S> <C>
Net sales $87,698
Cost of sales 53,296
-------
Gross profit 34,402
Selling, general and administrative expenses (Note 13) 36,128
Goodwill impairment (Note 2) 979
Depreciation and amortization 1,507
-------
Loss from operations (4,212)
Interest expense (Notes 6, 8 and 13) 1,484
-------
NET LOSS $(5,696)
=======
PER SHARE DATA:
Average shares outstanding 4,943
=======
Net loss per common share $(1.15)
=======
Dividends per common share None
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 30
KIDS MART, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
EIGHT MONTHS ENDED JANUARY 27, 1996
(In thousands, except for number of shares)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ----------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1995 1,400,626 $ 14 81.7 $ - 854,560 $ 9
Issuance of Series B preferred stock 320,000 3
Redemption of Series A preferred stock (81.7)
Exercise of Warrants C (Note 10) 102,814 1
Acquisition of Frost Hanna Acquisition
Group, Inc. (Note 2) 3,439,560 (15) (1,174,560) (12)
Issuance of Series A nonvoting Convertible
Preferred Stock (Notes 2 and 10)
Net loss
--------- ---- ----- ---- ---------- ----
BALANCE, JANUARY 27, 1996 4,943,000 $ - - $ - - $ -
========= ==== ===== ==== ========== ====
</TABLE>
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1995 $ 2,977 $ 3,000
Issuance of Series B preferred stock 817 820
Redemption of Series A preferred stock (820) (820)
Exercise of Warrants C (Note 10) 616 617
Acquisition of Frost Hanna Acquisition
Group, Inc. (Note 2) 5,693 5,666
Issuance of Series A nonvoting Convertible
Preferred Stock (Notes 2 and 10) 1,000,000 $ - 3,500 3,500
Net loss $(5,696) (5,696)
--------- ---- ------- ------- -------
BALANCE, JANUARY 27, 1996 1,000,000 $ - $12,783 $(5,696) $ 7,087
========= ==== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 31
KIDS MART, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
EIGHT MONTHS ENDED JANUARY 27, 1996
(In thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $(5,696)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill impairment 979
Depreciation and amortization 1,592
Changes in operating assets and liabilities, net of effect of acquisition of Frost Hanna
Acquisition Group, Inc.:
Receivable from Woolworth Corporation 4,130
Merchandise inventories (3,907)
Prepaid expenses and other current assets (1,211)
Accounts payable (859)
Accrued expenses and other current liabilities 2,154
Deferred revenue (536)
Deferred rent 278
-------
Net cash used in operating activities (3,076)
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,166)
Net cash acquired in acquisition of Frost Hanna Acquisition Group, Inc. 6,199
-------
Net cash provided by investing activities 5,033
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit facility 2,740
Net proceeds from issuance of Class B preferred stock 820
Redemption of Class A preferred stock (820)
Transaction fees incurred in acquisition of Frost Hanna Acquisition Group, Inc. (562)
Increase in deferred financing costs (60)
Exercise of Warrant C (Note 10) 617
Repayment of bridge loans (4,250)
-------
Net cash used in financing activities (1,515)
-------
NET INCREASE IN CASH 442
CASH, BEGINNING OF PERIOD 60
-------
CASH, END OF PERIOD $ 502
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,405
Income taxes paid $ -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 32
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As shown in the consolidated financial statements, during the eight
months ended January 27, 1996, Kids Mart, Inc. incurred net losses of
$5,696. Additionally, subsequent to January 27, 1996, Kids Mart, Inc.
continued to experience operating losses and anticipates violation
with certain other covenants during the remainder of fiscal 1996
(see Note 8). These factors among others may indicate that Kids
Mart, Inc. will be unable to continue as a going concern for a
reasonable period of time.
In response to these conditions, Kids Mart, Inc. has taken steps to
reduce expenses and increase liquidity. Kids Mart, Inc. has, among
other things, increased the percentage of higher margin private label
merchandise and closed 37 stores during the eight months ended January
27, 1996. In addition, subsequent to January 27, 1996, Kids Mart, Inc.
closed 17 stores, reduced its work force, renegotiated certain of its
store leases, entered into a sale/leaseback transaction (see Note 15),
entered into an agreement with a vendor to convert amounts payable to
this vendor to common stock (see Note 15), implemented a store closure
plan (the "Store Closure Plan") whereby it identified approximately
100 stores for closure (see Note 15), is renegotiating its loan
covenants with its lender (see Note 8), and is exploring various
interim and permanent financing opportunities with two financial
advisors.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classifications of liabilities that might
be necessary should Kids Mart, Inc. be unable to continue as a going
concern. Kids Mart, Inc.'s continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to successfully negotiate its loan
covenants with its lender and payments terms with its vendors and
landlords, to obtain additional financing or equity as may be
required, and ultimately, to attain profitable operations.
Management is continuing its efforts to obtain additional funds so
that Kids Mart, Inc. can meet its obligations and sustain operations
(see Note 15).
2. ORGANIZATION OF THE BUSINESS
On January 3, 1996, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated May 31, 1995, FH Sub
Delaware, Inc., a Delaware corporation and wholly owned subsidiary of
Frost Hanna Acquisition Group, Inc., a Florida corporation in the
development stage, ("FH") merged with and into LFS Acquisition Corp.
("LFS") (the "Merger"). As a result of the Merger, LFS became a
wholly owned subsidiary of FH. In exchange, FH issued an aggregate of
2,678,000 shares (the "Shares") of its common stock to the owners of
all the issued and outstanding shares of capital stock of LFS. The
Shares constituted approximately 54% of the outstanding shares of
common stock of FH without giving effect to the issuance of 1,204,300
shares of FH's common stock issuable upon the exercise of certain
warrants held by a) the underwriter of FH's initial public offering
(110,000 shares) and b) the initial LFS investors (1,094,300 shares)
(see Note 10). Assuming full exercise of all of the outstanding
warrants to purchase shares of FH's common stock, the former LFS
security holders would own approximately 61.4% of the outstanding
shares of FH's common stock. Since the former LFS investors would own
the controlling interest of FH's common stock, the Merger has been
accounted for as a "reverse acquisition" as if LFS recapitalized its
ownership interest and then acquired FH under the purchase method of
accounting by the issuance of 2,265,000 shares of its common stock
(the "FH Shares"). The FH Shares were valued at $6,199 which
represented the estimated fair market value of FH's net assets
acquired at the date of the Merger. Under such a transaction, LFS is
the "accounting acquirer" and FH is the "legal acquirer". Because LFS
is the "accounting acquirer", the consolidated financial statements
presented are those of LFS, not FH.
F-8
<PAGE> 33
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
FH was formed on April 2, 1993 to seek to effect a merger, exchange of
capital stock, asset acquisition or similar business combination with
an acquired business and completed a public offering of 1,265,000
shares of its common stock in September 1993. Through January 3,
1996, FH was in the development stage. The operating results
reflected in the accompanying consolidated financial statements do not
include FH's operating activities prior to January 3, 1996, the date
of the Merger, as the amounts are not significant.
Concurrent with the Merger, FH changed its fiscal year from the year
ending December 31 to the 52/53-week period ending on the Saturday
nearest January 31 and changed its name to Little Folks Shops, Inc.
On January 23, 1996, the name was changed to Kids Mart, Inc. (the
"Company").
LFS, a Delaware corporation, (hereafter, also referred to as the
Company), was formed on May 26, 1995 for the purpose of acquiring the
Holtzman's Little Folk Shop, Inc. ("Holtzman's") business from
Woolworth Corporation ("Woolworth"). On May 31, 1995 the Company
acquired all the outstanding shares of capital stock of Holtzman's
from Woolworth and certain of Holtzman's operating assets and
liabilities from Kinney Shoe Corporation, a wholly owned subsidiary of
Woolworth ("Kinney") (the "Acquisition"). Prior to this transaction,
Holtzman's had transferred certain of its assets and liabilities to
Kinney. The preliminary purchase price of the Acquisition was $22,820
($20,970 to Woolworth plus $1,850 in transaction fees) and included
$11,670 in cash (of which $1,670 was placed into an escrow account)
and $9,300 in current and long-term debt. This purchase price,
excluding transaction fees, increased from an originally agreed upon
estimated purchase price of $16,670 due to opening balance sheet
adjustments of approximately $4,300 (principally inventory, other
assets and accrued liabilities). The purchase price was subject to
adjustment based on the final book value of Holtzman's at May 31,
1995, as defined.
Subsequent to the Acquisition, disagreements arose between the Company
and Woolworth regarding the determination of the final purchase price
of Holtzman's net assets at May 31, 1995. Such disagreements resulted
in the filing of a complaint by the Company against Woolworth and
Kinney with Woolworth filing a counter complaint. On May 30, 1996,
the Company and Woolworth and Kinney reached a settlement under a
Mutual Release and Settlement Agreement (the "Settlement Agreement")
whereby Woolworth agreed to 1) release the cash of $1,670 held in
escrow to the Company, 2) cancel the $9,300 of debt incurred in
connection with the Acquisition and also cancel approximately $4,415
of other amounts paid by Woolworth on behalf of the Company during the
eight months ended January 27, 1996. In exchange, the Company issued
1,000,000 shares of its Series A convertible nonvoting preferred stock
to Woolworth (see Note 10). These shares were valued at $3,500, which
represented their fair market value at the date of issuance.
F-9
<PAGE> 34
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
The Company has accounted for the Acquisition under the purchase
method of accounting and, accordingly, recorded the assets and
liabilities acquired at their fair values. The excess purchase price
over net assets acquired is computed as follows:
<TABLE>
<S> <C>
Purchase price:
Cash paid by the Company, net of canceled advances of $4,415 $ 5,585
Issuance of 1,000,000 shares of Series A convertible preferred stock 3,500
Fees incurred in connection with the Acquisition 2,039
-------
Total 11,124
-------
Fair value of net assets acquired:
Current assets 13,610
Property and equipment 6,413
Liabilities (9,912)
-------
Total 10,111
-------
Excess of purchase price over net assets acquired $ 1,013
=======
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - The Company, a retailer of infant and children apparel and
toys, operates 296 stores in 20 states.
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Fiscal Year - The Company's fiscal year is the 52/53-week period
ending on the Saturday nearest January 31.
Accounting 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.
Actual results could differ from those estimates.
Merchandise Inventories - Merchandise inventories consist principally
of finished goods purchased from domestic and foreign vendors.
Inventories are carried at the lower of cost (determined by the retail
inventory method), or market. Certain costs of buying, warehousing
and distribution are included in inventory.
Property and Equipment - Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are
amortized over the shorter of their useful lives or the related lease
terms. Useful lives range from three to ten years.
Deferred Financing Costs - Deferred financing costs are amortized
using the straight-line method over the terms of the related debt
agreement.
F-10
<PAGE> 35
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
Excess of Purchase Price Over Net Assets Acquired - Excess purchase
price over net assets acquired is amortized over its estimated useful
life of 20 years. Amortization expense during the eight months ended
January 27, 1996, amounted to $34 (see Impairment of Long-Lived
Assets, below).
Deferred Revenue - The Company offers for sale a preferred customer
card which entitles the holder to a one-year 10% discount from the
retail price of its regularly priced merchandise. The proceeds from
card sales, net of related direct costs, are amortized into income
over a 12-month period.
Deferred Rent - Leases with free rent periods and/or scheduled
specific rent increases are recognized on a straight-line basis over
the lease term.
Income Taxes - Deferred income taxes reflect the tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, based on the income tax rates expected to be in
effect when the temporary differences are expected to reverse.
Net Loss per Common Share - Net loss per common share is based on the
weighted average number of common shares and common stock equivalents
outstanding. Common stock equivalents represent shares issuable upon
assumed exercise of warrants and conversion of preferred stock, which
would have a dilutive effect when there are earnings.
Impairment of Long-Lived Assets - In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which the Company is required to adopt effective with the fiscal year
beginning January 28, 1996. SFAS No. 121 standardizes the accounting
practices for the recognition and measurement of impairment losses on
certain long-lived assets. The Company elected early adoption of SFAS
No. 121 and, accordingly, wrote off the value of the excess purchase
price over net assets acquired amounting to $979 at January 27, 1996,
based on the projections of future cash flow.
Accounting for Stock-Based Compensation - The Company currently
accounts for its stock-based compensation plans using the provision of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). In 1995, the FASB issued SFAS
No. 123 "Accounting for Stock-Based Compensation". Under the
provisions of SFAS No. 123, companies can elect to account for
stock-based compensation plans using a fair-value based method or
continue using the intrinsic value method prescribed in APB No. 25.
SFAS No. 123 requires that companies electing to continue using APB
No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been
applied. The Company will include the necessary disclosures in its
1996 consolidated financial statements. As the Company anticipates
continuing to account for stock-based compensation using the intrinsic
value method, SFAS No. 123 will not have an impact on the Company's
consolidated financial statements.
Fair Value of Financial Instruments - The carrying value of financial
assets and liabilities approximates fair value due to the short
maturity of these items. The carrying amount of debt issued pursuant
to the Company's credit facility approximates fair value because the
interest rate changes with market interest rates.
F-11
<PAGE> 36
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
4. MERCHANDISE INVENTORIES
At January 27, 1996, the Company recorded a $1,164 markdown reserve in
connection with the reduction of merchandise retail prices subsequent
to January 27, 1996. In the opinion of management, this charge was
necessary to clear various categories of aged inventories and provide
space for fresh and more competitive merchandise.
5. PROPERTY AND EQUIPMENT
Property and equipment at January 27, 1996 consist of the following:
<TABLE>
<S> <C>
Furniture, fixtures and equipment $5,212
Leasehold improvements 2,367
------
Total 7,579
Less accumulated depreciation and amortization 1,473
------
Property and equipment, net $6,106
======
</TABLE>
6. BRIDGE LOANS
In connection with the Acquisition (see Note 2), the Company obtained
an aggregate of $4,250 of 10% bridge loans from a group of private
lenders, as well as Woolworth. The bridge loans were repaid on
January 3, 1996. In consideration for providing the bridge loans,
each of the lenders, with the exception of Woolworth, was granted one
warrant to purchase a share of common stock of the Company for a
purchase price of $6.00 per share for each $5.00 of bridge loans made
(see Note 10).
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the
following at January 27, 1996:
<TABLE>
<S> <C>
Accrued payroll and related expenses $1,114
Accrued advertising expenses 810
Accrued sales taxes 603
Other accrued expenses 2,019
------
Total $4,546
======
</TABLE>
8. CREDIT FACILITY
The Company has a credit facility with a financial institution under
which $20,000 is available for working capital advances and $10,000 is
available for the issuance of letters of credit. Aggregate borrowings
are limited to the lesser of $20,000 or specified percentages of
eligible merchandise inventories, as defined. At January 27, 1996,
the Company had outstanding revolving advances of $8,849 and letters
of credit of $4,893. Additional borrowings available under the
facility amounted to $1,148 at January 27, 1996.
F-12
<PAGE> 37
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
Advances under the credit facility, which bear interest at a reference
rate plus 2% (9.75% at January 27, 1996), are collateralized by
substantially all the assets of the Company. The credit facility
shall continue in effect until May 31, 1998, at which time it can
automatically be renewed for successive one-year periods thereafter,
unless sooner terminated pursuant to the terms of the agreement. On
April 15, 1996 and June 10, 1996, the credit facility was amended to
modify certain of its covenants, extend its term to May 31, 1999 and
grant the Company $2,000 of additional borrowings available from June
10, 1996 to February 15, 1997. In exchange, warrants to purchase
100,000 shares of the Company's common stock were issued to the
financial institution on June 14, 1996 (see "Financial Institution
Warrants" at Note 10). Loan covenants in connection with the credit
facility include the maintenance of certain financial ratios and other
restrictions, including the Company's successful completion of a
private placement of the Company's securities by September 30, 1996,
or successfully raising at least $2,000 in subordinated debt or
common stock equity by that date. At January 27, 1996, the Company
was in violation of one of these covenants, and anticipates
violation with certain other covenants during the remainder of fiscal
1996, and accordingly, has reclassified the amounts due under the
credit facility as of January 27, 1996 to a current liability. The
Company is currently in negotiations with the financial institution
to waive or amend these covenants.
9. REDEEMABLE COMMON STOCK
In connection with the Merger Agreement (see Note 2), certain public
stockholders of FH representing 9,900 shares of the Company's common
stock, voted against the Merger. Accordingly, as required per an
agreement with these stockholders to redeem their common stock shares
held, the Company reclassified the redemption value of 9,900 shares,
which voted against the Merger, to "redeemable common stock" in the
accompanying consolidated balance sheet. However, to the Company's
knowledge, none of these stockholders took the steps needed to
exercise the redemption rights and, therefore the Company may not have
any obligation to redeem these shares
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company has authorized the issuance of
100,000,000 shares of $.0001 par value preferred stock, including
1,000,000 shares of $.0001 par value Series A Convertible Preferred
Stock (the "Convertible Preferred Stock"). In connection with the
Settlement Agreement, the Company issued all shares of the Convertible
Preferred Stock to Woolworth (see Note 2). The Convertible Preferred
Stock have a liquidation preference of $10.00 per share and are
redeemable, at the Company's option, at a redemption price of $10.00
per share. Each share is convertible into one share of common stock
subject to adjustment for dilution. The Convertible Preferred Stock
are nonvoting. However, their holders can vote, as a single class, to
approve certain modifications to among other things, the Articles of
Incorporation.
Upon the declaration of dividends to common stockholders, the Company
is required to declare dividends on the Convertible Preferred Stock in
an amount equal to the per share amount distributable with respect to
the number of shares of common stock into which such shares of
Convertible Preferred Stock is convertible on the common stockholder
dividend declaration date.
WARRANTS - The Company has the following warrants outstanding at
January 27, 1996 related to the issuance of common stock:
Underwriter's Warrant - In connection with FH's initial public
offering in September 1993, FH sold to the managing
underwriter for $.1, warrants to purchase 110,000 shares of
common stock at $6.60 per share.
F-13
<PAGE> 38
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
The right to exercise these warrants is for the four-year
period commencing on September 2, 1994. These warrants are not
redeemable.
Warrant A - Represents the aggregate right to purchase 494,300
shares of common stock (including the right to purchase 35,590
shares as exercised under Warrant C) at $6.00 per share. The
right to exercise these warrants is for the five-year period
that begins at the earlier of a) the first fiscal year
reflecting net income of at least $.75 per share (undiluted) or
b) December 31, 2004.
Warrant B - Represents the aggregate right to purchase 600,000
shares of common stock at $6.00 per share. These warrants
expire on May 31, 2000.
Financial Institution Warrant - In connection with the
amendment of the credit facility (see Note 8), the Company
issued to the financial institution warrants to purchase
100,000 shares of common stock at $6.00 per share. These
warrants expire on June 14, 2001.
Prior to the merger, LFS had certain warrants outstanding (Warrant C)
which represented the right to purchase for $1.00 at a time
immediately preceding the consummation of the Merger (i) 102,814
shares of common stock of the Company, and (ii) such Warrant A
securities representing the right to purchase 35,590 (see Warrant A
above) shares of common stock. In connection with the exercise of
Warrant C on January 2, 1996, the Company issued 102,814 shares of LFS
common stock and recorded compensation expense of $617 representing
the difference between the market price of $6.00 per share and the
exercise price of $1.00 for Warrant.
11. INCOME TAXES
At January 27, 1996, deferred tax assets and liabilities were
comprised of the following:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,640 $ 1,640
Deferred revenue $ 495 495
Inventory capitalization 400 400
Other 393 393
------ ------- -------
Total 1,288 1,640 2,928
Deferred tax liability
Accelerated deductions (641) (641)
------ ------- -------
Net deferred tax assets 647 1,640 2,287
Less: valuation allowance (647) (1,640) (2,287)
------ ------- -------
Net amount recorded $ - $ - $ -
====== ======= =======
</TABLE>
The Company has recorded a valuation allowance to reduce the net
deferred income asset to zero.
The Company has federal net operating loss carryforwards available for
income tax purposes of approximately $4,103 that expire in 2010.
F-14
<PAGE> 39
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
12. COMMITMENTS AND CONTINGENCIES
The Company has been notified that certain stores in California have
materials containing asbestos. The asbestos material is generally in
trace quantities, and no remediation is expected to be required on the
understanding that such material is property secured.
The Company is a party to various other legal proceedings incidental
to its business. In the opinion of management, the ultimate
resolution of these matters would not have a material effect on the
Company's consolidated financial statements.
The Company has an employment agreement with its President that
expires on May 31, 1999 and requires a yearly salary of $300.
The Company has noncancelable operating leases, primarily for retail
stores, that expire at various dates through 2004. These leases
generally contain renewal options for periods ranging from one to
three years and require the Company to pay costs such as real estate
taxes, maintenance and/or additional rents based on a percentage of
sales. Net rental expense for all operating leases during the eight
months ended January 27, 1996 was $8,330.
Future minimum lease payments under operating leases at January 27,
1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY
<S> <C>
1997 $ 9,185
1998 7,548
1999 6,448
2000 5,153
2001 3,759
Thereafter 3,375
-------
Total $35,468
=======
</TABLE>
On June 17, 1996, the Company entered into an operating lease
agreement for a point-of-sale system. Under the provisions of this
lease agreement, the Company is required to make monthly payments
commencing with the first store installation and increasing to $62.3
based upon 282 stores. Monthly payments will be reduced in the event
of store closures. The term of the agreement is five years.
13. TRANSACTIONS WITH WOOLWORTH
The Company receives information systems, accounting and administrative
services from Woolworth pursuant to the terms of a transition service
agreement (the "Service Agreement"). In return, the Company pays
certain fees to Woolworth. These fees amounted to approximately $1,440
during the eight months ended January 27, 1996. The initial term of the
Service Agreement expired on May 31, 1996. In connection with the
Settlement Agreement (see Note 2), the Service Agreement was extended to
September 28, 1996, at which time, the Service Agreement can continue on
a month-to-month basis unless terminated by either party upon a 30-day
notice. Interest expense paid to Woolworth in connection with debt
incurred with the Acquisition (see Note 2) and the bridge loans (see
Note 6) amounted to $372 during the eight months ended January 27, 1996.
F-15
<PAGE> 40
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)
14. STOCK OPTION PLAN
On January 3, 1996, the stockholders of the Company approved the 1995
Stock Option Plan (the "Plan"). Under the Plan, 600,000 shares of
common stock have been reserved for issuance to eligible employees,
directors, consultants and advisors, subject to certain limitations,
as defined in the Plan. Incentive stock options may be granted at
prices not less than 100% (110% for individuals controlling more than
10% of the Company's total combined capital stock) at the date of the
grant, and expire within 10 years from the date of the grant (5 years
for individuals controlling more than 10% of the Company's total
combined capital stock). Nonstatutory stock options may be granted at
prices not less than 100% of the fair market value at the date of the
grant and expire within 10 years of the date the grant. The Plan
provides for an automatic grant of nonstatutory stock options to
acquire 2,000 shares of the Company's common stock to non-employee
directors (other than designees of Woolworth) each year on the day
following the Company's annual meeting of stockholders. No options
were granted during the eight months ended January 27, 1996.
15. SUBSEQUENT EVENTS
On July 24, 1996, the Company entered into a sale/leaseback
transaction whereby it sold certain equipment to a leasing company for
$288. The Company leased back such equipment under an operating lease
which provides for 24 monthly payments of $10 each. The Company
issued a warrant to the leasing company to purchase 50,000 shares of
the Company's common stock at $7.00 per share.
On September 11, 1996, the Company entered into an agreement with a
vendor whereby the vendor agreed to convert $650 of amounts due from
the Company to 433,333 shares of common stock. In exchange, the
Company agreed to use its best efforts to purchase annually a
minimum of $10,000 of merchandise inventories, as defined, from
the vendor.
On September 13, 1996, the Company's Board of Directors approved the
Store Closure Plan under which the Company will immediately reduce
its workforce at its distribution center and administrative offices
and close approximately 100 stores. The Company estimates that its
lease termination costs, property and equipment write-off and other
closing costs in connection with the Store Closure Plan
will be approximately $5,366, which will be recorded as a charge to
operations the third quarter ending October 26, 1996.
* * * * * *
F-16
<PAGE> 1
EXHIBIT 10.4
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
This Mutual Release and Settlement Agreement (this "Settlement
Agreement") is made and entered into this 30th day of May, 1996 by and among
Plaintiff LFS Acquisition Corp., a Delaware corporation and successor in
interest to LFS Acquisition Corp., a California corporation, and its parent,
Kids Mart, Inc., a Florida corporation (individually, each a "Plaintiff" and
collectively, "LFS"), Defendants Woolworth Corporation and Kinney Shoe
Corporation, each a New York corporation (individually, each a "Defendant" and
collectively, "Woolworth") and Jack Koffman. This Settlement Agreement is made
and entered into with reference to the following facts and circumstances:
WHEREAS, LFS Acquisition Corp. and Woolworth are parties to a
Purchase Agreement dated February 3, 1995, as may have been amended (the
"Purchase Agreement"), under which LFS Acquisition Corp. agreed to purchase the
business and assets of the Kids Mart/Little Folk Division from Kinney Shoe
Corporation, and the stock of Holtzman's Little Folk Shop Inc. (collectively,
"Kids Mart") from Woolworth Corporation, and Woolworth agreed to sell the same
to LFS Acquisition Corp.; and
WHEREAS, on or about May 31, 1995, the closing contemplated by
the Purchase Agreement occurred; and
WHEREAS, the initial purchase price (the "Purchase Price") for
Kids Mart was approximately $18.4 million with a purchase price adjustment of
$1.75 million, resulting in an adjusted purchase price of $16.67 million (of
which 10% was held in escrow), of which adjusted purchase price the sum of
$5,001,382 was paid by a Promissory Note from LFS Acquisition Corp. to
Woolworth Corporation dated May 31, 1995 (the "Woolworth Note"); and
<PAGE> 2
WHEREAS, on or about May 31, 1995, LFS Acquisition Corp.
deposited $1.67 million of the purchase price for Kids Mart into an escrow
account with Kaye, Scholer, Fierman, Hays & Handler, LLP the escrow agent (the
"Escrow Agent") pursuant to the Escrow Agreement (the "Escrow Agreement") dated
May 31, 1995 by and among LFS Acquisition Corp., Woolworth and the Escrow Agent
(the "Escrow Agreement"); and
WHEREAS, LFS Acquisition Corp. and Woolworth Corporation
entered into a Transitional Services Agreement dated May 31, 1995 (the "Service
Agreement") under which Woolworth Corporation agreed to perform certain
services for LFS Acquisition Corp., and during the course of which Woolworth
Corporation asserts it has paid for state sales and payroll taxes and other
amounts on behalf of LFS Acquisition Corp. in an amount in excess of $4.4
million (the "Advances"); which Advances remain unpaid; and on April 30, 1996
Woolworth Corporation gave notice of termination of the Service Agreement; and
WHEREAS, Woolworth asserts that LFS Acquisition Corp. owes
Woolworth $4,297,649 in adjustments to the Purchase Price and has asserted that
it may seek impartial resolution of the final purchase price adjustment
pursuant to the Purchase Agreement; and
WHEREAS, in December 1995, LFS Acquisition Corp. and Jack
Koffman ("Koffman") filed a complaint (the "Complaint") in California Superior
Court for the County of Los Angeles entitled LFS Acquisition Corp., et al. v.
Woolworth Corporation, et al., Case No. BC140222 (the "Action") asserting
causes of action for fraud, negligent misrepresentation, and breach of
contract; and
WHEREAS, Woolworth denied the material allegations of the
Complaint and, on January 23, 1996, cross-complained against LFS Acquisition
Corp., asserting causes of action for
2
<PAGE> 3
money paid on behalf of another, account stated, breach of contract, and unjust
enrichment; and LFS Acquisition Corp. has denied those allegations; and
WHEREAS, on January 3, 1996, FH Sub Delaware, Inc., a
wholly-owned subsidiary of Frost Hanna Acquisition Group, Inc., merged with and
into LFS Acquisition Corp., with LFS Acquisition Corp. surviving and becoming a
wholly-owned subsidiary of Frost Hanna Acquisition Group, Inc., which on
January 3, 1996 changed its name to Little Folk Shops, Inc. and which, on
January 23, 1996, changed its name to Kids Mart, Inc.; and
WHEREAS, the parties now desire to resolve these disputes
without the burden and expense of protracted litigation; and
WHEREAS, in furtherance of such resolution, Woolworth
Corporation and Kids Mart, Inc. are concurrently herewith entering into a Stock
Acquisition Agreement of even date (the "Stock Agreement") pursuant to which it
is contemplated that Kids Mart, Inc. will issue to Woolworth Corporation
1,000,000 shares of a newly-designated Series A Convertible Preferred Stock
(the "Preferred Stock").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained in this Settlement Agreement, the parties have agreed as
follows:
1. Woolworth Note. At the closing of the transactions
contemplated by the Stock Agreement (the "Closing"), Woolworth Corporation
shall deliver to LFS for cancellation the original Woolworth Note, with such
delivery to be deemed the release by Woolworth of all amounts (including
principal, interest, costs and fees) owed thereunder.
2. Amounts In Escrow. At the Closing, LFS Acquisition
Corp. and Woolworth shall execute and deliver the notice, in the form attached
as Exhibit "A" hereto, to the
3
<PAGE> 4
Escrow Agent, directing the Escrow Agent forthwith to pay to LFS all funds
held in the escrow account established by the Escrow Agreement, including
principal and any earnings thereon.
3. Issuance of Preferred Stock. Within five (5)
business days after the Closing, Kids Mart, Inc. in consideration of the
transactions contemplated by this Settlement Agreement, including among other
things, Woolworth's cancellation of the Woolworth Note and the satisfaction of
the Advances shall issue to Woolworth Corporation, in accordance with the terms
of the Stock Agreement, the Preferred Stock.
4. Transitional Services Agreement. The Service
Agreement between Woolworth Corporation and LFS Acquisition Corp. is and
remains in full force and effect, and shall be, and hereby is, extended under
the following terms and conditions:
Woolworth Corporation shall continue to provide MIS Services,
Office Services, Retail Accounting Services, Store Audit Services, Store Repair
Services, and Store Cash Management Services, as those terms are defined in the
Service Agreement, for all periods through the period ended September 28, 1996.
LFS Acquisition Corp. agrees to pay for these services at the respective
following rates from June 1, 1996 until termination of such services:
a. MIS Services: .91% of the actual sales by
LFS during the month in which such MIS
Services are provided (less $9,450 per
month).
b. Office Services: $15,300 per month.
c. Retail Accounting Services: $40,700 per month
(as reduced from time to time due to
reduction in use and scope of services).
d. Store Cash Management Services: $1,650 per
month.
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e. Store Repair Services: Cost of repairs and
maintenance plus a 20% service charge.
f. Store Audit Services: $475 per store.
As part of the MIS Services, Woolworth will also support the
connection of LFS' AS/400 to the Woolworth system for the transfer of data
files between Woolworth and LFS. Further, Woolworth shall continue to send
data (POS Polling) to and receive data (POS Polling) from LFS stores until
April 1, 1997. Data required for the stores would be prepared and transmitted
to Woolworth from LFS and data received from the stores would be de-compressed
and transmitted from Woolworth to LFS. LFS may, upon thirty (30) days' written
notice to Woolworth, terminate the POS Polling and any charges for this
service. Woolworth shall, in connection with all services to be rendered
hereunder, timely provide LFS with normal month-end closing reports. For the
Additional Services related to the MIS Services (as defined in the Service
Agreement) described in this paragraph, and any additional such developmental
services, LFS agrees to pay Woolworth Corporation the following additional
fees:
a. As long as Woolworth Corporation continues to
provide the other MIS Services described
above (and to receive the .91% based fee
therefor), $60 per hour for such Additional
Services; and
b. At such time as Woolworth Corporation no
longer provides the other MIS Services (and
does not receive the .91% based fee
therefor), $1.00 per store per polling or
promotional file download and $3.00 per store
per PLU (price look-up) download, including
communication expense; $25.00 per incident
for help desk calls;
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and, unless otherwise agreed, $60 per hour
for any Additional Services related to the
MIS Services.
Notwithstanding the contemplated termination of services after
the period ended September 28, 1996 and after April 1, 1997, as the case may
be, it is understood and agreed that, in accordance with Section 3.1 of the
Service Agreement, such services shall continue to be provided thereafter on a
month-to-month basis (for the described fees) unless and until either Woolworth
Corporation or LFS Acquisition Corp. terminates any one or more of such
services upon thirty (30) days' notice.
Notwithstanding anything in the Service Agreement to the
contrary, LFS agrees and acknowledges that (i) the total liability of Woolworth
Corporation (and its directors, officers, employees, agents and
representatives) arising out of or in connection with any breach by Woolworth
Corporation of, or any acts or omissions by Woolworth Corporation in performing
its obligations under, the provisions of the Service Agreement and/or the
provisions of this Paragraph 4, in each case from and after the date of this
Settlement Agreement, shall not exceed, regardless of the form of action,
whether in contract or in tort, including negligence, the aggregate fees
actually paid to Woolworth Corporation pursuant to this Paragraph 4 for such
period, except to the extent such claims arise from the willful misconduct or
bad faith of Woolworth Corporation, and (ii) none of Woolworth Corporation or
its directors, officers, employees, agents or representatives will be liable to
LFS for incidental, special, exemplary or consequential damages, even if
previously advised of the possibility thereof, including, but not limited to,
lost business revenue, failure to realize expected savings or other commercial
or
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economic loss of any kind, except to the extent such claims arise from the
willful misconduct or bad faith of Woolworth Corporation.
Woolworth Corporation will use its reasonable best efforts to
provide timely support in any translation of data in files for transmittal to
LFS Acquisition Corp.
5. Financial Statements. Woolworth Corporation will use
its reasonable best efforts to cause KPMG Peat Marwick LLP ("KPMG") to perform
an audit (the "Stub Audit") of the balance sheet of Holtzman's Little Folk
Shop, Inc. ("Holtzman's") as of May 31, 1995, and the related statements of
operations, stockholders' equity and cash flows for the period January 29, 1995
through May 31, 1995. At the Closing (if KPMG has given reasonable written
assurances to LFS that it will perform such work) LFS will pay KPMG (i) $22,500
for past due professional fees; and (ii) $100,000 (the "Preliminary Payment")
for fees incurred or to be incurred by KPMG for conduct of the Stub Audit and
preparation of the Draft Audit Materials and the Final Audit Materials, each as
defined below. At the conclusion of the Stub Audit, Woolworth Corporation will
use its reasonable best efforts (A) to deliver to Kids Mart, Inc. drafts of the
following materials (the "Draft Financial Statements"): (i) draft audited
financial statements for the "stub period" ended May 31, 1995 (the "Stub
Financials") and (ii) draft adjustments, if any, suggested by the Stub Audit to
the previously audited financial statements of Holtzman's for the two years
ended January 28, 1995 (the "Historical Financials") and (B) to cause KPMG to
deliver to Kids Mart Inc. a draft audit opinion and a draft auditor's consent
with respect to (x) the draft Stub Financials and (y) the Historical Financials
(as they may be adjusted) (such opinions and consents, the "Draft Audit
Materials").
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<PAGE> 8
Each of Woolworth Corporation and Kids Mart, Inc. will use its
respective reasonable best efforts to cause KPMG and Kids Mart, Inc's.
auditors, Deloitte & Touche ("Deloitte"), as well as the respective managements
of Woolworth Corporation and Kids Mart, Inc., to work together and cooperate in
resolving any disagreements that may arise with respect to the Draft Financial
Statements or the Draft Audit Materials. If all such disagreements are
resolved, or if none exist, then (i) Woolworth Corporation will use its
reasonable best efforts (A) to revise, if necessary, and finalize the Draft
Financial Statements and deliver to Kids Mart, Inc. the following materials
(the "Final Financial Statements"): (x) the Stub Financials and (y) the
Historical Financials, if revised and (B) to cause KPMG to deliver to Kids
Mart, Inc. an audit opinion and auditor's consent with respect to the Stub
Financials and the Historical Financials (as they may be adjusted) for use in
connection with periodic reporting requirements under the Securities Exchange
Act of 1934, as amended (the "1934 Act") (such opinion and consent, the "Final
Audit Materials"), and (ii) Kids Mart, Inc. (x) will use its reasonable best
efforts to cause (A) Deloitte to deliver a "material events," successor auditor
letter to KPMG substantially to the effect that nothing has come to Deloitte's
attention in its audit work for the eight month period ended January 27, 1996
that would have a material effect on the financial statements of Holtzman's for
any period prior to June 1, 1995 or that causes Deloitte to believe that any
such financial statements are incomplete or misleading in any material respect
and (B) the respective managements of Kids Mart, Inc. and LFS Acquisition Corp.
to deliver similar letters that also correct or retract (if, and to the extent,
applicable) their prior statements with respect to such financial statements in
the 1934 Act filings of Kids Mart, Inc. and in the pleadings in the Action and
(y) will (A) deliver to KPMG, with respect to all audits conducted and audit
opinions
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<PAGE> 9
prepared by KPMG with respect to Holtzman's, including the Stub Audit and the
Final Audit Materials, a release of KPMG and its affiliated and related persons
substantially similar in form to the release contained in Paragraph 7 of this
Settlement Agreement and (B) use its reasonable best efforts to deliver to KPMG
similar releases from the individuals identified in the last paragraph of said
Paragraph 7. It is understood that the respective deliveries contemplated by
clauses (i) and (ii) of this paragraph are conditioned upon each other and
intended to occur simultaneously. If the Final Audit Materials are delivered,
LFS also agrees to pay KPMG reasonable and customary fees not to exceed $10,000
for the performance of standard auditing procedures with respect to the
delivery of the auditor's consent included therein.
If at any time subsequent to delivery of the Final Audit
Materials, Kids Mart, Inc. requests KPMG to provide an additional consent with
respect to the use of the Final Audit Materials in any filing by Kids Mart,
Inc. under the Securities Act of 1933, as amended, it is understood that
nothing in this Paragraph 5 shall obligate KPMG to deliver such consent, and
KPMG may condition the delivery of such consent upon such lawful terms and
conditions as it deems necessary or appropriate.
If KPMG fails to provide reasonable written assurance of its
undertaking to perform the Stub Audit, or if any material disagreements with
respect to the Draft Audit Materials occur such that the deliveries
contemplated by the second preceding paragraph above are no longer feasible, or
if the Final Audit Materials and all other deliveries contemplated above do not
occur within three months of the Closing, then Woolworth Corporation agrees to
engage an independent accounting firm reasonably acceptable to Kids Mart, Inc.
(the "Independent Accountant") to perform an audit of the balance sheets of
Holtzman's as of January 29, 1994,
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<PAGE> 10
January 28, 1995 and May 31, 1995, and the related statements of operations,
stockholders' equity and cash flows for the years ended January 29, 1994 and
January 28, 1995 and the period of January 29, 1995 to May 31, 1995 (the
"Second Audits"), for the purpose of inclusion in the amended Form 10-K of Kids
Mart, Inc. for the year ended January 27, 1996 and with the understanding that
the Independent Accountant's work papers shall reasonably be made available to
LFS and Deloitte. Woolworth Corporation will also engage the Independent
Accountant to make a separate statement at the end of its audit process if, in
the view of the Independent Accountant, the Stub Financials and the Historical
Financials included in the Draft Financial Statements were not accurate in all
material respects or were otherwise materially misleading, in each case, as
they relate to Holtzman on a stand alone basis, it being understood that
specific expense categories for corporate allocations will be identified to LFS
and the basis of presentation in the Draft Financial Statements and the Final
Financial Statements with resepct to such allocations shall not be considered
inaccurate or misleading by the Independent Accountant if they are consistent
with the basis described in the Note 1(b) of the Historical Financials. If the
Independent Accountant makes such a statement, it is agreed that LFS will
reimburse Woolworth Corporation for 25% of all fees and costs of the
Independent Accountant in connection with the Second Audits, up to a maximum
reimbursement by LFS (exclusive of the Preliminary Payment) of $100,000. If
the Accountant does not make such a statement, it is agreed that LFS will
reimburse Woolworth Corporation for 75% of all fees and costs of the Accountant
in connection with the Second Audits, up to a maximum reimbursement by LFS
(inclusive of the Preliminary Payment) of $300,000.
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<PAGE> 11
In addition, if at any subsequent time Kids Mart, Inc.
requests the Independent Accountant to provide consents with respect to any of
the financial statements included in the Second Audits for use in any other
federal and/or state reporting or financial filings by Kids Mart, Inc.,
Woolworth Corporation will use its reasonable best efforts to cause the
Independent Accountant to so provide such consents, provided that LFS agrees to
reimburse Woolworth Corporation and/or the Independent Accountant, as the case
may be, for all customary and reasonable fees incurred in connection with the
performance of standard auditing procedures with respect to delivery of such
consents.
Each of Woolworth and LFS agrees to cooperate reasonably with
each other and their respective accountants in order to facilitate the
performance and timely conduct of all audits and other actions contemplated by
this Paragraph 5.
6. Dismissal of Action. At the Closing, counsel for
LFS, Koffman, and Woolworth shall execute a stipulation of dismissal with
prejudice of the Action, including the Complaint and Woolworth's cross-claim,
in the form annexed as Exhibit "B" hereto, the filing of which the parties
hereto shall forthwith jointly cause to be completed.
7. Kids Mart, Inc., LFS Acquisition Corp. and Jack
Koffman's Release of Woolworth Corporation and Kinney Shoe Corporation.
Effective at the time of the Closing, each of Kids Mart, Inc. and LFS
Acquisition Corp., on behalf of itself, its subsidiaries and any person or
entity claiming through (derivatively or otherwise) or otherwise asserting or
obtaining rights through, from or on behalf of it, and Koffman, on behalf of
himself and any person or entity claiming through or otherwise asserting or
obtaining rights through, from or on behalf of him (collectively, the "LFS
Releasing Parties"), hereby permanently and irrevocably discharges
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<PAGE> 12
each of Woolworth Corporation, Kinney Shoe Corporation, the respective
subsidiaries, affiliates, successors, predecessors and assigns of Woolworth
Corporation and Kinney Shoe Corporation, and the respective present and former
shareholders, officers, directors, general and limited partners, employees,
agents, representatives, attorneys, and parents of Woolworth Corporation,
Kinney Shoe Corporation and such other persons and entities, from, and settles
and compromises, all liabilities, debts, liens, claims, suits, actions, causes
of action, or rights to relief, whether anticipated or unanticipated, known or
unknown, of every kind, nature and description relating directly or indirectly
in any way to the subject matter of the Purchase Agreement or the Action,
whether arising out of any federal law (including, without limitation, the
federal securities laws), state or local law or other law, whether asserted as
complaints, demands, cross-claims, third-party claims or otherwise, including
but not limited to those that any LFS Releasing Party now has or may ever have
arising out of:
a. LFS Acquisition Corp.'s acquisition of Kids
Mart from Woolworth under the Purchase
Agreement and said Purchase Agreement;
b. Any transaction taking place before the date
of this Settlement Agreement and any and all
claims relating thereto;
c. The Woolworth Note and any other note
obligations between either or both
Plaintiffs, on the one hand, and either or
both Defendants, on the other hand, entered,
made, or outstanding before the date of this
Settlement Agreement; and
d. Services performed before the date of this
Settlement Agreement by Woolworth Corporation
under the Service Agreement.
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LFS Acquisition Corp. agrees that no later than five (5)
business days following the Closing, it shall deliver to Woolworth Corporation
releases from Richard B. Frost, Mark J. Hanna, Donald H. Baxter, Marshall E.
Rosenberg and Bernard E. Tessler, in their respective individual capacities,
providing for the permanent and irrevocable discharge to Woolworth Corporation,
Kinney Shoe Corporation, and the other releases identified in the immediately
preceding paragraph of this Paragraph 7 to the extent set forth therein.
In addition, and without in any way limiting the nature,
effect, extent and scope of the releases contained in this Paragraph 7, nothing
contained in this Paragraph 7 shall be deemed to affect the right of any LFS
Releasing Party to join or implead any of the released parties, for the purpose
of seeking appropriate apportionment of liability or contribution in accordance
with applicable law, as parties to any litigation or proceeding that may be
commenced by any party that is not, and is not controlled by or acting in
concert with, any LFS Releasing Party against any of the LFS Releasing Parties
relating directly or indirectly to the subject matter of the Purchase Agreement
or the Action or any other matter the subject of the release contained in this
Paragraph 7.
8. Surviving Woolworth Obligations. Notwithstanding the
releases provided for in Paragraph 7 of this Settlement Agreement, it is
understood and agreed that the obligations and agreements of Woolworth
contained in Sections 8.4, 8.7, 8.8, 8.10, 8.13, 8.16, 8.18, 9.3(e), 9.3(f),
9.3(g), 9.4, 10.1(a)(i) (but only with respect to a misrepresentation in a
Woolworth Continuing Representation (as hereinafter defined)), 10.1(a)(ii)
through (xii) (other than a condition constituting a failure to comply with, or
a violation of, any anti-fraud provision of any federal or state securities
law), 10.2, 10.3 and Article XII of the Purchase Agreement shall
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survive and continue in full force and effect in accordance with their terms.
For purposes hereof, the term "Woolworth Continuing Representations" shall mean
the representations and warranties of Woolworth made in Sections 6.1, 6.2, 6.3,
6.4 (other than clause (a)(iii) thereof), 6.5, 6.6, 6.8, 6.9, 6.10, 6.11, 6.12,
6.13, 6.14, 6.15, 6.17, 6.18, 6.19, 6.20, 6.21 (other than a condition
constituting a failure to comply with, or a violation of, any anti-fraud
provision of any federal or state securities law), 6.22, 6.23, 6.24, 6.25,
6.26, 6.27, 6.28, 6.29 and 6.31 of the Purchase Agreement. Notwithstanding the
immediately preceding two sentences, it is understood and agreed that the
releases in Paragraph 7 with respect to the Action are intended to be absolute,
and nothing in this Paragraph 8 is intended to or shall form or preserve the
basis of a claim, right or cause of action by or on behalf of either Plaintiff
under the Purchase Agreement that (i) was asserted in the Action or that
reasonably could have been asserted in the Action or (ii) is known to either
Plaintiff as of the date of this Settlement Agreement.
9. Woolworth's Release of LFS, Holtzman's Little Folk
Shop, Inc. and Koffman. Effective at the time of Closing, each of Woolworth
Corporation and Kinney Shoe Corporation, on behalf of itself, its subsidiaries
and any person or entity claiming through (derivatively or otherwise) or
otherwise asserting or obtaining rights through, from or on behalf of it
(collectively the "Woolworth Releasing Parties"), hereby permanently and
irrevocably discharges each of Kids Mart, Inc., LFS Acquisition Corp.,
Holtzman's Little Folk Shop, Inc., Koffman, the respective subsidiaries,
affiliates, successors, predecessors, and assigns of Kids Mart, Inc., LFS
Acquisition Corp., Holtzman's Little Folk Shop, Inc. and Koffman, and the
respective present and former shareholders, officers, directors, general and
limited partners, employees, agents, representatives, attorneys, and parents of
Kids Mart, Inc., LFS Acquisition
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Corp., Holtzman's Little Folk Shop, Inc. and Koffman and such other persons and
entities from all liabilities, debts, liens, claims, suits, actions, causes of
action, or rights to relief, whether anticipated or unanticipated, known or
unknown, of every kind, nature and description relating directly or indirectly
to the subject matter of the Purchase Agreement or the Action, whether arising
out of any federal law (including, without limitation, the federal securities
laws), state or local law or other laws, whether asserted as complaints,
demands, cross-claims, third-party claims or otherwise, including but not
limited to those that any Woolworth Releasing Party now has or may ever have
arising out of:
a. LFS Acquisition Corp.'s acquisition of Kids
Mart from Woolworth under the Purchase
Agreement and said Purchase Agreement;
b. Any transaction taking place before the date
of this Settlement Agreement (including the
Advances) and any and all claims relating
thereto;
c. The Woolworth Note and any other note
obligations between either or both Plaintiffs
on the one hand and either or both Defendants
on the other hand, entered, made, or
outstanding before the date of this
Settlement Agreement; and
d. Services performed before the date of this
Settlement Agreement by Woolworth Corporation
under the Service Agreement.
In addition, and without in any way limiting the nature,
effect, extent and scope of the releases contained in this Paragraph 9, nothing
contained in this Paragraph 9 shall be deemed to affect the right of any
Woolworth Releasing Party to join or implead any of the released
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<PAGE> 16
parties, for the purpose of seeking appropriate apportionment of liability or
contribution in accordance with applicable law, as parties to any litigation or
proceeding that may be commenced by any party that is not, and is not
controlled by or acting in concert with, any Woolworth Releasing Party against
any of the Woolworth Releasing Parties relating directly or indirectly to the
subject matter of the Purchase Agreement or the Action or any other matter the
subject of the release contained in this Paragraph 9.
10. Surviving LFS Obligations. Notwithstanding the
releases provided for in Paragraph 9 of this Settlement Agreement, it is
understood and agreed that the obligations and agreements of LFS Acquisition
Corp. contained in Sections 8.4, 8.7, 8.8, 8.10, 8.13, 8.16, 8.18, 8.20 (added
by amendment), 9.2, 9.3, 9.4, 10.1(b), 10.1(c), 10.2, 10.3 and Article XII of
the Purchase Agreement shall survive and continue in full force and effect in
accordance with their terms. Notwithstanding the immediately preceding
sentence, it is understood and agreed that the releases in Paragraph 9 with
respect to the Defendants' cross-claims in the Action are intended to be
absolute, and nothing in this Paragraph 10 is intended to or shall form or
preserve the basis of a claim, right or cause of action by or on behalf of
either Defendant under the Purchase Agreement that (i) was asserted as a
cross-claim in the Action or that reasonably could have been asserted as a
cross-claim in the Action or (ii) is known to either Defendant as of the date
of this Settlement Agreement. Notwithstanding the foregoing, and
notwithstanding the releases provided for in Paragraph 9 of this Settlement
Agreement, it is understood and agreed by LFS that Woolworth Corporation
retains the right to receive payment, and LFS hereby agrees to pay, (x) on
account of the invoices attached hereto as Exhibit "C" aggregating $306,104.45
and (y) for
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any services provided under the Service Agreement with respect to periods after
April 30, 1996 and not heretofore paid by LFS.
11. Representations and Warranties of LFS. LFS
represents and warrants that (i) LFS Acquisition Corp. is not aware of any
currently existing default (other than certain immaterial reporting
requirements) under its loan and security agreement, dated May 31, 1995, with
Foothill Capital Corporation, (ii) LFS is not aware of any material liability
to Woolworth Corporation or any of its subsidiaries which has not been
disclosed in writing to Woolworth Corporation prior to the Closing, (iii) LFS
has no present intention to file, or permit any subsidiary to file, a petition
for relief under title 11 of the United States Code, (iv) after giving effect
to the transactions contemplated hereby and the results thereof, and as at the
effective date of this Settlement Agreement, each of Kids Mart, Inc. and LFS
Acquisition Corp. (x) has assets in excess of its liabilities, at a fair
valuation, (y) will be able to pay its debts as they mature and (z) will have
capital sufficient with which to conduct its business and (v) each of LFS
Acquisition Corp. and Kids Mart, Inc. has determined, in the exercise of its
business judgment, that its execution and performance of this Settlement
Agreement are in the best interests of itself, its shareholders, and its
creditors.
12. Section 1542 Waiver. Each of the parties
acknowledges and warrants that its signing representatives have read and
understand the provisions of California Civil Code Section 1542, which states
as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF
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<PAGE> 18
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST
HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
Each of these parties expressly, voluntarily, and knowingly waives any and all
rights it may have under Civil Code Section 1542 and under any other statutes
or common law principles of similar effect.
13. Non-Admission of Liability. Each of the parties has
denied and continues to deny all claims, allegations, and contentions of
liability alleged by the other parties. Nothing in this Settlement Agreement
and nothing about the fact that the Action was settled shall be construed as an
admission by any of the parties of any fault, wrongdoing, or liability
whatsoever.
14. Subsequent Litigation; Indemnity.
a. Each of LFS Acquisition Corp. and Kids Mart,
Inc., jointly and severally, hereby agrees to
indemnify and hold harmless Woolworth
Corporation, its subsidiaries and affiliates,
and any present or former shareholder,
director, officer, agent, employee or
attorney of Woolworth Corporation or any of
its subsidiaries or affiliates (any of the
foregoing, an "Indemnified Person"), to the
full extent lawful, from and against any
losses, expenses (including reasonable
attorney's fees), claims or proceedings,
including shareholder actions (hereinafter
collectively referred to as "losses") related
to or arising out of the negotiation,
execution and/or implementation of the
Settlement Agreement.
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b. Kids Mart, Inc. or LFS Acquisition Corp.
shall be entitled to assume the defense of
any action for which indemnification is
sought under paragraph a. above with counsel
of its choice at its expense (in which case
it shall not thereafter be responsible for
the fees and expenses of any separate counsel
retained by an Indemnified Person except as
set forth below), provided, however, that
such counsel shall be reasonably satisfactory
to Woolworth Corporation. Notwithstanding an
election by Kids Mart, Inc. or LFS
Acquisition Corp. to assume the defense of
such action, each Indemnified Person shall
have the right to employ separate counsel and
to participate in the defense of such action
at its own cost.
15. Costs and Attorneys' Fees. Each of the parties
agrees to bear its own attorneys' fees and costs incurred in connection with
the Action and this Settlement Agreement, through and including the date of the
Closing.
16. Tax Assistance. LFS agrees, without cost or further
obligation, to identify to Woolworth tax positions that LFS believes may be
beneficial or advantageous for Woolworth to utilize or apply in connection with
Woolworth's prior operation of Kids Mart, Inc. stores and the Purchase
Agreement.
17. Applicable Law. The parties intend and agree that
this Settlement Agreement shall be subject to, governed by, and enforced and
construed pursuant to the internal law of the State of California (without
regard to principles of conflicts of laws).
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<PAGE> 20
18. Independent Counsel. Each of the parties represents
and warrants that, in connection with the negotiation and execution of this
Settlement Agreement, it has been represented by independent counsel and
financial advisors of its own choosing, that it has not relied upon the advice
or counsel of any other party's independent counsel or financial advisor in the
negotiation or drafting of this Settlement Agreement, that it has executed this
Settlement Agreement after receiving the advice of such independent counsel and
financial advisors, that its representative has read and understands the
provisions and terms of this Settlement Agreement, and that it has had an
adequate opportunity to conduct an independent investigation of all facts and
circumstances with respect to all matters that are the subject of this
Settlement Agreement. Woolworth acknowledges that it received and reviewed the
Form 10-K of Kids Mart, Inc. for the period ended January 27, 1996, filed with
the Securities and Exchange Commission.
19. Non-Assignment of Claims. Each of the parties
warrants and represents that it has not assigned or transferred or purported to
assign or transfer, voluntarily, involuntarily, or by operation of law, any
claim, cause of action, or matter released pursuant to this Settlement
Agreement, or any part or portion thereof, to any person or entity not a party
to this Settlement Agreement. Each of the parties agrees to indemnify all
other parties and hold them harmless from any claims, demands, damages, debts,
liabilities, accounts, obligations, costs, expenses, liens, actions, or causes
of action (including the payment of attorneys' fees and costs actually
incurred, whether or not litigation is commenced) based upon, in connection
with, or arising out of any such assignment or transfer or purported assignment
or transfer of such a claim, cause of action, or matter released pursuant to
this Settlement Agreement.
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20. All Terms In Writing. Each of the parties
acknowledges that this Settlement Agreement together with the Stock Agreement
(including the respective exhibits thereto and documents and instruments to be
delivered pursuant thereto) contains all of the terms and conditions agreed
upon by the parties concerning the settlement of the Action, and that this
Settlement Agreement together with the Stock Agreement supersedes all prior
negotiations, proposed agreements, and agreements concerning this settlement
and release. Each of the parties acknowledges that no party or representative,
agent, or attorney for a party has made any representation or warranty to
influence the execution of this Settlement Agreement that is not expressly
contained in this Settlement Agreement or the Stock Agreement. Each of the
parties acknowledges that it has not executed this Settlement Agreement in
reliance upon any representation or warranty not contained in this Settlement
Agreement or the Stock Agreement. This Settlement Agreement shall not be
modified or changed except by a written instrument signed by Kids Mart, Inc.
and Woolworth Corporation.
21. Successors. This Settlement Agreement is binding
upon and shall inure to the benefit of the parties and their respective
successors, assigns, heirs, trustees, and personal representatives.
22. Execution in Counterparts. This Settlement Agreement
may be executed in any number of counterparts, each of which shall be deemed to
be an original and all of which together shall be deemed to be one and the same
instrument.
23. Joint Drafting. The parties have jointly drafted
this Settlement Agreement and this Settlement Agreement shall not be
interpreted against or in favor of any of the parties on the ground that any of
the parties participated in the drafting of the Settlement Agreement.
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24. Authority to Execute. Each of the parties represents
and warrants that the person executing the Settlement Agreement on its behalf
is a representative duly authorized to bind it and empowered to enter into the
Settlement Agreement on its behalf.
25. Notice. All notices, requests, demands, consents,
and other communications required or permitted to be given or made hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or telecopier, or if mailed, certified or registered first class mail,
postage prepaid, return receipt requested, to:
a. as to LFS and Koffman, to Kids Mart, Inc.,
801 S. Sentous Avenue, City of Industry,
California 91748, Attn: Bernard Tessler,
CEO, Fax No. 818-854-3832, with copy to Kaye,
Scholer, Fierman, Hays & Handler, LLP, 425
Park Avenue, New York, New York 10022, Attn:
Mitchel H. Perkiel, Esq., Fax No.
212-836-7157; and
b. as to Woolworth, to Woolworth Corporation,
233 Broadway, New York, New York 10279,
Attn: General Counsel, Fax No. 212-553-2152;
with copy to Skadden, Arps, Slate, Meagher &
Flom, 919 Third Ave., New York, New York
10022, Attn: Peter J. Neckles, Esq., Fax No.
212-735-2000.
22
<PAGE> 23
THE UNDERSIGNED ACKNOWLEDGE THAT THEY HAVE READ THIS SETTLEMENT AGREEMENT IN
ITS ENTIRETY AND FULLY UNDERSTAND ITS TERMS.
The undersigned LFS Acquisition Corp. agrees to the terms of
this Settlement Agreement in LFS Acquisition Corp., et al. v. Woolworth
Corporation, et al., California Superior Court for the County of Los Angeles,
Case Number BC140222.
LFS ACQUISITION CORP.
Dated: By:
-------- -------------------------------
Name:
-----------------------------
Signature:
------------------------
Title:
----------------------------
The undersigned Kids Mart, Inc. agrees to the terms of this
Settlement Agreement in LFS Acquisition Corp., et al. v. Woolworth Corporation,
et al., California Superior Court for the County of Los Angeles, Case Number
BC140222.
KIDS MART, INC.
Dated: By:
-------- -------------------------------
Name:
-----------------------------
Signature:
------------------------
Title:
----------------------------
23
<PAGE> 24
The undersigned Jack Koffman agrees to the terms of this
Settlement Agreement in LFS Acquisition Corp., et al. v. Woolworth Corporation,
et al., California Superior Court for the County of Los Angeles, Case Number
BC140222.
JACK KOFFMAN
Dated: By:
-------- -------------------------------
Name:
-----------------------------
Signature:
------------------------
Title:
----------------------------
The undersigned Woolworth Corporation agrees to the terms of
this Settlement Agreement in LFS Acquisition Corp., et al. v. Woolworth
Corporation, et al., California Superior Court for the County of Los Angeles,
Case Number BC140222.
WOOLWORTH CORPORATION
Dated: By:
-------- -------------------------------
Name:
-----------------------------
Signature:
------------------------
Title:
----------------------------
24
<PAGE> 25
The undersigned Kinney Shoe Corporation agrees to the terms of
this Settlement Agreement in LFS Acquisition Corp., et al. v. Woolworth
Corporation, et al., California Superior Court for the County of Los Angeles,
Case Number BC140222.
KINNEY SHOE CORPORATION
Dated: By:
-------- -------------------------------
Name:
-----------------------------
Signature:
------------------------
Title:
----------------------------
25
<PAGE> 26
Exhibit A
NOTICE TO ESCROW AGENT
Kaye, Scholer, Fierman, Hays & Handler,
as Escrow Agent ("Escrow Agent") under
the Escrow Agreement dated May 31, 1995,
by and among LFS Acquisition Corp.,
Kinney Shoe corporation, Woolworth
Corporation and the Escrow Agent (the
"Escrow Agreement")
425 Park Avenue
New York, New York 10022
Attn: Alan Capilupi, Controller
Roger Berg, Esq.
Dear Sirs:
You are hereby instructed and directed to pay, by wire
transfer, the Escrow Fund (as defined in the Escrow Agreement) to the
following:
Payee: Foothill Capital Corporation
Bank Name: Chemical Bank
ABA#: 021000128
Account Name: Little Folk Shop or Kids Mart
Account Number: 323-266193
Very truly yours,
LFS ACQUISITION CORP.
By:
_______________________________
KINNEY SHOE CORPORATION
By:
_______________________________
WOOLWORTH CORPORATION
By:
_______________________________
<PAGE> 1
EXHIBIT 10.5
================================================================================
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
LFS ACQUISITION CORP.
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF MAY 31, 1995
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.5 Schedules and Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1 Revolving Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2 Letters of Credit and Letter of Credit Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.4 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.5 Interest: Rates, Payments, and Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.6 Crediting Payments; Application of Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.7 Statements of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.8 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. CONDITIONS; TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.1 Conditions Precedent to Initial Advance, L/C, or L/C Guaranty, and Conditions Subsequent . . . . . . . . . 15
3.2 Conditions Precedent to All Advances, L/Cs, or L/C Guarantees . . . . . . . . . . . . . . . . . . . . . . 17
3.3 Term; Automatic Renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.5 Early Termination by Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.6 Termination Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2 Negotiable Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.3 Collection of Accounts, General Intangibles, Negotiable Collateral . . . . . . . . . . . . . . . . . . . . 19
4.4 Delivery of Additional Documentation Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.1 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.3 Eligible Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
5.4 Location of Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.5 Inventory Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.6 Location of Chief Executive Office; FEIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.7 Due Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.8 Due Authorization; No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.10 No Material Adverse Change in Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.11 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.12 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.13 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.14 Reliance by Foothill; Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.1 Accounting System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.2 Collateral Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.3 Schedules of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.4 Financial Statements, Reports, Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.5 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.6 Guarantor Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.7 Designation of Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.8 Store Openings and Closings and Rent Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.9 Title to Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.10 Maintenance of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.13 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.14 No Setoffs or Counterclaims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.15 Location of Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.16 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.17 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.3 Restrictions on Fundamental Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.4 Extraordinary Transactions and Disposal of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.5 Change Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.6 Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.7 Restructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.8 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.9 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.10 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.11 Consignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
7.12 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.13 Accounting Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.14 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.15 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.16 Suspension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.17 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.18 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.19 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees . . . . . . . . . . . . 31
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9. FOOTHILL'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.2 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10. TAXES AND EXPENSES REGARDING THE COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11. WAIVERS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.1 Demand; Protest; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.2 Foothill's Liability for Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.3 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
12. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
14. DESTRUCTION OF BORROWER'S DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.1 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.3 Section Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.5 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.6 Amendments in Writing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
15.7 Counterparts; Telefacsimile Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
15.8 Revival and Reinstatement of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
15.9 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
-iii-
<PAGE> 5
SCHEDULES
Schedule E-1 Eligible Inventory
Schedule P-1 Permitted Liens
Schedule 5.9 Litigation
Schedule 6.15 Location of Inventory and Equipment
-iv-
<PAGE> 6
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT, is entered into as of May 31, 1995,
between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"),
with a place of business located at 11111 Santa Monica Boulevard, Suite 1500,
Los Angeles, California 90025-3333, and LFS ACQUISITION CORP., a Delaware
corporation ("Borrower"), with its chief executive office located at 801
Sentous Avenue, City of Industry, California 91784.
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 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.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under common control with, that
Person. For purposes of this definition, "control" as applied to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of that Person, whether through
the ownership of voting securities, by contract, or otherwise.
"Agreement" means this Loan and Security Agreement and any written
extensions, riders supplements, notes, amendments, or modifications to or in
connection with this Loan and Security Agreement.
"Authorized Officer" means any officer of Borrower.
"Average Unused Portion of Maximum Amount" means (a) the Maximum
Amount; less (b) the sum of: (i) the average Daily Balance of advances made by
Foothill under Section 2.1 that were outstanding during the immediately
preceding month; plus (ii) the average Daily Balance of the undrawn standby
L/Cs and L/C Guarantees (and in the case of commercial L/Cs and L/C Guarantees,
fifty percent (50%) of the average Daily Balance of the undrawn L/Cs and L/C
Guarantees) issued by Foothill under Section 2.2 that were outstanding during
the immediately preceding month.
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<PAGE> 7
Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.
Section 101 et seq.), as amended, and any successor statute.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Cost" means Borrower's landed cost of Inventory, as
determined by Borrower based upon a calculation reasonably acceptable to
Foothill.
"Borrower's 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, disc or tape files, printouts, runs, or other computer
prepared information.
"Borrowing Base" has the meaning set forth in Section 2.1.
"Business Day" means any day which 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 thirty percent (30%) of the total voting power of all classes of
stock then outstanding of Borrower normally entitled to vote in the election of
directors.
"Closing Date" means the date of the initial advance or the date of
the initial issuance of an L/C or an L/C Guaranty, whichever occurs first.
"Code" means the California Uniform Commercial Code.
"Collateral" means each of the following: the Accounts; Borrower's
Books; the Equipment; the General Intangibles; the Inventory; the Negotiable
Collateral; any money, or other assets of Borrower which now or hereafter come
into the possession, custody, or control of Foothill; and 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, Borrower's Books, Equipment, General Intangibles, Inventory,
Negotiable Collateral, 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.
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<PAGE> 8
"Consolidated Current Assets" means, as of any date of determination,
the aggregate amount of all current assets of Borrower and its subsidiaries
calculated on a consolidated basis that would, in accordance with GAAP, be
classified on a balance sheet as current assets.
"Consolidated Current Liabilities" means, as of any date of
determination, the aggregate amount of all current liabilities of Borrower and
its subsidiaries, calculated on a consolidated basis that would, in accordance
with GAAP, be classified on a balance sheet as current liabilities. For
purposes of this definition, all advances outstanding under this Agreement
shall be deemed to be current liabilities without regard to whether they would
be deemed to be so under GAAP.
"Daily Balance" means the amount of an Obligation owed at the end of a
given day.
"Early Termination Premium" has the meaning set forth in Section 3.5.
"Eligible Inventory" means Inventory consisting of first quality
finished goods (not defective goods or "seconds") held for sale in the ordinary
course of Borrower's business (net of all capitalized distribution center costs
and net of shrinkage reserves which may be adjusted by Foothill from time to
time in its reasonable discretion based upon historical shrinkage levels), that
is acceptable to Foothill in all respects, that is located at Borrower's
premises identified on Schedule E-1 or that is in transit to Borrower if: (a)
title to such Inventory has been transferred to Borrower and the Inventory is
in route to Borrower via a third party carrier, (b) the Inventory is insured to
Foothill's satisfaction and (c) documentation regarding such Inventory is
acceptable to Foothill, and such Inventory strictly complies with all of
Borrower's representations and warranties to Foothill. If Eligible Inventory
is in transit to Borrower and has been acquired pursuant to a Foothill L/C or
L/C Guarantee, the L/C or L/C Guarantee must have been drawn upon. Eligible
Inventory shall not include slow moving Inventory (meaning Inventory held by
Borrower in excess of one (1) year at any time during the first twelve (12)
months following the Closing Date, and thereafter meaning Inventory at any time
held by Borrower for more than six (6) months) or obsolete items, restrictive
or custom items, raw materials, work-in-process, components that are not part of
finished goods, spare parts, packaging and shipping materials, supplies used or
consumed in Borrower's business, Inventory subject to a security interest or
lien in favor of any third Person, bill and hold goods, Inventory that is not
subject to Foothill's perfected security interests, and Inventory acquired on
consignment.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
leasehold improvements, vehicles (including motor vehicles and trailers),
tools, parts, dies, jigs, goods (other than consumer goods, farm products, or
Inventory), wherever located, and any interest of Borrower in any of the
foregoing, and all attachments, accessories; accessions, replacements,
substitutions, additions, and improvements to any of the foregoing, wherever
located.
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<PAGE> 9
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any predecessor, successor, or superseding laws
of the United States of America, together with all regulations promulgated
thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) which, within the meaning of Section 414 of the IRC, is: (i)
under common control with Borrower; (ii) treated, together with Borrower, as a
single employer; (iii) treated as a member of an affiliated service group of
which Borrower is also treated as a member; or (iv) is otherwise aggregated
with the Borrower for purposes of the employee benefits requirements listed in
IRC Section 414(m)(4).
"ERISA Event" means any one or more of the following: (i) a Reportable
Event with respect to a Qualified Plan or a Multiemployer Plan; (ii) a
Prohibited Transaction with respect to any Plan; (iii) a complete or partial
withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan; (iv)
the complete or partial withdrawal of Borrower or an ERISA Affiliate from a
Qualified Plan during a plan year in which it was, or was treated as, a
"substantial employer" as defined in Section 4001(a)(2) of ERISA; (v) a failure
to make full payment when due of all amounts which, under the provisions of any
Plan or applicable law, Borrower or any ERISA Affiliate is required to make;
(vi) the filing of a notice of intent to terminate, or the treatment of a plan
amendment as a termination, under Sections 4041 or 4041A of ERISA; (vii) an
event or condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Qualified Plan or Multiemployer Plan; (viii) the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA
Affiliate; and (ix) a violation of the applicable requirements of Sections 404
or 405 of ERISA, or the exclusive benefit rule under Section 403(c) of ERISA,
by any fiduciary or disqualified person with respect to any Plan for which
Borrower or any ERISA Affiliate may be directly or indirectly liable.
"Event of Default" has the meaning set forth in Section 8.
"Excess Cash Flow" means an amount equal to one half (50%) of the
amount of Borrower's net income, plus depreciation, minus Borrower's capital
expenditures and required principal payments on Indebtedness, for the following
fiscal years in excess of the Base Amount set forth below for each such year:
<TABLE>
<CAPTION>
Fiscal Year Ending Base Amount
<S> <C>
January 31, 1996 $1,500,000
January 31, 1997 $4,000,000
January 31, 1998 $6,000,000
</TABLE>
"FEIN" means Federal Employer Identification Number.
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<PAGE> 10
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Expenses" means all: costs or expenses (including taxes,
photocopying, notarization, telecommunication and insurance premiums) required
to be paid by Borrower under any of the Loan Documents that are paid or
advanced by Foothill to third Persons; documentation, filing, recording,
publication, appraisal (including periodic Collateral appraisals), and search
fees assessed, paid, or incurred by Foothill in connection with Foothill's
transactions with Borrower; costs and expenses incurred by Foothill in the
disbursement of funds to Borrower (by wire transfer or otherwise); charges paid
or incurred by Foothill resulting from the dishonor of checks; costs and
expenses paid or incurred by Foothill 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 Collateral, or any portion thereof, irrespective of
whether a sale is consummated; costs and expenses paid or incurred by Foothill
in examining Borrower's Books; costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the Loan
Documents; and Foothill'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 or any guarantor of the Obligations), defending, or
concerning the Loan Documents, irrespective of whether suit is brought.
"Frost Hanna" means Frost Hanna Acquisition Group, Inc., a Florida
corporation.
"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, 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, infringements, claims, computer
programs, computer discs, computer tapes, literature, reports, catalogs,
deposit accounts, insurance premium rebates, tax refunds, and tax refund
claims), other than goods and Accounts.
"Hazardous Materials" means all or any of the following: (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
-5-
<PAGE> 11
substances or explosives or any radioactive materials; and (d) asbestos in any
form or electrical equipment which contains any oil or dielectric fluid
containing levels of polychlorinated biphenyls in excess of fifty (50) parts
per million.
"Holtzman" means Holtzman's Little Folk Shop, Inc., a California
corporation.
"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 of
Borrower in respect of letters of credit, letter of credit guaranties, bankers
acceptances, interest rate swaps, controlled disbursement accounts, or other
financial products; (c) all obligations under capitalized leases; (d) all
obligations or liabilities of others secured by a lien or security interest on
any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed; (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; and (f) all obligations of Borrower to
Woolworth evidenced by the Promissory Note issued by Borrower to Woolworth
pursuant to the Purchase Agreement, but excluding any obligations thereunder
payable solely from Borrower's excess cash flow.
"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, including assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally
with its creditors, or proceedings seeking reorganization, arrangement, or
other similar relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including goods held for sale and all of Borrower's present
and future raw materials, work in process, finished goods, and packing and
shipping materials, wherever located, and any documents of title representing
any of the above.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Kinney" means Kinney Shoe Corporation, a New York corporation.
"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).
"Loan Documents" means this Agreement, the Lock Box Agreements, the
Holtzman Continuing Guaranty and Security Agreement (Trademarks), subordination
agreements with other holders of Indebtedness, any note or notes executed by
Borrower and payable to
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<PAGE> 12
Foothill, and any other agreement entered into by the parties hereto in
connection with this Agreement.
"Lock Box" has the meaning provided in the respective Lock Box
Agreements.
"Lock Box Agreements" means those certain Blocked Depository Account
Agreements, in form and substance satisfactory to Foothill, each of which is
among Borrower, Foothill, and one of the Lock Box Banks.
"Lock Box Banks" means First Interstate Bank of California.
"Maximum Amount" has the meaning set forth in Section 2.1.
"Multiemployer Plan" means a multiemployer plan as defined in Sections
3(37) or 4001(a)(3) of ERISA or Section 414 of the IRC in which employees of
Borrower or an ERISA Affiliate participate or to which Borrower or any ERISA
Affiliate contribute or are required to contribute.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit, notes, drafts, instruments, certificated and uncertificated
securities (including the shares of stock of subsidiaries of Borrower),
documents, personal property leases (wherein Borrower is the lessor) and
chattel paper.
"Obligations" means all loans, advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations owing to Foothill
under any outstanding L/Cs or L/C Guarantees, premiums, liabilities (including
all amounts charged to Borrower's loan account pursuant to any agreement
authorizing Foothill to charge Borrower's loan account), obligations, fees
(including Early Termination Premiums), guaranties, covenants, and duties owing
by Borrower to Foothill of any kind and description (whether pursuant to or
evidenced by the Loan Documents, by any note or other instrument, or pursuant
to any other agreement between Foothill 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
Foothill may have obtained by assignment or otherwise, and further including
all interest not paid when due and all Foothill 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 2.4.
"PBGC" means the Pension Benefit Guaranty Corporation as defined in
Title IV of ERISA, or any successor thereto.
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<PAGE> 13
"Permitted Liens" means: (a) liens and security interests held by
Foothill; (b) liens for unpaid taxes that are not yet due and payable; (c)
liens and security interests set forth on Schedule P-1 attached hereto; (d)
purchase money security interests and liens of lessors under leases to the
extent that the acquisition or lease of the underlying asset was permitted
under Section 7.10, and so long as the security interest or lien only secures
the purchase price of the asset; (e) easements, rights of way, reservations,
covenants, conditions, restrictions, zoning variances, and other similar
encumbrances that do not materially interfere with the use or value of the
property subject thereto; (f) obligations and duties as lessee under any lease
existing on the date of this Agreement; and (g) mechanics', materialmen's,
warehousemen's, or similar liens.
"Person" means and includes natural persons, corporations, limited
partnerships, general 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.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which Borrower or any ERISA Affiliate sponsors or maintains or to which
Borrower or any ERISA Affiliate makes, is making, or is obligated to make
contributions, including any Multiemployer Plan or Qualified Plan.
"Prohibited Transaction" means any transaction described in Section
406 of ERISA, which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c) of the IRC.
"Purchase Agreement" means that certain Purchase Agreement, dated as
of February 3, 1995, among Borrower, Kinney and Woolworth, as amended from time
to time.
"Qualified Plan" means a pension plan (as defined in Section 3(2) of
ERISA) intended to be tax-qualified under Section 401(a) of the IRC which
Borrower or any ERISA Affiliate sponsors, maintains, or to which any such
person makes, is making, or is obligated to make, contributions, or, in the
case of a multiple-employer plan (as described in Section 4064(a) of ERISA),
has made contributions at any time during the immediately preceding period
covering at least five (5) plan years, but excluding any Multiemployer Plan.
"Reference Rate" means the highest of the variable rates of interest,
per annum, most recently announced by (a) Bank of America, N.T. & S.A., (b)
Mellon Bank, N.A., or (c) Citibank, N.A., or any successor to any of the
foregoing institutions, as its "prime rate" or "reference rate," as the case
may be, irrespective of whether such announced rate is the best rate available
from such financial institution.
"Renewal Date" has the meaning set forth in Section 3.3.
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<PAGE> 14
"Reportable Event" means any event described in Section 4043 (other
than Subsections (b)(7) and (b)(9)) of ERISA.
"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, and (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. 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.
"Subordinated Indebtedness" means Indebtedness in the aggregate
principal amount of Four Million Two Hundred Fifty Thousand Dollars
($4,250,000), evidenced by various Bridge-Notes, of even date herewith, in which
Borrower is the maker.
"Tangible Net Worth" means, as of the date any determination thereof
is to be; made, the difference of: (a) Borrower's total stockholder's equity
plus Subordinated Indebtedness and Indebtedness to Woolworth pursuant to the
Purchase Agreement; 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, calculated on a consolidated basis.
"Unfunded Benefit Liability" means the excess of a Plan's benefit
liabilities (as defined in Section 4001(a)(16) of ERISA) over the current value
of such Plan's assets, determined in accordance with the assumptions used by
the Plan's actuaries for funding the Plan pursuant to Section 412 of the IRC
for the applicable plan year.
"Voidable Transfer" has the meaning set forth in Section 15.8.
"Woolworth" means Woolworth Corporation, a New York corporation.
"Working Capital" means the result of subtracting Consolidated Current
Liabilities from Consolidated Current Assets.
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 on a consolidated
basis unless the context clearly requires otherwise.
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<PAGE> 15
1.3 CODE. Any terms used in this Agreement which are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references
to the singular include the plural, and the term "including" is not limiting.
The words "hereof," "herein,' "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. Section, subsection, clause, schedule, and
exhibit references 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, 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, Foothill agrees to make revolving advances to Borrower in an amount
not to exceed the Borrowing Base. For purposes of this Agreement, "Borrowing
Base" shall mean an amount equal to:
(1) During the months of January through April and July,
August and December of each year, the lower of: thirty percent (30%)
of the retail selling price of Eligible Inventory or sixty percent
(60%) of Borrower's Cost of Eligible Inventory, and
(2) During the months of September through November and
May and June of each year, the lower of: thirty five percent (35%) of
the retail selling price of Eligible Inventory, or sixty five percent
(65%) of Borrower's Cost of Eligible Inventory.
(b) Anything to the contrary in Section 2.1 (a)
above notwithstanding, Foothill may reduce its advance rates based upon
Eligible Inventory without declaring an Event of Default if it determines, in
its reasonable discretion, that there is a material impairment of the prospect
of repayment of all or any portion of the Obligations or a material impairment
of the value or priority of Foothill's security interests in the Collateral.
(c) Foothill shall have no obligation to make
advances hereunder to the extent they would cause the outstanding Obligations
to exceed Twenty Million Dollars ($20,000,000) ("Maximum Amount").
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<PAGE> 16
(d) Foothill is authorized to make advances under
this Agreement based upon telephonic or other instructions received from anyone
purporting to be an Authorized Officer of Borrower, or without instructions if
pursuant to Section 2.5(d). Borrower agrees to establish and maintain a single
designated deposit account for the purpose of receiving the proceeds of the
advances requested by Borrower and made by Foothill hereunder. Unless
otherwise agreed by Foothill and Borrower, any advance requested by Borrower
and made by Foothill hereunder shall be made to such designated deposit
account. Amounts borrowed pursuant to this Section 2.1 may be repaid and,
subject to the terms and conditions of this Agreement, reborrowed at any time
during the term of this Agreement.
2.2 LETTERS OF CREDIT AND LETTER OF CREDIT GUARANTEES.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to issue commercial or standby letters of credit for
the account of Borrower (each, an "L/C") or to issue standby letters of credit
or guarantees of payment (each such letter of credit or guaranty, an "L/C
Guaranty") with respect to commercial or standby letters of credit issued by
another Person for the account of Borrower. The aggregate face amount of such
L/Cs, and L/C Guarantees cannot exceed Ten Million Dollars ($ 10,000,000), and
the aggregate face amount of standby L/Cs and L/C Guarantees plus fifty percent
(50%) of the aggregate face amount of commercial L/Cs or L/C Guarantees (which
require delivery of finished Inventory as a drawing condition) cannot exceed
the Borrowing Base less the amount of advances outstanding pursuant to Section
2.1. Borrower expressly understands and agrees that Foothill shall have no
obligation to arrange for the issuance by other financial institutions of
letters of credit that are to be the subject of L/C Guarantees. Borrower and
Foothill 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 such L/C (including those that are the subject of L/C Guarantees) shall
have an expiry date no later than thirty (30) days prior to the date on which
this Agreement is scheduled to terminate under Section 3.3 (without regard to
any potential renewal term) and all such L/Cs and L/C Guarantees shall be in
form and substance acceptable to Foothill in its sole discretion. Foothill
shall not have any obligation to issue L/Cs or L/C Guarantees to the extent
that the face amount of all outstanding L/Cs and L/C Guarantees, plus the
amount of advances outstanding pursuant to Section 2.1, would exceed the
Maximum Amount. The L/Cs and the L/C Guarantees issued under this Section 2.2
shall be used by Borrower, consistent with this Agreement, for its general
working capital purposes or to support its obligations with respect to workers'
compensation premiums or other similar obligations. If Foothill is obligated
to advance funds under an L/C or L/C Guaranty, the amount so advanced
immediately shall be deemed to be an advance made by Foothill to Borrower
pursuant to Section 2.1 and, thereafter, shall bear interest at the rates then
applicable under Section 2.5.
(b) Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless from any loss, cost, expense, or liability,
including payments made by Foothill, expenses, and reasonable attorneys fees
incurred by Foothill arising out of or in connection with any L/Cs or L/C
Guarantees except where such loss, cost, expense or liability results from
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<PAGE> 17
Foothill's gross negligence or willful misconduct, as determined by a final,
non-appealable order of a court of competent jurisdiction. Borrower agrees to
be bound by the issuing bank's regulations and interpretations of any letters
of credit guaranteed by Foothill and opened to or for Borrower's account or by
Foothill's interpretations of any L/C issued by Foothill to or for Borrower's
account, even though this interpretation may be different from Borrower's own,
and Borrower understands and agrees that Foothill shall not be liable for any
error, negligence, or mistakes, whether of omission or commission, in following
Borrower's instructions or those contained in the L/Cs or any modifications,
amendments, or supplements thereto. Borrower understands that the L/C
Guarantees may require Foothill 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 Foothill harmless
with respect to any loss, cost, expense (including attorneys fees), or
liability incurred by Foothill under any L/C Guaranty as a result of Foothill's
indemnification of any such issuing bank.
(c) Borrower hereby authorizes and directs any
bank that issues a letter of credit guaranteed by Foothill to deliver to
Foothill all instruments, documents; and other writings and property received
by the issuing bank pursuant to the letter of credit, and to accept and rely
upon Foothill's instructions and agreements with respect to all matters arising
in connection with the 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) Any and all service charges, commissions,
fees (including an annual fee in the amount of not less than one percent (1%)
per annum), and third party costs incurred by Foothill relating to the L/Cs
guaranteed by Foothill shall be considered Foothill Expenses for purposes of
this Agreement and immediately shall be reimbursable by Borrower to Foothill.
On the first day of each month, Borrower will pay Foothill a fee equal to one
percent (1.0%) per annum times the actual Daily Balance of the undrawn L/Cs and
L/C Guarantees that were outstanding during the immediately preceding month.
Service charges, commissions, fees, and third party costs may be charged to
Borrower's loan account at the time the service is rendered or the cost is
incurred.
(e) Immediately upon the termination of this
Agreement, Borrower agrees to either: (i) provide cash collateral to be held by
Foothill in an amount equal to the maximum amount of Foothill's obligations
under L/Cs plus the maximum amount of Foothill's obligations to any Person
under outstanding L/C Guarantees, or (ii) cause to be delivered to Foothill
releases of all of (Foothill's obligations under its outstanding L/Cs and L/C
Guarantees. At Foothill's discretion, any proceeds of Collateral received by
Foothill 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). All
cash collateral held by Foothill shall be placed in an interest bearing account
and shall be returned to Borrower by Foothill when the L/Cs and L/C Guarantees
are no longer outstanding.
2.3 INTENTIONALLY OMITTED.
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<PAGE> 18
2.4 OVERADVANCES. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and
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
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay noncontingent Obligations and, thereafter, to be held by Foothill as cash
collateral to secure Borrower's obligation to repay Foothill for all amounts
paid pursuant to L/Cs or L/C Guarantees which cash collateral shall be returned
to Borrower by Foothill when the L/Cs and L/C Guarantees are no longer
outstanding.
2.5 INTEREST: RATES, PAYMENTS, AND CALCULATIONS.
(a) Interest Rate. All Obligations, except for
undrawn L/Cs and L/C Guarantees, shall bear interest, on the actual Daily
Balance, at a per annum rate of one and one-quarter (1.25) percentage points
above the Reference Rate.
(b) Default Rate. All Obligations, except for
undrawn L/Cs and L/C Guarantees, shall bear interest, from and after the
occurrence and during the continuance of an Event of Default, at a per annum
rate equal to four and one-quarter (4.25) percentage points above the Reference
Rate. From and after the occurrence and during the continuance of an Event of
Default, the fee provided in Section 2.2(d) shall be increased to a fee equal
to four percent (4.0%) per annum times the actual Daily Balance of the
undrawn L/Cs and L/C Guarantees that were outstanding during the immediately
preceding month.
(c) Minimum Interest. In no event shall the rate
of interest chargeable hereunder be less than seven and one-quarter percent
(7.25%) per annum. To the extent that interest accrued hereunder at the rate
set forth herein (including the minimum interest rate) would yield less than
the foregoing minimum amount, the interest rate chargeable hereunder for the
period in question automatically shall be deemed increased to that rate that
would result in the minimum amount of interest being accrued and payable
hereunder.
(d) Payments. Interest hereunder shall be due
and payable on the first day of each month during the term hereof. Borrower
hereby authorizes Foothill, at its option, without prior notice to Borrower, to
charge such interest, all Foothill Expenses (as and when incurred), and all
installments or other payments due under any note or other Loan Document to
Borrower's loan account, which amounts shall thereafter accrue interest at the
rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(e) Computation. The Reference Rate as of this
date is nine percent (9.0%) per annum. In the event the Reference Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
automatically and immediately shall be increased or decreased by an amount
equal to such change in the Reference Rate. The rates of interest charged
hereunder shall be based upon the average Reference Rate in effect during the
month. All interest and fees
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chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
(f) Intent to Limit Charges to Maximum Lawful
Rate. In no event shall the interest rate or 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 Foothill, in
executing this Agreement, intend to legally 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.
2.6 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The
receipt of any wire transfer of funds, check, or other item of payment by
Foothill (whether from transfers to Foothill by the Lock Box Banks pursuant to
the Lock Box Agreements or otherwise) immediately shall be applied to
provisionally reduce the Obligations, but shall not be considered a payment on
account unless such wire transfer is of immediately available federal funds and
is made to the appropriate deposit account of Foothill or unless and until such
check or other item of payment is honored when presented for payment. From and
after the Closing Date, Foothill shall be entitled to charge Borrower for one
(1) Business Day of 'clearance' at the applicable rates set forth in Sections
2.5(a) and 2.5(b) (applicable to advances under Section 2.1) on all collections,
checks, wire transfers, or other items of payment that are received by Foothill
(regardless of whether forwarded by the Lock Box Banks to Foothill, whether
provisionally applied to reduce the Obligations, or otherwise). This
across-the-board one (1) Business Day clearance charge on all receipts is
acknowledged by the parties to constitute an integral aspect of the pricing of
Foothill's facility to Borrower, and shall apply irrespective of the
characterization of whether receipts are owned by Borrower or Foothill, and
irrespective of the level of Borrower's Obligations to Foothill. Should any
check or item of payment 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 wire transfer, check, or other item of payment shall be
deemed received by Foothill only if it is received into Foothill's Operating
Account (as such account is identified in the Lock Box Agreements) on or before
11:00 a.m. Los Angeles time. If any wire transfer, check, or other item of
payment is received into Foothill's Operating Account (as such account is
identified in the Lock Box Agreements) after 11:00 a.m. Los Angeles time it
shall be deemed to have been received by Foothill as of the opening of business
on the immediately following Business Day.
2.7 STATEMENTS OF OBLIGATIONS. Foothill shall render
statements to Borrower of the Obligations, including principal, interest, fees,
and including an itemization of all charges and expenses constituting Foothill
Expenses owing, and such statements shall be conclusively
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presumed to be correct and accurate and constitute an account stated between
Borrower and Foothill unless, within thirty (30) days after receipt thereof by
Borrower, Borrower shall deliver to Foothill by telefacsimile, recognized
overnight courier service, or registered or certified mail at its address
specified in Section 12, written objection thereto describing the error or
errors contained in any such statements.
2.8 FEES. Borrower shall pay to Foothill the following
fees:
(a) Closing Fee. A one time closing fee of Two
Hundred Thousand Dollars ($200,000) which is earned, in full, on the Closing
Date and is due and payable by Borrower to Foothill in connection with this
Agreement on the Closing Date;
(b) Unused Line Fee. On the first day of each
month during the term of this Agreement, a fee in an amount equal to three
eighths of one percent (.375%) per annum times the Average Unused Portion of
the Maximum Amount;
(c) Financial Examination, Documentation, and
Appraisal Fees. Foothill's customary fee of Six Hundred Fifty Dollars ($650)
per day per examiner, plus out-of-pocket expenses for each financial analysis
and examination of Borrower performed by Foothill or its agents; Foothill's
customary appraisal fee of One Thousand Five Hundred Dollars ($1,500) per day
per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral
performed by Foothill or its agents. Prior to the occurrence of an Event of
Default or Foothill deeming itself insecure, financial examinations will not be
conducted more frequently than quarterly; and
(d) Servicing Fee. 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 Four
Thousand Dollars ($4,000) per month.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE, L/C, OR L/C
GUARANTY, AND CONDITIONS SUBSEQUENT. The obligation of Foothill to make the
initial advance or to provide the initial L/C or L/C Guaranty is subject to the
fulfillment, to the satisfaction of Foothill and its counsel, of each of the
following conditions on or before the Closing Date:
(a) the Closing Date shall occur on or before
June 30, 1995;
(b) Borrower shall have consummated the
acquisition that is the subject of the Purchase Agreement;
(c) Intentionally Omitted
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(d) Foothill shall have received each of the
following documents, duly executed, and each such document shall be in full
force and effect:
i) Borrower hereby agrees to execute
and deliver the Lock Box Agreements upon Foothill's request;
ii) a Continuing Guaranty of the
Obligations from Holtzman;
iii) a Security Agreement (Trademarks)
from Holtzman; and
iv) a letter from Woolworth regarding
its promissory note and Transitional Services, as defined in the Purchase
Agreement.
(e) Foothill shall have received a certificate
from the Secretary of Borrower attesting to the resolutions of Borrower's Board
of Directors authorizing its execution and delivery of this Agreement and the
other Loan Documents to which Borrower is a party and authorizing specific
officers of Borrower to execute same;
(f) Foothill shall have received copies of
Borrower's By-laws and Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(g) Foothill shall have received a certificate of
corporate status with respect to Borrower, dated within ten (10) days of the
Closing Date, by the Secretary of State of the state of incorporation of
Borrower, which certificate shall indicate that Borrower is in good standing in
such state;
(h) Borrower shall deliver to Foothill, within
thirty (30) days of the Closing Date, certificates of corporate status with
respect to Borrower, such certificates to be issued by the Secretary of State of
the states in which its failure to be duly qualified or licensed would have a
material adverse effect on the financial condition or properties and assets of
Borrower, which certificates shall indicate that Borrower is in good standing;
(i) Foothill shall have received the certified
copies of the policies of insurance, together with the endorsements thereto, as
are required by Section 6.12 hereof, the form and substance of which shall be
satisfactory to Foothill and its counsel;
(j) Foothill shall have received duly executed
certificates of title with respect to that portion of the Collateral that is
subject to certificates of title;
(k) Foothill shall have received landlord waivers
from the lessor of Borrower's distribution center in City of Industry,
California;
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(l) Borrower shall have not less than One Million
Five Hundred Thousand Dollars ($1,500,000) of cash or unused borrowing
availability under this Agreement after payment of monies required to the paid
on the Closing Date, net of any delinquencies on material obligations;
(m) Borrower shall have not less than Three
Million Dollars ($3,000,000) of Common Stock and Preferred Stock issued for
cash, plus Subordinated Indebtedness in the principal amount of not less than
Four Million Two Hundred Fifty Thousand Dollars ($4,250,000);
(n) Foothill shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Foothill in its sole
discretion; and
(o) all other documents and legal matters in
connection with the transactions contemplated by this Agreement shall have been
delivered or executed or recorded and shall be in form and substance
satisfactory to Foothill and its counsel.
The following conditions must be satisfied by
Borrower after the Closing Date:
(a) Borrower shall use its best efforts to obtain
landlord waivers for all locations in states in which landlords have rights of
distraint for rent that would have priority over Foothill's security interest
in any of the Collateral; and
(b) Within twelve (12) months of the Closing
Date, Borrower shall merge or consolidate with Frost Hanna, or Frost Hanna
shall acquire all of Borrower's outstanding capital stock or assets in a
transaction that is not taxable to Borrower, and immediately prior to such
transaction, Frost Hanna's net worth shall be not less than Six Million Dollars
($6,000,000); and
(c) Within sixty (60) days of the Closing Date,
the Lock Box shall be in effect and Woolworth shall no longer have access to
proceeds of store sales.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES, L/CS, OR L/C
GUARANTEES. The following shall be conditions precedent to all advances, L/Cs,
or L/C Guarantees 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 advance, L/C, or L/C Guaranty, 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 Event of Default or event which with the
giving of notice or passage of time would constitute an Event of Default shall
have occurred and be continuing on the
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date of such advance, L/C, or L/C Guaranty, nor shall either result from the
making of the advance; and
(c) no injunction, writ, restraining order, or
other order of any nature prohibiting, directly or indirectly, the making of
such advance or the issuance of such L/C or L/C Guaranty shall have been issued
and remain in force by any governmental authority against Borrower, Foothill,
or any of their Affiliates.
3.3 TERM; AUTOMATIC RENEWAL. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is three (3) years from the Closing Date and automatically
shall be renewed for successive one (1) year periods thereafter, unless sooner
terminated pursuant to the terms hereof. Either party may terminate this
Agreement effective on the Renewal Date or on any anniversary of the Renewal
Date by giving the other party at least sixty (60) days prior written notice by
telefacsimile, recognized overnight courier service, or registered or certified
mail, return receipt requested. The foregoing notwithstanding, Foothill 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.
3.4 EFFECT OF TERMINATION. On the date of termination,
all Obligations(including contingent reimbursement obligations under any
outstanding L/Cs or L/C Guarantees) 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, and Foothill's continuing security interests in the Collateral shall
remain in effect until all Obligations have been fully and finally discharged
and Foothill's obligation to provide advances hereunder is terminated. If
Borrower has sent a notice of termination pursuant to the provisions of Section
3.3, but fails to pay all Obligations on the date set forth in said notice,
then Foothill may, but shall not be required to, renew this Agreement for an
additional term of one (1) year.
3.5 EARLY TERMINATION BY BORROWER. The provisions of
Section 3.3 that allow termination of this Agreement by Borrower only on the
Renewal Date and certain anniversaries thereof notwithstanding, Borrower has
the option, at any time upon sixty (60) days prior written notice to Foothill,
to terminate this Agreement by paying to Foothill, in cash, the Obligations
(including an amount equal to the full amount of the L/Cs or L/C Guarantees),
together with a premium (the "Early Termination Premium") in an amount equal to
(a) three percent (3.0%) of the Maximum Amount during the first year after the
Closing Date, (b) two percent (2.0%) of the Maximum Amount during the second
year after the Closing Date, and (c) one percent of the Maximum Amount during
the third year after the Closing Date; provided, however, if Borrower
terminates this Agreement as the result of Foothill's material breach
hereunder, no Early Termination Premium need be paid.
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3.6 TERMINATION UPON EVENT OF DEFAULT. If Foothill
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
Foothill's lost profits as a result thereof, Borrower shall pay to Foothill
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 Foothill 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
3.6 shall be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants
to Foothill a continuing security interest in all currently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower
of each of its covenants and duties under the Loan Documents. Foothill's
security interests in the Collateral shall attach to all Collateral without
further act on the part of Foothill or Borrower. Anything contained in this
Agreement or any other Loan Document to the contrary notwithstanding, and other
than sales of Inventory to buyers in the ordinary course of business and sales
of Equipment in the aggregate amount of up of Fifty Thousand Dollars ($50,000)
in any fiscal year, Borrower has no authority, express or implied, to dispose
of any item or portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any
Collateral, including proceeds, is evidenced by or consists of Negotiable
Collateral, Borrower shall, immediately upon the request of Foothill, endorse
and assign such Negotiable Collateral to Foothill and deliver physical
possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES,
NEGOTIABLE COLLATERAL. Foothill, Borrower, and the Lock Box Banks shall enter
into the Lock Box Agreements, in form and substance satisfactory to Foothill in
its sole discretion, pursuant to which all of Borrower's cash receipts, checks,
and other items of payment (including, insurance proceeds, proceeds of cash
sales, rental proceeds, and tax refunds) will be forwarded to Foothill on a
daily basis. At any time, Foothill or Foothill's designee may: (a) at any time
that an Event of Default has occurred and is continuing or Foothill deems
itself insecure (in accordance with Section 1208 of the Code), notify customers
or Account Debtors of Borrower that the Accounts, General Intangibles, or
Negotiable Collateral have been assigned to Foothill or that Foothill has a
security interest therein; and (b) collect the Accounts, General Intangibles,
and Negotiable Collateral directly and charge the collection costs and expenses
to Borrower's loan account. Borrower agrees that it will hold in trust for
Foothill, as Foothill's trustee, any cash receipts, checks, and other items of
payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds) that it receives and immediately will deliver said
cash receipts, checks, and other items of payment to Foothill in their original
form as received by Borrower.
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4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At
any time upon the request of Foothill, Borrower shall execute and deliver to
Foothill all financing statements, continuation financing statements, fixture
filings, security agreements, chattel mortgages, pledges, assignments,
endorsements of certificates of title, applications for title, affidavits,
reports, notices, schedules of accounts, letters of authority, and all other
documents that Foothill may reasonably request, in form satisfactory to
Foothill, to perfect and continue perfected Foothill's security interests in
the Collateral and in order to fully consummate 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 Foothill (and any of Foothill's officers,
employees, or agents designated by Foothill) 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 Foothill deems itself
insecure (in accordance with Section 1208 of the Code), 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
notices to Account Debtors; (c) send requests for verification of Accounts; (d)
endorse Borrower's name on any checks, notices, acceptances, money orders,
drafts, or other item of payment or security that may come into Foothill's
possession; (e) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with Section 1208
of the Code), notify the post office authorities to change the address for
delivery of Borrower's mail to an address designated by Foothill, 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 or Foothill deems itself
insecure (in accordance with Section 1208 of the Code), 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 or
Foothill deems itself insecure (in accordance with Section 1208 of the Code),
settle and adjust disputes and claims respecting the Accounts directly with
Account Debtors, for amounts and upon terms which Foothill determines to be
reasonable, and Foothill may cause to be executed and delivered any documents
and releases which Foothill determines to be necessary. The appointment of
Foothill as Borrower's attorney, and each and every one of Foothill'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 Foothill's
obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its
officers, employees, or agents) shall have the right, from time to time
hereafter, during normal business hours, to inspect Borrower's 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.
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5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Foothill as follows:
5.1 NO PRIOR ENCUMBRANCES. Borrower has good and
marketable title to the Collateral, free and clear of liens, claims, security
interests, or encumbrances, except for Permitted Liens.
5.2 INTENTIONALLY OMITTED.
5.3 ELIGIBLE INVENTORY. All Eligible Inventory is now
and at all times hereafter shall be of good and merchantable quality, free from
defects.
5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory
and Equipment are not stored with a bailee, warehouseman, or similar party
(without Foothill's prior written consent) and are located only at the
locations identified on Schedule 6.15, in transit, or as otherwise permitted by
Section 6.15.
5.5 INVENTORY RECORDS. Borrower now keeps, and hereafter
at all times shall keep, correct and accurate records itemizing and describing
the kind, type, quality, and quantity of the Inventory, and Borrower's cost
therefor in accordance with the retail method of accounting.
5.6 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 11-3264797.
5.7 DUE ORGANIZATION AND QUALIFICATION. Borrower is duly
organized and existing and in good standing under the laws of the state of its
incorporation and, within ten (10) days of the date hereof, will be qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified could reasonably be expected to have a
material adverse effect on the business, operations, condition (financial or
otherwise), finances, or prospects of Borrower or on the value of the
Collateral to Foothill.
5.8 DUE AUTHORIZATION; NO CONFLICT. The execution,
delivery, and performance of the Loan Documents are within Borrower's corporate
powers, have been duly authorized, and are not in conflict with nor constitute
a breach of any provision contained in Borrower's Articles of Incorporation, or
By-laws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which its properties or assets may
be bound.
5.9 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, threatened, or
imminent litigation, governmental investigations, or claims,
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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 5.9; and (c) matters
arising after the date hereof that, if decided adversely to Borrower, would not
materially impair the prospect of repayment of the Obligations or materially
impair the value or priority of Foothill's security interests in the
Collateral.
5.10 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION.
All financial statements relating to Borrower or any guarantor of the
Obligations that have been delivered by Borrower to Foothill have been prepared
in accordance with GAAP 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, except that Borrower's fiscal year 1995
financial statements do not include the type of notes that would customarily be
included in a financial statement prepared in accordance with GAAP, and interim
financial statements do not reflect normal, non-material, year-end audit
adjustments. There has not been a material adverse change in the financial
condition of Borrower (or such guarantor, as applicable) since the date of the
latest financial statements submitted to Foothill on or before the Closing
Date.
5.11 SOLVENCY. Borrower is Solvent. 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. Borrower is not engaged in a business
or transaction, and is not about to engage in business or a transaction, for
which Borrower's properties and assets would constitute unreasonably small
capital after giving due consideration to the prevailing practices the industry
in which Borrower is engaged.
5.12 EMPLOYEE BENEFITS. Each Plan is in compliance in all
material respects with the applicable provisions of ERISA and the IRC. Each
Qualified Plan and Multiemployer Plan has been determined by the Internal
Revenue Service to qualify under Section 401 of the IRC, and the trusts created
thereunder have been determined to be exempt from tax under Section 501 of the
IRC, and, to the best knowledge of Borrower, nothing has occurred that would
cause the loss of such qualification or tax-exempt status. There are no
outstanding liabilities under Tide IV of ERISA with respect to any Plan
maintained or sponsored by Borrower or any ERISA Affiliate, nor with respect to
any Plan to which Borrower or any ERISA Affiliate contributes or is obligated
to contribute which could reasonably be expected to have a material adverse
effect on the financial condition of Borrower. No Plan subject to Title IV of
ERISA has any Unfunded Benefit Liability which could reasonably be expected to
have a material adverse effect on the financial condition of Borrower. Neither
Borrower nor any ERISA Affiliate has transferred any Unfunded Benefit Liability
to a person other than Borrower or an ERISA Affiliate or has otherwise engaged
in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA
which could reasonably be expected to have a material adverse effect on the
financial condition of Borrower. Neither Borrower nor any ERISA Affiliate has
incurred nor reasonably expects to incur (x) any liability (and no event has
occurred which, with the giving of notice under Section 4219 of ERISA, would
result in such liability) under Sections 4201 or 4243 of ERISA with respect to
a Multiemployer
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Plan, or (y) any liability under Title IV of ERISA (other than premiums due but
not delinquent under Section 4007 of ERISA) with respect to a Plan, which
could, in either event, reasonably be expected to have a material adverse
effect on the financial condition of Borrower. No application for a funding
waiver or an extension of any amortization period pursuant to Section 412 of
the IRC has been made with respect to any Plan. No ERISA Event has occurred or
is reasonably expected to occur with respect to any Plan which could reasonably
be expected to have a material adverse effect on the financial condition of
Borrower. Borrower and each ERISA Affiliate have complied in all material
respects with the notice and continuation coverage requirements of Section
4980B of the IRC.
5.13 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; provided, however that the Borrower has been advised by
certain landlords of its retail stores that such stores contain asbestos.
5.14 RELIANCE BY FOOTHILL; CUMULATIVE. Each warranty and
representation contained in this Agreement automatically shall be deemed
repeated with each advance or issuance of an L/C or L/C Guaranty and shall be
conclusively presumed to have been relied on by Foothill regardless of any
investigation made or information possessed by Foothill. The warranties and
representations set forth herein shall be cumulative and in addition to any and
all other warranties and representations that Borrower now or hereafter shall
give, or cause to be given, to Foothill.
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, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of
the following:
6.1 ACCOUNTING SYSTEM. Borrower shall maintain a
standard and modern system of accounting in accordance with GAAP with ledger and
account cards or computer tapes, discs, printouts, and records pertaining to
the Collateral which contain information as from time to time may reasonably
be requested by Foothill. Borrower also shall keep proper books of account
showing all sales, claims, and allowances on its Inventory.
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6.2 COLLATERAL REPORTS. Borrower shall deliver to
Foothill, no later than the fifteen (15th) day of each month during the term of
this Agreement, a detailed aging, by total, of the Accounts, a reconciliation
statement, and a summary aging, by vendor, of all accounts payable and any book
overdraft. Borrower shall deliver to Foothill, as Foothill may from time to
time require, copies of collection reports, sales journals, invoices, original
delivery receipts, customer's purchase orders, shipping instructions, bills of
lading, and other documentation respecting shipment arrangements. Absent such
a request by Foothill, copies of all such documentation shall be held by
Borrower as custodian for Foothill.
6.3 SCHEDULES OF ACCOUNTS. With such regularity as
Foothill shall require, Borrower shall provide Foothill with schedules
describing all Accounts. Foothill's failure to request such schedules or
Borrower's failure to execute and deliver such schedules shall not affect or
limit Foothill's security interests or other rights in and to the Accounts.
6.4 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
Borrower agrees to deliver to Foothill: (a) as soon as available, but in any
event within thirty (30) days after the end of each month during each of
Borrower's fiscal years (and forty-five (45) days after the end of each fiscal
quarter), a company prepared balance sheet, income statement, and cash flow
statement covering Borrower's operations during such period; and (b) as soon as
available, but in any event within ninety (90) days after the end of each of
Borrower's fiscal years, financial statements of Borrower for each such fiscal
year, audited by independent certified public accountants reasonably acceptable
to Foothill 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 Foothill stating that such accountants do not have
knowledge of the existence of any event or condition constituting an Event of
Default, or that would, with the passage of time or the giving of notice,
constitute an Event of Default. Such audited financial statements shall
include a balance sheet, profit and loss statement, and cash flow statement,
and, if prepared, such accountants' letter to management. If Borrower is a
parent company of one or more subsidiaries, or Affiliates, or is a subsidiary
or Affiliate of another company, then, in addition to the financial statements
referred to above, Borrower agrees to deliver financial statements prepared on
a consolidating basis so as to present Borrower and each such related entity
separately, and on a consolidated basis.
Together with the above, Borrower also shall deliver
to Foothill 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
Securities and Exchange Commission, 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 Foothill relating to the Collateral and
financial condition of Borrower.
Each month, together with the financial statements
provided pursuant to Section 6.4(a), Borrower shall deliver to Foothill a
certificate signed by its chief financial officer or chief executive officer to
the effect that: (i) all reports, statements, or computer prepared
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information of any kind or nature delivered or caused to be delivered to
Foothill hereunder have been prepared in accordance with GAAP and fairly
present the financial condition of Borrower; (ii) Borrower is in timely
compliance with all of its covenants and agreements hereunder; (iii) 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); and (iv) on the date of delivery of such certificate to Foothill there
does not exist any condition or event that constitutes an Event of Default (or,
in each case, 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 Foothill and to release to Foothill whatever financial information
concerning Borrower that Foothill may request. Borrower hereby irrevocably
authorizes and directs all auditors, accountants, or other third parties (other
than attorneys) to deliver to Foothill, 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 Foothill any
information they may have regarding Borrower's business and financial
condition.
6.5 TAX RETURNS. Borrower agrees to deliver to Foothill
copies of each of Borrower's future federal income tax returns, and any
amendments thereto, within thirty (30) days of the filing thereof with the
Internal Revenue Service.
6.6 GUARANTOR REPORTS. Borrower agrees to cause any
guarantor of any of the Obligations to deliver its annual financial statements
at the time when Borrower provides its audited financial statements to Foothill
and copies of all federal income tax returns as soon as the same are available
and in any event no later than thirty (30) days after the same are required to
be filed by law.
6.7 DESIGNATION OF INVENTORY. Borrower shall now and from
time to time hereafter, but not less frequently than weekly, execute and deliver
to Foothill a designation of Inventory specifying the retail selling price of
Borrower's Inventory and Borrower's Cost, and an aging of Borrower's Inventory
and further specifying such other information as Foothill may reasonably
request. Borrower will not include Inventory in transit in its Inventory
reports until such Inventory has been paid for by draws under applicable letters
of credit or has been acquired by Borrower without letter of credit financing.
6.8 STORE OPENINGS AND CLOSINGS AND RENT REPORTS.
Borrower shall give Foothill reasonable prior notice of new store openings and
closing of its stores. Except where Borrower is disputing its rent obligation
in good faith, Borrower shall make timely payment of all rents on real property
leases where Borrower is the lessee within applicable grace periods, and
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shall provide Foothill with a monthly report specifying the status of such
payments. In the event that Borrower becomes delinquent in its rent payments,
then Foothill can establish reserves against the Borrowing Base for the amount
of any landlord liens arising from such delinquency.
6.9 TITLE TO EQUIPMENT. Upon Foothill's request,
Borrower immediately shall deliver to Foothill, properly endorsed, any and all
evidences of ownership of, certificates of title, or applications for title to
any items of Equipment.
6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and
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. Borrower shall not, knowingly or willingly, permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and the Equipment is now and shall at all times remain personal property.
6.11 TAXES. Except where the assessment or tax is being
disputed by Borrower in good faith, 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 have been paid, and shall hereafter be
paid in full, before delinquency or before the expiration of any extension
period. Borrower shall make due and timely payment or deposit of all federal,
state, and local taxes, assessments, or contributions required of it by law,
and will execute and deliver to Foothill, on demand, appropriate certificates
attesting to the payment thereof or deposit with respect thereto. Borrower
will 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 Foothill with proof satisfactory to Foothill
indicating that Borrower has made such payments or deposits.
6.12 INSURANCE.
(a) Borrower, at its expense, shall keep the
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
Collateral, as well as insurance against larceny, embezzlement, and criminal
misappropriation.
(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as may be reasonably
satisfactory to Foothill. All such policies of insurance (except those of
public liability and property damage) shall contain a 438BFU lender's loss
payable endorsement, or an equivalent endorsement in a form satisfactory to
Foothill, showing Foothill as sole loss payee thereof, and shall contain a
waiver of warranties, and shall specify that the insurer must give at least ten
(10) days prior written notice to Foothill before canceling its policy for any
reason. Borrower shall deliver to Foothill certified copies of such
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policies of insurance and evidence of the payment of all premiums therefor.
All proceeds payable under any such policy relating to Collateral shall be
payable to Foothill to be applied on account of the Obligations.
6.13 FINANCIAL COVENANTS. Borrower shall maintain:
(a) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least eighty five one
hundredths to one (0.85:1.0), measured on a fiscal quarter-end basis;
(b) Total Liabilities to Tangible Net Worth
Ratio. A ratio of Borrower's total liabilities (other than the Subordinated
Indebtedness and Indebtedness to Woolworth pursuant to the Purchase Agreement)
divided by Tangible Net Worth of not more than four and eight tenths to one
(4.8:1.0), measured on a fiscal quarter-end basis at all times prior to
Borrower's combination with Frost Hanna, and a ratio of not more than three and
four tenths to one (3.4:1.0) thereafter;
(c) Tangible Net Worth. Tangible Net Worth of at
least Three Million Two Hundred Thousand Dollars ($3,200,000), measured on a
fiscal quarter-end basis at all times prior to Borrower's combination with
Frost Hanna, and at least Five Million Nine Hundred Thousand Dollars
($5,900,000) thereafter; and
(d) Working Capital. Working Capital of not less
than negative Four Million Three Hundred Thousand Dollars (-$4,300,000),
measured on a fiscal quarter-end basis at all times prior to Borrower's
combination with Frost Hanna, and not less than a negative Two Million Nine
Hundred Thousand Dollars (-$2,900,000) thereafter.
6.14 NO SETOFFS OR COUNTERCLAIMS. All payments hereunder
and under the other Loan Documents made by or on behalf of Borrower shall be
made 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.
6.15 LOCATION OF INVENTORY AND EQUIPMENT. Borrower shall
keep the Inventory and Equipment only at the locations identified on Schedule
6.15; provided, however, that Borrower may amend Schedule 6.15 so long as such
amendment occurs by written notice to Foothill not less than thirty (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 to perfect and continue
perfected Foothill's security interests in such assets and also provides to
Foothill a landlord's waiver in form and substance satisfactory to Foothill.
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6.16 COMPLIANCE WITH LAWS. Borrower shall 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, other than laws, rules, regulations, and
orders the non-compliance with which, individually or in the aggregate, would
not have and could not reasonably be expected to have a material adverse effect
on the business, operations, condition (financial or otherwise), finances, or
prospects of Borrower or on the value of the Collateral to Foothill.
6.17 EMPLOYEE BENEFITS.
(a) Borrower shall deliver to Foothill a written
statement by the chief financial officer or chief executive officer of Borrower
specifying the nature of any of the following events and the actions which
Borrower proposes to take with respect thereto promptly, and in any event
within ten (10) days of becoming aware of any of them, and when known, any
action taken or threatened by the Internal Revenue Service, PBGC, Department of
Labor, or other party with respect thereto: (i) an ERISA Event with respect to
any Plan; (ii) the incurrence of an obligation to pay additional premium to the
PBGC under Section 4006(a)(3)(E) of ERISA with respect to any Plan; and (iii)
any lien on the assets of Borrower arising in connection with any Plan.
(b) Borrower shall also promptly furnish to
Foothill copies prepared or received by Borrower or an ERISA Affiliate of: (i)
at the request of Foothill, each annual report (Internal Revenue Service Form
5500 series) and all accompanying schedules, actuarial reports, financial
information concerning the financial status of each Plan, and schedules showing
the amounts contributed to each Plan by or on behalf of Borrower or its ERISA
Affiliates for the most recent three (3) plan years; (ii) all notices of intent
to terminate or to have a trustee appointed to administer any Plan; (iii) all
written demands by the PBGC under Subtitle D of Title IV of ERISA; (iv) all
notices required to be sent to employees or to the PBGC under Section 302 of
ERISA or Section 412 of the IRC; (v) all written notices received with respect
to a Multiemployer Plan concerning (x) the imposition or amount of withdrawal
liability pursuant to Section 4202 of ERISA, (y) a termination described in
Section 4041A of ERISA, or (z) a reorganization or insolvency described in
Subtitle E of Title IV of ERISA; (vi) the adoption of any new Plan that is
subject to Title IV of ERISA or Section 412 of the IRC by Borrower or any ERISA
Affiliate; (vii) the adoption of any amendment to any Plan that is subject to
Title IV of ERISA or Section 412 of the IRC, if such amendment results in a
material increase in benefits or Unfunded Benefit Liability; or (viii) the
commencement of contributions by Borrower or any ERISA Affiliate to any Plan
that is subject to Title IV of ERISA or Section 412 of the IRC.
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 without Foothill's prior
written consent:
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7.1 INDEBTEDNESS. Create, incur, assume, permit,
guarantee, or otherwise become or remain, directly or indirectly, liable with
respect to any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in the latest
financial statements of Borrower submitted to Foothill on or prior to the
Closing Date;
(c) Indebtedness secured by Permitted Liens;
(d) Indebtedness owed to Woolworth pursuant to
the Purchase Agreement;
(e) Indebtedness incurred for remodeling of
stores;
(f) The Subordinated Indebtedness; and
(g) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (b), (c), (e) and (f) 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 Foothill as those applicable to the refinanced Indebtedness.
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 secure
only those assets or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Except for a
merger or consolidation with Frost Hanna, or the acquisition of Borrower's
outstanding capital stock or assets by Frost Hanna in a transaction that is tax
free to Borrower, enter into any acquisition, merger, consolidation,
reorganization, or recapitalization, or reclassify its capital stock, or
liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose
of, in one transaction or a series of transactions, all or any Substantial part
of its business, property, or assets, whether now owned or hereafter
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acquired, or acquire by purchase or otherwise all or substantially all of the
properties, assets, stock, or other evidence of beneficial ownership of any
Person.
7.4 EXTRAORDINARY TRANSACTIONS AND DISPOSAL OF ASSETS. Enter into
any transaction not in the ordinary and usual course of Borrower's business,
including the sale, lease, or other disposition of, moving, relocation, or
transfer, whether by sale or otherwise, of any of Borrower's properties or
assets (other than sales of Inventory to buyers in the ordinary course of
Borrower's business as currently conducted).
7.5 CHANGE NAME. Change Borrower's name without giving Foothill
at least thirty (30) days prior written notice, or change its FEIN, business
structure, 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 or
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill.
7.7 RESTRUCTURE. Except for a merger or consolidation with Frost
Hanna, make any change in the principal nature of Borrower's business
operations, or the date of its fiscal year.
7.8 PREPAYMENTS AND AMENDMENTS. Prepay any Indebtedness owing to
any third Person, except: (a) in connection with a refinancing permitted by
Section 7.1(d), (b) repayment of the Subordinated Indebtedness from proceeds of
an equity investment, or (c) payments to Woolworth, in accordance with the
Purchase Agreement, from Excess Cash Flow, as determined based upon Borrower's
year end audited financial statements; or amend any of the terms of the
Subordinated Indebtedness.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control except for a merger or consolidation with, or
sale of Borrower's outstanding capital stock to Frost Hanna.
7.10 CAPITAL EXPENDITURES. Make any capital expenditure, or any
commitment therefor, where the aggregate amount of such capital expenditures,
made or committed for in the fiscal year ending January 31, 1996, is in excess
of Two Million Five Hundred Thousand Dollars ($2,500,000), or in any subsequent
fiscal years is in excess of Three Million Five Hundred Thousand Dollars
($3,500,000).
7.11 CONSIGNMENTS. Consign any Inventory or sell any Inventory on
bill and hold, sale or return, sale on approval, or other conditional terms of
sale.
7.12 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or in stock) on, or purchase, acquire, redeem, or retire any
of Borrower's capital stock, of any class, whether now or hereafter
outstanding.
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7.13 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 Foothill information
regarding the Collateral or Borrower's financial condition. Borrower waives
the right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information if it is not provided to Foothill by Borrower
promptly after a request by Foothill.
7.14 INVESTMENTS. Directly or indirectly make or acquire any
beneficial interest in (including stock, partnership interest, or other
securities of), or (except for employee loans and advances in an aggregate
amount outstanding at any one time not to exceed One Hundred Thousand Dollars
($100,000)) make any loan, advance, or capital contribution to, any Person.
7.15 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 Foothill, and that
are no less favorable to Borrower than would be obtained in arm's length
transaction with a non-affiliate.
7.16 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.17 COMPENSATION. Increase the annual fee or per-meeting fees
paid to directors during any year by more than fifteen percent (15%) over
the prior year; pay or accrue total cash compensation, during any year, to
officers and senior management employees in an aggregate amount in excess of
the amount set forth in the schedule provided to Foothill by Borrower for
Borrower's current fiscal year, or in excess of one hundred fifteen percent
(115%) of that paid or accrued in the prior year for all subsequent fiscal
years.
7.18 USE OF PROCEEDS. Use the proceeds of the advances made
hereunder for any purpose other than: (a) on the Closing Date, to pay or portion
of the purchase price to Kinney and Woolworth pursuant to the Purchase
Agreement; (b) to pay transactional fees, costs and expenses incurred in
connection with this Agreement; and (c) thereafter, consistent with the terms
and conditions hereof, for its lawful and permitted corporate purposes.
7.19 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Borrower covenants and agrees that it will not,
without thirty (30) days prior written notification to Foothill, relocate its
chief executive office to a new location 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 Foothill's security
interests and also provides to Foothill a landlord's waiver in form and
substance satisfactory to Foothill. The
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inventory and Equipment shall not at any time now or hereafter be stored with a
bailee, warehouseman, or similar party without Foothill's prior written consent.
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 Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
8.2 If Borrower fails or neglects 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 Foothill; provided, however, that Borrower's
failure or neglect to comply with Sections 6.2 through 6.7, Sections 6.9, 6.11,
and 6.17 shall not constitute an Event of Default hereunder unless such failure
or neglect continues for ten (10) days or more;
8.3 If there is a material impairment of the prospect of
repayment of any portion of the Obligations owing to Foothill or a material
impairment of the value or priority of Foothill's security interests in the
Collateral;
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
forty-five (45) calendar days of the date of the filing thereof; provided,
however, that, during the pendency of such period, Foothill shall be relieved
of its obligation to make additional advances or issue additional L/Cs or L/C
Guarantees 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 of 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 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 and the aggregate amount of
such liens exceeds One Hundred Thousand Dollars ($100,000) at any one time,
which amount shall be fully reserved under the Foothill credit facilities;
8.9 If a judgment or other claim becomes a lien or encumbrance
upon any material portion of Borrower's properties or assets and the same is
not satisfied or released within thirty (30) days thereafter;
8.10 If there is a default in any material agreement to which
Borrower is a party with one or more third Persons, and such third Persons
either accelerate the maturity of Borrower's obligations thereunder or such
default results in a right by such third Persons, irrespective of whether
exercised, to accelerate the maturity of Borrower's obligations thereunder,
which right continues for more than thirty (30) days;
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 material misstatement or misrepresentation exists now
or hereafter in any warranty, representation, statement, or report made to
Foothill by Borrower or any officer, employee, agent, or director of Borrower,
or if any such warranty or representation is withdrawn;
8.13 If the obligation of any guarantor 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; or
8.14 If (a) with respect to any Plan, there shall occur any of the
following which could reasonably be expected to have a material adverse effect
on the financial condition of Borrower: (i) the violation of any of the
provisions of ERISA; (ii) the loss by a Plan intended to be a Qualified Plan of
its qualification under Section 401(a) of the IRC; (iii) the incurrence of
liability under Title IV of ERISA, (iv) a failure to make full payment when due
of all amounts which, under the provisions of any Plan or applicable law,
Borrower or any ERISA Affiliate is required to make; (v) the filing of a notice
of intent to terminate a Plan under Sections 4041 or
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4041A of ERISA, (vi) a complete or partial withdrawal of Borrower or an ERISA
Affiliate from any Plan; (vii) the receipt of a notice by the plan
administrator of a Plan that the PBGC has instituted proceedings to terminate
such Plan or appoint a trustee to administer such Plan; (viii) a commencement
or increase of contributions to, or the adoption of or the amendment of, a
Plan; and (ix) the assessment against Borrower or any ERISA Affiliate of a tax
under Section 4980B of the IRC; or (b) the Unfunded Benefit Liability of all of
the Plans of Borrower and its ERISA Affiliates shall, in the aggregate, exceed
One Hundred Dollars ($100).
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event
of Default Foothill may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
(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 Foothill;
(c) Terminate this Agreement and any of the other
Loan Documents as to any future liability or obligation of Foothill, but
without affecting Foothill's rights and security interests in the Collateral
and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Foothill considers
advisable, and in such cases, Foothill will credit Borrower's loan account with
only the net amounts received by Foothill in payment of such disputed Accounts
after deducting all Foothill Expenses incurred or expended in connection
therewith;
(e) Intentionally Omitted.
(f) Without notice to or demand upon Borrower or
any guarantor, make such payments and do such acts as Foothill considers
necessary or reasonable to protect its security interests in the Collateral.
Borrower agrees to assemble the Collateral if Foothill so requires, and to make
the Collateral available to Foothill as Foothill may designate. Borrower
authorizes Foothill to enter the premises where the Collateral is located, to
take and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien that in
Foothill's determination appears to conflict with its security interests and to
pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Foothill a license to enter
into possession of such premises and
-34-
<PAGE> 40
to occupy the same, without charge, for up to one hundred twenty (120) days in
order to exercise any of Foothill'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 Foothill (including any amounts received in the Lock Boxes),
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Foothill;
(h) Hold, as cash collateral, any and all
balances and deposits of Borrower held by Foothill, and any amounts received in
the Lock Boxes, 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 Collateral. Foothill is hereby granted 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 Collateral, in completing production of, advertising for sale,
and selling any Collateral and Borrower's rights under all licenses and all
franchise agreements shall inure to Foothill's benefit;
(j) Sell the 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 Foothill determines is commercially reasonable. It is not
necessary that the Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition
of the Collateral as follows:
(1) Foothill shall give Borrower and
each holder of a security interest in the Collateral who has filed with
Foothill 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 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 five (5) days before the date fixed for the sale, or at least five (5)
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 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 Collateral shall be
sent to such addresses as they have furnished to Foothill;
-35-
<PAGE> 41
(3) If the sale is to be a public sale,
Foothill also shall give notice of the time and place by publishing a notice
one time at least five (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) Foothill may credit bid and purchase at any public sale; and
(m) Any deficiency that exists after disposition of the
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 Foothill to Borrower.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies
under this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If Borrower fails to pay any monies (whether taxes, rents,
assessments, insurance, premiums, or otherwise) 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
Foothill determines that such failure by Borrower could have a material adverse
effect on Foothill's interests in the Collateral, even if Borrower is disputing
such payment obligation in good faith, in its discretion and without prior
notice to Borrower, Foothill 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 Foothill deems necessary to protect Foothill from
the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type described in Section 6.12, and take any action with
respect to such policies as Foothill deems prudent. Any such amounts paid by
Foothill shall constitute Foothill Expenses. Any such payments made by
Foothill shall not constitute an agreement by Foothill to make similar payments
in the future or a waiver by Foothill of any Event of Default under this
Agreement. Foothill need not inquire as to, or contest the validity of, any
such expense, tax, security interest, encumbrance, 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 owning.
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, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees at any tune held by Foothill on
which Borrower may in any way be liable.
-36-
<PAGE> 42
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as
Foothill complies with its obligations, if any, under Section 9207 of the Code,
Foothill shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction
of the Collateral shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower agrees to defend,
indemnify, save, and hold Foothill and its officers, employees, and agents
harmless against: (a) all obligations, demands, claims, and liabilities claimed
or asserted by any other Person arising out of or relating to the transactions
contemplated by this Agreement or any other Loan Document, and (b) all losses
(including attorneys fees and disbursements) in any way suffered, incurred, or
paid by Foothill as a result of or in any way arising out of, following, or
consequential to the transactions contemplated by this Agreement or any other
Loan Document, but excluding any such obligations, demands, claims, liabilities
and losses directly caused or incurred by reason of the gross negligence or
willful misconduct of the Person otherwise to be indemnified and held harmless
under this Section 11.3, as determined by a final, non-appealable order of a
court of competent jurisdiction. This provision shall survive the termination
of this Agreement.
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, or by recognized overnight courier service,
or by telefacsimile, to Borrower or to Foothill, as the case may be, at its
address set forth below:
If to Borrower: LFS ACQUISITION CORP.
801 Sentous Avenue
City of Industry, California 91784
Attn.: Bernard Tessier,
Chief Executive Officer
Telefacsimile No. (818) 854-3127
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn.: Business Finance Division Manager
Telefacsimile No. (310) 479-2690
-37-
<PAGE> 43
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 the other. All notices or demands sent in accordance with this Section 12,
other than notices by Foothill in connection with Sections 9504 or 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt or
three (3) days after the deposit thereof in the mail. Borrower acknowledges
and agrees that notices sent by Foothill in connection with Sections 9504 or
9505 of the Code shall be deemed sent when deposited in the mail or transmitted
by telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH
RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED
UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS
LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE
OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL BELIEVES THAT LEGAL OR
EQUITABLE PROCEEDINGS ARE REQUIRED TO PROTECT OR ENFORCE ITS RIGHTS HEREUNDER
AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH
OF BORROWER AND FOOTHILL WAIVES, 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 FOOTHILL 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 FOOTHILL 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.
-38-
<PAGE> 44
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered
to Foothill may be destroyed or otherwise disposed of by Foothill four (4)
months after they are delivered to or received by Foothill, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and
deemed effective when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. 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 Foothill's prior written consent and any
prohibited assignment shall be absolutely void. No consent to an assignment by
Foothill shall release Borrower from its Obligations unless such consent
specifically provides that Borrower shall be released. Foothill may assign this
Agreement and its rights and duties hereunder and no consent or approval by
Borrower is required in connection with any such assignment. Foothill reserves
the right to sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in Foothill's rights and benefits hereunder. In
connection with any such assignment or participation, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
Borrower or Borrower's business. To the extent that Foothill assigns its rights
and obligations hereunder to a third Person, Foothill shall thereafter be
released from such assigned obligations to Borrower and such assignment shall
effect a novation between Borrower and such third Person.
15.3 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.
15.4 INTERPRETATION. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Foothill
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.
15.5 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.
15.6 AMENDMENTS IN WRITING. This Agreement can only be
amended by a writing signed by both Foothill and Borrower.
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<PAGE> 45
15.7 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
a manually executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver a
manually executed counterpart of this Agreement but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability,
and binding effect of this Agreement.
15.8 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 Foothill 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 Foothill 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 Foothill is required or elects to repay or restore, and as to all
reasonable costs, expenses, and attorneys fees of Foothill 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.
15.9 INTEGRATION. This Agreement, together with the other
Loan Documents, reflect the entire understanding of the parties with respect to
the transactions contemplated hereby
-40-
<PAGE> 46
and shall not be contradicted or qualified by any other agreement, oral or
written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ PATRICIA McLOUGHLIN
---------------------------------
Patricia McLoughlin,
Vice President
LFS ACQUISITION CORP.
a Delaware corporation
By /s/ BERNARD TESSLER
---------------------------------
Bernard Tessler,
President
-41-
<PAGE> 47
SCHEDULE 5.9 LITIGATION
NONE
<PAGE> 48
SCHEDULE P-1 PERMITTED LIENS
NONE
<PAGE> 49
SCHEDULE E-1 ELIGIBLE INVENTORY
AND
SCHEDULE 6.15 LOCATION OF INVENTORY AND EQUIPMENT
<TABLE>
<CAPTION>
ZIP
RM DM STORE #3 CENTER ADDRESS CITY STATE CODE TELEPHONE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
52 333 12025 Atlantic Square 2130 S. Atlantic Blvd. Monterey Park CA 91754 (213) 721-2766
52 334 12026 Music Plus Plaza 9160 Foothill Blvd. Rancho Cucamonga CA 91730 (909) 989-9444
52 333 12027 Five Points 11964 Garvey Ave. El Monte CA 91732 (818) 444-0489
51 326 12029 Sycamore Square 2837 Cochran, E Simi Valley CA 93065 (805) 581-1062
52 333 12031 Foothill Shopping Center 868 Alosta Ave. Azusa CA 91702 (818) 334-7504
52 334 12035 Wild West Center 854 Jackman St. El Cajon CA 92020 (619) 447-2559
51 326 12038 Reseda Shopping Center 18207 Sherman Way Reseda CA 91335 (818) 708-3803
52 339 12041 Park Plaza Center 862 N. Western Ave. San Pedro CA 90732 (310) 831-3330
51 326 12042 Northridge Plaza 8750 Corbin Avenue Northridge CA 91324 (818) 886-1255
52 339 12043 Lakewood Plaza 6269 E. Spring St. Long Beach CA 90808 (310) 421-6126
52 337 12044 Lake Forest 23819 El Toro Rd., #8 Lake Forest CA 92630 (714) 855-8244
51 337 12045 Encinitas Village 111 N. El Camino Real Encinitas CA 92024 (619) 942-9811
51 326 12046 Park Oaks Center 1754-A Moorpark Rd. Thousand Oaks CA 91360 (805) 497-0677
52 336 12047 Chino Towne Center 12131 Central Ave. Chino CA 91710 (909) 627-0290
52 332 12048 Foothill/Rosemead 3615 Foothill Blvd. Pasadena CA 91107 (818) 351-0777
52 334 12049 Central City Mall 677 2nd St. San Bernardino CA 91408 (909) 889-6285
52 333 12053 North Downey 9216 Lakewood Blvd. Downey CA 90240 (310) 861-1828
52 336 12054 Brookhurst Center 929 S. Brookhurst Anaheim CA 92804 (714) 533-7611
52 332 12055 Cornell Plaza 1121 San Fernando Rd. Burbank CA 91504 (818) 848-6314
52 336 12056 Arlington Square 4060 Madison Ave. Riverside CA 92504 (909) 688-3203
52 336 12059 Chapman/Main 1421 West Chapman Ave. Orange CA 92668 (714) 978-7119
52 337 12060 La Mesa Springs 8036 La Mesa Blvd. La Mesa CA 92041 (619) 462-7388
52 337 12061 Clairmont Square 4735 Clairmont Sq., A San Diego CA 92117 (619) 270-4253
52 333 12062 Alhambra Valley Center 904 E. Valley Blvd. Alhambra CA 91801 (818) 289-8684
52 332 12063 Granary Square Center 25870 McBean Parkway Valencia CA 91355 (805) 255-8096
52 337 12064 El Camino N. Center 2455-K Vista Way Oceanside CA 92054 (619) 439-0966
52 339 12066 Carson/Main Center 166 E. Carson St. Carson CA 90745 (310) 549-3105
51 326 12067 Santa Maria Plaza 230 E. Betteravia Rd., M Santa Maria CA 93454 (805) 928-7331
52 336 12068 Norwalk Town Center 11713 Rosecrans Ave. Norwalk CA 90650 (310) 929-6322
52 339 12070 Culver City 3872 Midway Culver City CA 90230 (310) 837-8040
51 326 12072 Telephone Road 4744 Telephone Rd., #6 Ventura CA 93003 (805) 644-5909
52 334 12074 Hemet Valley 3485 W. Florida Ave. Hemet CA 92543 (909) 929-3335
52 336 12075 Fullerton 3208 E. Yorba Linda Blvd. Fullerton CA 92631 (714) 996-9072
52 332 12079 Eagle Rock Plaza 2700 Colorado Blvd. Los Angeles CA 90041 (213) 259-8545
51 321 12084 Silver Creek 1783 E. Capitol Expressway San Jose CA 95121 (408) 274-6593
51 324 12085 Vineyard Center 740 W. Kettleman Lane Lodi CA 95240 (209) 368-5023
51 324 12086 Mineral King 4239 Mineral King Hwy. Visalia CA 90321 (209) 739-1351
51 324 12087 College Square 967 N. March Lane Stockton CA 95207 (209) 951-7224
51 324 12088 Stockdale Village 5550 Stockdale Hwy. Bakersfield CA 93309 (805) 322-0221
51 322 12089 Santa Rosa 3575 Industrial Dr. Santa Rosa CA 95401 (707) 526-7848
51 321 12092 Westgate Mall 1600 Saratoga Ave., #505 San Jose CA 95129 (408) 374-2213
51 323 12093 Crestview Village 4754 Manzanita Ave. Carmichael CA 95608 (916) 972-7631
51 324 12094 Mervyn's Center 2801 McHenry Blvd. Modesto CA 95350 (209) 524-4680
51 321 12095 Westlake Mall 37 Westlake Mall Daly City CA 94015 (415) 755-1555
51 321 12097 Northridge Center 1376 Northridge Center Salinas CA 93906 (408) 449-9401
51 322 12099 Dublin Place 6948 Amador Plaza Road Dublin CA 94566 (510) 829-5767
51 324 12102 Olivewood Center 1366 W. Olive Ave. Merced CA 95340 (209) 722-5159
51 326 12103 Madonna Plaza 269 Madonna Road San Luis Obispo CA 93405 (805) 543-8511
51 322 12104 Fairmont Square 15081 E. 14th St. San Leandro CA 94578 (510) 481-8033
51 327 12105 Deer Valley 4155 W. Tunderbird Rd. Phoenix AZ 85023 (602) 938-4129
51 322 12107 Raley's Shopping Center 708-C Onstott Blvd. Yuba City CA 95991 (916) 673-0117
51 322 12108 Pinole Vista 1502 N. Fitzgerald Ave. Pinole CA 94564 (510) 222-1058
51 321 12110 Princeton Plaza 1375 Blossom Hill Rd., #46 San Jose CA 95118 (408) 266-9300
51 326 12112 Five Points Shopping Ct. 3963 State Street Santa Barbara CA 93105 (805) 964-8456
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
ZIP
RM DM STORE # CENTER ADDRESS CITY STATE CODE TELEPHONE
- -- -- ------- ------ ------- ---- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
52 337 12113 Loma Square Center 3333 Rosecrans Ave. San Diego CA 92110 (619)222-7808
51 327 12114 Loma Vista Center 4620 Meadow Land, #83 Las Vegas NV 89107 (702)870-8883
51 327 12115 Westridge 7611 W. Thomas Rd., #37 Phoenix AZ 85033 (602)849-5707
53 341 12116 Richland Pointe 5217 Rufe Snow Drive N. Richland Hill TX 76118 (817)485-2523
53 341 12118 Mervyn's Plaza 3725 W. Camp Wisdom Rd. Dallas TX 75237 (214)298-6692
53 341 12125 Market East 1515 N. Towneast, #147 Mesquite TX 75150 (214)279-9265
53 347 12130 Steeplechase Mall 10805 Jones Road Houston TX 77065 (713)955-5375
53 347 12132 North Oaks Center 4603-C FM 1960, West Houston TX 77069 (713)580-2933
51 323 12137 Southgate Plaza 4204 Florin Road Sacramento CA 95823 (916)424-9930
51 322 12138 Grape Yard Center 3222 Jefferson St. Napa CA 94558 (707)253-8259
53 347 12139 Spencer Square 3614 Spencer Highway Pasadena TX 77504 (713)946-4140
53 343 12140 Walzam Plaza Ct. 5350 Walzam Plaza San Antonio TX 78218 (210)656-8956
53 343 12141 Valley View Ct. 8507-A Blanco Road San Antonio TX 78216 (210)377-1058
51 327 12144 Flagstaff Mall 4650 N. Highway 89, #C-16 Flagstaff AZ 86004 (602)526-2321
53 347 12145 Palmer Plaza 3448 Palmer Highway Texas City TX 77590 (409)945-6364
53 346 12147 Town West 2315 Richmond Rd., #3 Texarkana TX 75503 (903)838-7695
53 347 12149 Culpepper Plaza 1663 Texas Ave., South College Station TX 77840 (409)764-8738
53 343 12152 Northwood Plaza 2900 W. Anderson Ln., #16 Austin TX 78704 (512)458-3002
53 343 12153 Brodie Oaks 4220 S. Lamar Blvd., #400 Austin TX 78704 (512)447-9447
53 347 12156 Deerbrook/Commons 9606 FM 1960 Bypass Humble TX 77338 (713)540-1844
53 347 12157 Greens Crossroads 225 W. Greens Rd. Houston TX 77067 (713)875-3408
52 334 12159 El Centro Center 1116 N. Imperial Ave. El Centro CA 92243 (619)353-3715
51 322 12160 Park Lane Center 274 E. Plumb Lane Reno NV 89502 (702)826-2821
53 347 12161 Galveston Plaza 2725 61st Street Galveston TX 77553 (409)744-0928
51 323 12163 Roseville Square 1101 Roseville Square Roseville CA 95678 (916)783-4072
53 341 12167 Richland Plaza 1328 E. Beltine Road Richardson TX 75081 (214)234-3039
53 347 12169 Northeast Square 18-C Uvalde Street Houston TX 77015 (713)453-3478
52 333 12172 Citrus Plaza 217 N. Citrus St., #8 West Covina CA 91791 (818)915-3919
52 333 12173 Mart of Montebello 876 W. Beverly Blvd. Montebello CA 90640 (213)721-7743
53 346 12175 North Park Plaza 5892-D Eastex Freeway Beaumont TX 77708 (409)892-2340
51 323 12177 Sunrise Mall 6165 Sunrise Mall Citrus Heights CA 95610 (916)729-0942
51 321 12178LF Serramonte Mall #8C Serramonte Center Daly City CA 94015 (415)755-3224
51 321 12179LF Eastridge Mall 153-A Eastridge Mall San Jose CA 95148 (408)238-7500
53 341 12180 French Quarter 4500 S. Broadway Tyler TX 75703 (903)561-7835
53 343 12181 Interstate 2300 Bell, #2 Amarillo TX 79106 (806)359-6950
53 347 12182 Gulfway Shopping Center 1420 Airline Drive Corpus Christi TX 78412 (512)991-5390
53 343 12183 South Plains Mall 6002 Slide Road, #813 Lubbock TX 79464 (806)793-5348
53 346 12184 South Gate 2940 Ryan Street Lake Charles LA 70601 (318)433-5745
53 343 12186 Cielo Vista Mall 8401 Gateway W. Blvd., F-4 El Paso TX 79925 (915)772-8211
52 332 12187 La Canada 2196 W. Footill Blvd. La Canada CA 91011 (818)249-9011
51 322 12190 Redding Fashion Plaza 1611 Hilltop Drive, G Redding CA 96001 (916)221-2871
52 332 12191 Barnsdall Square 1625 N. Vermont Hollywood CA 90027 (213)666-7196
53 336 12192 The City Mall 16 City Blvd., East, #110 Orange CA 92668 (714)634-4164
52 337 12193 Plaza Bonita 3030 Plaza Bonita Rd., #1160 National City CA 92050 (619)475-2775
52 336 12194LF Buena Park Mall 8393 On the Mall, #32 Buena Park CA 90620 (714)952-0475
53 343 12195 One Energy Square 3314 Andrews Highway Odessa TX 79762 (915)362-4750
51 326 12196 Topanga Plaza 6600 Topanga Cyn., #13A Canoga Park CA 91303 (818)702-9637
53 347 12200 Amigoland Mall 301 Mexico Blvd., Suite E-13 Brownsville TX 78520 (210)546-6743
53 343 12201 Killeen Mall 2100 S. SW Young Dr., #1312 Killeen TX 76541 (817)690-2337
53 343 12203 Midland Park Mall 4511 N. Midkiff, #C-37 Midland TX 79705 (915)697-0233
53 341 12205 Park Central Center 3226-A S. Clack Abilene TX 79606 (915)695-8361
51 322 12206 South Shore Center 2202 Shore Center, Suite E Alameda CA 94501 (510)523-2133
52 337 12207LF Chula Vista Shopping Ct 555 Broadway, #108 Chula Vista CA 91910 (619)425-4002
53 341 12209 Wichita Square 3614 Callfield Wichita Falls TX 76308 (817)691-7632
53 341 12210 Regency Square 1834 N.W. 52nd Street Lawton OK 73505 (405)355-8445
53 341 12211 Walnut Square 2209 S.W. 74th St., #301 Oklahoma City OK 73159 (405)685-6082
52 339 12212 Ladera Center 5375 W. Centinela Blvd. Los Angeles CA 90045 (310)568-8240
51 324 12214 Clovis Towne Center 130 W. Shaw Ave., #102 Clovis CA 93612 (209)298-8181
53 341 12216 Centre of America 1331 W. Memorial Rd. Oklahoma City OK 73114 (405)755-6082
51 327 12218 Valley Fair Mall 3601 S. 2700 West West Valley City UT 84119 (801)968-5664
53 343 12219 Mesilla Valley Mall 700 S. Tellshore, #1008 Las Cruces NM 88001 (505)522-0142
54 354 12221 Oaks Shopping Center 1533 Lee Street Des Plaines IL 60018 (708)297-7239
54 352 12222 Downers Park Plaza 7319 Lemont Road Downers Grove IL 60516 (708)852-7496
54 354 12223 Springbrook Shopping Ct 160 E. Lake St., S.E., #13 Bloomingdale IL 60108 (708)351-1045
54 354 12224 Meadows Town Mall 1400 E. Gulf Rd., #260 Rolling Meadows IL 60008 (708)593-4249
53 346 12225 Eastgate Center 3134 Louisville Ave. Monroe LA 71201 (318)323-2439
53 346 12226 East Lake Plaza 9851(A-2) E-10 Service Rd. New Orleans LA 70127 (504)243-0328
53 346 12228 Cortana Square 9536 Cortana Plaza Baton Rouge LA 70815 (504)926-3218
53 346 12229 Ambassador Row Courtyard 3603-F Ambassador Caffery Lafayette LA 70503 (318)988-4505
53 343 12230 Ross Plaza 4770 Montgomery, NE #8-10 Albuquerque NM 87110 (505)888-0601
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
ZIP
RM DM STORE #3 CENTER ADDRESS CITY STATE CODE TELEPHONE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
53 343 12231 Rio West Mall 1430 W. I-40 Frontage #158 Gallup NM 87301 (505) 722-9153
51 321 12233 Milpitas Towne Center 551 E. Calaveras Blvd. Milpitas CA 95035 (408) 946-8354
52 333 12234 Commerce Center 502 E. Whittier Blvd. Commerce CA 90022 (213) 728-3600
52 334 12236 Rialto Value Center 1517 S. Riverside Ave. Rialto CA 92376 (909) 877-6626
52 339 12238 Cypress Fashion Plaza 6876 Katella Avenue Cypress CA 90630 (714) 892-9894
52 333 12239 La Cienega 1837 S. La Cienega Blvd. Los Angeles CA 90035 (310) 837-8858
52 336 12240 Santa Fe Springs Mall 13350 Telegraph Rd. #94 Santa Fe Springs CA 90670 (310) 944-6932
54 352 12241 North Ridge Plaza 1330 North Larkin Joliet IL 60431 (815) 725-1193
54 353 12246 Marketplace of Matteson 4158 W. 211th St., Sp. #32-B Matteson IL 60443 (708) 481-7676
54 352 12247 Waukegan Plaza 1305 N. Lewis Avenue Waukegan IL 60085 (708) 249-1773
51 324 12248 Selma Plaza 2829 Whitson Selma CA 93662 (209) 896-2737
51 327 12250 Canyon Center 2071 E. 9400 South, #3 Sandy UT 84092 (801) 943-2215
51 327 12252 Layton Hills Mall 1076 Layton Hills Mall Layton UT 84041 (801) 546-4343
54 353 12254 Lake View Center 15798 La Grange Rd. Orland Park IL 60462 (708) 460-4913
54 352 12257 Brookfield Fashion Center 16900-K W. Bluemound Rd. #240 Brookfield WI 53005 (414) 797-9688
52 336 12259 Mall of Orange 2374 N. Orange Mall Orange CA 92665 (714) 637-3940
52 339 12260 Atlantic & Elizabeth 7910-E S. Atlantic Blvd. Cudahy CA 90201 (213) 560-9827
54 354 12262 Postal Center 2908 N. Ashland Blvd. Chicago IL 60657 (312) 248-1132
54 354 12263 N. Riverside Park Plaza 7345 W. 25th Street N. Riverside IL 60546 (708) 442-0828
54 352 12266 Fox River Mall 4301 W. Wisconsin, Sp. #838 Appleton WI 54915 (414) 730-8880
54 352 12267 Forest Plaza 6211 E. State St., #87 Rockford IL 61008 (815) 397-2508
54 354 12270 Cermark Court Shopping Ct. 2539 W. Cermak Chicago IL 60608 (312) 523-0537
54 355 12273 Westland Crossings 34758 Warren Road Westland MI 48185 (810) 525-1144
54 355 12275 Gratiot Center 31902 Gratiot Avenue Roseville MI 48066 (810) 293-4900
54 355 12277 Southgate Crossing Center 14870 Dix-Toledo Road Southgate MI 48192 (810) 282-1428
51 324 12281 Turlock Towne Center 665-2C N. Golden State, #2C Turlock CA 95380 (209) 632-7248
52 339 12282 Paramount Towne Center 16260 Paramount, Bldg E Paramount CA 90723 (310) 633-8551
51 324 12284 Heritage Place 204 E. Cross Street Tulare CA 93274 (209) 685-8526
52 332 12285 Gateway Center 1773-P E. Palmdale Blvd. Palmdale CA 93550 (805) 273-7268
52 339 12286 Hawaiian Gardens 12100 Carson Street Hawaiian Gardens CA 90716 (310) 429-4860
51 327 12287 Mervyn's Plaza 2978 N. Alma School Rd. Chandler AZ 85224 (602) 732-9616
54 352 12290 Westgate Mall 442 Westgate Mall Madison WI 53711 (608) 274-2440
54 352 12292 Oakwood Mall 4800 Golf Rd., Sp. #424 Eau Claire WI 54701 (715) 834-1061
54 354 12294 Melrose Crossings Center 1937 N. Mannheim Road Melrose Park IL 60160 (708) 343-5111
54 355 12295 North Towne Mall 343 New Town Sq. Dr., E-10 Toledo OH 43612 (419) 478-3201
54 353 12301 Speedway Shopping Center 5662-B Crawfordsville Rd. Speedway IN 46224 (317) 244-1400
51 323 12302 County Fair Mall 1264 E. Gibson Rd., SE #G-175 Woodland CA 95695 (916) 661-6804
53 346 12303 Carrollton Central Plaza 3844 Dublin Street New Orleans LA 70118 (504) 488-4571
53 346 12304 Westgate Center 8847 Veterans Memorial Blvd. Metaine LA 70003 (504) 466-2235
53 346 12305 Elmwood Center 1200 S. Clearview, #1150 Harahan LA 70123 (504) 734-5925
54 355 12306 Fashion Corners 4375 Bay Road Saginaw MI 48603 (517) 790-7278
52 332 12308 Santa Anita Fashion Mall 256 Santa Anita Fash Park Arcadia CA 91006 (818) 447-6456
54 356 12310 Euclid/Superior 13501 Euclid Avenue East Cleveland OH 44122 (216) 761-3700
54 356 12311 Kamms Plaza 3760 Rocky River Drive West Cleveland OH 44111 (216) 251-7908
54 356 12312 Southgate Center 21200 Libby Road Maple Heights OH 44137 (216) 663-1022
54 356 12313 Pleasant Valley Center 7534 Broadview Road Parma OH 44134 (216) 842-0664
54 356 12315 Southland Center 6865-D Southland Drive Middleburg Hts. OH 44130 (216) 684-6564
51 326 12316LF Panorama Mall #35 Panorama Mall Panorama City CA 91402 (818) 891-4404
54 353 12318 Greenwood Place 7685 S. Shelby St. Indianapolis IN 46227 (317) 887-6676
54 354 12319 Riverside Square 3145 S. Ashland Ave., #115 Chicago IL 60608 (312) 254-3892
54 354 12320 Scottsdale Shopping Center 7929 S. Cicero Avenue Chicago IL 60652 (312) 581-0024
54 353 12321 Salem Square 5555 S. Brainard Ave. Countryside IL 60525 (708) 352-8247
52 336 12324LF Lakewood Center 46 Lakewood Ct. Mall, #1101 Lakewood CA 90712 (310) 531-3459
52 332 12330LF Glendale Galleria 2223 Glendale Galleria Glendale CA 90210 (818) 241-6561
54 354 12333 Kedzie Plaza 4758 S. Kedzie Chicago IL 60632 (312) 523-1594
54 355 12334 The Heights 26434 Ford Road Dearborn Heights MI 48127 (810) 274-5426
54 356 12339 Plaza at Chapel Hill 462 Howe Avenue Cuyahoga Falls OH 44221 (216) 922-0943
54 356 12340 West Market Plaza 3893 Medina Road Akron OH 44313 (216) 666-2094
54 355 12341 Cross Pointe Center 101 E. Alex-Bel Rd., #156 Centerville OH 45459 (513) 436 4715
54 356 12342 Solon Square 33431 Aurora Road Solon OH 44139 (216) 248-5541
54 356 12343 Ridge Park Square 4778 Ridge Road Brooklyn OH 44144 (216) 749-4060
54 354 12344 Western Hills Plaza 6180-D Glenway Avenue Cincinnati OH 45211 (513) 481-6565
54 354 12345 Hyde Park Plaza 3880 Paxton Rd., Suite 1 Cincinnati OH 45209 (513) 321-8311
54 354 12346 Blue Ash Plaza 4130 Hunt Road Cincinnati OH 45236 (513) 791-0830
54 355 12348 Spring Meadows 1482 Spring Meadow Drive Holland OH 43528 (419) 866-5690
54 355 12349 Bel-Air Center 8800 E. Eight Mile Road Detroit MI 48234 (810) 893-7887
52 337 12350 Bristol Place 3378 S. Bristol Street Santa Ana CA 92704 (714) 545-8204
51 327 12352 Nellis Crossing 1256 Nellis Blvd., #E-125 Las Vegas NV 89104 (702) 459-8116
51 324 12353 Porterville Town 866 W. Henderson Avenue Porterville CA 93257 (209) 784-1136
51 326 12354 Central Plaza 830 Arneill Road Camarillo CA 93010 (805) 388-3828
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
ZIP
RM DM STORE # CENTER ADDRESS CITY STATE CODE TELEPHONE
- -- -- ------- ------ ------- ---- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
52 337 12472 Plaza Del Obispo 31878 Del Obispo, #112 San Juan Capistrano CA 92675 (714) 240-0942
52 334 12473 Rancho Calif. Town Center 29720 Rancho Calif. Rd. 3B Temecula CA 92591 (909) 699-5181
51 327 12474 Park Mall 5870 E. Broadway, #850 Tucson AZ 85711 (602) 745-0595
54 350 12477 Laurel Centre 14776 Baltimore Wash. Blvd. Laurel MD 20707 (301) 604-6776
53 347 12478 Shannon Mall 313 Shannon Sq. Park Mall Union City GA 30291 (404) 969-0626
54 353 12479 The Parkway 2103 N. Veterans Pkwy, #322 Bloomington IL 61704 (309) 664-0844
54 354 12480 Westview Center 1050A Barrington Road Streamwood IL 60107 (708) 837-4736
52 339 12483 Baldwin Hills Crens Plaza 3650 W. Martin Luther King Los Angeles CA 90008 (213) 294-4034
52 336 12484 Whittwood Mall 15612 Whittwood Lane Whittier CA 90603 (310) 947-5697
52 333 12485 Baldwin Park 14547 Ramona Blvd., #813 Baldwin Park CA 91706 (818) 814-0096
51 321 12486 Cochrane Plaza 128 Cochrane Plaza Morgan Hill CA 95037 (408) 778-2668
53 346 12488 Southland Mall 3038 W. Park Ave., #F13 Houma LA 70364 (504) 868-2287
53 345 12489 Mall of America 7795 W. Flagler St., #21 Miami FL 33144 (305) 267-5052
53 348 12491 Heritage Place 12559 Olive Blvd. Creve Coeur MO 63141 (314) 469-1544
54 350 12492 Montgomery 18280 Contour Rd., #6 Gaithersburg MD 20879 (301) 948-5780
54 350 12493 Landover Mall 2205 Bright Seat Road, A-1 Landover MD 20785 (301) 322-7407
54 356 12494 Reisterstown Rd. 6748 Reistertown Rd. Baltimore MD 21215 (410) 358-6419
54 350 12495 Iverson Mall 3791 Branch Ave. Hillcrest MD 20748 (301) 423-7617
53 348 12496 Lakeland Square 3800 N. Highway, 98, #126 Lakelarnd FL 33809 (813) 853-2041
53 346 12497 Belle Promenade 1701 Barataria Blvd., #168 Marrero LA 70072 (504) 348-8901
53 347 12498 Southlake Mall 2305 Southlake Mall Morrow GA 30260 (404) 960-8322
52 339 12499 Fox Hills Mall 366 Fox Hills Mall Culver City CA 90230 (310) 397-3299
54 352 12503 Gurnee Mills 6170 Grand Avenue Gurnee IL 60031 (708) 855-1801
51 327 12507LF Metro Center 9657-A Metro Parkway West Phoenix AZ 85051 (602) 861-1133
52 334 12509 Terra Vista Town Center 10582 Foothill Blvd., #190 Rancho Cucamonga CA 91730 (909) 948-1783
52 334 12510 Escondido 1272 G. Auto Parkway Escondido CA 92025 (619) 738-8277
53 346 12511 Pierre Bossier 2950 E. Texas Rd., #106 Bossier City LA 71111 (318) 747-6721
54 350 12512 The Center at Salisbury 2300 N. Salisbury Rd., #J121 Salisbury MD 21801 (410) 548-5602
54 350 12513 Federal Plaza 12268 Rockville Pike Ste. H Rockville MD 20852 (301) 816-0240
54 356 12514 Eastwood Plaza 5555 Youngstown Warren, #402 Niles OH 44446 (216) 652-6756
53 348 12515 Overland Plaza 9122 Overland Plaza Overland MO 63114 (314) 427-2112
54 353 12516 Northfield Square 1600 N. State Route 50, #708 Bourbonnais IL 60914 (815) 939-9777
51 327 12517 University Mall E-83 University Mall Orem UT 84058 (801) 225-4426
52 337 12518 Fountain Valley 18309 Brookhurst St., #4 Fountain Valley CA 92708 (714) 964-2045
52 332 12519 Huntington Oaks 518 Huntington Drive Monrovia CA 91016 (818) 358-4588
54 353 12521 Rivercrest Centre 4839 W. Cal Sag Crestwood IL 90445 (708) 489-5750
53 345 12523 Melbourne 1700 W. New Haven Ave., #741 Melbourne FL 32910 (407) 729-8147
53 345 12524 Westchester Shopping Ct 8459 S.W. 24th St. Miami FL 33155 (305) 264-0975
53 345 12525 Sawgrass Mills 12801 W. Sunrise Bl., #281 Sunrise FL 33323 (305) 846-9041
53 345 12526 Pembroke Commons 508 University Drive Pembroke FL 33024 (305) 435-1476
54 353 12527 Woodmar Shopping Center 6606-17B Indianapolis Blvd. Hammond IN 46320 (219) 844-4001
54 355 12528 Southland Mall 23000 Eureka Rd., #E-16 Taylor MI 48180 (810) 374-5960
52 332 12530 Plaza Pasadena 128 The Plaza Pasadena Pasadena CA 91101 (818) 564-1728
52 337 12531 Plaza De La Paz 27281 La Paz Rd., Suite P Laguna Niguel CA 92656 (714) 831-8837
52 336 12532 Corona Hills 340 McKinley St., #101 Corona CA 91719 (909) 272-6607
52 336 12533 Chino 4200 Chino Hills Pkwy, #670 Chino Hills CA 91709 (909) 393-7427
54 355 12534 Northland Mall 21500 N. Western Hwy., E24 Southfield MI 48075 (810) 443-5722
53 345 12538 Westland 3800 W. 18th Ave., #120 Hialeah FL 33012 (305) 828-6394
53 346 12540 Alexandria Mall 3437 Masonic Dr., #1566 Alexandria LA 71301 (318) 473-4303
54 353 12541 Village Park 1950-B Greyhound Pass Carmel IN 46032 (317) 846-7230
54 356 12542 Eastpoint Mall 7833 Eastpoint Mall Baltimore MD 94611 (410) 288-5298
54 356 12543 Annapolis Harbor Center 2528 Soloms Island Rd. Annapolis MD 21401 (410) 224-0766
51 322 12544 Rockridge Center 5110 Broadway Oakland CA 94611 (510) 601-0151
52 336 12545 Lake Elsinore Town Center 32295 Mission Trail Road Lake Elsinore CA 92330 (909) 245-5275
54 350 12546 Chesapeake Square 4200 Portsmouth Blvd. Chesapeake VA 23321 (804) 465-8086
54 350 12547 Coliseum Mall 1800 W. Mercury Blvd., #A4 Hampton VA 23666 (804) 825-0827
52 334 12548 Mall of Victorville 14400 Bear Valley Road Victorville CA 92392 (619) 955-6325
52 333 12549 Plaza at West Covina 1200 W. Covina Pkwy, #514 West Covina CA 91790 (818) 962-7108
52 333 12550 La Verne Towne Center 2418-C Foothill Blvd. La Verne CA 91750 (909) 596-5596
54 355 12551 Redford Plaza 9335 Telegraph Road Redford MI 48239 (810) 537-6328
51 326 12552 Santa Maria Town Center 115 Town Center East Santa Maria CA 93454 (805) 928-7471
51 326 12553 Esplanade Mall 183 Esplanade Mall Oxnard CA 93030 (805) 485-4229
51 324 12554 Hanford Mall 1675 W. Lacey Blvd., #H5 Hanford CA 93230 (209) 584-1173
54 350 12555 Potomac Mills 2700 Potomac Mills Cir. #148 Prince VA 22193 (703) 491-6327
52 334 12556 Moreno Valley Mall 22500 Towngate Circle, #2205 Moreno Valley CA 92553 (909) 653-7697
51 321 12557 Mervyn's Plaza 2064 El Camino Real Santa Clara CA 95051 (408) 261-9480
51 356 12562 Marley Station 7900 Gov. Ritchie Hwy. #19 Glen Burnie MD 21061
</TABLE>
331 TOTAL STORES
Distribution Center HQ Property City of Industry, CA
<PAGE> 53
<TABLE>
<CAPTION>
ZIP
RM DM STORE # CENTER ADDRESS CITY STATE CODE TELEPHONE
- -- -- ------- ------ ------- ---- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
52 332 12355 Canyon Country 19188 Soledad Canyon Road Canyon Country CA 91351 (805)252-5212
54 353 12357 Applewood Village 1908 Applewood Center Drive Anderson IN 46015 (317)644-0249
52 333 12358 San Dimas Plaza 957 West Arrow Highway San Dimas CA 91773 (909)592-9757
54 353 12362 Northgate Mall 2800 N. Waters St., #75 Decatur IL 62526 (217)877-3953
54 353 12364 Market View 13 Market View Champaign IL 61820 (217)359-8240
54 355 12366 Salem 5465 Salem Pike Dayton OH 45426 (513)854-1387
54 356 12367 Oak Park Center 2474 Lincoln Way East Massillon OH 44646 (216)837-2121
51 323 12368 Elkhorn Center 4341 Elkhorn Blvd. N. Sacramento CA 95842 (916)344-6873
53 343 12369 Old Mill Place 7040 Bandera Road San Antonio TX 78238 (210)680-4377
51 323 12373 Factoria Square 4086 128th Ave., SE, H-16 Bellevue WA 98006 (206)562-1495
51 327 12375 Santa Cruz Plaza 3720 South 16th Avenue Tucson AZ 85713 (602)624-3479
52 337 12376 Crossroads 3800 Barrance Parkway, J Irvine CA 92714 (714)551-3590
52 337 12378 Garden Grove Pavillion 12093 S. Brookhurst St. Garden Grove CA 92640 (714)534-1379
52 334 12379 Twin Peaks Plaza 14761 Pomerado Road Poway CA 92064 (619)486-3312
54 352 12381 Regency Point 2310 S. Greenbay Rd., #F Racine WI 53406 (414)554-6067
54 353 12382 Commons of Chicago 247 Commons Drive Chicago Ridge IL 60415 (708)636-1344
54 352 12384 Danada Square 86 Danada Square West Wheaton IL 60187 (708)668-2009
53 341 12386 Woodland Hills 7021 S. Memorial Drive Tulsa OK 74133 (918)250-1957
54 354 12388 Florence Square 7733-A Mall Road Florence KY 41042 (606)283-9499
54 355 12389 Livonia Plaza 30951 5 Mile Road, #86 Livonia MI 48150 (810)427-3690
54 355 12390 Commerce Towne 3050 Union Lake Road, #3D Commerce MI 48382 (810)363-0488
53 348 12393 Central Plaza 15305 Manchester Road Ballwin MO 63011 (314)394-4755
53 348 12394 Dierberg's Clocktower 11238 W. Florissant Road Florissant MO 63033 (314)838-6053
53 345 12396 University 417 S. Semoran Blvd. Winter Park FL 32792 (407)657-1787
53 345 12397 Skyview Plaza 7671 S. Orange Blossom Trl. Orlando FL 32809 (407)855-0351
53 345 12401 Crossroads 3922 Northlake Blvd. Palm Beach FL 33403 (407)694-8627
53 345 12402 Deerfield Mall 3828 W. Hillsboro Blvd. Deerfield FL 33442 (305)427-8778
53 348 12404 Cypress Point 25865 E. US Hwy. 19, N Clearwater FL 34623 (813)791-8817
51 323 12407 Gresham Town Fair 610 N.W. Eastman Parkway Gresham OR 97030 (503)669-0252
51 323 12408 Clackamas 8946 Sunnyside Road Clackamas OR 97015 (503)652-9043
51 323 12412 Greentree Square 505 S.E. Everett Mall Way Everett WA 98204 (206)353-7259
51 323 12413 Century Square 32041 Pacific Hwy. South Federal Way WA 98003 (206)839-6306
53 345 12414 Colonial 4652 E. Colonial Drive Orlando FL 32803 (407)898-6973
53 345 12415 TJ Maxx Plaza 7364 S.W. 117th Avenue Kendall FL 33183 (305)595-0845
53 348 12416 Rengency Square 2452 W. Brandon Blvd. Brandon FL 33511 (813)654-3996
53 348 12417 Largo Mall 10500 Ulmerton Rd., #620 Largo FL 34641 (813)586-4699
53 348 12418 Crossroads Center 38 Crossroads Center Fairview Heights IL 62208 (618)397-8908
53 348 12419 Hampton Village 34 Hampton Village Center St. Louis MO 63109 (314)481-9143
53 341 12420 Arlington Park 3701 S. Cooper, #151 Arlington TX 76015 (817)784-8705
53 347 12421 Baybrook Square 1273 W. Bay Area Blvd. Webster TX 77598 (713)332-2867
52 334 12422 Tri-City Center 1458 Industrial Park, #A1 Redlands CA 92374 (909)792-5783
52 339 12424 Hawthorne 12036 Hawthorne Plaza, #U3 Hawthorne CA 90250 (310)978-0756
51 322 12425 Factory Nut Tree 311-J Nut Tree Rd. Vacaville CA 95687 (707)446-9643
53 348 12431 Crosswinds Center 2056 66th St., N #139 St. Petersburg FL 33710 (813)343-6675
53 345 12432 IntraCoastal Mall 3745 N.E. 163rd Street North Miami FL 33160 (305)949-1065
54 356 12433 Boardman Plaza #35 Boardman/Centerfield Rd. Youngstown OH 44512 (216)726-5685
51 323 12435 Bellis Fair Mall 1 Bellis Fair Pkwy, #118 Bellingham WA 98226 (206)647-9492
52 332 12436 Kinney Cut-Down 13711 Foothill Blvd. Sylmar CA 91342 (818)362-0511
51 321 12437 Sunnyvale Town 1175 Town Center Lane Sunnyvale CA 94086 (408)733-3317
52 332 12439 Kinney Cut-Down 12512 N. Victory Blvd. North Hollywood CA 91606 (818)508-6109
51 322 12443 Navato Fair 922 Diablo Avenue Novato CA 94945 (415)892-2213
52 334 12444 Midtown Square 16930-G Main Street Hesperia CA 92345 (619)949-8224
52 334 12445 Mission Gorge 9720 Mission Gorge Rd., A&B Santee CA 92071 (619)562-5381
51 324 12447 Valley Plaza 2701 Ming Avenue, #64 Bakersfield CA 93304 (805)832-4048
54 350 12448 Plaza at Landmark 6204 Little River Turn Pike Alexandria VA 22312 (703)354-8663
54 350 12449 Fair City Mall 9662 Main Street Fairfax VA 22031 (703)239-8830
53 348 12451 South County Mall 424 S. County Center Way St. Louis MO 63129 (314)894-3406
52 333 12452LF Montebello Town Center 2011 Montebello Town Center Montebello CA 90640 (213)888-1370
51 321 12453LF Oakridge Mall 110 Oakridge Mall San Jose CA 95123 (408)281-4082
52 337 12454LF Laguna Hills Mall 24155 Laguna Hills Mall #1750 Laguna Hills CA 92653 (714)586-4829
54 350 12455 Forest Village 3393 Donnel Drive Forestville MD 20747 (301)967-1883
54 350 12456 Westgate Plaza 8085 Sudley Road Manassas VA 22110 (703)368-3692
53 348 12457 Fashion Square 3657 W. Waters Avenue Tampa FL 33614 (813)935-6686
53 347 12459 King's Market 1425 Market Blvd., #560 Roswell GA 30076 (404)641-1129
53 343 12460 Market Center 11130 Lomas Blvd., N.E. #F4 Albuquerque NM 87112 (505)291-8794
51 327 12461 Scottsdale 8980 E. Indian Bend Rd., #D4 Scottsdale AZ 85250 (602)998-8410
51 323 12463 Sunset Esplanade 2322 Tualation Valley Hwy. Hillsboro OR 97123 (503)640-6907
54 352 12464 Machesney Park 8750 N. 2nd Street Rockford IL 61111 (815)633-4955
51 321 12465LF New Park Mall 1213 New Park Mall Newark CA 94560 (510)796-3669
52 339 12469 Carson Mall 283 Carson Mall Carson CA 90746 (310)715-2516
</TABLE>
<PAGE> 54
VIA FEDERAL EXPRESS
FOOTHILL.
November 9, 1995
Mr. Bernie Tessler
President
C/O Little Folk Shop, Inc.
801 Sentous Avenue
City of Industry, CA 91748
Re: AMENDMENT NO. ONE TO THE LOAN
AND SECURITY AGREEMENT ("AMENDMENT")
Dear Mr. Tessler:
Enclosed please find two (2) execution copies of the above referenced Amendment
to be signed on behalf of LFS Acquisition Corp., and reaffirmed by Mr. Bernard
Tessler. Please return one (1) fully executed Amendment via Federal Express to
my attention and retain the remaining with your records.
If you have any questions, please give me a call at (310) 996-7144.
Sincerely,
FOOTHILL CAPITAL CORPORATION
/s/ MICHELLE L. MARTINEZ
- ----------------------------
Michelle L. Martinez
Loan Security Administrator
/mm
Enclosures
Foothill Capital Corporation / 310-996-7000
11111 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025-3333
A NORWEST COMPANY
<PAGE> 55
AMENDMENT NO. ONE TO THE LOAN
AND SECURITY AGREEMENT
LFS ACQUISITION CORP.
This Amendment No. One To The Loan And Security Agreement (the
"Amendment") is entered into as of the 8th day of November, 1995, by and
between LFS ACQUISITION CORP., a Delaware corporation ("Borrower"), whose
chief executive office is located at 801 Sentous Avenue, City of Industry,
California 91748 and FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333, in light of the following
facts:
FACTS
FACT ONE: Foothill and Borrower have previously entered into
that certain Loan And Security Agreement, dated May 31, 1995 (the "Agreement").
FACT TWO: Foothill and Borrower desire to further amend the
Agreement as provided herein. Terms defined in the Agreement which are used
herein shall have the same meanings as set forth in the Agreement, unless
otherwise specified.
NOW, THEREFORE, Foothill and Borrower hereby modify and amend the
Agreement as follows:
1. Notwithstanding anything to the contrary contained in Section
2.1 (a)(1) and Section 2.1 (a)(2) of the Agreement, Borrower's cost of Eligible
Inventory shall be (i) sixty five percent (65%) from December 1, 1995 through
December 10, 1995, (ii) sixty four percent (64%) from December 11, 1995 through
December 17, 1995, (iii) sixty three percent (63%) from December 18, 1995
through December 24, 1995, and (iv) sixty two percent (62%) from December 25,
1995 through December 30, 1995. On December 31, 1995, said Eligible Inventory
shall revert to the original terms of the Agreement.
2. Notwithstanding anything to the contrary contained in Section
2.1(c) of the Agreement, the "Maximum Amount" for purposes of the Agreement
shall be at Twenty Three Million Dollars ($23,000,000) from November 2, 1995
through December 31, 1995. On January 1, 1996, the Maximum Amount shall revert
to the original term of the Agreement.
1
<PAGE> 56
3. Foothill shall charge Borrower's loan account a fee in the
amount of $50,350 upon execution and delivery to Foothill of this Amendment.
Said fee shall be fully-earned, non-refundable, and due and payable on the date
Borrower's loan account is charged.
4. In the event of a conflict between the terms and provisions of
this Amendment and the terms and provisions of the Agreement, the terms and
provisions of this Amendment shall govern. In all other respects, the
Agreement, as supplemented, amended and modified, shall remain in fun force and
effect.
IN WITNESS WHEREOF, Borrower and Foothill have executed this Amendment
as of the day and year first written above.
FOOTHILL CAPITAL CORPORATION LFS ACQUISITION CORP.
a California corporation a Delaware corporation
By /s/ LISA M. GONZALES By /s/ BERNARD TESSLER, PRESIDENT
------------------------------ ------------------------------
Lisa M. Gonzales Bernard Tessler
Its Assistant Vice President Its President
----------------------------- -----------------------------
- ------------------------------------------------------------------------------
By its acceptance below this ___ day of November, 1995, the undersigned
guarantor hereby reaffirms its Continuing Guaranty dated May 31, 1995 and
consents to the above-stated terms.
HOLTZMAN'S LITTLE FOLK SHOP, INC.
a California corporation
By /s/ BERNARD TESSLER, PRESIDENT
------------------------------
Bernard Tessler
Its President
-----------------------------
2
<PAGE> 57
VIA FEDERAL EXPRESS
FOOTHILL.
February 21, 1995
Mr. Bernie Tessler
President
C/O Little Folk Shop, Inc.
801 Sentous Avenue
City of Industry, CA 91748
Re: LFS ACQUISITION CORP.
Dear Mr. Tessler:
Enclosed please find an executed copy of Amendment No. Two to the Loan And
Security Agreement regarding the above referenced company for your records.
If you have any questions regarding the enclosed, please feel free to call me
at (310) 996-7144.
Sincerely,
FOOTHILL CAPITAL CORPORATION
/s/ MICHELLE L. MARTINEZ
- ----------------------------
Michelle L. Martinez
Loan Security Administrator
/mm
Enclosures
cc: Robert C. Colton, Esq.
Foothill Capital Corporation / 310-996-7000
11111 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025-3333
A NORWEST COMPANY
<PAGE> 58
AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT
This Amendment Number Two to Loan and Security Agreement ("Amendment")
is entered into as of February 1, 1996, by and between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), and LFS ACQUISITION CORP.,
a Delaware corporation ("Borrower"), in light of the following:
A. Borrower and Foothill have previously entered into that certain
Loan and Security Agreement, dated as of May 31, 1995 (as amended, the
"Agreement").
B. Borrower and Foothill desire to amend the Agreement as provided
for and on the conditions herein.
NOW, THEREFORE, Borrower and Foothill hereby amend and supplement the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this
Amendment shall have the meanings given to them in the Agreement unless
specifically defined herein.
2. AMENDMENTS.
(a) The definition of Reference Rate in Section 1.1 of the
Agreement is amended as follows:
"Reference Rate" means the variable rate of interest,
per annum, most recently announced by Norwest Bank Minnesota,
National Association, or any successor to the foregoing
institution as its "prime rate" or "reference rate" as the case
may be, irrespective of whether such announced rate is the best
rate available from such financial institution.
(b) Section 2.1(a)(1) of the Agreement is amended as
follows, but only for the periods of February 1, 1996 through April 30,
1996 and July 1, 1996 through August 31, 1996 or on such earlier date as
Borrower has elected in writing to terminate the amendment to such
section;
(1) During the months of February through April of
1996, and July and August of 1996, the lower of: thirty five
percent (35%) of the retail selling price of Eligible Inventory
or sixty five percent (65%) of Borrower's cost of Eligible
Inventory, and
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(c) The second sentence of Section 2.2(d) of the Agreement
is amended as follows:
On the first day of each month, Borrower will pay
Foothill a fee equal to two percent (2%) per annum times the
actual Daily Balance of the undrawn L/Cs and L/C Guarantees that
were outstanding during the immediately preceding month.
(d) Section 2.5(a) and (b) are amended to read as follows:
(a) Interest Rate. All Obligations, except for
undrawn L/Cs and L/C Guarantees, shall bear interest, on the
actual Daily Balance, at a per annum rate of two (2) percentage
points above the Reference Rate.
(b) Default Rate. All Obligations, except for
undrawn L/Cs and L/C Guarantees, shall bear interest, from any
after the occurrence and during the continuance of an Event of
Default, at a per annum rate equal to five (5) percentage points
above the Reference Rate. From and after the occurrence and
during the continuance of an Event of Default, the fee provided
in Section 2.2(d) shall be increased to a fee equal to five
percent (5%) per annum times the actual Daily Balance of the
undrawn L/Cs and L/C Guarantees that were outstanding during the
immediately preceding month.
(e) The second sentence of Section 2.6 is amended as
follows:
From and after February 1, 1996, Foothill shall be
entitled to charge Borrower for two (2) Business Days of
clearance at the applicable rates set forth in Sections 2.5(a)
and 2.5(b) (applicable to advances under Section 2.1) on all
collections, checks, wire transfers or other items of payment
that are received by Foothill (regardless of whether forwarded
by the Lock Box Banks to Foothill, whether provisionally applied
to reduce the Obligations, or otherwise).
(f) Section 6.13 of the Agreement is hereby amended as
follows, but only for the quarters ending January 31, 1996, April 30,
1996 and July 31, 1996:
6.13 FINANCIAL COVENANTS. Borrower shall remain:
(a) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least
the following, measured on a fiscal quarter-end basis:
(1) eighty five one hundredths to one
(0.85:1.0) as of January 31, 1996;
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(2) eighty one hundredths to one (0.80:1.0) as of
April 30, 1996 and July 31, 1996;
(b) Total Liabilities to Tangible Net Worth Ratio. A
ratio of Borrower's total liabilities (other than the Subordinated
Indebtedness and Indebtedness to Woolworth pursuant to the Purchase
Agreement) divided by Tangible Net Worth of not more than one of the
following, measured on a fiscal quarter-end basis:
(1) fifteen to one (15:1.0) as of January 31,
1996;
(2) twenty five to one (25:1.0) as of April 30,
1996;
(3) fifty five to one (55:1.0) as of July 31,
1996.
(c) Tangible Net Worth. A Tangible Net Worth measured on
a fiscal quarter-end basis of not less than the following:
(1) Two Million Seven Hundred Fifty Thousand
Dollars ($2,750,000) as of January 31, 1996;
(2) One Million Two Hundred Fifty Thousand
Dollars ($1,250,000) as of April 30, 1996;
(3) Two Hundred Fifty Thousand Dollars ($250,000)
as of July 31, 1996; and
(d) Working Capital. Working Capital of not less than the
following negative amounts, measured on a fiscal quarter-end basis:
(1) Two Million Five Hundred Thousand Dollars
(-$2,500,000) as of January 31, 1996;
(2) Four Million Five Hundred Thousand Dollars
(-$4,500,000) as of April 30, 1996;
(3) Five Million Dollars (-$5,000,000) as of July
31, 1996.
For purpose of calculating the financial covenants contained in this
Section 6.13, Two Million Two Hundred Thousand Dollars ($2,200,000) of
Borrower's Consolidated Current Liabilities owed to Woolworth shall be excluded
through July 31, 1996 unless one of the following events occurs during such
period: (a) Borrower shall have settled its litigation with Woolworth, or (b)
Borrower's parent, Kids Mart, Inc. (formerly Frost Hanna), shall have issued
additional equity securities in either a public or private transaction. Upon
consummation of either one or both of the events set forth in (a) or (b) above,
whether prior to, on or after July 31, 1996, Foothill and Borrower shall
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<PAGE> 61
amend this Section 6.13 to give effect to such event in the same manner that
they utilized in establishing the covenants in Amendment Number One to Loan
and Security Agreement dated as of February 1, 1996.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to
Foothill that all of Borrower's representations and warranties set forth in the
Agreement are true, complete and accurate in all respects of the date hereof.
4. NO DEFAULTS. Borrower hereby affirms to Foothill that no Event
of Default has occurred and is continuing as of the date hereof.
5. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the following:
(a) Payment by Borrower to Foothill of an amendment fee in the
aggregate amount of Ninety Thousand Dollars ($90,000). The amendment fee shall
be charged to Borrower's loan account pursuant to Section 2.5(d) of the
Agreement and shall be payable on the first day of each month as follows:
(1) $15,000 each for the months of February through April,
1996,
(2) $20,000 for the month of July, 1996, if Section 2(b) of
this Amendment remains in effect on the first day of such month, and
(3) $25,000 for the month of August, 1996, if Section 2(b)
of this Amendment remains in effect on the first day of such month; and
(b) Receipt by Foothill of an executed copy of this Amendment.
6. COSTS AND EXPENSES. Borrower shall pay to Foothill all of
Foothill's out-of-pocket costs and expenses (including, without limitation, the
fees and expenses of its counsel) arising in connection with the preparation,
execution, and delivery of this Amendment and all related documents.
7. LIMITED EFFECT. In the event of a conflict between the terms
and provisions of this Amendment and the terms and provisions of the Agreement,
the terms and provision of this Agreement shall govern. In all other respects,
the Agreement, as amended and supplemented hereby, shall remain in full force
and effect.
8. COUNTERPARTS: EFFECTIVENESS. This Amendment may be executed in
any number of counterparts and by different parties on separate counterparts
each of which when so executed and delivered shall be deemed to be an
original. All such
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<PAGE> 62
counterparts, taken together, shall constitute but one and the same Amendment.
This Amendment shall become effective upon the execution of a counterpart of
this Amendment by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ MARTIN VALENCIA
------------------------------------
Title: Assistant Vice President
--------------------------------
LFS ACQUISITION CORP.,
a Delaware corporation
By: /s/ BERNARD TESSLER
------------------------------------
Bernard Tessler, President
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<PAGE> 63
The undersigned has executed a Continuing Guaranty in favor of Foothill
Capital Corporation ("Foothill") respecting the obligations of LFS ACQUISITION
CORP. ("Borrower") owing to Foothill. The undersigned acknowledges the terms of
the above Amendment and reaffirms and agrees that: its Continuing Guaranty
remains in full force and effect; nothing in such Continuing Guaranty obligates
Foothill to notify the undersigned of any changes in the financial
accommodations made available to Borrower or to seek reaffirmations of the
Continuing Guaranty; and no requirement to so notify the undersigned or to seek
reaffirmations in the future shall be implied by the execution of this
reaffirmation.
HOLTZMAN'S LITTLE FOLK SHOP, INC.,
a California corporation
By: /s/ BERNARD TESSLER
-------------------------------------
Bernard Tessler, President
6
<PAGE> 64
VIA FEDERAL EXPRESS
April 11, 1996
FOOTHILL.
LFS Acquisition Corp.
801 Sentous Avenue
City of Industry, CA 91748
Attn: Bernie Tessler
Re: LFS ACQUISITION CORP.
Gentlemen:
Reference is hereby made to that certain Loan And Security Agreement by
and between Foothill Capital Corporation ("Foothill") and LFS Acquisition Corp.
("Borrower") dated as of May 31, 1995 (as amended and supplemented, "the
Agreement"). Borrower has informed Foothill that it was not in compliance with
Sections 6.13(a), (b), (c) and (d) of the Agreement for its fiscal quarter ended
January 31, 1996 and has requested that Foothill waive compliance of said
Sections.
Section 6.13(a) of the Agreement states that Borrower shall maintain a
ratio of Consolidated Current Assets divided by Consolidated Current
Liabilities of at least eighty five one hundredths to one (0.85:1.0) as of
January 31, 1996.
Section 6.13(b) of the Agreement requires that Borrower shall maintain
a ratio of Borrower's total liabilities to Tangible Net Worth of not more than
fifteen to one (15:1.0) as of January 31, 1996.
Section 6.13(c) of the Agreement stipulates that Borrower shall
maintain a Tangible Net Worth of not less than Two Million Seven Hundred Fifty
Thousand Dollars ($2,750,0000) as of January 31, 1996.
Section 6.13(d) of the Agreement mandates that Borrower shall maintain
a Working Capital of not less than the negative amount of Two Million Five
Hundred Thousand Dollars (-$2,500,000) as of January 31, 1996.
Foothill hereby agrees to waive Borrower's compliance as stated above
for Sections 6.13(a), (b), (c) and (d) of the Agreement for Borrower's fiscal
quarter ended January 31, 1996 only.
Foothill Capital Corporation / 310-996-7000
11111 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025-3333
A NORWEST COMPANY
<PAGE> 65
LFS Acquisition Corp.
April 11, 1996
Page Two
Foothill shall charge Borrower's loan account a fee in the amount of $4,000.
Said fee shall be fully-earned, non-refundable, and due and payable on the date
Borrower's loan account is charged.
Foothill's waiver is effective only to the extent specifically stated above and
does not effect or diminish Foothill's rights hereafter to require strict
performance by Borrower of each provision of the Agreement. Foothill's rights
and remedies under the Agreement continue in full force and effect and the
consequences of any act or failure to act on the part of Borrower which would
constitute an Event of Default, as defined in the Agreement and to which
Foothill has not herein specifically consented are not waived.
Sincerely,
FOOTHILL CAPITAL CORPORATION
By /s/ MARTIN VALENCIA
----------------------------
Martin Valencia
Its Assistant Vice President
----------------------------
Foothill Capital Corporation / 310-996-7000
11111 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025-3333
A NORWEST COMPANY
<PAGE> 66
AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT
This Amendment Number Three to Loan and Security Agreement
("Amendment") is entered into as of April 15, 1996, by and between FOOTHILL
CAPITAL CORPORATION, a California corporation ("Foothill"), and LFS ACQUISITION
CORP., a Delaware corporation ("Borrower"), in light of the following:
A. Borrower and Foothill have previously entered into that
certain Loan and Security Agreement, dated as of May 31, 1995 (as amended, the
"Agreement").
B. Borrower and Foothill desire to further amend the Agreement as
provided for and on the conditions herein.
NOW, THEREFORE, Borrower and Foothill hereby amend and supplement the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this
Amendment shall have the meanings given to them in the Agreement unless
specifically defined herein.
2. AMENDMENTS.
Section 6.13 of the Agreement is hereby amended in its
entirety as follows:
6.13 FINANCIAL COVENANTS. Borrower shall maintain:
(a) Current Ratio. A ratio of
Consolidated Current Assets divided by Consolidated Current
Liabilities of at least the following, measured on a fiscal
quarter-end basis: .55:1.00;
(b) Tangible Net Worth. A Tangible Net
Worth measured on a fiscal quarter-end basis of not less than
the following negative amounts:
(1) -$4,500,000 as of April 30,
1996;
(2) -$6,000,000 as of July 31,
1996; and
(3) -$5,000,000 for all subsequent
fiscal quarters.
(c) Working Capital. Working Capital of
not less than the following negative amounts, measured on a
fiscal quarter-end basis:
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(1) -$10,000,000 as of April 30, 1996;
(2) -$11,500,000 as of July 31, 1996;
(3) -$10,500,000 as of October 31, 1996;
(4) -$9,750,000 for all subsequent fiscal quarters.
For purpose of calculating the financial covenants contained in this
Section 6.13, Two Million Two Hundred Thousand Dollars (2,200,000) of
Borrower's Consolidated Current Liabilities owed to Woolworth shall be excluded
through April 30, 1997 unless one of the following events occurs during such
period: (a) Borrower shall have settled its litigation with Woolworth, or (b)
Borrower's parent, Kids Mart, Inc. (formerly Frost Hanna), shall have issued
additional equity securities in either a public or private transaction. Upon
consummation of either one or both of the events set forth in (a) or (b) above,
whether prior to, on or after April 30, 1997, Foothill and Borrower shall amend
this Section 6.13 to give effect to such event in the same manner that they
utilized in establishing the covenants in Amendment Number One to Loan and
Security Agreement dated as of February 1, 1996.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to
Foothill that all of Borrower's representations and warranties set forth in the
Agreement are true, complete and accurate in all respects as of the date
hereof.
4. NO DEFAULTS. Borrower hereby affirms to foothill that no Event
of Default has occurred and is continuing as of the date hereof.
5. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the following:
(a) Payment by Borrower to Foothill of an amendment fee in the
aggregate amount of Fifty Thousand Dollars ($50,000). The amendment fee shall
be charged to Borrower's loan account pursuant to Section 2.5(d) of the
Agreement and shall be payable on the date hereof.
(b) Receipt by Foothill of an executed copy of this Agreement.
6. COSTS AND EXPENSES. Borrower shall pay to Foothill all of
Foothill's out-of-pocket costs and expenses (including, without limitation, the
fees and expenses of its counsel) arising in connection with the preparation,
execution, and delivery of this Amendment and all related documents.
7. LIMITED EFFECT. In the event of a conflict between the terms
and provisions of this Amendment and the terms and provisions of the Agreement,
the terms and provisions of the Amendment shall govern. In all other respects,
the Agreement as amended and supplemented hereby, shall remain in full force
and effect.
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<PAGE> 68
8. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which when so executed and delivered shall be deemed to be an original.
All such counterparts, taken together, shall constitute but one and the same
Amendment. This Amendment shall become effective upon the execution of a
counterpart of this Amendment by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ MARTIN VALENCIA
------------------------------------
Title: Assistant Vice President
--------------------------------
LFS ACQUISITION CORP.,
a Delaware corporation
By: /s/ BERNARD TESSLER
------------------------------------
Bernard Tessler, President
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<PAGE> 69
The undersigned has executed a Continuing Guaranty in favor of Foothill
Capital Corporation ("Foothill") respecting the obligations of LFS ACQUISITION
CORP. ("Borrower") owing to Foothill. The undersigned acknowledges the terms of
the above Amendment and reaffirms and agrees that: its Continuing Guaranty
remains in full force and effect; nothing in such Continuing Guaranty obligates
Foothill to notify the undersigned of any changes in the financial
accommodations made available to Borrower or to seek reaffirmations of the
Continuing Guaranty; and no requirement to so notify the undersigned or to seek
reaffirmations in the future shall be implied by the execution of this
reaffirmation.
HOLTZMAN'S LITTLE FOLK SHOP, INC.,
a California corporation
By: /s/ BERNARD TESSLER
-------------------------------------
Bernard Tessler, President
4
<PAGE> 70
AMENDMENT NUMBER FOUR TO LOAN AND SECURITY AGREEMENT
This Amendment Number Four to Loan and Security Agreement ("Amendment")
is entered into as of June 10, 1996, by and between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), and LFS ACQUISITION CORP.,
a Delaware corporation ("Borrower"), in light of the following:
A. Borrower and Foothill have previously entered into that certain
Loan and Security Agreement, dated as of May 31, 1996 (as amended, the
"Agreement").
B. Borrower and Foothill desire to further amend the Agreement as
provided for and on the conditions herein.
NOW, THEREFORE, Borrower and Foothill hereby amend and supplement the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this
Amendment shall have the meanings given to them in the Agreement unless
specifically defined herein.
2. AMENDMENTS.
(a) The final sentence of the definition of "Eligible
Inventory" is hereby amended as follows:
"Eligible Inventory shall not include obsolete items,
restrictive or custom items, raw materials, work-in-process, components
that are not part of finished goods, spare parts, packaging and shipping
materials, supplies used or consumed in Borrower's business, Inventory
subject to a security interest or lien in favor of any third Person,
bill and hold goods, Inventory that is not subject to Foothill's
perfected security interests, Inventory acquired on consignment, and
slow moving Inventory which means Inventory held by Borrower in excess
of the number of months for the periods set forth below:
Number of Months
----------------
Prior to June 15, 1996 12 months
June 15, 1996 through
July 14, 1996 11 months
July 16, 1996 through
August 14, 1996 10 months
August 15, 1996 through
September 14, 1996 9 months
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September 15, 1996 through
October 14, 1996 8 months
October 15, 1996 through
November 14, 1996 7 months
November 15, 1996 and at
all times thereafter 6 months."
(b) Section 2.1(a) of the Agreement is amended additional to
the Borrowing Base an additional amount of $2,000,000 (the "Overadvance") from
June 10, 1996 through February 1, 1997. Thereafter, the Borrowing Base shall
not include any portion of the Overadvance.
(c) The first sentence of Section 3.3 of the Agreement is
hereby amended in its entirety to read as follows:
"This Agreement shall become effective upon the execution and
delivery hereof by Borrower and Foothill and shall continue in full
force and effect for a term ending on May 31, 1999 (the "Renewal Date")
and automatically shall be renewed for successive one-year periods
thereafter, unless sooner terminated pursuant to the terms hereof."
(d) Section 3.5 of the Agreement is amended in its entirety
to read as follows:
"3.5 EARLY TERMINATION BY BORROWER. The provisions of
Section 3.5 that allow termination of this Agreement by Borrower only on
the Renewal Date and certain anniversaries thereof notwithstanding,
Borrower has the option, at any time upon sixty days prior written
notice to Foothill, to terminate this Agreement by paying to Foothill,
in cash, the Obligations (including an amount equal to the full amount
of the L/Cs or L/C Guarantees), together with a premium (the "Early
Termination Premium") in an amount equal to (a) 3% of the Maximum Amount
prior to June 1, 1997 (b) 2% of the Maximum Amount from June 1, 1998
until May 31, 1999; provided, however, if Borrower terminates this
Agreement as the result of Foothill's material breach hereunder, no
Early Termination Premium need be paid."
(e) The following additional sections are added to the
Agreement:
"6.18 SUPPLIER TERMS. At all times on or after August 31,
1996, Borrower shall receive payment terms from its major suppliers and
factors which will average not less than 30 days from invoice date."
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"6.19 ADDITIONAL EQUITY. On or before September 30, 1996,
Borrower shall have received proceeds from a private placement by Kids
Mart, Inc. of equity securities for an amount of not less than
$2,000,000 or shall have substantially completed such private
placement."
"6.20 COMPLIANCE WITH FINANCIAL PROJECTIONS. For the periods
June 1996 through January 1997, Borrower must be within at least 85% of
its financial projections for net revenues; earnings before interest,
taxes, depreciation and amortization; and net income. For purposes of
this Section 6.20, Borrower's projections shall be those projections
most recently delivered by Borrower to Foothill prior to June 10, 1996."
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to
Foothill that all of Borrower's representations and warranties set forth in the
Agreement are true, complete and accurate in all respects as of the date hereof.
4. NO DEFAULTS. Borrower hereby affirms to Foothill that no Event
of Default has occurred and is continuing as of the date hereof.
5. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the following:
(a) Receipt by Foothill of an executed copy of this Amendment.
(b) Receipt by Foothill of a five year Warrant to purchase 100,000
shares of Common Stock of Borrower's parent, Kids Mart, Inc., a Florida
corporation, in the form attached hereto.
6. FEES, COSTS AND EXPENSES. Borrower shall pay to Foothill: (a)
all of Foothill's out-of-pocket costs and expenses (including, without
limitation, the fees and expenses of its counsel) arising in connection with
the preparation, execution, and delivery of this Amendment and all related
documents, and (b) the following fees for this Amendment and the Overadvance:
(1) $15,000 per month for the months of June 1996 through January 1997 which
fee is payable on the first day of each month in advance; and (2) $7,500 for
each month that any portion of the Overadvance is outstanding (and an
additional $7,500 for each month in which the Overadvance exceeds $1,000,000 on
any day), which fees are payable on the first day of each month in arrears.
7. LIMITED EFFECT. In the event of a conflict between the terms
and provisions of this Amendment and the terms and provisions of the Agreement,
the terms and provisions of this Amendment shall govern. In all other
respects, the Agreement, as amended and supplemented hereby, shall remain in
full force and effect.
8. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which when so executed and delivered shall be deemed to be an
original. All such
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<PAGE> 73
counterparts, taken together, shall constitute but one and the same Amendment.
This Amendment shall become effective upon the execution of a counterpart of
this Amendment by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ MARTIN VALENCIA
------------------------------------
Title: Assistant Vice President
--------------------------------
LFS ACQUISITION CORP.,
a Delaware corporation
By: /s/ BERNARD TESSLER
------------------------------------
Bernard Tessler, President
4
<PAGE> 74
The undersigned has executed a Continuing Guaranty in favor of Foothill
Capital Corporation ("Foothill") respecting the obligations of LFS ACQUISITION
CORP. ("Borrower") owing to Foothill. The undersigned acknowledges the terms of
the above Amendment and reaffirms and agrees that: its Continuing Guaranty
remains in full force and effect; nothing in such Continuing Guaranty obligates
Foothill to notify the undersigned of any changes in the financial
accommodations made available to Borrower or to seek reaffirmations of the
Continuing Guaranty; and no requirement to so notify the undersigned or to seek
reaffirmations in the future shall be implied by the execution of this
reaffirmation.
HOLTZMAN'S LITTLE FOLK SHOP, INC.,
a California corporation
By: /s/ BERNARD TESSLER
-------------------------------------
Bernard Tessler, President
5
<PAGE> 75
AMENDMENT NO. FIVE TO THE LOAN
AND SECURITY AGREEMENT
LFS ACQUISITION CORP.
This Amendment No. Five To The Loan And Security Agreement (the
"Amendment") is entered into as of the 19th day of July, 1996, by and between
LFS ACQUISITION CORP., a Delaware corporation ("Borrower"), whose chief
executive office is located at 801 Sentous Avenue, City of Industry, California
91748 and FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"),
with a place of business located at 11111 Santa Monica Boulevard, Suite 1500,
Los Angeles, California 90025-3333, in light of the following facts:
FACTS
FACT ONE: Foothill and Borrower have previously entered into
that certain Loan And Security Agreement, dated May 31, 1995 (as amended and
supplemented, the "Agreement").
FACT TWO: Foothill and Borrower desire to further amend the
Agreement as provided herein. Terms defined in the Agreement which are used
herein shall have the same meanings as set forth in the Agreement, unless
otherwise specified.
NOW, THEREFORE, Foothill and Borrower hereby modify and amend the
Agreement as follows:
1. Section 2.1(a) of the Agreement is hereby amended to extend
the $2,000,000 Overadvance period from June 10, 1996 through February 15, 1997.
Thereafter, the Borrowing Base shall not include any portion of the
Overadvance.
2. Foothill shall charge Borrower's loan account a fee in the
amount of $250.00 upon execution and delivery to Foothill of this Amendment.
Said fee shall be fully-earned, non-refundable, and due and payable on the date
Borrower's loan account is charged.
3. In the event of a conflict between the terms and provisions of
this Amendment and the terms and provisions of the Agreement, the terms and
provisions of this Amendment shall govern. In all other respects, the
Agreement, as supplemented, amended and modified, shall remain in full force
and effect.
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<PAGE> 76
IN WITNESS WHEREOF, Borrower and Foothill have executed this Amendment
as of the day and year first written above.
FOOTHILL CAPITAL CORPORATION LFS ACQUISITION CORP.
a California corporation a Delaware corporation
By /s/ MARTIN VALENCIA By /s/ BERNARD TESSLER
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Martin P. Valencia Bernard Tessler
Its Assistant Vice President Its President
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By its acceptance below this 24 day of July, 1996, the undersigned guarantor
hereby reaffirms its Continuing Guaranty dated May 31, 1995 and consents to the
above-stated terms.
HOLTZMAN'S LITTLE FOLK SHOP, INC.
a California corporation
By /s/ BERNARD TESSLER
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Bernard Tessler
Its President
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2
<PAGE> 1
Exhibit 10.6
[CSI LOGO]
MASTER LEASE AGREEMENT NUMBER 143050
COMPUTER SALES INTERNATIONAL, INC.
10845 Olive Boulevard MAILING ADDRESS:
St. Louis, Missouri 63141 Post Office Box 16264
(314) 997-7010 St. Louis, MO 63105
In California: CSI Leasing Inc. In Florida: CSI Computer Sales, Inc.
MASTER LEASE AGREEMENT dated as of July 24, 1996 by and between COMPUTER SALES
INTERNATIONAL, INC. (hereinafter called "Lessor") having its principal office
and place of business at 10845 Olive Boulevard, St. Louis, Missouri 63141, and
KIDS MART, INC.
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(hereinafter called "Lessee") having its principal office and place of business
at 801 Sentous Avenue, City of Industry, California 91748
IN CONSIDERATION of the mutual agreements hereinafter set forth and the payment
of rent as herein provided for, the parties hereto agree as follows:
1. LEASE AGREEMENT
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor all
of the equipment and other tangible personal property described in each of the
Equipment Schedules which are executed from time to time by Lessor and Lessee
pursuant to this Master Lease. Each Equipment Schedule shall constitute a
separate lease on the terms and conditions stated therein and, to the extent
not inconsistent with the Equipment Schedule, on the terms and conditions
stated in the Master Lease which shall be incorporated by reference in the
Equipment Schedule. The term "Equipment" as used herein shall mean, with
respect to any Equipment Schedule, the Equipment described therein. The term
"Unit" as used herein shall mean an individual machine on an Equipment Schedule
or an individual feature when such feature is leased separately from a machine.
The term of this Master Lease shall begin on the date set forth above and shall
continue in effect so long as any Equipment Schedule entered into pursuant to
this Master Lease remains in effect.
2. TERM
2.1 COMMENCEMENT DATE: The commencement date ("Commencement Date") for
each Unit of Equipment will be the date on which such Unit is installed by the
manufacturer or other installer, except that, in the event there is a delay in
the installation of a Unit and such delay is attributable to Lessee, then the
Commencement Date for such Unit shall be five (5) working days following the
date upon which Lessee has been given notice that such Unit is available for
installation. If requested by Lessor, Lessee will promptly execute and deliver
to Lessor a certificate confirming the Commencement Date(s).
2.2 INITIAL TERM: The "Initial Term" of an Equipment Schedule shall
mean the period beginning on the Commencement Date of the Unit having the
latest Commencement Date of the Units on such Equipment Schedule if such
Commencement Date is the first day of a month, and otherwise, the Initial Term
shall begin on the first day of the month immediately following the month in
which such latest Commencement Date falls. The Initial Term of an Equipment
Schedule shall continue for the number of months specified therein and shall
automatically be extended for successive four month periods thereafter at the
same Monthly Rental unless and until terminated by either party giving the
other party not less than 120 days prior written notice. Any termination (i)
must relate to all of the Equipment described on the Equipment Schedule to
which the notice applies, (ii) will be effective only on the last day of the
Initial Term or on the last day of any successive four month period, (iii) will
be effective only if Lessee returns all of the Equipment to Lessor in
accordance with the terms of the Equipment Schedule by the day after the
scheduled termination date, and (iv) may not be unilaterally revoked.
3. MONTHLY RENTAL
Lessee shall pay to Lessor the monthly rental ("Monthly Rental") for
each Unit as set forth in the relevant Equipment Schedule. The Monthly Rental
shall be payable at the above mailing address of Lessor or at such other place
as Lessor may from time to time designate in a written notice to Lessee. The
Monthly Rental for each Unit shall commence on the Commencement Date of such
Unit and shall be due and payable in advance and without demand on the first
day of each month thereafter during the term of this Lease. If the Commencement
Date for a Unit is a day other than the first day of a month, Daily Rental
shall be payable ("Daily Rental" shall equal one-thirtieth of the Monthly
Rental for such Unit) for each day from, and including, the Commencement Date
to, but not including, the first day of the Initial Term, and such total Daily
Rental amount shall be due and payable on the first day of the Initial Term.
4. WARRANTIES
4.1 AFFIRMATIVE WARRANTIES: Lessor represents and warrants that:
(a) The Equipment shall be eligible for the manufacturer's standard
prime shift maintenance contract upon installation, provided Lessee requests
such coverage in writing prior to installation of the Equipment.
(b) During the term of this Master Lease, if no Event of Default has
occurred, Lessee's quiet enjoyment and peaceable possession of the Equipment
shall not be interrupted by Lessor or anyone claiming solely through or under
Lessor.
4.2 DISCLAIMER OF WARRANTIES: THE AFFIRMATIVE WARRANTIES SET FORTH
ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES OF LESSOR. LESSOR MAKES NO OTHER
WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, THE DESIGN OR CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY,
FITNESS, CAPACITY OR SUITABILITY FOR
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ANY PARTICULAR PURPOSE, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE
EQUIPMENT, OR CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS AND SPECIFICATIONS
OF ANY PURCHASE ORDER OR ORDERS RELATING THERETO. Without limiting the
generality of the foregoing, Lessor shall not be liable to Lessee for any
liability, claim, loss, damage or expense of any kind or nature [including
strict liability in tort] caused directly or indirectly by the Equipment, any
inadequacy thereof for any purpose, any deficiency or defect therein, whether
known or unknown to Lessor. In any event, Lessor shall not be liable to Lessee
for any loss of business or any other incidental or consequential loss or
damage resulting from any cause whatsoever.
4.3 ASSIGNMENT OF WARRANTIES: Lessor hereby assigns to Lessee any and
all manufacturer's warranties, if assignable, and any other such rights that
are assignable as Lessor may have against the manufacturer of the Equipment
provided, however, that Lessee's sole remedy for the breach of any such
warranty or right shall be against the manufacturer and not Lessor.
4.4 SELECTION: Lessee acknowledges, represents and warrants that it has
made the selection of the Equipment based on its own judgment and expressly
disclaims any reliance upon statements made by the Lessor. The Equipment is
being leased for commercial or business purposes only, and will not be used for
consumer, personal, home, or family purposes.
5. NET LEASE
Each Equipment Schedule constitutes a net lease. Lessee shall be solely
responsible for all costs and expenses of every nature arising out of the
possession, use, and operation of the Equipment. Lessee's obligation to pay the
Monthly Rental and all other sums due hereunder shall be absolute and
unconditional and shall not be subject to any setoff, abatement, counterclaim,
recoupment, defense, cancellation, repudiation, rejection of Equipment,
revocation of acceptance of Equipment or any other right that Lessee may have
against Lessor. Except as expressly provided for herein, neither this Master
Lease, nor any Equipment Schedule, shall terminate nor shall the obligations of
Lessee be affected by reason of any defect in, damage to, or any loss or
destruction of the Equipment or any Unit from any cause whatsoever, or the
interference with the use thereof by any private person, corporation, or
governmental authority or as a result of any war, riot, insurrection or Act of
God. It is the express intention of Lessor and Lessee that all Monthly Rental
payable by Lessee under each Equipment Schedule shall be, and continue to be,
payable in all events throughout the term thereof.
6. TAXES
6.1 PAYMENT OF TAXES: Lessee covenants and agrees to pay to the
appropriate taxing authority, and discharge before the same become delinquent,
all taxes, fees, or other charges of any nature whatsoever, without pro-ration,
together with any related interest or penalties ["Impositions"] now or
hereafter imposed, assessed or payable during the term of the relevant
Equipment Schedule including any extension thereof (or an imposition relating
to a record date or status date that fell within the term of the relevant
Equipment Schedule including any extension thereof or is otherwise associated
with Lessee's leasing, possession or use of the Equipment) against Lessor,
Lessee or the Equipment by any federal, state, county or local government or
taxing authority upon or with respect to [i] the Equipment or any Unit, [ii]
upon the leasing, ordering, purchase, sale, ownership, use, operation, return
or other disposition thereof, [iii] the Monthly Rental or any other sums due
hereunder with respect to any Equipment Schedule, or [iv] the leasing of the
Equipment [excepting only federal, state and local taxes measured by the net
income of Lessor or any franchise tax upon Lessor measured by Lessor's capital,
capital stock or net worth]. Because the payment due date or reimbursement date
for an imposition may occur after the expiration or termination of the term of
the relevant Equipment Schedule, it is understood and agreed that Lessee's
liability for such impositions shall survive the expiration or termination of
the term of the relevant Equipment Schedule.
6.2 BILLING: Lessee shall, to the extent permitted by law, cause all
impositions to be billed to Lessee. Lessee shall, at its expense, timely file
all forms and returns and timely do all things required to be done in
connection with the levy, assessment and payment of any impositions, and Lessor
hereby appoints Lessee as Lessor's attorney-in-fact where necessary for such
purposes. Lessee shall submit written evidence to Lessor of the payment of all
impositions required to be paid by Lessee hereunder promptly after such
payment. Notwithstanding the foregoing, Lessor, in its sole discretion, may pay
any imposition itself or file any forms or returns with respect thereto. If
Lessor pays any imposition, Lessee shall, when billed, reimburse Lessor for
such payment.
6.3 CONTEST: Lessee may contest any imposition by appropriate legal
proceedings provided the nonpayment of such imposition thereof, or such
proceedings, will not, in the opinion of counsel for Lessor, adversely affect
the title, property interest or rights of Lessor in the Equipment and provided
further that, if requested by Lessor, Lessee has given to Lessor security,
sufficient in form and amount, in Lessor's reasonable judgment, to fully
satisfy the amount of the contested imposition.
7. DELIVERY AND RETURN
Lessor shall arrange for delivery, and Lessee shall pay, when billed,
all delivery expenses [including, without limitation, transportation costs and
the cost of in-transit insurance] associated with the delivery of each Unit from
its previous location to the location specified in the relevant Equipment
Schedule. Lessee shall inspect each Unit upon delivery, identify any observable
damage prior to accepting delivery, and note any such damage on the bill of
lading. Costs of repair which are not recoverable from the carrier because of
Lessee's failure to properly inspect for observable damage shall be borne and
promptly paid by Lessee. Lessee shall provide a suitable place for installation
of the Equipment with all appropriate facilities as specified by the
manufacturer. Lessor shall arrange and Lessee shall pay for the installation of
each Unit [if Lessee wishes to have the Equipment installed by an installer
other than the manufacturer or some other party approved in writing by Lessor,
then Lessee shall accept the Equipment "as is" and Lessor's warranty set forth
in Paragraph 4.1 (a) shall not apply]. Upon the termination of Lessee's right to
possession of any Unit [by expiration of the term of the relevant Equipment
Schedule or otherwise], Lessee shall, in accordance with Lessor's instructions
and at Lessee's expense [including without limitation transportation costs and
costs of in-transit insurance] return the Unit to such location within the
Continental United States as shall be designated by Lessor. Lessee shall
reimburse Lessor for all expenses paid by Lessor associated with return of the
Unit when billed. Lessee shall return each Unit in the same operating order,
repair, condition and appearance as when received, excepting only normal wear
and tear, and with all engineering changes prescribed by the manufacturer prior
to the termination of Lessee's right of possession incorporated in the Unit.
Lessee, at its expense, shall make any repairs necessary in order to certify the
Equipment as eligible for the manufacturer's prime shift maintenance contract
upon its return and shall have the Unit certified as eligible for the same. At
the time the Equipment is returned, Lessee shall provide a letter from the
manufacturer certifying such maintenance eligibility.
8. CARE OF EQUIPMENT
8.1 USE AND MAINTENANCE: Lessee shall, at its expense, maintain the
Equipment in good operating order, repair, and condition. Lessee shall not use
the Equipment for any purpose other than that for which it was designed. Prior
to the delivery date and before any action is taken to install the Equipment,
Lessee shall make a written request to the manufacturer for continued coverage
of the Equipment under one of the manufacturer's standard maintenance
agreements, and shall, at its expense, enter into and maintain in force such
maintenance agreement for each Unit and provide Lessor with a copy of such
agreement. IF LESSEE FAILS TO MAKE THE PROPER WRITTEN REQUEST TO THE
MANUFACTURER FOR COVERAGE UNDER ONE OF THE MANUFACTURER'S STANDARD MAINTENANCE
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AGREEMENTS, THEN LESSEE SHALL ACCEPT THE EQUIPMENT "AS IS" AND LESSOR'S
WARRANTY SET FORTH IN PARAGRAPH 4.1(A) SHALL NOT APPLY. In no event, however,
shall Lessee be required to enter into such a contract for any Unit so long as
that Unit is under a manufacturer's warranty which provides substantially
similar coverage.
8.2 ALTERATIONS AND ATTACHMENTS: With the prior written consent of
the Lessor, Lessee may, at its expense, make alterations or add attachments to
the Equipment which are removable and which do not interfere with the normal
and satisfactory operation or maintenance of the Equipment or Lessee's ability
to obtain the maintenance contract required in Section 8.1 above. Upon the
termination of Lessee's right to possession of any Unit, any alterations or
attachments to such Unit shall become the property of Lessor unless removed at
Lessee's expense prior to such termination. Lessor shall have the right,
following termination of Lessee's right to possession of any Unit, to remove
any attachments or alterations made by Lessee to such Unit and dispose of the
same without any liability therefor to Lessee and Lessee shall pay the costs of
such removal when billed.
8.3 INSPECTION: Lessee shall make the Equipment available to Lessor,
Secured Party (hereinafter defined) and Assignee (hereinafter defined) or the
designees of any of them during normal working hours for inspection or for any
other reasonable purpose.
9. LOSS OR DAMAGE
9.1 RISK OF LOSS: Lessee shall be responsible for and hereby assumes
the entire risk of the Equipment being lost, damaged, destroyed, stolen, or
otherwise rendered unfit or unavailable for use from the date of delivery to
Lessee to the date of return to Lessor.
9.2 OCCURRENCE OF LOSS: If any Unit is lost, damaged, destroyed,
stolen, or otherwise rendered unfit for use, Lessee shall give to Lessor
immediate notice thereof, and this Master Lease and the applicable Equipment
Schedule shall continue in full force and effect without any abatement in the
Monthly Rental. Lessee shall determine within fifteen (15) days after the date
of the occurrence of damage whether such Unit can be repaired. In the event
Lessee determines that such Unit can be repaired, Lessee, at its expense, shall
cause such Unit to be promptly repaired. If a Unit is lost, destroyed or stolen
or if Lessee determines that a damaged Unit cannot be repaired, Lessee shall,
at Lessor's direction, within thirty (30) days of such event either replace the
Unit with an identical Unit, the title to which shall thereupon vest in Lessor
and which thereafter shall be considered the Unit subject to the Equipment
Schedule with no abatement in the Monthly Rental or, in Lessor's sole
discretion, pay to Lessor an amount equal to the Stipulated Loss Value of the
Unit determined as of the date of payment in accordance with the Stipulated
Loss Value Schedule attached to the applicable Equipment Schedule together with
all unpaid Monthly Rental which is due and payable through the date of payment.
Upon such payment, Lessee's obligation to pay further Monthly Rental for such
Unit shall cease.
10. INSURANCE
10.1 PROPERTY INSURANCE: Throughout the term of each Equipment
Schedule, Lessee shall, at its expense, maintain in full force and effect "all
risk" extended coverage, fire and casualty insurance for the Equipment. Such
insurance shall provide for coverage in an amount equal to the greater of the
Stipulated Loss Value or the replacement cost of the Equipment at the time of
loss. Lessor shall be named as the Loss Payee on such policy. In addition, the
policy shall, by means of a standard mortgage clause, name the Secured Party
and Assignee as additional insureds and loss payees as their interest shall
appear. Such policy shall provide that it may not be canceled or materially
altered unless thirty (30) days prior written notice is given to all parties
named therein. Upon Lessor's written request, Lessee shall provide Lessor with a
Certificate of Insurance evidencing such insurance coverage. If, within two
weeks after Lessee's receipt of such request, Lessee has not provided Lessor
with a satisfactory Certificate, then Lessor may, at Lessor's option, obtain
such insurance until Lessee provides the Certificate, and Lessee shall
reimburse Lessor for the cost of such insurance when billed.
10.2 LIABILITY INSURANCE: During the term of this Master Lease,
Lessee, at its expense, shall maintain reasonable, commercial general liability
and property damage insurance with respect to the use, possession and operation
of the Equipment in an amount not less than one million dollars for each
occurrence.
11. INDEMNIFICATION
Lessee shall and does hereby indemnify and hold Lessor, any Assignee,
and any Secured Party, harmless from and against any and all claims, costs,
reasonable attorneys' fees, expenses, damages, and liabilities (including those
resulting from the application of strict liability doctrines or statutes)
arising out of Lessee's selection, possession, leasing, operation, control,
use, maintenance, delivery, or return of the Equipment. Notwithstanding the
foregoing, Lessee shall not be required to indemnify a party for any claim
resulting from acts of that party which constitute willful misconduct or gross
negligence.
12. ASSIGNMENT, SUBLEASE OR RELOCATION BY LESSEE
UPON AT LEAST THIRTY (30) DAYS PRIOR WRITTEN NOTICE TO LESSOR, LESSEE
MAY ASSIGN OR SUBLEASE A UNIT TO ANY PARTY, OR RELOCATE A UNIT TO ANY LOCATION,
WITHIN ANY STATE OF THE CONTINENTAL UNITED STATES, PROVIDED THAT LESSOR,
ASSIGNEE, AND SECURED PARTY, IN SUCH PARTIES' SOLE DISCRETION, SHALL HAVE
APPROVED SUCH ASSIGNEE, SUBLESSEE, OR LOCATION, AND PROVIDED FURTHER THAT (i)
ALL COSTS OF ANY NATURE WHATSOEVER (INCLUDING ANY ADDITIONAL IMPOSITIONS AND
ANY ADDITIONAL EXPENSES ASSOCIATED WITH FILING NEW PRECAUTIONARY UNIFORM
COMMERCIAL CODE FINANCING STATEMENTS) RESULTING FROM ANY RELOCATION, ASSIGNMENT
OR SUBLEASE SHALL BE BORNE BY LESSEE; (ii) ANY ASSIGNMENT OR SUBLEASE SHALL BE
MADE EXPRESSLY SUBJECT AND SUBORDINATE TO THE TERMS OF THIS LEASE; AND (iii)
LESSEE SHALL ASSIGN ITS RIGHTS UNDER SUCH ASSIGNMENT OR SUBLEASE TO LESSOR,
ASSIGNEE, OR SECURED PARTY AS ADDITIONAL COLLATERAL AND SECURITY FOR LESSEE'S
OBLIGATIONS HEREUNDER. In the event of a relocation, assignment, or sublease,
Lessee and its assignee or its sublessee shall cooperate with Lessor in taking
all reasonable measures to protect the title of Lessor or Assignee and the
interest of any Secured Party to and in the Equipment. No relocation,
assignment, or sublease shall relieve Lessee of its primary obligations under
the relevant Equipment Schedule and this Master Lease.
13. ASSIGNMENT BY LESSOR
Lessor shall have the right to assign as security its interest or grant
a security interest in any or all of the Equipment Schedules which may from
time to time be executed and the Units described in any such Equipment
Schedules to a security assignee ("Secured Party"). Lessor shall also have the
right to sell or otherwise dispose of any or all of the Units described in any
Equipment Schedule, subject to the prior right of Lessee in such Units, and to
assign its interest as Lessor under such Equipment Schedule, to any assignee
("Assignee"). Any such assignment shall not in any way release Computer Sales
International, Inc. from liability for performance of the Lessor's obligations
hereunder. Lessee acknowledges that any assignment by Lessor will not
materially change Lessee's duties or obligations under the Equipment Schedule
nor materially increase the burden or risk imposed on Lessee. Lessee hereby
consents to and shall acknowledge such assignment or assignments as shall be
designated by written notice to Lessee by Lessor. Lessee further covenants and
agree that:
(a) Any such Secured Party or Assignee shall have and be
entitled to exercise any and all discretions, rights and powers of
Lessor under the Equipment Schedule in which it has an interest,
provided that a Secured Party or Assignee shall not be obligated to
perform any of the obligations of Lessor other than Lessor's obligations
under Paragraph 4.1(b).
(b) Lessee shall pay directly to the Secured Party or Assignee
all Monthly Rental and all other sums due upon receipt of notice of any
assignment and of instructions to do so; and
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(c) After an assignment to a Secured Party or Assignee, Lessee's
obligations hereunder including its obligation to pay the Monthly Rental
and any and all other amounts payable under the Equipment Schedule by
Lessee shall be absolute and unconditional and shall not be subject to
any abatement, reduction, recoupment, defense, setoff, or counterclaim
available to Lessee against Lessor for any reason whatsoever.
(d) Only one executed counterpart of any Equipment Schedule
shall be marked "Original"; any other executed counterparts shall be
marked "Non-original" or "Copy". No security interest in any Equipment
Schedule may be created through the transfer and possession of any
counterpart other than the "Original", nor shall any sale, assignment or
transfer of any interest in an Equipment Schedule be effective or be
binding upon Lessee through the transfer and possession of any
counterpart other than the "Original".
14. EVENTS OF DEFAULT
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a default under the relevant Equipment Schedule:
(a) Lessee fails to pay the Monthly Rental, or any other amount
due hereunder, on or before the date the same is due and such failure
continues for a period of ten (10) days after receipt of written notice
thereof from Lessor;
(b) any financial statements or information or any other
representation or warranty given to Lessor proves to have been
materially false or misleading as of the date it was given by or on
behalf of Lessee;
(c) Lessee fails to observe or perform any other material term,
condition, obligation, agreement or covenant set forth herein, and such
failure continues for a period of ten (10) days after receipt of
written notice thereof from Lessor;
(d) Lessee assigns or attempts to assign this Master Lease or
any Equipment Schedule, or removes, transfers, encumbers, sublets or
parts with possession of any Unit, attempts to do any of the foregoing,
or suffers or permits any of the foregoing to occur except as expressly
permitted herein;
(e) Lessee ceases doing business as a going concern, or it or
its shareholders take any action looking to its dissolution or
liquidation;
(f) the entry of an order for relief under the United States
federal bankruptcy laws or the entry of any other decree or order by a
court having jurisdiction in the premises adjudging the Lessee a
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect
of the Lessee under the United States federal bankruptcy laws or any
other applicable federal or state law, or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Lessee or of any substantial part of its property, or
the ordering, the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a
period of 60 consecutive days;
(g) the commencement by the Lessee of a voluntary case under the
United States federal bankruptcy laws, or the institution by the Lessee
of proceedings to be adjudicated a bankrupt or insolvent, or the consent
by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization, an arrangement with creditors or an order for relief
under the United States federal bankruptcy laws or any other applicable
federal or state law, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or other similar official of the
Lessee or of any substantial part of its property, or the making by it
of an assignment for the benefit of creditors, or the admission by it
in writing of its inability to pay its debts as they become due, or, to
the knowledge of the Lessor, the taking of corporate action by the
Lessee in furtherance of any such action.
15. REMEDIES
15.1 EXPRESS REMEDIES: If an Event of Default occurs, Lessor may, at
is option, do any or all of the following:
(a) proceed by appropriate court action or actions either at law
or in equity to enforce performance by Lessee of the relevant Equipment
Schedule, and the covenants and terms of this Master Lease to the extent
it pertains to such Equipment Schedule, and to recover from Lessee any
and all damages or expenses, including reasonable attorneys' fees, which
Lessor shall have sustained or incurred by reason of the Event of
Default or on account of Lessor's enforcement of its remedies hereunder,
or
(b) by notice to Lessee, declare immediately due and payable all
monies to be paid by Lessee during the Initial Term (or any extended
term then in effect) of the Equipment Schedule, as liquidated damages,
and not as a penalty, and Lessor shall have the right, to the extent
permitted by law, to (i) recover all monies so declared due and payable,
discounted to the date of payment at the rate of 4% per annum, or
one-half of the then-prevailing prime interest rate charged by principal
New York banks, whichever is less, as liquidated damages, and not as a
penalty; (ii) recover all other amounts which are due or which become
due under the Equipment Schedule; (iii) terminate Lessee's right to
possession (but not Lessee's obligation under this Lease) and to retake
immediate possession of the Equipment without any process of law and for
such purpose Lessor may enter upon premises where the Equipment may be
located and may remove the same therefrom without notice, and without
being liable to Lessee therefor, except that Lessor shall be liable for
damages resulting from the negligence of Lessor, Lessor's assignee or
their respective agents and representatives in any such entry or
repossession; (iv) recover all expenses, including reasonable attorneys'
fees, which Lessor shall have incurred or may incur by reason of the
Event of Default on account of Lessor's endorsement of its remedies
hereunder; and (v) pursue any other remedy permitted by law or equity.
The possibility of a re-lease or resale under Paragraph 15.2 shall not
excuse prompt payment in full by Lessee under this Paragraph 15.1.
15.2 RE-LEASE OR RESALE: Lessor shall made a reasonable, good faith
effort to retake possession of the Equipment and, if Lessor succeeds in
retaking possession of any Unit, Lessor shall sell or lease each Unit with the
privilege of becoming the purchaser thereof, at public of private sale, for
cash or on credit. Lessee's share of the proceeds of any such sale or lease
("Lessee's Share") shall be the lesser of (x), the amount by which the Re-Lease
Proceeds or the Resale Proceeds of such Unit exceed the Remarketing Costs of
such Unit, and (y), the amount payable by Lessee to Lessor pursuant to Paragraph
15.1 (b)(i) above with respect to such Unit. Lessor shall credit Lessee's Share
against all amounts owed by Lessee to Lessor under Paragraph 15.1 or otherwise
and the remainder of Lessee's share, if any, shall be paid to Lessee. EXCEPT AS
SET FORTH IN THIS PARAGRAPH, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER
CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS
DAMAGES OR MODIFY OR LIMIT ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. In
applying this provision, the following definitions shall apply:
(a) The "Re-Lease Proceeds" of a Unit shall mean the present
value (discounted to the date of payment using the interest rate at
which Lessor has non-recourse financing or a non-recourse financing
commitment with respect to the re-lease) of the monthly rental payments
for the Unit under a re-lease to a third party, taking into account only
those monthly rental payments under the re-lease which are payable on
or before the last day of the Initial Term or the last day of any
extended term then in effect with respect to the Unit under the
Equipment Schedule. If the re-lease is not financeable, the Re-Lease
Proceeds shall be the monthly rental payments for such period as
received.
(b) The term "Resale Proceeds" of a Unit shall mean the amount
by which the proceeds of any sale of the Unit exceed the Lessor's
estimate of the fair market value of the Unit at the end of the Initial
Term or at the end of any extended term then in effect with respect to
the Unit under this Master Lease.
(c) The term "Remarketing Costs" of a Unit shall mean all
expenses incurred directly or indirectly by Lessor in re-leasing or
selling the Unit and in obtaining a financing commitment in the case of
a re-lease of a Unit, including, without limitation, reasonable fees and
commissions (including a reasonable fee to Lessor) incurred in locating
a buyer, a subsequent lessee or a financing
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<PAGE> 5
commitment, attorneys' fees, the cost of recovering the Unit from the
Lessee and transportation, installation, refurbishing, reconditioning
and storage charges.
15.3 NO WAIVER: The waiver by Lessor of any breach of any obligation of
Lessee shall not be deemed a waiver of a breach of any other obligation or of
any subsequent breach of the same or any other obligation. The subsequent
acceptance of rental payments hereunder by Lessor shall not be deemed a waiver
of any prior existing breach by Lessee regardless of Lessor's knowledge of such
prior existing breach at the time of acceptance of such rental payments.
15.4 CUMULATION: To the extent permitted by law, the above remedies
shall be deemed cumulative and may be exercised successively or concurrently.
16. PERFORMANCE AND EXECUTION
Lessee represents and warrants to Lessor (i) that the execution and
performance of this Master Lease and each Equipment Schedule have been duly
authorized by Lessee and that upon execution by Lessee and Lessor this Master
Lease and each Equipment Schedule will constitute a valid obligation binding
upon, and enforceable against, Lessee in accordance with the terms of the
Master Lease and each Equipment Schedule; (ii) that neither the execution of
this Master Lease or any Equipment Schedule nor the due performance thereof by
Lessee will result in any breach of, or constitute any default under or
violation of, Lessee's certificate or articles of incorporation, Lessee's
by-laws or any agreement to which Lessee is a party or by which any interest of
Lessee may be affected; (iii) that Lessee is in good standing in its state of
incorporation and in the states where any Unit is to be located; (iv) the
persons executing this Master Lease and each Equipment Schedule on behalf of
Lessee have been duly authorized to do so; and (v) that any and all financial
statements and other information with respect to Lessee heretofore furnished by
Lessee to Lessor in connection with negotiations concerning one or more
Equipment Schedules were, when furnished, and remain at the time of execution
of any Equipment Schedule, true and without any misleading omissions, excepting
any changes which have been disclosed in a written notice to Lessor.
17. ADDITIONAL DOCUMENTATION
Lessee shall promptly deliver to Lessor the documentation listed
below which may from time to time be requested by Lessor. If such a request is
made prior to the delivery of any Unit, receipt of such documentation shall be
a condition precedent to Lessor's obligation to deliver such Unit:
(a) financial information including, without limitation, a copy
of Lessee's balance sheet and income statement for Lessee's three prior
fiscal years, certified by independent certified public accountants and
such other current financial information representing the financial
condition and operations of Lessee as Lessor may from time to time
reasonably request;
(b) a certificate of the resolutions of the Board of Directors
of Lessee duly authorizing or ratifying this Master Lease or any
Equipment Schedule executed hereunder;
(c) a certificate of incumbency setting forth names and
signatures of those persons authorized to execute this Master Lease or
any Equipment Schedule on behalf of Lessee;
(d) landlord's and/or mortgagee's waiver, in form and substance
satisfactory to any Assignee or Secured Party, from any landlord or
mortgagee of any premises upon which any Unit is located;
(e) an opinion of counsel for Lessee as to the matters set forth
in Paragraph 16. (i through iv) above, and as to such other matters as
Lessor may reasonably request; and
(f) such document confirming the execution of the Lease
necessary or desirable to effect an assignment, to perfect an interest
of Lessor, a Secured Party or Assignee, or for such other purpose
relating to the Master Lease and/or any Equipment Schedule or to an
assignment as Lessor may reasonably request. Lessee hereby appoints
Lessor as Lessee's agent to prepare, execute and file in Lessee's name
precautionary Uniform Commercial Code financing statements in connection
with each Equipment Schedule showing the interest of Lessor, and any
Assignee or Secured Party in the Equipment as appropriate.
18. GENERAL
18.1 TITLE: This Master Lease is intended to be a true lease and not a
lease intended as security or lease in the nature of a security interest.
Lessee shall, at its expense, protect and defend Lessor's title to the
Equipment and the interest of any Assignee or Secured Party against all persons
claiming against or through Lessee. Lessee shall keep and maintain the
Equipment and this Master Lease free and clear of all liens and encumbrances
(other than those placed on the same by Lessor and the liens for current taxes
not yet payable).
18.2 FIXTURES: Lessee will not affix any Unit of the Equipment to any
real property if, as a result thereof, the Unit will become a fixture under
applicable law.
18.3 ENTIRE AGREEMENT: This Agreement (together with all schedules and
attachments hereto) constitutes the entire agreement between Lessor and Lessee,
and no provision hereof may be amended or modified except in writing signed by
Lessor and Lessee. NO PROVISION OF THIS AGREEMENT MAY BE WAIVED EXCEPT IN
WRITING SIGNED BY THE PARTY FROM WHOM SUCH WAIVER IS SOUGHT, AND ANY SUCH
WAIVER SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND FOR THE SPECIFIC
PURPOSE GIVEN.
LESSEE'S INITIALS: BS
------
18.4 NOTICES: All notices hereunder shall be in writing and shall be
delivered in person or sent by registered or certified mail, to the address of
the party contained herein, and shall be deemed received three (3) days after
deposit in the United States mail with postage prepaid. Either party may change
its address for notice purposes by notifying the other party in the manner
aforesaid of such change. Lessee shall also send copies of all notices sent to
Lessor, to Secured Party, or Assignee (if any).
18.5 SEVERABILITY: Any provision hereof prohibited by, or unlawful or
unenforceable under, any applicable law of any jurisdiction shall be
ineffective as to such jurisdiction without invalidating the remaining
provisions of this Agreement provided, however, that where the provisions of
any such applicable law may be waived, they are hereby waived by Lessee and
Lessor to the full extent permitted by law.
18.6 GOVERNING LAW: THIS MASTER LEASE AND ALL EQUIPMENT SCHEDULES AND
ANY OTHER INSTRUMENT EXECUTED IN CONNECTION HEREWITH SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED UNDER, THE LAWS OF THE STATE OF MISSOURI, WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OR CHOICE OF LAW. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR AN
EQUIPMENT SCHEDULE. This Master Lease and Equipment Schedules are subject to
acceptance by Lessor at its home office.
18.7 PERFORMANCE OF LESSEE'S OBLIGATIONS: If Lessee shall fail to make
any payment or perform any act required by this Master Lease or any Equipment
Schedule, Lessor may at Lessee's expense, but shall not be obligated to, make
such payment or perform such act without notice to or demand upon Lessee and
without waiving or releasing any obligation or default. Lessee shall, when
billed, reimburse Lessor for any expense incurred hereunder by Lessor in
performing Lessee's obligations. LESSEE MAY NOT ASSIGN ITS RIGHTS OR
OBLIGATIONS, EXCEPT AS SPECIFICALLY PROVIDED IN PARAGRAPH 12 OF THIS MASTER
LEASE.
18.8 SURVIVAL: All representations, warranties, indemnities, and
covenants contained in this Master Lease and in any Equipment Schedule, which
by their nature would continue beyond the termination, cancellation or
expiration of the Lease, including, by way of illustration only and not
limitation, those in Paragraph 6, 10, 11 and 18, shall continue in full force
and effect and shall survive
Page No. 5 of 6
<PAGE> 6
notwithstanding the full payment of all amounts due hereunder or the
termination of Lessee's right to possession of any Unit.
18.9 HEADINGS: Headings and captions are for convenience of reference
only and shall not be construed as part of the Lease.
18.10 OVERDUE PAYMENTS: Any Monthly Rental due Lessor under this
Master Lease, if not paid by the fifth day of the month in which payment became
due, shall accrue interest until paid at a rate equal to one and one-half
percent per month, or the maximum rate permissible by law, whichever is lower.
Any other amounts payable to Lessor by Lessee under this Master Lease are due
and payable within fifteen (15) days after the billing date, and, if not paid
on or before such due date, shall accrue interest from the due date until paid
at a rate equal to one and one-half percent per month, or the maximum rate
permitted by law, whichever is lower.
18.11 CONSENT OR APPROVAL: With respect to any provision herein which
calls for the consent or approval of a party, such consent or approval shall
not be unreasonably withheld.
18.12 SUBSTITUTION OF EQUIPMENT: If, at any time during the term of
an Equipment Schedule, Lessor's right to lease the Equipment expires, Lessor
shall promptly provide indentical substitute Equipment, and all expenses of
such substitution, including deinstallation, installation and transportation
expenses, shall be borne by Lessor.
18.13 DELIVERY FOR EXAMINATION: Submission of the form of this Master
Lease for examination shall not bind Lessor in any manner, and no obligations
shall arise until this instrument is signed by both Lessor and Lessee.
18.14 TERMS IN EQUIPMENT SCHEDULES: If the provisions of any
Equipment Schedule are inconsistent with the provisions of this Master Lease,
then the provisions of such Equipment Schedule shall control.
LESSOR: LESSEE:
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
BY: /s/ E. William Gillula BY: /s/ Bradley H. Sell
-------------------------------- ---------------------------------
E. William Gillula Bradley H. Sell
TITLE: Executive Vice President TITLE: Vice President/Controller
------------------------------ ------------------------------
DATE: August 1, 1996 DATE: July 26, 1996
------------------------------- -------------------------------
(Please initial page 5, section 18.3)
<PAGE> 7
ADDENDUM ONE TO MASTER LEASE AGREEMENT NO. 143050
This Addendum One to Master Lease Agreement No. 143050 (the "Lease") is
dated as of July 24, 1996, and is entered into by and between COMPUTER SALES
INTERNATIONAL, INC. ("Lessor") and KIDS MART, INC. ("Lessee").
Notwithstanding anything to the contrary contained in the Lease between
the parties hereto, dated on even date herewith, and in consideration of the
mutual promises, covenants, and conditions contained in the Lease and contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto covenant and
agree as follows:
1. CONTROLLING TERMS: This Addendum One shall become a part of the
Lease and shall be read together with the Lease as one single document. To the
extent that there shall be any conflict as between the terms and provisions
contained in the Lease and those contained herein, the terms and provisions set
forth herein shall control.
2. SECTION 11 INDEMNIFICATION: Add the following paragraph to the end
of the section:
Lessor shall indemnify Lessee from and against any and all claims,
costs, reasonable attorneys' fees, expenses, damages and liabilities arising
out of the negligence or intentional misconduct of Lessor or its employees
or agents, or arising out of Lessor's breach of its obligations under this
Lease.
3. SECTION 14 EVENTS OF DEFAULT: In subsection (c), insert "material"
before "term."
IN WITNESS WHEREOF, the parties hereto have executed this Addendum One
to Master Lease No. 143050, as of the date set forth below.
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
BY: /s/ E. William Gillula BY: /s/ Bradley H. Sell
----------------------------- -----------------------------
E. William Gillula Bradley H. Sell
TITLE: Executive Vice President TITLE: Vice President/Controller
--------------------------- ---------------------------
DATE: August 1, 1996 DATE: July 30, 1996
-------------------------- ---------------------------
HRA/LA
<PAGE> 8
ADDENDUM ONE TO MASTER LEASE AGREEMENT NO. 143050
This Addendum One to Master Lease Agreement No. 143050 (the "Lease") is
dated as of July 24, 1996, and is entered into by and between COMPUTER SALES
INTERNATIONAL, INC. ("Lessor") and KIDS MART, INC. ("Lessee").
Notwithstanding anything to the contrary contained in the Lease between
the parties hereto, dated on even date herewith, and in consideration of the
mutual promises, covenants, and conditions contained in the Lease and contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto covenant and
agree as follows:
1. CONTROLLING TERMS: This Addendum One shall become a part of the
Lease and shall be read together with the Lease as one single document. To the
extent that there shall be any conflict as between the terms and provisions
contained in the Lease and those contained herein, the terms and provisions set
forth herein shall control.
2. SECTION 11 INDEMNIFICATION: Add the following paragraph to the end
of the section:
Lessor shall indemnify Lessee from and against any and all
claims, costs, reasonable attorneys' fees, expenses, damages and
liabilities arising out of the negligence or intentional misconduct of
Lessor or its employees or agents, or arising out of Lessor's breach of
its obligations under this Lease.
3. SECTION 14 EVENTS OF DEFAULT: In subsection (c), insert "material"
before "term."
IN WITNESS WHEREOF, the parties hereto have executed this Addendum One
to Master Lease No. 143050, as of the date set forth below.
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
BY: /s/ E. William Gillula BY: /s/ Bradley H. Sell
----------------------------- -----------------------------
E. William Gillula Bradley H. Sell
TITLE: Executive Vice President TITLE: Vice President/Controller
--------------------------- ---------------------------
DATE: August 1, 1996 DATE: July 29, 1996
-------------------------- ---------------------------
HRA/LA
<PAGE> 9
ADDENDUM ONE TO MASTER LEASE AGREEMENT NO. 143050
This Addendum One to Master Lease Agreement No. 143050 (the "Lease") is
dated as of July 24, 1996, and is entered into by and between COMPUTER SALES
INTERNATIONAL, INC. ("Lessor") and KIDS MART, INC. ("Lessee").
Notwithstanding anything to the contrary contained in the Lease between
the parties hereto, dated on even date herewith, and in consideration of the
mutual promises, covenants, and conditions contained in the Lease and contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto covenant and
agree as follows:
1. CONTROLLING TERMS: This Addendum One shall become a part of the
Lease and shall be read together with the Lease as one single document. To the
extent that there shall be any conflict as between the terms and provisions
contained in the Lease and those contained herein, the terms and provisions set
forth herein shall control.
2. SECTION 11 INDEMNIFICATION: Add the following paragraph to the end
of the section:
Lessor shall indemnify Lessee from and against any and all claims,
costs, reasonable attorneys' fees, expenses, damages and liabilities
arising out of the negligence or intentional misconduct of Lessor or
its employees or agents, or arising out of Lessor's breach of its
obligations under this Lease.
3. SECTION 14 EVENTS OF DEFAULT: In subsection (c), insert "material"
before "term."
IN WITNESS WHEREOF, the parties hereto have executed this Addendum One
to Master Lease No. 143050, as of the date set forth below.
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
BY: /s/ E. William Gillula BY: /s/ Bradley H. Sell
----------------------------- -----------------------------
E. William Gillula Bradley H. Sell
TITLE: Executive Vice President TITLE: Vice President/Controller
--------------------------- ---------------------------
DATE: August 1, 1996 DATE: July 29, 1996
-------------------------- ---------------------------
HRA/LA
<PAGE> 10
NON-ORIGINAL
No security interest in an Equipment Schedule
may be created or perfected by possession
of this copy.
[CSI LOGO]
- ------------------------------------------------------------------------------
COMPUTER SALES INTERNATIONAL, INC.
10845 Olive Boulevard MAILING ADDRESS:
St. Louis, Missouri 63141 Post Office Box 16264
(314) 997-7010 St. Louis, MO 63105
EQUIPMENT SCHEDULE NO. ONE Dated as of July 24, 1996
LESSOR: LESSEE: KIDS MART, INC.
801 Sentous Avenue
COMPUTER SALES INTERNATIONAL, INC. City of Industry, California 91748
Lessor and Lessee named above hereby agree that, except as modified or
superseded by this Equipment Schedule or any Addenda hereto, all of the terms
and conditions of the MASTER LEASE AGREEMENT NO. 143050 dated July 24, 1996,
are hereby incorporated herein and made a part hereof:
1. EQUIPMENT:
FEATURE MONTHLY
MACHINE (QUANTITY NEW/ RENTAL
QTY TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED PER UNIT
_____________________________________________________________________________
Exhibit "A" (Listing of Equipment) is incorporated herein by this reference.
/X/ (check box if applicable)
- -----------------------------------------------------------------------------
EQUIPMENT LOCATION: 801 Sentous Avenue
City of Industry, California 91748
- -----------------------------------------------------------------------------
2. Monthly Rental for all Units: MONTH 1 - $31,458.00; MONTHS 2 THROUGH 22 -
$10,486.00; MONTHS 23 AND 24 - $0.00
3. Initial Term: TWENTY-FOUR (24) MONTHS
4. Anticipated Installation Date: ALREADY INSTALLED AND ACCEPTED
5. Addendum One hereto is incorporated herein by this reference.
/X/ (check box if applicable)
6. A photocopy of this Equipment Schedule, and any exhibits or addenda hereto,
may be filed as a precautionary Uniform Commercial Code Financing Statement
to evidence Lessor's interest in the Equipment.
7. At Lessor's option, this Equipment Schedule shall not be effective unless
signed by Lessee and returned to Lessor on or before JULY 31, 1996.
COMPUTER SALES INTERNATIONAL, INC. LESSEE: KIDS MART, INC.
By: /s/ E. William Gillula By: /s/ Bradley H. Sell
-------------------------------- ---------------------------------
E. William Gillula Bradley H. Sell
Title: Executive Vice President Title: Vice President/Controller
----------------------------- ------------------------------
Date: August 1, 1996 Date: July 26, 1996
----------------------------- ------------------------------
HRA/LA
<PAGE> 11
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
EXHIBIT "A"
KIDS MART, INC.
EQUIPMENT SCHEDULE NO. ONE, MASTER LEASE NO. 143050
$10,486.00
<TABLE>
<CAPTION>
FEATURE MONTHLY
MACHINE (QUANTITY NEW/ RENTAL PER
QTY. TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED UNIT
- ---- ---------- --------- ----------- -------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
1 IBM 3490-E01 DESKTOP TAPE SUBSYSTEM 13-B4569 USED $860.00
1 IBM 9406-510 AS 400 100511M USED $9,626.00
0044(1) DEVICE PARITY PROTECTION
0078(1) 3490-E01 FIELD MERGE STAND
ALONE
0090(1) LOAD PER CANADA
2144(1) 30.0 RPR PROCESSOR
2612(1) EIA 232/V.24 ONE LINE ADPT
2617(2) ETHERNET LAN (IEEE 802.3
CSMA/CD)
2960(1) 120V, 15A 6FT LINECORD
5014(1) QUICK SHIP
5052(1) STORAGE EXPANSION - KITTYHAWK
BASE
5504(1) 1/2" TAPE CART ALT IPL SPECIFY
FOR 3490 EXX
5520(1) COMPLETE SYSTEM ORDER
5540(1) WSC-T TWIN-AS CABLE
6380(1) FIELD REMOVABLE MEDIA
6501(1) SCSI-P CABLE (RED HEAD V2R3
FEATURE)
6512(1) DISK UNIT CONTROLLER FOR RAID
6606(1) RESTORE DEVICES FOR CENTURY
MODELS
6607(13) RESTORE DEVICES FOR CENTURY
MODELS
7255(2) OPTIONAL BASE 256MB MS
</TABLE>
Initialed by : Lessor L
-----
Lessee BS
-----
Page No. 1 of 1
<PAGE> 12
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
ADDENDUM ONE TO EQUIPMENT SCHEDULE NO. ONE
MASTER LEASE AGREEMENT NO. 143050
This Addendum One to "Equipment Schedule One, Master Lease Agreement
No. 143050" (the "Lease"), is dated as of July 24, 1996, and is entered into,
by and between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and KIDS MART,
INC. ("Lessee").
Notwithstanding anything to the contrary contained in the Lease
between the parties hereto, dated on even date herewith and with respect to
certain computer equipment (the "Equipment"), and in consideration of the
mutual promises, covenants, and conditions in the Lease and contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto covenant and agree as
follows:
1. CONTROLLING TERMS: This Addendum One shall become a part of the
Lease and shall be read together with the Lease as one single document. To the
extent that there shall be any conflicts as between the terms and provisions
contained in the Lease and those contained herein, the terms and provisions set
forth herein shall control.
2. LESSOR'S PURCHASE OF EQUIPMENT:
a) The Equipment is installed at Lessee's location and is
unconditionally accepted by Lessee for lease hereunder.
b) Lessor will buy the Equipment directly from Lessee pursuant to
Purchase Agreement No. 143051 entered into contemporaneously herewith.
c) Lessor's performance under this Lease is conditioned on Lessee
selling the Equipment to Lessor at a price not to exceed $265,220.00.
3. COMMENCEMENT DATE: The Commencement Date is the date Lessor buys
the Equipment from Lessee.
4. CALIFORNIA SALES TAX: Lessee represents and warrants that it has
paid all California sales tax with respect to its purchase of the Equipment and
that Lessee's first functional use of the Equipment occurred within the 90 days
prior to the Commencement Date. Lessee shall provide to Lessor satisfactory
proof of payment of such taxes. Accordingly, the parties understand that there
will be no California sales tax due with respect to Monthly Rental under this
Lease; however, if such tax is assessed or payable for any reason, then Lessee
shall be responsible for payment of all amounts due (including interest and
penalties, if any.).
5. LESSOR CONTINGENCY: Lessor's performance under this Lease is
conditioned on Lessee issuing to Lessor a warrant for 50,000 shares of common
stock of Lessee at a strike price of $7.00 per share and a duration of five (5)
years from execution. Lessee will provide the warrant to Lessor prior to the
Commencement Date.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum One
to Equipment Schedule No. One, Master Lease No. 143050, as of the date set forth
below.
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
By: /s/ E. William Gillula By: /s/ Bradley H. Sell
--------------------------- ----------------------------
E. William Gillula Bradley H. Sell
Title: Executive Vice President Title: Vice President/Controller
---------------------------- ---------------------------
Date: August 1, 1996 Date: July 26, 1996
---------------------------- ---------------------------
HRA/LA
<PAGE> 13
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
[CSI LOGO]
- --------------------------------------------------------------------------------
COMPUTER SALES INTERNATIONAL, INC.
10845 Olive Boulevard
St. Louis, Missouri 63141
(314)997-7010
LESSEE: KIDS MART, INC.
STIPULATED LOSS VALUE SCHEDULE TO EQUIPMENT SCHEDULE NUMBER: ONE
MASTER LEASE AGREEMENT NUMBER: 143050
BASE VALUE: $265,220.00
<TABLE>
<CAPTION>
STIPULATED STIPULATED
MONTHLY LOSS VALUE MONTHLY LOSS VALUE
PAYMENTS (PERCENT OF PAYMENTS (PERCENT OF
MADE BASE VALUE) MADE BASE VALUE)
- -------------------------------------------------------------------
<S> <C> <C> <C>
0 110.0% 13 90.1%
1 108.5 14 88.6
2 106.9 15 87.1
3 105.4 16 85.6
4 103.9 17 84.0
5 102.4 18 82.5
6 100.8 19 81.0
7 99.3 20 79.4
8 97.8 21 77.9
9 96.3 22 76.4
10 94.7 23 74.9
11 93.2 24 and thereafter 73.3
12 91.7
</TABLE>
In the event of a loss of less than all of the Equipment listed on the above
Equipment Schedule, the Stipulated Loss Value shall be allocated to the Units
lost in the same proportion as the Monthly Rental per Unit for the lost Units
bears to the Monthly Rental for all Units listed on the Equipment Schedule.
Initialed by Lessor: INITIALS
ILLEGIBLE
---------
Lessee: INITIALS
ILLEGIBLE
---------
HRA/LA
<PAGE> 14
NON-ORIGINAL
No security interest in an Equipment Schedule
may be created or perfected by possession
of this copy.
[CSI LOGO]
- ------------------------------------------------------------------------------
COMPUTER SALES INTERNATIONAL, INC.
10845 Olive Boulevard MAILING ADDRESS:
St. Louis, Missouri 63141 Post Office Box 162624
(314) 997-7010 St. Louis, MO 63105
EQUIPMENT SCHEDULE NO. TWO DATED AS OF JULY 24, 1996
LESSOR: LESSEE: KIDS MART, INC.
801 Sentous Avenue
COMPUTER SALES INTERNATIONAL, INC. City of Industry, California 91748
Lessor and Lessee named above hereby agree that, except as modified or
superseded by this Equipment Schedule or any Addenda hereto, all of the terms
and conditions of the MASTER LEASE AGREEMENT NO. 143050 dated July 24, 1996,
are hereby incorporated herein and made a part hereof:
1. EQUIPMENT: MONTHLY
FEATURE LEASE RATE
MACHINE (QUANTITY NEW/ FACTOR
QTY TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED PER UNIT
_____________________________________________________________________________
Exhibit "A" (Listing of Equipment) is incorporated herein by this reference.
/X/ (check box if applicable)
- -----------------------------------------------------------------------------
EQUIPMENT LOCATION: 801 Sentous Avenue
City of Industry, California 91748
- -----------------------------------------------------------------------------
2. Monthly Lease Rate Factor for all Units: SEE ADDENDUM ONE
3. Initial Term: TWENTY-FOUR (24) MONTHS
4. Anticipated Installation Date: JULY 1, 1996 THROUGH OCTOBER 31, 1996
5. Addendum One hereto is incorporated herein by this reference.
/X/ (check box if applicable)
6. A photocopy of this Equipment Schedule, and any exhibits or addenda hereto,
may be filed as a precautionary Uniform Commercial Code Financing Statement
to evidence Lessor's interest in the Equipment.
7. At Lessor's option, this Equipment Schedule shall not be effective unless
signed by Lessee and returned to Lessor on or before JULY 31, 1996.
COMPUTER SALES INTERNATIONAL, INC. LESSEE: KIDS MART, INC.
By: /s/ E. William Gillula By: /s/ Bradley H. Sell
-------------------------------- ---------------------------------
E. William Gillula Bradley H. Sell
Title: Executive Vice President Title: Vice President/Controller
----------------------------- ------------------------------
Date: August 1, 1996 Date: July 26, 1996
----------------------------- ------------------------------
HRA/LA
<PAGE> 15
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
EXHIBIT "A"
KIDS MART, INC.
EQUIPMENT SCHEDULE NO. TWO, MASTER LEASE NO. 143050
<TABLE>
<CAPTION>
MONTHLY
FEATURE LEASE RATE
MACHINE (QUANTITY NEW/ FACTOR
QTY. TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED PER UNIT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* COMPAQ PENTIUM DESKTOP PC NEW .03908 TIMES
UNIT COST
* COMPAQ PENTIUM SERVER NEW .03908 TIMES
UNIT COST
* HP LASERJET PRINTER NEW .03908 TIMES
UNIT COST
* MISCELLANEOUS HARDWARE NEW .04689 TIMES
UNIT COST
</TABLE>
<TABLE>
<CAPTION>
FEATURE MONTHLY
MACHINE (QUANTITY NEW/ RENTAL
QTY. TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED PER UNIT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
**11 COMPAQ 151N 150 COLOR MONITOR 603BCO5AH582, USED $16.00
603BC05AH890,
603BC05AH474,
603BC05AF200,
612BC05AH450,
612BC05AH457,
612BC05AH451,
612BC05AI986,
612BC05AJ004,
612BC05AJ007,
612BC05AI994
**10 COMPAQ 5100E PROLINEA PC A616HTC2H155, USED $72.00
A616HTC2H666,
A616HTC2H763,
A616HTC2H709,
A614HTC2D190,
A616HTC2J107,
A616HTC2J135,
A616HTC2J133,
A603HTB3H035,
A603HTB3H036
(2) KINGSTON 4MB
NON-PARITY F/CQ
PRO E SERIES
(1) INTEL (10)
ETHEREXPRESS LAN 16TP
8/16 BIT ADP
</TABLE>
Initialed by: Lessor INITS ILLEGIBLE
---------------
Lessee INITS ILLEGIBLE Page No. 1 of 1
---------------
<PAGE> 16
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
ADDENDUM ONE TO EQUIPMENT SCHEDULE NO. TWO
MASTER LEASE AGREEMENT NO. 143050
This Addendum One to "Equipment Schedule Two, Master Lease Agreement
No. 143050" (the "Lease"), is dated as of July 24, 1996, and is entered into,
by and between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and KIDS
MART, INC. ("Lessee").
Notwithstanding anything to the contrary contained in the Lease between
the parties hereto, dated on even date herewith and with respect to certain
computer equipment (the "Equipment"), and in consideration of the mutual
promises, covenants, and conditions in the Lease and contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto covenant and agree as follows:
1. CONTROLLING TERMS: This Addendum One shall become a part of the
Lease and shall be read together with the Lease as one single document. To the
extent that there shall be any conflicts as between the terms and provisions
contained in the Lease and those contained herein, the terms and provisions set
forth herein shall control.
2. LESSOR'S PURCHASE OF EQUIPMENT:
(a) Lessor shall purchase the Equipment designated with one asterisk
(the "New Equipment") directly from Entex Information Services, Inc. ("Entex")
and other vendors designated by Lessee.
(b) The Equipment designated with two asterisks (the "Lessee Equipment")
is already installed at Lessee's location and is unconditionally accepted by
Lessee for lease hereunder. Lessor shall purchase the Lessee Equipment directly
from Lessee pursuant to Purchase Agreement No. 143059 entered into
contemporaneously herewith. The purchase price of the Lessee Equipment will not
exceed $22,880.00. The Commencement Date of the Lessee Equipment is the date
Lessor buys the Lessee Equipment from Lessee.
(c) Total Equipment cost is not to exceed $200,000.00. If Lessee wants
this Lease to cover Equipment which has a cost greater than $200,000.00,
Lessor, in its sole discretion, may pay the additional cost.
(d) Lessor is not liable for any failure or delay in delivery caused by
Entex or any other party or condition not within Lessor's control.
*3. QUANTITIES; MONTHLY RENTAL:
(a) In addition to the Lessee Equipment, this Equipment Schedule
covers all Units of New Equipment listed that are installed at Lessee's
facilities between July 1, 1996 and October 31, 1996, inclusive. At this time,
Lessee is unable to specify exactly how many Units will be installed;
therefore, the "quantity" column has been left blank. As Lessee determines the
quantities of New Equipment it requires, Lessee shall have the vendor send to
Lessor invoices which will reference this Lease and which will specify machine
type(s), quantities, equipment location(s), sales price, serial number(s) and
installation date(s) of the Units ordered by Lessee. Upon receipt of each
properly prepared invoice, Lessor shall remit the sales price to the vendor.
(b) Monthly Rental per Unit for the New Equipment will equal the
"Monthly Lease Rate Factor" for that Unit, which is specified in the Equipment
Schedule or on Exhibit "A", multiplied by the Unit's cost. On November 1, 1996,
or as soon thereafter as is reasonably practicable, Lessee shall execute a
Certificate of Acceptance for all installed Equipment, which Certificate
verifies the actual quantities of machines; and the Monthly Rental per Unit
and the total Monthly Rental for the Equipment Schedule, both of which will be
expressed as dollar amounts.
<PAGE> 17
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
4. INITIAL TERM: The twenty-four (24) month Initial Term shall start
on November 1, 1996, and expire on October 31, 1998. Lessee shall pay to Lessor
Daily Rental as set forth in Section 3 of the Master Lease, for each Unit of
Equipment for each day from, and including, its installation date (or, for
Lessee Equipment, its Commencement Date) through, but not including, November
1, 1996. Daily Rental shall be due in a lump sum on November 1, 1996.
5. STIPULATED LOSS VALUE: Because the actual quantities of Equipment
are unknown at this time, specific dollar amounts cannot be listed on the
Stipulated Loss Value Schedule. Instead, "vendor list price/Lessor purchase
price" has been specified so that, at the time of a loss, the Stipulated Loss
Value shall be equal to the present vendor list price for the Unit times the
applicable percentage, or in the case of Lessee Equipment, equal to Lessor's
purchase price for the Unit times the applicable percentage. The parties agree,
however, that on November 1, 1996, or as soon thereafter as reasonably
practicable, a new Stipulated Loss Value Schedule specifying a dollar amount
Base Value shall be executed.
6. CALIFORNIA SALES TAX: Lessee represents and warrants that it has
paid all California sales tax with respect to its purchase of the Lessee
Equipment and that Lessee's first functional use of the Lessee Equipment
occurred within the 90 days prior to its Commencement Date. Lessee shall
provide to Lessor satisfactory proof of payment of such taxes. Accordingly, the
parties understand that there will be no California sales tax due with respect
to Monthly Rental for the Lessee Equipment under this Lease; however, if such
tax is assessed or payable for any reason, then Lessee be responsible for
payment of all amounts due (including interest and penalties, if any.).
7. LESSOR CONTINGENCY: Lessor's performance under this Lease is
conditioned on Lessee's execution and performance under Equipment Schedule One
between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum One
to Equipment Schedule No. Two, Master Lease No. 143050, as of the date set
forth below.
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
By: /s/ E. William Gillula By: /s/ Bradley H. Sell
-------------------------------- --------------------------------
E. William Gillula Bradley H. Sell
Title: Executive Vice President Title: Vice President/Controller
----------------------------- -----------------------------
Date: August 1, 1996 Date: July 26, 1996
------------------------------ ------------------------------
<PAGE> 18
NON-ORIGINAL
No security interest in an Equipment Schedule may
be created or perfected by possession of this copy.
[CSI LOGO]
- --------------------------------------------------------------------------------
COMPUTER SALES INTERNATIONAL, INC.
10845 Olive Boulevard
St. Louis, Missouri 63141
(314)997-7010
LESSEE: KIDS MART, INC.
STIPULATED LOSS VALUE SCHEDULE TO EQUIPMENT SCHEDULE NUMBER: TWO
MASTER LEASE AGREEMENT NUMBER: 143050
BASE VALUE: Vendor List Price/Lessor Purchase Price
<TABLE>
<CAPTION>
STIPULATED STIPULATED
MONTHLY LOSS VALUE MONTHLY LOSS VALUE
PAYMENTS (PERCENT OF PAYMENTS (PERCENT OF
MADE BASE VALUE) MADE BASE VALUE)
- -------------------------------------------------------------------
<S> <C> <C> <C>
0 110.0% 13 90.1%
1 108.5 14 88.6
2 106.9 15 87.1
3 105.4 16 85.6
4 103.9 17 84.0
5 102.4 18 82.5
6 100.8 19 81.0
7 99.3 20 79.4
8 97.8 21 77.9
9 96.3 22 76.4
10 94.7 23 74.9
11 93.2 24 and thereafter 73.3
12 91.7
</TABLE>
In the event of a loss of less than all of the Equipment listed on the above
Equipment Schedule, the Stipulated Loss Value shall be allocated to the Units
lost in the same proportion as the Monthly Rental per Unit for the lost Units
bears to the Monthly Rental for all Units listed on the Equipment Schedule.
Initialed by Lessor: INITIALS
ILLEGIBLE
---------
Lessee: INITIALS
ILLEGIBLE
---------
HRA/LA
<PAGE> 19
[CSI LOGO] PURCHASE AGREEMENT NUMBER: 143059
- --------------------------------------------------------------------------------
COMPUTER SALES INTERNATIONAL, INC.
10845 Olive Boulevard MAILING ADDRESS:
St. Louis, Missouri 63141 Post Office Box 16264
(314)997-7010 St. Louis, MO 63105
PURCHASE AGREEMENT Dated JULY 24, 1996
This Agreement is between COMPUTER SALES INTERNATIONAL, INC. (the "Buyer") and
KIDS MART, INC. which has its principal place of business at 801 SENTOUS
AVENUE, CITY OF INDUSTRY, CALIFORNIA 91748 (the "Seller").
1. EQUIPMENT: Seller agrees to sell and Buyer, by its written acceptance,
agrees to buy the following Equipment (the "Equipment") on the terms and
conditions contained in this Agreement:
- --------------------------------------------------------------------------------
FEATURE
MACHINE (QTY. NEW/ UNIT
QTY. TYPE/MODEL PER UNIT) DESCRIPTION SERIAL# USED PRICE
- --------------------------------------------------------------------------------
SEE EXHIBIT "A" ATTACHED HERETO FOR A LISTING OF EQUIPMENT
BUYER WILL LEASE THE EQUIPMENT BACK TO SELLER UNDER EQUIPMENT SCHEDULE NO. TWO
TO MASTER LEASE AGREEMENT NO. 143050 BETWEEN THE PARTIES.
- -------------------------------------------------------------------------------
2. DELIVERY: Seller shall deliver and Buyer shall accept delivery of each
Unit of the Equipment at 801 SENTOUS AVENUE, CITY OF INDUSTRY, CALIFORNIA
91748; on a mutually acceptable date no later than AUGUST 5, 1996. (Under
Equipment Schedule No. Two, the Equipment will remain at Seller's location.)
3. SALES PRICE: The aggregate sales price of the Equipment is $22,880.00,
which Buyer will pay to Seller by the delivery date of the Equipment, provided
all serial numbers for the Equipment have been given to Buyer and all liens on
the Equipment have been released. Buyer is buying the Equipment for resale and
its sales tax number is SS-OHA-30-631191 in the state of California.
4. WARRANTIES:
A. Seller warrants to Buyer:
(i)Seller, at the time of delivery of the Equipment, is the lawful owner of the
Equipment free and clear of all liens and encumbrances of every kind and
manner. Seller shall supply Buyer with a Bill of Sale evidencing title and
warranty, and Seller shall supply Buyer with a copy of its Bill of Sale from
Entex Information Services, Inc.; and
(ii)Seller, at the time of delivery, has the full right, power and authority to
sell the Equipment; and
(iii)The Equipment has been under a manufacturer's maintenance agreement and at
the time of delivery the Equipment is in good working order and eligible
(according to the manufacturer's normal policies) for the manufacturer's
standard maintenance contract. On Buyer's request, Seller shall supply Buyer
with a letter from the manufacturer regarding eligibility of the Equipment for
a maintenance contract.
B. THE EXPRESS WARRANTIES ABOVE ARE IN LIEU OF ANY AND ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE. SELLER MAKES NO WARRANTY AS TO THE CONDITION OF THE
EQUIPMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS SECTION.
5. TAXES: Buyer shall pay all sales and use taxes levied or based on the
sales price, this Agreement, or the Equipment. Personal property taxes
assessable on a Unit prior to the delivery date will be paid by Seller.
Page No. 1 of 2
<PAGE> 20
6. DISABILITY: If Seller is unable to timely perform its obligations under this
Agreement due to any cause, Buyer may terminate this Agreement in whole or in
part and on termination Seller shall refund to Buyer all monies paid to it by
Buyer on this Agreement.
7. MISCELLANEOUS:
A. ENTIRE AGREEMENT: This Agreement is the entire agreement between Seller and
Buyer with respect to the purchase and sale of the Equipment. No representation
or statement not contained in this Agreement will be binding on Seller or Buyer
as a warranty or otherwise, unless in writing and executed by the party to be
bound.
B. BINDING EFFECT: This Agreement is binding on and inures to the benefit of
the parties to this Agreement and their respective successors in interest and
permitted assigns.
C. NOTICES: Any notice relating to this Agreement must be in writing and sent
by electronic facsimile transmission, by overnight courier service or by
registered or certified mail, postage prepaid, addressed to the party for which
it is intended at the address set forth in the beginning of this Agreement or
to such other address as either party indicates in writing. Notice is effective
on the earlier of receipt or three days from the date of mailing.
D. GOVERNING LAW: This Agreement, including all matters of construction,
validity, performance and enforcement, is governed by the laws of the State of
Missouri, without giving effect to principles of conflicts or choice of law.
E. OTHER EQUIPMENT: All form stands, logic manuals, diagnostics, test decks,
cables, terminators, special RPQ devices permanently attached or removable on
one or more ends, associated cables, maintenance documentation, tools, IR
log(s), kick plates, covers and the like, which are required to attach and
install the Equipment will be included as part of the Equipment and will be
delivered to Buyer by Seller at no additional charge. Seller shall either
replace or pay the replacement costs of any missing items.
F. ACCEPTANCE: This Agreement is subject to acceptance by Buyer at its home
office.
G. SEVERABILITY: Any provision of this Agreement prohibited by, or unlawful or
unenforceable under, any applicable law of any jurisdiction will be ineffective
as to that jurisdiction without invalidating the remaining provisions of this
Agreement, but where the provisions of applicable law may be waived, they are
waived to the full extent permitted by law.
H. SURVIVAL: All representations, warranties, and covenants contained in this
Agreement continue in full force and effect and survive the purchase of the
Equipment.
I. CORPORATE AUTHORITY: The parties covenant and warrant that the persons
executing this Agreement on their behalf are duly authorized to execute this
Agreement, and this Agreement constitutes a valid and binding obligation of the
parties.
J. EQUAL OPPORTUNITY COMPLIANCE: The Equal Employment Opportunity Clause in
Section 202 of Executive Order 11246, as amended, relative to equal employment
opportunity and the implementing rules and regulations of the Office of Federal
Contracts Compliance Programs are incorporated in this Agreement by specific
reference. On request, Seller shall furnish Buyer certificates of compliance
with orders and regulation.
The parties have executed this Agreement on the date written below. At Buyer's
option, this Agreement is not effective unless signed by Seller and returned to
Buyer by JULY 31, 1996.
BUYER: SELLER:
COMPUTER SALES INTERNATIONAL, INC. KIDS MART, INC.
By: /s/ E. William Gillula By: /s/ Bradley H. Sell
------------------------------- -----------------------------
E. William Gillula Bradley H. Sell
Title: Executive Vice President Title: Vice President/Controller
--------------------------- --------------------------
Date: August 1, 1996 Date: July 26, 1996
--------------------------- --------------------------
Page No. 2 of 2
<PAGE> 21
EXHIBIT "A"
KIDS MART, INC.
PURCHASE AGREEMENT NO. 143059
<TABLE>
<CAPTION>
FEATURE
MACHINE (QUANTITY NEW/
QTY. TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11 COMPAQ 15IN 150 COLOR MONITOR 603BC05AH582, USED
603BC05AH890,
603BC05AH474,
603BC05AF200,
612BC05AH450,
612BC05AH457,
612BC05AH451,
612BC05AI986,
612BC05AJ004,
612BC05AJ007,
612BC05AI994
10 COMPAQ 5100e PROLINEA PC A616HTC2H155, USED
A616HTC2H666,
A616HTC2H763,
A616HTC2H709,
A614HTC2D190,
A616HTC2J107,
A616HTC2J135,
A616HTC2J133,
A603HTB3H035,
A603HTB3H036
(2) KINGSTON 4MB NON-PARITY F/CQ
(1) INTEL (10) ETHEREXPRESS LAN
16TP 8/16 BIT ADP
</TABLE>
Page No. 1 of 1
<PAGE> 1
EXHIBIT 10.7
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND WILL BE FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY KIDS MART, INC. AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT.
AGREEMENT
Michael A. Harb
BE BOP CLOTHING, INC.
5833 Avalon Blvd.
Los Angeles, CA 90003
Dear Mr. Harb:
SECTION 1
The parties to this Agreement are Be Bop Clothing, Inc., a California
corporation and Kids Mart, Inc., a Florida corporation. This Agreement is also
contingent upon the parties executing an Exchange Agreement and Investment
Representation Agreement. Pursuant to that contingency and also in exchange for
the following agreed upon consideration, the parties agree as follows:
SECTION 2
Currently, there exists an open Accounts Receivable owed to Be Bop
Clothing, Inc. in the sum of Five Hundred Eighty Six Thousand Four Hundred
Twenty-three Dollars and Thirteen Cents ($586,423.13). It is anticipated that
an additional Sixty Three Thousand Five Hundred Six Dollars and Eighty Seven
Cents ($63,576.87) of merchandise will be shipped to Kids Mart, Inc. to
comprise a total "investment" of Six Hundred Fifty Thousand Dollars
($650,000.00). That amount will be the total "investment" by Be Bop Clothing,
Inc., which will then be given non-registered Common Stock of Kids Mart, Inc.
at a price per share (with respect to the Exchange Agreement) of One Dollar and
Fifty Cents ($1.50). The Common Stock of Kids Mart, Inc. is currently quoted on
the OTC Bulletin Board.
SECTION 3
As long as Be Bop Clothing, Inc. does not reduce its investment in Kids
Mart, Inc. as set forth in Section 2 above, Kids Mart, Inc. will use its best
efforts to maintain Ten Million Dollars ($10,000,000) in annual sales from Be
Bop Clothing, Inc. beginning January 1, 1997, as per the attached "Volume
Breakdown and Mark-up Goal" which is hereby incorporated by reference and made a
part of this Agreement. Until Kids Mart, Inc. receives factor support, the terms
of payment for the Ten Million Dollars annual sales will be based upon mutual
agreement between Be Bop Clothing, Inc. and Kids Mart, Inc., for each purchase
order. If the parties are unable to agree upon mutually agreeable terms, either
party has the option to cancel this agreement upon thirty (30) days written
notice. However, until Kids Mart, Inc. receives factor support, Kids Mart, Inc.
agrees to net 45 day terms. At the time Kids Mart, Inc. receives factor support,
Be Bop Clothing, Inc. will grant Kids Mart, Inc. net sixty (60) day terms.
Should Kids Mart, Inc. not be prompt in paying said accounts on these terms,
said failure would constitute a breach of this Agreement.
<PAGE> 2
SECTION 4
Kids Mart, Inc. agrees that a senior executive officer and primary
shareholder of Be Bop Clothing, Inc. will be installed on the Board of
Directors of Kids Mart, Inc. within three (3) months of the execution of this
Agreement to serve until the next Annual Meeting of Shareholders. Thereafter,
unless Be Bop Clothing, Inc. has reduced its above-stated investment by more
than Fifty Percent (50%), Kids Mart, Inc. shall nominate said senior executive
officer of Be Bop Clothing, Inc. to the Board of Directors to be voted upon by
the shareholders at each annual meeting.
SECTION 5
Modification. Neither this Agreement nor any provision hereof shall be
modified, discharged or terminated except by an instrument in writing signed by
the party against whom any waiver, change, discharge or termination is sought.
SECTION 6
Notices. Any notice, demand or other communication which any party
hereto may be required, or may elect, to give to anyone interested hereunder
shall be sufficiently given if (a) deposited, a postage prepaid, in a United
States mail letter box, registered or certified mail, return receipt requested,
addressed to such address as may be given herein or (b) delivered personally at
such address.
SECTION 7
Binding Effect. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties and their heirs,
executors, administrators, successors, legal representatives and permitted
assigns. If the undersigned is more than one person, the obligations of the
undersigned shall be joint and several and the agreements, representations,
warranties and acknowledgments herein contained shall be deemed to be made by
and be binding upon each such person and his heirs, executors, administrators
and successors.
SECTION 8
Partial Agreement. This instrument contains the partial agreement of
the parties, and there are no representations, covenants or other agreements
except the Exchange Agreement and Investment Representation Agreement
referenced herein.
SECTION 9
Assignability. This Agreement is not transferable or assignable by the
parties unless agreed to in writing by all said parties.
2
<PAGE> 3
SECTION 10
Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
made and to be performed entirely within such state.
SECTION 11
Gender. All pronouns contained herein and any variations thereof shall
be deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the parties hereto may require.
SECTION 12
Counterparts. This Agreement may be executed through the use of
separate signature pages or in any number of counterparts, and each of such
counterparts shall, for all purposes, constitute one agreement binding on all
the parties, notwithstanding that all parties are not signatories to the same
counterpart.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
11th day of September, 1996.
BE BOP CLOTHING INCORPORATED KIDS MART, INC.
By: /s/ Marcus Sphatt By: /s/ Bernard Tessler
- ---------------------------- ----------------------------
Marcus Sphatt Bernard Tessler
Vice President President
By: /s/ Michael Harb
- ----------------------------
Michael Harb
Chief Executive Officer
<PAGE> 4
* *
ADDENDUM TO AGREEMENT
<PAGE> 1
EXHIBIT 10.8
KIDS MART, INC.
(A FLORIDA CORPORATION)
EXCHANGE AGREEMENT
AND
INVESTMENT REPRESENTATION AGREEMENT
Bernard Tessler
Kids Mart, Inc.
801 Sentous Avenue
City of Industry, CA 91748
Dear Mr. Tessler:
SECTION 1
1.1 SUBSCRIPTION. The undersigned hereby subscribes for and agrees to
purchase 433,333 shares of Common Stock (Par Value $.0001 per share) (the
"Securities") issued by Kids Mart, Inc. (the "Company"), a corporation
organized under the laws of the State of Florida, at a price of $1.50 per
share, on the terms and conditions described herein. Although the Securities
are unregistered and may not be sold unless registered under federal and state
securities laws, or an exemption from registration is applicable, the Common
Stock of the Company is quoted on the OTC Bulletin Board.
1.2 PURCHASE
The undersigned tenders trade payables due from the Company to
the undersigned in the amount of $650,000 in full payment of the purchase price
of the Securities. Upon execution and delivery of this Agreement, acceptance by
the Company, and delivery of the Securities such $650,000 of trade payables
shall be converted into payment of the purchase price of the Securities and
shall no longer be considered due and owing to the undersigned.
1.3 ACCEPTANCE OR REJECTION OF SUBSCRIPTION.
(a) The undersigned understands and agrees that the Management
of the Company reserves the right to reject this subscription for the purchase
of Securities, in whole or in part, if in its judgement it deems such action in
the best interests of the Company.
(b) In the event the undersigned's subscription is accepted,
Management shall accept the undersigned's tender by executing this subscription
agreement.
<PAGE> 2
Section 2
2.1. Investor Representations and Warranties. The undersigned hereby
acknowledges, represents and warrants to, and agrees with, Management of the
Company as follows:
(a) The undersigned is investing in the Securities for its own
account, for investment purposes only, and not with a view to or for the
resale, distribution or fractionalization thereof, in whole or in part, and no
other person has a direct or indirect beneficial interest in the Securities.
(b) The undersigned has reviewed the opinion of counsel to the
Company pertaining to the offer and sale of the Securities contemplated herein
and acknowledges its understanding that the offering and sale of the Securities
is intended to be exempt from registration under the Securities Act of 1933, as
amended (the "Act"), by virtue of Section 4(2) of the Act and exempt from
qualification under the California Corporate Securities Law of 1968, as
amended, by virtue of Section 25102 (f). In furtherance thereof, the
undersigned represents and warrants to and agrees with the Management of the
Company as follows:
(i) The undersigned has the financial ability to bear
the economic risk of its investment in the Securities (including its possible
loss), has adequate means of providing for its current needs and personal
contingencies and has no need for liquidity with respect to its investment in
the Securities.
(ii) The undersigned has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Securities and has obtained, in its judgment,
sufficient information from the Company to evaluate the merits and risks of an
investment in the Securities.
(c) The undersigned:
(i) has been provided an opportunity to obtain any
information concerning the Company and all other information to the extent the
Company possesses such information or can acquire it without unreasonable
effort or expense;
(ii) has been given the opportunity to ask questions
of, and receive answers from the Management of the Company concerning all
matters pertaining to this investment, and has been given the opportunity to
obtain such additional information necessary in order to evaluate the merits
and risks of an investment in the Securities to the extent the Company
possesses such information or can acquire it without unreasonable effort or
expense; and
<PAGE> 3
(iii) has determined that the Securities are a suitable investment
for it and that at this time it could bear a complete loss of its investment;
(d) In making the decision to purchase the Securities herein
subscribed for, the undersigned has relied solely upon independent
investigations made by it. The undersigned is not relying on the Company with
respect to tax and other economic considerations involved in this investment.
(e) In addition to the Risk Factors set forth in this Agreement, the
undersigned specifically acknowledges its awareness that the Company's financial
position continues to deteriorate. Consequently, investment in the Company at
this time is extremely speculative and the undersigned acknowledges the distinct
possibility that the undersigned may lose the entire investment. THIS INVESTMENT
SHOULD BE CONSIDERED RESCUE FINANCING OF THE MOST SPECULATIVE NATURE.
(f) The undersigned is an "accredited investor" as such term is
defined in Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act of 1934, as amended. The undersigned falls within item
10 set forth on the copy of such definition attached hereto as Annex A.
(g) The undersigned represents, warrants and agrees that it will not
sell or otherwise transfer the Securities without registration under the
Securities Act or an exemption therefrom, and fully understands and agrees that
is must bear the economic risk of its investment for an indefinite period of
time because, among other reasons, the Securities have not been registered under
the Act or under the securities laws of certain states and, therefore, cannot be
resold, pledged, assigned or otherwise disposed of unless it is subsequently
registered under the Act and under applicable securities laws of such states or
an exemption from such registration is available. The undersigned understands
that the Company is under no obligation to register the Securities on its behalf
or to assist it in complying with any exemption from such registration under the
Act, except as set forth in Section 4, hereto. The undersigned also understands
that sales or transfers of the Securities are further restricted by provisions
of the applicable state securities laws.
2.2. Investor Awareness. The undersigned acknowledges, represents, agrees
and is aware that:
(a) no Federal or state agency has passed upon the securities or made
any findings or determination as to the fairness of this investment;
<PAGE> 4
(b) an investment in the Company is an illiquid investment
and the undersigned must bear the economic risk of its investment for an
indefinite period of time;
(c) the Management of the Company may be indemnified by the
Company against liabilities sustained by it by reason of its serving as the
Management of the Company;
(d) the Management of the Company is relying upon the
representations, warranties, agreements, undertakings and acknowledgments made
by the undersigned in this Agreement in determining the undersigned's
suitability as a purchaser of the Securities as an "accredited investor" as set
forth above. In addition, the undersigned undertakes to notify the Company
immediately of any change in any representation, warranty or other information
relating to the undersigned set forth herein.
(e) The purchase and sale of any investment in the Company
involves a high degree of risk and such risk may be increased in the case of
circumstances beyond the control of Management of the Company. This investment
is not recommended for those who cannot withstand the loss of their entire
investment;
(f) the success of the Company will be particularly
dependent upon the efforts of its Management. If the Company's officers and
directors die or become disabled, or otherwise terminate their relationship
with the Company, the Company would be materially adversely affected. There is
no assurance that the net worth of the Company's Management will be sufficient
to enable it to perform any financial obligations which the Company's
Management may have to the Company. Neither the Company's Management nor anyone
else, including the undersigned, has agreed to fund any deficits or agreed to
lend money to the company;
(g) Because of its minority interest in the Company, except
as permitted by general shareholder rights, a holder of the Securities will
have no right to participate in management of the Company or in the conduct of
its business except as permitted by general shareholder rights and unless a
representative of the undersigned serves as a member of the Board of Directors.
Section 3
3.1 Risk Factors. The undersigned has carefully considered and
evaluated the following risk factors. The risks set forth below do not purport
to be a complete description of all risks which may exist with respect to an
investment in the Securities, but is merely illustrative of the types of risks
which an investor should consider before deciding to invest.
<PAGE> 5
(a) Hazardous Materials. The Company has been notified
that certain stores in California have materials containing asbestos. The
asbestos material is generally in trace quantities, and no remediation is
expected to be required on the understanding that such material is properly
secured. However, should remediation be required, no assurance can be given as
to the effect this would have on the Company, although it could have a material
adverse effect.
(b) Closed Stores; Rent Liability. The Company has ceased
operations in nine previously unprofitable stores. The remaining term of the
leases on eight of these stores vary from less than six months to over three
years. As of January 27, 1996 the total rent liability associated with these
leases was approximately $0.4 million. The Company is attempting to negotiate
favorable terms with the various landlords. However, the Company may incur a
significant rent liability in connection with these leases.
(c) Credit Restraints. The Company is having difficulty
securing adequate terms from its suppliers. It has been required to pay for
inventory on significantly shortened terms. Support among the factors has been
on a severely limited basis. The Company has not been able to obtain
merchandise at planned levels. These restrictions may adversely impact the
Company's ability to continue to procure adequate levels of merchandise,
especially for the back-to-school and Christmas seasons.
(d) Cash Flow Constraints. The Company is experiencing
acute cash flow constraints. Two factors have contributed to these constraints;
1) heavy liquidation sales at all stores prior to and following the acquisition
of the company's business; and 2) shortened inventory payment terms. There can
be no assurance that the Company will not continue to incur substantial
markdowns and impaired cash flows.
(e) Net Losses and Accumulated Deficit. The Company has
experienced substantial losses since its acquisition of the Little Folks/Kids
Mart business. No assurance can be given as to when, if ever, the Company can
become profitable.
(f) Dependent on Woolworth. The Company receives
information systems, accounting and administrative services from Woolworth
pursuant to the terms of a transition service agreement (the "Service
Agreement"). In return, the Company pays certain fees to Woolworth. The initial
term of the Service Agreement expired on May 31, 1996. In connection with the
Settlement Agreement, the Service Agreement was extended to September 28, 1996.
The Company may not establish it own systems by the expiration date and may
incur significant expenses in developing such systems.
(g) Adverse Retail Industry Conditions. The retail
industry generally has recently suffered through a period of
<PAGE> 6
sluggish sales and significant price competition. The Company continues to
struggle through difficult market and industry condition over which it has no
control. No assurance can be given that such adverse market conditions will not
continue, nor can the Company predict what effect such conditions may have on
the near or long term prospects of the Company.
(h) Absence of Market; Transferability and Liquidity of Investment.
While the Common Stock of the Company is currently quoted on the OTC bulletin
Board, no established trading market has developed and there can be no
assurance that an established trading market will develop, or if developed, that
it will be maintained. Further, as noted a above, the issuance of the
Securities has not been registered under the Securities Act and, accordingly,
the undersigned may not dispose of its Surities unless such disposition has
been validly registered with the SEC under the Securities Act or such
disposition is, in the opinion of counsel to the Company, exempt from such
registration.
(i) Offering Price. The offering price of the Securities has been
aribtrarily determined by the Company. Accordingly, the offering price of the
Securities may not be any indication of the value of the Securities.
(j) Risk of Dilution; Need for Additional Financing. Based on internal
financial forecasts, the Company believes that the proceeds from this
transaction will not be sufficient to fund the Company's operation and capital
expenditures during the next six months. The Company will need additional
capital and there can be no assurance that the Company will be able to obtain
such additional capital. The Company's cash requirements may vary materially
from those planned currently due to general economic, competitive or other
factors. Adequate funds to meet that company's working capital requirements,
whether obtained through financial markets, additional equity offerings or from
the resources, may not be available to the Company when required or may not be
on terms acceptable to the Company. Any such additional financing may result in
significant dissolution to existing stockholders, or the issuance of securities
with rights superior to those of the Securities. If such financing is not
available, the Company may be required to modify its business plans or reduce
or cease certain or all of its operation, or file a petition for reorganization
under Chapter 11 of the Federal bankruptcy laws.
(k) Dividend Policy. Since its inception, the Company has not paid any
dividends on its Common Stock The Company intends to retain future earnings, if
any, to provide funds for working capital, operations and/or expansion of its
business, and accordingly, does not anticipate paying any cash dividends on the
Stock in the foreseeable future. Furthermore, the Company's revolving credit
line contains convenants restricting declaration or payment of dividends.
<PAGE> 7
(1) Competition. All aspects of the children's apparel specialty retail
industry are highly competitive. The Company competes with a number and variety
of retailers, mass merchandisers and warehouse clubs, including several
national chains, some of which have greater financial and marketing resources
than the Company. Competition exists primarily in the areas of price, product
selection and service. competitive factors could require price reductions or
increases in expenditures for marketing and customer service that could
adversely affect the Company's operating results.
(m) Dependence on Key Personnel. The Company is highly dependent on the
members of its management team. The future success of the Company depends in
part on its ability to attract and retain highly qualified personnel. The
Company faces intense competition for such highly qualified personnel. There
can be no assurance that the Company will be able to hire sufficient
qualified personnel on a timely basis or retain such personnel.
(n) Dependence on Key Suppliers. The Company has no in-house
manufacturing capability. Approximately 35% of the Company's merchandise is
currently manufactured to its private label specifications by independent
factories located in the United States and throughout the world. The Company
utilizes a buying agent in Hong Kong. the Company has no long-term contracts
with its private label manufacturing sources and competes with other companies
for production facilities and import quota capacity. Approximately 35% of its
private label merchandise is produced by fewer than 30 manufacturers. The use
of private label merchandise brings with it the associated burdens of quality
control and favorable delivery schedules. There can be no assurance that the
Company will be able to maintain relationships with its suppliers or at
acceptable costs and terms.
(o) Restrictions on Imports. The Company's operations are subject to
the customary risks of doing business abroad, including fluctuation in the
value of currencies, customs duties and related fees, import controls and trade
barriers (including quotas), restrictions on the transfer of funds, work
stoppages and in certain parts of the world, political instability. The Company
believes that it has reduced these risks by diversifying its offshore
purchases among various countries and factories. These factors have not had a
material adverse impact upon the Company's operations to date. Imports into
the United States are also affected by the cost of transportation, the
imposition of import duties and increased competition for greater production
abroad. The countries from which the company's products are imported may, from
time to time, impose new quotas, duties, tariffs or other restrictions, or
adjust presently prevailing quotas, duty or tariff levels, which could affect
the Company's operations and its ability to import products at current or
increased levels. The Company cannot predict the likelihood or frequency of
any such events occurring. The Company's
<PAGE> 8
imported products are subject to United States customs duties and, in the
ordinary course of its business, the Company may, from time to time, be subject
to claims for duties and other charges.
Section 4
Registration Rights; Etc.
4.1. Certain Definitions. As used in this Section 4, the following
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Act.
"Registrable Securities" shall mean the Securities covered hereby.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act and applicable rules and regulations thereunder, and
the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company in
compliance with Section 4.2 hereof other than Selling Expenses, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, blue sky fees and expenses, and
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company).
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities, all fees and
disbursements of counsel for any Holder and any blue sky fees and expenses
excluded from the definition of "Registration Expenses".
"Holder" shall mean any holder of outstanding Shares or Registrable
Securities which (except for purposes of determining "Holders" under Section
4.6 hereof) have not been sold to the public.
"Other Shareholders" shall mean holders of securities of the Company who are
entitled by contract with the Company to have securities included in a
registration of the Company's securities.
4.2. Company Registration.
(a) Notice of Registration. If the Company shall determine to
register any of its securities either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights, other than a
<PAGE> 9
registration relating solely to employee benefit plans, or a registration
relating solely to a Commission Rule 145 transaction, or a registration on any
registration form which does not permit secondary sales, the Company will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made by any Holder within fifteen (15) days after receipt of the
written notice from the Company described in clause (i) above, except as set
forth in Section 4.2(b) below.
(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the written notice given
pursuant to Section 4.2(a)(i). In such event, the right of any Holder to
registration pursuant to Section 4.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company, directors and officers and the Other
Shareholders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for underwriting by the Company.
Notwithstanding any other provision of this Section 4.2, if the
underwriter determines that marketing factors require a limitation on the
number of shares to be underwritten, the underwriter may (subject to the
allocation priority set forth below) exclude from such registration and
underwriting some of the Registrable Securities which would otherwise be
underwritten pursuant hereto provided, however, that in no event shall the
Registrable Securities underwritten pursuant hereto constitute less than
one-third of such offering. The Company shall so advise all holders of
securities requesting registration, and the number of shares of securities that
are entitled to be included in the registration and underwriting shall be
allocated in the following manner. The number of shares that may be included in
the registration and underwriting on behalf of such Holders, directors and
officers and Other Shareholders shall be allocated among such Holders,
directors and officers and other Shareholders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities and other
securities
<PAGE> 10
which they had requested to be included in such registration at the time of
filing the registration statement.
If any Holder of Registrable Securities or any officer, director or
Other Shareholder disapproves of the terms of any such underwriting, such
person may elect to withdraw therefrom by written notice to the Company and the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
4.3 Expenses of Registration. The Company shall bear all
Registration Expenses incurred in connection with any registration,
qualification and compliance by the Company pursuant to Section 4.2 hereof. All
Selling Expenses shall be borne by the holders of the securities so registered
pro rata on the basis of the number of their shares so registered.
4.4 Registration Procedures. In the case of each registration
effected by the Company pursuant to this Section 4, the Company will keep each
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. The Company will, at its expense:
(a) keep such registration effective for a period of
one hundred twenty (120) days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto,
whichever first occurs;
(b) furnish such number of prospectuses and other
documents incident thereto as a Holder from time to time may reasonably
request; and
(c) use its best efforts to register or qualify the
Registrable Securities under the securities laws or blue-sky laws of such
jurisdictions as any Holder may request; provided, however, that the Company
shall not be obligated to register or qualify such Registrable Securities in
any particular jurisdiction in which the Company would be required to execute a
general consent to service of process in order to effect such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act or
applicable rules or regulations thereunder.
4.5 Indemnification.
(a) The Company, with respect to each registration,
qualification and compliance effected pursuant to this Section 4, will
indemnify and hold harmless each Holder, each of its officers, directors and
partners, and each party controlling such Holder, and each underwriter, if any,
and each party who controls any underwriter, against all claims, losses,
damages and liabilities (or
<PAGE> 11
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Company of
the Securities Act or any rule or regulation thereunder applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors and partners, and
each party controlling such Holder, each such underwriter and each party who
controls any such underwriter, for any legal and any other expenses incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based solely upon
written information furnished to the Company by such Holder or underwriter, as
the case may be, and stated to be specifically for use therein.
(b) Each Holder and Other Shareholder will, if Registrable
Securities held by such person are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify and hold
harmless the Company, each of its directors and officers and each underwriter,
if any, of the Company's securities covered by such a registration statement,
each party who controls the Company or such underwriter, each other such Holder
and Other Shareholder and each of their respective officers, directors and
partners, and each party controlling such Holder or Other Shareholder, against
all claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Company and
such Holders, Other Shareholders, directors, officers, partners, parties,
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement ) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document solely in reliance upon and in conformity
with written information furnished to the Company by such Holder or Other
Shareholder and stated to be specifically for use therein; provided, however,
that the obligations of such Holders and Other Shareholders hereunder shall be
limited to an amount equal to the proceeds to
<PAGE> 12
each such Holder or Other Shareholder of securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section
4.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall have been
advised by counsel that actual or potential differing interests or defenses
exist or may exist between the Indemnifying Party and the Indemnified Party, in
which case such expense shall be paid by the Indemnifying Party), and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 4. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
4.6 Information by Holder. Each Holder of Registrable Securities, and
each Other Shareholder holding securities included in any registration, shall
furnish to the Company such information regarding such Holder or Other
Shareholder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Section 4.
4.7 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may permit the sale of
the Registrable Securities to the public without registration, the Company
agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all time
from and after ninety (90) days following the effective date of the first
registration under the Securities Act filed by the Company for an offering of
its securities to the general public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Securities Exchange Act of
<PAGE> 13
1934, as amended, at any time after it has become subject to such reporting
requirements; and
(c) So long as the Holder owns any Registrable Securities,
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of Rule 144 (at any time
from and after ninety (90) days following the effective date of the first
registration statement in connection with an offering of its Securities to the
general public), and of the Securities Act and the Securities Exchange Act of
1934, as amended (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed as the Holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing the Holder to sell any such securities without registration.
Section 5
5.1 Indemnity. The undersigned hereby agrees to indemnify and hold
harmless the Company, its officers and directors, and each other person, if
any, against any and all loss, liability, claim, damage and expense whatsoever
resulting directly from any material false representation or material breach of
warranty by the undersigned contained herein.
5.2 Modification. Neither this Agreement nor any provision hereof
shall be modified, discharged or terminated except by an instrument in writing
signed by the party against whom any waiver, change, discharge or termination
is sought.
5.3 Notices. Any notice, demand or other communication which any
party hereto may be required, or may elect, to give to anyone interested
hereunder shall be sufficiently given if (a) deposited, postage prepaid, in a
United States mail letter box, registered or certified mail, return receipt
requested, addressed to such address as may be given herein or (b) delivered
personally at such address.
5.4 Binding Effect. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties and
their heirs, executors, administrators, successors, legal representatives and
permitted assigns. If the undersigned is more than one person, the obligations
of the undersigned shall be joint and several and the agreements,
representations, warranties and acknowledgements herein contained shall be
deemed to be made by and be binding upon each such person and his heirs,
executors, administrators and successors.
5.5 Entire Agreement. This instrument contains the entire agreement
of the parties, and there are no representations,
<PAGE> 14
covenants or other agreements except as stated or referred to herein.
5.6. Assignability. This Agreement is not transferable or assignable
by the undersigned.
5.7 Applicable Law.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
made and to be performed entirely within such state.
(b) The undersigned is a California resident and the offer and
issue of the Securities has been made in California.
5.8. Gender. All pronouns contained herein and any variations thereof
shall be deemed to refer to the masculine, feminine or neuter, singular or
plural, as the identity of the parties hereto may require.
5.9. Counterparts. This Agreement may be executed through the use of
separate signature pages or in any number of counterparts, and each of such
counterparts shall, for all purposes, constitute one agreement binding on all
the parties, notwithstanding that all parties are not signatories to the same
counterpart.
IN WITNESS WHEREOF, the undersigned has executed this Exchange
Agreement and Investment Representation Agreement on this 11th day of September
1996.
BE BOP CLOTHING, INCORPORATED
By: /s/ Michael Harb By: /s/ Marcus Sphatt
------------------------------- ---------------------------------
Michael Harb Marcus Sphatt, Vice President
Chief Executive Officer
* * * * * *
Subscription accepted as of the 11th day of September 1996.
KIDS MART, INC.
By: /s/ Bernard Tessler, President
-------------------------------
Bernard Tessler, President
<PAGE> 15
ANNEX A
Effective April 19, 1989, the following are "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act of
1933 (the "Securities Act"):
1. An individual whose net worth, together with that of his
spouse, exceeds $1,000,000.
2. An individual who had individual income in excess of $200,000
in each of the two most recent years or joint income with that individual's
spouse in excess of $300,000 in each of those years and who reasonably expects
to reach the same income level this year.
3. A bank as defined in Section 3(a)(2) of the Securities Act, or
a savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual capacity or
fiduciary capacity.
4. A broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934.
5. An insurance company as defined in Section 2(13) of the
Securities Act.
6. An investment company registered under the Investment Company
Act of 1940 or a business development company as defined in Section 2(a)(48) of
that Act.
7. A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
8. An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974, if:
a. the decision to invest in the entity is made by a plan
fiduciary, as defined in Section 3(21) of such Act,
which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or
b. the plan has total assets in excess of $5,000,000, or
c. the plan is a self-directed plan with investment
decisions made solely by persons who are accredited
investors.
<PAGE> 16
9. A private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940.
10. A charitable organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust or
partnership, not formed with the specific purpose of acquiring the securities,
with total assets in excess of 5,000,000.
11. A trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities, whose purchase is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) of the Securities Act.
12. Any director, executive officer or general partner of the issuer of the
securities being offered or sold, or any director, executive officer or general
partner of a general partner of that issuer.
13. A plan established and maintained by a state, its political
subdivisions or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees with total assets in excess of
$5,000,000.
14. An entity in which all of the equity owners are accredited investors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF JANUARY 27, 1996, CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE EIGHT MONTHS ENDED JANUARY 27, 1996 AND NOTE 5 TO CONSOLIDATED FINANCIAL
STATEMENTS, AS OF AND FOR THE EIGHT MONTHS ENDED JANUARY 27, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO.
</LEGEND>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> JAN-27-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> JAN-27-1996
<CASH> 502
<SECURITIES> 0
<RECEIVABLES> 1,670
<ALLOWANCES> 0
<INVENTORY> 17,144
<CURRENT-ASSETS> 21,204
<PP&E> 7,579
<DEPRECIATION> 1,473
<TOTAL-ASSETS> 27,609
<CURRENT-LIABILITIES> 20,194
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 12,783
<TOTAL-LIABILITY-AND-EQUITY> 27,609
<SALES> 87,698
<TOTAL-REVENUES> 87,698
<CGS> 53,296
<TOTAL-COSTS> 36,128
<OTHER-EXPENSES> 2,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,484
<INCOME-PRETAX> (5,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,696)
<EPS-PRIMARY> ($1.15)
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