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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 5, 2000
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COMMISSION FILE NO. 1-13099
FLOORING AMERICA, INC.
A DELAWARE CORPORATION
(IRS EMPLOYER IDENTIFICATION NO. 58-2060334)
210 TOWNPARK DRIVE
KENNESAW, GEORGIA 30144
(678) 355-4000
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
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COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007 NEW YORK STOCK EXCHANGE, INC.
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<S> <C>
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE
ON WHICH REGISTERED)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G)
OF THE SECURITIES EXCHANGE ACT OF 1934:
COMMON STOCK, $.001 PAR VALUE
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 / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant (16,090,988 shares) on May 1, 2000 was
approximately $50,284,500 based on the closing price of the registrant's common
stock as reported on the New York Stock Exchange on May 1, 2000. For the
purposes of this response, officers, directors and holders of 10% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of
May 1, 2000 was 19,321,972 shares exclusive of 2,116,460 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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PART I
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). These statements appear in a number of places
in this Report and include statements regarding the intent, belief or current
expectations of Flooring America, Inc. ("Flooring America," the "Company," "we,"
"us," or "our"), our directors or our officers with respect to, among other
things:
- trends affecting our financial condition or results of operations,
- potential acquisitions or divestitures by us,
- our business and growth strategies,
- our ability to successfully integrate acquired businesses, and
- our financing plans and requirements.
You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among others, factors that could
adversely affect actual results and performance include:
- local and regional economic conditions in the areas that we serve,
- the level of customer spending for flooring products,
- competition among flooring retailers and carpet manufacturers,
- changes in merchandise mixes, site selection and related traffic and
demographic patterns,
- availability of financing,
- inventory management and turnover levels,
- realization of cost savings,
- our success in integrating recent and future acquisitions, and
- the resolution or outcome of the pending litigation and government
investigation relating to the restatement of previously announced
financial results for the fiscal year ended January 31, 1999 and for each
of the quarters therein.
The accompanying information contained in this Form 10-K, as well as in our
other Exchange Act filings, identifies important additional factors that could
adversely affect actual results and performance. See "Item 1. Business--Risk
Factors." You are urged to carefully consider such factors.
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ITEM 1. BUSINESS.
GENERAL
Flooring America, Inc., formerly known as The Maxim Group, Inc., ("Flooring
America," the "Company," "we," "us," or "our") operates and franchises one of
the largest flooring distribution networks in North America. Effective
January 2000, we announced our intention to rebrand our full service retail
store operations under a single brand, "Flooring America," from several brands
under which we operated stores throughout the United States, including
CarpetMAX-Registered Trademark-, New York Carpet World, The Carpet Exchange, and
Carpetland USA. As of May 1, 2000, we have converted approximately 76% of our
Company-owned stores to the "Flooring America" brand and we expect the remainder
to be converted prior to October 2000. Approximately 20% of our full service
franchise stores have been converted to the "Flooring America" brand by our
CarpetMAX-Registered Trademark- franchisees. We also own the GCO Carpet
Outlet-Registered Trademark- brand under which we own and franchise
cash-and-carry discount flooring stores. In addition, we own the CarpetsPlus-TM-
brand which we license to independent flooring dealers.
Originally formed in 1991 as the franchisor of
CarpetMAX-Registered Trademark- flooring stores, we have grown our franchise
network to include, as of May 1, 2000, 627 franchise members in 49 states, plus
Canada, operating 486 Flooring America (or CarpetMAX) stores, 117 GCO Carpet
Outlet-Registered Trademark- stores and 231 CarpetsPlus-TM- stores. Through the
growth of our franchise network, we have developed a comprehensive retail
infrastructure, including store development, marketing, advertising, credit
programs, sales training, and product sourcing resources. In an effort to
leverage this retail infrastructure, we began acquiring selected flooring
retailers in fiscal 1995 and began opening Company-owned retail stores in fiscal
1996.
In August 1998, we significantly expanded our network of Company-owned
stores by acquiring substantially all of the retail store assets of Shaw
Industries, Inc. ("Shaw"). These assets included 266 retail flooring stores,
each of which operated under one of ten different brand names, including New
York Carpet World, Carpetland USA and The Carpet Exchange. As of May 1, 2000, we
owned and operated a total of 274 full service retail flooring centers and 7 GCO
Carpet Outlet stores.
In order to focus our full efforts and resources on our retail operations,
in January 1999, we sold substantially all of the assets of our Image
Industries, Inc. ("Image"), subsidiary to Aladdin Manufacturing Corporation, a
subsidiary of Mohawk Industries, Inc. We received total consideration of
approximately $210.7 million which included the assumption of approximately
$48.1 million of related debt and short-term liabilities. Image was a leading
plastics recycler and manufacturer of polyester fiber and carpet, with annual
sales for fiscal 1999 of approximately $200 million.
During the year ended February 5, 2000, we operated three reportable
segments: retail, franchise services and corporate. During the year ended
January 31, 1999, we operated a fourth reportable segment, manufacturing. The
retail segment is composed of retail flooring stores and distribution support
centers. The franchise services segment includes the operations of three of our
franchise businesses: GCO, CarpetsPlus and MaxCARE. Corporate consists of the
Flooring America franchise business, store development, marketing, advertising,
consumer credit, and product sourcing activities, as well as corporate
non-operating items not directly relating to the manufacturing, retail or
franchise services segments. See Note 18 to our Consolidated Financial
Statements for certain financial information relating to these segments.
We have developed an E-Commerce Internet site to offer a variety of home
decor products. Operating through our Everythingdecor, Inc. subsidiary, the web
site, which began operating on May 20, 2000, provides consumers with planning
resources, products and services covering ten major decor categories including
flooring, furniture, wall coverings, lighting, and paint. Users can purchase the
products directly on-line through the website, www.everythingdecor.com, or
receive referrals to a variety of retailers who offer the same products and are
located in close proximity to the users. As of May 20, 2000,
Everythingdecor, Inc.
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had developed a network of 7,000 affiliated decor retailers and 200
manufacturers representing approximately 50,000 stock keeping units ("SKUs").
Everythingdecor, Inc. has established revenue sharing arrangements with many of
these manufacturers and retailers. We are currently seeking to divest
approximately eighty percent of our ownership interest in Everythingdecor, Inc.
as part of our effort to focus on our existing flooring operations. No
assurances can be given as to whether any such transaction will be completed or
as to the timing or terms of any potential sale.
INDUSTRY OVERVIEW
Based on industry estimates, the U.S. retail flooring industry exceeded
$20 billion in annual sales in 1999. The industry is segregated into three
distinct markets: residential replacement (including full-service stores and
cash-and-carry outlets); specified contract (commercial); and builder business.
We believe that the residential replacement market comprises approximately 50%
of the total North American residential flooring market, with the specified
contract and builder markets making up the remainder of the retail flooring
industry. Despite a recent trend towards consolidation, distribution channels in
the domestic retail flooring industry remain highly fragmented, with independent
retail flooring dealers operating over 25,000 locations. Home centers, furniture
stores, department stores and mass merchants also offer flooring products to
consumers.
We believe that the retail flooring industry, taken as a whole, remains
characterized by a large number of small regional companies and a few larger
home improvement centers, none of which has a flooring specific national brand
name. The typical independent flooring retailer operates a single store with
limited product selection and service. As a result, management believes that
most independent flooring retailers are at a competitive disadvantage, with
limited purchasing power for products and service and no national brand name
recognition. Other challenges facing smaller retailers include effective asset
management, merchandising, selling and store management techniques.
OUR BUSINESS STRATEGY
Our longer term strategic objective is to establish the largest and most
profitable residential and commercial flooring specialty store distribution
network in North America. As discussed in operating strategy below, our
short-term strategic imperative is to return to profitability and increase cash
flow. We have built a multi-faceted flooring distribution network, consisting of
both Company-owned and franchised retail stores, supported by our extensive
specialty retailing capabilities in product sourcing, store development,
marketing and advertising, credit, personnel training and franchise support.
The cornerstone of our business strategy is our full-service flooring retail
concept ("Flooring America") that is designed to create competitive advantages
over traditional flooring stores. The principal elements of our strategy
include:
BROAD SELECTION OF PRODUCTS AND SERVICES. A significant majority of our
retail flooring centers (Company-owned and franchised) are one-stop,
full-service flooring stores for customers seeking a broad selection of carpet
and other flooring products. These flooring centers generally offer
approximately 15,000 SKUs of flooring products, including carpet, area rugs,
hardwood flooring, ceramic tile, vinyl flooring, laminates, stone and resilient
surfaces from leading flooring products manufacturers. Our Flooring America
branded stores typically carry a much broader selection of high quality flooring
products and offer a more comprehensive range of related services than those
normally featured at traditional independently owned and operated flooring
outlets.
PROVIDE A "POINT-OF-SALE" CUSTOMER FRIENDLY ENVIRONMENT WITH SUPERIOR
SERVICE. We believe that a customer friendly shopping environment and high
level of customer service at the point-of-sale are important competitive
advantages. The size and format of our typical flooring center, along with a
well-trained professional staff, allows us to emphasize customer care and is
designed to create a comfortable, enjoyable and productive shopping experience.
Our full service point-of-sale concept provides the
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Flooring America brand customer with one-stop shopping, including selection,
installation and on-going maintenance. In addition, our full-service stores
offer customers added conveniences, including a proprietary credit program,
interior design consulting, delivery and installation services and a 100%
satisfaction guarantee policy.
DISTINCT RETAILING STRATEGIES. By operating both Flooring America brand and
GCO brand stores, we seek to penetrate the three major sources for retail
flooring sales: residential replacement, home building and specified contract
markets. As noted above, our Flooring America brand flooring centers (both
Company-owned and franchised) offer a wide selection of high quality flooring
products with a high level of service to the customer, while GCO Carpet Outlets
offer discount flooring products to the cash-and-carry customer. We believe that
the breadth of our retail network and the diversity of our targeted customer
base may help mitigate the negative impact on revenues that may periodically
occur because of adverse changes in local competitive or economic conditions.
ESTABLISH A NATIONAL BRAND. To enhance our strategy of becoming a true
national retailer, we are consolidating our various full-service retail brands
into a single brand operating under the name "Flooring America." We believe that
using a single full service brand helps to ensure that customers focus on
flooring products rather than the multiple identities under which we previously
operated our stores. Store conversions to the Flooring America brand commenced
in October 1999 and are expected to extend through September 2000. The
conversion includes rebranding the full-service Company-owned stores by changing
signs and in some instances changing merchandise and store interiors. To further
support the consolidation to one full service brand, we are offering our
CarpetMAX franchisees the opportunity to convert their CarpetMAX stores to
franchised Flooring America outlets pursuant to a franchise agreement similar to
the current CarpetMAX franchise agreement, but with additional obligations and
restrictions placed upon the franchisee more consistent with a typical franchise
relationship. We intend to build brand name awareness for Flooring America
stores through national advertising programs, community involvement, charitable
acts and grass roots advertising efforts. To that end, we have become a
corporate sponsor for the Special Olympics, chosen Cathy Rigby to act as our
national spokesperson and advertised our brand in decor magazines.
SIGNIFICANT PRODUCT SOURCING CAPABILITIES. Our large retail network
provides significant purchasing power, enabling us to receive advantageous
pricing, delivery terms and merchandising programs from manufacturers of
flooring products. We have established close relationships with major suppliers
across all flooring categories. By capitalizing on suppliers' production and
delivery flexibility, we believe the stores operating within our retail network
are able to offer customers one of the largest selections of high quality
flooring products, delivered to us, generally on a just-in-time basis, thereby
minimizing our inventory requirements.
EXTENSIVE RETAILING INFRASTRUCTURE. In order to service our retail flooring
network, we have built an extensive retail infrastructure, including store
development, marketing, advertising, credit programs, sales and management
training, and product sourcing resources. We plan to continue to leverage these
resources to support both Company-owned and franchised stores.
OPERATING STRATEGY
Our strategic imperative in the short-term is to return to profitability and
increase cash flows. In the longer-term, our strategic objective is to establish
the largest and most profitable flooring distribution network in North America.
To achieve these objectives, we are presently pursuing the following performance
improvement initiatives and operating strategies:
- We have closed stores that were losing money.
- We have rebranded into one national brand (Flooring America), which after
the initial advertising launch, will allow us to realize advertising
savings by running the same advertisements for all the
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stores in the same Dominant Metropolitan Area ("DMA"), as well as a
national advertising campaign.
- We have identified specific opportunities for expense reductions related
to personnel cost, outside services, and general and administrative cost
at the support center, retail stores and warehouse locations and have
initiated such expense reductions.
- We have identified margin and cash flow improvement opportunities in the
retail stores and have begun taking actions to realize improved margins
and cash flows.
- We are seeking to divest certain non-core assets, which will enable us to
concentrate on our core businesses, Flooring America retail and franchise
stores.
We will continue to evaluate our business practices to enhance our service to
our customers, to create and maintain efficient distribution channels and
strengthen the training of our employees.
SLOWLY EXPAND COMPANY-OWNED STORE BASE WITHIN ESTABLISHED MARKETS. In the
longer term, we expect to slowly expand the number of Company-owned and operated
stores, principally in existing or contiguous market areas. We target market
areas with significant new residential building activity and/or more established
communities where remodeling is likely to occur. We believe that the continued
rollout of Company-owned flooring centers will enhance profitability by allowing
us to leverage our retail infrastructure.
EXPAND GCO FRANCHISE NETWORK. As part of our operation strategy, we also
intend to expand our franchise network by adding approximately 15 GCO franchised
stores per year. We believe that the expansion of the GCO franchise network
complements our full service store base by giving price conscious customers an
alternative offering. Further, with only 62 of the 211 DMA's in the United
States currently covered by GCO Carpet Outlets, we believe significant growth
opportunities exist for this concept.
PENETRATE NEW DISTRIBUTION CHANNELS. We intend to leverage our existing
strengths by offering flooring products and services to selected nontraditional
markets such as insurance restoration, real estate selling organizations and
mortgage companies.
EXPAND PRODUCT OFFERINGS AND SERVICES FOR EACH DISTRIBUTION FORMAT. We
believe that by offering new products and services to our customers, such as
consumer credit programs, installation and post-sale maintenance products and
services, we will increase retail sales through more frequent and larger
customer transactions.
MERCHANDISING STRATEGY.
Our merchandising strategy includes the re-branding of our full-service
retail stores to the Flooring America brand in order to increase our brand name
recognition. In addition, we have introduced initiatives to change the
merchandise mix at many of our full-service retail stores to better serve our
customers' needs, while continuing to minimize our inventory investment by
relying on vendors to supply products on a just-in-time basis.
COMPANY OWNED OPERATIONS
Our Company-owned retail stores are currently operated through full service
retail stores operating under the Flooring America brand (or under old brands
like New York Carpet World, Carpetland USA or The Carpet Exchange in the interim
before they are converted to the Flooring America brand) and cash and carry
outlet format under the GCO Carpet Outlet brand.
FLOORING AMERICA STORES. Our stores carry a broad variety of private label
flooring products from leading manufacturers. These stores provide customers
with a "one-stop" shopping experience for all of their flooring needs, catering
primarily to consumers seeking a wide selection of high quality products. Our
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full-service retail format offers customers a wide selection of competitively
priced flooring products. These flooring centers offer approximately 15,000
SKUs, including an extensive selection of carpet, area rugs, hardwood flooring,
ceramic tile, vinyl flooring, laminates and stone. With a greater emphasis on
hard surface flooring products than a typical carpet store, we believe that in
certain markets these full service stores meet increased consumer demand for
alternatives to traditional carpet products. Our full-service flooring centers
are typically located in prime retail locations with high consumer visibility
and are staffed with specialized flooring sales associates. These stores offer a
wide range of services, including interior design consulting, measuring,
delivery and installation.
GCO CARPET OUTLETS. These stores cater to the cash-and-carry flooring
market. GCO stores average approximately 10,000 square feet of retail space that
maintain in-store inventory. Generally, GCO Carpet Outlets derive more than 70%
of their revenues from the sale of carpet, with the balance consisting of pad,
hardwood and vinyl flooring sales. GCO Carpet Outlets cater primarily to price
sensitive customers who do not require high levels of customer service or a
broad selection of products. Customers typically include "do-it-yourself"
homeowners, homebuilders, rental property owners and property managers. In
contrast to the full service operations of Flooring America stores, GCO Carpet
Outlets do not offer delivery or installation services. Instead, customers
requiring these services are provided a list of recommended independent
contractors. GCO flooring products are sold with only a limited warranty.
SUPPLIER RELATIONSHIPS. We believe that we obtain quality products at a low
cost due to the collective purchasing volume of our consolidated retail network
and our relationships with major flooring products suppliers. Our ability to
purchase certain private label products creates significant buying
opportunities. In addition, our use of our suppliers' distribution networks
permits us to maintain low inventory levels at our Flooring America stores.
The following table lists a sampling of the major suppliers of certain of
our flooring products:
BROADLOOM CARPET:
- Shaw Industries, Inc.
- Mohawk Industries, Inc.
- Beaulieu of America
VINYL FLOORING:
- Armstrong World Industries, Inc.
HARDWOOD FLOORING:
- Triangle Pacific Corporation and its divisions
CERAMIC TILE:
- Casa Italia
- EPC America
- Dal-Tile International Inc.
- Shaw Ceramics
- Stiles Tile Works
LAMINATES:
- Perstop Flooring AB (Pergo)
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- Formica Flooring
Each of these suppliers is one of the leaders in its respective flooring
products category. Our suppliers also include niche carpet, vinyl, hardwood,
laminate and ceramic tile producers worldwide, as well as leading manufacturers
and importers of area rugs and other decorative flooring products.
ADVERTISING AND PROMOTION. Through our in-house facility, we develop for
our own use and the use by our franchisees, marketing and promotion programs.
These programs include television, radio, print and direct mail campaigns, sales
literature and point-of-purchase programs. Customized advertising packages are
available to franchisees at lower rates than those charged by most advertising
or production companies.
RETAIL MANAGEMENT AND SALES TRAINING. We focus on enhancing retail
productivity by applying proven techniques to train our store managers and sales
associates. All Company-owned store management and sales and operating personnel
receive training in a variety of areas ranging from product knowledge to sales
and service techniques.
SITE SELECTION AND STORE DEVELOPMENT AND DESIGN. We operate our own
in-house real estate department which is responsible for site selection,
contract negotiation and build-out of our Company-owned stores. In locating new
sites, the real estate department evaluates the economic conditions,
demographics, growth and customer base of potential markets, as well as possible
competition. For our new stores, we also target areas with significant new
residential building activity or older, more established communities where
remodeling is likely to occur. Within each market, we seek to locate flooring
centers in retail locations with high consumer visibility. Our strategy is to
open multiple stores within each market to achieve management, operating and
advertising efficiencies and to help create barriers to competitive entry or
expansion. The interior store design includes a pre-determined product mix,
fixtures and display systems, and point-of-sale merchandising signage and
promotional materials.
MANAGEMENT INFORMATION SYSTEMS. Most Company-owned stores are currently
operating their businesses with the information systems that were in place at
the time we acquired or opened them. We were attempting to integrate these
various systems to provide operating units with appropriate management
information and to streamline transaction processing. Further integration
efforts have temporarily been postponed. Although certain hardware has been
upgraded for the store network and we have tested certain SAP modules for retail
applications, no assurances can be given with respect to our ability to
implement a fully integrated management information system or as to the timing
of any such implementation, which may be adversely affected by limitations on
our ability to fund such upgrades.
BUILDER AND CONTRACT OPERATIONS
To expand our market share and enhance our management expertise in the
builder market of the flooring industry, over the years we have acquired a
number of independent retail companies with established reputations in the
builder market. We service the builder market primarily in local areas where we
have located our regional service centers. Our contract business caters
primarily to the flooring requirements of larger commercial customers. Where we
have an established infrastructure available to serve these markets, we are
attempting to leverage our extensive merchandise mix, product displays, sales
personnel and customer service capabilities to further penetrate such markets.
CUSTOMER SERVICE
We seek to differentiate our full service operations from other independent
and large retailers through our customer service offerings. Accordingly, our
full-service stores offer customers the following services:
INTERIOR DESIGN AND PRODUCT SELECTION. Sales professionals assist customers
in all aspects of selecting flooring (including assessment of interior design
preferences), coordination with other furnishings and
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decorating preferences, and product layout and measuring. To ensure customer
satisfaction, our Flooring America brand stores offer a 30-day unconditional
satisfaction guarantee. Our sales professionals seek opportunities to visit
customers' home or commercial locations to verify proper installation and to
identify any additional sales opportunities.
DELIVERY AND INSTALLATION. Our Flooring America brand flooring centers rely
on local contractors for the installation of flooring products. Installation is
often the final contact with customers, therefore we have developed a ten point
certification and merit-based training program for our installation
subcontractors, to promote consistent, high quality installation services.
CONSUMER CREDIT PROGRAM. We offer an exclusive credit program at Flooring
America branded stores and participating CarpetMAX and Flooring America
franchises through an affiliation with a national provider of consumer
financing. We believe these credit programs enhance closing ratios and lead to
higher average ticket purchases. We use a pre-approved listing service, which
enables us to solicit sales from 100% credit pre-approved potential customers.
With 60-day, 90-day, 6-month and 12-month interest-free programs, plus revolving
credit packages, we offer a variety of credit plans to our customers. Flooring
America branded stores also offer longer term (up to two years) third-party
consumer credit financing for our customers.
FRANCHISE OPERATIONS
We are one of the largest franchisors of flooring stores in the United
States. As of May 1, 2000, we had (i) 117 GCO Carpet Outlet franchised stores
operating in 62 of the 211 DMA's in the United States and (ii) 347 Flooring
America/CarpetMAX franchise territories, within which there were approximately
486 Flooring America/CarpetMAX stores. Because of the different nature of their
businesses, Flooring America/CarpetMAX franchises, which operate full-service
flooring centers, as opposed to GCO franchisees, which operate self-service
centers, may be established in the same geographic territory. In addition to the
GCO and Flooring America/CarpetMAX franchise systems, in February 1997, we began
to offer MaxCARE(-Registered Trademark-) franchises to address the increased
demand for carpet and upholstery cleaning services and wood refurbishing. As of
May 1, 2000, we had sold 73 MaxCARE franchises. In November 1998, following the
acquisition of the CarpetsPlus dealership system, we began offering CarpetsPlus
franchises to unaffiliated large, full-service retail flooring dealers who
sought enhanced purchasing power without the structure and brand affiliation
associated with the Flooring America/CarpetMAX franchise system.
The following table sets forth the number of franchised flooring
centers/locations for each of our franchise concepts:
<TABLE>
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JANUARY 31,
MAY 1, FEBRUARY 5, -------------------
2000 2000 1999 1998
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<S> <C> <C> <C> <C>
Flooring America/CarpetMAX(1).................. 486 493 572 463
GCO............................................ 117 115 110 101
CarpetsPlus(1)................................. 231 216 250 --
MaxCARE........................................ 73 73 61 24
Other.......................................... -- -- 30 --
</TABLE>
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(1) The decrease in the combined number of Flooring America and CarpetsPlus
franchise stores over the reported periods was due to a variety of events,
including store closings, franchisee bankruptcies, franchise terminations,
franchises abandoning the franchise system or, in the case of Flooring
America/CarpetMAX stores, conversions to the CarpetsPlus franchise network.
FLOORING AMERICA/CARPETMAX FRANCHISE NETWORK. We generate revenues from
Flooring America and CarpetMAX franchisees through two primary sources:
(i) initial franchise fees and (ii) rebates, commissions or fees paid by
suppliers based on franchisees' purchases of flooring products. In
January 2000, with
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the conversion to a single brand identity, we formed the Flooring America
franchise system with the goal to convert our then-current base of CarpetMAX
franchises to the Flooring America brand concept so that in connection with our
consolidation of our multiple Company-owned brands to one brand, our CarpetMAX
franchises would convert their CarpetMAX stores to Flooring America stores.
CarpetMAX franchisees, excluding franchisees located in Canada, have been given
until February 2001 to convert to Flooring America or risk the possibility that
we will seek new Flooring America franchisees for the territories occupied by
non-converting CarpetMAX franchises. CarpetMAX franchisees who do not convert
will remain part of our franchise network without the ability to use the
"Flooring America" brand or receive any other benefits available to Flooring
America franchisees. As of May 1, 2000, approximately 20% of our CarpetMAX
franchisees had converted their businesses to become part of the Flooring
America franchise program. We estimate that by February 2001, more than 80% of
all CarpetMAX franchisees will have converted to the Flooring America brand.
The Flooring America franchise agreement requires franchisees to purchase at
least 90% of their total flooring products purchases from suppliers designated
by us and sanctioned by the Flooring America Merchandise Committee. In addition
to having access to flooring products at lower costs, payment of an initial
one-time franchise fee, provides Flooring America franchisees with access to
certain private label products and specials.
Flooring America/CarpetMAX franchisees have the exclusive right to operate a
Flooring America or CarpetMAX franchise utilizing the Flooring America or
CarpetMAX trademarks, as the case may be, within a specific geographic area (the
"Exclusive Area"). Provided the franchisee is not in default of its franchise
agreement, we may not license another franchisee to operate within such
franchisee's Exclusive Area, nor may we or our affiliates operate a
Company-owned store within the Exclusive Area without the franchisee's consent.
Flooring America and CarpetMAX franchise agreements have an indefinite term.
Unlike the CarpetMAX franchise agreement, which can only be terminated by the
franchisee in the event we materially breach the agreement, the Flooring America
franchise agreement may be terminated by the franchisee upon 90 days prior
notice to us. We have the right to terminate either franchise agreement upon the
occurrence of certain events of default listed in the franchise agreements.
GCO FRANCHISE NETWORK. We generate revenues from GCO franchisees both from
initial franchise fees paid upon store openings and royalty fees based on store
sales. Each franchisee pays a royalty on net delivered sales during a year and
the GCO franchise agreement also requires franchisees to spend approximately 5%
to 15% of their gross revenues on advertising and promotional activities. To
better serve the needs of our GCO franchisees, we have continued to expand the
scope of services available to them. For example, we now offer services relating
to site selection assistance, merchandising, advertising and promotion,
management and sales training, consumer credit, information systems and other
store operations.
GCO franchisees have limited exclusivity to use the GCO business concept and
service marks, logos, slogans and other identifying features within a specific
geographic area (the "Protected Territory"), provided that the franchisee is not
in default of its franchise agreement and subject to certain limitations and
exceptions. We may not grant more than one GCO Carpet Outlet franchise within a
Protected Territory, nor may we or any of our affiliates, operate a
Company-owned discount flooring store using the GCO marks or the GCO franchise
system within a Protected Territory without the franchisee's consent. GCO
franchise agreements have a term of 10 years, may be renewed for additional
consecutive terms of five years and may be terminated by (i) the franchisee in
the event that GCO fails to cure a material breach of the franchise agreement or
(ii) us upon the occurrence of certain events of default as set forth in the
franchise agreement. We also offer GCO area development agreements under which a
franchisee commits to opening multiple stores in a single market area in
exchange for discounted initial franchise fees. Our GCO franchise program also
offers other expansion incentives to existing franchisees and Flooring
America/CarpetMAX franchisees, including discounted franchise fees under certain
circumstances.
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CARPETSPLUS FRANCHISE NETWORK. During September 1998, we acquired
CarpetsPlus of America, LLC, a national resource network specializing in the
retail flooring industry. CarpetsPlus offers its group members enhanced buying
power, along with systems to (i) take advantage of cumulative purchasing power
to obtain favorable pricing from selected suppliers, (ii) use of the
CarpetsPlus-TM- name and other related trademarks, (iii) purchase private-label
CarpetsPlus products, (iv) obtain assistance in strategic product selection and
store design and layouts and, (v) obtain rebates on purchases of flooring
products. The CarpetsPlus franchise program is intended to supplement the
franchisee's current business activities and does not require the franchisee to
change any aspect of its business. Each CarpetsPlus franchisee receives an
exclusive territory within which no other franchised CarpetsPlus store may be
located. There are no signage requirements. The initial membership fee is $7,500
to operate the franchise from the franchisee's existing retail flooring store.
If the franchisee wants to operate additional retail flooring stores within the
franchise, the franchisee must pay an additional membership fee of $5,000 per
store. Franchisees do not pay royalty fees or advertising fees. We receive
rebates or commissions based upon CarpetsPlus franchisees' purchases from the
designated suppliers and distributors. CarpetsPlus franchise agreements have an
indefinite term and may be terminated by the franchisee for any reason upon
90 days' prior notice to us and may be terminated by us upon the occurrence of
certain events of default listed in the franchise agreement. All CarpetsPlus
franchisees are required to purchase no less than 50% of their total flooring
products purchases from suppliers or distributors that we designate.
MAXCARE FRANCHISE NETWORK. Under the MaxCARE system, franchisees offer
carpet cleaning, upholstery cleaning, wood refurbishing and related services to
both individuals and businesses. These services are provided using standardized
equipment, which is mounted in vans or trucks bearing MaxCARE's distinctive
colors and signage. Each MaxCARE franchisee receives an exclusive operating
territory, which typically includes one or more counties within a state. All
franchisees are required to offer the products and services that we specify.
Each MaxCARE franchisee is required to purchase certain products from us and may
purchase services from several of our operating divisions. Each franchisee must
pay an initial franchise fee based upon the population in the franchisee's
operating territory. The payment of the franchise fee is generally financed over
a period of five years. MaxCARE franchise agreements have a term of 10 years,
may be renewed for one additional term of 10 years and may be terminated by
(i) the franchisee in the event that we fail to cure a material breach of the
franchise agreement or (ii) us upon the occurrence of certain events of default
listed in the franchise agreement.
In addition to the initial franchise fee, all MaxCARE franchisees must
purchase one or more specially equipped vans, carpet and wood cleaning machines
and accessories from us or our designated suppliers before they begin
operations. All franchisees must pay a royalty of their gross sales, subject to
a minimum monthly royalty payment. All franchisees must also contribute a
percentage of gross sales to a national advertising fund that we administer and
must spend a certain percentage of gross sales on local advertising.
COMPETITION
Competition in the retail flooring industry is intense due to the
significant number of retailers. Large retailers of flooring products who
provide significant competition include The Home Depot, Inc., Lowe's Corporation
and Sears, Roebuck & Co. The principal areas of competition within the retail
flooring industry include store location, product selection, merchandising,
customer service and price. We believe that there are two primary competitors to
our Flooring America franchise business: Carpet One and Abbey Rug. We
distinguish our Flooring America franchise system from our competition by
offering a full range of services to our franchise members in addition to the
traditional services of purchasing and merchandising. Management believes that
our competitors subcontract most services, except purchasing of flooring
products, to outside vendors.
TRADEMARKS, SERVICE MARKS, TRADE NAMES AND COMMERCIAL SYMBOLS
We have registered a number of marks with the U.S. Patent and Trademark
Office including CARPETMAX(-Registered Trademark-), CARPET
MAX(-Registered Trademark-), CARPETMAX--THE NATIONAL CARPET
EXCHANGE(-Registered Trademark-),
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MAKING A WORLD OF DIFFERENCE(-Registered Trademark-), CarpetMAX Making a World
of Difference(-Registered Trademark-), MaxCARE(-Registered Trademark-),
MaxCARE-Professional Cleaning Systems(-Registered Trademark-), Carpetland
USA(-Registered Trademark-), New York Carpet World(-Registered Trademark-),
GCO(-Registered Trademark-) and GCO CARPET OUTLETS(-Registered Trademark-). We
have also applied for registration of several other marks including word and
design marks for Flooring America-TM-, e-decor.com-TM- and CarpetsPlus-TM-. GCO
also uses a number of service marks in association with its standard GCO
franchise including a word mark consisting of the words "GCO Carpet
Outlets-TM-," and design and word marks consisting of "GCO Carpet Outlets-TM-"
or "Georgia Carpet Outlets-TM-." We consider our marks and trade names to be
material to our business and certain of our marks and trade names are registered
with or applications for registration are pending with various state agencies.
We are not aware of any material adverse claims concerning our marks.
EMPLOYEES
As of May 1, 2000, we employed 3,317 persons. No employee is a party to any
collective bargaining agreement. Management considers our employee relations to
be satisfactory.
GOVERNMENTAL REGULATION
We are subject to Federal Trade Commission ("FTC") regulations governing the
offer and sale of franchises. The FTC's Trade Regulation Rule on Franchising
requires us to furnish to prospective franchisees a franchise offering circular
containing certain information prescribed by such FTC rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship currently exist in a substantial number of
states. Such laws generally require registration of the franchise offering
circular with state authorities prior to the offer or sale of franchises and
regulate the franchise relationship by, for example, requiring the franchisor to
deal with its franchisees in good faith, prohibiting misrepresentations and
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination against franchisees in charges, royalties or fees. Although such
laws may restrict a franchisor in the termination of a franchise agreement by,
for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and a requirement to repurchase inventory or other compensation, these
provisions have not had a significant effect on our various franchise systems.
We are not currently aware of any pending franchise legislation, which in
our view would have a material adverse effect on our operations. However,
various legislative proposals have been or are being debated at both the state
and federal levels, which could result in new laws regulating the offer and sale
of franchises and other aspects of the franchisor-franchisee relationship. It is
possible that such legislation, if enacted, could affect our franchise
operations. We believe, however, that our operations comply in all material
respects with current federal and state franchise regulations.
Each Company-owned store and franchise location is subject to licensing and
regulation by a number of governmental authorities, which may include health,
sanitation, safely, fire, building and other agencies in the state or
municipality in which the business is located. Difficulties in obtaining, or
failure to obtain, the required licenses or approvals could delay or prevent the
procurement of new Company-owned store sites or franchises in a particular area.
THE FOLLOWING DISCUSSION OF ASPECTS OF THE COMPANY'S BUSINESS ALSO CONSTITUTES A
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
We wish to caution readers that the following important factors, among
others, in some cases have affected, and in the future could affect, our actual
results and could cause our actual quarterly and annual consolidated results for
fiscal 2001, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of us.
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RISKS ASSOCIATED WITH ACQUISITIONS
THE INTEGRATION OF NEW BUSINESSES, INCLUDING THE RETAIL STORES ACQUIRED FROM
SHAW, HAS RESULTED IN DIFFICULTIES AND MAY CAUSE US TO DEVOTE A DISPROPORTIONATE
AMOUNT OF OUR RESOURCES AND OUR MANAGEMENT'S TIME.
The process of integrating new businesses into our operations represents a
significant challenge. The process of integrating acquired businesses into our
operations may result in difficulties and may require a disproportionate amount
of resources and management attention.
In particular, prior to our acquisition of the Shaw retail stores, those
stores incurred significant losses and operated at a lower profit level than is
typical in the retail flooring industry. Although we have made improvements in
the profitability and sales at these acquired stores, they continue to operate
at a loss and have adversely affected our results of operations. To the extent
such conditions continue, they may affect, not only the operation of the
acquired stores, but also our consolidated results of operations in future
periods. There can be no assurance that we will be able to operate these stores
profitably in the future.
ANY FUTURE ACQUISITIONS COULD POTENTIALLY HAVE ADDITIONAL ADVERSE CONSEQUENCES
FOR YOU AS A SHAREHOLDER.
As a result of future acquisitions, we may:
- incur significant charges to earnings as a result of restructuring charges
in the event our current store network overlaps in certain markets, and
- dilute the ownership of shareholders, as we may need to finance these
acquisitions through the issuance of additional common stock.
In addition, we can not assure you that competition for acquisition candidates
will not increase, causing an increase in the costs associated with
acquisitions.
WE HAVE A RELATIVELY LIMITED HISTORY OF OPENING AND OPERATING COMPANY-OWNED
STORES.
We have limited experience in the acquisition of property for construction,
opening and direct management of Company-owned stores. Our growth and future
operating results depend principally on our ability to manage our existing
Company-owned stores and newly acquired or developed Company-owned stores and to
open and operate additional stores in the future.
Our success depends, in part, on our ability to anticipate and respond to
changing merchandise trends and consumer demands in a timely manner.
Accordingly, if we fail to identify and respond to emerging trends, such failure
could adversely affect our business. For example, if we miscalculate either the
market for the merchandise in our stores or the purchasing habits of our
customers, we may be required to sell a significant amount of inventory at below
average markups over our cost, or even below cost, which could have a material
adverse effect on our business, financial condition or results of operations.
QUALIFIED STORE LEVEL PERSONNEL ARE IMPORTANT TO OUR SUCCESS.
We believe the training of our store personnel gives us a competitive
advantage. There can be no assurance that competition for qualified retail sales
associates and store managers will not increase. Similarly, alternative
employment opportunities could result in higher compensation costs, increased
employee turnover or lower levels of customer service, any of which could have a
material adverse effect on our business, financial condition or results of
operations.
IF WE ARE UNABLE TO SUCCESSFULLY UPGRADE AND INTEGRATE OUR CURRENT MANAGEMENT
INFORMATION SYSTEMS AND INTEGRATE ACQUIRED OPERATIONS, OUR GROWTH AND
PROFITABILITY MAY BE ADVERSELY AFFECTED.
Our growth and profitability is significantly dependent on our ability to
upgrade and integrate all of our operations under a new centralized management
information, accounting, internal control and purchasing systems.
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Most Company-owned stores are currently operating their businesses with the
information systems that were in place at the time we acquired or opened them.
Although certain hardware has been upgraded for the store network and we are
utilizing certain SAP modules for general ledger, human resources and payroll
functions, we have delayed implementation of SAP retail applications. We have
made a significant investment in all SAP modules, including SAP retail
applications. If we are unable to implement the SAP retail applications, a
write-down of such costs may be required. No assurances can be given with
respect to our ability to implement a fully integrated management information
system or as to the timing of any such implementation, which may be adversely
affected by our ability to fund such upgrades and implementations.
The satisfactory performance, reliability and availability of our management
information systems, including our transaction-processing systems and network
infrastructure are important to our reputation and relationships with our
suppliers and our ability to attract franchisees and customers and maintain
adequate service levels. Any system interruption that results in impaired
performance could reduce the volume of goods sold and the attractiveness of our
business models. Our inability to procure adequate software and hardware or to
develop and upgrade further our technology, transaction-processing systems or
network infrastructure to integrate existing and acquired businesses or
operations may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service and impaired quality or speed of
operational matters, any of which could have a material adverse effect on our
business.
Our business, in particular our ability to successfully receive and fulfill
inquiries and orders and provide high-quality customer service, largely depends
on the efficient and uninterrupted operation of our computer and communications
hardware systems. Our systems and operations may be vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquakes and/or similar events. We have very limited redundant
systems. Despite the implementation of network security measures, our servers
and other computer systems may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and fulfill customer inquiries
and orders.
To remain competitive, we must be able to enhance and improve the
responsiveness, functionality and features of our management information
systems. Accordingly, our success will depend, in part, on our ability to
license leading technologies necessary or useful in our business, develop and
enhance our planned services and develop new services and technology that
address the increasingly sophisticated and varied needs of our prospective
customers and franchisees. There can be no assurance that we will have the
capital resources necessary to acquire planned or new systems or that we will be
able to successfully use planned or new technologies effectively or that we will
be able to adapt our existing technology and information-processing systems to
handle expanded operations, whether as the result of acquisitions or otherwise.
ABILITY TO SERVICE INDEBTEDNESS
TO SERVICE OUR CURRENT OBLIGATIONS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments to satisfy our debt and other obligations will
depend upon our future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, which
are beyond our control. Debt service is dependent upon available cash reserves
and cash flow from operations, together with available borrowings under our
senior credit facility with Foothill Capital Corporation ("Senior Credit
Facility"). See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." If we are unable to service our debt
obligations, we will be required to adopt alternative strategies. These
strategies may include:
- reducing or delaying our capital expenditures,
- curtailing or eliminating the opening of Company-owned stores,
- selling assets,
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- restructuring or refinancing our indebtedness, or
- seeking additional equity capital.
We are unable to give assurance that any of these strategies could be
implemented on satisfactory terms, if at all. Our inability to service our debt
obligations may result in the acceleration of some or all of our indebtedness,
which would have a material adverse effect on our financial condition.
We cannot give assurance that our business will generate sufficient cash
flow from operations, that our currently anticipated growth in revenues and cash
flow will be realized or that future borrowings will be available to us,
including under our revolving Senior Credit Facility, in an amount sufficient to
fund our liquidity needs, or to enable us to pay our indebtedness, including the
senior subordinated notes (the "Senior Notes") See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations. We may
need to refinance all or a portion of our indebtedness, including the Senior
Notes, on or before maturity. We cannot give assurance that we will be able to
refinance any of our indebtedness, including our revolving Senior Credit
Facility and the Senior Notes, on commercially reasonable terms or at all.
OPERATING RISKS
WE COMPETE WITH A SIGNIFICANT NUMBER OF RETAILERS, INCLUDING SOME THAT HAVE
GREATER RESOURCES THAN US.
Competition in the retail flooring industry is intense due to the
significant number of retailers in this market. Larger, more diversified
retailers also provide significant competition, including The Home Depot, Inc.,
Lowe's Corporation and Sears, Roebuck & Co. The principal methods of competition
within the retail flooring industry include store location, product selection,
merchandising, customer service and price. We can make no assurances that our
competitors will not substantially increase resources devoted to the marketing
and sale of products competitive with our products, which could require us to
reduce prices or increase spending on product development, marketing and sales.
Such increased competition could have a material adverse effect on us.
OUR EARNINGS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH MAY AFFECT THE PRICE
OF OUR COMMON STOCK.
Our quarterly operating results have fluctuated in the past and are expected
to fluctuate in the future as a result of a variety of factors, including:
- the timing of store openings and related pre-opening expenses,
- weather conditions,
- price increases by suppliers,
- actions by competitors,
- conditions in the carpet manufacturing, home building and improvement
markets and the flooring industry in general, and
- regional and national economic conditions and other factors.
Moreover, we believe that some of the fluctuation in our earnings occurs because
our business experiences some degree of seasonality which, we believe, is
typical of the flooring industry. Individual stores generally experience lower
net sales, operating results, cash flow from operations and lower sales of
flooring products in the first and fourth fiscal quarters than in the second and
third fiscal quarters. We believe these lower results of operations are
primarily due to the effects of winter weather on home construction and
improvement projects. The market price of our securities could be subject to
significant fluctuations in response to our operating results and other factors,
and we can make no assurances that the market price of our securities will not
decline below current levels.
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A PROLONGED ECONOMIC DOWNTURN IN THE ECONOMY WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
The flooring industry historically has been adversely impacted by economic
downturns. We believe that the industry is significantly influenced by:
- consumer behavior,
- consumer confidence,
- the level of personal discretionary spending,
- the condition of the residential and commercial construction industries,
- interest rates,
- credit availability, and
- the overall strength of the economy.
Therefore, a prolonged economic downturn would likely have a material
adverse effect on our business operations.
OUR SUCCESS IS DEPENDENT UPON, AMONG OTHER THINGS, THE SKILLS, EXPERIENCE AND
EFFORTS OF OUR NEW SENIOR MANAGEMENT.
Our success is largely dependent on the efforts and abilities of our new
senior management and certain other key personnel, including, Mr. David Nichols,
our new Chairman of the Board, President and Chief Executive Officer, Mr.
Leonard Thill, our Chief Financial Officer, Secretary and Compliance Officer,
and Mr. Stephen Coburn, our Executive Vice President--Operations/Human
Resources. The loss of the services of members of senior management could have a
material adverse effect on our business and prospects. In addition, we believe
that our future success will depend in part upon our ability to continue to
attract and retain highly qualified senior management and other personnel. We do
not maintain key person life insurance on behalf of any of our officers or
employees.
WE DEPEND ON A FEW LARGE SUPPLIERS FOR OUR FLOORING PRODUCTS AND THE
DISTRIBUTION OF THESE PRODUCTS.
Our retail network relies on several large independent flooring products
manufacturers for the supply of certain flooring products. These manufacturers
include Shaw and Mohawk Industries, Inc., which together supplied in excess of
50% of our flooring purchases during the fiscal year ended February 5, 2000. In
addition, our retail inventory management is highly dependent on the delivery
capabilities of these manufacturers. Any significant change in our relationships
with these manufacturers, or in these manufacturers' production or distribution
methods could have a material adverse effect on our business operations.
Although these manufacturers have been reliable, high quality producers in the
past, we can make no assurances that these manufacturers will be willing or able
to meet our requirements and our franchisees' requirements on a timely basis in
the future or that these manufacturers' pricing and rebate policies will remain
competitive. While we believe there are a number of alternative manufacturers
capable of supplying us with, and distributing to us, flooring products, any
delays in obtaining alternative suppliers could have a material adverse effect
on our operations and those of our franchisees. In addition, we rely on some of
our suppliers to provide us with advertising and other vendor support funds to
help support our store operations. If these suppliers do not contribute such
vendor support, our results of operations would likely be adversely affected.
COMPETITION FOR NEW FRANCHISEES; RISK OF LOSING FRANCHISEES.
There is a great deal of competition among franchisors in the flooring
industry to grow their franchise systems. We believe there has been a marked
increase in franchise sales personnel throughout the flooring industry.
Additionally, there has been a marked increase in the number of buying groups
that aggressively market to independent retailers who might otherwise be
interested in our Flooring America franchise system.
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We also face increased risk that our Flooring America franchisees will
exercise their right to leave our franchise system upon 90 days notice to us.
There can be no assurances that we will not lose a number of Flooring America
franchisees to our competitors.
OUR BUSINESS OPERATIONS COULD BE ADVERSELY AFFECTED BY ANY CHANGES IN THE LAWS
THAT REGULATE OUR RELATIONSHIPS WITH OUR FRANCHISEES.
We are subject to federal regulations and state laws that regulate the offer
and sale of franchisees and the franchisor-franchisee relationship. We are not
aware of any specific pending franchise legislation that is likely to have a
material adverse effect on our operations. However, various legislative
proposals periodically have been or are being considered at both the state and
federal levels which could result in new laws regulating the offer and sale of
franchises and other aspects of the franchisor-franchisee relationship. It is
possible that such legislation, if enacted, could aversely affect our franchise
operations.
THE DISCOVERY OF ADVERSE HEALTH EFFECTS RESULTING FROM CARPET COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND THOSE OF OUR FRANCHISEES.
The effect of carpet and other flooring products on indoor air quality has
been the subject of debate in recent years. Although it is uncertain whether
emissions from carpet pose a health hazard, there can be no assurance that
researchers will not detect hazardous levels of emissions from carpet. The
discovery of adverse health effects resulting from carpet, or the public
perception of these effects, could have a material adverse effect on our
operations and those of our franchisees.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
WE ARE RESTRICTED BY THE INDENTURE GOVERNING THE TERMS OF OUR SENIOR
SUBORDINATED NOTES.
The indenture governing the terms of our senior subordinated notes (the
"Senior Notes") contains covenants, which limit our ability to, among other
things:
- borrow money,
- pay dividends,
- redeem our capital stock,
- make certain investments and other restricted payments,
- issue the capital stock of our subsidiaries,
- create liens on our subsidiaries and other restrictions affecting our
subsidiaries,
- issue guarantees,
- transact business with affiliates, and
- sell assets and/or merge or consolidate with other entities.
WE ARE RESTRICTED BY OUR SENIOR CREDIT FACILITY, WHICH CONTAINS ADDITIONAL
RESTRICTIVE COVENANTS AND REQUIRES US TO SATISFY CERTAIN FINANCIAL TESTS.
Our Senior Credit Facility contains various restrictive covenants and
requires us to satisfy certain financial tests, including maintaining certain
levels of tangible net worth and earnings, and sets limits on capital
expenditures and consolidated senior debt. Our ability to comply with these
covenants and to satisfy these financial tests may be affected by events beyond
our control. A breach of any of these covenants could result in an event of
default under the Senior Credit Facility. In the event of default under the
Senior Credit Facility, our lender could elect to declare all amounts borrowed,
together with accrued interest, to be immediately due and payable. The lender
under the Senior Credit Facility could also terminate all commitments under the
Senior Credit Facility and, if such borrowed amounts are not paid, enforce their
rights pursuant to the security interests on certain of our assets. In addition,
default under the Senior Credit Facility could constitute default under the
indenture governing our Senior Notes, and vice-versa.
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IF WE EXPERIENCE A CHANGE IN CONTROL, WE MAY NOT HAVE SUFFICIENT FUNDS TO REPAY
THE INDEBTEDNESS, WHICH WE COULD BE REQUIRED TO PAY UNDER THE TERMS OF OUR
SENIOR NOTES.
Upon the occurrence of a change in the control of Flooring America, each
holder of our Senior Notes may require us to purchase all or a portion of the
holder's notes at 101% of the principal amount of the notes, with interest
accrued, if any, from the last interest payment date. Under these circumstances,
we may be required to:
- repay all or a portion of the outstanding principal of, and pay any
accrued interest on, our other senior indebtedness, or
- obtain consent from our other senior lenders to permit the purchase of our
Senior Notes.
If we are unable to repay all of the required indebtedness or are unable to
obtain the necessary consents, we may not be able to offer to purchase the
Senior Notes, which would cause us to be in default under the indenture. We may
not have sufficient funds available at the time of any change in control of
Flooring America to make any debt payment as described above. Even if we were
able to obtain refinancing, we can provide no assurance that the financing would
be on terms acceptable to us.
THE SAME TYPES OF EVENTS THAT WOULD CAUSE US TO BE IN DEFAULT UNDER THE SENIOR
NOTES IN THE EVENT OF A CHANGE IN CONTROL MAY ALSO CAUSE US TO BE IN DEFAULT
UNDER OUR OTHER INDEBTEDNESS.
The events that constitute a change in the control of Flooring America under
the indenture may also cause us to be in default under the Senior Credit
Facility or our other senior indebtedness. Such a default may permit the holders
of our debt instruments to reduce their borrowings or accelerate the debt and,
if the debt is not paid, to enforce their rights pursuant to security interests
on certain of our assets. An event of default under the indenture for the Senior
Notes is an event of default under the Senior Credit Facility.
SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING--WE WILL NEED
TO MAKE SIGNIFICANT CAPITAL EXPENDITURES IN ORDER TO EXPAND.
In order to expand and develop our current business and enter new markets,
we will need to make significant capital expenditures. We expect to fund these
expenditures through internally generated funds, borrowings under our revolving
Senior Credit Facility, the divestiture of one or more non-core businesses, and
further debt or equity financing. We cannot give assurance, however, that we
will succeed in generating sufficient funds or in raising sufficient future debt
or equity financing on acceptable terms. Our future capital requirements depend
on a number of factors, some of which we can control and others of which are
beyond our control. The factors which we can control include marketing expenses
and staffing levels. Those factors which are beyond our control include
competitive conditions and capital costs. If, due to these and other factors, we
are unable to raise sufficient funds, we may have to delay or abandon some of
our expenditures or plans for future expansion. This would negatively affect our
growth and our ability to compete in the retail flooring industry.
OTHER RISKS
THE ULTIMATE RESOLUTION OF THE CLASS ACTION LAWSUITS AND THE SEC INQUIRY MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We are unable to predict or determine the final outcome of the class action
lawsuit or the SEC investigation (see "Item 3. Legal Proceedings") and the
effect of these proceedings on our financial results, our business or our
management. In addition, it is not feasible to estimate the amounts or potential
range of loss with respect thereto. The potential outcomes or resolutions of the
class action lawsuit could include a judgment against us or settlements that
could require substantial payments by us. Potential outcomes of the SEC
investigation could include judicial, administrative or other sanctions being
imposed on us and/or certain of our officers. In addition, the timing of the
final resolution of these matters is uncertain. We believe that material adverse
outcomes with respect to the class action lawsuit or the SEC investigation could
have a material adverse effect on our financial condition, results of operations
and cash flows.
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OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD SERVE TO DETER
OR PREVENT TAKE-OVER ATTEMPTS BY A POTENTIAL PURCHASER OF SHARES OF OUR COMMON
STOCK WHO WOULD BE WILLING TO PAY A PREMIUM OVER MARKET PRICE.
Our Certificate of Incorporation contains provisions, which give the Board
of Directors the ability to deter or prevent a merger with, or a sale of control
to a third party even though a majority of our stockholders may vote in favor of
such a transaction. We are also subject to the provisions of Section 203 of the
Delaware General Corporation Law, which may have the effect of delaying,
deferring, or preventing a change in control of Flooring America by limiting
transactions between us and those stockholders who generally own 15% or more of
our outstanding capital stock.
In addition, our Certificate of Incorporation includes a number of
additional anti-takeover provisions which:
- require a staggered board of directors, meaning that only one-third of the
members of our board of directors is elected each year,
- limit the ability of stockholders to call special meetings,
- eliminate stockholder action by unanimous consent,
- restrict the ability of the stockholders to amend certain provisions of
the Certificate of Incorporation,
- permit the Board of Directors to amend our Bylaws without stockholder
consent, and
- authorize the issuance of up to 1,000,000 shares of preferred stock by the
Board of Directors without stockholder action.
These provisions make it more difficult for a third party to achieve a change in
control of the Company through the acquisition of a large block of our common
stock and may have the effect of encouraging persons considering unsolicited
tender offers or other unilateral takeover proposals to negotiate with the board
of directors rather than pursue non-negotiated takeover attempts. As a result,
you may be deprived of opportunities to sell some or all of your shares at
prices that represent a premium over market price.
ITEM 2. PROPERTIES.
As of May 1, 2000, we leased approximately 300 facilities and owned 3
facilities, through which we conduct our retail operations. Our corporate staff
is located in an owned 230,000 square foot facility on a 13-acre site in
Kennesaw, Georgia, a suburb of Atlanta.
ITEM 3. LEGAL PROCEEDINGS.
CLASS ACTION LITIGATION
Since an announcement in May 1999 that we would be restating financial
results for fiscal 1999 (from the amount disclosed in a previous announcement)
and certain of the quarters therein, eleven lawsuits seeking to be certified as
class actions have been filed against us and certain of our current and former
executive officers and directors. Each of these actions was filed in the U. S.
District Court for the Northern District of Georgia. The plaintiffs in these
actions purported to represent a class of all persons who purchased or otherwise
acquired our common stock between August 31, 1998 and May 19, 1999. The
complaints alleged that we, along with certain of our current and former
officers and directors violated the federal securities laws by, among other
things, issuing materially false and misleading statements regarding our
financial results for fiscal 1999 and for certain quarters therein, which had
the effect of artificially inflating the market price of our common stock. The
complaints alleged that by virtue of this conduct the defendants violated
Section 10(b) of the Exchange Act and SEC Rule 10b-5 thereunder. The complaints
also alleged that the individual defendants were controlling persons within the
meaning of Section 20 of the Exchange Act and are therefore liable to the
plaintiffs on that basis as well. The complaints seek
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compensatory and punitive damages along with pre-judgment interest, reasonable
attorney's fees, expert witness fees and other costs.
Within the statutory period, Rudman Partners, LP ("Rudman"), an
institutional investor filed application to be lead plaintiff in all these cases
under the Private Securities Litigation Reform Act. All other plaintiffs and
applicants have withdrawn their petitions to be appointed lead plaintiff. On
February 8, 2000, the Court entered an order appointing Rudman as "Lead
Plaintiff." In addition, Rudman was granted sixty days to file a consolidated
amended complaint to replace the eleven previously filed complaints which have
been consolidated for all purposes. The plaintiffs filed their consolidated
class action complaint on April 10, 2000.
We intend to vigorously defend these claims. Nevertheless, it is not
possible at this time to determine the outcome of the above litigation or the
effect of its resolution on our financial position or operating results.
Management believes that our defenses have merit; however, there can be no
assurance that we will be successful in our defense or that this lawsuit will
not have a material adverse effect on our results of operations. See "Item 1.
Business--Risk Factors."
We have made a claim under our directors and officers liability insurance
policy with respect to the litigation. While such policy includes "entity"
coverage and the claims are being defended under a reservation of rights by the
insurers, even if coverage is available to us under the policy, there can be no
assurance that this policy will be sufficient to cover all liability in the
event of an adverse outcome in the lawsuit.
SEC INVESTIGATION
Following the announcement in May 1999 that we would restate our financial
results for fiscal 1999 (from the amount disclosed in a previous press release)
and certain of the quarters therein, the SEC commenced an informal inquiry in
connection with the matters relating to the restatement. On January 21, 2000,
the SEC commenced its formal investigation into fiscal 1999 financial statements
(which were subsequently restated) and related accounting policies, procedures
and system of internal controls. We are cooperating with the SEC in its
investigation. We cannot predict the outcome of this investigation.
OTHER LITIGATION
Kurt Salmon Associates ("KSA"), a consultant, sued us claiming that we had
failed to pay invoices for work performed. The action was filed on June 18, 1999
in the United States District Court for the Northern District of Georgia,
Atlanta Division. The complaint sought damages in an amount stated to be not
less than $1,509,000, interest and litigation expenses. We have denied the
allegations and counterclaimed for breach of contract, rescission, breach of
implied covenant of good faith and fair dealing, breach of fiduciary duty and
attorneys' fees and costs of litigation. The parties have engaged in extensive
document production and have exchanged interrogatory responses. In the process,
KSA has increased the amount of actual damages it seeks to $2,154,000. We have
quantified the damages we seek in our counterclaim to more than $9,000,000. No
depositions have been taken at this time, and discovery is expected to continue
into the fall. We cannot predict the outcome of this matter.
On April 13, 2000, we filed a seven-count lawsuit in United States District
Court for the Northern District of Georgia, Atlanta Division, seeking
compensatory and punitive damages in excess of $100,000,000 and a preliminary
injunction against a supplier of flooring products for publishing false and
disparaging messages on an Internet message board created by Yahoo! as a forum
for communications among our shareholders. We have mutually agreed with one of
the parties originally named in the lawsuit to dismiss all litigation pending
between us. The agreement resulted in neither a material gain nor a material
loss for either company involved. However, we continue to allege that, between
February 1999 and January 2000, Misco-Shawnee, Inc. (a supplier of flooring
products) and James Gould (the owner of Misco-Shawnee and holder of the Color
Tile brand name, used aliases to publish messages to the Internet message board.
Our complaint alleges that, among other things, these defendants (1) published
materially
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false and misleading information concerning us, (2) posted disparaging
statements, (3) made defamatory statements about our officers,
(4) misappropriated confidential information from us and (5) disclosed that
proprietary information on the message board for the purpose of damaging our
employees and investors. Our lawsuit asserts claims for trade libel, intentional
interference with contractual and business relations, aiding and abetting a
breach of fiduciary duty, unfair competition, and violations of the Georgia
Uniform Deceptive Trade Practices Act and Trade Secrets Act.
We are involved in certain other legal actions arising in the ordinary
course of business. We believe none of these actions, either individually or in
the aggregate, will have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 5, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the New York Stock Exchange under the symbol
"FRA." Our common stock traded on the New York Stock Exchange from June 27, 1997
to December 31, 1999 under the symbol "MXG". Our common stock had previously
traded on the NASDAQ National Market. The following table sets forth for the
periods indicated the high and low sales prices of our common stock as reported
by the New York Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR ENDED FEBRUARY 5, 2000 -------- --------
<S> <C> <C>
First Quarter............................................. $23 1/4 $7 5/8
Second Quarter............................................ 10 1/8 6
Third Quarter............................................. 8 4
Fourth Quarter............................................ 7 5
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR ENDED JANUARY 31, 1999 -------- --------
<S> <C> <C>
First Quarter............................................. $19 3/8 $16 3/16
Second Quarter............................................ 23 1/2 15
Third Quarter............................................. 22 9/16 14 1/16
Fourth Quarter............................................ 25 5/8 15 5/8
</TABLE>
As of May 1, 2000, there were 619 holders of record of our common stock. Our
management believes that there are in excess of 3,000 beneficial holders of our
common stock.
We have never declared or paid any dividends on our common stock. We do not
intend to declare or pay any cash dividends for the foreseeable future, and
intend to retain earnings, if any, for the future operation and expansion of our
business. Future cash dividends, if any, will be at the discretion of our Board
of Directors and will depend upon, among other things, our future earnings,
operations, capital requirements and surplus, availability of cash, general
financial condition, contractual restrictions and such other factors as the
Board of Directors may deem relevant. Currently, we are restricted in our
ability to declare or pay cash dividends under the terms of our Senior Credit
Facility and senior subordinated notes.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain of our selected consolidated
financial and operating data for the periods indicated which have been derived
from our Consolidated Financial Statements. This selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements,
21
<PAGE>
related notes and other financial information included herein. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
TEN MONTHS
JANUARY 31, ENDED
FEBRUARY 5, ------------------------------------ JANUARY 31,
2000(1) 1999 1998 1997 1996(1)
----------- ----------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 762,808 $ 664,426 $365,127 $ 309,721 $ 227,551
Cost of sales................... 481,241 457,339 249,381 222,290 161,723
----------- ----------- -------- ----------- -----------
Gross profit.................... 281,567 207,087 115,746 87,431 65,828
Selling, general and
administrative expenses....... 325,475 220,748 83,955 72,366 59,197
Special charges................. 8,554(2) 23,713(2) -- -- 6,569(2)
Merger-related costs............ -- -- -- 4,900(3) --
----------- ----------- -------- ----------- -----------
Operating (loss) income......... (52,462) (37,374) 31,791 10,165 62
Interest income................. 3,044 1,754 1,233 613 415
Interest expense................ (14,263) (15,097) (6,948) (7,006) (4,695)
Gain on sale of Image........... -- 24,863 -- -- --
Other, net...................... (245) 1,023 394 302 78
----------- ----------- -------- ----------- -----------
(Loss) income before income
taxes and extraordinary
charge........................ (63,926) (24,831) 26,470 4,074 (4,140)
Provision (benefit) for income
taxes......................... 1,611 (5,656) 10,314 1,929 105
----------- ----------- -------- ----------- -----------
(Loss) income before
extraordinary charge.......... (65,537) (19,175) 16,156 2,145 (4,245)
Extraordinary charge, net of tax
benefit....................... (5,009) (377) (785) -- --
----------- ----------- -------- ----------- -----------
Net (loss) income............... $ (70,546) $ (19,552) $ 15,371 $ 2,145 $ (4,245)
=========== =========== ======== =========== ===========
(Loss) earnings per share:
Basic........................... $ (3.70) $ (1.10) $ 0.95 $ 0.16 $ (0.32)
=========== =========== ======== =========== ===========
Diluted......................... $ (3.70) $ (1.10) $ 0.92 $ 0.15 $ (0.32)
=========== =========== ======== =========== ===========
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 45,612 $ 89,901 $ 28,880 $ 6,439 $ 4,207
Receivables, net................ 49,022 52,607 59,190 45,716 34,660
Inventories..................... 47,480 58,744 54,693 42,148 49,170
Property and equipment, net..... 72,026 71,766 137,207 101,403 93,879
Total assets.................... 342,549 388,768 321,494 219,673 202,085
Total debt and capital lease
obligations................... 151,212 124,447 131,663 96,289 94,185
Stockholders' equity............ 90,338 160,867 133,775 76,154 72,150
OTHER FINANCIAL DATA:
Image revenues(4)............... $ -- $ 197,796 $178,011 $ 162,681 $ 128,260
EBITDA, as adjusted(5).......... (31,220) 5,548 43,741 25,583 14,639
Depreciation and amortization... 12,688 19,209 11,950 10,518 8,008
Capital expenditures............ 25,899 62,564 47,673 17,444 15,580
Gross margin.................... 36.9% 31.2% 31.7% 28.2% 28.9%
EBITDA margin, as adjusted...... (4.09%) 0.8% 12.0% 8.3% 6.4%
</TABLE>
22
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- ------------------------
(1) On January 31, 1996, we changed our fiscal year end from March 31 to
January 31. Also on February 1, 1999, we changed our fiscal year end from
January 31 to the first Saturday following January 31.
(2) Certain of our acquired stores have not performed as anticipated at the time
of purchase. The results from these operations led management to assess the
realizability of the goodwill and store assets recorded in connection with
these acquisitions. The result of this assessment indicated a permanent
impairment of goodwill necessitating a write off totaling $6.6 million in
fiscal 1996 and $4.2 million in fiscal 1999. Fiscal 1999 special charges
also include a write off of vendor receivables of $2.4 million, claims
reserves of $9.5 million, write down of obsolete equipment of $492,000, and
store closure and carrying costs of $7.1 million. Fiscal 2000 special
charges include store closure and impairment charges of $8.6 million. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Year Ended February 5, 2000
Compared to Year Ended January 31, 1999--Special Charges" and Note 10 of
Notes to Flooring America's Consolidated Financial Statements.
(3) Represents a charge of $4.9 million related to the mergers with Image and
Bailey & Roberts Flooring, Inc. which were accounted for as
pooling-of-interests.
(4) Includes revenues generated from manufactured carpet, fiber and PET sales.
(5) EBITDA, as adjusted, is defined as earnings before interest; taxes;
depreciation; amortization; other, net; gain on sale of Image and special
charges. While EBITDA should not be construed as a substitute for operating
income or as a better measure of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is a measure commonly used in our industry and is
included herein because management believes it is useful and provides
additional information with respect to our ability to meet future debt
service, capital expenditures and working capital requirements. EBITDA, as
adjusted, reported above excludes special charges of $6.6 million,
$4.9 million, $23.7 million and $8.6 million for fiscal 1996, 1997, 1999 and
2000, respectively, and extraordinary charges of $785,000, $377,000 and
$5.0 million in fiscal 1998, 1999, and 2000, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF FLOORING AMERICA, INCLUDING THE NOTES THERETO CONTAINED
IN THIS ANNUAL REPORT ON FORM 10-K.
MATTERS RELATING TO RESTATEMENT OF FINANCIAL RESULTS
RESTATEMENT OF QUARTERLY RESULTS FOR THE FIRST TWO QUARTERS OF FISCAL
2000. The quarterly financial results for the quarters ended May 8, 1999 and
August 7, 1999 have been restated to correct certain revenue and expense amounts
recorded during the first two quarters of fiscal 2000. The majority of these
corrections relate to expensing amounts previously recorded as assets and
deferring certain revenues and rebates. See Note 19 of the Notes to the
Consolidated Financial Statements for the original and restated amounts for each
respective quarterly period.
RESTATEMENT OF QUARTERLY RESULTS FOR THE FIRST THREE QUARTERS OF FISCAL
1999. On April 6, 1999, we issued a press release announcing revenues of
$684.4 million, a net loss of $3.0 million and a loss per diluted share of $0.17
for the year ended January 31, 1999. On May 18, 1999, we announced that, as a
result of the year-end financial audit process, we would record certain
adjustments to these previously reported financial results for fiscal 1999, as
well as for certain of the quarters therein.
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<PAGE>
In response to the audit process adjustments, and after considering the
recommendations of our auditors, the Audit Committee of our Board of Directors
in turn recommended to our Board that a Special Committee of the Board be
appointed to, among other things, initiate a formal inquiry into our accounting
practices. The Special Committee was appointed and so authorized by our Board
and retained the law firm of Smith, Gambrell & Russell, LLP to assist in the
investigation, which, in turn, retained the forensic audit group of Arthur
Andersen LLP to assist in conducting the review.
On October 11, 1999, following a detailed review of our accounting records,
Arthur Andersen, LLP completed the year-end audit process of our financial
statements and we announced restated financial results for the fiscal year ended
January 31, 1999 and each of the quarters therein. For the year ended
January 31, 1999, we reported restated revenues of $664.4 million, a net loss of
$19.6 million and a loss per diluted share of $1.10. These restated results
included changes in recognition and/or timing of certain vendor support funds,
certain expense accruals and asset write-downs. No adjustments were necessary
for periods prior to fiscal 1999.
As noted above, we restated our previously issued financial statements for
the three quarters ended April 30, 1998, July 31, 1998 and October 31, 1998 by
filing amended Quarterly Reports on Form 10-Q/A for the three-quarters ended
April 30, 1998, July 31, 1998 and October 31, 1998, respectively. See Note 19 to
our Consolidated Financial Statements for information relating to these
quarterly restatements.
In the fourth quarter of fiscal year 2000, the Special Committee completed
its review of the information and made recommendations to the Board of
Directors, which were adopted in their entirety. We have either completed or are
in the process of implementing the recommendations of the Special Committee. We
have undertaken steps to improve our internal controls and procedures to ensure
the integrity of our financial reporting and are continuing this process, which
included the appointment of our current Chief Financial Officer in
September 1999.
Since an announcement in May 1999 that we would be restating financial
results for fiscal 1999 (from the amount disclosed in a previous press release)
and certain of the quarters therein, eleven lawsuits seeking to be certified as
class actions were filed against us and certain of our current and former
executive officers and directors. These eleven lawsuits have been consolidated
into one class action suit. Additionally, in January 2000, the Securities and
Exchange Commission ("SEC") commenced a formal investigation in connection with
the matters relating to the fiscal 1999 restatements. See "Item 3. Legal
Proceedings."
GENERAL
Our operations consist primarily of owning and operating flooring stores and
selling franchises for the operation of a variety of flooring stores. We derive
the majority of our revenues from sales of flooring products, fees paid by
franchisees to our various franchise systems, and rebates and commissions from
suppliers as a result of product purchases by us and our franchisees. Our goal
is to effectively integrate our network of retail flooring stores with our
franchise systems. As of May 1, 2000, our retail network consisted of 281
Company-owned stores and 834 franchise centers/locations.
Over the past three years, our revenues and gross profit have increased
significantly, 108.9% and 143.3%, respectively, while our selling, general and
administrative expenses increased 287.7% during the same period. These
significant changes were primarily due to our acquisition of the retail assets
from Shaw Industries, Inc. ("Shaw") and our sale of Image Industries, Inc.
("Image"), a carpet manufacturer. As we have shifted our business operations to
focus on retail operations, our sales and cost structure shifted significantly,
leading to greater advertising, occupancy and personnel costs. The operating
loss of $54.5 million for the fiscal year ended February 5, 2000, relates to
retail and franchise activities, without manufacturing, and also reflects an
$8.6 million charge for store closing cost.
24
<PAGE>
Effective August 9, 1998, we acquired the retail store assets of Shaw for
consideration of 3,150,000 shares of our common stock valued at $55.2 million, a
$10.0 million promissory note (after adjustments) and $25.0 million in cash.
These assets included 266 retail flooring centers, which resulted in a
substantial increase in the number of retail flooring stores we owned and
operated. The acquired retail stores, along with our previous Company-owned
stores have been integrated into our Flooring America brand, and we are
continuing to make merchandise shifts to fixtures and displays, evaluating store
performance, reviewing current operational practices and analyzing market
demographics. Moreover, the Company-owned stores' geographic areas and product
lines overlapped with our existing stores or franchisees in certain areas
causing the need to close or remodel certain stores.
Prior to our acquisition of the Shaw retail stores, those stores incurred
significant losses and operated at a lower profit level than is typical in the
retail flooring industry. Although we have made improvements in the
profitability and sales at these acquired stores, they continue to operate at a
loss and have adversely affected our results of operations.
Actions have been taken or are currently being initiated to reduce these
losses. They include:
- We have closed stores that were losing money.
- We have rebranded into one national brand (Flooring America), which after
the initial advertising launch, will allow us to realize advertising
savings by running the same advertisements for all the stores in the same
DMA, as well as a national advertising campaign.
- We have identified specific opportunities for expense reductions related
to personnel cost, outside services, and general and administrative cost
at the support center, retail stores and warehouse locations and have
initiated such expense reductions.
- We have identified margin and cash flow improvement opportunities in the
retail stores and have begun taking actions to realize improved margins
and cash flows.
- We are seeking to divest certain non-core assets which will enable us to
concentrate on our core businesses, Flooring America retail and franchise
stores.
We will continue to evaluate our business practices to enhance our service to
our customers, to create and maintain efficient distribution channels and
strengthen the training of our employees.
During the year ended February 2000, we operated three reportable segments:
retail; franchise services and corporate. During the year ended January 31,
1999, we operated a fourth reportable segment, manufacturing. The retail segment
is composed of retail flooring stores and distribution support centers. The
franchise services segment includes the operations of three of our franchise
businesses: GCO, CarpetsPlus and MaxCARE. Corporate consists of the Flooring
America Franchise business, store development, marketing, advertising, consumer
credit, and product sourcing activities, as well as corporate non-operating
items not directly relating to the manufacturing, retail or franchise services
segments. See Note 18 to our Consolidated Financial Statements for certain
financial information relating to these segments.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 5, 2000 COMPARED TO YEAR ENDED JANUARY 31, 1999
TOTAL REVENUES. Total revenues increased 14.8% to $762.8 million for the
year ended February 5, 2000 ("fiscal 2000") from $664.4 million for the year
ended January 31, 1999 ("fiscal 1999"). The components of total revenues,
exclusive of the effect of intersegment eliminations, are discussed below.
Intersegment eliminations, which totaled $19.4 million in fiscal 2000 and
$43.9 million in fiscal 1999, include certain intercompany allocations. The
decrease in intersegment eliminations is a result of the sale of Image in
January 1999.
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<PAGE>
RETAIL REVENUE. Retail revenue primarily consists of sales of flooring
products by our retail stores. Retail revenues increased 65.2% to
$692.1 million for fiscal 2000 from $418.9 million for fiscal 1999. The
growth in retail sales of flooring products was primarily due to the impact
of the acquisition of the retail store assets of Shaw in August 1998. Retail
revenue related to the Shaw stores increased $264.6 million from
$270.2 million for fiscal 1999 to $534.8 million in fiscal 2000.
MANUFACTURING REVENUE. Manufacturing revenue of $197.8 million for
fiscal 1999 included the sale of manufactured carpet and polyethylene
tereptalate ("PET"), fiber and flake. With the sale of substantially all the
assets of Image in January 1999, we no longer engage in manufacturing
operations.
FRANCHISE SERVICES REVENUE. Franchise services revenue is generated
from three primary sources: (i) one-time franchise fees from new
franchisees, (ii) brokerage fees and/or royalties on certain flooring
products purchased by the franchisee; and (iii) franchise service fees for
services such as advertising, which are offered to franchisees. Franchise
services revenue increased 15.3% to $28.4 million for fiscal 2000 from
$24.7 million for fiscal 1999. The growth in franchise services revenue was
primarily related to the inclusion in fiscal 2000 of a full year of revenues
from CarpetsPlus compared to only five months in fiscal 1999.
CORPORATE REVENUE. Corporate revenue is primarily generated from four
sources: (i) vendor rebates from flooring purchases for franchisees,
(ii) national account revenue, (iii) sales of promotional goods from the
corporate distribution center and (iv) marketing service fees for services
such as advertising. Corporate revenues decreased 7.9% to $61.7 million in
fiscal 2000 from $67.0 million in fiscal 1999. This decrease was due to a
decrease in marketing service revenue of $3.3 million and a decrease in
national account revenue of $1.7 million.
GROSS PROFIT. Gross profit increased 36.0% to $281.6 million for fiscal
2000 from $207.1 million for fiscal 1999. As a percentage of total revenue,
gross profit was 36.9% for fiscal 2000 compared to 31.2% for fiscal 1999.
Contributing to the increase in gross profit as a percentage of total revenue
was the continuing change in our business mix to a revenue base consisting
principally of the sales of flooring products. Gross profit, exclusive of
manufacturing operations, increased 73.4% to $281.6 million for fiscal 2000
versus $162.3 million for fiscal 1999. This increase was primarily related to
the inclusion in fiscal 2000 of a full year of operations for the stores
acquired from Shaw compared to only six months in fiscal 1999. As a percentage
of sales, gross profit, exclusive of manufacturing operations, increased in
fiscal 2000 to 36.9% from 34.8% in fiscal 1999. The principal reason for the
increase is that the retail flooring centers acquired from Shaw in August of
1998 realize a higher gross profit percentage due to their higher concentration
of residential replacement business as opposed to commercial and builder
business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 47.4% to $325.5 million for fiscal 2000 from
$220.7 million for fiscal 1999. The increase in selling and administrative
expenses was primarily attributable to an overall growth in the size of our
retail base, including the retail store assets acquired from Shaw. With the sale
of our manufacturing operations in January 1999, the retail segment comprised a
substantial portion of our operations. Selling, general, and administrative
expenses, exclusive of manufacturing operations, increased 71.2% to
$325.5 million in fiscal 2000 from $190.2 million in fiscal 1999. This
$135.3 million increase was primarily related to the inclusion in fiscal 2000 of
a full year of selling, general, and administrative expenses for the stores
acquired from Shaw compared to only six months in fiscal 1999. As a percentage
of revenues, selling, general and administrative expenses, exclusive of
manufacturing operations, was 42.7% for fiscal 2000 as compared to 40.8% for
fiscal 1999. This increase percentage was principally due to higher employee
costs relative to revenues in fiscal 2000 resulting from the Shaw acquisition.
Employee costs in the retail flooring centers acquired from Shaw are higher due
to their higher concentration of residential replacement business as opposed to
commercial and builder business. In addition, employee costs in support
functions increased in
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<PAGE>
relation to revenues as a result of the Shaw acquisition. As discussed herein,
we have initiated a number of cost reduction and other actions to reduce
expenses and improve operating performance.
OPERATING LOSS. Operating loss increased to a loss of $52.5 million for
fiscal 2000 from a loss of $37.4 million for fiscal 1999. The components of
operating loss, exclusive of the effect of intersegment eliminations, are
discussed below. Intersegment eliminations totaled income of $215,000 in fiscal
2000 and expense of $7.3 million in fiscal 1999.
RETAIL OPERATING LOSS. Retail operating loss decreased to a loss of
$29.5 million for fiscal 2000 from a loss of $32.3 million for fiscal 1999.
This decreased loss was primarily due to the impact of the acquisition of
the retail store assets of Shaw. These stores have higher selling, general
and administrative expense related to advertising, as well as, higher costs
related to remodeling and rebranding into the Flooring America brand. The
fiscal 2000 and fiscal 1999 operating losses also include special charges of
$8.6 million and $11.8 million, respectively, as discussed below.
MANUFACTURING OPERATING INCOME. Manufacturing operating income was
$14.2 million for fiscal 1999. With the sale of substantially all the assets
of Image in 1999, we no longer engage in manufacturing operations.
FRANCHISE SERVICES OPERATING INCOME. Franchise services operating
income increased to $1.8 million for fiscal 2000 from income of
$1.7 million for fiscal 1999. The increase in franchise services operating
income was primarily related to the inclusion in fiscal 2000 of a full year
of franchise services operating income from CarpetsPlus compared to only
five months in fiscal 1999.
CORPORATE OPERATING LOSS. Corporate operating loss increased to
$25.2 million in fiscal 2000 from a loss of $13.6 million in fiscal 1999.
Fiscal 1999 included a special charge of $11.9 million. Exclusive of the
special charge, corporate operating loss increased $23.5 million. Such
increased loss was primarily due to higher selling, general and
administrative expense. The increased expenses included employee costs
($9.1 million), computer development ($3.4 million), and legal, professional
and consulting fees ($15.6 million). Legal, professional and consulting fees
in fiscal 2000 included one time charges of $5.3 million, related to the
restatement of fiscal 1999 financial results and related matters.
SPECIAL CHARGES. During the second quarter of fiscal 1999, we reevaluated
our retail business strategy and expanded our focus on our retail operations. As
a result of this revised business strategy, we amended our franchise agreements
for one of our franchised line of retail stores, closed certain Company-owned
stores, and wrote-down to fair value certain retail assets, including goodwill.
We again reevaluated and analyzed the performance of our Company-owned retail
stores in the fourth quarter of fiscal year 2000. This reevaluation and analysis
indicated that approximately 34 stores and excess real estate should be closed
and/or sold. As a consequence, charges totaling $8,554,000 were incurred in the
fourth quarter of fiscal year ended February 5, 2000. The pre-tax special
charges related to the following:
<TABLE>
<CAPTION>
FISCAL YEAR END
-------------------------------
FEBRUARY 5, JANUARY 31,
2000 1999
------------ -------------
<S> <C> <C>
Write off of vendor receivables................. $ -- $ 2.4 million
Claims reserves................................. -- 9.5 million
Write-down of equipment......................... -- 0.5 million
Store closure and carrying costs................ 8.6 million(1) 7.1 million
Write-down of goodwill.......................... -- 4.2 million
------------ -------------
Total special charges........................... $8.6 million $23.7 million
============ =============
</TABLE>
- ------------------------
(1) Includes $1.5 million of asset improvement charges.
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INTEREST EXPENSE. Interest expense decreased 5.5% to $14.3 million for
fiscal 2000 from $15.1 million for fiscal 1999. This change represents a change
in the composition of debt outstanding during the year.
INCOME TAX EXPENSE (BENEFIT). The income tax expense in fiscal 2000
includes a provision for a valuation allowance of $8.4 million on our beginning
of the year deferred tax assets. Pursuant to Statement of Financial Accounting
Standards No. 109, our cumulative losses in recent years have created the
presumption that the deferred tax assets will likely not be realized.
Accordingly, we provided a valuation allowance for all of our net deferred tax
assets at February 5, 2000. Such charge was largely offset by the benefit of a
tax refund receivable generated by the carryback of our 1999 net operating loss.
EXTRAORDINARY CHARGES. The extraordinary charges recorded in fiscal 2000
related to two transactions. First, a charge of $274 thousand from our
repurchase of $4.0 million principal amount of our Senior Notes and the
write-off of unamortized finance fees and discounts. Second, a charge of
$4.7 million in the fourth quarter from the repayment of our former revolving
credit facilities and the write-off of unamortized financing fees. The totals
amounted to $5.0 million for fiscal 2000.
YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
TOTAL REVENUES. Total revenues increased 82.0% to $664.4 million for the
year ended January 31, 1999 from $365.1 million for the year ended January 31,
1998 ("fiscal 1998"). The components of total revenues, exclusive of the effect
of intersegment eliminations, are discussed below. Intersegment eliminations,
which totaled $43.9 million in fiscal 1999 and $6.7 million in fiscal 1998,
include sales of flooring products by Image to our retail stores and certain
intercompany allocations.
RETAIL REVENUE. Retail revenue primarily consists of sales of flooring
products by our retail stores. Retail revenues increased 218.6% to
$418.9 million for fiscal 1999 from $131.5 million for fiscal 1998. The
growth in retail sales of flooring products was primarily due to the impact
of the acquisition of the retail store assets of Shaw and, to a lesser
extent, to internal growth.
MANUFACTURING REVENUE. Manufacturing revenue includes the sale of
manufactured carpet and polyethylene tereptalate ("PET"), fiber and flake.
Manufacturing revenues increased 11.1% to $197.8 million for fiscal 1999
from $178.0 million for fiscal 1998. Sales of manufactured carpet increased
12.6% to $171.1 million for fiscal 1999 from $151.9 million for fiscal 1998.
Unit sales of manufactured carpet increased 6.9% to 29.3 million square
yards for fiscal 1999 from 27.4 million square yards in fiscal 1998. Sale of
PET, fiber and flake increased 2.3% to $26.7 million for fiscal 1999 from
$26.1 million for fiscal 1998. Unit sales decreased 7.8% to 59.0 million
pounds for fiscal 1999 from 64.0 million pounds for fiscal 1998. The average
selling price per pound of PET, fiber and flake for fiscal 1999 increased by
11.0% from fiscal 1998.
FRANCHISE SERVICES REVENUE. Franchise services revenue is generated
from three primary sources: (i) one-time franchise fees from new franchisees
(revenue recognized at time of franchise agreement signing), (ii) brokerage
fees and/or royalties on certain flooring products purchased by the
franchisee; and (iii) franchise service fees for services such as
advertising, which are offered to franchisees. Franchise services revenue
increased 11.1% to $24.7 million for fiscal 1999 from $22.2 million for
fiscal 1998. The increase in franchise services revenue is due to, among
other things, the acquisition of CarpetsPlus in September 1998.
CORPORATE REVENUE. Corporate revenue is primarily generated from four
sources: (i) vendor rebates from flooring purchases for franchisees,
(ii) national account revenue, (iii) sales of promotional goods from the
corporate distribution center and (iv) marketing service fees for services
such as advertising. Corporate revenue increased 66.9% to $67.0 million in
fiscal 1999 from $40.1 million in fiscal 1998. This increase resulted from
increases in national accounts revenue, Flooring America marketing services
and distribution center sales.
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<PAGE>
GROSS PROFIT. Gross profit increased 78.9% to $207.1 million for fiscal
1999 from $115.7 million for fiscal 1998. As a percentage of total revenue,
gross profit was 31.2% for fiscal 1999 compared to 31.7% for fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 162.9% to $220.7 million for fiscal 1999 from
$84.0 million for fiscal 1998. The increase in selling and administrative
expenses reflects an overall growth in the size of our retail base, including
the retail store assets acquired from Shaw. These stores incurred higher levels
of advertising costs than other Flooring America brands. These acquired stores
also incurred selling, general and administrative expense relating to the
integration of these stores into Flooring America. As a percentage of total
revenue, selling, general and administrative expenses increased to 33.2% for
fiscal 1999 from 23.0% for fiscal 1998. The increase in selling, general and
administrative expenses, both as a percentage of revenues and operating expenses
reflect our changing revenue mix. Selling, general and administrative expenses
of our retail segment, which operates on a higher cost basis than the
manufacturing segment, increased as a percentage of selling, general and
administrative expenses due to the purchase of Shaw's retail store assets in
August 1998. With the sale of our manufacturing operations in January 1999, the
retail segment will comprise a substantial portion of our operations in future
periods. Also contributing to the increase in selling, general and
administrative expenses in fiscal 1999 were increases in advertising, bad debt
and compensation expenses.
OPERATING INCOME/LOSS. Operating income/loss decreased to a loss of
$37.4 million for fiscal 1999 from operating income of $31.8 million for fiscal
1998. The components of operating income/loss, exclusive of the effect of
intersegment eliminations, are discussed below. Intersegment eliminations
totaled $7.3 million in expenses in fiscal 1999 and a benefit of $1.0 million in
fiscal 1998.
RETAIL OPERATING LOSS. Retail operating loss increased to a loss of
$32.2 million for fiscal 1999 from a loss of $1.2 million for fiscal 1998.
This increase was primarily due to the impact of the acquisition of the
retail store assets of Shaw. These stores have higher selling, general and
administrative expense related to advertising, as well as, higher costs
related to remodeling and rebranding into the Flooring America brand. This
increase also resulted from the special charge of $11.8 million in fiscal
1999 that was not present in fiscal 1998.
MANUFACTURING OPERATING INCOME. Manufacturing operating income
decreased 39.0% to $14.2 million for fiscal 1999 from $23.2 million for
fiscal 1998. This decrease was due to cost of sales increasing during fiscal
1999. During fiscal 1998, the Company experienced unusually low raw material
costs related to bottle costs, while in fiscal 1999 these bottle costs
returned to historical rates.
FRANCHISE SERVICES OPERATING INCOME/LOSS. Franchise services operating
income remained approximately the same with fiscal 1999 franchise services
operating income of $1.7 million and fiscal 1998 franchise services
operating income of $1.7 million.
CORPORATE OPERATING INCOME/LOSS. Corporate operating income decreased
to a loss of $13.6 million in fiscal 1999 from income of $7.0 million in
fiscal 1998. This loss is primarily the result of a $11.9 million special
charge discussed below (see "SPECIAL CHARGES"), as well as increased
expenses relating to, among other things, advertising, bad debt and
compensation expense.
INTEREST EXPENSE. Interest expense increased 117.3% to $15.1 million for
fiscal 1999 from $6.9 million for fiscal 1998 due principally to a higher debt
balances and a higher interest rate during fiscal 1999. See "Liquidity and
Capital Resources."
SPECIAL CHARGES. During the second quarter of fiscal 1999, we reevaluated
our retail business strategy and determined to expand our focus on our retail
operations. As a result of this revised business strategy, we amended the
franchise agreements for one of our franchised line of retail stores, closed
certain Company-owned stores, and wrote-down to fair value certain retail
assets, including goodwill. We recorded a $28.5 million charge for these special
items during the three-month period ended July 31, 1998. The
29
<PAGE>
initial charge was subsequently reduced by $4.8 million, as revised estimates
for claim reserves and store closure costs were less than initially expected,
offset in part by a ten store net increase in the number of stores to be closed
from the initial estimate of fifteen. The $23.7 million pretax special charge
related to the following items:
<TABLE>
<S> <C>
Write off of vendor receivables............................. $ 2.4 million
Claims reserves............................................. 9.5 million
Write-down of equipment..................................... 0.5 million
Store closure and carrying costs............................ 7.1 million
Write-down of goodwill...................................... 4.2 million
-------------
Total special charges....................................... $23.7 million
=============
</TABLE>
During fiscal 1999, we amended our franchise agreement with the majority of
our CarpetMAX franchisees, whereby we established certain requirements for more
uniformity in the appearance and merchandising of the franchised stores. As part
of the amended franchise agreement, we reduced the number of flooring vendors
available to CarpetMAX franchisees. We wrote off certain vendor receivables and
established a reserve to settle claims that may arise from the franchise
network. In addition, we have written down to fair value certain assets made
obsolete by the amended franchise agreement. We also accrued for the costs of
closing certain Company-owned retail stores, most of which were closed as of
January 31, 1999.
In connection with the reevaluation of our retail strategy described above,
we analyzed the performance of our Company-owned retail stores. This analysis
indicated that significant strategic and operational changes would be necessary
in some stores, including changes in the customer mix, location, store design,
and merchandising. These factors caused management to assess the realizability
of the goodwill recorded.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance at July 31, 1998, to the estimate of the related
market's undiscounted future cash flows. The assumptions used reflected
earnings, market and industry conditions, as well as the then current operating
plans. The assessment indicated a permanent impairment of goodwill for certain
markets. As a consequence, such goodwill was written down to fair value, which
resulted in a write-off of goodwill totaling $4.2 million during fiscal 1999.
GAIN ON SALE OF IMAGE. We recorded a gain on sale of Image of
$24.9 million as a result of the sale of our Image subsidiary in January 1999.
With the sale of substantially all the assets of Image, we no longer engage in
manufacturing operations.
INCOME TAX EXPENSE (BENEFIT). We recorded an income tax benefit of
$5.7 million for fiscal 1999 compared to a $10.3 million expense for fiscal
1998. The decrease in income tax expense is due to our recording a loss in
fiscal 1999 as compared to income in fiscal 1998. The fiscal 1999 effective tax
benefit of 22.8% was due to higher non-deductible costs and valuation allowances
related to state net operating losses.
EXTRAORDINARY CHARGES. The extraordinary charges recorded in fiscal 1999
and 1998 resulted from the write-off of unamortized financing fees associated
with our former revolving credit facilities. The charges amounted to $377,000,
net of an income tax benefit of $236,000 for fiscal 1999, and $785,000, net of
an income tax benefit of $546,000, for fiscal 1998.
SEASONALITY
Historically, our retail flooring sales are subject to some seasonal
fluctuation typical to the flooring industry, with higher sales occurring in the
summer and fall months during our second and third quarters, and lower sales
occurring during the fourth quarter holiday season. Increases occur in the
second quarter
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<PAGE>
as construction schedules increase during the summer, and the largest increase
occurs in the third quarter as a consequence of a combination of ongoing
construction and pre-holiday home remodeling. See Note 19 of Notes to
Consolidated Financial Statements included herein for summary quarterly data.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Our primary capital requirements are for new store openings and
working capital. We historically have met our capital requirements through a
combination of cash flow from operations, net proceeds from the sale of equity
and debt securities, bank lines of credit, disposition of assets, and standard
payment terms from suppliers.
SALE OF IMAGE. On January 29, 1999, we sold substantially all the assets of
our Image subsidiary to Aladdin Manufacturing Corporation, a wholly owned
subsidiary of Mohawk Industries, Inc. This transaction was valued at
approximately $210.7 million, including the assumption of $30.0 million in
related debt and $18.1 million in short-term liabilities. Proceeds from the sale
were used to retire bank indebtedness incurred as a result of the acquisition of
the Shaw retail status.
SENIOR CREDIT FACILITY. On January 28, 2000, we entered into a Senior
Credit Facility with Foothill Capital Corporation, as agent, which provides for
aggregate commitments of up to $45.0 million, subject to levels of collateral
and other availability restrictions ("Senior Credit Facility"). This Senior
Credit Facility replaced the amended and restated senior credit facility with
our former senior lenders dated May 18, 1999. The Senior Credit Facility
consists of a five year revolving facility that matures on January 28, 2005.
Borrowings under the Senior Credit Facility are secured by accounts receivable,
inventories, certain real and personal property and certain of our intangible
assets and those of our subsidiaries, as well as the capital stock of our
subsidiaries. As additional collateral security for the Senior Credit Facility,
we have established a cash collateral account with the lender. Amounts
outstanding under the Senior Credit Facility bear interest at various variable
rates. The Senior Credit Facility contains a number of covenants customary for
credit transactions of this type and requires us to meet certain financial
ratios. Borrowings outstanding under the Senior Credit Facility totaled
approximately $32.1 million at February 5, 2000 and availability totaled
$5.0 million. The Senior Credit Facility contains a number of restrictive
financial and other covenants. On May 6, 2000, we were not in compliance with
certain of the financial covenants and on May 15, 2000, we entered into a third
amendment to the Senior Credit Facility which reset certain of the financial
covenants and ratios. We plan to continue to monitor compliance with the Senior
Credit Facility, however, no assurances can be given with respect to continued
compliance with the Credit Agreement.
SENIOR SUBORDINATED NOTES. On October 16, 1997, we issued $100.0 million of
9 1/4% notes due 2007 (the "Senior Notes"). The net proceeds to us from the
offering of the Senior Notes were approximately $96 million net of an initial
issue discount and fees and related costs. We used the net proceeds from the
offering of the Senior Notes to repay all borrowings outstanding under a
revolving senior credit facility of approximately $82.7 million and for general
corporate purposes, including capital expenditures.
Each of our operating subsidiaries has fully and unconditionally guaranteed
the Senior Notes on a joint and several basis. The guarantor subsidiaries
comprise all of our direct and indirect operating subsidiaries. We have not
presented separate financial statements and other disclosures concerning the
guarantor subsidiaries because there are no significant restrictions on the
ability of the guarantor subsidiaries to make distributions to us.
On September 3, 1998, we defaulted on the restricted payment covenant
contained in the Indenture (the "Indenture") pursuant to which the Senior Notes
were issued. The default occurred when we repurchased shares of our common stock
in the open market pursuant to our ongoing stock repurchase program. On
March 21, 2000, we obtained the consent of the Noteholders for a waiver of this
covenant violation. In order to obtain the consent of the Noteholders, on
March 21, 2000, we repurchased $25 million of Senior Notes at a purchase price
of 102% of their principal face amount, plus accrued and
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<PAGE>
unpaid interest and other fees and charges. We also paid a cash consent fee of
$3.6 million and attorneys' fees to counsel for the noteholders in the amount of
$451 thousand in order to cure the default under the Indenture.
In connection with the waiver of the default, the Indenture for the Senior
Notes was amended so that the following additional terms apply to the remaining
outstanding Senior Notes:
- The interest rate increased from 9 1/4% per annum to a variable rate of
interest of at least 12 3/4% and as much as 15% per annum.
- The Senior Notes are secured by a second lien on certain assets;
- We have agreed to make the following offers to purchase the following
principal amounts of outstanding Senior Notes plus accrued and unpaid
interest as set forth below:
- $10 million on or before December 31, 2000 at 97% of the principal face
amount;
- $10 million on or before February 5, 2001 at 103% of the principal face
amount;
- $5 million on or before March 31, 2001 at 97% of the principal face
amount;
- $10 million on or before February 4, 2002 at 103% of the principal face
amount;
- We also have agreed to make an offer to purchase any Senior Notes which
remain outstanding on October 15, 2002 at a price of 106.375%, plus
accrued and unpaid interest and other fees and charges, and
- We agreed to maintain a minimum fixed charge coverage ratio, which
agreement is expected to be amended.
Pursuant to the Indenture, we were required to make a semi-annual interest
payment to the noteholders on April 15, 2000. We did not make the payment on or
before April 15, 2000. Under the terms of the Indenture, a failure to make an
interest payment by the date due is not an event of default if the payment is
made within 30 days from the date it was originally due. We utilized the 30 day
grace period and paid all accrued interest due on the Senior Notes on May 15,
2000.
The Indenture, as amended by the Fifth Supplemental Indenture, requires us
to maintain a minimum consolidated fixed charge coverage ratio, measured on a
quarterly basis, beginning with the first quarter of fiscal year 2001. As of
May 6, 2000, our consolidated fixed charge coverage for the first quarter of
fiscal year 2001 was below the minimum required by the Indenture. Pursuant to
the terms of the Indenture, failure to comply with this financial covenant will
not constitute an event of default unless we fail to comply for two consecutive
fiscal quarters. We expect to seek an amendment to the Indenture to waive and/or
reset the coverage ratios and, although no assurances can be given, expect to
obtain an amendment by mid-to-late June of this year.
CAPITAL RESOURCES. We have limited unused credit lines and must satisfy all
of our working capital and capital expenditure requirements from such lines and
from cash provided by operating activities, from external borrowing or from the
sale of assets. Substantially all of our strategic assets have been pledged to
secure various outstanding indebtedness of the Company. Sales of assets, which
are not replaced would under the terms of the applicable financing agreements,
generally require payment of the indebtedness secured thereby, which
indebtedness, in many cases, would likely exceed the immediately realizable
value of such assets. We have relatively few non-strategic assets which we could
monetize, substantially all of such assets being subject to various liens and
security interests which would restrict or limit our ability to realize any
significant proceeds from the sale thereof. To the extent that our access to
capital is constrained, we may not be able to make certain capital expenditures
or implement certain other aspects of our strategic plan and we may, therefore,
be unable to achieve the benefits expected therefrom.
32
<PAGE>
Our ability to make payments to satisfy our debt and other obligations will
depend upon our future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, which
are beyond our control. Debt service is dependent upon available cash reserves
and cash flow from operations, together with available borrowing under our
Senior Credit Facility. If we are unable to service our debt obligations, we
will be required to adopt alternative strategies. These strategies may include:
- reducing or delaying our capital expenditures,
- curtailing or eliminating the opening of Company-owned stores,
- selling assets,
- restructuring or refinancing our indebtedness, or
- seeking additional equity capital.
We are unable to give assurance that any of these strategies could be
implemented on satisfactory terms, if at all. Our inability to service our debt
obligations may result in the acceleration of some or all of our indebtedness,
which would have a material adverse effect on our financial condition.
We cannot give assurance that our business will generate sufficient cash
flow from operations, that our currently anticipated growth in revenues and cash
flow will be realized or that future borrowings will be available to us,
including under our revolving Senior Credit Facility, in an amount sufficient to
enable us to pay our indebtedness, including the Senior Notes, or to fund our
other liquidity needs. We may need to refinance all or a portion of our
indebtedness, including the Senior Notes, on or before maturity. We cannot give
assurance that we will be able to refinance any of our indebtedness, including
our revolving Senior Credit Facility and the Senior Notes, on commercially
reasonable terms or at all.
We expect to report substantial operating and net losses for the first
quarter of fiscal 2001.
OTHER DEBT. As of May 1, 2000, we also had approximately $18.0 million of
debt outstanding under various term loans.
GOING CONCERN. Our consolidated financial statements have been prepared on
a going concern basis which assumes continuity of operations and realization of
assets and liquidation of liabilities in the ordinary course of business. We
incurred a net loss of $70,546,000 for the fiscal year ended February 5, 2000
and had a working capital deficit of $48,201,000 at February 5, 2000. The report
of independent auditors on our consolidated financial statements for the year
ended February 5, 2000 includes an explanatory paragraph to the effect that
substantial doubt exists with respect to our ability to continue as a going
concern due to our recurring losses from operations and the anticipation that
certain debt covenants and obligations will not be met without a restructuring
of our debts. See the Consolidated Financial Statements and Item 1.
Business-Risk Factors in this annual report on Form 10-K. We are highly
leveraged and substantially all of our assets are and will likely remain subject
to various liens and security interests, and our loan agreement, indenture and
other agreements contain mandatory prepayment provisions in the event that the
assets are sold. Accordingly, we may not be able to rely, in any significant
degree, on the proceeds from sales of assets to fund operations and we may have
limited sources of additional liquidity other than cash generated by operations.
Our ability to improve our financial position and meet our financial obligations
will depend upon a variety of factors, including significantly improved
operating results, favorable pricing environments, absence of adverse general
economic conditions, more effective operating cost controls and efficiencies,
and our ability to attract new capital, obtain concessions or extensions from
our existing lenders and noteholders and maintain adequate liquidity. No
assurances can be given that we will be successful in generating the operating
results or attracting new capital required for future viability.
33
<PAGE>
CONTINGENCIES. Since an announcement in May 1999 that we would be restating
financial results for fiscal 1999 (from the amount disclosed in a previous press
release) and certain of the quarters therein, eleven lawsuits claiming to be
class actions have been filed against us and certain of our current and former
executive officers and directors. These lawsuits have been consolidated into one
class action lawsuit. In addition, the Securities and Exchange Commission
commenced a formal investigation in January 2000 in connection with the matters
relating to the restatement. See "Item 1. Business--Risk Factors" and "Item 3.
Legal Proceedings."
CASH FLOWS. During fiscal 2000, operating activities used $36.8 million
compared to $6.7 million used in fiscal 1999. The increase in cash used in
operating activities was principally attributable to an increase in operating
losses incurred during the year.
During fiscal 1999, operating activities used $6.7 million compared to
$3.2 million used in fiscal 1998. The increase in cash used in operating
activities resulted primarily from an increase in accounts receivable and
inventories. The increase in accounts receivables and inventories was mainly due
to higher sales of flooring products.
During fiscal 2000, investing activities used $27.5 million compared to
providing $83.3 million for fiscal 1999. In fiscal 1999, we received proceeds
from the sale of Image, which were absent in fiscal 2000. Also capital
expenditures decreased substantially from fiscal 1999 due to the sale of Image.
Finally, acquisitions were substantially reduced in fiscal 2000 from the
previous fiscal year.
During fiscal 1999, investing activities provided $83.3 million compared to
using $49.0 million for fiscal 1998. The change is primarily due to the sale of
Image offset by the purchase of CarpetsPlus and the retail store assets of Shaw.
During fiscal 2000, financing activities provided $20.0 million compared to
$15.6 million used in fiscal 1999. This increase is due primarily to borrowings
under the Senior Credit Facility. Also during fiscal 1999, we used cash to
repurchase common stock and was provided cash from the exercise of stock
options. No such financing activities occurred in fiscal 2000.
During fiscal 1999, financing activities used $15.6 million compared to
$74.6 million provided in fiscal 1998. This decrease is primarily due to
proceeds received from the issuance of common stock in a public offering and the
issuance of senior subordinated notes in fiscal 1998. No such financing
activities occurred in fiscal 1999.
CAPITAL EXPENDITURES. We anticipate that we will require approximately
$15.0 million for fiscal 2001, to (i) rebrand our various retail formats under
the singular Flooring America brand, including signage and interior store
changes, (ii) reconfigure existing stores including certain of the stores
acquired from Shaw, and (iii) upgrade our management information systems.
MANAGEMENT INFORMATION SYSTEMS. Most Company-owned stores are currently
operating their businesses with the information systems that were in place at
the time we acquired or opened them. Although certain hardware has been upgraded
for the store network and we are utilizing certain SAP modules for general
ledger, human resources and payroll functions, we have delayed implementation of
SAP retail applications. We have made a significant investment in all SAP
modules, including SAP retail applications. If we are unable to implement the
SAP retail applications, a write down of such costs may be required. No
assurances can be given with respect to our ability to implement a fully
integrated management information system or as to the timing of any such
implementation, which may be adversely affected by our ability to fund such
upgrades and implementations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 "Accounting for Derivatives Instruments and Hedging
Activities." The Statement establishes accounting
34
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and reporting standards for derivative instruments and transactions involving
hedge accounting. In June 1999, the FASB deferred the effective date of
Statement No. 133 for one year, until fiscal years beginning after June 15,
2000. We do not anticipate that this Statement will have a material impact on
our financial statements.
We adopted, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" and Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," in February 1999. There was no material impact on
the financial statements as a result of adoption of these statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY. We have limited exposure to market volatility in
interest rates. As of February 5, 2000, exposure from interest rates was not
material to our financial position, results of operations, or cash flows, as
$103.5 million of our $145.6 million of debt has been fixed at rates of up to
15% until 2007. Based on our low overall floating interest rate exposure at
February 5, 2000, a near-term 100 basis point change in interest rates would
impact interest expense by approximately $421 thousand.
COMMODITY PRICE AND FOREIGN CURRENCY SENSITIVITY. Increases or decreases in
the market price of carpet, hardwood and vinyl flooring may affect our purchases
and, accordingly, our earnings. We do not use futures or options contracts to
manage volatility with respect to this exposure. The potential increase in
purchases based on commodity activity is generally also reflected as a
corresponding increase in our prices and, therefore, we believe is not material
to our financial position and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
- Report of Independent Auditors and Report of Independent Public
Accountants
- Consolidated Balance Sheets--As of February 5, 2000 and January 31, 1999
- Consolidated Statements of Operations--For the Year ended February 5, 2000
and Years ended January 31, 1999 and 1998
- Consolidated Statements of Stockholders' Equity--For the Year ended
February 5, 2000, and Years ended January 31, 1999 and 1998
- Consolidated Statements of Cash Flows--Year ended February 5, 2000, and
Years ended January 31, 1999 and 1998
- Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Ernst & Young, LLP has served as our independent auditors for the fiscal
year ended February 5, 2000. Representatives of Ernst & Young, LLP are expected
to be present at the shareholders' meeting and will have the opportunity to make
a statement if they desire to do so and to respond to appropriate questions. We
have not selected our independent accountants for the 2001 fiscal year.
As of January 4, 2000, we terminated the engagement of Arthur Andersen LLP
as our independent accountants to audit our financial statements.
The audit reports of Arthur Andersen LLP on our consolidated financial
statements as of and for the years ended January 31, 1999 and 1998, did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles, except that
Arthur
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Andersen LLP's report on our consolidated financial statements as of and for the
year ended January 31, 1999 contained a separate paragraph stating:
"The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company is not in compliance with a
certain restricted payment covenant contained in the indenture which
references the Company's $100 million Senior Subordinated Notes due
October 2007 (the 'Senior Notes') and as a result, the trustee or the
holders of not less than 25% of the Senior Notes may declare all unpaid
principal plus any accrued interest of all of the Senior Notes due and
payable. The Company's available borrowings under its Senior Credit
Facility plus cash on hand are not sufficient to repay the Senior Notes
if declared due and payable. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern."
The decision to consider a change in independent accountants was recommended
to our Audit Committee on November 8, 1999. Upon receiving and approving that
recommendation, on December 22, 1999, the Audit Committee delegated to the Chief
Financial Officer the authority to decide when and if to dismiss Arthur Andersen
LLP.
In connection with the audits of the two fiscal years ended January 31, 1999
and 1998, and through the date of this report, we have not had any disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused Arthur Andersen LLP to make reference thereto in their report
on our consolidated financial statements for such periods.
Except as noted herein, during our two most recent fiscal years, and through
the date of this report, we have not had any reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K. In connection with Arthur Andersen LLP's
audit of the fiscal year end January 31, 1999, Arthur Andersen LLP did advise us
that material weaknesses and significant deficiencies existed in our internal
controls that could adversely affect our ability to record, process, summarize
and report financial data consistent with the assertions of management in its
financial statements. We responded to Arthur Andersen LLP's letter by
investigating the matters raised by such letter and addressing and taking
appropriate actions designed to correct the noted weaknesses and deficiencies.
On January 10, 2000, we retained and appointed the accounting firm of
Ernst & Young LLP as our new independent auditors to audit our financial
statements for the fiscal year ended February 5, 2000. The decision to retain
and appoint the accounting firm of Ernst & Young LLP was approved by our Audit
Committee and our Board of Directors. Prior to engaging Ernst & Young LLP as our
independent accountants on January 10, 2000, we did not consult with Ernst &
Young LLP regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements.
36
<PAGE>
PART III
ITEM 10. BOARD OF DIRECTORS
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT.
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH FLOORING AMERICA
- ---- -------- --------------------------------------------------------
<S> <C> <C>
David L. Nichols............ 58 Chairman of the Board, President and Chief Executive
Officer
Leonard H. Thill............ 45 Chief Financial Officer, Secretary and Compliance
Officer
Stephen P. Coburn........... 49 Executive Vice President--Operations/Human Resources
Paul R. Renn................ 45 President--Flooring America Retail Division
Michael L. DeGrace.......... 54 President--MaxCARE Franchise Division
Michael Cherico............. 41 President--GCO Carpet Outlet Division
Scott Wheeler............... 35 President--Flooring America Franchise Division
Donald P. Burke............. 44 Vice President and Corporate Controller
Joseph J. Jillson........... 56 Director
Richard A. Kaplan........... 54 Director
J. Michael Nixon............ 55 Director
F. G. "Buck" Rodgers........ 73 Director
Larry T. Solari............. 57 Director
Herb Wolk................... 68 Director
</TABLE>
Our executive officers are appointed by the Board of Directors and hold
office at the pleasure of the Board.
DAVID L. NICHOLS has served as our Chairman of the Board since
January 2000. On May 10, 2000, our Board of Directors elected Mr. Nichols to
serve as our President and Chief Executive Officer as well as Chairman. From
1963-1998, Mr. Nichols served in various capacities with Mercantile Stores
Company, Inc., a $3 billion department store chain, most recently as the
Company's Chairman and CEO from 1992 through 1998. Mr. Nichols also serves as a
director for The Andersons Inc., the Federal Reserve Bank of Cleveland, Value
City Department Stores, Inc. and R.G. Barry Corporation. Mr. Nichols is a
Class III Director and his term of office expires with the 2002 Annual Meeting
of Stockholders.
LEONARD H. THILL has served as our Chief Financial Officer, Secretary and
Compliance Officer since September 1999. Mr. Thill served in various capacities
with the United States Securities and Exchange Commission from 1987 to
September 1999, including his last position as Assistant Chief Accountant with
the SEC's Division of Enforcement.
STEPHEN P. COBURN has served as our Executive Vice President of Operations
since November 1999 and head of our Human Resources department since
January 2000. Mr. Coburn joined us as Corporate Controller in January 1999 and
served in that capacity until November 1999. Mr. Coburn served in various
capacities with Image Industries, Inc. (our wholly owned subsidiary from
August 1996 to January 1999) from September 1994 to January 1999, including
Treasurer from August 1997 to January 1999.
PAUL R. RENN has served in various capacities since October 1997, including
his current position as President--Flooring America Retail Division since
February 2000. Mr. Renn served as Sales Manager--
37
<PAGE>
Southwest Region of Abbey Carpets, a flooring cooperative, from April 1995 to
October 1995, and as General Manager--Texas of Carpet Exchange, a flooring
retailer, from September 1989 to March 1995.
MICHAEL L. DEGRACE has served as President--MAXCARE Franchise Division since
February 1999. From 1997 to January 1999, Mr. DeGrace served as Vice
President--Sales and Marketing of Image Industries, Inc. Mr. DeGrace served as
Vice President of Sales and Marketing of Beaulieu of America, Inc., a carpet
manufacturer, from 1995 to 1996, and served in various capacities, including
Regional Vice President, with Shaw Industries, Inc., a carpet manufacturer, from
1979 to 1995.
MICHAEL CHERICO has served in various capacities with us since 1993,
including his current position as President of our GCO Carpet Outlet Division
since July 1997.
SCOTT WHEELER has served in various capacities with us since June 1996,
including his current position as the President of Flooring America Franchise
Division since February 2000. From June 1996 to February 2000, Mr. Wheeler
worked in the CarpetMAX Division, including the position of Vice President of
Retail Support before becoming President of our Flooring America Franchise
Division. From June 1995 to June 1996, Mr. Wheeler served as a Territory Manager
for Mohawk Industries, Inc.
DONALD P. BURKE has served as Vice President and Corporate Controller since
January 2000. Mr. Burke joined us as Director of Financial Reporting in
March 1999. Mr. Burke served as Director of Banking and Financial Reporting for
Georgia Gulf Corporation, a chemical and plastics manufacturer from 1984 to
March 1999.
JOSEPH J. JILLSON has served as a Director since November 1998. Mr. Jillson
has served as an executive officer and co-owner of Q.I. Corporation, a building
materials contractor, since 1967. Mr. Jillson is a Class II Director and his
term of office expires with our 2001 Annual Meeting of Stockholders.
RICHARD A. KAPLAN has served as a Director since 1989 and served as Chairman
of the Board from 1989 to February 1994. Mr. Kaplan founded Flooring America in
1989. Mr. Kaplan has also served as President and Chief Executive Officer of
Pictometry International, LLC, a technology company, since August 1999.
Mr. Kaplan served as Chairman of the Board of Worksmart International, Inc., a
personnel-consulting company, from 1995 to 1998, and as Chairman of the Board of
Richland Industries Corp., a retail flooring chain based in Rochester, New York,
from 1972 to 1995. Mr. Kaplan is a Class III Director and his term of office
expires with the 2002 Annual Meeting of Stockholders.
J. MICHAEL NIXON has served as a Director since February 1996. Mr. Nixon has
served as the President and co-owner of Q.I. Corporation, a building materials
contractor, since 1967. Mr. Nixon is a Class I Director and his term of office
expires with our 2000 Annual Meeting of Stockholders.
F.G. "BUCK" RODGERS has served as a Director since February 2000.
Mr. Rodgers was employed by IBM Corporation from 1950 to 1984, serving in a
variety of positions, including 10 years as IBM Vice President of Marketing, a
position he held until his retirement in 1984. Mr. Rodgers also serves as a
Director for Bergen Brunswig Corporation, Milliken Company, Response Logic Inc.
and Protegrity, Inc. Mr. Rodgers is a Class II Director and his term of office
expires with our 2001 Annual Meeting of Stockholders.
LARRY T. SOLARI has served as a Director since April 1999. Mr. Solari has
served as Chairman of the Board and Chief Executive Officer of BSI
Holdings, Inc., a builder services company, since 1998. Mr. Solari served as
Chairman of the Board and Chief Executive Officer of Sequential Products, Inc.,
a manufacturer in the building materials industry, from 1996 to 1997, as
President of the Building Materials Group of Domtar, Inc. from 1994 to 1996, and
as President of the Construction Products Group of The Owens--Corning Company
from 1989 to 1994. Mr. Solari is a director of Beazer Homes, Inc., a single-
family homebuilder, Therma--Tru, Inc. and Pacific Coast Building Products, Inc.
Mr. Solari is a Class II Director and his term of office expires with our 2001
Annual Meeting of Stockholders.
38
<PAGE>
HERB WOLK has served as a Director since 1991. Mr. Wolk is the owner and
President of Cadillac Carpet Distributors and has served in various capacities
with that company since 1976. Mr. Wolk is a Class I Director and his term of
office expires with our 2000 Annual Meeting of Stockholders.
There are no family relationships between any director or executive officer
and any other director or executive officer of Flooring America.
The Board of Directors held ten meetings during the year ended February 5,
2000. Each Director attended at least 75% or more of the aggregate number of
meetings held by the Board of Directors and the committees on which he served.
The Board of Directors has two standing committees--the Audit Committee and the
Compensation Committee.
The Audit Committee presently consists of Joseph J. Jillson--Chairman, J.
Michael Nixon, F.G. "Buck" Rodgers and Larry T. Solari. The Audit Committee has
been assigned the principal functions of:
- recommending the independent auditors
- reviewing and approving the annual report of the independent auditors
- approving the annual financial statements and
- reviewing and approving summary reports of the auditor's findings and
recommendations.
The Audit Committee held four meetings during the year ended February 5,
2000.
The Compensation Committee presently consists of J. Michael Nixon--Chairman,
F.G. "Buck" Rodgers, Richard Kaplan and Herb Wolk. The Compensation Committee
has been assigned the functions of approving and monitoring the remuneration
arrangements for senior management and administering our 1993 Stock Option Plan
and granting stock options thereunder. The Compensation Committee did not meet
during the year ended February 5, 2000.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and persons who own more than 10% of our outstanding common
stock, to file with the Securities and Exchange Commission reports of changes in
ownership of our common stock held by such persons. Officers, directors and
greater than 10% shareholders are also required to furnish us with copies of all
forms they file under this regulation. To the best of our knowledge, based
solely on a review of the copies of such reports furnished to us and
representations that no other reports were required, during the fiscal year
ended February 5, 2000 all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with, except
that initial Form 3 filings were not filed on a timely basis for David L.
Nichols, Donald Burke, Karen Nevad, and Scott Wheeler, due to an administrative
error. A.J. Nassar, Joseph J. Jillson and J. Michael Nixon, failed to file on a
timely basis one report relating to one transaction and Larry T. Solari, A.J.
Nassar and Scott Wheeler each filed an amendment to one report relating to one
transaction.
39
<PAGE>
Although it is not our obligation to make filings pursuant to Section 16 of
the Securities Exchange Act of 1934, we adopted a policy requiring all
Section 16 reporting persons to report monthly to our outside general counsel as
to whether any transactions in our common stock occurred during the previous
month.
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides certain summary information for the fiscal
years ended February 5, 2000 and January 31, 1999 and 1998 concerning
compensation paid or accrued by us to or on behalf of our Chief Executive
Officer and each of our other five most highly compensated executive officers
during the year ended February 5, 2000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------ ------------
OTHER NUMBER OF
NAME AND ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDED
- ------------------ -------- -------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
A.J. Nassar........................ 2000(3) $600,000 $ -- $23,873(2) 150,000
1999 600,000 1,920,012 27,591(2) 250,000
1998 350,012 265,000 10,750(2) 275,000
Michael L. DeGrace................. 2000(4) 246,092 140,000 2,800 10,000
President--MAXCARE 1999 228,615 25,000 -- 25,000
Franchise Division 1998 193,739 -- -- 65,000
Paul D. Bumblauskas................ 2000(5) 168,346 73,000 35,259(2) 25,000
1999 86,800 10,000 -- 10,000
1998 156,359 -- -- --
Stephen P. Coburn.................. 2000(6) 194,211 50,000 3,700 50,000
Executive Vice President-- 1999 109,769 10,000 -- 25,000
Operations/Human Resources 1998 102,135 -- -- 15,000
Gary F. Brugliera.................. 2000(7) 200,000 -- -- 10,000
1999 119,231 -- -- 75,000
Gary Eidlin........................ 2000(8) 175,000 -- 2,500 25,000
1999 175,000 50,000 2,500 --
1998 164,532 -- 2,375 --
</TABLE>
- ------------------------
(1) Except as otherwise indicated, represents our matching contribution under
our 401(k) plan.
(2) Includes auto allowance and other perquisites, in addition to our matching
contribution under our 401(k) plan.
(3) Mr. Nassar resigned as our President, Chief Executive Officer and Director
on May 10, 2000.
(4) Mr. DeGrace joined us in February 1999 as the President--MAXCARE Franchise
Division. Mr. DeGrace's compensation amounts include compensation received
from Image Industries, Inc. (which was our wholly owned subsidiary from
August 1996 to January 1999) from 1997 to January 1999 where he served as
Vice President--Sales and Marketing.
(5) Mr. Bumblauskas joined us in June of 1998. Mr. Bumblauskas resigned as our
Senior Vice President--Operations on May 12, 2000.
(6) Mr. Coburn joined us in January 1999 from Image Industries Inc.
Mr. Coburn's compensation amounts include compensation paid to him by Image
from February 1997 to January 1999.
40
<PAGE>
(7) Mr. Brugliera joined us in June 1998 and resigned from his position as Chief
Financial Officer on September 21, 1999. Mr. Brugliera ceased to be an
employee of the Company effective January 8, 2000.
(8) Mr. Eidlin ceased to be Senior Vice President--National Accounts on May 11,
2000.
EMPLOYMENT AGREEMENTS
(1) DAVID L. NICHOLS. On January 4, 2000, David L. Nichols, was elected to
serve as our Chairman of the Board of Directors. On May 10, 2000, our Board of
Directors elected Mr. Nichols to serve as our President and Chief Executive
Officer in addition to his position as our Chairman. We are currently
negotiating the terms of an employment agreement with Mr. Nichols which will
reflect the magnitude of his responsibilities with the Company. We anticipate
that an agreement with Mr. Nichols will be signed in the very near future.
(2) LEONARD H. THILL. On September 27, 1999, we entered into an Employment
Agreement with Leonard H. Thill, pursuant to which Mr. Thill serves as our Chief
Financial Officer. The Employment Agreement is for a term of three years,
expiring on September 27, 2002, and provides for an annual base salary of
$225,000 plus an annual bonus of up to 50% of his base salary if we attain
certain operating and financial goals established by our executive management
team and the Compensation Committee of the Board of Directors. The Employment
Agreement will automatically renew unless it is earlier terminated or either we
or Mr. Thill elects not to renew the Employment Agreement. In the event
Mr. Thill is terminated by us without cause, he would receive, for a period of
12 months thereafter, the annual base salary which would otherwise be payable
had he remained employed by us. In addition, all unvested stock options would
become immediately exercisable. The Employment Agreement contains
non-solicitation provisions, effective through the actual date of termination of
the Employment Agreement and for a period of three years thereafter.
(3) STEPHEN P. COBURN. In November 1999, Stephen P. Coburn was named as our
Executive Vice President of Operations. Mr. Coburn has also served as head of
our Human Resources department since January 2000. We are currently negotiating
an employment agreement with Mr. Coburn and anticipate that an agreement will be
signed in the very near future.
(4) A.J. NASSAR. On May 10, 2000, Mr. Nassar resigned as our President,
Chief Executive Officer and Director. We are currently working on finalizing a
severance package which will likely include a consulting agreement for
Mr. Nassar, under which he will be obligated to provide consulting services to
us at the discretion of our Chief Executive Officer for a period of three years.
Mr. Nassar will be compensated by us for his consulting services, with such
compensation to be applied to repayment of the current outstanding debt
Mr. Nassar owes us (which is approximately $900,000). In connection with his
severance package, Mr. Nassar will enter into covenants not to compete against
us, solicit our employees, or disparage us or our officers and employees, as a
condition to receiving salary and benefits under the severance agreement.
Prior to Mr. Nassar's resignation, he was employed by us pursuant to an
Employment Agreement originally entered into on June 4, 1997, pursuant to which
Mr. Nassar served as our Chief Executive Officer. Such Employment Agreement,
which was amended on January 1, 1998, was for a term of three years, and was to
expire on June 4, 2000. The Employment Agreement provided for an annual base
salary of $600,000. Under the Employment Agreement, in the event Mr. Nassar's
employment was terminated by us without cause, he would have received during the
balance of his term of employment (not to exceed 24 months), the annual base
salary which would otherwise be payable to him had he remained in our employ. In
addition, all unvested stock options would have become immediately exercisable
and Mr. Nassar would have received 12 months' provision of employee benefits and
a pro rata portion of his annual bonus. The Employment Agreement contained
non-compete and non-solicitation provisions,
41
<PAGE>
effective through the actual date of termination of the Employment Agreement and
for a period of two years thereafter.
COMPENSATION OF DIRECTORS
Our Directors who are compensated for serving as our officers serve without
compensation for their services as directors. Effective December 23, 1999, our
non-employee Directors receive a retainer of $12,000 for fiscal year 2000 and
each year thereafter. Non-employee Directors serving as the Chair of a committee
receive an additional $3,000 retainer per fiscal year. Non-employee Directors
receive $2,500 per regularly scheduled Board of Directors meeting, $3,000 per
regularly scheduled Board meeting and Committee meeting held concurrently and
$500 for each special telephonic Board or Committee meeting. Non-employee
Directors will also be eligible to receive 10,000 options to purchase our common
stock on an annual basis beginning in June, 2000. Such options shall be priced
at the current market value of our common stock at the time of issuance and
shall vest immediately. All of our directors are reimbursed by us for all
out-of-pocket expenses reasonably incurred by them in the discharge of their
duties as directors, including out-of-pocket expenses incurred in attending
meetings of the Board of Directors and of any committees of the Board of
Directors. Certain of our outside directors have also previously been granted
options to purchase shares of common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Compensation Committee of the
Board of Directors during the year ended February 5, 2000: Richard A. Kaplan, J.
Michael Nixon, F.G. "Buck" Rogers and Herb Wolk. None of the members of the
Compensation Committee has been an officer or employee for us or any of our
subsidiaries. Except as set forth herein under "Certain Transactions," there
were no material transactions between us and any of the members of the
Compensation Committee during the fiscal year ended February 5, 2000.
STOCK OPTION PLAN
We have adopted a 1993 Stock Option Plan (the "1993 Plan") for employees who
are contributing significantly to the management or operation of our business or
that of our subsidiaries as determined by our Board of Directors or the
committee administering the 1993 Plan. The 1993 Plan provides for the grant of
options to purchase up to 5,000,000 shares of Common Stock at the discretion of
our Board of Directors or a committee designated by the Board of Directors to
administer the 1993 Plan. The option exercise price must be at least 100% (110%
in the case incentive stock options granted to a holder of 10% or more of the
Common Stock) of the fair market value of the Common Stock on the date the
option is granted and the options are exercisable by the holder thereof in full
at any time prior to their expiration in accordance with the terms of the 1993
Plan. Stock options granted pursuant to the 1993 Plan will expire on or before
(1) the date which is the tenth anniversary of the date the option is granted,
or (2) the date which is the fifth anniversary of the date an incentive stock
option is granted in the event that the option is granted to a key employee who
owns more than 10% of the total combined voting power of all classes of our
stock or any of our subsidiaries.
42
<PAGE>
The following table provides certain information concerning individual
grants of stock options under the 1993 Plan made during the fiscal year ended
February 5, 2000 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
GRANTED TO EXERCISE OR PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN BASE PRICE OPTION TERM(1)
GRANTED FISCAL ($ PER EXPIRATION -----------------------
NAME (#) YEAR SHARE) DATE 5% 10%
- ---- -------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar(2)...................... 100,000(3) 9.09% $6.39 1/23/10 $307,420 $868,238
50,000(3) 4.54% 8.72 1/23/10 37,460 317,869
Michael L. DeGrace.................. 20,000(4) 1.82% 8.00 4/13/09 100,623 254,999
Paul D. Bumblauskas(5).............. 25,000(4) 2.27% 8.00 4/13/09 125,779 318,748
Gary Eidlin(6)...................... 25,000(4) 2.27% 8.00 4/13/09 125,779 318,748
Gary F. Brugliera(7)................ 10,000(4) .91% 8.00 4/13/09 50,312 127,499
Stephen P. Coburn................... 50,000(4) 4.54% 8.00 4/13/09 251,558 637,497
</TABLE>
- ------------------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of our common
stock appreciates in value from the date of grant at the 5% and 10% annual
rates prescribed by the SEC and therefore are not intended to forecast
possible future appreciation, if any, of the price of our common stock.
(2) Mr. Nassar resigned as our President, Chief Executive Officer and Director
on May 10, 2000.
(3) Options vest in increments of 20% per year beginning on January 23, 2001 and
on each January 23 thereafter until fully vested.
(4) Options vest in increments of 20% per year beginning on April 13, 2000 and
on each April 13 thereafter until fully vested.
(5) Mr. Bumblauskas resigned as our Senior Vice President--Operations on
May 12, 2000.
(6) Mr. Eidlin ceased to be an employee of the Company effective May 11, 2000.
(7) Mr. Brugliera ceased to be an employee of the Company effective January 8,
2000.
The following table provides certain information concerning options
exercised during fiscal 2000 and the value of unexercised options held by the
Named Executive Officers as of February 5, 2000.
<TABLE>
<CAPTION>
UNEXERCISED OPTIONS AT
FISCAL YEAR END VALUE OF UNEXERCISED
--------------------------- IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE NUMBER OF ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar..................... -- $ -- 725,000 400,000 $ -- $ --
Michael L. DeGrace.............. -- -- 26,000 84,000 -- --
Paul D. Bumblauskas............. -- -- 0 35,000 -- --
Gary Eidlin..................... -- -- 2,758 31,897 -- --
Gary F. Brugliera............... -- -- 10,000 75,000 -- --
Stephen P. Coburn............... -- -- 6,000 84,000 -- --
</TABLE>
- ------------------------
(1) Dollar values were calculated by determining the difference between the
closing price of $5.56 per share of common stock on February 5, 2000, and
the exercise price of the options.
43
<PAGE>
EMPLOYEE RETIREMENT SAVINGS PLAN
We have established a savings and profit-sharing plan that qualifies as a
tax-deferred savings plan under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan") for our salaried employees who are at least 21 years old and who
have completed one year of service with us. Under the 401(k) Plan, eligible
employees may contribute up to 20% of their gross salary to the 401(k) Plan or
$10,000, whichever is less. Each participating employee is fully vested in
contributions made by such employee. We presently match 25% of the amount
contributed by an employee up to 6% of the employee's salary, but our policy
regarding matching contributions may be changed annually in the discretion of
the Board of Directors. All amounts contributed under the 401(k) Plan are
invested in one or more investment accounts administered by an independent plan
administrator.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Common Stock as of May 16, 2000, with respect to (i) each
person known by us to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each of our directors, (iii) each of the Named Executive
Officers (as defined herein), and (iv) all directors and executive officers as a
group. Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NAME OF NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED(L) OF TOTAL
- ---------------- --------------------- ----------
<S> <C> <C>
Joseph J. Jillson.......................................... 170,000(2) *
Richard A. Kaplan.......................................... 130,956 *
David L. Nichols........................................... 25,000 *
J. Michael Nixon........................................... 210,000 1.09%
F. G. Buck Rodgers......................................... 20,000(2) *
Larry T. Solari............................................ 60,000(2) *
Herb Wolk.................................................. 220,000 1.14%
Michael L. DeGrace......................................... 40,000(3) *
Paul D. Bumblauskas........................................ 5,000(3) *
Gary Eidlin................................................ 9,138(3) *
Gary F. Brugliera.......................................... 500 *
Stephen P. Coburn.......................................... 16,000(4) *
A.J. Nassar................................................ 1,009,828(5) 5.04%
FMR Corp................................................... 1,294,330(6) 6.70%
Julian D. Saul............................................. 1,826,984(7) 9.46%
Linda Saul Schejola........................................ 1,260,000(8) 6.52%
Cumberland Associates LLC.................................. 2,170,200(9) 11.23%
Wellington Management Company, LLC......................... 1,439,300(10) 7.45%
Dimensional Fund Advisors, Inc............................. 1,085,700(11) 5.62%
Cramer Rosenthal McGlynn................................... 1,270,000(12) 6.57%
All directors and executive officers as a group (17 1,943,933(13) 10.06%
persons).................................................
</TABLE>
- ------------------------
* Less than one percent of outstanding shares.
(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also
includes options which are exercisable within sixty days of
44
<PAGE>
the date hereof. Beneficial ownership as reported in the above table has
been determined in accordance with Rule 13d-3 of the Securities Exchange Act
of 1934. The percentages are based upon shares outstanding, excluding
treasury shares, as of May 16, 2000, except for certain parties who hold
options to purchase shares which are exercisable within the next 60 days.
The percentages for those parties who hold presently exercisable options are
based upon the sum of shares plus the number of shares subject to options
held by them which are exercisable within the next 60 days, as indicated in
the following notes.
(2) Includes 20,000 shares of Common Stock subject to stock options exercisable
within the next 60 days.
(3) Represents shares of Common Stock subject to stock options exercisable
within the next 60 days.
(4) Includes 10,000 shares of Common Stock subject to stock options exercisable
within the next 60 days.
(5) Includes 725,000 shares of Common Stock subject to stock options exercisable
within the next 60 days.
(6) According to an amended Schedule 13G dated February 14, 2000 filed with the
Commission by FMR Corp. ("FMR"), Edward C. Johnson III and Abigail P.
Johnson. Mr. Johnson is the Chairman of FMR and the owner of 12% of the
aggregate outstanding voting stock of FMR and Ms. Johnson is a director of
FMR and the owner of 24.5% of the aggregate outstanding voting stock of FMR
and each may be deemed to be members of a controlling group with respect to
FMR. The Schedule 13G states that (i) Fidelity Management & Research
Company, a registered investment adviser and a wholly-owned subsidiary of
FMR ("Fidelity"), is the beneficial owner of 999,400 shares of Common Stock
as a result of acting as investment advisor to various registered investment
companies (the "Funds"), (ii) Mr. Johnson, FMR (through its control of
Fidelity) and the Funds each has sole power to dispose of the 999,400 shares
owned by the Funds, and (iii) the power to vote all of the 999,400 shares
resides with the Board of Trustees of the Funds. The Schedule 13G further
states that Fidelity International Limited ("FIL") is the beneficial owner
of 294,930 shares of Common Stock of the Company. A partnership controlled
by Edward C. Johnson III and members of his family owns shares of FIL voting
stock with the right to cast approximately 39.89% of the total votes which
may be cast by all holders of FIL voting stock. According to the
Schedule 13G, FMR and FIL are separate and independent corporate entities.
The Company makes no representation as to the accuracy or completeness of
the information reported. The address of FMR Corp. is 82 Devonshire Street,
Boston, Massachusetts 02109 and the address of FIL is Pembroke Hall, 42
Crowlane, Hamilton, Bermuda.
(7) According to a Schedule 13G dated October 15, 1998 filed with the Commission
by Mr. Saul, his beneficial ownership (i) includes 18,947 shares owned
individually by Mr. Saul and 1,808,037 shares owned by a trust of which
Mr. Saul is the sole trustee, and (ii) excludes 63,016 shares owned by
Mr. Saul's spouse, with respect to which he disclaims beneficial ownership.
The Company makes no representation as to the accuracy or completeness of
the information reported. Mr. Saul's address is 702 Mt. Sinai Road, Dalton,
Georgia 30720.
(8) According to a Schedule 13G dated October 15, 1998 filed with the Commission
by Ms. Schejola, her beneficial ownership includes 12,631 shares owned
individually by Ms. Schejola and 1,247,369 shares owned by a trust of which
Ms. Schejola is the sole trustee. The Company makes no representation as to
the accuracy or completeness of the information reported. Ms. Schejola's
address is Via Bottazzi, 2, 15057 Tortona (AI), Italy.
(9) According to a Schedule 13G dated May 16, 2000 filed with the Commission by
Cumberland Associates LLC ("Cumberland"), its beneficial ownership
(i) includes 2,012,000 shares with respect to which it has sole voting and
dispositive power and 158,200 shares with respect to which it shares voting
and dispositive power, and (ii) excludes 35,500 shares owned by Glenn
Krevlin, a member of Cumberland. The Company makes no representation as to
the accuracy or completeness of the information reported. Cumberland's
address is 1114 Avenue of the Americas, New York, New York 10036.
(10) According to a Schedule 13G dated February 11, 2000 filed with the
Commission by Wellington Management Company, LLP ("Wellington"), its
beneficial ownership includes 940,300 shares with respect to which it shares
voting power and 1,439,300 shares with respect to which it shares
dispositive
45
<PAGE>
power. The Company makes no representation as to the accuracy or
completeness of the information reported. Wellington's address is 75 State
Street, Boston, Massachusetts 02109.
(11) According to a Schedule 13G dated February 3, 2000 filed with the
Commission by Dimensional Fund Advisors Inc. ("Dimensional"), its beneficial
ownership includes 1,085,700 shares with respect to which it has sole voting
and dispositive power. The Company makes no representation as to the
accuracy or completeness of the information reported. Dimensional's address
is 1299 Ocean Avenue, 11(th) Floor, Santa Monica, California 90401.
(12) According to a Schedule 13G dated March 6, 2000 filed with the Commission
by Cramer Rosenthal McGlynn, LLC ("Cramer"), its beneficial ownership
includes 1,270,000 shares with respect to which it has shared voting and
dispositive power. The Company makes no representation as to the accuracy or
completeness of the information reported. Cramer's address is 707
Westchester Avenue, White Plains, New York 10604.
(13) Includes an aggregate of 947,649 shares of Common Stock subject to stock
options exercisable within the next 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of April 24, 2000, A.J. Nassar, our former President and Chief Executive
Officer owed us a total of $950,000. Mr. Nassar resigned as our President, Chief
Executive Officer and as a Director on May 10, 2000. We are working on
finalizing a severance package which will likely include a consulting agreement
with Mr. Nassar, pursuant to which we will pay him annual compensation which
will be set off against Mr. Nassar's indebtedness to us. We have charged all of
Mr. Nassar's indebtedness to expenses, except for $35,000. This amount was
charged to expense in fiscal 2000 primarily as a result of action by the Board
of Directors in June 1999 which authorized payments of bonuses over a three year
period in amounts sufficient to recover a substantial portion of the
indebtedness. All borrowings were made by Mr. Nassar to fund certain of his
personal expenses and currently do not bear any interest. The highest amount
owed to us by Mr. Nassar during fiscal year 2000 was $1,022,000.
In September 1998, we loaned $100,000 to David E. Cicchinelli, who at the
time was serving as our Chief Operating Officer and a director. This loan bears
interest at an annual rate of 8.5%, payable monthly, with principal due on
demand. The loan was made to Mr. Cicchinelli to fund certain of his personal
expenses. The highest amount owed to us by Mr. Cicchinelli during fiscal 2000
was $112,000. As of February 5, 2000, $112,000, including accrued interest,
remained outstanding on this loan.
Herb Wolk, a current director, and Ronald H. McSwain, a former director,
each own a flooring retailer, which is one of our franchisees. During fiscal
2000, Mr. Wolk's flooring company paid less than $1,000 to us for miscellaneous
items and received $50,000 in rebates and other consideration from us. During
fiscal 2000, Mr. McSwain's flooring company paid $90,000 to us for various
services and received $150,000 in rebates and other consideration from us.
Julian D. Saul, who owns 9.46% of the outstanding shares of our common
stock, serves as President and a director of Shaw Industries, Inc., one of our
suppliers of flooring products. During fiscal 2000, we purchased approximately
$282 million of flooring products from Shaw and received approximately
$17.6 million of rebates and other vendor support payments from Shaw.
Additionally, in connection with the acquisition of the retail store assets of
Shaw in August 1998, we issued to Shaw a promissory note in the principal amount
of $18 million, which was subsequently reduced to a principal amount of
$10 million. This note bears interest at a rate equal to the rate paid by us on
our Senior Credit Facility. Approximately $10 million remained outstanding on
this note as of February 5, 2000.
Our ability to enter into future transactions with affiliates is limited by
the terms of our Senior Notes and Senior Credit Facility.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
1. FINANCIAL STATEMENTS. The following financial statements and
accountants' reports have been filed as Item 8 in Part II of this Form 10-K:
- Report of Independent Auditors and Report of Independent Public
Accountants
- Consolidated Balance Sheets--As of February 5, 2000 and January 31, 1999
- Consolidated Statements of Operations--For the year ended February 5, 2000
and years ended January 31, 1999 and 1998
- Consolidated Statements of Cash Flows--Year ended February 5, 2000, and
years ended January 31, 1999 and 1998
- Consolidated Statements of Stockholders' Equity--For the year ended
February 5, 2000, and years ended January 31, 1999 and 1998
- Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of Flooring America for the year ended February 5, 2000, and years
ended January 31, 1999 and 1998 is included pursuant to Item 8 in Part II of
this Form 10-K:
<TABLE>
<S> <C>
Report of Independent Auditors on Schedule.................. S-1
Report of Independent Public Accountants on Schedule........ S-2
Schedule II Valuation and Qualifying Accounts.............. S-3
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or the information required to be set forth therein is included in the
consolidated financial statements or notes thereto.
3. EXHIBITS. The following exhibits are filed with or incorporated by
reference into this Form 10-K. The exhibits which are denominated by an asterisk
(*) were previously filed as a part of, and are hereby incorporated by reference
from either
(i) a Registration Statement on Form SB-2 for the Registrant, Registration
No. 33-66926 (referred to as "SB-2"),
(ii) Amendment No. 2 to the Registrant's Registration Statement on Form SB-2
(referred to as "SB-2 Amendment No. 2)",
(iii) the Registrant's Annual Report on Form 10-KSB for the year ended
March 31, 1995 (referred to as "1995 10-K"),
(iv) the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (referred to as "1995 10-Q"),
(v) a Registration Statement on Form S-3 for the Registrant, Registration
No. 333-20105 (referred to as "S-3"),
(vi) the Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997 (referred to as "4-30-97 10-Q"),
(vii) a Registration Statement on Form S-4 for the Registrant, Registration
No. 333-39819 (referred to as "S-4"),
47
<PAGE>
(viii) a Registration Statement on Form S-4 for the Registrant, Registration
No. 333-8713 (referred to as "1996 S-4"),
(ix) a Registration Statement on Form S-8 for the Registrant, Registration
No. 333-47299 (referred to as "S-8"),
(x) the Registrant's Annual Report on Form 10-K for the year ended
January 31, 1997 (referred to as "1997 10-K"),
(xi) the Registrant's Annual Report on Form 10-K for the year ended
January 31, 1998 (referred to as "1998 10-K"),
(xii) the Registrant's Annual Report on Form 10-K for the year ended
January 31, 1999 (referred to as "1999 10-K"),
(xiii) the Registrant's Current Report on Form 8-K dated June 23, 1998
(referred to as "6/23/98 8-K"),
(xiv) the Registrant's Current Report on Form 8-K dated August 9, 1998
(referred to as "8/9/98 8-K"), and
(xv) the Registrant's Current Report on Form 8-K dated January 29, 1999
(referred to as "1/29/99 8-K").
Except as otherwise indicated, the exhibit number corresponds to the exhibit
number in the referenced document.
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
<C> <S> <C>
*3.1 -- Certificate of Incorporation of the Company (SB-2)
*3.2 -- Certificate of Amendment dated August 29, 1996 (1997 10-K)
*3.3 -- Certificate of Amendment dated December 17, 1998
*3.4 -- By-Laws of the Company (SB-2)
*3.5 -- Amendment No. 1 to By-Laws effective August 29, 1996 (1997
10-K)
*4.1 -- Specimen Certificate of Common Stock (SB-2 Amendment No. 2)
*4.2 -- Indenture dated as of October 16, 1997 between The Maxim
Group, Inc. and its subsidiaries as Guarantors and State
Street Bank and Trust Company, as Trustee (S-4)
4.3 -- Fifth Supplemental Indenture dated as of March 21, 2000
*4.4 -- Form of Flooring America 9 1/4% Senior Subordinated Notes
due 2007, Series B (contained in the Indenture filed as
Exhibit 4.2)
*10.1 -- 1993 Incentive Stock Option Plan (SB-2)
*10.2 -- Amendment No. 1 to 1993 Incentive Stock Option Plan (1995
10-K)
*10.3 -- Amendment No. 2 to 1993 Stock Option Plan (1996 S-4)
*10.4 -- Amendment No. 3 to 1993 Stock Option Plan (S-8)
*10.5 -- Amendment No. 4 to 1993 Stock Option Plan (1999 10-K Exhibit
10.1.4)
*10.6 -- Amendment No. 5 to 1993 Stock Option Plan (1999 10-K Exhibit
10.1.5)
*10.7 -- Form of Flooring America Franchise Membership Agreement
(1999 10-K Exhibit 10.3)
*10.8 -- Employment Agreement dated June 4, 1997 between the Company
and A.J. Nassar (4-30-97 10-Q)
*10.9 -- Amendment No. 1 dated September 25, 1997 to Employment
Agreement dated June 4, 1997 by and between A.J. Nassar and
Flooring America (S-4)
*10.11 -- Amendment No. 2 dated January 1, 1998 to Employment
Agreement dated June 4, 1997, as amended, by and between
A.J. Nassar and Flooring America (1998 10-K)
*10.12 -- Agreement and Plan of Merger, dated as of June 23, 1998,
between Flooring America, CMAX Acquisition, Inc., Shaw
Industries, Inc. and Shaw Carpet Showplace, Inc. (6/23/98
8-K, exhibit 2.1)
*10.13 -- Amendment, dated August 9, 1998, to Agreement and Plan of
Merger, dated as of June 23, 1998, between The Maxim Group,
Inc., CMAX Acquisition, Inc., Shaw Industries, Inc. and Shaw
Carpet Showplace, Inc. (8/9/98 8-K, exhibit 2.1.1)
*10.14 -- Asset Purchase Agreement, dated as of November 12, 1998, as
amended and restated on January 29, 1999, by and among The
Maxim Group, Inc., Image Industries, Inc. and Aladdin
Manufacturing Corporation (1/29/99 8-K, exhibit 2.1)
*10.15 -- Employment Agreement dated September 27, 1999, by and
between the Company and Leonard H. Thill.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
<C> <S> <C>
10.16 -- Loan and Security Agreement by and among Flooring America,
Inc., 4 Floors, Inc., Advance Floor Decorators, Inc., Bailey
& Roberts CarpetMAX of Tennessee, Inc., CarpetMAX of Utah,
Inc., Flooring America Franchising, L.P. (f/k/a CarpetMAX,
L.P.), CarpetMAX Retail Stores, Inc., Manasota Carpet, Inc.,
Wadsworth & Owens Decorating Center, Inc., CarpetsPlus of
America, Inc., GCO Carpet Outlet, Inc., Karen's Inc., Maxim
Retail Group, Inc., Maxim Retail Stores, Inc., C & S
Textiles, Inc., Colorado Carpet & Rugs, Inc., Tri-R of
Orlando, Inc., and GCO, Inc., as Borrowers, the financial
institutions named therein, as Lenders, and Foothill Capital
Corporation, as Arranger and Administrative Agent, dated
January 28, 2000
10.17 -- First Amendment to Loan and Security Agreement by and among
Flooring America, Inc., 4 Floors, Inc., Advance Floor
Decorators, Inc., Bailey & Roberts CarpetMAX of Tennessee,
Inc., CarpetMAX of Utah, Inc., Flooring America Franchising,
L.P. (f/k/a CarpetMAX, L.P.), CarpetMAX Retail Stores, Inc.,
Manasota Carpet, Inc., Wadsworth & Owens Decorating Center,
Inc., CarpetsPlus of America, INC., GCO Carpet Outlet, Inc.,
Karen's Inc., Maxim Retail Group, Inc., Maxim Retail Stores,
Inc., C & S Textiles, Inc., Colorado Carpet & Rugs, Inc.,
Tri-R of Orlando, Inc., and GCO, Inc., as Borrowers, the
financial institutions named therein, as Lenders, and
Foothill Capital Corporation, as Arranger and Administrative
Agent, dated as of February 23, 2000
10.18 -- Second Amendment to Loan and Security Agreement by and among
Flooring America, Inc., 4 Floors, Inc., Advance Floor
Decorators, Inc., Bailey & Roberts CarpetMAX of Tennessee,
Inc., CarpetMAX of Utah, Inc., Flooring America Franchising,
L.P. (f/k/a CarpetMAX, L.P.), CarpetMAX Retail Stores, Inc.,
Manasota Carpet, Inc., Wadsworth & Owens Decorating Center,
Inc., CarpetsPlus of America, INC., GCO Carpet Outlet, Inc.,
Karen's Inc., Maxim Retail Group, Inc., Maxim Retail Stores,
Inc., C & S Textiles, Inc., Colorado Carpet & Rugs, Inc.,
Tri-R of Orlando, Inc., and GCO, Inc., as Borrowers, the
financial institutions named therein, as Lenders, and
Foothill Capital Corporation, as Arranger and Administrative
Agent, dated as of March 17, 2000
10.19 -- Third Amendment to Loan and Security Agreement by and among
Flooring America, Inc., 4 Floors, Inc., Advance Floor
Decorators, Inc., Bailey & Roberts CarpetMAX of Tennessee,
Inc., CarpetMAX of Utah, Inc., Flooring America Franchising,
L.P. (f/k/a CarpetMAX, L.P.), CarpetMAX Retail Stores, Inc.,
Manasota Carpet, Inc., Wadsworth & Owens Decorating Center,
Inc., CarpetsPlus of America, INC., GCO Carpet Outlet, Inc.,
Karen's Inc., Maxim Retail Group, Inc., Maxim Retail Stores,
Inc., C & S Textiles, Inc., Colorado Carpet & Rugs, Inc.,
Tri-R of Orlando, Inc., and GCO, Inc., as Borrowers, the
financial institutions named therein, as Lenders, and
Foothill Capital Corporation, as Arranger and Administrative
Agent, dated as of May 15, 2000
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K. The following report on Form 8-K was filed during the
quarter ended February 5, 2000: Current Report on Form 8-K dated January 11,
2000 (reporting changes in our certifying accountant).
50
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Flooring America, Inc.
We have audited the accompanying consolidated balance sheet of Flooring
America, Inc. and subsidiaries as of February 5, 2000, and the related
consolidated statement of operations, stockholders' equity, and cash flows for
the year ended February 5, 2000. 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 auditing standards generally
accepted in the United States. 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flooring America, Inc. and
subsidiaries as of February 5, 2000, and the results of their operations and
their cash flows for the year ended February 5, 2000 in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company incurred a loss for the fiscal year ended February 5, 2000, has a
working capital deficit at February 5, 2000, and anticipates certain debt
covenants and obligations will not be met without a restructuring of its debts.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that might result from
the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
May 23, 2000
51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Flooring America, Inc.:
We have audited the accompanying consolidated balance sheets of FLOORING
AMERICA, INC. (a Delaware corporation) (formerly known as The Maxim
Group, Inc.) and subsidiaries as of January 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended January 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flooring America, Inc. and
subsidiaries as of January 31, 1999, and the results of their operations and
their cash flows for each of the two years in the period ended January 31, 1999
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is not in compliance with a certain restricted
payment covenant contained in the indenture which references the Company's
$100 million Senior Subordinated Notes due October 2007 (the "Senior Notes") and
as a result, the trustee or the holders of not less than 25% of the Senior Notes
may declare all unpaid principal plus any accrued interest of all of the Senior
Notes due and payable. The Company's available borrowings under its Senior
Credit Facility plus cash on hand are not sufficient to repay the Senior Notes
if declared due and payable. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 11, 1999
52
<PAGE>
FLOORING AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 45,612 $ 89,901
Current portion of franchise license fees receivable, net of
allowance of $160 and $565 in 2000 and 1999,
respectively.............................................. 628 2,013
Current portion of notes receivable from franchisees, net of
allowance of $128 in 2000................................. 2,030 3,405
Receivables , net of allowance for doubtful accounts of
$6,022 and $5,049 in 2000 and 1999, respectively.......... 49,022 52,607
Inventories................................................. 47,480 58,744
Refundable income taxes..................................... 8,106 --
Deferred income taxes....................................... -- 7,361
Prepaid expenses............................................ 7,168 6,316
Assets held for sale........................................ 5,749 --
-------- --------
Total current assets...................................... 165,795 220,347
Property and equipment, net................................. 72,026 71,766
Franchise license fees receivable, less current portion, net
of allowance of $821 and $570 in 2000 and 1999,
respectively.............................................. 3,329 2,337
Notes receivable from franchisees, less current portion, net
of allowance of $900 and $1,200 in 2000 and 1999,
respectively.............................................. 3,273 8,228
Deferred income taxes....................................... -- 1,065
Intangible assets, net of accumulated amortization of $7,104
and $2,666 in 2000 and 1999, respectively................. 89,150 71,341
Other assets................................................ 8,976 13,684
-------- --------
Total assets................................................ $342,549 $388,768
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt........................... $ 12,527 $ 16,952
Senior subordinated notes................................... 95,478 99,387
Current portion of capital lease obligations................ 4,992 6,635
Accounts payable............................................ 23,253 26,706
Rebates payable to franchisees.............................. 1,794 749
Deposits.................................................... 12,775 14,769
Deferred revenue............................................ 1,281 2,254
Income taxes payable........................................ 422 2,633
Accrued liabilities......................................... 61,474 55,827
-------- --------
Total current liabilities................................. 213,996 225,912
Long-term debt, less current portion........................ 37,591 4
Capital lease obligations, less current portion............. 624 1,469
Other long-term liabilities................................. -- 516
Commitments and contingencies (Note 16)
Stockholders' equity
Preferred stock--$.001 par value; 1,000,000 shares
authorized; no shares issued............................ -- --
Common stock--$.001 par value; 75,000,000 shares
authorized; shares issued:
21,438,432 in 2000 and 21,315,664 in 1999............... 21 21
Additional paid-in capital................................ 185,307 185,828
Retained earnings (deficit)............................... (60,710) 9,836
Accumulated other comprehensive income.................... (587) --
Treasury shares at cost: 2,236,460 in 2000 and 2,365,900
in 1999................................................. (33,693) (34,818)
-------- --------
Total stockholders' equity.............................. 90,338 160,867
-------- --------
Total liabilities and stockholders' equity.................. $342,549 $388,768
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
53
<PAGE>
FLOORING AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------
JANUARY 31,
FEBRUARY 5, -------------------
2000 1999 1998
----------- -------- --------
<S> <C> <C> <C>
Revenues:
Sales of flooring products................................ $720,771 $608,916 $303,560
Fees from franchise services.............................. 38,642 24,960 29,860
Fiber and PET sales....................................... 3,395 26,716 26,059
Other..................................................... -- 3,834 5,648
-------- -------- --------
Total revenues.......................................... 762,808 664,426 365,127
Cost of sales............................................... 481,241 457,339 249,381
-------- -------- --------
Gross profit.............................................. 281,567 207,087 115,746
Selling, general and administrative expense................. 325,475 220,748 83,955
Special charges............................................. 8,554 23,713 --
-------- -------- --------
Operating (loss) income................................... (52,462) (37,374) 31,791
Other income (expense):
Interest income........................................... 3,044 1,754 1,233
Interest expense.......................................... (14,263) (15,097) (6,948)
Gain on sale of Image..................................... -- 24,863 --
Other, net................................................ (245) 1,023 394
-------- -------- --------
(Loss) income before income taxes and extraordinary
charge.................................................... (63,926) (24,831) 26,470
Provision (benefit) for income taxes........................ 1,611 (5,656) 10,314
-------- -------- --------
(Loss) income before extraordinary charge................... (65,537) (19,175) 16,156
Extraordinary charge on early retirement
of debt, net of tax benefit............................... (5,009) (377) (785)
-------- -------- --------
Net (loss) income........................................... $(70,546) $(19,552) $ 15,371
======== ======== ========
Basic (loss) earnings per share before extraordinary
charge.................................................... $ (3.44) $ (1.08) $ 1.00
Extraordinary charge per share.............................. (0.26) (0.02) (0.05)
-------- -------- --------
Basic (loss) earnings per share............................. $ (3.70) $ (1.10) $ 0.95
======== ======== ========
Diluted (loss) earnings per share before extraordinary
charge.................................................... $ (3.44) $ (1.08) $ 0.96
Extraordinary charge per share.............................. (0.26) (0.02) (0.04)
-------- -------- --------
Diluted (loss) earnings per share........................... $ (3.70) $ (1.10) $ 0.92
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
54
<PAGE>
FLOORING AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY 5, JANUARY 31, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $(70,546) $(19,552) $ 15,371
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Special charges........................................... 8,554 7,540 --
Depreciation and amortization............................. 12,688 19,209 11,950
Deferred income taxes..................................... 8,426 (12,437) 3,353
Gain on sale of Image..................................... -- (24,863) --
(Gain) loss on sale of assets............................. 2,805 (809) 469
Changes in operating assets and liabilities, net of
effects of acquisitions and disposition:
Receivables............................................. 11,042 (3,420) (18,651)
Inventories............................................. 13,925 (10,843) (12,410)
Refundable income taxes................................. (8,106) 2,558 (1,247)
Prepaid expenses and other assets....................... 3,553 (4,534) (5,575)
Accounts payable and other liabilities.................. (19,158) 40,480 3,518
-------- -------- ---------
Net cash used in operating activities....................... (36,817) (6,671) (3,222)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of cash sold and selling
expenses................................................ 7,850 172,097 52
Capital expenditures...................................... (25,899) (62,564) (47,673)
Acquisitions, net of cash acquired........................ (9,414) (26,267) (1,339)
-------- -------- ---------
Net cash (used in) provided by investing activities......... (27,463) 83,266 (48,960)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... -- -- 47,243
Proceeds from exercise of stock options................... -- 5,169 6,901
Purchase of treasury stock................................ -- (19,924) (14,894)
Long-term debt proceeds................................... 71,041 93,900 162,580
Long-term debt repayments................................. (48,562) (94,098) (126,478)
Principal payments on capital lease obligations........... (2,488) (621) (729)
-------- -------- ---------
Net cash provided by (used in) financing activities......... 19,991 (15,574) 74,623
-------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (44,289) 61,021 22,441
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 89,901 28,880 6,439
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 45,612 $ 89,901 $ 28,880
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 10,508 $ 14,009 $ 4,956
Income taxes............................................ 6,521 693 6,672
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued in connection with acquisitions....... $ 604 $ 61,399 $ 3,000
Note payable issued in connection with acquisition........ 7,380 11,496 --
Assets acquired pursuant to capital lease obligations..... -- 5,983 --
Assets acquired pursuant to debt obligations.............. -- 4,877 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE>
FLOORING AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
--------------------- PAID-IN EARNINGS COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) INCOME STOCK TOTAL
---------- -------- ---------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1997.... 12,800,477 $13 $ 62,124 $ 14,017 $ -- $ -- $ 76,154
Purchase of 1,221,000 shares
of treasury stock.......... -- -- -- -- -- (14,894) (14,894)
Issuance of common stock..... 3,372,365 3 50,240 -- -- -- 50,243
Common stock issued upon
exercise of stock
options.................... 1,179,679 1 6,900 -- -- -- 6,901
Net income................... -- -- -- 15,371 -- -- 15,371
---------- --- -------- -------- ----- -------- --------
Balance, January 31, 1998.... 17,352,521 17 119,264 29,388 -- (14,894) 133,775
Purchase of 1,144,900 shares
of treasury stock.......... -- -- -- -- -- (19,924) (19,924)
Issuance of common stock..... 3,474,698 4 61,395 -- -- -- 61,399
Common stock issued upon
exercise of stock
options.................... 488,445 -- 5,169 -- -- -- 5,169
Net loss..................... -- -- -- (19,552) -- -- (19,552)
---------- --- -------- -------- ----- -------- --------
Balance, January 31, 1999.... 21,315,664 21 185,828 9,836 -- (34,818) 160,867
Issuance of common stock..... 122,768 -- 604 -- -- -- 604
Issuance of treasury stock in
connection with
acquisition................ -- -- (1,125) -- -- 1,125 --
Comprehensive loss:
Net loss..................... -- -- -- (70,546) -- -- (70,546)
Unrealized holding loss on
investment................. -- -- -- -- (587) -- (587)
--------
Comprehensive loss........... -- -- -- -- -- -- (71,133)
---------- --- -------- -------- ----- -------- --------
Balance, February 5, 2000.... 21,438,432 $21 $185,307 $(60,710) $(587) $(33,693) $ 90,338
========== === ======== ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
56
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Flooring America, Inc. and subsidiaries (the "Company" or "Flooring
America") are engaged in retail and commercial sales of flooring products
throughout North America through a network of Company-owned retail stores and a
network of franchisees. We are also engaged in the sale of franchises for the
retail flooring industry and other related products and services to our
franchises. Substantially all of the assets of Image Industries, Inc. ("Image"),
our wholly owned manufacturing subsidiary, were sold on January 29, 1999 (See
Note 3).
RISK FACTORS
We rely on several large flooring manufacturers for the supply of our
flooring products. While we believe there are a number of alternative
manufacturers capable of supplying and distributing our products, delays in
obtaining alternative sources, if necessary, could have a significant adverse
effect on our results of operations.
We also have certain other risk factors, which include, but are not limited
to the ability to service indebtedness, operating risks, integration of
acquisitions and computer systems, litigation, competition, possible economic
downturns and changes in laws and regulations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Flooring
America and all majority owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in the prior
years financial statements have been reclassified to conform to the current
years presentation.
CHANGE IN FISCAL YEAR END
On February 1, 1999, we changed our fiscal year end from January 31 to the
first Saturday following January 31. This change added five days to the 2000
fiscal year. Accordingly, the fiscal year ended February 5, 2000, consists of
four 13-week periods.
GOING CONCERN
The accompanying consolidated financial statements have been presented
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business.
At February 5, 2000, we were in default on the restricted payment covenant
contained in the Indenture (the "Indenture") pursuant to which the Senior
Subordinated Notes ("Senior Notes") were issued. The default occurred when we
repurchased shares of our common stock in the open market pursuant to our
ongoing stock repurchase program. On March 21, 2000, we obtained the consent of
the Noteholders for a waiver of this covenant violation. In order to obtain the
consent of the Noteholders, on March 21, 2000, we repurchased $25,000,000 of
Senior Notes at a purchase price of 102% of their principal face amount, plus
accrued and unpaid interest and other fees and charges of approximately
$4,001,000.
57
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Indenture, as amended by the Fifth Supplemental Indenture on March 21,
2000, requires us to maintain a minimum consolidated fixed charge coverage
ratio, measured on a quarterly basis, beginning with the first quarter of fiscal
year 2001. As of May 6, 2000, our consolidated fixed charge coverage for the
first quarter of fiscal year 2001 was below the minimum required by the
Indenture. Pursuant to the terms of the Indenture, failure to comply with this
financial covenant will not constitute an event of default unless we fail to
comply for two consecutive fiscal quarters. We expect to seek an amendment to
the Indenture to waive and/or reset the coverage ratios and, although no
assurance can be given, we expect to obtain such an amendment.
On January 28, 2000, we entered into a new five year Loan and Security
Agreement ("Senior Credit Facility") (see Note 11), which provides for aggregate
commitments of up to $45,000,000, subject to collateral levels and other
availability limitations. Borrowings outstanding under the Senior Credit
Facility totaled approximately $32,130,000 at February 5, 2000 and availability
totaled $5,000,000. The Senior Credit Facility contains a number of restrictive
financial and, other covenants. On May 6, 2000, we were not in compliance with
certain of the financial covenants and on May 15, 2000, we entered into a third
amendment to the Senior Credit Facility which reset certain of the financial
covenants and ratios. We plan to continue to monitor compliance with the Senior
Credit Facility, however, no assurances can be given with respect to continued
compliance with the Credit Agreement.
We incurred a net loss of $70,546,000 for the fiscal year ended February 5,
2000, and have a working capital deficit of $48,201,000 at February 5, 2000.
Presently, our cash flow projections indicate we will not be able to meet our
debt obligations as they become due. We are negotiating with the Senior
Noteholders to restructure the maturities of the Senior Notes. Although no
assurance can be given, we expect to restructure such maturities.
Actions have been taken or are currently being initiated to reduce these
losses. They include:
- We have closed stores that were losing money.
- We have rebranded our full service operations under one national brand
(Flooring America), which after the initial advertising launch, will allow
us to realize advertising savings by running the same advertisements for
all the stores in the same Dominant Metropolitan Area ("DMA"), as well as
a national advertising campaign.
- We have identified specific opportunities for expense reductions related
to personnel cost, outside services and general and administrative cost at
the support center, retail stores and warehouse locations, and have
initiated such expense reductions.
- We have identified margin and cash flow improvement opportunities in the
retail stores and have begun taking actions to realize improved margins
and cash flows.
- We are seeking to divest certain non-core assets, which will enable us to
concentrate on our core businesses, Flooring America retail and franchise
stores.
We will continue to evaluate our business practices to enhance our service to
our customers, to create and maintain efficient distribution channels and
strengthen the training of our employees.
58
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The accompanying fiscal 2000 consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern.
At January 31, 1999, we were not in compliance with a certain restricted
payment covenant contained in the indenture which references our $100 million
Senior Subordinated Notes due October 2007 (the "Senior Notes") and as a result,
the trustee or the holders of not less than 25% of the Senior Notes may declare
all unpaid principal plus any accrued interest of all of the Senior Notes due
and payable. Our available borrowings under our Senior Credit Facility, as
amended May 18, 1999, plus cash on hand are not sufficient to repay the Senior
Notes if declared due and payable. These matters raised substantial doubt about
our ability to continue as a going concern at January 31, 1999.
The fiscal 1999 consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
we be unable to continue as a going concern.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term interest-bearing
deposits with original maturities of three months or less.
RECEIVABLES
We finance a portion of our franchise sales over terms of four to fifteen
years, generally at a 10 percent interest rate. An allowance for doubtful
accounts is provided based on our collection experience and periodic reviews of
the accounts.
Receivables are due primarily from retail customers through the United
States. These receivables are generally unsecured. We provide an allowance for
doubtful accounts equal to the estimated losses expected to be incurred in the
collection of accounts receivable.
REVENUE RECOGNITION
Revenue from retail and commercial sales is recognized upon completion of
the flooring products installation or at the time of delivery for floorings not
installed by us or our authorized installers. Sales from the manufacturing
operations were recognized at the time products were shipped.
We recognize franchise license fees as income when we have performed
substantially all of our obligations under the franchise agreement and
collectibility is reasonable assured.
We recognize vendor volume rebates and merchandising support as either a
reduction of product costs or advertising over the periods in which the
agreements' criteria are met.
59
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
We negotiate volume rebates with various flooring products manufacturers on
behalf of our franchisees. In exchange for this service, we earn a portion of
the product rebates as the shipments are made to our franchisees. We receive
these rebates from the manufacturers throughout the year. The franchisees that
meet certain criteria typically receive their portion of the rebates annually.
Accordingly, we have recorded revenue and receivables from manufacturers, and
rebates payable to franchisees related to these rebates. Certain franchisees did
not meet the criteria to receive their portion of the rebate payable.
Accordingly, we reduced rebates payable by $83,000 as of February 5, 2000 and
$3,800,000 as of January 31, 1999.
ADVERTISING AND PROMOTION
We develop and offer our franchisees marketing and promotional programs,
including television, radio and print advertising, direct mail campaigns and
sales literature, and training.
All costs associated with advertising and promoting products are expensed as
incurred. Amounts expensed were $46,520,000, $33,908,000 and $10,686,000 for
fiscal years 2000, 1999, and 1998, respectively.
INVENTORIES
Inventories for retail operations, consisting of goods held for resale, are
recorded at the lower of cost or market. Cost is principally determined on a
specific identification basis, which approximates the first-in, first-out
method.
Inventories for manufacturing operations were valued at the lower of cost
(first-in, first-out) or market value. Costs include raw materials, direct labor
and manufacturing overhead. Market was based on current replacement cost for raw
materials and supplies and net realizable value for finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, which includes interest on funds
borrowed to finance construction. Fully depreciated assets are retained in
property and accumulated depreciation accounts until removed from service. When
assets are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and the net difference,
less any amount realized, is reflected in the consolidated statements of
operations.
Our buildings, furniture, fixtures, and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets for financial
reporting purposes, with accelerated methods used for income tax purposes.
Improvements to leased property are depreciated using the straight-line method
over the life of the lease, or the useful life of the improvement, whichever is
shorter.
Our property and equipment are depreciated using the following estimated
useful lives:
<TABLE>
<S> <C>
Buildings................................................... 10 to 40 years
Leasehold improvements...................................... 3 to 20 years
Equipment, including computers.............................. 3 to 10 years
Furniture and fixtures...................................... 5 to 7 years
Transportation equipment.................................... 5 years
</TABLE>
60
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Goodwill arises in
connection with business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over 15 to 20 years. Amortization of
$4,457,000, $1,935,000, and $652,000 was charged to expense in fiscal years
ended 2000, 1999, and 1998, respectively.
REALIZATION OF LONG-LIVED ASSETS
We periodically evaluate the carrying value of our long-lived assets,
including related goodwill, in accordance with Financial Accounting Standards
Board Statement 121. Our evaluation considers their operating performance and
estimated future undiscounted cash flows of the underlying businesses. We adjust
the carrying amount of the assets to their fair value if the unamortized balance
exceeds the estimate of future cash flows. See Note 10 for discussion of charges
recorded based on management's assessment of the realization of certain
intangible and fixed assets.
DEFERRED LOAN COSTS
Deferred loan costs, which are included in other assets, represent fees and
expenses incurred to obtain long-term debt. The costs are charged to interest
expense over the life of the related financing agreement.
SELF-INSURANCE
We are self-insured for health care, workers' compensation and short-term
disability up to predetermined amounts above which third-party insurance
applies. Losses are accrued based on our estimates of the aggregate liability
for claims incurred using certain actuarial assumptions based on our experience.
EARNINGS PER SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
period. The weighted average common shares outstanding and potentially dilutive
common shares outstanding for fiscal years 2000 and 1999, of 19,049,000 and
17,833,000, respectively, do not reflect the assumed exercise of outstanding
stock options due to the anti-dilutive effect of the assumed exercises for the
periods. Diluted earnings per common share in 1998 was computed based on the
weighted average number of common shares outstanding of 16,158,000, adjusted for
potentially dilutive issuances of 608,000 shares of common stock pursuant to the
exercise of outstanding stock options.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments consist primarily of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt. The carrying amounts
of cash, accounts receivable, and accounts payable approximate their fair values
because of their short-term maturity. The carrying amounts of our Senior Credit
Facility approximate their fair values, because interest rates on the debt are
periodically adjusted and approximate current market rates. The estimated fair
value for our Senior Notes was based on quoted market prices or current rates
for similar instruments with the same maturities. The estimated fair value of
61
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
our Senior Notes at February 5, 2000 and January 31, 1999 was approximately
$76,920,000 and $99,850,000, compared with a carrying value of $95,478,000 and
$99,387,000, respectively.
We do not use derivatives for hedging or trading purposes.
STOCK-BASED COMPENSATION
We account for our stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, we do not record compensation expense for stock option
grants when the exercise price equals or exceeds the market price on the date of
grant.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 "Accounting for Derivatives Instruments and Hedging
Activities." The statement establishes accounting and reporting standards for
derivative instruments and transactions involving hedge accounting. In
June 1999, the FASB deferred the effective date of Statement No. 133 for one
year, until fiscal years beginning after June 15, 2000. We do not anticipate
that this Statement will have a material impact on our financial statements.
We adopted the American Institute of Certified Public Accountants Statement
of Position 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" and Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," in February 1999. There was no material impact on
the financial statements as a result of adoption of these statements.
NOTE 3. ACQUISITIONS AND DISPOSITION
During the fiscal year ended February 5, 2000, we acquired 15 retail stores
for an aggregate amount of approximately $20,700,000. The consideration
consisted of $12,920,000 in cash, $7,380,000 in notes payable and the issuance
of 18,529 shares of common stock valued at $400,000. The related purchase
agreements also provide for additional consideration to be paid based on certain
stores' future financial performance. These acquisitions have been recorded
using the purchase method of accounting. The purchase price has been allocated
to the assets acquired and liabilities assumed based upon estimates of the fair
values at the dates of acquisition. As a result of the acquisitions, we recorded
goodwill of approximately $15,900,000, which is being amortized over 20 years.
Effective August 9, 1998, we acquired substantially all of the residential
retail store assets of Shaw Industries, Inc. and its wholly owned subsidiary,
Shaw Carpet Showplace, Inc. (collectively, "Shaw"). Under the terms of the
merger agreement, we issued to Shaw 3,150,000 shares of our common stock valued
at approximately $55,188,000 for financial statement purposes. We also signed a
one-year note in the principal amount of $18,000,000 (adjusted to $10,000,000
after giving effect to purchase price adjustments), paid Shaw $25,000,000 in
cash and assumed certain liabilities. The acquisition has been recorded using
the purchase method of accounting. The purchase price has been allocated to the
assets acquired and liabilities assumed based upon estimates of the fair values
at the date of acquisition. As a result of this acquisition, we recorded
goodwill of approximately $50,000,000, which is being amortized over 20 years.
62
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND DISPOSITION (CONTINUED)
In connection with the acquisition of the residential retail store assets of
Shaw, we entered into a Transition Services Agreement with Shaw. The Transition
Services Agreement provided for certain services from Shaw from the date of the
acquisition and continuing to not later than December 31, 1999. We paid Shaw and
charged to expense approximately $4,228,000 in fiscal 1999. No amounts were paid
or charged to expense in fiscal 2000 as a result of the final termination
settlement.
Effective September 25, 1998, we acquired CarpetsPlus of America, LLC, a
flooring-buying group. The acquisition has been recorded using the purchase
method of accounting at a price of approximately $8,485,000, consisting of a
cash payment of $2,275,000 and the issuance of 324,698 shares of our common
stock valued at approximately $6,210,000. In addition, during the fiscal year
ended February 5, 2000, we issued 34,185 common shares from escrow settling
certain contingencies. In addition to the consideration received at closing, the
shareholders of CarpetsPlus of America, LLC may receive shares of our common
stock having a value of up to $2,300,000 based on the profitability of the
acquired company during the two-year period ending January 31, 2001. As a result
of this acquisition, we recorded goodwill of approximately $8,400,000, which is
being amortized over 20 years.
On January 29, 1999, we sold substantially all of the assets of our Image
subsidiary to Mohawk Industries, Inc. ("Mohawk") for total consideration of
$210,666,000, which included the assumption of $48,136,000 in related debt and
short-term liabilities. Proceeds were used to retire debt and to fund our
working capital requirements.
NOTE 4. PRO FORMA FOR ACQUISITIONS AND DISPOSITION
The operating results of the retail stores acquired from Shaw are included
in our consolidated statements of operations from the date of acquisition. The
following unaudited pro forma summary presents our consolidated results of
operations as if the acquisition of the retail store assets of Shaw and the
disposition of all of the assets of Image (see Note 3) had occurred on
February 1, 1997. The pro forma expenses include the recurring costs that are
directly attributable to the acquisition, such as interest expense and
amortization of goodwill, and their related tax effects.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
-------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenue........................................... $753,160 $705,192
Net loss.............................................. (43,215) (3,795)
Basic loss per share.................................. (2.23) (0.20)
Diluted loss per share................................ (2.23) (0.20)
</TABLE>
63
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts receivable.............................. $54,775 $50,736
Receivable from asset sale............................. -- 5,020
Receivables from officers, directors and employees..... 269 1,900
------- -------
Total receivables.................................. 55,044 57,656
Less reserves.......................................... (6,022) (5,049)
------- -------
Receivables, net....................................... $49,022 $52,607
======= =======
</TABLE>
NOTE 6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $ -- $ 309
Goods held for resale.................................. 47,480 58,435
------- -------
Total.................................................. $47,480 $58,744
======= =======
</TABLE>
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements.................................. $ 8,836 $ 5,065
Buildings and leasehold improvements................... 41,804 36,555
Equipment.............................................. 21,700 6,656
Furniture and fixtures................................. 9,403 12,166
Transportation equipment............................... 2,903 2,765
Construction in progress............................... 4,929 20,297
-------- --------
Property and equipment, at cost........................ 89,575 83,504
Less accumulated depreciation.......................... (17,549) (11,738)
-------- --------
Property and equipment, net............................ $ 72,026 $ 71,766
======== ========
</TABLE>
64
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Salaries, wages, benefits and related taxes............ $15,084 $16,001
Accrued interest....................................... 4,437 3,199
Accrued installer fees................................. 2,120 2,001
Special charge reserve................................. 7,887 6,017
Accrued other closed location leases................... 386 6,350
Accrued acquisition earnout............................ 6,750 2,535
Accrued advertising.................................... 2,392 3,644
Taxes, other than income............................... 3,888 1,689
Other.................................................. 18,530 14,391
------- -------
Accrued liabilities.................................... $61,474 $55,827
======= =======
</TABLE>
NOTE 9. NOTES RECEIVABLE FROM FRANCHISEES
We have made loans to certain franchisees totaling $6,331,000 and
$12,833,000 at February 5, 2000 and January 31, 1999, respectively. The loans
due from franchisees are payable in monthly installments and/or are due on
demand. The current portion of these notes totals $2,158,000 and $3,405,000 at
February 5, 2000 and January 31, 1999, respectively. Interest is payable monthly
at rates ranging from prime (7 3/4% at February 5, 2000) to 16 1/2% on the
outstanding balance. The loans are secured by the franchisees' accounts
receivable, inventory, equipment, company common stock, personal guarantees
and/or personal property.
65
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SPECIAL CHARGES
During the three month period ended July 31, 1998, we reevaluated our
business strategy and determined to expand our focus on our retail operations.
As a result of the revised retail strategy, we amended the franchise agreement
for one of our franchised line of retail stores, closed certain Company-owned
stores, and wrote down to fair value certain retail assets, including goodwill.
We estimated that the changes to the franchise agreement would result in
franchisee claims brought against us. We recorded a $28,531,000 charge for these
special items during the three-month period ended July 31, 1998. The initial
charge was subsequently reduced by $4,818,000, as revised estimates for
franchisee claim reserves and store closure costs were less than initially
expected. The revised estimates were offset in part by a ten store net increase
in the number of stores to be closed. As of February 5, 2000, $21,998,000 of the
special charges was incurred, with $1,715,000 remaining in the reserve, which is
included in accrued liabilities in the accompanying balance sheet.
On June 1, 1998, we amended our franchise agreement with the majority of our
CarpetMAX franchisees whereby we established certain requirements for more
uniformity in the appearance and merchandising of the franchised stores. As part
of the amended franchise agreement, the number of flooring products vendors
available to franchisees through us, to buy and earn rebates from, was reduced.
We wrote-off certain vendor receivables and established a reserve to settle
claims of franchisees arising from the changes to the franchise agreement. In
addition, we have written down to fair value certain assets made obsolete by the
amended franchise agreement.
We also originally accrued for the costs of closing 15 Company-owned retail
stores, most of which were closed as of January 31, 1999. The number of store
locations to be closed was revised and we determined that three of the
originally identified stores were to remain open and 13 additional stores were
to be closed, bringing the total number of stores to be closed to 25.
In connection with the reevaluation of our retail strategy described above,
we analyzed the performance of our Company-owned retail stores. This analysis
indicated that significant strategic and operational changes would be necessary
in some stores, including changes in the customer mix, location, store design,
and merchandising. These factors also caused management to assess the
realization of the goodwill recorded for these stores.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance at July 31, 1998 to the estimate of the related
undiscounted future cash flows. The assumptions used reflected earnings, and
market and industry conditions, as well as current operating plans. The
assessment indicated a permanent impairment of goodwill for certain markets. As
a consequence, such goodwill was written down to fair market value, which
resulted in a write-off totaling $4,200,000.
66
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SPECIAL CHARGES (CONTINUED)
The major components of the special charges reserve, the remainder of which
are included in accrued liabilities on the balance sheet at January 31, 1999,
were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1999
-------------------------------------------
INITIAL REVISION AMOUNT REMAINING
CHARGE TO CHARGE INCURRED BALANCE
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Write-off of vendor receivables....................... $ 2,439 $ -- $ (2,439) $ --
Claim reserves........................................ 10,700 (1,214) (6,291) 3,195
Write-down of equipment............................... 492 -- (492) --
Store closure and carrying costs:
Original locations.................................. 10,700 (7,071) (2,698) 931
Additional locations................................ -- 3,467 (1,576) 1,891
Write-down of goodwill................................ 4,200 -- (4,200) --
------- ------- -------- ------
$28,531 $(4,818) $(17,696) $6,017
======= ======= ======== ======
</TABLE>
We again reevaluated and analyzed the performance of our Company-owned
retail stores in the fourth quarter of fiscal year ended 2000. This reevaluation
and analysis indicated that approximately 34 stores and excess real estate
should be closed and/or sold. As a consequence, charges totaling $8,554,000 were
incurred in the fourth quarter of the fiscal year ended February 5, 2000.
The major components of the special charges reserve, at February 5, 2000,
are as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE
JANUARY 31, ADDITIONAL AMOUNTS FEBRUARY 5,
1999 CHARGES INCURRED 2000
----------- ---------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Claims reserves.................................... $3,195 $ -- $(1,480) $1,715
Store closure and impairment charge:
Original locations............................... 931 -- (931) --
Additional locations............................. 1,891 8,554(1) (4,273) 6,172
------ ------ ------- ------
$6,017 $8,554 $(6,684) $7,887
====== ====== ======= ======
</TABLE>
(1) The charge of $8,554,000 includes a writedown of assets of $1,486,000. Such
writedown has been reflected in amounts incurred with a corresponding
adjustments to assets held for sale in the accompanying balance sheet.
67
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. DEBT
Debt at February 5, 2000 and January 31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes, net of discount.......................... $ 95,478 $ 99,387
Senior Credit Facility................................. 32,130 --
Shaw note.............................................. 10,000 11,496
Synthetic lease facility............................... -- 4,877
Other debt with interest rates averaging 8.25%......... 7,988 583
-------- --------
145,596 116,343
Less Senior Notes classified as current................ (95,478) (99,387)
Less synthetic lease facility classified as current.... -- (4,877)
Less current portion................................... (12,527) (12,075)
-------- --------
Long-term debt, less current amounts................... $ 37,591 $ 4
======== ========
</TABLE>
The contractual maturities of long-term debt subsequent to February 5, 2000
are $47,337,000, $15,147,000, $12,006,000, $2,565,000, $32,680,000 and
$35,861,000 for the fiscal years ending 2001, 2002, 2003, 2004, 2005 and
thereafter, respectively.
SENIOR SUBORDINATED NOTES
During 1997, we sold $100,000,000 of our 9 1/4% Senior Subordinated Notes
("Senior Notes"), due 2007, to institutional buyers in a private offering under
Rule 144A promulgated under the Securities Act of 1933. The net proceeds to us
from the offering of the Senior Notes were approximately $96,000,000, net of an
issue discount and fees and related costs.
Each of our operating subsidiaries has fully and unconditionally guaranteed
the Senior Notes on a joint and several basis. We have not presented separate
financial statements and other disclosures concerning these subsidiaries because
there are no significant restrictions on the ability of the subsidiaries to make
distributions to us.
As of February 5, 2000, we were not in compliance with the terms of the
Indenture. In order to obtain the consent of the Noteholders to a waiver of the
default, we reached an agreement which included the repurchase on March 21, 2000
of $25,000,000 of Senior Notes at a purchase price of 102%, plus accrued and
unpaid interest and other fees and charges. As of May 1, 2000, Senior Notes
totaling $71,000,000 are outstanding. In connection with the waiver of the
default, the Indenture for the Senior Notes was amended so that the following
additional terms apply to the remaining outstanding Senior Notes;
- The interest rate increased from 9 1/4% per annum to a variable rate of
interest of at least 12 3/4% and as much as 15% per annum.
- The Senior Notes are secured by a second lien on certain assets;
- We have agreed to make the following offers to purchase the following
principal amounts of outstanding Senior Notes plus accrued and unpaid
interest as set forth below:
- $10 million on or before December 31, 2000 at 97% of the principal face
amount;
68
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. DEBT (CONTINUED)
- $10 million on or before February 5, 2001 at 103% of the principal face
amount;
- $5 million on or before March 31, 2001 at 97% of the principal face
amount;
- $10 million on or before February 4, 2002 at 103% of the principal face
amount;
- We also have agreed to make an offer to purchase any Senior Notes which
remain outstanding on October 15, 2002 at a price of 106.375%, plus
accrued and unpaid interest and other fees and charges, and
- We agreed to maintain a minimum fixed charge coverage ratio, which
agreement is expected to be amended.
In March 1999, we purchased the principal amount of $4,000,000 of our Senior
Notes in the open market. The amount paid approximated the face amount of the
Senior Notes.
SENIOR CREDIT FACILITY
On January 28, 2000, we entered into a five year Senior Credit Facility with
our lender, which provides for aggregate commitments of up to $45,000,000,
subject to collateral levels and other availability restrictions. This Senior
Credit Facility replaced the amended and restated Senior Credit Facility entered
into by us and our former senior lenders on May 18, 1999. Borrowings outstanding
under the Senior Credit Facility totaled $32,130,000 as of February 5, 2000 and
availability totaled $5,000,000. Borrowings under the Senior Credit Facility are
secured by accounts receivable, inventories, certain real and personal property,
and certain of our intangible assets and those of our subsidiaries, as well as
the capital stock of our subsidiaries. As additional collateral security for the
Senior Credit Facility, we have established a cash collateral account with the
lender. Amounts outstanding under the Senior Credit Facility bear interest at a
variable rate equal to, at our option, (i) the reference rate (defined as the
base rate announced by Wells Fargo Bank as its base rate) and (ii) Eurodollar
rate (defined as LIBOR), in each case, plus the applicable margin. The
applicable margin ranges from 0.50% to 2.75%. On a quarterly basis, a fee of
0.375% of the unused portion of the Senior Credit Facility is payable.
The Senior Credit Facility contains a number of covenants, including, among
others, covenants restricting us and our restricted subsidiaries with respect to
the incurrence of indebtedness (including contingent obligations); the creation
of liens; the sale, lease, assignment, transfer, or other disposition of assets;
the making of certain investments, loans, advances, and acquisitions; and the
consummation of certain transactions, such as mergers or consolidations.
Further, the Senior Credit Facility contains cross default provisions related to
our other indebtedness. The Senior Credit Facility requires us to meet certain
financial ratios and covenants, including minimum tangible net worth and
interest coverage and restricts the payment of other indebtedness. On May 6,
2000 we were not in compliance with certain of the financial covenants and on
May 15, 2000, we entered into a third amendment to the Senior Credit Facility
which reset certain of the financial covenants and ratios. We will continue to
monitor compliance with the Senior Credit Facility, however, no assurance can be
given with respect to continued compliance with the Credit Agreement.
Extraordinary charges were recorded in fiscal 2000, 1999 and 1998 for the
write-off of unamortized financing fees associated with prior credit facilities.
The resulting charges amounted to $5,009,000, of which $4,735,000 was recorded
in the fourth quarter of fiscal 2000, with $377,000 and $785,000 recorded in
fiscal 1999 and 1998, respectively, net of income tax benefits of $0, $236,000
and $546,000, respectively.
69
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. DEBT (CONTINUED)
SHAW NOTE
We executed a promissory note related to the acquisition of the Shaw retail
assets (See Note 3). The note is unsecured and is subordinate to borrowings
under our Senior Credit Facility and other bank indebtedness. The interest on
the promissory note is at a rate equal to borrowings under the Senior Credit
Facility. The principal amount outstanding is due January 2, 2001.
NOTE 12. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fiscal year ended February 5, 2000:
U.S. Federal.............................................. $(7,237) $(16,890) $(24,127)
State and local........................................... 422 (3,658) (3,236)
Valuation allowance....................................... -- 28,974 28,974
------- -------- --------
Provision (benefit) for income taxes........................ $(6,815) $ 8,426 $ 1,611
======= ======== ========
Fiscal year ended January 31, 1999:
U. S. Federal............................................. $ 5,880 $(12,384) $ (6,504)
State and local........................................... 1,729 (3,000) (1,271)
Valuation allowance....................................... -- 2,119 2,119
------- -------- --------
Provision (benefit)for income taxes......................... $ 7,609 $(13,265) $ (5,656)
======= ======== ========
Fiscal year ended January 31, 1998:
U.S. Federal.............................................. $ 4,806 $ 4,402 $ 9,208
State and local........................................... 636 470 1,106
------- -------- --------
Provision for income taxes.................................. $ 5,442 $ 4,872 $ 10,314
======= ======== ========
</TABLE>
70
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. INCOME TAXES (CONTINUED)
Income tax (benefit) expense differed from the expected amounts (computed by
applying the United States federal income tax rate of 35% in 2000, 34% in 1999
and 35% in 1998 to pretax (loss) earnings, including the extraordinary charge in
fiscal 2000, as a result of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------
JANUARY 31,
FEBRUARY 5, -------------------
2000 1999 1998
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" income tax (benefit) expense............ $(24,127) $(8,443) $ 9,265
Increase (reduction) in income taxes resulting from:
Nondeductible goodwill.................................... 626 1,119 139
Nondeductible compensation................................ -- 517 --
Nondeductible expenses.................................... 159 691 79
State and local income taxes, net of federal income tax
benefit................................................. (2,103) (868) 719
Valuation allowance....................................... 28,974 2,119 --
Other, net................................................ (1,918) (791) 112
-------- ------- -------
(Benefit) provision for income taxes........................ $ 1,611 $(5,656) $10,314
======== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are presented below:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deductible goodwill....................................... $ 512 $ 591
Accounts receivable, principally due to allowance
for doubtful accounts................................... 1,815 1,693
Inventories, principally due to additional costs
inventoried for tax purposes............................ 1,796 897
Accrued expenses.......................................... 6,750 4,999
Stock based compensation.................................. 752 662
Net operating loss and credit carry forwards.............. 19,724 2,319
Other..................................................... 129 317
------- ------
31,478 11,478
Less valuation allowance.................................. (31,093) (2,119)
------- ------
Total deferred tax assets................................... 385 9,359
------- ------
Deferred tax liabilities:
Property and equipment.................................... (158) (448)
Deferred gain on sale of Image............................ -- (170)
Amortization of intangibles............................... (227) (315)
------- ------
Total deferred tax liabilities........................ (385) (933)
------- ------
Net deferred tax asset................................ $ -- $8,426
======= ======
</TABLE>
71
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. INCOME TAXES (CONTINUED)
We have generated net operating loss carryforwards ("NOLs"), which are available
to offset taxable income generated in future years, subject to the applicable
limitations and the NOLs expiration occurring between 2001 and 2020. The Federal
net operating loss is approximately $36,000,000. A valuation allowance for the
net deferred tax assets has been provided in the accompanying consolidated
financial statements as of February 5, 2000 as it is deemed more likely than not
that the net deferred tax assets will not be realized.
NOTE 13. RELATED PARTY TRANSACTIONS
In 1997, we invested $1,000,000 in North Atlantic Acquisition Corp. ("North
Atlantic"), a blind pool investment. A.J. Nassar, our former President and Chief
Executive Officer, was a shareholder and former director of North Atlantic. At
the time of our investment in North Atlantic, Mr. Nassar owned 14.1% of the
outstanding Class A common stock of North Atlantic. As a result of North
Atlantic's initial public offering and subsequent merger, Mr. Nassar's
percentage of ownership was reduced to less than one percent of the outstanding
shares of Class A common stock. Our investment in North Atlantic has been
included in other assets in the accompanying balance sheets. The value of the
investment as of February 5, 2000 was $413,000 and, therefore, an unrealized
loss of $587,000 has been reflected as other comprehensive income on
shareholders' equity.
We had loans outstanding (exclusive of amounts written off or expensed) from
current and former officers, directors and employees of $269,000 as of
February 5, 2000, and $1,900,000 as of January 31, 1999, with interest rates of
approximately 8.0%-9.25% per annum. Such notes are due in annual installments
plus accrued interest over the next four years or are due on demand. The
officer, director and employee receivables have been included in receivables in
the accompanying balance sheet, except for $915,000 due from Mr. Nassar, which
has been charged to expense. This amount was charged to expense in fiscal 2000
primarily as a result of an action by the Board of Directors in June 1999 which
authorized payments of bonuses over a three year period in amounts sufficient to
recover a substantial portion of the note.
Ronald H. McSwain, a former director for us and Herb Wolk, a current
director for us, each own flooring stores, which are our franchisees. During
fiscal 2000 and 1999, these individuals paid and received the following amounts
from us:
<TABLE>
<CAPTION>
MCSWAIN WOLK
-------- --------
<S> <C> <C>
FOR FISCAL YEAR ENDED FEBRUARY 5, 2000:
Amounts paid to us for services........................... $90,000 $ 1,000
Rebates received from us.................................. 150,000 50,000
FOR FISCAL YEAR ENDED JANUARY 31, 1999:
Amounts paid to us for services........................... $11,000 $ 1,000
Rebates received from us.................................. 567,000 128,000
</TABLE>
72
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. RELATED PARTY TRANSACTIONS (CONTINUED)
Julian D. Saul owns 9.46% of the outstanding shares of our common stock and
serves as President and a director of Shaw Industries, Inc., one of our major
suppliers of flooring products. The following amounts were paid or received from
Shaw:
<TABLE>
<CAPTION>
FEBRUARY 5, JANUARY 31,
FISCAL YEAR ENDED: 2000 1999
- ------------------ ------------ -----------
<S> <C> <C>
Purchase of flooring products..................... $282,000,000 $84,000,000
Rebates and vendor support received............... 17,600,000 12,000,000
</TABLE>
Also see Note 11 regarding the note payable to Shaw.
NOTE 14. STOCKHOLDERS' EQUITY
In February 1997, we sold 3,175,773 shares of our common stock to the
public. We received approximately $47,900,000 of proceeds from the offering, and
such proceeds were utilized to reduce amounts outstanding under our Senior
Credit Facility. During the fiscal year ended January 31, 1999, we issued
3,510,776 shares of our common stock for the purchase of the retail assets of
Shaw and CarpetsPlus (see Note 3). During the fiscal year ended February 5,
2000, we issued an additional 34,185 common shares to CarpetsPlus.
In March 1997, our Board of Directors authorized a stock repurchase program
pursuant to which we have periodically repurchased shares of our common stock in
the open market. As of February 5, 2000, we had repurchased an aggregate of
2,236,460 shares for $33,693,000. Our ability to repurchase our common stock is
limited by certain restrictions contained in the Indenture relating to our
Senior Notes (see Note 11). During the fiscal year ended February 5, 2000, we
placed 129,440 shares of the repurchased stock in escrow related to an
acquisition.
We adopted a stock option plan in fiscal 1994, which, as amended, provides
for the granting of incentive and non-qualified stock options for up to
5,000,000 shares of common stock to key employees and directors at an exercise
price of at least 100% of fair market value at the date of grant. Information
relating to stock options granted under our stock option plan (excluding
replacement stock options) is
73
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)
summarized as of and for the fiscal year ended February 5, 2000 and fiscal years
ended January 31, 1999 and January 31, 1998 as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------
JANUARY 31,
FEBRUARY 5, ---------------------------------------------
2000 1999 1998
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Options outstanding at beginning of fiscal
year........................................... 3,244,044 2,333,555 1,455,508
Options granted.................................. 1,100,567 1,409,000 1,309,527
Options canceled................................. (1,129,943) (135,476) (282,562)
Options exercised................................ -- (363,035) (148,918)
-------------------- --------------------- ---------------------
Options outstanding at end of fiscal year........ 3,214,668 3,244,044 2,333,555
==================== ===================== =====================
Option prices per share:
Options granted.................................. $5.38-$19.25 $14.25-$17.50 $10.00-$16.00
Options canceled................................. $6.50-$19.25 $10.25-$14.50 $10.25-$15.50
Options exercised................................ -- $ 5.25-$15.50 $ 5.25-$14.50
Options outstanding at end of fiscal year........ $ 5.25-$19.25 $ 5.25-$17.50 $ 5.25-$16.00
Weighted average option prices per share:
Options granted.................................. $ 8.28 $ 14.55 $ 12.97
Options canceled................................. $ 15.32 $ 11.88 $ 13.05
Options exercised................................ $ -- $ 11.47 $ 9.26
Options outstanding at end of fiscal year........ $ 11.05 $ 13.01 $ 10.56
</TABLE>
The majority of the employee options become exercisable in increments of 20%
per year; however, certain options have various other vesting provisions.
At February 5, 2000, the outstanding options had a weighted average
remaining contractual life of approximately 6.9 years and there were 1,637,334
options currently exercisable with option prices ranging from $5.25 to $19.25
with a weighted average exercise price of $11.82.
Effective August 10, 1993, Image adopted a Plan and Agreement of Conversion
(the "Conversion"), in which all previously outstanding vested and unvested
stock options and unvested stock appreciation units were canceled and a like
number of fully vested replacement stock options were issued. These options have
an exercise price of $.01 per share and expire March 30, 2006. In connection
with the August 1996 merger between us and Image, all outstanding options under
the Conversion and the Stock Option Plan were converted into like options to
purchase shares of our common stock. At February 5, 2000, 195,641 replacement
stock options were outstanding, which are not included in the stock option
information presented in the above table.
Statement of Financial Accounting Standards No. 123 ("SFAS 123") defines a
fair value-based method of accounting for employee stock options or similar
equity instruments. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain
with the accounting in APB Opinion No. 25 must make pro forma disclosures of net
earnings and earnings per share as if the fair value-based method of accounting
defined in the Statement had been applied.
74
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCKHOLDERS' EQUITY (CONTINUED)
We have elected to account for our stock-based compensation plan under APB
25; however, we have computed, for pro forma disclosure purposes, the value of
all options granted since April 1, 1995 using the Black-Scholes option pricing
model as prescribed by SFAS 123 using the following weighted average assumptions
for such grants with respect to fiscal 2000, 1999, and 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 31,
FEBRUARY 5, -------------------------------
2000 1999 1998
----------- --------- -------------------
<S> <C> <C> <C>
Risk-free interest rate.................................. 4.50% 4.50% 5.95%-6.75%
Expected dividend yield.................................. -- -- --
Expected life............................................ 5.0 years 5.0 years 7.5 years
Expected volatility...................................... 95% 43% 49%
</TABLE>
The weighted average fair value per share of awards granted in fiscal 2000,
1999, and 1998 was $6.15, $6.41, and $6.93, respectively. The total value of the
options granted during the years ended February 5, 2000 and January 31, 1999 and
1998 was computed as approximately $7,058,000, $9,045,000, and $7,014,000,
respectively, which would be amortized over the vesting period of the options.
If we had accounted for the stock option plans in accordance with SFAS 123, our
reported pro forma net (loss) income and pro forma net (loss) earnings per share
for the years ended February 5, 2000 and January 31, 1999 and 1998 would have
decreased to the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 31,
FEBRUARY 5, -----------------------
2000 1999 1998
------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net (loss) income:
As reported in the financial statements................... $(70,546) $(19,552) $15,371
Pro forma in accordance with SFAS 123..................... (73,186) (21,761) 14,096
Pro forma diluted (loss) earnings per common share:
As reported in the financial statements................... $ (3.70) $ (1.10) $ 0.92
Pro forma in accordance with SFAS 123..................... (3.84) (1.22) 0.84
</TABLE>
NOTE 15. EMPLOYEE BENEFIT PLAN
We have a 401(k) retirement savings plan, which is open to all employees who
have completed six months of service. Our matching contribution is $.25 of every
dollar contributed by the employee. This discretionary matching amount is not to
exceed 6% of the participant's contribution to the 401 (k) plan. Our matching
contribution vests to the employees over a six-year period. The expense incurred
for the plan was $773,000, $458,000 and $171,000 for the fiscal years ended
February 5, 2000 and January 31, 1999 and 1998, respectively.
75
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. COMMITMENTS AND CONTINGENCIES
LEASES
We are party to various non-cancelable lease agreements involving property
and equipment, which extend for varying periods up to 20 years. Certain of these
leases have options to renew at varying terms.
Rental expense for operating leases amounted to $33,042,000, $21,906,000,
and $6,431,000 for the years ended February 5, 2000 and January 31, 1999 and
1998, respectively.
Included in property and equipment are the following assets held under
capital leases:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
FEBRUARY 5, 2000:
Buildings and leasehold improvements........................ $ 2,389 $4,937 $ 7,326
Equipment................................................... -- 130 130
------- ------ -------
Assets under capital leases............................... 2,389 5,067 7,456
Less accumulated amortization............................... (1,775) (292) (2,067)
------- ------ -------
Assets under capital leases, net............................ $ 614 $4,775 $ 5,389
======= ====== =======
JANUARY 31, 1999:
Buildings and leasehold improvements........................ $ 2,318 $5,801 $ 8,119
Machinery and equipment..................................... 4 1,460 1,464
------- ------ -------
Assets under capital leases............................... 2,322 7,261 9,583
Less accumulated amortization............................... (1,329) (163) (1,492)
------- ------ -------
Assets under capital leases, net............................ $ 993 $7,098 $ 8,091
======= ====== =======
</TABLE>
We are in default of certain of our capital lease obligations. The
obligations under such leases are classified as current liabilities in the
accompanying financial statements.
76
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future lease obligations on long-term, noncancelable leases in
effect at February 5, 2000, are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
------------------------------
RELATED OPERATING
PARTY OTHER TOTAL LEASES
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2001.................................................... $ 399 $ 853 $ 1,252 $ 35,125
2002.................................................... 337 735 1,072 32,109
2003.................................................... 216 597 813 23,229
2004.................................................... 38 505 543 19,606
2005.................................................... -- 502 502 15,969
2006 and thereafter..................................... -- 4,479 4,479 61,529
------- ------- ------- --------
Total minimum lease payments.......................... 990 7,671 8,661 $187,567
========
Less amounts representing interest...................... (313) (2,732) (3,045)
Less current portion.................................... (358) (413) (771)
------- ------- -------
$ 319 $ 4,526 $ 4,845
======= ======= =======
</TABLE>
We sold certain land and buildings for $21,471,000 in January 1999. The
assets were leased back from the purchasers over a period of 15 years and
substantially all the leases are being accounted for as operating leases. The
leases require us to pay customary operating and repair expenses and to observe
certain customary operating restrictions. The leases contain renewal options at
lease termination.
GUARANTEE
In connection with our consumer credit program, we guarantee the obligations
of our franchisees related to charge backs for customer disputes in the event
that the franchisee is unable to correct the defect and is insolvent, has
terminated its business, or is in bankruptcy. We may resubmit these type
transactions for payment once the outstanding customer concerns are alleviated.
LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
Since an announcement in May 1999 that we would restate financial results
for fiscal 1999 (from an amount disclosed in a previous announcement) and
certain of the quarters therein, eleven lawsuits seeking to be certified as
class actions have been filed against us and certain of our current and former
executive officers and directors. These eleven lawsuits have been consolidated
into one lawsuit. Each of these actions was filed in the U. S. District Court
for the Northern District of Georgia. The plaintiffs in these actions purported
to represent a class of all persons who purchased or otherwise acquired our
common stock between August 31, 1998 and May 19, 1999. The complaints alleged
that we, along with certain of our current and former officers and directors
violated the federal securities laws by, among other things, issuing materially
false and misleading statements regarding our financial results for fiscal 1999
and for certain quarters therein, which had the effect of artificially inflating
the market price of our common stock. The complaints alleged that by virtue of
this conduct the defendants violated Section 10(b) of the Exchange Act and SEC
Rule 10b-5 thereunder. The complaints also alleged that the individual
defendants
77
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
were controlling persons within the meaning of Section 20 of the Exchange Act
and are, therefore, liable to the plaintiffs on that basis as well. The
complaints sought compensatory and punitive damages along with pre-judgment
interest, reasonable attorney's fees, expert witness fees and other costs.
Within the statutory period, Rudman Partners, LP ("Rudman"), an
institutional investor, filed application to be lead plaintiff in all these
cases under the Private Securities Litigation Reform Act. All other plaintiffs
and applicants have withdrawn their petitions to be appointed lead plaintiff. On
February 8, 2000, the Court entered an order appointing Rudman as "Lead
Plaintiff." In addition, Rudman was granted sixty days to file a consolidated
amended complaint to replace the eleven previously filed complaints which have
been consolidated for all purposes. The plaintiffs filed their consolidated
class action complaint on April 10, 2000.
We intend to vigorously defend these claims. It is not possible at this time
to determine the outcome of this lawsuit or the effect of its resolution on our
financial position or operating results. Management believes that our defenses
have merit; however, there can be no assurance that we will be successful in our
defense or that this lawsuit will not have a material adverse effect on our
financial condition or results of operations.
We have made a claim under our directors and officers liability insurance
policy with respect to the litigation. Such policy includes "entity" coverage
and the claims are being defended under a reservation of rights by the insurers.
However, even if coverage is available to us under the policy, there can be no
assurance that such coverage would be sufficient to cover all liability in the
event of an adverse outcome in the lawsuit.
SEC INVESTIGATION
Following an announcement in May 1999 that we would restate our financial
results for fiscal 1999 (from an amount disclosed in a previous announcement)
and certain of the quarters therein, the Securities and Exchange Commission
("SEC") commenced an informal inquiry in connection with the matters relating to
the restatement. On January 21, 2000, the SEC commenced its formal investigation
into fiscal 1999 financial statements and related accounting policies,
procedures and systems of internal controls. We are cooperating with the SEC in
its investigation. We cannot predict the outcome of this investigation.
OTHER LITIGATION
Kurt Salmon Associates ("KSA"), a consultant, has sued us claiming that we
had failed to pay invoices for work performed. The complaint sought damages in
an amount stated to be not less than $1,509,000, plus interest and litigation
expenses. We denied the allegations and counterclaimed for breach of contract,
rescission, breach of implied covenant of good faith and fair dealing, breach of
fiduciary duty and attorneys' fees and costs of litigation. The parties have
engaged in extensive document production and have exchanged interrogatory
responses. In the process, KSA has increased the amount of actual damages it
seeks to $2,154,000. We have quantified the damages we seek in our counterclaim
to more than $9,000,000. No depositions have been taken at this time, and
discovery is expected to continue into the fall. We cannot predict the outcome
of this matter.
We are involved in certain other legal actions arising in the ordinary
course of business. We believe none of these actions, either individually or in
the aggregate, will have a material adverse effect on our business, financial
condition or results of operations.
78
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. EXPORT SALES
In fiscal years 1999 and 1998, export sales accounted for approximately 3%
and 5%, respectively, of our revenues. Export sales were related to Image and
made principally to customers in the Middle East, Europe and Canada. Effective
with the sale of substantially all the assets of Image in January 1999, we no
longer have any export sales.
NOTE 18. SEGMENT INFORMATION
We have identified four reportable segments through which we conduct our
operating activities: retail, manufacturing, franchise services and corporate.
These four segments reflect an aggregation of the operating segments used by our
management for making decisions and assessing performance. Management determines
operating segments based primarily upon the operation's line of business.
The retail segment is comprised of retail flooring stores and distribution
support centers. The manufacturing segment was comprised of the operations of
Image. With the sale of substantially all the assets of Image on January 29,
1999, we no longer engage in manufacturing operations. The franchise services
segment includes the operations of three of our franchise businesses: GCO,
CarpetsPlus and MaxCARE. Corporate consists of the Flooring America franchise
business, store development, marketing, advertising, consumer credit, training
and product sourcing activities, as well as corporate non-operating items not
directly relating to the manufacturing, retail or franchise services segments.
Intersegment sales and transfers occurred as carpet was transferred from
Image to our retail stores and as the retail stores purchased advertising or
product sourcing services from corporate. Intersegment transactions are
accounted for on the same basis as transactions with third parties.
Identifiable assets consist of cash, accounts receivable, inventory,
property and equipment and other assets used in the operations of the segment.
We have no assets located outside the United States.
79
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SEGMENT INFORMATION (CONTINUED)
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
FEBRUARY 5, 2000 JANUARY 31, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Manufacturing................................. $ -- $197,796 $178,011
Retail........................................ 692,112 418,861 131,459
Franchise services............................ 28,440 24,659 22,189
Corporate..................................... 61,697 67,025 40,147
Intersegment eliminations..................... (19,441) (43,915) (6,679)
-------- -------- --------
Total..................................... 762,808 664,426 365,127
Special charges
Retail........................................ 8,554 11,788 --
Corporate..................................... -- 11,925 --
-------- -------- --------
Total..................................... 8,554 23,713 --
Operating (loss) profit
Manufacturing................................. 235 14,171 23,236
Retail........................................ (29,517) (32,230) (1,195)
Franchise services............................ 1,833 1,656 1,734
Corporate..................................... (25,228) (13,635) 6,981
Intersegment eliminations..................... 215 (7,336) 1,035
-------- -------- --------
Total..................................... (52,462) (37,374) 31,791
Interest income............................... 3,044 1,754 1,233
Interest expense.............................. (14,263) (15,097) (6,948)
Gain on the sale of Image..................... -- 24,863 --
Other, net.................................... (245) 1,023 394
-------- -------- --------
(Loss) income before taxes.................... (63,926) (24,831) 26,470
</TABLE>
80
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
FEBRUARY 5, 2000 JANUARY 31, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization
Manufacturing................................. $ -- $ 10,054 $ 8,820
Retail........................................ 10,438 5,271 1,987
Franchise services............................ 784 481 280
Corporate..................................... 1,466 3,403 863
-------- -------- --------
Total..................................... 12,688 19,209 11,950
Capital expenditures
Manufacturing................................. -- 29,043 20,002
Retail........................................ 6,534 25,761 20,925
Franchise services............................ 500 506 706
Corporate..................................... 18,865 7,254 6,040
-------- -------- --------
Total..................................... 25,899 62,564 47,673
Total assets
Manufacturing................................. -- 7,765 185,183
Retail........................................ 186,726 195,402 61,258
Franchise services............................ 27,181 27,602 9,969
Corporate..................................... 128,642 157,999 65,084
-------- -------- --------
Total..................................... 342,549 388,768 321,494
</TABLE>
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------
JANUARY 31,
FEBRUARY 5, -------------------
2000 1999 1998
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Domestic.................................................. $762,808 $644,133 $345,132
Foreign................................................... -- 20,293 19,995
-------- -------- --------
Total....................................................... $762,808 $664,426 $365,127
======== ======== ========
</TABLE>
81
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER (1) QUARTER (1) QUARTER QUARTER
----------- ----------- -------- --------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
AS RESTATED:
FISCAL YEAR ENDED FEBRUARY 5, 2000
Net revenues....................................... $191,023 $ 202,365 $198,843 $170,577
Gross profit....................................... 71,317 74,606 78,485 57,159
Loss before extraordinary charge................... (4,194) (5,897) (7,123) (48,323)
Extraordinary charge, net of taxes................. (274) -- -- (4,735)
Net loss........................................... (4,468) (5,897) (7,123) (53,058)
Basic loss per common share before extraordinary
charge........................................... (0.22) (0.31) (0.37) (2.53)
Extraordinary charge............................... (0.01) -- -- (0.25)
Basic loss per common share........................ (0.23) (0.31) (0.37) (2.78)
Diluted loss per common share before extraordinary
charge........................................... (0.22) (0.31) (0.37) (2.53)
Extraordinary charge............................... (0.01) -- -- (0.25)
Diluted loss per common share...................... (0.23) (0.31) (0.37) (2.78)
AS PREVIOUSLY REPORTED:
FISCAL YEAR ENDED FEBRUARY 5, 2000:
Net revenues....................................... $192,580 $ 202,506 $198,843
Gross profit....................................... 73,674 76,255 78,485
Loss before extraordinary charge................... (526) (2,691) (7,123)
Extraordinary charge, net of taxes................. (274) -- --
Net loss........................................... (800) (2,691) (7,123)
Basic loss per common share before extraordinary
charge........................................... (0.03) (0.14) (0.37)
Extraordinary charge............................... (0.01) -- --
Basic loss per common share........................ (0.04) (0.14) (0.37)
Diluted loss per common share before extraordinary
charge........................................... (0.03) (0.14) (0.37)
Extraordinary charge............................... (0.01) -- --
Diluted loss per common share...................... (0.04) (0.14) (0.37)
</TABLE>
- ------------------------
(1) The quarterly financial results for the quarters ended May 8, 1999 and
August 7, 1999 have been restated to correct certain revenue and expense
amounts recorded during the first two quarters of
82
<PAGE>
FLOORING AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
fiscal 2000. The majority of these corrections relate to expensing amounts
previously recorded as assets and deferring certain revenues and rebates.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER (1) QUARTER (1) QUARTER (1) QUARTER (1)
------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1999:
Net revenues.................................. $ 96,632 $95,581 $249,572 $222,641
Gross profit.................................. 27,068 22,760 85,973 71,286
Income (loss)before extraordinary charge...... 1,318 (21,600) 2,631 (1,524)
Extraordinary charge, net of taxes............ -- -- 377 --
Net income (loss)............................. 1,318 (21,600) 2,254 (1,524)
Basic earnings (loss) per common share before
extraordinary charge........................ 0.08 (1.32) 0.14 (0.08)
Extraordinary charge.......................... -- -- (0.02) --
Basic earnings (loss) per common share........ 0.08 (1.32) 0.12 (0.08)
Diluted earnings (loss) per common share
before extraordinary charge................. 0.08 (1.32) 0.13 (0.08)
Extraordinary charge.......................... -- -- (0.02) --
Diluted earnings (loss) per common share...... 0.08 (1.32) 0.11 (0.08)
</TABLE>
- ------------------------
(1) Amounts as restated in our Quarterly Reports on Form 10-Q/A for the quarters
ended April 30, 1998, July 31, 1998 and October 31, 1998, as filed with the
Securities and Exchange Commission. In connection with our year-end audit
process, we recorded certain adjustments that we deemed necessary to more
accurately state the previously filed fiscal 1999 interim financial
statements. These adjustments included changes in recognition and/or timing
of certain vendor support funds, certain expense accruals, and asset
write-downs.
NOTE 20. SUBSEQUENT EVENTS
In March 2000, we repurchased $25,000,000 of our Senior Notes and paid a
consent fee in the amount of $3,550,000 and attorney fees in the amount of
$451,000 in order to cure a default under such Senior Notes as further described
in Note 11.
83
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Flooring America Inc.:
We have audited the consolidated financial statements of Flooring
America Inc. as of February 5, 2000, and for the year then ended and have issued
our report thereon dated May 23, 2000 (included elsewhere in this Annual Report
on Form 10-K). Our audits also included the financial statement schedule listed
in Item 14(2). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein. The
financial statement schedule does not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of the uncertainty regarding the Company's ability to continue as a going
concern.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
May 23, 2000
84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Flooring America Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of FLOORING AMERICA INC. AND SUBSIDIARIES
(formerly known as The Maxim Group, Inc.) as of January 31, 1999 and for each of
the two years in the period ended January 31, 1999 included in the Company's
annual report on Form 10-K for the period ended February 5, 2000, and have
issued our report thereon dated October 11, 1999. Our report on the consolidated
financial statements includes an explanatory paragraph with respect to the
preparation of the financial statements assuming that the Company will continue
as a going concern. As discussed in Note 1 to the financial statements, the
Company is not in compliance with a certain restricted payment covenant
contained in the indenture which references the Company's $100 million Senior
Subordinated Notes due October 2007 (the "Senior Notes") and as a result, the
trustee or the holders of not less than 25% of the Senior Notes may declare all
unpaid principal plus any accrued interest of all of the Senior Notes due and
payable. The Company's available borrowings under its Senior Credit Facility
plus cash on hand are not sufficient to repay the Senior Notes if declared due
and payable. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in the index is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rule and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 11, 1999
85
<PAGE>
SCHEDULE II
FLOORING AMERICA
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED FEBRUARY 5, 2000, JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
CHARGE TO
BALANCE AT COSTS CHARGE TO
BEGINNING OF AND OTHER BALANCE AT
YEAR EXPENSE ACCOUNTS (B) DEDUCTIONS END OF YEAR
------------ --------- ------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 5, 2000:
Allowance for doubtful accounts (a).... $7,384 $4,635 $ 258 $(4,246) $8,031
====== ====== ====== ======= ======
YEAR ENDED JANUARY 31, 1999:
Allowance for doubtful accounts (a).... $2,916 $6,801 $1,009 $(3,342) $7,384
====== ====== ====== ======= ======
YEAR ENDED JANUARY 31, 1998:
Allowance for doubtful accounts (a).... $2,269 $2,105 $ 125 $(1,583) $2,916
====== ====== ====== ======= ======
</TABLE>
- ------------------------
(a) Our other valuation and qualifying accounts are not significant and are
omitted in accordance with Rule 4.02 or are presented in the notes to our
Consolidated Financial Statements.
(b) These amounts include reserves of acquired operations.
All other schedules have been omitted, as they are not required under the
related instructions, are inapplicable, or because the information required is
included in the financial statements.
86
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, in the City of Kennesaw, State of Georgia on
May 26, 2000.
<TABLE>
<S> <C> <C>
FLOORING AMERICA, INC.
By: /s/ DAVID L. NICHOLS
-----------------------------------------
David L. Nichols
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID L. NICHOLS Chairman of the Board, President
------------------------------------------- and Chief Executive Officer May 26, 2000
David L. Nichols(1) (Principal Executive Officer)
Chief Financial Officer,
/s/ LEONARD H. THILL Secretary and Compliance
------------------------------------------- Officer (Principal Financial May 26, 2000
Leonard H. Thill(2) and Principal Accounting
Officer)
/s/ JOSEPH J. JILLSON Director
------------------------------------------- May 26, 2000
Joseph J. Jillson
/s/ RICHARD A. KAPLAN Director
------------------------------------------- May 26, 2000
Richard A. Kaplan
/s/ J. MICHAEL NIXON Director
------------------------------------------- May 26, 2000
J. Michael Nixon
/s/ F.G. BUCK RODGERS Director
------------------------------------------- May 26, 2000
F.G. "Buck" Rodgers(3)
/s/ LARRY T. SOLARI Director
------------------------------------------- May 26, 2000
Larry T. Solari
/s/ HERB WOLK Director
------------------------------------------- May 26, 2000
Herb Wolk
</TABLE>
(1) Mr. Nichols joined the Company in January 2000 when he was elected to serve
as Chairman of the Board of Directors.
(2) Mr. Thill joined the Company in September 1999 as our Chief Financial
Officer, Secretary and Compliance Officer.
(3) Mr. Rodgers joined the Company as a director in February 2000.
87
<PAGE>
FLOORING AMERICA, INC.
(FORMERLY KNOWN AS THE MAXIM GROUP, INC.),
AS ISSUER,
AND
THE GUARANTORS NAMED HEREIN
AND
STATE STREET BANK AND TRUST COMPANY, AS TRUSTEE
FIFTH SUPPLEMENTAL INDENTURE
DATED AS OF MARCH 21, 2000
TO
INDENTURE
DATED AS OF OCTOBER 16, 1997
---------------------
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
<PAGE>
FIFTH SUPPLEMENTAL INDENTURE, dated as of March 21, 2000, by and among
Flooring America, Inc. (formerly known as The Maxim Group, Inc.), a Delaware
corporation (the "COMPANY"), and Maxim Industries, Inc., CarpetMAX of
Utah, Inc., GCO, Inc., Investor Management, Inc., GCO Carpet Outlet, Inc., Maxim
Retail Group, Inc., Flooring America Franchising, L.P. (formerly known as
Carpetmax, L.P.), Tri-R of Orlando, Inc., Maxim Equipment Leasing
Company, Inc., Bailey & Roberts CarpetMAX of Tennessee, Inc., Maxim Retail
Stores, Inc., C&S Textiles, Inc., CarpetsPlus of America, Inc., CarpetMAX Retail
Stores, Inc., Advance Floor Decorators, Inc., Colorado Carpet & Rugs, Inc.,
Everythingdecor, Inc., 4 Floors, Inc., Karen's Inc., Manasota Carpet, Inc.,
Floor Source Distributors, Inc. and Wadsworth & Owens Decorating Center, Inc.,
as guarantors (collectively, the "GUARANTORS"), and State Street Bank and Trust
Company, a Massachusetts trust company, as trustee (the "TRUSTEE").
WHEREAS, the Company, the Guarantors and the Trustee are parties to an
Indenture, dated as of October 16, 1997, as supplemented (the "INDENTURE"), in
respect of $100,000,000 aggregate principal amount of the Company's 9 1/4%
Senior Subordinated Notes due 2007 (the "SECURITIES");
WHEREAS, certain Events of Default exist as a result of certain repurchases
by the Company of its Common Stock during the year 1998 in violation of
Section 1009 of the Indenture (the "EXISTING RESTRICTED PAYMENT DEFAULTS");
WHEREAS, the Company, the Guarantors and the Trustee desire to enter into,
and the Holders of at least a majority in aggregate principal amount of the
Securities (the "MAJORITY HOLDERS") have consented to and have directed the
Trustee to enter into, this Fifth Supplemental Indenture to amend the Indenture
and to waive the Existing Restricted Payment Defaults;
WHEREAS, all conditions and requirements necessary to make this Fifth
Supplemental Indenture a valid, binding and legal instrument in accordance with
its terms have been performed and fulfilled and the execution and delivery
hereof have been in all respects duly authorized; and
WHEREAS, the Trustee has been instructed by the Majority Holders to enter
into an intercreditor agreement with Foothill Capital Corporation, as
Administrative Agent under the Credit Facility.
NOW, THEREFORE, in consideration of the above premises, each party agrees,
for the benefit of each other party and for the equal and ratable benefit of the
Holders of the Securities, as follows:
ARTICLE I
AMENDMENTS AND WAIVER
Section 1.1 AMENDMENTS TO INDENTURE. The Indenture is hereby amended as
follows:
(a) Maxim Industries, Inc. (the "ADDITIONAL GUARANTOR") shall be a
Guarantor, a Restricted Subsidiary and a Wholly-Owned Restricted Subsidiary for
all purposes under the Indenture and each of the terms "Guarantor," Restricted
Subsidiary" and "Wholly-Owned Restricted Subsidiary" shall for all purposes
under the Indenture specifically include the Additional Guarantor.
(b) The Indenture is hereby amended to reflect the change in the corporate
name of the Company from "The Maxim Group, Inc." to "Flooring America, Inc."
(c) The Indenture is hereby amended to reflect the change in the legal name
of "Carpetmax, L.P." to "Flooring America Franchise, L.P."
(d) The definition of "Administrative Agent" set forth in Section 101 is
amended and restated to read in its entirety as follows:
"Administrative Agent" means Foothill Capital Corporation, as Agent
under the Credit Facility.
2
<PAGE>
(e) The definition of "Consolidated Fixed Charge Coverage Ratio" contained
in Section 101 is amended and restated to read in its entirety as follows:
"Consolidated Fixed Charge Coverage Ratio" shall mean, with respect to
the Company and its Subsidiaries on a consolidated basis for any period, the
ratio of (a) the greater of (i) EBITDA or (ii) zero, to (b) interest expense
during such period.
(f) The definition of "Credit Facility" contained in Section 101 is amended
and restated to read in its entirety as follows:
"Credit Facility" means the Loan and Security Agreement, dated as of
January 28, 2000, among the Company, the Company's Subsidiary corporations
and partnerships identified as borrowers or guarantors therein, the lenders
from time to time party thereto, and Foothill Capital Corporation, as
administrative agent, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith and
all other Loan Documents (as defined in the Credit Facility), as such credit
agreement and/or related documents may be amended, restated, supplemented,
renewed, replaced or otherwise modified from time to time whether or not
with the same agent, trustee, lenders or holders, and, subject to the
provisos to the next sentence, irrespective of any changes in the terms and
conditions thereof. Without limiting the generality of the foregoing, the
term "Credit Facility" shall include any amendment, amendment and
restatement, renewal, extension, restructuring, supplement or modification
to the Credit Facility and all refundings, refinancings and replacements of
the Credit Facility, including any agreement (i) extending the maturity of
any Indebtedness incurred thereunder or contemplated thereby, (ii) adding or
deleting borrowers or guarantors thereunder, so long as borrowers and
issuers include the Company and its successors and assigns,
(iii) increasing the amount of Indebtedness incurred thereunder or available
to be borrowed thereunder, PROVIDED that on the date such Indebtedness is
incurred it would not exceed the amount permitted to be incurred by
clause (i) of paragraph (b) of Section 1008 or (iv) otherwise altering the
terms and conditions thereof; PROVIDED, FURTHER, that in the case of clauses
(i) through (iv), any such agreement is not prohibited by the terms of this
Indenture.
(g) The definition of "Indenture Obligations" set forth in Section 101 is
amended and restated to read in its entirety as follows:
"Indenture Obligations" means the obligations of the Company and any
other obligor under this Indenture, under the Securities or under any of the
Security Documents including any Guarantor, to pay principal of, premium, if
any, and interest when due and payable, and all other amounts due or to
become due under or in connection with this Indenture, the Securities or any
Security Document and the performance of all other obligations to the
Trustee and the Holders under this Indenture, the Securities and the
Security Documents, according to the respective terms hereof and thereof.
(h) The definition of "Maturity" set forth in Section 101 is amended and
restated to read in its entirety as follows:
"Maturity" means, when used with respect to the Securities, the date on
which the principal of the Securities becomes due and payable as therein
provided or as provided in this Indenture, whether at Stated Maturity, by
declaration of acceleration or otherwise.
(i) Clause (vii) of the second sentence of the definition of "Senior
Indebtedness" set forth in Section 101 is amended and restated to read in its
entirely as follows:
(vii) that portion of any Indebtedness which at the time of issuance or
incurrence is issued or incurred in violation of this Indenture.
3
<PAGE>
(j) Section 101 is amended to include the following additional definitions
in the proper alphabetical order:
"Collateral" means any and all collateral under the Security Documents.
"Collateral Party" means the Company, each Guarantor and each other
Person that provides collateral security for the Indenture Obligations
pursuant to the Security Documents.
"Consulting Agreement" means, collectively, the letter of understanding,
dated February 8, 2000, between the Company and E&Y Restructuring, LLC, and
the letter of understanding, dated March 1, 2000, between the Company and
Ernst & Young, LLP, each as modified by the letter agreement dated
March 21, 2000, among the Company, E&Y Restructuring, LLC and Ernst & Young,
LLP.
"Deferred Purchase Amount" means, at any time of determination, the
aggregate principal amount of the Outstanding Securities equal to the
difference between (a) $15,000,000 and (b) the sum of (i) at any time from
and after the closing of each purchase of Securities tendered, if any, under
and in accordance with Section 1023 or, if no Securities are tendered
thereunder, the Initial Deferred Purchase Date related to such offer, the
aggregate principal amount of all Securities the Company shall have offered
to purchase under and in accordance with Section 1023 and (ii) at any time
from and after the closing of each purchase of Securities tendered, if any,
under and in accordance with Section 1025 or, if no Securities are tendered
thereunder, the Second Deferred Purchase Date related to such offer, the
aggregate principal amount of all Securities the Company shall have offered
to purchase under and in accordance with Section 1025.
"Deferred Purchase Portion" means, in relation to the principal amount
of each Security, at any time of determination, the fraction, expressed as a
percentage, equal to (i) the Deferred Purchase Amount at such time, divided
by (ii) the aggregate principal amount of the Outstanding Securities at such
time. As of March 21, 2000, the Deferred Purchase Portion equals 21.127%.
"Domestic Subsidiary" means each direct and indirect Subsidiary that is
domiciled, incorporated or organized under the laws of any state or
territory of the United States or the District of Columbia whether existing
as of the date hereof or hereafter created or acquired.
"EBITDA" means, for any period, the net income (or net loss) of the
Company on a consolidated basis with its Subsidiaries for such period as
determined in accordance with GAAP, (a) PLUS, to the extent reflected in the
changes in the statement of net income for such period, the sum, without
duplication, of the following (i) interest expense, (ii) taxes based upon
income or profits, (iii) depreciation and amortization expense, and
(iv) extraordinary losses, and (b) MINUS, to the extent reflected in the
changes in the statement of net income for such period, extraordinary gains.
"Fifth Supplemental Indenture" means the Fifth Supplemental Indenture to
this Indenture, dated as of March 21, 2000.
"First Tier Foreign Subsidiary" means each Foreign Subsidiary which is
owned directly by the Company or a Guarantor.
"Foreign Subsidiary" means any Subsidiary that is not a Domestic
Subsidiary.
"Intercreditor Agreement" means the Intercreditor Agreement, dated as of
March 21, 2000, by and between the Trustee and the Administrative Agent, and
acknowledged and agreed to by the Company and the Guarantors.
"Mortgage" means any mortgage or deed of trust entered between the
Company or one of its Subsidiaries and the Trustee to secure all or any part
of the Indenture Obligations.
"Permitted Liens" means (a) Liens securing the Indenture Obligations,
(b) Liens securing Indebtedness permitted under Section 1008(b)(i) of this
Indenture, (c) Liens for taxes not yet due or
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Liens for taxes being contested in good faith by appropriate proceedings for
which adequate reserves determined in accordance with GAAP have been
established (and as to which the property subject to any such Lien is not
yet subject to foreclosure, sale, collection, levy or loss on account
thereof), (d) Liens in respect of property imposed by law arising in the
ordinary course of business such as materialmen's, mechanics',
warehousemen's, carrier's, landlords' and other nonconsensual statutory
Liens which are not yet due and payable or which are being contested in good
faith by appropriate proceedings for which adequate reserves determined in
accordance with GAAP have been established (and as to which the property
subject to any such Lien is not yet subject to foreclosure, sale or loss on
account thereof), (e) pledges or deposits made in the ordinary course of
business to secure payment of worker's compensation insurance, unemployment
insurance, pensions or social security programs, (f) Liens arising from good
faith deposits in connection with or to secure performance of tenders, bids,
leases, government contracts, performance and return-of-money bonds and
other similar obligations incurred in the ordinary course of business (other
than obligations in respect of the payment of borrowed money), (g) Liens
arising from good faith deposits in connection with or to secure performance
of statutory obligations and surety and appeal bonds, (h) easements,
rights-of-way, restrictions (including zoning restrictions), matters of
plat, minor defects or irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use of the
encumbered property for its intended purposes, (i) judgment Liens that would
not constitute an Event of Default, (j) Liens arising by virtue of any
statutory or common law provision relating to banker's liens, rights of
setoff or similar rights as to deposit accounts or other funds maintained
with a creditor depository institution, (k) Liens existing on January 28,
2000 and identified on SCHEDULE A to the Fifth Supplemental Indenture;
PROVIDED THAT no such Lien shall extend to any property other than the
property subject thereto on January 28, 2000 and (l) other Liens described
in the definition of "Permitted Liens" (as defined in the Credit Facility as
in effect on January 28, 2000).
"Pledge Agreement" means the Pledge Agreement, dated as of March 21,
2000, among the Company, the Guarantors and the Trustee.
"Remaining Portion" means, in relation to the principal amount of each
Security, at any time of determination, the fraction, expressed as a
percentage, equal to (i) the difference between (a) the aggregate principal
amount of the Outstanding Securities at such time and (b) the Deferred
Purchase Amount at such time, DIVIDED by (ii) the aggregate principal amount
of the Outstanding Securities at such time. As of March 21, 2000, the
Remaining Portion equals 78.873%.
"Security Agreement" means the Security Agreement, dated as of
March 21, 2000, among the Company, the Guarantors and the Trustee.
"Security Documents" mean, collectively, the Intercreditor Agreement,
the Security Agreement, the Pledge Agreement, the Trademark Assignment, the
Mortgages, and any other document, instrument or agreement executed and/or
delivered by any Collateral Party securing the payment or performance of all
or any part of the Indenture Obligations.
"Senior Secured Creditor" means the Administrative Agent under the
Credit Facility and any holder of Indebtedness permitted under
Section 1008(b)(i) of this Indenture.
"Trademark Assignment" means the Conditional Assignment and Trademark
Security Agreement, dated as of March 21, 2000, among the Company, the
Guarantors and the Trustee.
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(k) Section 102 is amended to include the following additional information
in the proper alphabetical order:
<TABLE>
<CAPTION>
TERM DEFINED IN SECTION
- ---- ------------------
<S> <C>
Asset Sale Proceeds Account................................. 1013
Consultant.................................................. 1028
Definitive Offer............................................ 1026
Definitive Offer Notice..................................... 1026
Definitive Purchase Date.................................... 1026
Definitive Purchase Price................................... 1026
Determination Date.......................................... 301
Increase Date............................................... 301
Initial Deferred Offer...................................... 1023
Initial Deferred Offer Notice............................... 1023
Initial Deferred Purchase Note.............................. 1023
Initial Deferred Purchase Price............................. 1023
Mandatory Offer............................................. 1024
Mandatory Offer Notice...................................... 1024
Mandatory Purchase Date..................................... 1024
Mandatory Purchase Price.................................... 1024
Price Reset Date............................................ 1024
Second Deferred Offer....................................... 1025
Second Deferred Offer Notice................................ 1025
Second Deferred Purchase Date............................... 1025
Second Deferred Purchase Price.............................. 1025
Special Rate................................................ 301
Standard Rate............................................... 301
</TABLE>
(l) The last paragraph of Section 106 is amended and restated to read in
its entirety as follows:
Any notice required to be delivered to the lenders under the Credit
Facility shall be sufficient for every purpose hereunder if in writing and
mailed, first-class postage prepaid, or delivered by a nationally recognized
overnight courier, to the Administrative Agent at 1111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025, Attention: Business
Finance Division Manager, Facsimile No. (310) 478-9788, with a copy to
Foothill Capital Corporation, 60 State Street, Suite 1150, Boston, MA 02109,
Attention: Todd Colpitts, Senior Account Executive Vice President, Facsimile
No. (617) 722-9493 (with a copy to Paul, Hastings, Janofsky & Walker LLP,
600 Peachtree Street, N.E., Suite 2400, Atlanta, Georgia, Attention: Jesse
H. Austin, III, Esq., Facsimile No. (404) 815-2424), or to such other
address as may be designated in writing to the Trustee by the Administrative
Agent.
(m) The phrase "Section 303, 304, 305, 306, 307, 308, 906, 1013, 1016 or
1108" contained in the first paragraph of Section 301 is deleted and replaced
with the phrase "Section 303, 304, 305, 306, 307, 308, 906, 1013, 1016, 1023,
1024, 1025, 1026 or 1108".
(n) Section 301 is amended to include the following at the end thereof:
Anything to the contrary in the Indenture or any of the Securities
notwithstanding, effective as of December 15, 1999, $739.58 of each
$1,000.00 in principal amount of each Outstanding Security (I.E., an
aggregate principal amount equal to $71,000,000) shall bear interest at a
rate of 12.75% per annum and $260.42 of each $1,000.00 in principal amount
of each Outstanding Security (i.e., an aggregate principal amount of
$25,000,000) shall bear interest at the rate of 9.25% per annum; and,
subject to the immediately succeeding paragraph, commencing March 21, 2000,
the Remaining Portion of each Outstanding Security shall bear interest at a
rate of 12.75% per annum, as such interest rate shall
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<PAGE>
increase from time to time in accordance with the immediately succeeding
sentences (the "Standard Rate"). The Standard Rate shall successively
increase by .25% per annum on October 15, 2000 and on each April 15 and
October 15 thereafter (October 15, 2000 and each April 15 and October 15
thereafter is referred to herein as a "Increase Date"); PROVIDED, HOWEVER,
that in the event that on the date that is two (2) Business Days immediately
preceding any Increase Date (each, a "Determination Date") the Securities
are rated lower than "B-" by S&P, the Standard Rate shall increase by .50%
per annum on such Increase Date. Upon the occurrence and during the
continuance of any Event of Default, the Standard Rate shall equal the
greater of (a) 14.75% per annum and (b) the Standard Rate otherwise in
effect. On each Determination Date, the Company shall deliver to the Trustee
an Officer's Certificate certifying the rating assigned to the Securities by
S&P on such Determination Date.
The Deferred Purchase Portion of each Outstanding Security shall bear
interest (A) at all times during the period commencing March 21, 2000 through
December 31, 2000 while no Event of Default is continuing, at a rate of 13.75%
per annum and (B) at all times thereafter while no Event of Default is
continuing, at a rate of 15.00% per annum (such rate as in effect from time to
time, the "Special Rate"). Upon the occurrence and during the continuance of any
Event of Default, the Deferred Purchase Portion of the each Outstanding Security
shall bear interest at a rate of 2.00% per annum in excess of the Special Rate
otherwise applicable thereto pursuant to clause (A) or (B) above.
(o) Anything to the contrary notwithstanding, the Company shall not have
the right under Article Four to elect to be released from its obligations under
Sections 1023, 1024, 1025 or 1026.
(p) Clause (c) of Section 501 is amended and restated to read in its
entirety as follows:
(c)(i) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under this Indenture
or any Guarantee (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause (a) or
(b) or in clause (ii), (iii), (iv), (v), (vi), (vii), (viii) or (ix) of this
clause (c)) and such default or breach shall continue for a period of
30 days after written notice has been given, by overnight mail, (x) to the
Company by the Trustee or (y) to the Company and the Trustee by the holders
of at least 25% in aggregate principal amount of the Outstanding Securities,
which notice shall specify that it is a "notice of default," shall specify
the performance, covenant or agreement the default in which or the breach of
which shall have occurred and shall demand that such a default or breach be
remedied; (ii) there shall be a default in the performance or breach of the
provisions described in Article Eight herein; (iii) the Company shall have
failed to make or consummate an Offer in accordance with the provisions of
Section 1013 herein; (iv) the Company shall have failed to make or
consummate a Change of Control Offer in accordance with the provisions of
Section 1016 herein; (v) the Company shall have failed to make, or
consummate on or prior to December 31, 2000, one or more Initial Deferred
Offers to purchase in the aggregate at least $10,000,000 in aggregate
principal amount of Securities in accordance with the provisions of
Section 1023 herein; (vi) the Company shall have failed to make or
consummate any Mandatory Offer in accordance with the provisions of
Section 1024 herein; (vii) the Company shall have failed to make, or
consummate on or prior to March 31, 2001, one or more Second Deferred Offers
to purchase in the aggregate an aggregate principal amount of the Securities
equal to the Deferred Purchase Amount in accordance with the provisions of
Section 1025 herein; (viii) the Company shall have failed to make or
consummate the Definitive Offer in accordance with the provisions of
Section 1026 herein; or (ix) the Company shall default in the performance or
breach of the provisions in Section 1027 herein;
(q) The period at the end of clause (i) of Section 501 is deleted and
replaced by a semi-colon, followed by the following new clauses:
(j) there shall be a default in the performance, or breach of any
covenant or agreement of the Company or any other Collateral Party under any
of the Security Documents and such default or
7
<PAGE>
breach shall continue for a period of 30 days after written notice has been
given, by overnight mail, (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the Outstanding Securities, which notice shall specify
that it is a "notice of default," shall specify the performance, covenant or
agreement the default in which or the breach of which shall have occurred
and shall demand that such a default or breach be remedied; or
(k) (i) any Security Document shall for any reason cease to be, or
shall for any reason be asserted in writing by the Company or any other
Credit Party not to be, in full force and effect in accordance with its
terms or (ii) any Lien purported to be created by any of the Security
Documents shall cease to be valid, perfected, and with priority subordinate
only to the Liens in favor of the Senior Secured Creditors Securing
Indebtedness permitted under Section 1008(b)(i).
(r) The phrase "Sections 1013 and 1016" contained in Section 606 is deleted
and replaced with the phrase "Sections 1013, 1016, 1023, 1024, 1025 and 1026".
(s) Section 607 is amended to include the following new paragraph at the
end thereof:
To secure the Company's payment obligations in this Section, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities. When the Trustee incurs
expenses after the occurrence of an Event of Default specified in
Article 501(h) or (i) with respect to the Company, the expenses are intended
to constitute expenses of administration under the Bankruptcy Law.
(t) Article Six is amended to include the following new Sections 615 and
616:
Section 615. ACTIONS OF TRUSTEE UNDER SECURITY DOCUMENTS.
The Trustee shall act as a secured party under the Security Documents and
shall have the rights and obligations specified therein. The provisions of this
Indenture, including, but not limited to, Article Five and this Article Six
shall apply to all actions or failures to act of the Trustee thereunder.
The Trustee's rights in the Collateral are subject to an Intercreditor
Agreement between the Trustee and the Administrative Agent, dated as of
March 21, 2000, pursuant to which the Administrative Agent may take certain
actions with respect to the Collateral that could result in the Trustee being
deprived of all or a portion of the value that Trustee's rights in the
Collateral might otherwise have.
Section 616. SEPARATE AND CO-TRUSTEES.
(a) If it deems such to be necessary or prudent in order to conform to
any law of any jurisdiction in which all or part of the Collateral shall be
situated or to make any claim or bring any suit with respect to the
Collateral or any Security Document, the Trustee, in consultation with the
holders of at least 50% of aggregate principal amount of the Outstanding
Securities, shall have the power to appoint in writing one or more persons
to act as separate trustees or co-trustees, jointly with the Trustee, of any
of the Collateral, and any such person shall be such separate trustee or
co-trustee, with such powers and duties as shall be specified in such
instrument of appointment.
(b) Every separate trustee and co-trustee shall, to the extent not
prohibited by law, be subject to the following terms and conditions;
(1) The rights, powers, duties and obligations conferred or imposed
upon such separate or co-trustee shall be conferred or imposed upon and
exercised or performed by the Trustee and such separate or co-trustee, as
shall be set forth in the instrument appointing him or it; PROVIDED,
HOWEVER, that such separate or co-trustee shall take no action without
the consent of the Trustee (unless the requirement for such consent shall
be forbidden by law as to any particular application of such
requirement.)
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<PAGE>
(2) All powers, duties, obligations and rights conferred upon the
Trustees, in respect of the custody of all cash deposited hereunder,
shall be exercised solely by the Trustee; and
(3) The Trustee may at any time by written instrument accept the
resignation of or remove any such separate trustee or co-trustee. A
successor to a separate trustee or co-trustee so resigning or removed may
be appointed in the manner provided in this Section.
(c) Such separate trustee or co-trustee, upon acceptance of such trust,
shall be vested with the estates or property specified in such instrument,
either jointly or with the Trustee, or separately, as may be provided
therein, subject to all the trusts, conditions and provisions of this
Indenture, and every such instrument shall be filed with the Trustee. Any
separate trustee or co-trustee may, at any time, by written instrument
constitute the Trustee his agent or attorney-in-fact with full power and
authority, to the extent by law, to do all acts and things and exercise all
discretion authorized or permitted by him, for and in behalf of him and his
name. If any separate trustee or co-trustee shall be dissolved, become
incapable of acting, resign, be removed or die, all the estates, property,
rights, powers, trusts, duties and obligations of said separate trustee or
co-trustee, so far as permitted by law, shall vest in and be exercised by
the Trustee, without the appointment of a successor to said separate trustee
or co-trustee, until the appointment of a successor to said co-trustee is
necessary as provided in this section.
(u) Clause (i) of Paragraph (b) of Section 1008 is amended and restated to
read in its entirety as follows:
(i) Indebtedness of the Company or any Guarantor under the Credit
Facility and under any revolving credit facility or bank term loans in an
aggregate principal amount at any one time outstanding not to exceed
$85,000,000;
(v) Each reference to the phrase "the Notes" contained in clause (x) of
Paragraph (b) of Section 1008 is deleted and replaced with the phrase "the
Securities".
(w) Clause (xi) of Section 1008 is amended and restated to read in its
entirety as follows:
(xi) Indebtedness of the Company or any Guarantor in addition to that
described in clauses (i) through (x) above, and any renewals, extensions,
substitutions, refinancings or replacements of such Indebtedness, so long as
the aggregate principal amount of all Indebtedness pursuant to this
clause (xi) shall not exceed in the aggregate $20,000,000 at any time
outstanding.
(x) Section 1011 is amended and restated to read in its entirety as
follows:
Section 1011. LIMITATION ON LIENS.
Neither the Company nor any Guarantor will, nor will it permit any
Subsidiary to, contract, create, incur, assume or permit to exist any Lien with
respect to any of its property or assets of any kind (whether real or personal,
tangible or intangible, whether now owned or after acquired), except for
Permitted Liens.
(y) Section 1013 is amended to include the following new clause (k) at the
end thereof:
(k) The Net Cash Proceeds of each Asset Sale not immediately used to
repay Senior Indebtedness shall be deposited in an account established by
the Company with the consent of the Administrative Agent in which the
Trustee, for its benefit and the benefit of the Holders, shall have a duly
perfected Lien (the "Asset Sale Proceeds Account"). The Company shall be
entitled to withdraw amounts on deposit in the Asset Sale Proceeds Account
(i) to make investments of the type described in clause (b) of this
Section 1013, (ii) to permanently repay Senior Indebtedness as contemplated
by clause (b) of this Section 1013, (iii) to repay the Securities and Pari
Passu Indebtedness as contemplated by this Section 1013, and (iv) to
purchase Securities in connection with any Change of Control Offer, any
Mandatory Offer, the Definitive Offer, any Initial Deferred Offer, any
Second Deferred Offer or any call for redemption in accordance with the
terms of the Securities and this Indenture. All
9
<PAGE>
amounts on deposit in the Asset Sale Proceeds Account may at the direction
of the Company be invested in cash and Cash Equivalents (as such term is
defined in the Credit Facility as in effect on January 28, 2000). All
interest or profits, if any, on such investments shall be deposited in the
Asset Sale Proceeds Account and reinvested as specified above. If an Event
of Default shall have occurred and be continuing, the Trustee may apply all
amounts on deposit in the Asset Sale Proceeds Account to the Indenture
Obligations. The Company and each Guarantor hereby grant to the Trustee, for
its benefit and the benefit of the Holders, a Lien on the Asset Sale
Proceeds Account (and all amounts on deposit therein) securing the Indenture
Obligations.
(z) Clause (a) of Section 1021 is amended to include the following new
sentence at the end thereof:
The written statement referred to in the immediately preceding sentence will
include computations in reasonable detail of the Fixed Charge Coverage Ratio at
the end of such fiscal quarter or fiscal year, as the case may be. The written
statement required by this Section 1021 also shall include a certification that,
on or within 30 days prior to the date of delivery of such written statement to
the Trustee, (i) the Company has provided the Company's legal counsel with a
complete list (the "PERFECTION LIST") of (A) the Guarantors, (B) the
jurisdictions of organization of the Company and the Guarantors and (C) the
chief executive offices, principal places of business and locations of
Collateral of the Company and each Guarantor under the Security Agreement and
(ii) based upon the Perfection List, its counsel has advised it that the
Trustee, for the benefit of the Secured Creditors (as defined in the Security
Agreement) has a perfected security interest in all of the Collateral in which
the perfection of a security interest can be effected by the filing of financing
statements under the Uniform Commercial Code (as in effect in the relevant
jurisdictions).
(aa) Article Ten is amended to include the following new Sections:
Section 1023. INITIAL DEFERRED OFFERS.
(a) The Company will make one or more offers (each such offer, an "Initial
Deferred Offer") to purchase in the aggregate on or prior to December 31, 2000
(each such date, an "Initial Deferred Purchase Date") at least $10,000,000 in
aggregate principal amount of the Securities (or, if less than $10,000,000 of
Securities are outstanding on any Initial Deferred Purchase Date, the aggregate
principal amount of the Outstanding Securities) from all Holders of Securities
in accordance with the terms of this Section 1023. The purchase price shall
equal 97% of the principal amount of the Securities, plus accrued and unpaid
interest and any accrued and unpaid fees or charges (the "Initial Deferred
Purchase Price"). Each Initial Deferred Offer shall be commenced and the related
Initial Deferred Offer Notice shall be mailed at least 30 days and not more than
60 days prior to the related Initial Deferred Purchase Date, or such earlier
date as in necessary to comply with requirements under the Exchange Act.
(b) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with each Initial Deferred Offer.
(c) Subject to paragraph (b) above, the Company shall send or cause to be
sent by first-class mail, postage prepaid, to the Trustee and to each Holder, at
his address appearing in the Security Register, a notice in respect of each
Initial Deferred Offer (each, an "Initial Deferred Offer Notice") stating or
including:
(1) that the Holder has the right to require the Company to repurchase,
subject to proration, such Holder's Securities at the Initial Deferred
Purchase Price;
(2) the Initial Deferred Purchase Date;
(3) the instructions a Holder must follow in order to have his
Securities purchased in accordance with paragraph (a) of this Section;
10
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(4) (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q, as applicable, and any
Current Report on Form 8-K of the Company filed subsequent to such Quarterly
Report (or in the event the Company is not required to prepare any of the
foregoing Forms, the comparable information required pursuant to
Section 1020), (ii) a description of material developments, if any, in the
Company's business subsequent to the date of the latest of such Reports,
(iii) if material, appropriate pro forma financial information, and
(iv) such other information, if any, concerning the business of the Company
which the Company in good faith believes will enable such Holders to make an
informed investment decision regarding the Initial Deferred Offer;
(5) that the Initial Deferred Offer is being made pursuant to this
Section 1023 and that all Securities properly tendered pursuant to the
Initial Deferred Offer will be accepted for payment at the Initial Deferred
Purchase Price;
(6) the Initial Deferred Purchase Price;
(7) the names and addresses of the Paying Agent and the offices or
agencies referred to in Section 1002;
(8) that Securities must be surrendered prior to the Initial Deferred
Purchase Date to the Paying Agent at the office of the Paying Agent or to an
office or agency referred to in Section 1002 to collect payment;
(9) that any Securities not tendered will continue to accrue interest
and that unless the Company defaults in the payment of the Initial Deferred
Purchase Price, any Security accepted for payment pursuant to a Initial
Deferred Offer shall cease to accrue interest on and after the Initial
Deferred Purchase Date and shall be cancelled and no longer Outstanding;
(10) the procedures for withdrawing a tender; and
(11) that the Initial Deferred Purchase Price for any Security which
has been properly tendered and not withdrawn and which has been accepted for
payment pursuant to the Initial Deferred Offer will be paid promptly
following the Initial Deferred Purchase Date (but in no event later than the
third Business Day following the Initial Deferred Purchase Date).
(d) Holders electing to have Securities purchased hereunder will be
required to surrender such Securities at the address specified in the Initial
Deferred Offer Notice on or prior to the Initial Deferred Purchase Date. Holders
will be entitled to withdraw their election to have their Securities purchased
pursuant to this Section 1023 if the Company receives, not later than the
Initial Deferred Purchase Date, a telegram, telex, facsimile transmission or
letter setting forth (1) the name of the Holder, (2) the certificate number of
the Security in respect of which such notice of withdrawal is being submitted,
(3) the principal amount of the Security (which shall be $1,000 or an integral
multiple thereof) delivered for purchase by the Holder as to which his election
is to be withdrawn, (4) a statement that such Holder is withdrawing his election
to have such principal amount of such Security purchased, and (5) the principal
amount, if any, of such Security (which shall be $1,000 or an integral multiple
thereof) that remains subject to the original notice of the Initial Deferred
Offer and that has been or will be delivered for purchase by the Company.
(e) The Company shall (i) not later than the Initial Deferred Purchase
Date, accept for payment Securities or portions thereof tendered pursuant to the
Initial Deferred Offer, (ii) not later than 10:00 a.m. (New York time) on the
third Business Day after the Initial Deferred Purchase Date, deposit with the
Trustee or with a Paying Agent an amount of money in same day funds (or New York
Clearing House funds if such deposit is made prior to the Initial Deferred
Purchase Date) sufficient to pay the aggregate Initial Deferred Purchase Price
of all the Securities or portions thereof which are to be purchased on that date
and (iii) not later than 10:00 a.m. (New York time) on the Business Day
following the Initial Deferred Purchase Date, deliver to the Paying Agent an
Officers' Certificate stating the Securities or portions
11
<PAGE>
thereof accepted for payment by the Company. The Paying Agent shall promptly
mail or deliver to Holders of Securities so accepted payment in an amount equal
to the Initial Deferred Purchase Price of the Securities purchased from each
such Holder, and the Company shall execute and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Security equal in
principal amount to any unpurchased portion of the Security surrendered. Any
Securities not so accepted shall be promptly mailed or delivered by the Paying
Agent at the Company's expense to the Holder thereof. For purposes of this
Section 1023, the Company shall choose a Paying Agent which shall not be the
Company.
Subject to applicable escheat laws, the Trustee and the Paying Agent shall
return to the Company any cash that remains unclaimed, together with interest,
if any, thereon, held by them for the payment of the Initial Deferred Purchase
Price; PROVIDED, HOWEVER, that (x) to the extent that the aggregate amount of
cash deposited by the Company with the Trustee or the Paying Agent in respect of
a Initial Deferred Offer exceeds the aggregate Initial Deferred Purchase Price
of the Securities or portions thereof to be purchased, then the Trustee shall
hold such excess for the Company and (y) unless otherwise directed by the
Company in writing, no later than the fourth Business Day following the Initial
Deferred Purchase Date the Trustee shall return any such excess (including,
without limitation, monies deposited with respect to an election which has been
withdrawn in accordance with paragraph (d)) to the Company.
(f) Securities to be purchased shall, on the Initial Deferred Purchase
Date, become due and payable at the Initial Deferred Purchase Price and from and
after such date (unless the Company shall default in the payment of the Initial
Deferred Purchase Price) such Securities shall cease to bear interest. Such
Initial Deferred Purchase Price shall be paid to such Holder no later than the
later of the third Business Day after the Initial Deferred Purchase Date and the
Business Day following the date of delivery of such Security to the relevant
Paying Agent at the office of such Paying Agent by the Holder thereof in the
manner required. Upon surrender of any such Security for purchase in accordance
with the foregoing provisions, such Security shall be paid by the Company at the
Initial Deferred Purchase Price; PROVIDED, HOWEVER, that installments of
interest whose Stated Maturity is on or prior to the Initial Deferred Purchase
Date shall be payable to the Person in whose name the Securities (or any
Predecessor Securities) is registered as such on the relevant Regular Record
Dates according to the terms and the provisions of Section 309; PROVIDED,
FURTHER, that Securities to be purchased are subject to proration in the event
the aggregate principal amount of all Securities tendered for purchase exceeds
the aggregate principal amount of Securities subject to the Initial Deferred
Offer, with such adjustments as may be appropriate by the Trustee so that only
Securities in denominations of $1,000 or integral multiples thereof, shall be
purchased. If any Security tendered for purchase shall not be so paid upon
surrender thereof due to failure to make deposit of funds with the Trustee or a
Paying Agent in accordance with paragraph (e) above, the principal thereof (and
premium, if any, thereon) shall, until paid, bear interest from the Initial
Deferred Purchase Date at the rate borne by such Security. Any Security that is
to be purchased only in part shall be surrendered to a Paying Agent at the
office of such Paying Agent (with, if the Company, the Security Registrar or the
Trustee so requires, due endorsement by, or a written instrument of transfer in
form satisfactory to the Company and the Security Registrar or the Trustee duly
executed by, the Holder thereof or such Holder's attorney duly authorized in
writing), and the Company shall execute and the Trustee shall authenticate and
deliver to the Holder of such Security, without service charge, one or more new
Securities of any authorized denomination as requested by such Holder in an
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Security so surrendered that is not purchased. The
Company shall publicly announce the results of the Initial Deferred Offer on or
as soon as practicable after the Initial Deferred Purchase Date.
Section 1024. MANDATORY OFFERS.
(a) The Company will offer (each, a "Mandatory Offer") to purchase on each
of February 5, 2001, February 4, 2002 and the first Business Day of each fiscal
year of the Company thereafter (each, a "Mandatory Purchase Date") at least
$10,000,000 in aggregate principal amount of the Securities (or, if less than
$10,000,000 of Securities are outstanding on the relevant Mandatory Purchase
Date, the
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aggregate principal amount of the Outstanding Securities) from all Holders of
Securities in accordance with the terms of this Section 1024. The purchase price
shall equal 103% of the principal amount of the Securities, plus accrued and
unpaid interest and any accrued and unpaid fees or charges (the "Mandatory
Purchase Price"); PROVIDED, HOWEVER, that in the event that the Securities are
rated "B" or higher by S&P on the second Business Day immediately prior to any
scheduled Mandatory Purchase Date (a "Price Reset Date"), the Mandatory Purchase
Price for the Securities to be purchased on such Mandatory Purchase Date shall
equal 97% of the principal amount of the Securities, plus accrued and unpaid
interest and any accrued and unpaid fees or charges. On each Price Reset Date,
the Company shall deliver to the Trustee an Officer's Certificate certifying the
rating assigned to the Securities by S&P on such Price Reset Date. The Mandatory
Purchase Price set forth in the Mandatory Offer Notice (as defined below) shall
be based upon the rating assigned to the Securities by S&P at the time the
Mandatory Offer Notice is sent to the Trustee and the Holders in accordance with
clause (c) below. In the event that the rating assigned to the Securities by S&P
on the Price Reset Date differs from the rating at the time the Mandatory Offer
notice was distributed requiring either an increase or a decrease in the
Mandatory Purchase Price, (i) the Company shall notify the Trustee and the
Holders on the Reset Date of the change in the Purchase Price and (ii) the
Mandatory Offer will remain open until the tenth Business Day following the
Price Reset Date (or such later date as required by the Exchange Act) and the
Mandatory Purchase Date will be extended accordingly. Each Mandatory Offer shall
be commenced and the related Mandatory Offer Notice shall be mailed at least
30 days and not more than 60 days prior to the relevant Mandatory Purchase Date,
or such earlier date as in necessary to comply with requirements under the
Exchange Act.
(b) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with each Mandatory Offer.
(c) Subject to paragraph (b) above, the Company shall send or cause to be
sent by first-class mail, postage prepaid, to the Trustee and to each Holder, at
his address appearing in the Security Register, a notice in respect of each
Mandatory Offer (each, a "Mandatory Offer Notice") stating or including:
(1) that the Holder has the right to require the Company to repurchase,
subject to proration, such Holder's Securities at the Mandatory Purchase
Price;
(2) the Mandatory Purchase Date;
(3) the instructions a Holder must follow in order to have his
Securities purchased in accordance with paragraph (a) of this Section;
(4) (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q, as applicable, and any
Current Report on Form 8-K of the Company filed subsequent to such Quarterly
Report (or in the event the Company is not required to prepare any of the
foregoing Forms, the comparable information required pursuant to
Section 1020), (ii) a description of material developments, if any, in the
Company's business subsequent to the date of the latest of such Reports,
(iii) if material, appropriate pro forma financial information, and
(iv) such other information, if any, concerning the business of the Company
which the Company in good faith believes will enable such Holders to make an
informed investment decision regarding the Mandatory Offer;
(5) that the Mandatory Offer is being made pursuant to this
Section 1024 and that all Securities properly tendered pursuant to the
Mandatory Offer will be accepted for payment at the Mandatory Purchase
Price;
(6) the Mandatory Purchase Price;
(7) the names and addresses of the Paying Agent and the offices or
agencies referred to in Section 1002;
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(8) that Securities must be surrendered prior to the Mandatory Purchase
Date to the Paying Agent at the office of the Paying Agent or to an office
or agency referred to in Section 1002 to collect payment;
(9) that any Securities not tendered will continue to accrue interest
and that unless the Company defaults in the payment of the Mandatory
Purchase Price, any Security accepted for payment pursuant to a Mandatory
Offer shall cease to accrue interest on and after the Mandatory Purchase
Date and shall be cancelled and no longer Outstanding;
(10) the procedures for withdrawing a tender; and
(11) that the Mandatory Purchase Price for any Security which has been
properly tendered and not withdrawn and which has been accepted for payment
pursuant to the Mandatory Offer will be paid promptly following the
Mandatory Purchase Date (but in no event later than the third Business Day
following the Mandatory Purchase Date).
(d) Holders electing to have Securities purchased hereunder will be
required to surrender such Securities at the address specified in the Mandatory
Offer Notice on or prior to the Mandatory Purchase Date. Holders will be
entitled to withdraw their election to have their Securities purchased pursuant
to this Section 1023 if the Company receives, not later than the Mandatory
Purchase Date, a telegram, telex, facsimile transmission or letter setting forth
(1) the name of the Holder, (2) the certificate number of the Security in
respect of which such notice of withdrawal is being submitted, (3) the principal
amount of the Security (which shall be $1,000 or an integral multiple thereof)
delivered for purchase by the Holder as to which his election is to be
withdrawn, (4) a statement that such Holder is withdrawing his election to have
such principal amount of such Security purchased, and (5) the principal amount,
if any, of such Security (which shall be $1,000 or an integral multiple thereof)
that remains subject to the original notice of the Mandatory Offer and that has
been or will be delivered for purchase by the Company.
(e) The Company shall (i) not later than the Mandatory Purchase Date,
accept for payment Securities or portions thereof tendered pursuant to the
Mandatory Offer, (ii) not later than 10:00 a.m. (New York time) on the third
Business Day after the Mandatory Purchase Date, deposit with the Trustee or with
a Paying Agent an amount of money in same day funds (or New York Clearing House
funds if such deposit is made prior to the Mandatory Purchase Date) sufficient
to pay the aggregate Mandatory Purchase Price of all the Securities or portions
thereof which are to be purchased on that date and (iii) not later than
10:00 a.m. (New York time) on the Business Day following the Mandatory Purchase
Date, deliver to the Paying Agent an Officers' Certificate stating the
Securities or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail or deliver to Holders of Securities so accepted
payment in an amount equal to the Mandatory Purchase Price of the Securities
purchased from each such Holder, and the Company shall execute and the Trustee
shall promptly authenticate and mail or deliver to such Holders a new Security
equal in principal amount to any unpurchased portion of the Security
surrendered. Any Securities not so accepted shall be promptly mailed or
delivered by the Paying Agent at the Company's expense to the Holder thereof.
For purposes of this Section 1024, the Company shall choose a Paying Agent which
shall not be the Company.
Subject to applicable escheat laws, the Trustee and the Paying Agent shall
return to the Company any cash that remains unclaimed, together with interest,
if any, thereon, held by them for the payment of the Mandatory Purchase Price;
PROVIDED, HOWEVER, that (x) to the extent that the aggregate amount of cash
deposited by the Company with the Trustee or the Paying Agent in respect of a
Mandatory Offer exceeds the aggregate Mandatory Purchase Price of the Securities
or portions thereof to be purchased, then the Trustee shall hold such excess for
the Company and (y) unless otherwise directed by the Company in writing, no
later than the Business Day following the Mandatory Purchase Date the Trustee
shall return any such excess (including, without limitation, monies deposited
with respect to an election which has been withdrawn in accordance with
paragraph (d)) to the Company.
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(f) Securities to be purchased shall, on the Mandatory Purchase Date,
become due and payable at the Mandatory Purchase Price and from and after such
date (unless the Company shall default in the payment of the Mandatory Purchase
Price) such Securities shall cease to bear interest. Such Mandatory Purchase
Price shall be paid to such Holder no later than the later of the third Business
Day after the Mandatory Purchase Date and the Business Day following the date of
delivery of such Security to the relevant Paying Agent at the office of such
Paying Agent by the Holder thereof in the manner required. Upon surrender of any
such Security for purchase in accordance with the foregoing provisions, such
Security shall be paid by the Company at the Mandatory Purchase Price; PROVIDED,
HOWEVER, that installments of interest whose Stated Maturity is on or prior to
the Mandatory Purchase Date shall be payable to the Person in whose name the
Securities (or any Predecessor Securities) is registered as such on the relevant
Regular Record Dates according to the terms and the provisions of Section 309;
PROVIDED, FURTHER, that Securities to be purchased are subject to proration in
the event the aggregate principal amount of all Securities tendered for purchase
exceeds the aggregate principal amount of Securities subject to the Mandatory
Offer, with such adjustments as may be appropriate by the Trustee so that only
Securities in denominations of $1,000 or integral multiples thereof, shall be
purchased. If any Security tendered for purchase shall not be so paid upon
surrender thereof due to failure to make deposit of funds with the Trustee or a
Paying Agent in accordance with paragraph (e) above, the principal thereof (and
premium, if any, thereon) shall, until paid, bear interest from the Mandatory
Purchase Date at the rate borne by such Security. Any Security that is to be
purchased only in part shall be surrendered to a Paying Agent at the office of
such Paying Agent (with, if the Company, the Security Registrar or the Trustee
so requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Security Registrar or the Trustee duly
executed by, the Holder thereof or such Holder's attorney duly authorized in
writing), and the Company shall execute and the Trustee shall authenticate and
deliver to the Holder of such Security, without service charge, one or more new
Securities of any authorized denomination as requested by such Holder in an
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Security so surrendered that is not purchased. The
Company shall publicly announce the results of the Mandatory Offer on or as soon
as practicable after the Mandatory Purchase Date.
Section 1025. SECOND DEFERRED OFFERS.
(a) The Company will make one or more offers (each such offer, a "Second
Deferred Offer") to purchase in the aggregate on or prior to March 31, 2001
(each such date, a "Second Deferred Purchase Date") an aggregate principal
amount of the Securities equal to the Deferred Purchase Amount from all Holders
of Securities in accordance with the terms of this Section 1025. The purchase
price shall equal 97% of the principal amount of the Securities, plus accrued
and unpaid interest and any accrued and unpaid fees or charges (the "Second
Deferred Purchase Price"). Each Secured Deferred Offer shall be commenced and
the related Second Deferred Offer Notice shall be mailed at least 30 days and
not more than 60 days prior to the related Second Deferred Purchase Date, or
such earlier date as in necessary to comply with requirements under the Exchange
Act.
(b) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with each Second Deferred Offer.
(c) Subject to paragraph (b) above, the Company shall send or cause to be
sent by first-class mail, postage prepaid, to the Trustee and to each Holder, at
his address appearing in the Security Register, a notice in respect of Second
Deferred Offer (each, a "Second Deferred Offer Notice") stating or including:
(1) that the Holder has the right to require the Company to repurchase,
subject to proration, such Holder's Securities at the Second Deferred
Purchase Price;
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(2) the Second Deferred Purchase Date;
(3) the instructions a Holder must follow in order to have his
Securities purchased in accordance with paragraph (a) of this Section;
(4) (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q, as applicable, and any
Current Report on Form 8-K of the Company filed subsequent to such Quarterly
Report (or in the event the Company is not required to prepare any of the
foregoing Forms, the comparable information required pursuant to
Section 1020), (ii) a description of material developments, if any, in the
Company's business subsequent to the date of the latest of such Reports,
(iii) if material, appropriate pro forma financial information, and
(iv) such other information, if any, concerning the business of the Company
which the Company in good faith believes will enable such Holders to make an
informed investment decision regarding the Second Deferred Offer;
(5) that the Second Deferred Offer is being made pursuant to this
Section 1025 and that all Securities properly tendered pursuant to the
Second Deferred Offer will be accepted for payment at the Second Deferred
Purchase Price;
(6) the Second Deferred Purchase Price;
(7) the names and addresses of the Paying Agent and the offices or
agencies referred to in Section 1002;
(8) that Securities must be surrendered prior to the Second Deferred
Purchase Date to the Paying Agent at the office of the Paying Agent or to an
office or agency referred to in Section 1002 to collect payment;
(9) that any Securities not tendered will continue to accrue interest
and that unless the Company defaults in the payment of the Second Deferred
Purchase Price, any Security accepted for payment pursuant to a Second
Deferred Offer shall cease to accrue interest on and after the Second
Deferred Purchase Date and shall be cancelled and no longer Outstanding;
(10) the procedures for withdrawing a tender; and
(11) that the Second Deferred Purchase Price for any Security which has
been properly tendered and not withdrawn and which has been accepted for
payment pursuant to the Second Deferred Offer will be paid promptly
following the Second Deferred Purchase Date (but in no event later than the
third Business Day following the Second Deferred Purchase Date).
(d) Holders electing to have Securities purchased hereunder will be
required to surrender such Securities at the address specified in the Second
Deferred Offer Notice on or prior to the Second Deferred Purchase Date. Holders
will be entitled to withdraw their election to have their Securities purchased
pursuant to this Section 1025 if the Company receives, not later than the Second
Deferred Purchase Date, a telegram, telex, facsimile transmission or letter
setting forth (1) the name of the Holder, (2) the certificate number of the
Security in respect of which such notice of withdrawal is being submitted,
(3) the principal amount of the Security (which shall be $1,000 or an integral
multiple thereof) delivered for purchase by the Holder as to which his election
is to be withdrawn, (4) a statement that such Holder is withdrawing his election
to have such principal amount of such Security purchased, and (5) the principal
amount, if any, of such Security (which shall be $1,000 or an integral multiple
thereof) that remains subject to the original notice of the Second Deferred
Offer and that has been or will be delivered for purchase by the Company.
(e) The Company shall (i) not later than the Second Deferred Purchase Date,
accept for payment Securities or portions thereof tendered pursuant to the
Second Deferred Offer, (ii) not later than 10:00 a.m. (New York time) on the
third Business Day after the Second Deferred Purchase Date, deposit
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with the Trustee or with a Paying Agent an amount of money in same day funds (or
New York Clearing House funds if such deposit is made prior to the Initial
Deferred Purchase Date) sufficient to pay the aggregate Initial Deferred
Purchase Price of all the Securities or portions thereof which are to be
purchased on that date and (iii) not later than 10:00 a.m. (New York time) on
the Business Day following the Second Deferred Purchase Date, deliver to the
Paying Agent an Officers' Certificate stating the Securities or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail or
deliver to Holders of Securities so accepted payment in an amount equal to the
Second Deferred Purchase Price of the Securities purchased from each such
Holder, and the Company shall execute and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Security equal in
principal amount to any unpurchased portion of the Security surrendered. Any
Securities not so accepted shall be promptly mailed or delivered by the Paying
Agent at the Company's expense to the Holder thereof. For purposes of this
Section 1025, the Company shall choose a Paying Agent which shall not be the
Company.
Subject to applicable escheat laws, the Trustee and the Paying Agent shall
return to the Company any cash that remains unclaimed, together with interest,
if any, thereon, held by them for the payment of the Second Deferred Purchase
Price; PROVIDED, HOWEVER, that (x) to the extent that the aggregate amount of
cash deposited by the Company with the Trustee or the Paying Agent in respect of
a Second Deferred Offer exceeds the aggregate Second Deferred Purchase Price of
the Securities or portions thereof to be purchased, then the Trustee shall hold
such excess for the Company and (y) unless otherwise directed by the Company in
writing, no later than the fourth Business Day following the Second Deferred
Purchase Date the Trustee shall return any such excess (including, without
limitation, monies deposited with respect to an election which has been
withdrawn in accordance with paragraph (d)) to the Company.
(f) Securities to be purchased shall, on the Second Deferred Purchase Date,
become due and payable at the Second Deferred Purchase Price and from and after
such date (unless the Company shall default in the payment of the Second
Deferred Purchase Price) such Securities shall cease to bear interest. Such
Second Deferred Purchase Price shall be paid to such Holder no later than the
later of the third Business Day after the Second Deferred Purchase Date and the
Business Day following the date of delivery of such Security to the relevant
Paying Agent at the office of such Paying Agent by the Holder thereof in the
manner required. Upon surrender of any such Security for purchase in accordance
with the foregoing provisions, such Security shall be paid by the Company at the
Second Deferred Purchase Price; PROVIDED, HOWEVER, that installments of interest
whose Stated Maturity is on or prior to the Second Deferred Purchase Date shall
be payable to the Person in whose name the Securities (or any Predecessor
Securities) is registered as such on the relevant Regular Record Dates according
to the terms and the provisions of Section 309; PROVIDED, FURTHER, that
Securities to be purchased are subject to proration in the event the aggregate
principal amount of all Securities tendered for purchase exceeds the aggregate
principal amount of Securities subject to the Second Deferred Offer, with such
adjustments as may be appropriate by the Trustee so that only Securities in
denominations of $1,000 or integral multiples thereof, shall be purchased. If
any Security tendered for purchase shall not be so paid upon surrender thereof
due to failure to make deposit of funds with the Trustee or a Paying Agent in
accordance with paragraph (e) above, the principal thereof (and premium, if any,
thereon) shall, until paid, bear interest from the Second Deferred Purchase Date
at the rate borne by such Security. Any Security that is to be purchased only in
part shall be surrendered to a Paying Agent at the office of such Paying Agent
(with, if the Company, the Security Registrar or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Security Registrar or the Trustee duly executed by, the Holder
thereof or such Holder's attorney duly authorized in writing), and the Company
shall execute and the Trustee shall authenticate and deliver to the Holder of
such Security, without service charge, one or more new Securities of any
authorized denomination as requested by such Holder in an aggregate principal
amount equal to, and in exchange for, the portion of the principal amount of the
Security so surrendered that is not purchased. The Company shall publicly
announce the results of the Second Deferred Offer on or as soon as practicable
after the Second Deferred Purchase Date.
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<PAGE>
Section 1026. DEFINITIVE OFFER.
(a) The Company will offer (the "Definitive Offer") to purchase on
October 15, 2002 (the "Definitive Purchase Date") all of the Securities of the
Holders in whole or in part, in integral multiples of $1,000, at a purchase
price equal to 106.375% of the principal amount of such Securities, plus accrued
and unpaid interest and any unpaid fees or charges, in accordance with the terms
of this Section 1026. The Definitive Offer shall be commenced and the related
Definitive Offer Notice shall be mailed at least 30 days and not more than
60 days prior to the Definitive Purchase Date, or such earlier date as is
necessary to comply with requirements under the Exchange Act.
(b) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with the Definitive Offer.
(c) Subject to paragraph (b) above, the Company shall send or cause to be
sent by first-class mail, postage prepaid, to the Trustee and to each Holder, at
his address appearing in the Security Register, a notice (the "Definitive Offer
Notice") stating or including:
(1) that the Holder has the right to require the Company to repurchase
such Holder's Securities at the Definitive Purchase Price;
(2) the Definitive Purchase Date;
(3) the instructions a Holder must follow in order to have his
Securities purchased in accordance with paragraph (a) of this Section;
(4) (i) the most recently filed Annual Report on Form 10-K (including
audited consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q, as applicable, and any
Current Report on Form 8-K of the Company filed subsequent to such Quarterly
Report (or in the event the Company is not required to prepare any of the
foregoing Forms, the comparable information required pursuant to
Section 1020), (ii) a description of material developments, if any, in the
Company's business subsequent to the date of the latest of such Reports,
(iii) if material, appropriate pro forma financial information, and
(iv) such other information, if any, concerning the business of the Company
which the Company in good faith believes will enable such Holders to make an
informed investment decision regarding the Definitive Offer;
(5) that the Definitive Offer is being made pursuant to this
Section 1026 and that all Securities properly tendered pursuant to the
Definitive Offer will be accepted for payment at the Definitive Purchase
Price;
(6) the Definitive Purchase Price;
(7) the names and addresses of the Paying Agent and the offices or
agencies referred to in Section 1002;
(8) that Securities must be surrendered prior to the Definitive
Purchase Date to the Paying Agent at the office of the Paying Agent or to an
office or agency referred to in Section 1002 to collect payment;
(9) that any Securities not tendered will continue to accrue interest
and that unless the Company defaults in the payment of the Definitive
Purchase Price, any Security accepted for payment pursuant to a Definitive
Offer shall cease to accrue interest on and after the Definitive Purchase
Date and shall be cancelled and no longer Outstanding;
(10) the procedures for withdrawing a tender; and
(11) that the Definitive Purchase Price for any Security which has been
properly tendered and not withdrawn and which has been accepted for payment
pursuant to the Definitive Offer will be paid
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promptly following the Definitive Purchase Date (but in no event later than
the third Business Day following the Definitive Purchase Date).
(d) Holders electing to have Securities purchased hereunder will be
required to surrender such Securities at the address specified in the Definitive
Offer Notice on or prior to the Definitive Purchase Date. Holders will be
entitled to withdraw their election to have their Securities purchased pursuant
to this Section 1026 if the Company receives, not later than the Definitive
Purchase Date, a telegram, telex, facsimile transmission or letter setting forth
(1) the name of the Holder, (2) the certificate number of the Security in
respect of which such notice of withdrawal is being submitted, (3) the principal
amount of the Security (which shall be $1,000 or an integral multiple thereof)
delivered for purchase by the Holder as to which his election is to be
withdrawn, (4) a statement that such Holder is withdrawing his election to have
such principal amount of such Security purchased, and (5) the principal amount,
if any, of such Security (which shall be $1,000 or an integral multiple thereof)
that remains subject to the original notice of the Definitive Offer and that has
been or will be delivered for purchase by the Company.
(e) The Company shall (i) not later than the Definitive Purchase Date,
accept for payment Securities or portions thereof tendered pursuant to the
Definitive Offer, (ii) not later than 10:00 a.m. (New York time) on the third
Business Day after the Definitive Purchase Date, deposit with the Trustee or
with a Paying Agent an amount of money in same day funds (or New York Clearing
House funds if such deposit is made prior to the Definitive Purchase Date)
sufficient to pay the aggregate Definitive Purchase Price of all the Securities
or portions thereof which are to be purchased on that date and (iii) not later
than 10:00 a.m. (New York time) on the third Business Day after the Definitive
Purchase Date, deliver to the Paying Agent an Officers' Certificate stating the
Securities or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail or deliver to Holders of Securities so accepted
payment in an amount equal to the Definitive Purchase Price of the Securities
purchased from each such Holder, and the Company shall execute and the Trustee
shall promptly authenticate and mail or deliver to such Holders a new Security
equal in principal amount to any unpurchased portion of the Security
surrendered. Any Securities not so accepted shall be promptly mailed or
delivered by the Paying Agent at the Company's expense to the Holder thereof.
For purposes of this Section 1024, the Company shall choose a Paying Agent which
shall not be the Company.
Subject to applicable escheat laws, the Trustee and the Paying Agent shall
return to the Company any cash that remains unclaimed, together with interest,
if any, thereon, held by them for the payment of the Definitive Purchase Price;
PROVIDED, HOWEVER, that (x) to the extent that the aggregate amount of cash
deposited by the Company with the Trustee or the Paying Agent in respect of a
Definitive Offer exceeds the aggregate Definitive Purchase Price of the
Securities or portions thereof to be purchased, then the Trustee shall hold such
excess for the Company and (y) unless otherwise directed by the Company in
writing, no later than the fourth Business Day following the Definitive Purchase
Date the Trustee shall return any such excess (including, without limitation,
monies deposited with respect to an election which has been withdrawn in
accordance with paragraph (d)) to the Company together with interest or
dividends, if any, thereon.
(f) Securities to be purchased shall, on the Definitive Purchase Date,
become due and payable at the Definitive Purchase Price and from and after such
date (unless the Company shall default in the payment of the Definitive Purchase
Price) such Securities shall cease to bear interest. Such Definitive Purchase
Price shall be paid to such Holder no later than the later of the third Business
Day after the Definitive Purchase Date and the Business Day following the date
of delivery of such Security to the relevant Paying Agent at the office of such
Paying Agent by the Holder thereof in the manner required. Upon surrender of any
such Security for purchase in accordance with the foregoing provisions, such
Security shall be paid by the Company at the Definitive Purchase Price;
PROVIDED, HOWEVER, that installments of interest whose Stated Maturity is on or
prior to the Definitive Purchase Date shall be payable to the Person in whose
name the Securities (or any Predecessor Securities) is registered as such on the
relevant Regular Record Dates according to the terms and the provisions of
Section 309. If any Security tendered for purchase shall not be
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so paid upon surrender thereof due to failure to make deposit of funds with the
Trustee or a Paying Agent in accordance with paragraph (e) above, the principal
thereof (and premium, if any, thereon) shall, until paid, bear interest from the
Definitive Purchase Date at the rate borne by such Security. Any Security that
is to be purchased only in part shall be surrendered to a Paying Agent at the
office of such Paying Agent (with, if the Company, the Security Registrar or the
Trustee so requires, due endorsement by, or a written instrument of transfer in
form satisfactory to the Company and the Security Registrar or the Trustee duly
executed by, the Holder thereof or such Holder's attorney duly authorized in
writing), and the Company shall execute and the Trustee shall authenticate and
deliver to the Holder of such Security, without service charge, one or more new
Securities of any authorized denomination as requested by such Holder in an
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Security so surrendered that is not purchased. The
Company shall publicly announce the results of the Definitive Offer on or as
soon as practicable after the Definitive Purchase Date.
Section 1027. CONSOLIDATED FIXED CHARGE COVERAGE RATIO. As of the last day
of the fiscal quarter ending closest to April 30, 2000, and as of the last day
of each fiscal quarter thereafter, the Company will maintain a Consolidated
Fixed Charge Coverage Ratio of at least the amount set forth in the table below
(i) with respect to the fiscal quarter ending closest to April 30, 2000, for the
immediately preceding one (1) fiscal quarter, (ii) with respect to the fiscal
quarter ending closest to July 31, 2000, for the immediately preceding two
(2) fiscal quarters, (iii) with respect to the fiscal quarter ending closest to
October 31, 2000, for the immediately preceding three (3) fiscal quarters, and
(iv) with respect to each fiscal quarter thereafter, for the immediately
preceding four (4) fiscal quarters:
<TABLE>
<CAPTION>
CONSOLIDATED FIXED CHARGE
COVERAGE RATIO SHALL NOT BE
FISCAL QUARTER ENDING CLOSEST TO: LESS THAN:
- --------------------------------- ---------------------------
<S> <C>
April 30, 2000.............................................. 1.25 to 1.00
Thereafter.................................................. 1.75 to 1.00
</TABLE>
During the period from March 21, 2000 through the end of the fiscal quarter
ending on or about February 4, 2001, no Event of Default shall arise as a result
of the Company's failure to comply with this Section 1027 unless the Company
fails to comply with this Section 1027 for two (2) consecutive fiscal quarters.
Section 1028. CONSULTANT.
(a) The Company shall continue to engage the firm of E&Y Restructuring, LLC
and Ernst & Young LLP (collectively, the "Consultant") in accordance with the
terms of the Consulting Agreement during the period from March 21, 2000 through
March 21, 2001 (or such earlier time as the Holders of not less than a majority
of the aggregate principal amount of the Securities at the time Outstanding
shall, by Act of such Holders, agree). The Consultant shall promptly provide the
Trustee and the Holders with such reports and information regarding the business
and operations of the Company and its Subsidiaries and their cooperation with
the Consultant as the Holders of not less than a majority of the aggregate
principal amount of the Securities at any time Outstanding may reasonably
request, including, without limitation, written confirmation that the Company
and its Subsidiaries are cooperating with the Consultant, but excluding material
non-public information unless the recipient thereof shall have satisfied such
requirements respecting the disclosure thereof as the Company may from time to
time reasonably prescribe.
(b) The Company shall not permit or suffer any termination or any material
amendment or modification of the terms and provisions of the Consulting
Agreement without the prior consent of the Holders of a majority of the
aggregate principal amount of Outstanding Securities; PROVIDED, HOWEVER, that no
Event of Default shall be deemed to occur under this Section 1028 if the
Consultant shall terminate the Consulting Agreement for any reason other than as
a result of a default by the Company under the Consulting Agreement or the
failure of the Company in any material respect to cooperate with the Consultant,
unless within 45 days after such termination, the Company shall fail to engage
another
20
<PAGE>
consultant (reasonably satisfactory to the Holders of not less than a majority
of the aggregate principal amount of the Securities at the time Outstanding) to
provide substantially the same services as set forth in the Consulting
Agreement.
Section 1029. ADDITIONAL CREDIT PARTIES.
At the time any Person becomes a Subsidiary of the Company or any Guarantor,
the Company shall so notify the Trustee and promptly thereafter (but in any
event within 30 days after the date thereof) shall cause such Person to (a) if
it is a Domestic Subsidiary, to become a Guarantor in accordance with
Section 1415, (b) cause all of the capital stock of such Person (if it is a
Domestic Subsidiary) or 65% of the capital stock of such Person (if it is a
First Tier Foreign Subsidiary) to be duly pledged to the Trustee pursuant to the
Pledge Agreement, (c) if such Person is a Domestic Subsidiary, pledge all of its
assets pursuant to the Security Agreement and the other Security Documents and
(d) if such Person is a Domestic Subsidiary and has any Subsidiaries, pledge all
of the capital stock of such Domestic Subsidiaries owned by it and 65% of the
stock of the First Tier Foreign Subsidiaries owned by it to the Trustee pursuant
to the Pledge Agreement, (e) comply with all of its obligations under the
Security Documents and (f) deliver appropriate UCC-1 financing statements,
environmental reports, landlord's waivers, certified resolutions and other
organizational and authorizing documents of such Person and favorable opinions
of counsel to such Person (which shall cover, among other things, the legality,
validity, binding effect and enforceability of the documentation referred to
above). In the event that the Company or any Guarantor grants a Lien on real
property in favor of any Senior Secured Creditor, the Company or such Guarantor
shall promptly grant and perfect a Lien on such real property in favor of the
Trustee securing the Indenture Obligations (subordinate only to the Lien on such
real property in favor of such Senior Secured Creditor securing Indebtedness
permitted under Section 1008(b)(i)), pursuant to documentation substantially
identical (with appropriate changes) to the documentation executed in favor of
such Senior Secured Creditor, together with an opinion of counsel to the Company
or such Guarantor, as the case may be (which shall cover, among other things,
the legality, validity, binding effect and enforceability of the documentation
granting the Lien in favor of the Trustee) and, if a mortgagee title policy is
acquired by such Senior Secured Creditor, a mortgage title policy in favor of
the Trustee substantially identical to the mortgagee title policy in favor of
such Senior Secured Creditor (with appropriate changes). Without limiting the
generality of the foregoing, the Company and the Guarantors agree, from time to
time, to execute any and all documents, instruments and agreements, and to take
any further action that may be required under applicable law or as the Trustee
or the holders of not less than a majority of the aggregate principal amount of
the Outstanding Securities may request to grant, preserve, protect and perfect
the validity and priority (subordinate only to Liens in favor of the Senior
Secured Creditors securing the Indebtedness permitted under Section 1008(b)(i))
of Liens over its property in favor of the Trustee. Anything to the contrary
contained herein, in any Security Document or otherwise notwithstanding, nothing
shall require or be deemed to require the Trustee to enter into any
intercreditor or subordination agreement with any Senior Secured Creditor (other
than the Intercreditor Agreement).
(bb) Section 1407 is amended and restated to read in its entirety as
follows:
Section 1407. FRAUDULENT CONVEYANCE; CONTRIBUTION; SUBROGATION.
(a) Any term or provision of this Guarantee to the contrary
notwithstanding, the aggregate amount of the Indenture Obligations guaranteed by
each Guarantor hereunder shall be reduced to the extent necessary to prevent its
Guarantee from violating or becoming violable under applicable law relating to
fraudulent conveyance or fraudulent transfer, insolvency of debtors or similar
laws affecting the rights of creditors generally.
(b) Subject to clause (c) below, each Guarantor that makes a payment or
distribution under its Guarantee shall be entitled to a contribution from each
other Guarantor in a pro rata amount based on the net assets of each Guarantor,
determined in accordance with GAAP.
21
<PAGE>
(c) All rights of subrogation, reimbursement, exoneration, contribution or
indemnification (whether contractual, under the Bankruptcy Law, under common law
or otherwise) of any Guarantor arising in respect of any amounts paid by such
Guarantor pursuant to the provisions of this Article Fourteen (collectively,
"Reimbursement Rights") shall be subject to the immediately succeeding sentence.
No Guarantor shall be entitled to enforce or receive any payments arising out
of, or based upon, any Reimbursement Right until 91 days after all Indenture
Obligations shall have been indefeasibly paid in full.
(cc) Anything to the contrary set forth in the Indenture (including,
without limitation, Article Eleven) or the Securities notwithstanding, the
Securities shall not be subject to redemption at the option of the Company (and
the Company shall not commence redemption of the Securities) until the
completion of the Definitive Offer in accordance with Section 1028 of the
Indenture.
Section 1.2. WAIVER OF EXISTING RESTRICTED PAYMENT DEFAULTS. The Existing
Restricted Payment Defaults are hereby waived in accordance with Section 513 of
the Indenture.
ARTICLE II
MISCELLANEOUS PROVISIONS
Section 2.1. TERMS DEFINED. For all purposes of this Fifth Supplemental
Indenture, except as otherwise defined or unless the context otherwise requires,
terms used in capitalized form in this Fifth Supplemental Indenture and defined
in the Indenture have the meanings specified in the Indenture.
Section 2.2. INDENTURE. Except as amended hereby, the Indenture and the
Securities are in all respects ratified and confirmed and all their terms shall
remain in full force and effect.
Section 2.3. GOVERNING LAW. THIS FIFTH SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
Section 2.4. SUCCESSORS AND ASSIGNS. All agreements of the Company, the
Guarantors, the Additional Guarantor and the Trustee in this Fifth Supplemental
Indenture, and the Securities and the Security Documents shall bind their
respective successors and assigns.
Section 2.5. MULTIPLE COUNTERPARTS. This Fifth Supplemental Indenture may
be executed in any number of counterparts (including via telecopier), each of
which shall be an original, but such counterparts shall together constitute but
one and the same instrument.
Section 2.6. EFFECTIVENESS. The provisions of this Fifth Supplemental
Indenture shall become effective immediately upon its execution and delivery by
the Trustee in accordance with the provisions of Article IX of the Indenture.
Section 2.7. TRUSTEE DISCLAIMER. The Trustee accepts the amendment of the
Indenture effected by this Fifth Supplemental Indenture and agrees to execute
the trust created by the Indenture as hereby amended, but only upon the terms
and conditions set forth in the Indenture, including the terms and provisions
defining and limiting the liabilities and responsibilities of the Trustee, which
terms and provisions shall in like manner define and limit, its liabilities and
responsibilities in the performance of the trust created by the Indenture as
hereby amended, and, without limiting the generality of the foregoing, the
Trustee shall not be responsible in any manner whatsoever for or with respect to
any of the recitals or statements contained herein, all of which recitals or
statements are made solely by the Company, the Guarantors and the Additional
Guarantor or for or with respect to (i) the validity, efficacy or sufficiency of
this Fifth Supplemental Indenture or any of the terms or provisions hereof,
(ii) the proper authorization hereof by the Company, the Guarantors and the
Additional Guarantor by corporate action or otherwise, (iii) the due execution
hereof by the Company, the Guarantors and the Additional Guarantor, (iv) the
consequences (direct or indirect and whether deliberate or inadvertent) of any
amendment herein provided for, and the
22
<PAGE>
Trustee makes no representation with respect to any such matters, or (v) the
validity or sufficiency of the consent solicitation or the consent solicitation
materials or procedures in connection therewith.
Section 2.8. HEADINGS. The headings of the Articles and Sections of this
Fifth Supplemental Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
[Remainder of Page Intentionally Blank]
23
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental
Indenture to be duly executed, all as of the date first written above.
<TABLE>
<S> <C> <C> <C>
FLOORING AMERICA, INC.
By:
---------------------------------------
Name:
Title:
Attest:
---------------------------------------
Name:
Title:
ADVANCE FLOOR DECORATORS, INC.
CARPETMAX OF UTAH, INC.
COLORADO CARPET & RUGS, INC.
CARPETMAX RETAIL STORES, INC.
EVERYTHINGDECOR, INC.
FLOOR SOURCE DISTRIBUTORS, INC.
4 FLOORS, INC.
KAREN'S INC.
MANASOTA CARPET, INC.
MAXIM RETAIL GROUP, INC.
MAXIM RETAIL STORES, INC.
WADSWORTH & OWENS DECORATING CENTER, INC.
By:
---------------------------------------
Name:
Title:
Attest:
---------------------------------------
Name:
Title:
C&S TEXTILES, INC.
INVESTOR MANAGEMENT, INC.
MAXIM EQUIPMENT LEASING COMPANY, INC.
TRI-R OF ORLANDO, INC.
By:
---------------------------------------
Name:
Title:
Attest:
---------------------------------------
Name:
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC.
CARPETSPLUS OF AMERICA, INC.
GCO, INC.
GCO CARPET OUTLET, INC.
By:
---------------------------------------
Name:
Title:
Attest:
---------------------------------------
Name:
Title:
FLOORING AMERICA FRANCHISING, L.P.
By: FLOORING AMERICA, INC.,
AS GENERAL PARTNER
By:
---------------------------------------
Name:
Title:
STATE STREET BANK AND TRUST COMPANY,
AS TRUSTEE
By:
---------------------------------------
Name:
Title:
Attest:
---------------------------------------
Name:
Title:
</TABLE>
<PAGE>
SCHEDULE A
PERMITTED LIENS
<PAGE>
Exhibit 10.16
================================================================================
LOAN AND SECURITY AGREEMENT
AMONG
FLOORING AMERICA, INC., 4 FLOORS, INC.,
ADVANCE FLOOR DECORATORS, INC.,
BAILEY & ROBERTS CARPETMAX OF TENNESSEE, INC.,
CARPETMAX OF UTAH, INC., FLOORING AMERICA FRANCHISING, L.P.,
CARPETMAX RETAIL STORES, INC., MANASOTA CARPET, INC.,
WADSWORTH & OWENS DECORATING CENTER, INC.,
CARPETSPLUS OF AMERICA, INC., GCO CARPET OUTLET, INC.,
KAREN'S INC., MAXIM RETAIL GROUP, INC.,
MAXIM RETAIL STORES, INC., C&S TEXTILES, INC.,
COLORADO CARPET & RUGS, INC.,
TRI-R OF ORLANDO, INC. AND GCO, INC.,
AS BORROWERS,
THE FINANCIAL INSTITUTIONS NAMED HEREIN,
AS LENDERS,
AND
FOOTHILL CAPITAL CORPORATION,
AS ARRANGER AND ADMINISTRATIVE AGENT
January 28, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page(s)
-------
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION......................................................................1
1.1 Definitions..............................................................................1
1.2 Accounting Terms........................................................................20
1.3 Code....................................................................................20
1.4 Construction............................................................................20
1.5 Schedules and Exhibits..................................................................20
2. LOAN AND TERMS OF PAYMENT........................................................................20
2.1 Revolving Advances......................................................................20
2.2 Letters of Credit.......................................................................27
2.3 Intentionally Omitted...................................................................30
2.4 Intentionally Omitted...................................................................30
2.5 Payments................................................................................30
2.6 Overadvances............................................................................31
2.7 Interest and Letter of Credit Fees: Rates, Payments, and Calculations..................31
2.8 Collection of Accounts..................................................................34
2.9 Crediting Payments; Application of Collections..........................................35
2.10 Designated Account......................................................................35
2.11 Maintenance of Loan Account; Statements of Obligations..................................35
2.12 Fees....................................................................................36
2.13 Eurodollar Rate Loans...................................................................36
2.14 Illegality..............................................................................38
2.15 Requirements of Law.....................................................................38
2.16 Indemnity...............................................................................40
2.17 Increased Maximum Amount................................................................40
2.18 All Obligations to Constitute Joint and Several Obligations.............................41
2.19 Maximum Borrower Liability..............................................................41
3. CONDITIONS; TERM OF AGREEMENT....................................................................43
3.1 Conditions Precedent to the Initial Advance and Initial Letter of Credit................43
3.2 Conditions Precedent to all Advances and all Letters of Credit..........................46
3.3 Condition Subsequent....................................................................46
3.4 Term....................................................................................47
3.5 Effect of Termination...................................................................47
3.6 Early Termination by Borrowers..........................................................48
3.7 Termination Upon Event of Default.......................................................48
4. CREATION OF SECURITY INTEREST....................................................................48
4.1 Grant of Security Interest..............................................................48
4.2 Negotiable Collateral...................................................................49
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral..................49
4.4 Delivery of Additional Documentation Required...........................................49
4.5 Power of Attorney.......................................................................49
4.6 Right to Inspect........................................................................50
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<PAGE>
5. REPRESENTATIONS AND WARRANTIES...................................................................50
5.1 No Encumbrances.........................................................................50
5.2 Eligible Accounts.......................................................................50
5.3 Eligible Inventory......................................................................50
5.4 Equipment...............................................................................50
5.5 Location of Inventory and Equipment.....................................................50
5.6 Inventory Records.......................................................................51
5.7 Location of Chief Executive Office; FEIN................................................51
5.8 Due Organization and Qualification; Subsidiaries........................................51
5.9 Due Authorization; No Conflict..........................................................51
5.10 Litigation..............................................................................52
5.11 No Material Adverse Change. ............................................................52
5.12 Solvency................................................................................52
5.13 Employee Benefits.......................................................................52
5.14 Environmental Condition................................................................53
5.15 Intellectual Property...................................................................53
5.16 Broker's Fees...........................................................................53
6. AFFIRMATIVE COVENANTS............................................................................53
6.1 Accounting System.......................................................................53
6.2 Collateral Reporting....................................................................53
6.3 Financial Statements, Reports, Certificates.............................................54
6.4 Tax Returns; Tax Refund Claims..........................................................55
6.5 Intentionally Omitted...................................................................55
6.6 Returns.................................................................................55
6.7 Title to Equipment......................................................................55
6.8 Maintenance of Equipment................................................................56
6.9 Taxes...................................................................................56
6.10 Insurance...............................................................................56
6.11 No Setoffs or Counterclaims.............................................................58
6.12 Location of Inventory and Equipment.....................................................58
6.13 Compliance with Laws....................................................................58
6.14 Employee Benefits.......................................................................58
6.15 Leases..................................................................................59
6.16 New Mexico Property.....................................................................59
7. NEGATIVE COVENANTS...............................................................................59
7.1 Indebtedness............................................................................59
7.2 Liens...................................................................................60
7.3 Restrictions on Fundamental Changes.....................................................60
7.4 Disposal of Assets......................................................................60
7.5 Change Name.............................................................................61
7.6 Guarantee...............................................................................61
7.7 Nature of Business......................................................................61
7.8 Prepayments and Amendments..............................................................61
7.9 Change of Control.......................................................................62
7.10 Consignments............................................................................62
7.11 Distributions...........................................................................62
7.12 Accounting Methods......................................................................62
7.13 Investments.............................................................................63
7.14 Transactions with Affiliates............................................................63
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<PAGE>
7.15 Suspension..............................................................................63
7.16 Intentionally Omitted...................................................................63
7.17 Use of Proceeds.........................................................................63
7.18 Change in Location of Chief Executive Office; Inventory and Equipment
with Bailees............................................................................63
7.19 No Prohibited Transactions Under ERISA..................................................63
7.20 Financial Covenants.....................................................................64
7.21 Capital Expenditures....................................................................65
7.22 Retail Store Closings...................................................................66
8. EVENTS OF DEFAULT................................................................................66
9. THE LENDER GROUP'S RIGHTS AND REMEDIES...........................................................68
9.1 Rights and Remedies.....................................................................68
9.2 Remedies Cumulative.....................................................................70
10. TAXES AND EXPENSES...............................................................................70
11. WAIVERS; INDEMNIFICATION.........................................................................70
11.1 Demand; Protest; etc....................................................................70
11.2 The Lender Group's Liability for Collateral.............................................71
11.3 Indemnification.........................................................................71
12. NOTICES..........................................................................................71
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.......................................................72
14. DESTRUCTION OF BORROWERS' DOCUMENTS..............................................................73
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.......................................................73
15.1 Assignments and Participations..........................................................73
15.2 Successors..............................................................................75
16. AMENDMENTS; WAIVERS..............................................................................75
16.1 Amendments and Waivers..................................................................76
16.2 No Waivers; Cumulative Remedies.........................................................77
17. AGENT; THE LENDER GROUP..........................................................................77
17.1 Appointment and Authorization of Agent..................................................77
17.2 Delegation of Duties....................................................................78
17.3 Liability of Agent-Related Persons......................................................78
17.4 Reliance by Agent.......................................................................78
17.5 Notice of Default or Event of Default...................................................79
17.6 Credit Decision.........................................................................79
17.7 Costs and Expenses; Indemnification.....................................................80
17.8 Agent in Individual Capacity............................................................80
17.9 Successor Agent.........................................................................81
17.10 Withholding Tax.........................................................................81
17.11 Collateral Matters......................................................................82
17.12 Restrictions on Actions by Lenders; Sharing of Payments.................................83
17.13 Agency for Perfection...................................................................83
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17.14 Payments by Agent to the Lenders........................................................84
17.15 Concerning the Collateral and Related Loan Documents....................................84
17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by
Lenders; Other Reports and Information..................................................84
17.17 Several Obligations; No Liability.......................................................85
18. GENERAL PROVISIONS...............................................................................86
18.1 Effectiveness...........................................................................86
18.2 Section Headings........................................................................86
18.3 Interpretation..........................................................................86
18.4 Severability of Provisions..............................................................86
18.5 Counterparts; Telefacsimile Execution...................................................86
18.6 Revival and Reinstatement of Obligations................................................86
18.7 Integration.............................................................................86
18.8 Time is of the Essence..................................................................86
18.9 Revised Article 9.......................................................................87
</TABLE>
SCHEDULES AND EXHIBITS
<TABLE>
<S> <C>
Schedule C-1 Commitment
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule R-1 Real Property Collateral
Schedule 2.8 Bank and Investment Accounts
Schedule 5.7 Chief Executive Office and FEIN of each Borrower Party
Schedule 5.8 Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 5.15 Intellectual Property
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Other Indebtedness
Schedule 7.4 Release Prices
Schedule 7.22 Retail Store Sales
Exhibit A Form of Assignment and Acceptance
Exhibit B Form of Borrowing Base Certificate
Exhibit C Form of Compliance Certificate
Exhibit D Form of Increased Maximum Amount Activation Notice
Exhibit E Form of New Lender Supplement
</TABLE>
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT") is entered into as
of January 28, 2000, among FLOORING AMERICA, INC., a Delaware corporation, 4
FLOORS, INC., an Ohio corporation, ADVANCE FLOOR DECORATORS, INC., a Michigan
corporation, BAILEY & ROBERTS CARPETMAX OF TENNESSEE, INC., a Tennessee
corporation, CARPETMAX OF UTAH, INC., a Utah corporation, FLOORING AMERICA
FRANCHISING, L.P. (f/k/a Carpetmax, L.P.), a Georgia limited partnership,
CARPETMAX RETAIL STORES, INC., a Delaware corporation, MANASOTA CARPET, INC., a
Florida corporation, WADSWORTH & OWENS DECORATING CENTER, INC., a Florida
corporation, CARPETSPLUS OF AMERICA, INC., a Georgia corporation, GCO CARPET
OUTLET, INC., an Alabama corporation, KAREN'S INC., a Michigan corporation,
MAXIM RETAIL GROUP, INC., a Georgia corporation, MAXIM RETAIL STORES, INC., a
Georgia corporation, C & S TEXTILES, INC., an Idaho corporation, COLORADO CARPET
& RUGS, INC., a Colorado corporation, TRI-R OF ORLANDO, INC., a Georgia
corporation, and GCO, INC., a Nevada corporation, as borrowers ("Borrowers" and
each "Borrower"), on the one hand, and the financial institutions listed on the
signature pages hereof as lenders (such financial institutions, together with
their respective successors and assigns, are referred to hereinafter each
individually as a "Lender" and collectively as the "Lenders"), and FOOTHILL
CAPITAL CORPORATION, as Arranger (as defined below) and Agent (as defined
below), on the other hand.
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 each
Borrower arising out of the sale or lease of goods or the rendition of services
by a Borrower, irrespective of whether earned by performance, and any and all
credit insurance, guaranties, or security therefor.
"ADJUSTED EURODOLLAR RATE" means, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next 1/16%) determined by dividing (a) the
Eurodollar Rate for such Interest Period by (b) a percentage equal to (i) one
hundred percent (100%) minus (ii) the Reserve Percentage. The Adjusted
Eurodollar Rate shall be adjusted on and as of the effective day of any change
in the Reserve Percentage.
"ADVANCES" has the meaning set forth in SECTION 2.1(a).
"AFFILIATE" means, as applied to any Person, any other Person
who directly or indirectly controls, is controlled by, is under common control
with or is a director or officer of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to vote 5% or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
1
<PAGE>
"AGENT" means Foothill, solely in its capacity as
administrative agent for the Lenders, and shall include any successor agent.
"AGENT'S ACCOUNT" has the meaning set forth in SECTION 2.8.
"AGENT ADVANCE" has the meaning set forth in SECTION 2.1(h).
"AGENT LOAN" has the meaning set forth in SECTION 2.1(g).
"AGENT-RELATED PERSONS" means Foothill, in its capacity as
Agent, Arranger and a Lender, together with its Affiliates, and the officers,
directors, employees, counsel, agents, and attorneys-in-fact of Foothill and
such Affiliates.
"AGREEMENT" has the meaning set forth in the preamble hereto.
"ARRANGER" means Foothill Capital Corporation, in its capacity
as arranger hereunder.
"ASSIGNEE" has the meaning set forth in SECTION 15.1.
"ASSIGNMENT AND ACCEPTANCE" has the meaning set forth in
SECTION 15.1 (a) and shall be in the form of EXHIBIT A.
"ASSIGNMENT OF NOTES" means the Assignment of Notes of even
date herewith among Borrowers and Agent, in form and substance satisfactory to
Agent, as the same may be modified, amended, supplemented or restated from time
to time.
"AUTHORIZED PERSON" means any officer or other employee of a
Borrower.
"AVAILABILITY" means, as of the date of determination, the
result (so long as such result is a positive number) of (a) the lesser of the
Borrowing Base or the Maximum Amount, LESS (b) the Revolving Facility Usage.
"AVERAGE UNUSED PORTION OF MAXIMUM AMOUNT" means, as of any
date of determination, (a) the Maximum Amount, LESS (b) the sum of (i) the
average Daily Balance of Advances that were outstanding during the immediately
preceding month, PLUS (ii) the average Daily Balance of the undrawn Letters of
Credit that were outstanding during the immediately preceding month.
"BANKRUPTCY CODE" means the United States Bankruptcy Code (11
U.S.C. Sections 101 et seq.), as amended, and any successor statute.
"BENEFIT PLAN" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which a Borrower, any Subsidiary of a Borrower, or
any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the past six (6) years.
"BLOCKED ACCOUNT" shall mean a depositary account established
pursuant to one of the Blocked Account Agreements.
2
<PAGE>
"BLOCKED ACCOUNT AGREEMENTS" means those certain Depository
Account Agreements, in form and substance satisfactory to Agent, each of which
is among any Borrower, Agent, and one of the Blocked Account Banks.
"BLOCKED ACCOUNT BANKS" means Bank of America, N.A. and
SunTrust Bank, Inc. or such other Person or Persons as may be agreed to by any
Borrower and Agent from time to time.
"BORROWER" and "BORROWERS" have the respective meanings set
forth in the preamble to this Agreement.
"BORROWER PARTIES" means each Borrower and each direct and
indirect Subsidiary of a Borrower, and "BORROWER PARTY" means any one of the
foregoing Borrower Parties.
"BORROWER'S BOOKS" means all of each Borrower's books and
records including: ledgers; records indicating, summarizing, or evidencing such
Borrower's properties or assets (including the Collateral) or liabilities; all
information relating to such Borrower's business operations or financial
condition; and all computer programs, disk or tape files, printouts, runs, or
other computer prepared information.
"BORROWING" means a borrowing hereunder consisting of Advances
made on the same day by the Lenders, or by Agent in the case of an Agent Loan or
an Agent Advance.
"BORROWING BASE" has the meaning set forth in SECTION 2.1(a).
"BORROWING BASE CERTIFICATE" means a certificate substantially
in the form of EXHIBIT B or such other form acceptable to Agent.
"BUSINESS DAY" means any day that is not a Saturday, Sunday,
or other day on which national banks are authorized or required to close.
"CAPITAL STOCK" means, as applied to any Person, any capital
stock, general or limited partnership interests, limited liability company
interests or other equivalents of such Person, regardless of class or
designation, and all warrants, options, purchase rights, conversion or exchange
rights, voting rights, calls or claims of any character with respect thereto.
"CARPETMAX" means CarpetMAX Retail Stores, Inc., a Georgia
corporation.
"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 10% of the total voting power of all classes of stock
then outstanding of Parent entitled to vote in the election of directors.
"CLOSING DATE" means the date of the first to occur of the
making of the initial Advance or the issuance of the initial Letter of Credit.
"CODE" means the Georgia Uniform Commercial Code.
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"COLLATERAL" means all real and personal property of each
Borrower, whether now existing or hereafter arising, including without
limitation each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Investment Property and its components,
(g) the Negotiable Collateral,
(h) the Real Property Collateral,
(i) any money, or other assets of a Borrower that now or
hereafter come into the possession, custody, or control of the Lender Group, and
(j) 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, Investment Property, Negotiable Collateral, Real
Property, money, deposit accounts, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and the proceeds
thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver,
mortgagee waiver, bailee letter, or acknowledgment agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a Lien upon, or having rights or interests in the Equipment or Inventory,
in each case, in form and substance satisfactory to Agent.
"COLLECTIONS" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds).
"COMMITMENT" means, at any time with respect to a Lender, the
principal amount set forth (a) beside such Lender's name under the heading
"Commitment" on SCHEDULE C-1, or (b) on the New Lender Supplement pursuant to
which such Lender became a Lender hereunder in accordance with SECTION 2.17, or
(c) on the Assignment and Acceptance pursuant to which such Lender became a
Lender hereunder in accordance with the provisions of SECTION 15.1, as such
Commitment may be adjusted from time to time in accordance with the provisions
of SECTION 15.1 and "Commitments" means, collectively, the aggregate amount of
the commitments of all of the Lenders.
"COMPLIANCE CERTIFICATE" means a certificate substantially in
the form of EXHIBIT C and delivered by the chief accounting officer or corporate
controller of Parent to Agent.
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"CONCENTRATION ACCOUNT" means account number 3751241416 of
Parent maintained at Bank of America, N.A., or such other deposit account of
Borrowers (located in the United States) into which cash received in the other
Blocked Accounts is wire transferred as provided in SECTION 2.8(a).
"CONTROL AGREEMENT" means that certain Securities Account
Control Agreement of even date herewith among Parent, Norwest Investment
Services, Inc. and Agent.
"CONTROL ACCOUNT" means that certain investment account at
Norwest Investment Services, Inc. that is controlled by Agent pursuant to the
Control Agreement.
"COST" means, with respect to Eligible Inventory, the lower of
cost or market value of such Eligible Inventory as determined on a basis
consistent with Borrower's current and historical accounting practices.
"CREDIT CARD AGREEMENTS" means those certain agreements
between Agent and the credit card processors of Borrowers pursuant to which such
credit card processors agree to transfer on a daily basis all credit card
receipts of Borrowers into the Concentration Account or another Blocked Account,
in form and substance satisfactory to Agent.
"CREDIT CARD CONCENTRATION ACCOUNT" means account number
8801853931 formerly in the name of Maxim Retail Stores, Inc. and now in the name
of Agent maintained at SunTrust Bank, Atlanta, or such other deposit account of
Borrowers (located in the United States) into which Collections from credit card
processors are wire transferred as provided in SECTION 2.8(a).
"DAILY BALANCE" means the amount of an Obligation owed at the
end of a given day.
"DEEMS ITSELF INSECURE" means that Agent deems itself insecure
because it reasonably believes Borrowers, or any of them, have engaged in a
fraudulent activity.
"DEFAULT" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.
"DEFAULTING LENDER" has the meaning set forth in
SECTION 2.1 (f)(ii).
"DEFAULTING LENDERS RATE" means the Reference Rate for the
first three (3) days from and after the date the relevant payment is due and
thereafter at the interest rate then applicable to Reference Rate Loans.
"DESIGNATED ACCOUNT" means account number 3751241429 of Parent
maintained with Parent's Designated Account Bank, or such other deposit account
of a Borrower (located within the United States) which has been designated, in
writing and from time to time, by a Borrower to Agent.
"DESIGNATED ACCOUNT BANK" means Bank of America, N.A., whose
office is located at Dallas, Texas, and whose ABA number is 111000012.
"DILUTION" means, in each case based upon the experience of
the greater of the immediately prior three (3) or twelve (12) months, the result
of dividing the Dollar amount
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of (a) bad debt write-downs, discounts, advertising, returns, promotions,
credits, or other dilution with respect to the Accounts, by (b) Borrowers'
Collections (excluding extraordinary items) plus the Dollar amount of clause
(a).
"DILUTION RESERVE" means, as of any date of determination, an
amount sufficient to reduce the Lenders' advance rate against Eligible Accounts
by one percentage point for each percentage point by which Dilution is in excess
of five percent (5%).
"DISBURSEMENT LETTER" means an instructional letter executed
and delivered by Borrowers to Agent regarding the extensions of credit to be
made on the Closing Date, the form and substance of which shall be satisfactory
to Agent.
"DOLLARS OR $" means United States dollars.
"EARLY TERMINATION PREMIUM" has the meaning set forth in
SECTION 3.6.
"EBITDA" means, for any period, the net income (or net loss)
of Parent on a consolidated basis with its Subsidiaries for such period as
determined in accordance with GAAP, (a) plus, to the extent reflected in the
changes in the statement of net income for such period, the sum of, with
duplication, the following (i) interest expense, (ii) depreciation and
amortization expense, and (ii) extraordinary losses and, to the extent
preapproved by Agent, non recurring losses, and (b) minus, to the extent
reflected in the changes in the statement of net income for such period,
extraordinary gains.
"ELIGIBLE ACCOUNTS" means those Accounts created by Borrowers
in the ordinary course of business (net of retainages and accruals), that arise
out of Borrowers' sale of goods or rendition of services, that strictly comply
with each and all of the representations and warranties respecting Accounts made
by Borrowers to the Lender Group in the Loan Documents, and that are and at all
times continue to be acceptable to Agent in all respects in its reasonable
credit judgment; PROVIDED, HOWEVER, that standards of eligibility may be fixed
and revised from time to time by Agent in Agent's reasonable credit judgment.
Eligible Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to pay within
sixty (60) days of due date or Accounts with selling terms of more than thirty
(30) days;
(b) Accounts owed by an Account Debtor or its Affiliates where
50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are
deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an
employee, Affiliate, or agent of a Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Accounts that are not payable in Dollars or with respect
to which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
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subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Agent (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Agent and is directly
drawable by Agent, or (z) the Account is covered by credit insurance in form and
amount, and by an insurer, satisfactory to Agent;
(f) Accounts with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which the
applicable Borrower has complied, to the satisfaction of Agent, with the
Assignment of Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the
United States (exclusive, however, of Accounts owed by any State that does not
have a statutory counterpart to the Assignment of Claims Act and Accounts with
respect to which the applicable Borrower has complied to the satisfaction of
Agent, with the applicable statutory counterpart of the Assignment of Claims
Act);
(g) Accounts, including without limitation Accounts from
suppliers, with respect to which the Account Debtor is a creditor of a Borrower,
has or has asserted a right of setoff, has disputed its liability, or has made
any claim with respect to the Account, to the extent of such right to setoff,
dispute or claim, unless, in the case of Accounts from suppliers, the applicable
Account Debtor has executed and delivered to Agent a Non-Offset Agreement in
form and substance satisfactory to Agent;
(h) Accounts with respect to an Account Debtor whose total
obligations owing to Borrowers exceed ten percent (10%) of all Eligible
Accounts, to the extent of the obligations owing by such Account Debtor in
excess of such percentage;
(i) Accounts with respect to which the Account Debtor is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(j) Accounts the collection of which Agent, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Accounts with respect to which the goods giving rise to
such Account have not been shipped and billed to the Account Debtor, the
services giving rise to such Account have not been performed and accepted by the
Account Debtor (including without limitation progress billings), or the Account
otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless the applicable Borrower has qualified to do business in New Jersey,
Minnesota, West Virginia, or such other states, or has filed a Notice of
Business Activities Report with the applicable division of taxation, the
department of revenue, or with such other state offices, as appropriate, for the
then-current year, or is exempt from such filing requirement;
(m) Accounts that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrowers of the
subject contract for goods or services; and
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(n) Accounts with respect to which the Account Debtor is a
franchisee or credit card processor.
"ELIGIBLE INVENTORY" means Inventory consisting of first
quality finished goods held for sale in the ordinary course of Borrowers'
business, net of general ledger reserves, reserves for shrinkage, reserves for
Inventory count variances and reserves for aged Inventory, that are located at a
Borrower's premises identified on SCHEDULE E-1, that strictly comply with each
and all of the representations and warranties respecting Inventory made by
Borrowers to the Lender Group in the Loan Documents, and that are and at all
times continue to be acceptable to Agent in all respects in Agent's reasonable
credit judgment; PROVIDED, HOWEVER, that standards of eligibility may be fixed
and revised from time to time by Agent in Agent's reasonable credit judgment. In
determining the amount to be so included, Inventory shall be valued at the lower
of cost or market on a basis consistent with Borrowers' current and historical
accounting practices. An item of Inventory shall not be included in Eligible
Inventory if:
(a) it is not owned solely by a Borrower or a Borrower does
not have good, valid, and marketable title thereto (subject to the security
interests permitted by clauses (a) and (l) of the definition of Permitted
Liens);
(b) it is not located at one of the locations set forth on
SCHEDULE E- 1;
(c) it is not located on property owned or leased by a
Borrower or in a contract warehouse, in each case, subject to a Collateral
Access Agreement executed by the mortgagee, lessor, the warehouseman, or other
third party, as the case may be, and segregated or otherwise separately
identifiable from goods of others, if any, stored on the premises;
(d) it is not subject to a valid and perfected first priority
security interest in favor of the Lender Group;
(e) it consists of goods returned or rejected by a Borrower's
customers or goods in transit; and
(f) it (i) is obsolete or slow moving, a restrictive or custom
item, work-in-process, raw materials, a component that is not part of finished
goods, or (ii) constitutes spare parts, packaging and shipping materials,
supplies used or consumed in Borrowers' business, Inventory subject to a Lien in
favor of any third Person, bill and hold goods, defective goods, "seconds," or
Inventory acquired on consignment, or (iii) consists of remnants, furniture,
window treatments, wall coverings, short-rolls, laminates, samples, franchisee
Inventory, racks, sundry items, trucks or equipment or promotional items.
"ELIGIBLE TRANSFEREE" means (a) a commercial bank organized
under the laws of the United States, or any state thereof, and having total
assets in excess of $5,000,000,000, or the asset based lending Affiliate of such
bank, (b) a commercial bank organized under the laws of any other country which
is a member of the Organization for Economic Cooperation and Development or a
political subdivision of any such country, and having total assets in excess of
$5,000,000,000, or the asset based lending Affiliate of such bank; provided that
such bank is acting through a branch or agency located in the United States, (c)
a finance company, insurance or other financial institution, or fund that is
engaged in making, purchasing, or otherwise investing in commercial loans in the
ordinary course of its business and having total assets in excess of
$500,000,000, (d) any Affiliate (other than individuals) of an existing Lender,
and (e) any other Person approved by Agent and Borrowers.
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"ENVIRONMENTAL INDEMNITY AGREEMENT" means, collectively, that
certain Indemnity Agreement Regarding Environmental Activity of even date
herewith between Parent and Agent and that certain Indemnity Agreement Regarding
Environmental Activity (Arizona, Florida, Indiana, Tennessee, Texas) of even
date herewith between Parent and Agent, as the same may be modified, amended,
supplemented or restated from time to time.
"EQUIPMENT" means all of each Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any interest of such Borrower in any of the foregoing, and (b)
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, 29 U.S.C. Section 1000 et seq., amendments thereto, successor statutes,
and regulations or guidance promulgated thereunder.
"ERISA AFFILIATE" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the employees of
a Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
a Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which a Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with a Borrower and whose employees are aggregated with the employees of a
Borrower under IRC Section 414(o).
"ERISA EVENT" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e)
any event or condition (i) that provides a basis under Section 4042(a)(1), (2),
or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of a Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by a Borrower or its Subsidiaries or any of their ERISA
Affiliates.
"EURODOLLAR RATE" means, with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum at which United States
dollar deposits are offered to Wells Fargo Bank, National Association by major
banks in the London interbank market (or other Eurodollar Rate market selected
by Agent) on or about 2:00 p.m. (Atlanta, Georgia time) two (2) Business Days
prior to the commencement of such Interest Period in amounts comparable to the
amount of the Eurodollar Rate Loans requested by and available to Borrowers in
accordance with this Agreement, with a maturity of comparable duration to the
Interest Period selected by any Borrower.
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"EURODOLLAR RATE ADVANCES" means any Advance (or any portion
thereof) made or outstanding hereunder during any period when interest on such
Advance (or portion thereof) is payable based on the Adjusted Eurodollar Rate.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 8.
"EVERYTHINGDECOR" means Everythingdecor, Inc., a Georgia
corporation.
"EXISTING INDENTURE DEFAULT" means that certain default in the
restricted payment covenants contained in Section 109 of the Indenture, notice
of which was given by the Indenture Trustee by letter dated November 17, 1998.
"EXISTING LENDER" means Bank of America, N.A.
"FEE LETTER" means that certain Fee Letter of even date
herewith among Borrowers and Agent.
"FEIN" means Federal Employer Identification Number.
"FIXED CHARGE COVERAGE RATIO" shall mean, with respect to
Parent and its Subsidiaries on a consolidated basis for any period, the ratio of
(a) the greater of (i) EBITDA, or (ii) zero, to (b) interest expense during such
period.
"FOOTHILL" means Foothill Capital Corporation, a California
corporation.
"FUNDING DATE" means the date on which a Borrowing occurs.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"GENERAL INTANGIBLES" means all of each 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, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"GOVERNING DOCUMENTS" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"HAZARDOUS MATERIALS" means (a) substances that are defined or
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or
"EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or
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any radioactive materials, and (d) asbestos in any form or electrical equipment
that contains any oil or dielectric fluid containing levels of polychlorinated
biphenyls in excess of 50 parts per million.
"HONEYMOON PERIOD" means the period from the date ninety (90)
days following the Closing Date to and including the date one hundred and twenty
(120) days following the Closing Date.
"INCREASED MAXIMUM AMOUNT ACTIVATION NOTICE" means a notice in
the form of EXHIBIT D.
"INCREASED MAXIMUM AMOUNT CLOSING DATE" means any Business Day
designated as such in an Increased Maximum Amount Activation Notice.
"INDEBTEDNESS" means: (a) all obligations of each Borrower for
borrowed money, (b) all obligations of each Borrower evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement or other
obligations of each Borrower in respect of letters of credit, bankers
acceptances, interest rate swaps, or other financial products, (c) all
obligations of each Borrower under capital leases, (d) all obligations or
liabilities of others secured by a Lien on any property or asset of a Borrower,
irrespective of whether such obligation or liability is assumed, and (e) any
obligation of a Borrower guaranteeing or intended to guarantee (whether
guaranteed, endorsed, co-made, discounted, or sold with recourse to a Borrower)
any indebtedness, lease, dividend, letter of credit, or other obligation of any
other Person, other than an obligation arising by virtue of the endorsement of a
check.
"INDENTURE" means that certain Indenture dated as of October
16, 1997, as supplemented by that certain First Supplemental Indenture dated as
of January 30, 1998, as further supplemented by that certain Second Supplemental
Indenture dated as of August 9, 1998, as further supplemented by that certain
Third Supplemental Indenture dated as of November 25, 1998, as further
supplemented by that certain Fourth Supplemental Indenture dated as of July 31,
1999, among Parent, as issuer, the guarantors party thereto, and the Indenture
Trustee, relating to the Senior Subordinated Notes, as supplemented pursuant to
clause (i) of the proviso in Section 7.8(d).
"INDENTURE DOCUMENTS" means collectively, the Indenture and
each document executed in connection therewith, including without limitation
documents executed in connection with the proviso in Section 7.8(d).
"INDENTURE TRUSTEE" means State Street Bank and Trust Company,
as Trustee under the Indenture.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"INTANGIBLE ASSETS" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.
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"INTEREST PERIOD" means, for any Eurodollar Rate Loan, the
period commencing on the Business Day such Eurodollar Rate Loan is disbursed or
continued, or on the Business Day on which a Reference Rate Loan is converted to
such Eurodollar Rate Loan, and ending on the date one (1), two (2), or three (3)
months thereafter, as selected by a Borrower and notified to Agent pursuant to
SECTION 2.13, but in no event ending after the Maturity Date of this Agreement.
"INVENTORY" means all present and future inventory in which a
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of each Borrower's present and
future raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"INVENTORY ADVANCE RATE CHANGE DATE" means the later of the
date Agent receives a post Closing Date appraisal of the Inventory acceptable to
Agent in its reasonable discretion and the date Borrowers demonstrate their
ability to appropriately report Borrowing Base Collateral, as determined by
Agent in its discretion.
"INVENTORY RESERVES" means reserves (determined from time to
time by Agent in its discretion) for (a) the estimated costs relating to unpaid
freight charges, warehousing or storage charges, taxes, duties, and other
similar unpaid costs associated with the acquisition of Eligible Inventory by
Borrowers, PLUS (b) the estimated reclamation claims of unpaid sellers of
Inventory sold to Borrowers.
"INVESTMENT PROPERTY" means all "investment property," as such
term is defined in the Code, now owned or hereafter acquired by each Borrower
and, in any event, including, without limitation, all securities, whether
certificated or uncertificated, security entitlements, securities accounts,
commodity contracts and commodity accounts.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"L/C" has the meaning set forth in SECTION 2.2(a).
"L/C GUARANTY" has the meaning set forth in SECTION 2.2(a).
"LENDER" and "LENDERS" have the respective meanings set forth
in the preamble to this Agreement, and shall include any other Person made a
party to this Agreement in accordance with the provisions of SECTION 2.17 or
SECTION 15.1.
"LENDER GROUP" means, individually and collectively, each of
the individual Lenders and Agent.
"LENDER GROUP EXPENSES" means all: costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrowers, or
any of them, under any of the Loan Documents that are paid or incurred by the
Lender Group; reasonable fees or charges paid or incurred by the Lender Group in
connection with the Lender Group's transactions with Borrowers, including, fees
or out-of-pocket charges for photocopying, notarization, couriers and
messengers, telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor vehicles),
filing, recording, publication, appraisal (including periodic Personal Property
Collateral or Real Property Collateral appraisals), real estate surveys, real
estate title policies and
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endorsements, and environmental audits; costs and expenses incurred by Agent in
the disbursement of funds to Borrowers (by wire transfer or otherwise);
reasonable charges paid or incurred by Agent resulting from the dishonor of
checks; costs and expenses paid or incurred by Agent to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Personal Property Collateral or the Real
Property Collateral, or any portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by the Lender Group in
examining each Borrower's Books or setting up electronic collateral reporting
from Borrowers to Agent; costs and expenses of third party claims or any other
suit paid or incurred by the Lender Group in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or the Lender Group's relationship with Borrowers or any guarantor;
and the Lender Group's reasonable attorneys', financial advisors' or other
professionals' fees and expenses incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, enforcing (including reasonable
attorneys', financial advisors' or other professionals' fees and expenses
incurred in connection with a "workout," a "restructuring," or an Insolvency
Proceeding concerning any Borrower or any guarantor of the Obligations),
defending, or concerning the Loan Documents, irrespective of whether suit is
brought.
"LETTER OF CREDIT" means an L/C or an L/C Guaranty, as the
context requires.
"LIEN" means any interest in property securing an obligation
owed to, or a claim by, any Person other than the owner of the property, whether
such interest shall be based on the common law, statute, or contract, whether
such interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"LOAN ACCOUNT" has the meaning set forth in SECTION 2.11.
"LOAN DOCUMENTS" means this Agreement, the Control Agreement,
the Environmental Indemnity Agreement, the Disbursement Letter, the Letters of
Credit, the Blocked Account Agreements, the Mortgages, the Fee Letter, the
Trademark Security Agreement, the Pledge Agreement, the Assignment of Notes, the
Subsidiary Guaranty, the Subsidiary Pledge Agreement, the Subsidiary Security
Agreement, the Credit Card Agreements, the Non-Offset Agreements, any note or
notes executed by Borrowers and payable to the Lender Group, and any other
agreement entered into, now or in the future, in connection with this Agreement.
"MARGIN" has the meaning set forth in SECTION 2.7(a).
"MATERIAL ADVERSE CHANGE" means (a) a material adverse change
in the business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise) of Borrowers (taken as a
whole), (b) the material impairment of Borrowers' (taken as a whole) ability to
perform its obligations under the Loan Documents to which it is a party or of
the Lender Group to enforce the Obligations or realize upon the Collateral, (c)
a material adverse effect on the value of the Collateral or the amount that the
Lender Group would be likely to receive (after giving consideration to delays in
payment and costs of enforcement) in the liquidation of such
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Collateral, or (d) a material impairment of the priority of the Lender Group's
Liens with respect to the Collateral.
"MATURITY DATE" has the meaning set forth in SECTION 3.4.
"MAXIM RETAIL STORES" means Maxim Retail Stores, Inc., a
Georgia corporation.
"MAXIMUM AMOUNT" means, as of any date of determination,
$45,000,000, as such amount may be increased from time to time on or before the
date ninety (90) days following the Closing Date in an aggregate amount up to
$30,000,000 (for a total Maximum Amount not to exceed $75,000,000) pursuant to
and in accordance with SECTION 2.17.
"MORTGAGE POLICIES" and "MORTGAGE POLICY" have the respective
meanings set forth in Section 3.1(l).
"MORTGAGES" means one or more mortgages, deeds of trust, or
deeds to secure debt, executed by a Borrower Party in favor of Agent, the form
and substance of which shall be satisfactory to Agent, that encumber the Real
Property Collateral and the related improvements thereto.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" (as defined
in Section 4001(a)(3) of ERISA) to which a Borrower, any of its Subsidiaries, or
any ERISA Affiliate has contributed, or was obligated to contribute, within the
past six (6) years.
"NEGOTIABLE COLLATERAL" means all of each Borrower's present
and future letters of credit, notes, drafts, instruments, investment property,
security entitlements, securities (including the shares of stock of Subsidiaries
of such Borrower), documents, personal property leases (wherein such Borrower is
the lessor), chattel paper, and Borrower's Books relating to any of the
foregoing.
"NET LIQUIDATION VALUE" means that percentage determined by
the then most recent appraisal of Borrowers' Inventory undertaken at the request
of Agent as reflecting that appraiser's estimate of the recovery of Cost of
Eligible Inventory in liquidation thereof.
"NET PROCEEDS" shall mean the net cash or cash equivalent
proceeds from the sale of any subject asset after payment of reasonable selling
costs and expenses not to exceed ten percent (10%) of the proceeds from such
sale.
"NEW HEADQUARTERS" shall mean the Real Property and
improvements thereon at 210 TownPark Drive, Kennesaw, Georgia.
"NEW LENDER" has the meaning set forth in SECTION 2.17(b).
"NEW LENDER SUPPLEMENT" has the meaning set forth in SECTION
2.17(b).
"NEW MEXICO PROPERTY" means the Real Property and improvements
thereon located at Las Cruces, New Mexico.
"NON-OFFSET AGREEMENTS" means those certain agreements between
Agent and the suppliers of Borrower pursuant to which such suppliers agree not
to offset rebates owed
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to a Borrower against amounts owed by Borrowers to such suppliers for the
purchase of Inventory, in form and substance satisfactory to Agent.
"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 under any
outstanding Letters of Credit, premiums (including Early Termination Premiums),
liabilities (including all amounts charged to Borrowers' Loan Account pursuant
hereto), obligations, fees, charges, costs, or Lender Group Expenses (including
any fees or expenses that, but for the provisions of the Bankruptcy Code, would
have accrued), lease payments, guaranties, covenants, and duties owing by any
Borrower to the Lender Group of any kind and description (whether pursuant to or
evidenced by the Loan Documents or pursuant to any other agreement between the
Lender Group and any 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 any Borrower to others that the Lender Group may have
obtained by assignment or otherwise, and further including all interest not paid
when due and all Lender Group Expenses that Borrowers are required to pay or
reimburse by the Loan Documents, by law, or otherwise.
"ORIGINAL PROPOSED REDEMPTION" means a redemption of the
Senior Subordinated Notes in the aggregate principal amount of $40,000,000, plus
accrued and unpaid interest and fees owing thereon, all as more particularly set
forth in that certain Offer to Purchase and Consent Solicitation with respect to
the Senior Subordinated Notes dated November 1, 1999.
"ORIGINATING LENDER" has the meaning set forth in SECTION
15.1(e).
"OVERADVANCE" has the meaning set forth in SECTION 2.6.
"PARENT" means Flooring America, Inc., a Delaware corporation.
"PARTICIPANT" has the meaning set forth in SECTION 15.1(c).
"PAY-OFF LETTER" means a letter, in form and substance
reasonably satisfactory to Agent, from Existing Lender respecting the amount
necessary to repay in full all of the obligations of each Borrower owing to
Existing Lender and obtain a termination or release of all of the Liens existing
in favor of Existing Lender in and to the properties or assets of Borrowers and
their Subsidiaries.
"PBGC" means the Pension Benefit Guaranty Corporation as
defined in Title IV of ERISA, or any successor thereto.
"PERMITTED LIENS" means (a) Liens held by the Lender Group,
(b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii)
are the subject of Permitted Protests, (c) Liens set forth on SCHEDULE P-1, (d)
the interests of lessors under operating leases and purchase money security
interests and Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under SECTION 7.21 and
so long as the Lien only attaches to the asset purchased or acquired and only
secures the purchase price (together with interest thereon and costs of
collection therefor) of the asset, (e) Liens arising by operation of law in
favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or
suppliers, incurred in the ordinary course of business of Borrowers and not in
connection with the borrowing of money, and which Liens either (i) are for sums
not yet due and payable, or (ii) are the subject of Permitted Protests, (f)
Liens arising from deposits made in connection with obtaining worker's
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compensation or other unemployment insurance, (g) Liens or deposits to secure
performance of bids, tenders, or leases (to the extent permitted under this
Agreement), incurred in the ordinary course of business of Borrowers and not in
connection with the borrowing of money, (h) Liens arising by reason of security
for surety or appeal bonds in the ordinary course of business of Borrowers, (i)
Liens of or resulting from any judgment or award that would not cause a Material
Adverse Change and as to which the time for the appeal or petition for rehearing
of which has not yet expired, or in respect of which a Borrower is in good faith
prosecuting an appeal or proceeding for a review, and in respect of which a stay
of execution pending such appeal or proceeding for review has been secured, (j)
Liens with respect to the Real Property Collateral that are exceptions to the
commitments for title insurance issued in connection with the Mortgages, as
accepted by Agent, (k) with respect to any Real Property that is not part of the
Real Property Collateral, easements, rights of way, zoning and similar covenants
and restrictions, and similar encumbrances that customarily exist on properties
of Persons engaged in similar activities and similarly situated and that in any
event do not materially interfere with or impair the use or operation of the
Collateral by any Borrower or the value of the Lender Group's Lien thereon or
therein, or materially interfere with the ordinary conduct of the business of
Borrowers, and (l) Liens in favor of the Indenture Trustee to the extent
permitted by Section 7.8(d) and so long as such Liens are subject to an
intercreditor agreement between the Indenture Trustee and Agent, in form and
substance satisfactory to Agent.
"PERMITTED PROTEST" means the right of a Borrower to protest
any Lien (other than any such Lien that secures the Obligations), tax (other
than payroll taxes or taxes that are the subject of a United States federal tax
lien), or rental payment, provided that (a) a reserve with respect to such
obligation is established on the books of such Borrower in an amount that is
reasonably satisfactory to Agent, (b) any such protest is instituted and
diligently prosecuted by such Borrower in good faith, and (c) Agent is satisfied
that, while any such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the Liens of the Lender Group in
and to the Collateral.
"PERSON" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"PERSONAL PROPERTY COLLATERAL" means all Collateral other than
the Real Property Collateral.
"PLAN" means any employee benefit plan, program, or
arrangement maintained or contributed to by a Borrower or with respect to which
it may incur liability.
"PLEDGE AGREEMENT" means that certain Pledge Agreement of even
date herewith among Borrowers and Agent, in form and substance satisfactory to
Agent, as the same may be modified, amended, supplemented or restated from time
to time.
"PRO-RATA SHARE" means, with respect to a Lender, a fraction
(expressed as a percentage), the numerator of which is the amount of such
Lender's Commitment and the denominator of which is the aggregate amount of the
Commitments.
"REAL ESTATE BORROWING BASE" has the meaning set forth in
SECTION 2.1.
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"REAL PROPERTY" means any estates or interests in real
property now owned or hereafter acquired by a Borrower Party.
"REAL PROPERTY COLLATERAL" means the parcel or parcels of real
property and the related improvements thereto identified on SCHEDULE R-1, and
any Real Property hereafter acquired by a Borrower.
"REFERENCE RATE" means the variable rate of interest, per
annum, most recently announced by Wells Fargo Bank, National Association, or any
successor thereto, as its "base rate," irrespective of whether such announced
rate is the best rate available from such financial institution.
"REFERENCE RATE LOAN" means any Advance (or any portion
thereof) made or outstanding hereunder during any period when interest on such
Advance (or portion thereof) is payable based on the Reference Rate.
"REPORTABLE EVENT" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than a Reportable
Event as to which the provision of 30 days notice to the PBGC is waived under
applicable regulations.
"REQUIRED LENDERS" means, at any time, Agent together with
such other Lenders whose Pro Rata Shares together with Agent's aggregate 50.1%
or more of the Commitments.
"REQUIREMENT OF LAW" means, as to any Person: all (a) (i)
statutes and regulations and (ii) court orders and injunctions, arbitrators'
decisions, and/or similar rulings, in each instance by any governmental
authority, or other body which has jurisdiction over such Person, or any
property of such Person, or of any other Person for whose conduct such Person
would be responsible and (b) that Person's organizational documents, by-laws
and/or other instruments which deal with corporate or similar governance, as
applicable.
"RESERVE PERCENTAGE" means and refers to, as of the date of
determination thereof, the maximum percentage (rounded upward, if necessary to
the nearest 1/100th of one percent (1%)), as determined by Agent (or its
Affiliates) in accordance with its (or their ) usual procedures (which
determination shall be conclusive in the absence of manifest error), that is in
effect on such date as prescribed by the Federal Reserve Board for determining
the reserve requirements (including supplemental, marginal, and emergency
reserve requirements) with respect to eurocurrency funding (currently referred
to as "eurocurrency liabilities") by Wells Fargo Bank, National Association or
its Affiliates.
"RETIREE HEALTH PLAN" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"REVISED ARTICLE 9" has the meaning set forth Section 18.9.
"REVOLVING FACILITY USAGE" means, as of any date of
determination, the aggregate amount of Advances and undrawn or unreimbursed
Letters of Credit outstanding.
"SELLER NOTES" means, collectively, (a) that certain
Subordinated Promissory Note dated August 9, 1998 in the original principal
amount of $18,048,000 from
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Parent payable to the order of Shaw Industries, Inc., as amended by that certain
letter agreement dated as of December 13, 1999, (b) that certain Promissory Note
dated April 8, 1999 in the original principal amount of $480,393.15 from
CarpetMAX payable to the order of David Wadsworth, (c) that certain Promissory
Note dated April 20, 1999 in the original principal amount of $2,000,000 from
CarpetMAX payable to the order of Robert Tiffany, (d) that certain Promissory
Note dated May 28, 1999 in the original principal amount of $2,400,000 from
Parent payable to the order of Richard H. Hillman and Michael Melkonian, (e)
that certain Promissory Note dated July 2, 1999 in the original principal amount
of $1,153,850 from Parent payable to the order of Thomas L. Levi, (f) that
certain Promissory Note dated July 2, 1999 in the original principal amount of
$961,550 from Parent payable to the order of Arthur D. Levi, and (g) that
certain Promissory Note dated July 2, 1999 in the original principal amount of
$384,600 from Parent payable to the order of John J. Wood; and each of the
Seller Notes shall be referred to as a "Seller Note."
"SETTLEMENT" has the meaning set forth in SECTION 2.1(i)(i).
"SETTLEMENT DATE" has the meaning set forth in SECTION
2.1(i)(i).
"SOLVENT" means, with respect to any Person on a particular
date, that on such date (a) at fair valuations, all of the properties and assets
of such Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and (e)
such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"SENIOR SUBORDINATED NOTES" means those certain 9-1/4% Senior
Subordinated Notes due 2007 in the original principal amount of $100,000,000.
"SUBSIDIARY" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"SUBSIDIARY GUARANTY" means that certain Subsidiary Guaranty
of even date herewith among Maxim Equipment Leasing Company, Inc., a Georgia
corporation, Floor Source Distributors, Inc., a Georgia corporation,
Everythingdecor, Investor Management, Inc., an Alabama corporation, Maxim
Industries, Inc. (f/k/a Image Industries, Inc.), a Delaware corporation, and
Agent, in form and substance satisfactory to Agent, as the same may be modified,
amended, supplemented or restated from time to time.
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"SUBSIDIARY PLEDGE AGREEMENT" means that certain Subsidiary
Pledge Agreement of even date herewith among Maxim Equipment Leasing Company,
Inc., a Georgia corporation, Floor Source Distributors, Inc., a Georgia
corporation, Everythingdecor, Investor Management, Inc., an Alabama corporation,
Maxim Industries, Inc. (f/k/a Image Industries, Inc.), a Delaware corporation,
and Agent, in form and substance satisfactory to Agent, a the same may be
modified, amended, supplemented or restated from time to time.
"SUBSIDIARY SECURITY AGREEMENT" shall mean that certain
Subsidiary Security Agreement of even date herewith among Maxim Equipment
Leasing Company, Inc., a Georgia corporation, Floor Source Distributors, Inc., a
Georgia corporation, Everythingdecor, Investor Management, Inc., an Alabama
corporation, Maxim Industries, Inc. (f/k/a Image Industries, Inc.), a Delaware
corporation, and Agent, in form and substance satisfactory to Agent, as the same
may be modified, amended, supplemented or restated from time to time.
"TANGIBLE NET WORTH" means, as of any date of determination,
with respect to Parent on a consolidated basis with its Subsidiaries, the
difference of (a) total stockholder's equity, MINUS (b) the sum of: (i) all
Intangible Assets, (ii) all prepaid expenses, and (iii) all amounts due to
Parent (on a consolidated basis with its Subsidiaries) from Affiliates.
"TAX REFUND BORROWING BASE" has the meaning set forth in
SECTION 2.1.
"TRADEMARK SECURITY AGREEMENT" means that certain Trademark
Security Agreement of even date herewith between Borrowers, Everythingdecor and
Agent, in form and substance satisfactory to Agent, as the same may be modified,
amended, supplemented or restated from time to time.
"UNUSED LINE FEE" has the meaning set forth in Section
2.12(b).
"VOIDABLE TRANSFER" has the meaning set forth in SECTION 15.8.
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 "Parent" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Parent on a consolidated
basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in the
Code shall be construed and defined as set forth in the Code unless otherwise
defined herein.
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, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of Default
shall "continue" or be "continuing" until such Event of Default has been waived
in writing by the requisite members of the Lender Group. 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.
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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,
each Lender agrees to make advances ("Advances") to Borrowers in an amount at
any one time outstanding not to exceed such Lender's Pro Rata Share of an amount
equal to the lesser of (i) the Maximum Amount LESS the outstanding balance of
all undrawn or unreimbursed Letters of Credit, or (ii) the Borrowing Base LESS
the aggregate amount of all undrawn or unreimbursed Letters of Credit. For
purposes of this Agreement, "Borrowing Base", as of any date of determination,
shall mean the result of:
(w) THE LESSER OF --
(I) the sum of --
(i) eighty-five percent (85%) of Eligible
Accounts, LESS the amount, if any, of the Dilution Reserve,
and
(ii) (A) prior to the Inventory Advance Rate
Change Date, twenty-five percent (25%) of the Cost of Eligible
Inventory, MINUS the Inventory Reserves, and (B) thereafter,
THE LESSER OF (aa) fifty percent (50%) of the Cost of Eligible
Inventory and (bb) eighty percent (80%) of the most recently
determined Net Liquidation Value multiplied by the Cost of the
Inventory, MINUS the Inventory Reserves, and
(II) an amount equal to Borrowers' Collections with
respect to Accounts for the immediately preceding thirty (30)
day period, PLUS
(x) (I) until the earlier of the date one
hundred eighty (180) days following the Closing Date and the
date Agent, for the benefit of the Lenders, receives the Net
Proceeds from the sale/leaseback of the New Headquarters,
$10,000,000 and (II) thereafter $-0- (the "Real Estate
Borrowing Base"), PLUS
(y) (I) until the earlier of the date
forty-five (45) days following the Closing Date, and the date
Agent, for the benefit of the Lenders, receives the Net
Proceeds from the sale/leaseback of the New Headquarters,
$5,000,000 as such amount shall be reduced from time to time
by the amount of any Net Proceeds from the sale of any Real
Property or any tax refund of Borrowers; PROVIDED, HOWEVER,
that such amount shall not be reduced to an amount less than
$-0- and (II) thereafter $-0- (the "Tax Refund Borrowing
Base"), MINUS
(z) the aggregate amount of reserves, if
any, established by Agent under SECTIONS 2.1(b), 6.15 AND 10.
(b) Anything to the contrary in this Section notwithstanding,
Agent shall have the right to establish reserves against the Borrowing Base in
such amounts as Agent, in its reasonable judgment (from the perspective of an
asset-based lender) shall deem necessary or
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appropriate, including reserves (i) on account of sums that any Borrower is
required to pay (such as taxes, assessments, insurance premiums, or, in the case
of leased assets, rents or other amounts payable under such leases) and has
failed to pay under any Section of this Agreement or any other Loan Document,
(ii) without duplication of the foregoing, on account of amounts owing by any
Borrower to any Person to the extent secured by a Lien on, or trust over, any of
the Collateral, which Lien or trust, in the reasonable determination of Agent
(from the perspective of an asset-based lender), would be likely to have a
priority superior to the Liens of Agent (such as landlord liens, ad valorem
taxes, or sales taxes where given priority under applicable law) in and to such
item of Collateral, and (iii) on account of the tax refund claim Borrowers
intend to make until such time as Borrowers demonstrate to the satisfaction of
Agent that they are owed and will receive a tax refund in an amount equal to or
in excess of $4,000,000.
(c) 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.
(d) PROCEDURE FOR BORROWING. Each Borrowing shall be made upon
any Borrower's irrevocable request therefor delivered to Agent (which notice
must be received by Agent no later than 1:00 p.m. (Atlanta, Georgia time) on the
Funding Date if such advance is for $5,000,000 or less or no later than 1:00
p.m. (Atlanta, Georgia time) on the Business Day immediately preceding the
requested Funding Date if such advance is for more than $5,000,000) specifying
(i) the amount of the Borrowing; and (ii) the requested Funding Date, which
shall be a Business Day.
(e) AGENT'S ELECTION. Promptly after receipt of a request for
a Borrowing pursuant to SECTION 2.1(d) in excess of $5,000,000, Agent shall
elect, in its discretion, (i) to have the terms of SECTION 2.1(f) apply to such
requested Borrowing, or (ii) to make an Agent Loan pursuant to the terms of
SECTION 2.1(g) in the amount of the requested Borrowing. Any requested Borrowing
of $5,000,000 or less shall be made as an Agent Loan pursuant to the terms of
SECTION 2.1(g).
(f) MAKING OF ADVANCES.
(i) In the event that Agent shall elect to have the terms
of this SECTION 2.1(f) apply to a requested Borrowing in excess of $5,000,000 as
described in SECTION 2.1(e), then promptly after receipt of a request for a
Borrowing pursuant to SECTION 2.1(d), Agent shall notify the Lenders, not later
than 4:00 p.m. (Atlanta, Georgia time) on the Business Day immediately preceding
the Funding Date applicable thereto, by telephone and promptly followed by
telecopy, or other similar form of transmission, of the requested Borrowing.
Each Lender shall make the amount of such Lender's Pro Rata Share of the
requested Borrowing available to Agent in same day funds, to such account of
Agent as Agent may designate, not later than 3:00 p.m. (Atlanta, Georgia time)
on the Funding Date applicable thereto. After Agent's receipt of the proceeds of
such Advances, upon satisfaction of the applicable conditions precedent set
forth in SECTIONS 3.1 and 3.2, Agent shall make the proceeds of such Advances
available to Borrowers on the applicable Funding Date by transferring same day
funds equal to the proceeds of such Advances received by Agent to the Designated
Account; PROVIDED, HOWEVER, that, subject to the provisions of SECTION 2.1(l),
Agent shall not request any Lender to make, and no Lender shall have the
obligation to make, any Advance if Agent shall have received written notice from
any Lender, or otherwise has actual knowledge, that (A) one or more of the
applicable conditions precedent set forth in SECTIONS 3.1 or 3.2 will not be
satisfied on the requested Funding Date for the
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applicable Borrowing, or (B) the requested Borrowing would exceed the
Availability on such Funding Date.
(ii) Unless Agent receives notice from a Lender on or
prior to the Closing Date or, with respect to any Borrowing after the Closing
Date, at least one Business Day prior to the date of such Borrowing, that such
Lender will not make available as and when required hereunder to Agent for the
account of Borrowers the amount of that Lender's Pro Rata Share of the
Borrowing, Agent may assume that each Lender has made or will make such amount
available to Agent in immediately available funds on the Funding Date and Agent
may (but shall not be so required), in reliance upon such assumption, make
available to Borrowers on such date a corresponding amount. If and to the extent
any Lender shall not have made its full amount available to Agent in immediately
available funds and Agent in such circumstances has made available to Borrowers
such amount, that Lender shall on the Business Day following such Funding Date
make such amount available to Agent, together with interest at the Defaulting
Lenders Rate for each day during such period. A notice from Agent submitted to
any Lender with respect to amounts owing under this subsection shall be
conclusive, absent manifest error. If such amount is paid to Agent such payment
to Agent shall constitute such Lender's Advance on the date of Borrowing for all
purposes of this Agreement. If such amount is not paid to Agent on the Business
Day following the Funding Date, Agent will notify Borrowers of such failure to
fund and, upon demand by Agent, Borrowers shall pay such amount to Agent for
Agent's account, together with interest thereon for each day elapsed since the
date of such Borrowing, at a rate per annum equal to the interest rate
applicable at the time to the Advances composing such Borrowing. The failure of
any Lender to make any Advance on any Funding Date shall not relieve any other
Lender of any obligation hereunder to make an Advance on such Funding Date, but
no Lender shall be responsible for the failure of any other Lender to make the
Advance to be made by such other Lender on any Funding Date. Any Lender that
fails to make any Advance that it is required to make hereunder on any Funding
Date and that has not cured such failure by making such Advance within one (1)
Business Day after written demand upon it by Agent to do so, shall constitute a
"Defaulting Lender" for purposes of this Agreement until such Advance is made,
or relieve, excuse or otherwise affect the liability of any Defaulting Lender to
Borrowers.
(iii) Agent shall not be obligated to transfer to a
Defaulting Lender any payments made by Borrowers to Agent for the Defaulting
Lender's benefit; nor shall a Defaulting Lender be entitled to the sharing of
any payments hereunder. Amounts payable to a Defaulting Lender shall instead be
paid to or retained by Agent. Agent may hold and, in its discretion, re-lend to
Borrowers the amount of all such payments received or retained by it for the
account of such Defaulting Lender. Solely for the purposes of voting or
consenting to matters with respect to the Loan Documents and determining Pro
Rata Shares, such Defaulting Lender shall be deemed not to be a "Lender" and
such Defaulting Lender's Commitment shall be deemed to be zero. This section
shall remain effective with respect to such Defaulting Lender until (A) the
Obligations under this Agreement shall have been declared or shall have become
immediately due and payable or (B) the requisite non-Defaulting Lenders, Agent,
and Borrowers shall have waived such Defaulting Lender's default in writing. The
operation of this section shall not be construed to increase or otherwise affect
the Commitment of any non-Defaulting Lender, or relieve or excuse the
performance by Borrowers of their duties and obligations hereunder.
(g) MAKING OF AGENT LOANS.
(i) In the event Agent shall elect to have the terms of
this SECTION 2.1(g) apply to a requested Borrowing in excess of $5,000,000 as
described in SECTION 2.1(e) or in the event of any requested Borrowing of
$5,000,000 or less, Agent shall make an
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Advance in the amount of such Borrowing (any such Advance made solely by Agent
pursuant to this SECTION 2.1(g) being referred to as an "Agent Loan" and such
Advances being referred to collectively as "Agent Loans") available to Borrowers
on the Funding Date applicable thereto by transferring same day funds to
Borrowers' Designated Account. Each Agent Loan is an Advance hereunder and shall
be subject to all the terms and conditions applicable to other Advances, except
that all payments thereon shall be payable to Agent solely for its own account
(and for the account of the holder of any participation interest with respect to
such Advance). Subject to the provisions of SECTION 2.1(l), Agent shall not make
any Agent Loan if Agent shall have received written notice from any Lender, or
otherwise has actual knowledge, that (i) one or more of the applicable
conditions precedent set forth in SECTIONS 3.1 or 3.2 will not be satisfied on
the requested Funding Date for the applicable Borrowing, or (ii) the requested
Borrowing would exceed the Availability on such Funding Date. Agent shall not
otherwise be required to determine whether the applicable conditions precedent
set forth in SECTIONS 3.1 or 3.2 have been satisfied on the Funding Date
applicable thereto prior to making, in its sole discretion, any Agent Loan.
(ii) The Agent Loans shall be secured by the Collateral
and shall constitute Advances and Obligations hereunder, and shall bear interest
at the rate applicable from time to time to Obligations pursuant to SECTION 2.7.
(h) AGENT ADVANCES.
(i) Agent hereby is authorized by Borrowers and the
Lenders, from time to time in Agent's sole discretion, (1) after the occurrence
of a Default or an Event of Default (but without constituting a waiver of such
Default or Event of Default), or (2) at any time that any of the other
applicable conditions precedent set forth in SECTION 3.1 or 3.2 have not been
satisfied, to make Advances to Borrowers on behalf of the Lenders which Agent,
in its reasonable business judgment, deems necessary or desirable (A) to
preserve or protect the Collateral, or any portion thereof, (B) to enhance the
likelihood of, or maximize the amount of, repayment of the Obligations, or (C)
to pay any other amount chargeable to Borrowers pursuant to the terms of this
Agreement, including Lender Group Expenses and the costs, fees, and expenses
described in SECTION 10 (any of the Advances described in this SECTION 2.1(h)
being hereinafter referred to as "Agent Advances"); PROVIDED, that Agent shall
not make any Agent Advances to Borrowers without the consent of the Required
Lenders if the amount thereof would exceed $5,000,000 in the aggregate at any
one time.
(ii) Agent Advances shall be repayable on demand and
secured by the Collateral, shall constitute Advances and Obligations hereunder,
and shall bear interest at the rate applicable from time to time to the
Obligations pursuant to SECTION 2.7.
(i) SETTLEMENT. It is agreed that each Lender's funded portion
of the Advances is intended by the Lenders to be equal at all times to such
Lender's Pro Rata Share of the outstanding Advances. Such agreement
notwithstanding, Agent and the Lenders agree (which agreement shall not be for
the benefit of or enforceable by Borrowers) that in order to facilitate the
administration of this Agreement and the other Loan Documents, settlement among
them as to the Advances, the Agent Loans, and the Agent Advances shall take
place on a periodic basis in accordance with the following provisions:
(i) Agent shall request settlement ("Settlement") with the
Lenders on a weekly basis and on each Increased Maximum Amount Closing Date, or
on a more frequent basis if so determined by Agent, (1) for itself, with respect
to each Agent Loan and Agent Advance, and (2) with respect to Collections
received and any increase in the Maximum Amount
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to occur on an Increased Maximum Amount Closing Date, as to each by notifying
the Lenders by telephone and promptly followed by telecopy, or other similar
form of transmission, of such requested Settlement, no later than 4:00 p.m.
(Atlanta, Georgia time) on the Business Date immediately preceding the date of
such requested Settlement, including without limitation each Increased Maximum
Amount Closing Date (the "Settlement Date"). Such notice of a Settlement Date
shall include a summary statement of the amount of outstanding Advances, Agent
Loans, and Agent Advances for the period since the prior Settlement Date, the
amount of repayments received in such period, and the amounts allocated to each
Lender of the principal, interest, fees, and other charges for such period.
Subject to the terms and conditions contained herein (including SECTION
2.1(i)(ii)): (y) if a Lender's balance of the Advances, Agent Loans, and Agent
Advances exceeds such Lender's Pro Rata Share of the Advances, Agent Loans, and
Agent Advances as of a Settlement Date, then Agent shall by no later than 4:00
p.m. (Atlanta, Georgia time) on the Settlement Date transfer in same day funds
to the account of such Lender as such Lender may designate, an amount such that
each Lender shall, upon receipt of such amount, have as of the Settlement Date,
its Pro Rata Share of the Advances, Agent Loans, and Agent Advances; and (z) if
a Lender's (including any New Lender's) balance of the Advances, Agent Loans and
Agent Advances is less than such Lender's Pro Rata Share of the Advances, Agent
Loans, and Agent Advances as of a Settlement Date, such Lender shall no later
than 3:00 p.m. (Atlanta, Georgia time) on the Settlement Date transfer in same
day funds to such account of Agent as Agent may designate, an amount such that
each Lender shall, upon transfer of such amount, have as of the Settlement Date,
its Pro Rata Share of the Advances, Agent Loans, and Agent Advances. Such
amounts made available to Agent under clause (z) of the immediately preceding
sentence shall be applied against the amounts of the applicable Agent Loan or
Agent Advance and, together with the portion of such Agent Loan or Agent Advance
representing Foothill's Pro Rata Share thereof, shall constitute Advances of
such Lenders. If any such amount is not made available to Agent by any Lender on
the Settlement Date applicable thereto to the extent required by the terms
hereof, Agent shall be entitled to recover for its account such amount on demand
from such Lender together with interest thereon at the Defaulting Lenders Rate.
(ii) In determining whether a Lender's balance of the
Advances, Agent Loans, and Agent Advances is less than, equal to, or greater
than such Lender's Pro Rata Share of the Advances, Agent Loans, and Agent
Advances as of a Settlement Date, Agent shall, as part of the relevant
Settlement, apply to such balance the portion of payments actually received by
Agent with respect to principal, interest, fees payable by Borrowers and
allocable to the Lenders hereunder, and proceeds of Collateral. To the extent
that a net amount is owed to any such Lender after such application, such net
amount shall be distributed by Agent to that Lender as part of such Settlement;
PROVIDED, HOWEVER, that the closing fee payable by Borrowers under SECTION
2.12(a) shall be distributed to the Lenders within three (3) Business Days
following the Closing Date without regard to the netting of amounts owing to or
owed by any Lender as part of a Settlement.
(iii) Between Settlement Dates, Agent, to the extent no
Agent Advances or Agent Loans are outstanding, may pay over to Foothill any
payments received by Agent, which in accordance with the terms of the Agreement
would be applied to the reduction of the Advances, for application to Foothill's
Pro Rata Share of the Advances. If, as of any Settlement Date, Collections
received since the then immediately preceding Settlement Date have been applied
to Foothill's Pro Rata Share of the Advances other than to Agent Loans or Agent
Advances, as provided for in the previous sentence, Foothill shall pay to Agent
for the accounts of the Lenders, and Agent shall pay to the Lenders, to be
applied to the outstanding Advances of such Lenders, an amount such that each
Lender shall, upon receipt of such amount, have, as of such Settlement Date, its
Pro Rata Share of the Advances. During the period between Settlement
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Dates, Agent with respect to Agent Loans and Agent Advances, and each Lender
with respect to the Advances other than Agent Loans and Agent Advances, shall be
entitled to interest at the applicable rate or rates payable under this
Agreement on the daily amount of funds employed by Agent or the Lenders, as
applicable.
(j) NOTATION. Agent shall record on its books the principal
amount of the Advances owing to each Lender, including the Agent Loans and Agent
Advances owing to Agent, and the interests therein of each Lender, from time to
time. In addition, each Lender is authorized, at such Lender's option, to note
the date and amount of each payment or prepayment of principal of such Lender's
Advances in its books and records, including computer records, such books and
records constituting rebuttably presumptive evidence, absent manifest error, of
the accuracy of the information contained therein.
(k) LENDERS' FAILURE TO PERFORM. All Advances (other than
Agent Loans and Agent Advances) shall be made by the Lenders simultaneously and
in accordance with their Pro Rata Shares. It is understood that (i) no Lender
shall be responsible for any failure by any other Lender to perform its
obligation to make any Advances hereunder, nor shall any Commitment of any
Lender be increased or decreased as a result of any failure by any other Lender
to perform its obligation to make any Advances hereunder, and (ii) no failure by
any Lender to perform its obligation to make any Advances hereunder shall excuse
any other Lender from its obligation to make any Advances hereunder.
(l) OVERADVANCES. Agent may make voluntary Overadvances
without the written consent of the Required Lenders for amounts charged to the
applicable Loan Account for interest, fees or Lender Group Expenses pursuant to
SECTION 2.1(h)(i)(2)(C). If the conditions for borrowing under SECTION 3.2
cannot be fulfilled, Agent may, but is not obligated to, knowingly and
intentionally continue to make Advances (including Agent Loans) to Borrowers
such failure of condition notwithstanding, so long as, at any time, (i) either
(A) the outstanding Revolving Facility Usage would not exceed the Borrowing Base
by more than $5,000,000 or (B) (y) the outstanding Revolving Facility Usage
would not exceed the Borrowing Base by more than the amount proposed by Agent
and agreed to by the Required Lenders, and (z) such Advances are made pursuant
to a plan (proposed by Agent and agreed to by the Required Lenders) for the
elimination of the outstanding Revolving Facility Usage in excess of the
Borrowing Base, and (ii) the outstanding Revolving Facility Usage (except for
and excluding amounts charged to the applicable Loan Account for interest, fees,
or Lender Group Expenses) does not exceed the Maximum Amount. The foregoing
provisions are for the sole and exclusive benefit of Agent and the Lenders and
are not intended to benefit Borrowers in any way. The Advances and Agent Loans,
as applicable, that are made pursuant to this SECTION 2.1(l) shall be subject to
the same terms and conditions as any other Agent Advance or Agent Loan, as
applicable, except that the rate of interest applicable thereto shall be the
rate set forth in SECTION 2.7(c)(i) for Reference Rate Loans without regard to
the presence or absence of a Default or Event of Default; PROVIDED, that the
Required Lenders may, at any time, revoke Agent's authorization contained in
this SECTION 2.1(l) to make Overadvances (except for and excluding amounts
charged to the applicable Loan Account for interest, fees, or Lender Group
Expenses), any such revocation to be in writing and to become effective upon
Agent's receipt thereof; PROVIDED FURTHER, HOWEVER, that the making of such
Overadvances shall not constitute a waiver of such Event of Default arising
therefrom.
In the event Agent obtains actual knowledge that Revolving
Facility Usage exceeds the amount permitted by the preceding paragraph,
regardless of the amount of or reason for such excess, Agent shall notify the
Lenders as soon as practicable (and prior to making any (or any further)
intentional Overadvances (except for and excluding amounts charged to the
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applicable Loan Account for interest, fees, or Lender Group Expenses) unless
Agent determines that prior notice would result in imminent harm to the
Collateral or its value), and Lenders thereupon shall, together with Agent,
jointly determine the terms of arrangements that shall be implemented with
Borrowers intended to reduce, within a reasonable time, the outstanding
principal amount of the Advances to Borrowers to an amount permitted by the
preceding paragraph. In the event any Lender disagrees over the terms of
reduction and/or repayment of any Overadvance, the terms of reduction and/or
repayment thereof shall be implemented according to the determination of the
Required Lenders.
Each Lender shall be obligated to settle with Agent as
provided in SECTION 2.1(i) for the amount of such Lender's Pro Rata Share of any
unintentional Overadvances by Agent reported to such Lender, any intentional
Overadvances made as permitted under this SECTION 2.1(l), and any Overadvances
resulting from the charging to the applicable Loan Account of interest, fees, or
Lender Group Expenses.
(m) EFFECT OF BANKRUPTCY. If a case is commenced by or against
any Borrower under the Bankruptcy Code, or other statute providing for debtor
relief, then, unless approved by the Required Lenders, the Lender Group shall
not make additional loans or provide additional financial accommodations under
the Loan Documents to such Borrower as debtor or debtor-in-possession, or to any
trustee for such Borrower, nor consent to the use of cash collateral (PROVIDED
that the applicable Loan Account shall continue to be charged, to the fullest
extent permitted by law, for accruing interest, fees, and Lender Group
Expenses).
(n) DESIGNATED SENIOR INDEBTEDNESS. Borrowers represent,
warrant, agree and intend that the Obligations constitute "Senior Indebtedness"
and "Designated Senior Indebtedness" under the Indenture, that this Agreement
constitutes the "Credit Facility" under the Indenture and that the Lender Group
is entitled to all of the benefits of a holder of "Senior Indebtedness" and
"Designated Senior Indebtedness" under the Indenture.
2.2 LETTERS OF CREDIT.
(a) AGREEMENT TO CAUSE ISSUANCE; AMOUNTS; OUTSIDE EXPIRATION
DATE. Subject to the terms and conditions of this Agreement, Agent agrees to
issue letters of credit for the account of any Borrower (each, an "L/C") or to
issue guarantees of payment (each such guaranty, an "L/C Guaranty") with respect
to letters of credit issued by an issuing bank for the account of any Borrower.
Agent shall have no obligation to issue a Letter of Credit if any of the
following would result:
(i) the sum of one hundred percent (100%) of the
aggregate amount of all other types of undrawn and unreimbursed Letters of
Credit, would exceed the Borrowing Base LESS the amount of outstanding Advances
(including any Agent Advances and Agent Loans); or
(ii) the aggregate amount of all undrawn or unreimbursed
Letters of Credit would exceed the lower of: (x) the Maximum Amount LESS the
amount of outstanding Advances (including any Agent Advances and Agent Loans);
or (y) $5,000,000; or
(iii) the outstanding Obligations would exceed the
Maximum Amount.
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Borrowers expressly understand and agree that Agent shall have no obligation to
arrange for the issuance by issuing banks of the letters of credit that are to
be the subject of L/C Guarantees. Borrowers and the Lender Group acknowledge and
agree that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have an expiry date no later than sixty (60) days prior to the date on which
this Agreement is scheduled to terminate under SECTION 3.4 and all such Letters
of Credit shall be in form and substance acceptable to Agent in its sole
discretion. If the Lender Group is obligated to advance funds under a Letter of
Credit, Borrowers immediately shall reimburse such amount to Agent and, in the
absence of such reimbursement, the amount so advanced immediately and
automatically shall be deemed to be an Advance hereunder and, thereafter, shall
bear interest at the rate then applicable to Advances under SECTION 2.7.
(b) INDEMNIFICATION. Each Borrower hereby, jointly and
severally, agrees to indemnify, save, defend, and hold the Lender Group harmless
from any loss, cost, expense, or liability, including payments made by the
Lender Group, expenses, and reasonable attorneys fees incurred by the Lender
Group arising out of or in connection with any Letter of Credit. Borrowers agree
to be bound by the issuing bank's regulations and interpretations of any letters
of credit guarantied by the Lender Group and opened to or for a Borrower's
account or by Agent's interpretations of any Letter of Credit issued by Agent to
or for a Borrower's account, even though this interpretation may be different
from Borrowers' own, and Borrowers understand and agree that the Lender Group
shall not be liable for any error, negligence, or mistake, whether of omission
or commission, in following Borrowers' instructions or those contained in any
Letter of Credit or any modifications, amendments, or supplements thereto.
Borrowers understand that the L/C Guarantees may require the Lender Group to
indemnify the issuing bank for certain costs or liabilities arising out of
claims by any Borrower against such issuing bank. Each Borrower, jointly and
severally, hereby agrees to indemnify, save, defend, and hold the Lender Group
harmless with respect to any loss, cost, expense (including reasonable attorneys
fees), or liability incurred by the Lender Group under any L/C Guaranty as a
result of the Lender Group's indemnification of any such issuing bank.
(c) SUPPORTING MATERIALS. Each Borrower hereby authorizes and
directs any bank that issues a letter of credit guaranteed by an L/C Guaranty to
deliver to Agent all instruments, documents, and other writings and property
received by the issuing bank pursuant to such letter of credit, and to accept
and rely upon Agent's instructions and agreements with respect to all matters
arising in connection with such letter of credit and the related application. No
Borrower may or may be the "applicant" or "account party" with respect to such
letter of credit.
(d) COSTS OF LETTERS OF CREDIT. Any and all charges,
commissions, fees, and costs incurred by Agent relating to the letters of credit
guaranteed by an L/C Guaranty shall be considered Lender Group Expenses for
purposes of this Agreement and immediately shall be reimbursable by Borrowers to
Agent.
(e) INDEMNIFICATION. Immediately upon the termination of this
Agreement, Borrowers agree to either (i) provide cash collateral to be held by
Agent in an amount equal to 105% of the maximum amount of the Lender Group's
obligations under Letters of Credit, or (ii) cause to be delivered to Agent
releases of all of the Lender Group's obligations under outstanding Letters of
Credit. At Agent's discretion, any proceeds of Collateral received by Agent
after the occurrence and during the continuation of an Event of Default may be
held as the cash collateral required by this SECTION 2.2(e).
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(f) INCREASED COSTS. If by reason of (i) any change in any
applicable law, treaty, rule, or regulation or any change in the interpretation
or application by any governmental authority of any such applicable law, treaty,
rule, or regulation, or (ii) compliance by the issuing bank or the Lender Group
with any direction, request, or requirement (irrespective of whether having the
force of law) of any governmental authority or monetary authority including,
without limitation, Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect (and any successor thereto):
(i) any reserve, deposit, or similar requirement is or
shall be imposed or modified in respect of any Letters of Credit issued
hereunder, or
(ii) there shall be imposed on the issuing bank or the
Lender Group any other condition regarding any letter of credit, or Letter of
Credit, as applicable, issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or the Lender Group of issuing, making, guaranteeing, or
maintaining any letter of credit, or Letter of Credit, as applicable, or to
reduce the amount receivable in respect thereof by such issuing bank or the
Lender Group, then, and in any such case, Agent may, at any time within a
reasonable period after the additional cost is incurred or the amount received
is reduced, notify Borrowers, and Borrowers shall pay on demand such amounts as
the issuing bank or Agent may specify to be necessary to compensate the issuing
bank or Agent for such additional cost or reduced receipt, together with
interest on such amount from the date of such demand until payment in full
thereof at the rate set forth in SECTION 2.7(a) OR (c)(i) for Reference Rate
Loans, as applicable. The determination by the issuing bank or Agent, as the
case may be, of any amount due pursuant to this SECTION 2.2(f), as set forth in
a certificate setting forth the calculation thereof in reasonable detail, shall,
in the absence of manifest or demonstrable error, be final and conclusive and
binding on all of the parties hereto.
(g) PARTICIPATIONS.
(i) PURCHASE OF PARTICIPATIONS. Immediately upon issuance
of any Letter of Credit in accordance with this SECTION 2.2, each Lender shall
be deemed to have irrevocably and unconditionally purchased and received without
recourse or warranty, an undivided interest and participation in the credit
support or enhancement provided through Agent to such issuer in connection with
the issuance of such Letter of Credit, equal to such Lender's Pro Rata Share of
the face amount of such Letter of Credit (including, without limitation, all
obligations of a Borrower with respect thereto, and any security therefor or
guaranty pertaining thereto).
(ii) DOCUMENTATION. Upon the request of any Lender,
Agent shall furnish to such Lender copies of any Letter of Credit, reimbursement
agreements executed in connection therewith, application for any Letter of
Credit and credit support or enhancement provided through Agent in connection
with the issuance of any Letter of Credit, and such other documentation as may
reasonably by requested by such Lender.
(iii) OBLIGATIONS IRREVOCABLE. The obligations of each
Lender to make payments to Agent with respect to any Letter of Credit or with
respect to any credit support or enhancement provided through Agent with respect
to a Letter of Credit, and the obligations of each Borrower to make payments to
Agent, for the account of the Lenders, shall be irrevocable, not subject to any
qualification or exception whatsoever, including, without limitation, any of the
following circumstances:
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(A) any lack of validity or enforceability of this
Agreement or any of the other Loan Documents;
(B) the existence of any claim, setoff, defense, or
other right which any Borrower may have at any time against a beneficiary named
in a Letter of Credit or any transferee of any Letter of Credit (or any Person
for whom any such transferee may be acting), any Lender, Agent, the issuer of
such Letter of Credit, or any other Person, whether in connection with this
Agreement, any Letter of Credit, the transactions contemplated herein or any
unrelated transactions (including any underlying transactions between such
Borrower or any other Person and the beneficiary named in any Letter of Credit);
(C) any draft, certificate, or any other document
presented under the Letter of Credit proving to be forged, fraudulent, invalid,
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(D) the surrender or impairment of any security for
the performance or observance of any of the terms of any of the Loan Documents;
or
(E) the occurrence of any Default or Event of
Default.
2.3 INTENTIONALLY OMITTED.
2.4 INTENTIONALLY OMITTED.
2.5 PAYMENTS.
(a) PAYMENTS BY BORROWERS.
(i) All payments to be made by any Borrower shall be made
without set-off, recoupment, deduction, or counterclaim, except as otherwise
required by law. Except as otherwise expressly provided herein, all payments by
any Borrower shall be made to Agent for the account of the Lenders or Agent, as
the case may be, at Agent's address set forth in SECTION 12, and shall be made
in immediately available funds, no later than 2:00 p.m. (Atlanta, Georgia time)
on the date specified herein. Any payment received by Agent later than 2:00 p.m.
(Atlanta, Georgia time), at the option of Agent, shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue until such following Business Day.
(ii) Whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
(iii) Unless Agent receives notice from Borrowers prior
to the date on which any payment is due to the Lenders that Borrowers will not
make such payment in full as and when required, Agent may assume that Borrowers
have made such payment in full to Agent on such date in immediately available
funds and Agent may (but shall not be so required), in reliance upon such
assumption, distribute to each Lender on such due date an amount equal to the
amount then due such Lender. If and to the extent Borrowers have not made such
payment in full to Agent, each Lender shall repay to Agent on demand such amount
distributed to such Lender, together with interest thereon at the Reference Rate
for each day from the date such amount is distributed to such Lender until the
date repaid.
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(b) APPORTIONMENT AND APPLICATION OF PAYMENTS. Except as
otherwise provided with respect to Defaulting Lenders, aggregate principal and
interest payments shall be apportioned ratably among the Lenders (according to
the unpaid principal balance of the Advances to which such payments relate held
by each Lender) and payments of the fees (other than fees designated for Agent's
separate account) shall, as applicable, be apportioned ratably among the
Lenders. All payments shall be remitted to Agent and all such payments not
relating to principal or interest on specific Advances, or not constituting
payment of specific fees and all proceeds of Collateral received by Agent, shall
be applied, FIRST, to pay any fees or expense reimbursements then due to Agent
from Borrowers; SECOND, to pay any fees or expense reimbursements then due to
the Lenders from Borrowers; THIRD, to pay interest due in respect of all
Advances, including Agent Loans and Agent Advances; FOURTH, to pay or prepay
principal of Agent Loans and Agent Advances; FIFTH, ratably to pay principal of
the Advances (other than Agent Loans and Agent Advances) and unreimbursed
obligations in respect of Letters of Credit; and SIXTH, ratably to pay any other
Obligations due to Agent or any Lender by any Borrower. Agent shall promptly
distribute to each Lender, pursuant to the applicable wire transfer instructions
received from each Lender in writing, such funds as it may be entitled to
receive, subject to a Settlement delay as provided for in SECTION 2.1(i).
2.6 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrowers to the Lender Group pursuant to SECTIONS 2.1 AND
2.2 is greater than either the Dollar or percentage limitations set forth in
SECTIONS 2.1 AND 2.2 (an "Overadvance"), Borrowers immediately shall pay to
Agent, in cash, the amount of such excess to be used by Agent to reduce the
Obligations pursuant to the terms of SECTION 2.5(b).
2.7 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS.
(a) INTEREST RATE. Except as provided in clause (c) below, (i)
all Eurodollar Rate Loans shall bear interest at a per annum rate equal to the
Adjusted Eurodollar Rate plus the applicable margin (as calculated below) (the
"Margin") in effect with respect to Eurodollar Rate Loans from time to time
outstanding, (ii) Reference Rate Loans shall bear interest at a per annum rate
equal to the Reference Rate plus the Margin in effect with respect to Reference
Rate Loans from time to time outstanding, and (iii) all other Obligations shall
bear interest at the per annum rate equal to the Reference Rate plus the Margin
in effect with respect to Reference Rate Loans. As of the Closing Date and
through and including the date of the one year anniversary of the Closing Date
the Margin shall be the applicable per annum rate set forth in the table below;
<TABLE>
<CAPTION>
Margin for Margin for
Reference Rate Loans from Closing Eurodollar Rate Loans from
Date through First Anniversary of Closing Date through First
Closing Date: Anniversary of Closing Date:
<S> <C>
1.00% 2.75%
</TABLE>
provided, however, that on the date immediately following the one year
anniversary of the Closing Date and on each date that the financial statements
of Borrowers are delivered to the Lenders pursuant to SECTION 6.3(b) for the
fiscal year most recently ended, the Margin with respect Eurodollar Rate Loans
and Reference Rate Loans shall be adjusted based upon the EBITDA, calculated for
the most recently ended fiscal year, as reflected in such financial statements
delivered to the Lenders; PROVIDED, HOWEVER, that the adjustment to the Margin
occurring on the first day following the one year anniversary of the Closing
Date shall be based upon the EBITDA for the
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<PAGE>
fiscal year ended closest to January 31, 2000. Such Margin, as adjusted,
expressed as a per annum rate of interest, shall be as follows:
<TABLE>
<CAPTION>
If EBITDA for the fiscal Then the Margin for Then the Margin for Reference
year most recently ended is: Eurodollar Rate Loans Rate Loans that are Tranche A
(000's omitted) shall be: Advances shall be:
- ----------------------------- -------------------------- --------------------------------
<S> <C> <C>
Greater than $27,000 2.25% 0.50%
- ----------------------------- -------------------------- --------------------------------
Equal to or less than 2.50% 0.75%
$27,000 but greater than
$25,000
- ----------------------------- -------------------------- --------------------------------
Equal to or less than 2.75% 1.00%
$25,000 but greater than
$23,000
- ----------------------------- -------------------------- --------------------------------
Equal to or less than 3.00% 1.25%
$23,000 but greater than
$21,000
- ----------------------------- -------------------------- --------------------------------
Equal to or less than 3.25% 1.50%
$21,000
- ----------------------------- -------------------------- --------------------------------
</TABLE>
In the event that Borrowers fail to provide the financial statements referred to
above in accordance with terms of SECTION 6.3(b), and without prejudice to any
additional rights under SECTION 8.1 and SECTION 2.7(c), the Margin shall be one
and one-half of one percent (1.50%) per annum with respect to Reference Rate
Loans and three and one-quarter of one percent (3.25%) per annum with respect to
Eurodollar Rate Loans until two (2) Business Days after the actual delivery of
such statements; PROVIDED, HOWEVER, that, notwithstanding the foregoing, the
Margin shall not be so adjusted at any time prior to the date immediately
following the first anniversary of the Closing Date.
(b) LETTER OF CREDIT FEE. Borrowers shall pay Agent, for the
benefit of the Lender Group, a fee (in addition to the charges, commissions,
fees, and costs set forth in SECTION 2.2(d)) equal to one and one-half of one
percent (1.50%) per annum times the Daily Balance of the aggregate undrawn
amount of all Letters of Credit that were outstanding during the immediately
preceding month.
(c) DEFAULT RATE. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except for undrawn
Letters of Credit) shall bear interest at a per annum rate equal to two percent
(2%) above the rate otherwise applicable to such Obligations, and (ii) the
Letter of Credit fee provided in SECTION 2.7(b) shall be increased to two and
one-half of one percent (2.50%) per annum times the amount of the aggregate
undrawn amount of all outstanding Letters of Credit.
(d) Intentionally Omitted.
(e) PAYMENTS. Interest and Letter of Credit fees payable
hereunder shall be due and payable, in arrears, on the first day of each month
during the term hereof. Borrowers hereby authorize Agent, at its option, without
prior notice to any Borrower, to charge such interest and Letter of Credit fees,
all Lender Group Expenses (as and when incurred), the
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<PAGE>
charges, commissions, fees, and costs provided for in SECTION 2.2(d) (as and
when accrued or incurred), the fees and charges provided for in SECTION 2.12
(as and when accrued or incurred), and all other payments due under any Loan
Document to the applicable Loan Account, which amounts thereafter shall
accrue interest at the rate then applicable to Advances hereunder. Any
interest not paid when due shall be compounded and shall thereafter accrue
interest at the rate then applicable to Advances hereunder.
(f) COMPUTATION. The Reference Rate as of the date of this
Agreement is eight and one-half percent (8.5%) 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. All interest and fees
chargeable under the Loan Documents shall be computed on the basis of a 360 day
year for the actual number of days elapsed.
(g) INTENT TO LIMIT CHARGES TO MAXIMUM LAWFUL RATE. The
parties hereto hereby agree and stipulate that the only charge imposed upon
Borrowers for the use of money in connection with this Agreement is and shall be
the specific interest and fees described in Article II hereof and in any other
Loan Document. Notwithstanding the foregoing, the parties hereto further agree
and stipulate that all agency fees, syndication fees, facility fees,
underwriting fees, default charges, late charges, funding or "breakage" charges,
increased cost charges, attorneys' fees and reimbursement for costs and expenses
paid by Agent or any Lender to third parties or for damages incurred by Agent or
any Lender, are charges made to compensate Agent or any such Lender, for
underwriting or administrative services and costs or losses performed or
incurred, and to be performed or incurred, by Agent and Lenders in connection
with this Agreement and shall under NO CIRCUMSTANCES BE DEEMED TO BE CHARGES FOR
THE USE OF MONEY pursuant to Official Code of Georgia Annotated Sections 7-4-2
and 7-4-18. All charges other than charges for the use of money shall be fully
earned and nonrefundable when due. 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.
Borrowers and the Lender Group, in executing and delivering this Agreement,
intend legally to agree upon the rate or rates of interest and manner of payment
stated within it; PROVIDED, HOWEVER, that, anything contained herein to the
contrary notwithstanding, if said rate or rates of interest or manner of payment
exceeds the maximum allowable under applicable law, then, IPSO FACTO as of the
date of this Agreement, Borrowers are and shall be liable only for the payment
of such maximum as allowed by law, and payment received from Borrowers 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.
(h) PROMISE TO PAY. Borrowers, jointly and severally, hereby
promise to pay in full to Agent the amount of all Obligations, including the
principal amount of all Advances, together with accrued interest, fees and other
amounts due thereon, all in accordance with the terms of this Agreement.
2.8 COLLECTION OF ACCOUNTS.
(a) Each Borrower shall irrevocably instruct all credit card
processors of Borrowers to remit all Collections held by such credit card
processors on a daily basis into any Blocked Account or, at Agent's option, any
other bank account and the available portion of such Collections shall be
deposited to or sent by electronic funds transfer (including, but not limited
to, ACH transfers) on each Business Day to the Credit Card Concentration
Account. Each Borrower shall cause all Collections (other than Collections from
credit card processors) received by such
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<PAGE>
Borrower from any source, including without limitation all tax refunds, to be
deposited on a daily basis into any Blocked Account or, at Agent's option, any
other bank account and the available portion of such Collections shall be
deposited to or sent by electronic funds transfer (including, but not limited
to, ACH transfers) on each Business Day to the Concentration Account. With
respect to such bank accounts that are Blocked Accounts, the applicable
Borrower, Agent and the Blocked Account Banks shall enter into Blocked Account
Agreements, which, among other things, with respect to all Blocked Accounts
(other than the Concentration Account and the Credit Card Concentration Account)
will provide for all available cash deposited into a Blocked Account to be sent
by electronic funds transfer (including, but not limited to, ACH transfers) each
Business Day (i) in the case of Collections from credit card processors, to the
Credit Card Concentration Account, and (ii) in the case of all other
Collections, to the Concentration Account. With respect to each account (other
than Blocked Accounts) into which Collections are deposited, the applicable
Borrower shall irrevocably authorize and direct in writing, in form and
substance satisfactory to Agent, each such bank to send via wire transfer
(including, but not limited to, ACH transfers) each Business Day all available
funds deposited into each such account (i) in the case of Collections from
credit card processors, to the Credit Card Concentration Account, and (ii) in
the case of all other Collections, to the Concentration Account and each such
bank shall agree to do so. No Blocked Account Agreement or other arrangement
contemplated in this SECTION 2.8(a) shall be modified by any Borrower without
the prior written consent of Agent. Upon the terms and subject to the conditions
set forth in the Blocked Account Agreements applicable to the Concentration
Account and the Credit Card Concentration Account, all amounts received in the
Concentration Account and the Credit Card Concentration Account shall be wired
each Business Day into an account (the "Agent's Account") maintained by Agent at
a depositary selected by Agent.
(b) Borrowers shall not transfer any funds out of or otherwise
use funds in the Control Account except in compliance with the Control
Agreement; PROVIDED, HOWEVER, that notwithstanding the foregoing Agent will
consent to the use of such funds to make the Original Proposed Redemption so
long as such Original Proposed Redemption is made in accordance with Section
7.8(a).
(c) Borrowers shall not, and shall not permit any of their
Subsidiaries to, open or maintain any deposit account or investment account with
any bank or other financial institution other than the Designated Account, the
Blocked Accounts and the other accounts listed on SCHEDULE 2.8. All deposit
accounts and investment accounts of Borrowers and their Subsidiaries are listed
on SCHEDULE 2.8.
(d) Borrowers covenant and agree to maintain any cash
management system implemented pursuant to Section 3.3(d).
2.9 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of
any Collections by Agent (whether from transfers to Agent by the Blocked Account
Banks pursuant to the Blocked Account Agreements or otherwise) immediately shall
be applied provisionally to reduce the Obligations outstanding under SECTION
2.1, but shall not be considered a payment on account unless such Collection
item is a wire transfer of immediately available federal funds and is made to
the Agent's Account or unless and until such Collection item is honored when
presented for payment. From and after the Closing Date, Agent shall be entitled
to charge Borrowers for Agent's sole account one (1) Business Days of
`clearance' or `float' at the rate set forth in SECTION 2.7(a)(iii) or SECTION
2.7(c)(i) with respect to Reference Rate Loans, as applicable, on all
Collections that are received by Agent (regardless of whether forwarded by the
Blocked Account Banks to Agent, whether provisionally applied to reduce the
Obligations under SECTION 2.1, or
33
<PAGE>
otherwise). This across-the-board one (1) Business Day clearance or float charge
on all Collections is acknowledged by the parties to constitute an integral
aspect of the pricing of the Lender Group's financing of Borrowers, and shall
apply irrespective of the characterization of whether receipts are owned by a
Borrower or Agent, and whether or not there are any outstanding Advances, the
effect of such clearance or float charge being the equivalent of charging one
(1) Business Days of interest on such Collections. Should any Collection item
not be honored when presented for payment, then Borrowers shall be deemed not to
have made such payment, and interest shall be recalculated accordingly. Anything
to the contrary contained herein notwithstanding, any Collection item shall be
deemed received by Agent only if it is received into the Agent's Account on a
Business Day on or before 2:00 p.m. (Atlanta, Georgia time). If any Collection
item is received into the Agent's Account on a non-Business Day or after 2:00
p.m. (Atlanta, Georgia time) on a Business Day, it shall be deemed to have been
received by Agent as of the opening of business on the immediately following
Business Day.
2.10 DESIGNATED ACCOUNT. Agent and the Lender Group are authorized
to make the Advances and issue the Letters of Credit under this Agreement based
upon telephonic or other instructions received from anyone purporting to be an
Authorized Person, or without instructions if pursuant to SECTION 2.7(e).
Borrowers agree to establish and maintain the Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
Advances requested by any Borrower and made by the Lender Group hereunder.
Unless otherwise agreed by Agent and Borrowers, any Advance requested by a
Borrower and made by the Lender Group hereunder shall be made to the Designated
Account.
2.11 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Agent
shall maintain an account on its books in the name of Borrowers (the "Loan
Account") on which Borrowers will be charged with all Advances made by the
Lender Group to any Borrower or for any Borrower's account, including, accrued
interest, Lender Group Expenses, and any other payment Obligations of any
Borrower. In accordance with SECTION 2.9, the Loan Account will be credited with
all payments received by Agent from any Borrower or for any Borrower's account,
including all amounts received in the Agent's Account from any Blocked Account
Bank. Agent shall render statements regarding the Loan Account to Borrowers,
including principal, interest, fees, and including an itemization of all charges
and expenses constituting the Lender Group Expenses owing, and such statements
shall be conclusively presumed to be correct and accurate and constitute an
account stated between Borrowers and the Lender Group unless, within thirty (30)
days after receipt thereof by Borrowers, Borrowers shall deliver to Agent
written objection thereto describing the error or errors contained in any such
statements.
2.12 FEES. Borrowers shall pay to Agent for the ratable benefit of
the Lender Group (except where otherwise indicated) the following fees:
(a) FEE LETTER. On the Closing Date, for the sole account of
Agent, the fees set forth in the Fee Letter;
(b) UNUSED LINE FEE. On the first day of each month during the
term of the Loan Agreement in arrears, an unused line fee in an amount equal to
three-eighths of one percent (0.375%) per annum times the Average Unused Portion
of the Maximum Amount (the "Unused Line Fee"); and
(b) FINANCIAL EXAMINATION, DOCUMENTATION, AND APPRAISAL FEES.
For each of the respective sole accounts of Agent and, to the extent a Lender
accompanies Agent under SECTION 4.6, such Lender: (i) a fee of $750 per day per
examiner, plus out-of-pocket
34
<PAGE>
expenses, for each financial analysis and examination (i.e., audits) of
Borrowers performed by personnel employed by Agent and any such Lender; (ii) a
fee of $750 per day per person, plus out-of-pocket expenses, to set up
electronic collateral reporting from Borrowers to Agent; (iii) an appraisal fee
of $1,500 per day per appraiser, plus out-of-pocket expenses for each appraisal
of the Collateral performed by personnel employed by Agent and any such Lender;
(iv) the actual charges paid or incurred by Agent if it elects to employ the
services of one or more third Persons to perform such financial analyses and
examinations (i.e., audits) of Borrowers or to appraise the Collateral or set up
such electronic collateral reporting; and (v) on each anniversary of the Closing
Date, a fee of $1,000 per year for the sole account of Agent for Agent's loan
documentation review.
All fees provided for in this Agreement and any other Loan Document, including
without limitation the fees provided for in Sections 2.12(a), (b) and (c) above
shall be fully earned when due and non-refundable when paid.
2.13 EURODOLLAR RATE LOANS. Any other provisions herein to the
contrary notwithstanding, the following provisions shall govern with respect to
Eurodollar Rate Loans as to the matters covered:
(a) BORROWING; CONVERSION; CONTINUATION. Any Borrower may from
time to time, on or after the Closing Date, request in writing to Agent: (i)
Advances to constitute Eurodollar Rate Loans; (ii) that Reference Rate Loans be
converted into Eurodollar Rate Loans; or (iii) that existing Eurodollar Rate
Loans continue for an additional Interest Period; PROVIDED, HOWEVER, that
notwithstanding anything herein which may be construed to the contrary, at all
times that the Real Estate Borrowing Base is in effect at least $10,000,000 of
Advances must constitute Reference Rate Loans; PROVIDED FURTHER, HOWEVER, that
at all times that the Tax Refund Borrowing Base is in effect at least an
additional $5,000,000 (or such lesser amount as shall constitute the Tax Refund
Borrowing Base) of Advances must constitute Reference Rate Loans. Any such
request shall specify the aggregate amount of the requested Eurodollar Rate
Loans, the proposed funding date therefor (which shall be a Business Day, and
with respect to continued Eurodollar Rate Loans shall be the last day of the
Interest Period of the existing Eurodollar Rate Loans being continued), and the
proposed Interest Period, in each case subject to the limitations set forth
below. Eurodollar Rate Loans may only be made, continued, or extended if, as of
the proposed funding date therefor each of the following conditions is
satisfied:
(v) no Event of Default exists;
(w) no more than five (5) Eurodollar Rate Loans may be
in effect at any one time;
(x) the amount of each Eurodollar Rate Loan borrowed,
converted, or continued must be in an amount not
less than $1,000,000 and integral multiples of
$500,000 in excess thereof;
(y) Agent shall have determined that the Interest Period
or Adjusted Eurodollar Rate is available to the
Lenders and can be readily determined as of the date
of the request for such Eurodollar Rate Loan by a
Borrower; and
35
<PAGE>
(z) Agent shall have received such request at least two
(2) Business Days prior to the proposed funding date
therefor.
Any request by a Borrower to borrow Eurodollar Rate Loans, to convert Reference
Rate Loans to Eurodollar Rate Loans, or to continue any existing Eurodollar Rate
Loans shall be irrevocable, except to the extent that Agent shall determine
under SECTIONS 2.13(a), 2.14 OR 2.15 that such Eurodollar Rate Loans cannot be
made or continued.
(b) DETERMINATION OF INTEREST PERIOD. By giving notice as set
forth in SECTION 2.13(a), any Borrower shall have the option of selecting a one
(1), two (2), or three (3) month Interest Period for such Eurodollar Rate Loan.
The determination of Interest Periods shall be subject to the following
provisions:
(i) in the case of immediately successive Interest
Periods, each successive Interest Period shall
commence on the day on which the next preceding
Interest Period expires;
(ii) if any Interest Period would otherwise expire on a
day which is not a Business Day, the Interest Period
shall be extended to expire on the next succeeding
Business Day; PROVIDED, HOWEVER, that if the next
succeeding Business Day occurs in the following
calendar month, then such Interest Period shall end
on the last Business Day of the calendar month at
the end of such Interest Period;
(iii) if any Interest Period begins on the last Business
Day of a month or on a day for which there is no
numerically corresponding day in the calendar month
at the end of such Interest Period, then the
Interest Period shall end on the last Business Day
of the calendar month at the end of such Interest
Period; and
(iv) no Borrower may select an Interest Period which
expires later than the Maturity Date.
(c) AUTOMATIC CONVERSION: OPTIONAL CONVERSION BY AGENT. Any
Eurodollar Rate Loan shall automatically convert to a Reference Rate Loan upon
the last day of the applicable Interest Period, unless Agent has received a
request to continue such Eurodollar Rate Loan at least two (2) Business Days
prior to the end of such Interest Period in accordance with the terms of SECTION
2.13(a). Any Eurodollar Rate Loan shall, at the Lender Group's option, upon
notice to Borrowers, convert to a Reference Rate Loan in the event that (i) an
Event of Default shall have occurred and be continuing as of the last day of the
Interest Period for such Eurodollar Rate Loan, or (ii) this Agreement is
terminated, and Borrowers shall pay to Agent for the benefit of the Lenders any
amounts required by SECTION 2.16 as a result thereof.
2.14 ILLEGALITY. Any other provision herein to the contrary
notwithstanding, if the adoption of or any change in any Requirement of Law or
in the interpretation or application thereof shall make it unlawful for any
Lender to make or maintain Eurodollar Rate Loans as contemplated by this
Agreement, (a) the obligation of the Lenders hereunder to make Eurodollar Rate
Loans, continue Eurodollar Rate Loans as such, and convert Reference Rate Loans
to
36
<PAGE>
Eurodollar Rate Loans shall forthwith be suspended and (b) the then outstanding
Eurodollar Rate Loans, if any, shall be converted automatically to Reference
Rate Loans on the respective last days of the then current Interest Periods with
respect thereto or within such earlier period as required by law; PROVIDED,
HOWEVER, that before any such suspension or conversion, each Lender agrees to
use reasonable efforts (consistent with its internal policy and legal and
regulatory restrictions and so long as such efforts would not be disadvantageous
to it, in its reasonable discretion, in any legal, economic, or regulatory
manner) to designate a different lending office if the making of such a
designation would allow such Lender or its lending office to continue to perform
its obligations to make Eurodollar Rate Loans. If any such conversion of a
Eurodollar Rate Loan occurs on a day which is not the last day of the then
current Interest Period with respect thereto, Borrowers shall pay to Agent for
the benefit of the Lenders such amounts, if any, as may be required pursuant to
SECTION 2.16. If circumstances subsequently change so that the Lenders shall
determine that they are no longer so affected, the Lenders promptly will notify
Agent and Agent will promptly notify Borrowers, and upon receipt of such notice,
the obligations of the Lenders to make or continue Eurodollar Rate Loans or to
convert Reference Rate Loans into Eurodollar Rate Loans shall be reinstated.
2.15 REQUIREMENTS OF LAW.
(a) If the adoption of or any change in any Requirement of Law
or in the interpretation or application thereof or compliance by the Lenders
with any request or directive (whether or not having the force of law) from any
central bank or other governmental authority made subsequent to the date hereof:
(i) shall subject any Lender to any tax, levy, charge,
fee, reduction, or withholding of any kind
whatsoever with respect to this Agreement or any
Advance, or change the basis of taxation of payments
to any Lender in respect thereof (except for the
establishment of a tax based on the net income of
such Lender or changes in the rate of tax on the net
income of such Lender);
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan, or similar
requirement against assets held by, deposits or
other liabilities in or for the account of, loans or
other extensions of credit by, or any other
acquisition of funds by, any office of any Lender;
or
(iii) shall impose on any Lender any other condition with
respect to this Agreement or any Advance;
and the result of any of the foregoing is to increase the cost to any Lender of
making, converting into, continuing, or maintaining Eurodollar Rate Loans or to
reduce any amount receivable hereunder in respect of Eurodollar Rate Loans, or
to forego any other sum payable thereunder or make any payment on account
thereof, then, in any such case, Borrowers shall promptly pay such Lender, upon
its demand and submission of a certificate setting forth the information
required below, any additional amounts necessary to compensate such Lender for
such increased cost or reduced amount receivable; PROVIDED, HOWEVER, that before
making any such demand, each Lender agrees to use reasonable efforts (consistent
with its internal policy and legal and regulatory restrictions and so long as
such efforts would not be disadvantageous to it, in its reasonable
37
<PAGE>
discretion, in any legal, economic, or regulatory manner) to designate a
different Eurodollar lending office if the making of such designation would
allow such Lender or its Eurodollar lending office to continue to perform its
obligations to make Eurodollar Rate Loans or to continue to fund or maintain
Eurodollar Rate Loans and avoid the need for, or materially reduce the amount
of, such increased cost. If a Lender becomes entitled to claim any additional
amounts pursuant to this SECTION 2.15, such Lender shall notify Agent and
Borrowers of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to this SECTION 2.15
submitted by a Lender to Agent and Borrowers shall be conclusive in the absence
of manifest error. If Borrowers so notify any such Lender within five (5)
Business Days after such Lender notifies Borrowers of any increased cost
pursuant to the foregoing provisions of this SECTION 2.15 and reimburses such
for any cost in accordance with SECTION 2.16, Borrowers may convert all affected
Eurodollar Rate Loans then outstanding into Reference Rate Loans in accordance
with SECTION 2.13.
(b) If any Lender shall have determined that the adoption of
or any change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any Person
controlling such Lender with any request or directive regarding capital adequacy
(whether or not having the force of law) from any governmental authority made
subsequent to the date hereof does or shall have the effect of increasing the
amount of capital required to be maintained or reducing the rate of return on
such Lender's or such Person's capital as a consequence of its obligations
hereunder to a level below that which such Lender or such Person could have
achieved but for such change or compliance (taking into consideration such
Lender's or such Person's policies with respect to capital adequacy) by an
amount deemed by such Lender to be material, then from time to time, after
submission by such Lender to Agent and Borrowers of a prompt written request
therefor and a certificate setting forth the basis of its determination and
computation of the amount or amounts owed (which certificate shall be conclusive
absent manifest error), Borrowers shall pay to such Lender such additional
amount or amounts as will compensate such Lender or such Person for such
reduction. This covenant shall survive the termination of this Agreement and the
payment of the Obligations.
2.16 INDEMNITY. Each Borrower, jointly and severally, agrees to
indemnify each Lender and to hold each Lender harmless from any loss or expense
which such Lender may sustain or incur as a consequence of (a) a default by
Borrowers in payment when due of the principal amount of or interest on any
Eurodollar Rate Loan, (b) a default by any Borrower in making a borrowing of,
conversion into, or continuation of Eurodollar Rate Loans after such Borrower
has given a notice requesting the same in accordance with the provisions of this
Agreement, (c) a default by Borrowers in making any prepayment after a Borrower
has given a notice thereof in accordance with the provisions of this Agreement,
or (d) the making of a prepayment of Eurodollar Rate Loans on a day which is not
the last day of an Interest Period with respect thereto (whether due to the
termination of this Agreement upon an Event of Default or otherwise), including,
in each case, any such loss or expenses arising from the re-employment of funds
obtained by it or from fees payable to terminate the deposits from which such
funds were obtained. Calculation of all amounts payable to the Lenders under
this SECTION 2.16 shall be made as though the Lenders had actually funded the
relevant Eurodollar Rate Loan through the purchase of a deposit bearing interest
at the Adjusted Eurodollar Rate in an amount equal to the amount of such
Eurodollar Rate Loan and having a maturity comparable to the relevant Interest
Period; PROVIDED, HOWEVER, that any Lender may fund each of the Eurodollar Rate
Loans in a manner it sees fit, and the foregoing assumption shall be utilized
only for the calculation of amounts payable under this SECTION 2.16. This
covenant shall survive the termination of this Agreement and the payment of the
Obligations.
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<PAGE>
2.17 INCREASED MAXIMUM AMOUNT.
(a) Borrower, Agent and any one or more Lenders (including New
Lenders) may, but shall not be required, on any date from the Closing Date to
the date that is ninety (90) days following the Closing Date, agree that such
Lenders shall make or increase the amount of their Commitment by executing an
Increased Maximum Amount Activation Notice specifying (i) the amount of such
increase in the Maximum Amount, (ii) the amount of each Lender's Commitment or
increase in its Commitment, and (iii) the Increased Maximum Amount Closing Date;
PROVIDED, HOWEVER, that increases in the Maximum Amount pursuant to this SECTION
2.17 shall not exceed $30,000,000 in the aggregate; PROVIDED FURTHER, HOWEVER,
that no Lender shall have any obligation to participate in any increase
described in this SECTION 2.17 unless it agrees to do so in its sole discretion;
PROVIDED, FURTHER, HOWEVER, that any such increase in the Maximum Amount shall
be subject to (A) Borrowers' ability to appropriately report Borrowing Base
Collateral as determined by Agent in its sole discretion and Agent's execution
of an Increased Maximum Amount Activation Notice shall evidence such
determination by Agent and (B) payment of the fees provided for in the Fee
Letter that are due and payable on such Increased Maximum Amount Closing Date.
(b) Any additional bank, financial institution or other entity
which, with the consent of Borrowers (which consent will not be unreasonably
withheld) and Agent, elects to become a "Lender" under this Agreement in
connection with any transaction described in SECTION 2.17(a) hereof must be an
"Eligible Transferee" and must execute a New Lender Supplement substantially in
the form of EXHIBIT E (each, a "New Lender Supplement"), whereupon such bank,
financial institution or other entity (a "New Lender") shall become a Lender for
all purposes and to the same extent as if originally a party hereto and shall be
bound by and entitled to the benefits of this Agreement.
2.18 ALL OBLIGATIONS TO CONSTITUTE JOINT AND SEVERAL OBLIGATIONS.
All Obligations shall constitute joint and several obligations of the Borrowers
and shall be secured by Agent's security interest (on behalf of the Lender
Group) and Lien upon all of the Collateral, and by all other security interests
and Liens heretofore, now or at any time hereafter granted by any Borrower Party
to Agent or any other member of the Lender Group to the extent provided in the
Loan Documents under which such Lien arises. Each Borrower expressly represents
and acknowledges that it is part of a common enterprise with the other Borrowers
and that any financial accommodations by the Lender Group, or any of them, to
any other Borrower hereunder and under the other Loan Documents are and will be
of direct and indirect interest, benefit and advantage to all Borrowers. Each
Borrower acknowledges that any request for an Advance, request for the issuance
of a Letter of Credit, conversion request or other notice given by any Borrower
to Agent or any other member of the Lender Group shall bind all Borrowers, and
that any notice given by Agent or any other member of the Lender Group to any
Borrower shall be effective with respect to all Borrowers. Each Borrower
acknowledges and agrees that each Borrower shall be liable, on a joint and
several basis, for all of the Advances and other Obligations, regardless of
which Borrower actually may have received the proceeds of any of the Advances or
other extensions of credit or have had Letters of Credit issued hereunder or the
amount of such Advances received, Letters of Credit issued or the manner in
which Agent accounts among Borrowers for such Advances, Letters of Credit or
other extensions of credit on its books and records, and further acknowledges
and agrees that Loans to any Borrower inure to the mutual benefit of all of the
Borrowers and that Agent and the other members of the Lender Group are relying
on the joint and several liability of the Borrowers in extending the Advances
and other financial accommodations hereunder.
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Each Borrower shall be entitled to subrogation and contribution rights from and
against the other Borrowers to the extent any Borrower is required to pay to the
Lenders or any other member of the Lender Group any amount in excess of the
Loans advanced directly to, or other Obligations incurred directly by, such
Borrower or as otherwise available under applicable law; PROVIDED, HOWEVER, that
such subrogation and contribution rights are and shall be subject to the terms
and conditions of SECTION 2.18 hereof.
2.19 MAXIMUM BORROWER LIABILITY.
(a) It is the intent of the Borrowers, Agent, and the Lenders
and any other Person holding any of the Obligations that each Borrower's maximum
obligations hereunder (such Borrower's "Maximum Borrower Liability") in any case
or proceeding referred to below (but only in such a case or proceeding) shall
not be in excess of:
(i) in a case or proceeding commenced by or against such
Borrower under the Bankruptcy Code on or within one (1) year from the date on
which any of the Obligations of such Borrower are incurred, the maximum amount
that would not otherwise cause the Obligations of such Borrower hereunder (or
any other Obligations of such Borrower to Agent, any other member of the Lender
Group or any other Person holding any of the Obligations) to be avoidable or
unenforceable against such Borrower under (A) Section 548 of the Bankruptcy Code
or (B) any state fraudulent transfer or fraudulent conveyance act or statute
applied in such case or proceeding by virtue of Section 544 of the Bankruptcy
Code; or
(ii) in a case or proceeding commenced by or against such
Borrower under the Bankruptcy Code subsequent to one (1) year from the date on
which any of the Obligations of such Borrower are incurred, the maximum amount
that would not otherwise cause the Obligations of such Borrower hereunder (or
any other Obligations of such Borrower to Agent, any other member of the Lender
Group or any other Person holding any of the Obligations) to be avoidable or
unenforceable against such Borrower under any state fraudulent transfer or
fraudulent conveyance act or statute applied in any such case or proceeding by
virtue of Section 544 of the Bankruptcy Code; or
(iii) in a case or proceeding commenced by or against such
Borrower under any law, statute or regulation other than the Bankruptcy Code
relating to dissolution, liquidation, conservatorship, bankruptcy, moratorium,
readjustment of debt, compromise, rearrangement, receivership, insolvency,
reorganization or similar debtor relief from time to time in effect affecting
the rights of creditors generally (collectively, "Other Debtor Relief Law"), the
maximum amount that would not otherwise cause the Obligations of such Borrower
hereunder (or any other Obligations of such Borrower to Agent, any other member
of the Lender Group or any other Person holding any of the Obligations) to be
avoidable or unenforceable against such Borrower under such Other Debtor Relief
Law, including, without limitation, any state fraudulent transfer or fraudulent
conveyance act or statute applied in any such case or proceeding. (The
substantive state or federal laws under which the possible avoidance or
unenforceability of the Obligations of any Borrower hereunder (or any other
Obligations of such Borrower to Agent, any other member of the Lender Group or
any other Person holding any of the Obligations) shall be determined in any such
case or proceeding shall hereinafter be referred to as the "Avoidance
Provisions").
(b) To the extent set forth in this SECTION 2.19, but only to
the extent that the Obligations of any Borrower hereunder, or the transfers made
by such Borrower under any Security Document, would otherwise be subject to
avoidance under any Avoidance Provisions if
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such Borrower is not deemed to have received valuable consideration, fair value,
fair consideration or reasonably equivalent value for such transfers or
obligations, or if such transfers or obligations of any Borrower hereunder would
render such Borrower insolvent, or leave such Borrower with an unreasonably
small capital or unreasonably small assets to conduct its business, or cause
such Borrower to have incurred debts (or to have intended to have incurred
debts) beyond its ability to pay such debts as they mature, in each case as of
the time any of the obligations of such Borrower are deemed to have been
incurred and transfers made under such Avoidance Provisions, then the
obligations of such Borrower hereunder shall be reduced to that amount which,
after giving effect thereto, would not cause the Obligations of such Borrower
hereunder (or any other Obligations of such Borrower to Agent, any other member
of the Lender Group or any other Person holding any of the Obligations), as so
reduced, to be subject to avoidance under such Avoidance Provisions. This
SECTION 2.19(b) is intended solely to preserve the rights hereunder of Agent,
the other members of the Lender Group and any other Person holding any of the
Obligations to the maximum extent that would not cause the obligations of the
Borrowers hereunder to be subject to avoidance under any Avoidance Provisions,
and none of the Borrowers nor any other Person shall have any right, defense,
offset, or claim under this SECTION 2.19(b) as against Agent, any other member
of the Lender Group or any other Person holding any of the Obligations that
would not otherwise be available to such Person under the Avoidance Provisions.
(c) Each Borrower agrees that the Obligations may at any time
and from time to time exceed the Maximum Borrower Liability of such Borrower,
and may exceed the aggregate Maximum Borrower Liability of all Borrowers
hereunder, without impairing this Agreement or any provision contained herein or
affecting the rights and remedies of the Lender Group, or any of them,
hereunder.
(d) In the event any Borrower (a "Funding Borrower") shall
make any payment or payments under this Agreement or shall suffer any loss as a
result of any realization upon any collateral granted by it to secure its
obligations hereunder, each other Borrower (each, a "Contributing Borrower")
shall contribute to such Funding Borrower an amount equal to such payment or
payments made, or losses suffered, by such Funding Borrower determined as of the
date on which such payment or loss was made multiplied by the ratio of (i) the
Maximum Borrower Liability of such Contributing Borrower (without giving effect
to any right to receive any contribution or other obligation to make any
contribution hereunder), to (ii) the aggregate Maximum Borrower Liability of all
Borrowers (including the Funding Borrowers) hereunder (without giving effect to
any right to receive, or obligation to make, any contribution hereunder).
Nothing in this SECTION 2.19(d) shall affect any Borrower's joint and several
liability to Agent, and the other members of the Lender Group for the entire
amount of its Obligations. Each Borrower covenants and agrees that its right to
receive any contribution hereunder from a Contributing Borrower shall be
subordinate and junior in right of payment to all obligations of the Borrowers
to Agent and the other members of the Lender Group hereunder.
(e) No Borrower will exercise any rights which it may acquire
by way of subrogation hereunder or under any other Loan Document or at law by
any payment made hereunder or otherwise, nor shall any Borrower seek or be
entitled to seek any contribution or reimbursement from any other Borrower in
respect of payments made by such Borrower hereunder or under any other Loan
Document, until all amounts owing to Agent and the other members of the Lender
Group on account of the Obligations are paid in full in cash (or, with respect
to Letter of Credit Obligations, are cash collateralized or supported by a
Letter of Credit acceptable to Agent in the amount of one hundred five percent
(105%) of the outstanding Letters of Credit) and the Commitments are terminated.
If any amounts shall be paid to any Borrower on account of such subrogation or
contribution rights at any time when all of the Obligations shall not have been
paid
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in full, such amount shall be held by such Borrower in trust for Agent and the
other members of the Lender Group, segregated from other funds of such Borrower,
and shall, forthwith upon receipt by such Borrower, be turned over to Agent in
the exact form received by such Borrower (duly endorsed by such Borrower to
Agent, if required), to be applied against the Obligations, whether matured or
unmatured, as provided for herein.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND INITIAL LETTER
OF CREDIT. The obligation of the Lender Group to make the initial Advance or to
issue the initial Letter of Credit is subject to the fulfillment, to the
satisfaction of Agent and its counsel, of each of the following conditions on or
before the Closing Date:
(a) the Closing Date shall occur on or before March 1, 2000.
(b) Agent shall have received searches reflecting the filing
of its financing statements and fixture filings;
(c) Agent shall have received each of the following documents,
duly executed, and each such document shall be in full force and effect:
a. the Disbursement Letter;
b. the Pay-Off Letter, together with UCC termination
statements and other documentation evidencing the
termination by Existing Lender of its Liens in and
to the properties and assets of Borrowers and their
Subsidiaries;
c. the Mortgages;
d. the Trademark Security Agreement;
e. the Pledge Agreement;
f. the Assignment of Notes;
g. the Subsidiary Guaranty;
h. the Subsidiary Pledge Agreement;
i. the Subsidiary Security Agreement;
j. the Environmental Indemnity Agreement; and
k. the Control Agreement.
(d) Agent shall have received a certificate from the Secretary
of each Borrower attesting to the resolutions of such Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which such Borrower is a party and authorizing
specific officers of such Borrower to execute the same;
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(e) Agent shall have received copies of each Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing Date,
certified by the Secretary of such Borrower;
(f) Agent shall have received a certificate of status with
respect to each Borrower, dated within ten (10) days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of such Borrower, which certificate shall indicate that such
Borrower is in good standing in such jurisdiction;
(g) Agent shall have received certificates of status with
respect to each Borrower, each dated within fifteen (15) days of the Closing
Date, such certificates to be issued by the appropriate officer of the
jurisdictions in which its failure to be duly qualified or licensed would
constitute a Material Adverse Change, which certificates shall indicate that
such Borrower is in good standing in such jurisdictions; (h) Agent shall have
received a certificate of insurance, as are required by SECTION 6.10, the form
and substance of which shall be satisfactory to Agent and its counsel;
(i) Agent shall have received those duly executed certificates
of title in the possession of Borrowers with respect to that portion of the
Collateral that is subject to certificates of title;
(j) Agent shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as Agent
may require;
(k) Agent shall have received an opinion of Borrowers' counsel
in form and substance satisfactory to Agent in its sole discretion;
(l) Agent shall have received (i) an appraisal of the New
Headquarters, satisfactory to Agent, and (ii) mortgagee title insurance policies
(or marked commitments to issue the same) for the Real Property Collateral
issued by a title insurance company satisfactory to Agent (each a "Mortgage
Policy" and, collectively, the "Mortgage Policies") in amounts satisfactory to
Agent assuring Agent that the Mortgages on such Real Property Collateral are
valid and enforceable first priority mortgage Liens on such Real Property
Collateral free and clear of all defects and encumbrances except Permitted
Liens, and the Mortgage Policies shall otherwise be in form and substance
reasonably satisfactory to Agent;
(m) Agent shall have received a phase-I environmental report
and a real estate survey shall have been completed with respect to the Real
Property Collateral and copies thereof delivered to Agent; the environmental
consultants and surveyors retained for such reports or surveys, the scope of the
reports or surveys, and the results thereof shall be acceptable to Agent in its
sole discretion;
(n) Agent shall have received satisfactory evidence that all
tax returns required to be filed by each Borrower have been timely filed and all
taxes upon each Borrower or its properties, assets, income, and franchises
(including real property taxes and payroll taxes) have been paid prior to
delinquency, except such taxes that are the subject of a Permitted Protest;
(o) Agent shall have received evidence satisfactory to it
that, after making the initial Advance and the issuance of any Letters of Credit
on the Closing Date, the repayment of the Existing Indebtedness and the use of
the proceeds of the Advances made on the
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Closing Date, Borrowers shall have unrestricted cash on hand and Availability,
less the increase, if any, in Borrowers' accounts payable over sixty (60) days
past due since Agents prospect audit, in an amount equal to or greater than
$5,000,000;
(p) Agent shall have received satisfactory reference checks on
key management;
(q) Agent shall have completed a satisfactory field audit; and
(r) all other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed, or recorded and shall be in form and substance satisfactory to Agent
and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND ALL LETTERS OF
CREDIT. The following shall be conditions precedent to all Advances and all
Letters of Credit hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
(b) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof; and
(c) no injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
any Borrower, the Lender Group or any of their Affiliates.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial
closing hereunder, Borrowers shall perform or cause to be performed the
following (the failure by any Borrower to so perform or cause to be performed
constituting an Event of Default):
(a) on or before February 2, 2000, Borrowers shall have
delivered to Agent local counsel opinions in form and substance satisfactory to
Agent from with respect to each of the states (other than Georgia and New
Mexico) in which Real Estate Collateral is located;
(b) on or before February 2, 2000, Borrowers shall have
delivered to Agent endorsements to the Pledged Notes (as defined in the
Assignment of Notes) in form and substance satisfactory to Agent;
(c) on or before February 7, 2000, Borrowers shall have
delivered to Agent a Blocked Account Agreement for each of the Credit Card
Concentration Account and the Concentration Account;
(d) on or before February 7, 2000, Borrowers shall have
delivered to Agent a loss payable endorsement meeting the requirements of
Section 6.10;
(e) on or before February 14, 2000, Borrowers shall have
delivered to Agent a Credit Card Agreement from each credit card processor of
each Borrower;
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(f) on or before February 15, 2000, Borrowers shall have
complied with Section 6.16;
(g) on or before the date twenty (20) days following the
Closing Date, Borrowers shall have delivered to Agent evidence that the Liens
referenced on Schedule 3.3 have been terminated. Prior to such date, such Liens
shall be deemed to be Permitted Liens;
(h) on or before the date thirty (30) days following the
Closing Date, Borrowers shall have delivered to Agent certified copies of the
policies of insurance, together with the endorsements thereto, as are required
by SECTION 6.10, the form and substance of which shall be reasonably
satisfactory to Agent and its counsel;
(i) on or before the date thirty (30) days following the
Closing Date, Borrowers shall have delivered to Agent updated projections for
Borrowers on a monthly basis for each month from the date of delivery to the
fiscal year ending closest to January 31, 2001, in form satisfactory to Agent;
(j) on or before the date forty-five (45) days following the
Closing Date, Borrowers shall have delivered to Agent a Blocked Account
Agreement in form and substance reasonably acceptable to Agent for a new
Concentration Account, evidence that the Concentration Account in existence on
the Closing Date has been closed, and all documentation necessary to provide
that all Collections deposited into any Blocked Account (other than the new
Concentration Account) will thereafter be transferred to the new Concentration
Account on a daily basis as otherwise provided for in the relevant Blocked
Account Agreement;
(k) on or before the date ninety (90) days following the
Closing Date, Borrowers shall have implemented a new cash management system
acceptable to Agent in its reasonable discretion;
(l) on or before the date sixty (60) days following the
Closing Date, Agent shall have received a new appraisal of the Inventory
acceptable to Agent in its reasonable discretion;
(m) on or before the date sixty (60) days following the
Closing Date, Borrowers shall have demonstrated to Agent their ability to
appropriately report on Borrowing Base Collateral as determined by Agent in its
discretion;
(n) on or before the date sixty (60) days following the
Closing Date, Borrowers shall have used their best efforts to consummate a
sale/leaseback of the New Headquarters; and
(o) on or before the date ninety (90) days following the date
of request, Borrowers shall deliver to Agent such certificates of title for
Borrowers' vehicles as shall be requested by Agent.
3.4 TERM. This Agreement shall become effective upon the execution
and delivery hereof by Borrowers and the Lender Group and shall continue in full
force and effect for a term ending on the date (the "Maturity Date") that is
five (5) years from the Closing Date, unless sooner terminated pursuant to the
terms hereof. The foregoing notwithstanding, Agent (on behalf of the Lender
Group) shall have the right to terminate the Lender Group's obligations under
this
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Agreement immediately and without notice upon the occurrence and during the
continuation of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including the obligation to deposit cash collateral
to secure contingent reimbursement obligations of Borrowers with respect to any
outstanding Letters of Credit) immediately shall become due and payable without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrowers of Borrowers' duties, Obligations, or covenants hereunder,
and the Lender Group's continuing security interests in the Collateral shall
remain in effect until all Obligations have been fully and finally discharged
and the Lender Group's obligation to provide additional credit hereunder is
terminated.
3.6 EARLY TERMINATION BY BORROWERS. The provisions of SECTION 3.4
that provide for termination of this Agreement on the Maturity Date
notwithstanding, Borrowers have the option, at any time upon ninety (90) days
prior written notice to Agent, to terminate this Agreement by paying to Agent
(for the ratable benefit of the Lender Group), in cash, the Obligations
(including an amount equal to 105% of the undrawn amount of the Letters of
Credit to secure contingent reimbursement obligations with respect to
outstanding Letters of Credit), in full, together with a premium (the "Early
Termination Premium") equal to (a) five percent (5%) of the Commitments if this
Agreement is terminated on or before the first anniversary of the Closing Date,
(b) four percent (4%) of the Commitments if this Agreement is terminated after
the first anniversary of the Closing Date and on or before the second
anniversary of the Closing Date, (c) three percent (3%) of the Commitments if
this Agreement is terminated after the second anniversary of the Closing Date
and on or before the third anniversary of the Closing Date, and (d) one percent
(1%) of the Commitments if this Agreement is terminated after the third
anniversary of the Closing Date and prior to the Maturity Date; PROVIDED,
HOWEVER, that notwithstanding the foregoing, the Early Termination Premium shall
be an amount equal to two and one-half percent (2.5%) of the Commitments if this
Agreement is terminated during the Honeymoon Period so long as Borrowers shall
have used their best efforts to appropriately report Borrowing Base Collateral,
as determined by Agent in its discretion, and Agent shall not have determined
that the Inventory Advance Rate Change Date has occurred; PROVIDED FURTHER,
HOWEVER, that no Early Termination Premium shall be payable if the Obligations
(including an amount equal to 105% of the undrawn amount of the Letters of
Credit to secure contingent reimbursement obligations with respect to
outstanding Letters of Credit) are paid in full and this Agreement is terminated
from the proceeds of any of the following: (i) a refinancing provided or
arranged by Wells Fargo Bank, National Association, (ii) a "going private"
transaction, (iii) a sale of Parent, or (iii) a transaction in which a secondary
equity offering is consummated by Parent in an amount sufficient to satisfy the
Obligations in full.
3.7 TERMINATION UPON EVENT OF DEFAULT. If the Lender Group
terminates this Agreement upon the occurrence of an Event of Default, in view of
the impracticability and extreme difficulty of ascertaining actual damages and
by mutual agreement of the parties as to a reasonable calculation of the Lender
Group's lost profits as a result thereof, Borrowers shall pay to Agent (for the
ratable benefit of the Lender Group) upon the effective date of such
termination, a premium in an amount equal to the Early Termination Premium. The
Early Termination Premium shall be presumed to be the amount of damages
sustained by the Lender Group as the result of the early termination and
Borrowers agree that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this SECTION 3.7 shall
be deemed included in the Obligations.
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4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants to
Agent for the benefit of the Lender Group a continuing security interest in all
currently existing and hereafter acquired or arising Personal Property
Collateral of such Borrower in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrowers of each of
their covenants and duties under the Loan Documents. The security interests of
Agent for the benefit of the Lender Group in the Personal Property Collateral
shall attach to all Personal Property Collateral without further act on the part
of the Lender Group or Borrowers. Anything contained in this Agreement or any
other Loan Document to the contrary notwithstanding, except as expressly
permitted by SECTION 7.4, Borrowers have no authority, express or implied, to
dispose of any item or portion of the Personal Property Collateral or the Real
Property Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral, the
applicable Borrower, immediately upon the request of Agent, shall endorse and
deliver physical possession of such Negotiable Collateral to Agent.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time after a Default or Event of Default has occurred and is
continuing, Agent or Agent's designee may (a) notify customers or Account
Debtors of each Borrower that the Accounts, General Intangibles, or Negotiable
Collateral have been assigned to Agent for the benefit of the Lender Group or
that Agent for the benefit of the Lender Group has a security interest therein,
and (b) collect the Accounts, General Intangibles, and Negotiable Collateral
directly and charge the collection costs and expenses to the Loan Account. Each
Borrower agrees that it will hold in trust for the Lender Group, as the Lender
Group's trustee, any Collections that it receives and immediately will deliver
said Collections to Agent in their original form as received by such Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Agent, each Borrower shall execute and deliver to Agent all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Agent reasonably
may request, in form satisfactory to Agent, to perfect and continue perfected
the Liens of the Lender Group 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. Each Borrower hereby irrevocably makes,
constitutes, and appoints Agent (and any of Agent's officers, employees, or
agents designated by Agent) as such Borrower's true and lawful attorney, with
power to (a) if such Borrower refuses to, or fails timely to execute and deliver
any of the documents described in SECTION 4.4, sign the name of such 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 the Lender Group deems itself
insecure, sign such 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 such Borrower's name on any
Collection item that may come into the Lender Group's possession, (e) at any
time that an Event of Default has occurred and is continuing or the Lender Group
deems itself insecure, notify the post office authorities to change the address
for delivery of such Borrower's mail to an address designated by Agent, to
receive and open all mail addressed to such Borrower, and to
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retain all mail relating to the Collateral and forward all other mail to such
Borrower, (f) at any time that an Event of Default has occurred and is
continuing or the Lender Group deems itself insecure, make, settle, and adjust
all claims under such 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 Agent
deems itself insecure, settle and adjust disputes and claims respecting the
Accounts directly with Account Debtors, for amounts and upon terms that Agent
determines to be reasonable, and Agent may cause to be executed and delivered
any documents and releases that Agent determines to be necessary. The
appointment of Agent as each Borrower's attorney, and each and every one of
Agent's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully and finally repaid and performed and the
Lender Group's obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Agent (through any of its officers,
employees, or agents), and together with any Lender that so elects, shall have
the right, from time to time hereafter to inspect the Borrower's Books of each
Borrower and to check, test, and appraise the Collateral in order to verify each
Borrower's financial condition or the amount, quality, value, condition of, or
any other matter relating to, the Collateral. Borrowers acknowledge and agree
that, prior to a Default or Event of Default, Agent intends to engage a third
party appraiser at Borrowers' expense to update the Inventory appraisal on a
quarterly basis.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce the Lender Group to enter into this Agreement,
each Borrower makes the following representations and warranties which shall be
true, correct, and complete in all respects as of the date hereof, and shall be
true, correct, and complete in all respects as of the Closing Date, and at and
as of the date of the making of each Advance or the issuance of each Letter of
Credit thereafter, as though made on and as of the date of such Advance or
issuance of such Letter of Credit (except to the extent that such
representations and warranties relate solely to an earlier date) and such
representations and warranties shall survive the execution and delivery of this
Agreement:
5.1 NO ENCUMBRANCES. Each Borrower has good and indefeasible
title to the Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrowers'
business, unconditionally owed to the applicable Borrowers without defenses,
disputes, offsets, counterclaims, or rights of return or cancellation. The
property giving rise to such Eligible Accounts has been delivered to the Account
Debtor, or to the Account Debtor's agent for immediate shipment to and
unconditional acceptance by the Account Debtor. No Borrower has received notice
of actual or imminent bankruptcy, insolvency, or material impairment of the
financial condition of any Account Debtor regarding any Eligible Account.
5.3 ELIGIBLE INVENTORY. All Eligible Inventory is of good and
merchantable quality, free from defects.
5.4 EQUIPMENT. All of the Equipment (except Equipment which is
being repaired or has become obsolete or reached the end of its useful life or
is fully depreciated) is used or held for use in Borrowers' business and is fit
for such purposes.
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5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Agent's prior written consent) and are located only at the locations identified
on SCHEDULE 6.12 or otherwise permitted by SECTION 6.12.
5.6 INVENTORY RECORDS. Each Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality, and quantity of the
Inventory, and such Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of each Borrower Party is located at the address indicated on SCHEDULE
5.7 and each Borrower Party's FEIN is set forth on SCHEDULE 5.7.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Each Borrower Party is duly organized and existing and
in good standing under the laws of the jurisdiction of its incorporation and
qualified and licensed to do business in, and in good standing in, any state
where the failure to be so licensed or qualified reasonably could be expected to
have a Material Adverse Change.
(b) Set forth on SCHEDULE 5.8, is a complete and accurate
list of each Borrower Party's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their incorporation; (ii) the number of shares or units, as
applicable of each class of Capital Stock authorized for each of such
Subsidiaries; and (iii) the number and the percentage of the outstanding shares,
units or percentage interest, as applicable, of each such class owned directly
or indirectly by each Borrower Party. All of the outstanding Capital Stock of
each such Subsidiary has been validly issued and is fully paid and
non-assessable.
(c) Except as set forth on SCHEDULE 5.8, no Capital Stock
(or any securities, instruments, warrants, options, purchase rights, conversion
or exchange rights, calls, commitments or claims of any character convertible
into or exercisable for Capital Stock) of any direct or indirect Subsidiary of
any Borrower Party is subject to the issuance of any security, instrument,
warrant, option, purchase right, conversion or exchange right, call, commitment
or claim of any right, title, or interest therein or thereto.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by each
Borrower Party of this Agreement and the Loan Documents to which it is a party
have been duly authorized by all necessary corporate action.
(b) The execution, delivery, and performance by each
Borrower Party of this Agreement and the Loan Documents to which it is a party
do not and will not (i) violate any provision of federal, state, or local law or
regulation (including Regulations T, U, and X of the Federal Reserve Board)
applicable to such Borrower Party, the governing documents of such Borrower
Party, or any order, judgment, or decree of any court or other governmental
authority binding on such Borrower Party, (ii) conflict with, result in a breach
of, or constitute (with due notice or lapse of time or both) a default under any
material contractual obligation or material lease of such Borrower Party, (iii)
result in or require the creation or imposition of any Lien of any nature
whatsoever upon any properties or assets of such Borrower Party, other than
Permitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any
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material contractual obligation of such Borrower Party, which approval or
consent as the case may be has not been obtained.
(c) Other than (i) the filing of appropriate financing
statements, fixture filings, the Trademark Security Agreement with the United
States Patent and Trademark Office and mortgages and (ii) the registration of
Agent's security interest in vehicles with appropriate state authorities, the
execution, delivery, and performance by each Borrower Party of this Agreement
and the Loan Documents to which such Borrower Party is a party do not and will
not require any registration with, consent, or approval of, or notice to, or
other action with or by, any federal, state, foreign, or other governmental
authority or other Person.
(d) This Agreement and the Loan Documents to which each
Borrower Party is a party, and all other documents contemplated hereby and
thereby, when executed and delivered by such Borrower Party will be the legally
valid and binding obligations of such Borrower Party, enforceable against such
Borrower Party in accordance with their respective terms, except as enforcement
may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or limiting creditors'
rights generally.
(e) The Liens granted by each Borrower Party to Agent (for
the benefit of the Lender Group) in and to its properties and assets pursuant to
this Agreement and the other Loan Documents are validly created, perfected, and
first priority Liens, subject only to Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against any Borrower Party before any court or administrative agency and no
Borrower Party has knowledge or belief of any pending, threatened, or imminent
litigation, governmental investigations, or claims, complaints, actions, or
prosecutions involving any Borrower Party or any guarantor of the Obligations in
excess of $100,000, except for: (a) ongoing collection matters in which a
Borrower Party is the plaintiff; (b) matters disclosed on SCHEDULE 5.10; and (c)
matters arising after the date hereof that, if decided adversely to a Borrower
Party, would not result in a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating
to any Borrower Party or any guarantor of the Obligations that have been
delivered by Borrower Parties to the Lender Group have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes and being subject to year-end audit adjustments) and
fairly present the applicable Borrower Party's (or such guarantor's, as
applicable) financial condition as of the date thereof and the applicable
Borrower Party's results of operations for the period then ended. There has not
been a Material Adverse Change with respect to any Borrower Party (or such
guarantor, as applicable) since the date of the latest financial statements
submitted to the Lender Group on or before the Closing Date.
5.12 SOLVENCY. Each Borrower Party is Solvent. No transfer of
property is being made by any Borrower Party and no obligation is being incurred
by any Borrower Party 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 such Borrower Party.
5.13 EMPLOYEE BENEFITS. None of any Borrower Party or any of their
ERISA Affiliates maintains or contributes to any Benefit Plan, other than those
listed on SCHEDULE 5.13. Each Borrower Party and each ERISA Affiliate have
satisfied the minimum funding standards of
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ERISA and the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
Material Adverse Change. None of any Borrower Party or any ERISA Affiliate, or
any fiduciary of any Plan is subject to any direct or indirect material unfunded
liability with respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of any Borrower Party or any ERISA Affiliate is
required to provide security to any Plan under Section 401(a)(29) of the IRC.
5.14 ENVIRONMENTAL CONDITION. No Borrower Party's properties or
assets have ever been used by a Borrower Party or, to the best of each Borrower
Party's knowledge, by previous owners or operators in the disposal of, or to
produce, store, handle, treat, release, or transport, any Hazardous Materials
other than in compliance with applicable law. No Borrower Party's properties or
assets have 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 a Borrower Party. No
Borrower Party has 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 such Borrower Party resulting in the
releasing or disposing of Hazardous Materials into the environment.
5.15 INTELLECTUAL PROPERTY. No Borrower Party owns, licenses or
has any rights to or interest in any patents, trade names, trademarks,
servicemarks, registered copyrights, or any application for the registration of
any of the foregoing, except as set forth on SCHEDULE 5.15.
5.16 BROKER'S FEES. No broker's or finder's fees or commissions
are payable in connection with the closing of this Agreement or the transactions
contemplated hereby. Agent and Borrowers agree that no broker has been used in
this transaction. Notwithstanding the foregoing, any brokerage commissions or
fees payable in connection with the financing provided for herein shall be
payable by Borrowers. Borrowers agree to indemnify, defend and hold the Lender
Group harmless from and against any claim of any broker or finder arising out of
the financing provided for herein.
6. AFFIRMATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, each Borrower shall do all of the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables each Borrower Party to produce financial statements in
accordance with GAAP, and maintain records pertaining to the Collateral that
contain information as from time to time may be reasonably requested by Agent.
Each Borrower also shall keep, and shall cause each of its Subsidiaries to keep,
a modern inventory reporting system that shows all additions, sales, claims,
returns, and allowances with respect to the Inventory.
6.2 COLLATERAL REPORTING. Provide Agent with the following
documents at the following times in form satisfactory to Agent: (a) weekly, a
Borrowing Base Certificate summarizing sales, cash collections, changes in
Accounts and a calculation of the Borrowing Base as of such date, (b) on a
monthly basis and, in any event, by no later than the twentieth (20th) day of
each month with respect to February, March and April, 2000 and thereafter by no
later than the
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fifteenth (15th) day of each month during the term of this Agreement, (i) a
detailed calculation of the Borrowing Base, and (ii) a detailed aging, by total,
of the Accounts, together with a reconciliation to the detailed calculation of
the Borrowing Base previously provided to Agent, (c) on a monthly basis and, in
any event, by no later than the twentieth (20th) day of each month with respect
to February, March and April, 2000 and thereafter by no later than the fifteenth
(15th) day day of each month during the term of this Agreement, a summary aging,
by vendor, of each Borrower's accounts payable and any book overdraft, (d) on a
weekly basis, Inventory reports specifying each Borrower's cost of its Inventory
by category, with additional detail showing additions to and deletions from the
Inventory, (e) on a weekly basis, unless previously reported in Section 6.2(a),
notice of all returns, disputes, or claims, (f) upon request, copies of invoices
in connection with the Accounts, customer statements, credit memos, remittance
advices and reports, deposit slips, shipping and delivery documents in
connection with the Accounts and for Inventory and Equipment acquired by each
Borrower, purchase orders and invoices, (g) on a quarterly basis, a detailed
list of each Borrower's commercial customers with purchases from Borrowers in
excess of $50,000 per month, and (h) such electronic data or other reports as to
the Collateral or the financial condition of any Borrower as Agent may
reasonably request from time to time. Original sales invoices evidencing daily
sales shall be mailed by the applicable Borrower to each Account Debtor and, at
Agent's direction upon the occurrence and during the continuance of a Default or
Event of Default, the invoices shall indicate on their face that the Account has
been assigned to Agent (for the benefit of the Lender Group) and that all
payments are to be made directly to Agent.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to
Agent: (a) as soon as available, but in any event within thirty (30) days after
the end of each month that is not a fiscal quarter end and within forty-five
(45) days after the end of each month that is a fiscal quarter end during each
of Parent's fiscal years, a company prepared balance sheet, income statement,
and statement of cash flow covering Parent'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 Parent's fiscal years, financial statements of Parent for each such
fiscal year, audited by independent certified public accountants reasonably
acceptable to Agent and certified, without any qualifications or explanatory
paragraphs, by such accountants to have been prepared in accordance with GAAP,
together with a certificate of such accountants addressed to Agent stating that
such accountants do not have knowledge of the existence of any Default or Event
of Default. Such audited financial statements shall include a balance sheet,
profit and loss statement, and statement of cash flow and, if prepared, such
accountants' letter to management. In addition to the financial statements
referred to above, Borrowers agree to deliver financial statements prepared on a
consolidating basis so as to present Parent and each Subsidiary of Parent
separately, and on a consolidated basis.
Together with the above, Borrowers also shall deliver to
Agent Parent's and, as applicable, any Subsidiary of Parent's Form 10-Q
Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and
any other filings made by Parent or any Subsidiary of Parent with the Securities
and Exchange Commission as soon as the same are filed, or any other information
that is provided by any Borrower or any Subsidiary of any Borrower to its
shareholders, the Indenture Trustee or the holders of the Senior Subordinated
Notes and any other report reasonably requested by Agent relating to the
financial condition of Borrowers and their Subsidiaries. Borrowers also shall
deliver to Agent copies of all press releases issued by any Borrower Party.
Each month, together with the financial statements provided
pursuant to SECTION 6.3(a), Borrowers shall deliver to Agent a certificate
signed by its chief financial officer or corporate controller to the effect
that: (i) all financial statements delivered or caused to be delivered to Agent
hereunder have been prepared in accordance with GAAP (except, in the case
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of unaudited financial statements, for the lack of footnotes and being subject
to year-end audit adjustments) and fairly present the financial condition of
Borrowers, (ii) the representations and warranties of the Borrower Parties
contained in this Agreement and the other Loan Documents, as applicable, are
true and correct in all material respects on and as of the date of such
certificate, as though made on and as of such date (except to the extent that
such representations and warranties relate solely to an earlier date), (iii) for
each month that also is the date on which a financial covenant in SECTION 7.20
is to be tested, a Compliance Certificate demonstrating in reasonable detail
compliance at the end of such period with the applicable financial covenants
contained in SECTION 7.20, and (iv) on the date of delivery of such certificate
to Agent there does not exist any condition or event that constitutes a Default
or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the
extent of any non-compliance, describing such non-compliance as to which he or
she may have knowledge and what action Borrowers have taken, are taking, or
proposes to take with respect thereto).
Parent shall have issued written instructions to its
independent certified public accountants authorizing them to communicate with
Agent and to release to Agent whatever financial information concerning
Borrowers that Agent may request. Borrowers hereby irrevocably authorize and
direct all auditors, accountants, or other third parties to deliver to Agent, at
Borrowers' expense, copies of Parent's and its Subsidiaries' financial
statements, papers related thereto, and other accounting records of any nature
in their possession, and to disclose to Agent any information they may have
regarding Parent's and its Subsidiaries' business affairs and financial
conditions.
6.4 TAX RETURNS; TAX REFUND CLAIMS. Deliver to Agent copies of
each Borrower Party's future federal income tax returns and any other tax refund
claims, and any amendments thereto, within thirty (30) days of the filing
thereof with the Internal Revenue Service or comparable state authority.
6.5 INTENTIONALLY OMITTED.
6.6 RETURNS. Cause returns and allowances, if any, as between any
Borrower and its Account Debtors to be on the same basis and in accordance with
the usual customary practices of such Borrower, as they exist at the time of the
execution and delivery of this Agreement. If, at a time when no Event of Default
has occurred and is continuing, any Account Debtor returns any Inventory to a
Borrower, such Borrower promptly shall determine the reason for such return and,
if such Borrower accepts such return, issue a credit memorandum (with a copy to
be sent to Agent) in the appropriate amount to such Account Debtor. If, at a
time when an Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to a Borrower, such Borrower promptly shall determine the
reason for such return and, if Agent consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Agent) in the appropriate amount to such Account Debtor.
6.7 TITLE TO EQUIPMENT. Upon Agent's request, each Borrower
immediately shall deliver to Agent, properly endorsed or otherwise indicating
Agent's security interest therein, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment as to
which a certificate of title has been issued or is required to be issued.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date, no
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Borrower shall (without the consent of Agent (which consent will not be withheld
upon the execution and delivery of such documents as may be required in order to
maintain Agent's first priority security interest therein)) permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and such Equipment shall (unless consented to by Agent as set forth above) at
all times remain personal property.
6.9 TAXES. Cause all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against any Borrower Party or any property of any Borrower Party to be paid in
full, before delinquency or before the expiration of any extension period,
except to the extent that the validity of such assessment or tax shall be the
subject of a Permitted Protest. Each Borrower shall, and shall cause its
Subsidiaries to, make due and timely payment or deposit of all such federal,
state, and local taxes, assessments, or contributions required of it or them by
law, and will execute and deliver to Agent, on demand, appropriate certificates
attesting to the payment thereof or deposit with respect thereto. Each Borrower
will, and will cause each of its Subsidiaries to, make timely payment or deposit
of all tax payments and withholding taxes required of it or them by applicable
laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Agent
with proof satisfactory to Agent indicating that such Borrower and its
Subsidiaries have made such payments or deposits.
6.10 INSURANCE.
(a) At its expense, keep the Personal Property Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as are ordinarily insured against
by other owners in similar businesses. Each Borrower also shall, and shall cause
its Subsidiaries to, maintain business interruption, public liability, product
liability, and property damage insurance relating to such Borrower's or its
Subsidiaries' ownership and use of the Personal Property Collateral and the
Collateral (as defined in the Subsidiary Security Agreement), as applicable, as
well as insurance against larceny, embezzlement, and criminal misappropriation.
(b) At its expense, obtain and maintain (i) insurance of the
type necessary to insure the Improvements and Chattels (as such terms are
defined in the Mortgages), for the full replacement cost thereof, against any
loss by fire, lightning, windstorm, hail, explosion, aircraft, smoke damage,
vehicle damage, earthquakes, elevator collision, and other risks from time to
time included under "extended coverage" policies, in such amounts as Agent may
require, but in any event in amounts sufficient to prevent any Borrower Party
from becoming a co-insurer under such policies, (ii) combined single limit
bodily injury and property damages insurance against any loss, liability, or
damages on, about, or relating to each parcel of Real Property Collateral, in an
amount of not less than the amount in place on the Closing Date; (iii) business
rental insurance covering annual receipts for a twelve (12) month period for
each parcel of Real Property Collateral; and (iv) insurance for such other risks
as Agent may reasonably require. Replacement costs, at Agent's option, may be
redetermined by an insurance appraiser, satisfactory to Agent, not more
frequently than once every twelve (12) months at Borrowers' cost.
(c) At its expense, maintain key man life insurance policies
with respect to the following individuals and in the following amounts:
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<TABLE>
<CAPTION>
Name Amount
<S> <C>
A.J. Nassar $2,000,000
</TABLE>
The applicable Borrower shall furnish Agent with a
collateral assignment of such life insurance policy, shall record such
collateral assignment with the issuer of the policy, and shall furnish proof of
such issuer's acceptance of such assignment. All proceeds payable under such
life insurance policy shall be payable to Agent (for the ratable benefit of the
Lenders) to be applied on account of the Obligations.
(d) All such policies of insurance shall be in such form,
with such companies, and in such amounts as may be reasonably satisfactory to
Agent. All insurance required herein shall be written by companies which are
authorized to do insurance business in the State of Georgia or California. All
hazard insurance and such other insurance as Agent shall specify, shall contain
a California Form 438BFU (NS) mortgagee endorsement, or an equivalent
endorsement satisfactory to Agent, showing Agent (for the ratable benefit of the
Lenders) as sole loss payee thereof, and shall contain a waiver of warranties.
Every policy of insurance referred to in this SECTION 6.10 shall contain an
agreement by the insurer that it will not cancel such policy except after thirty
(30) days prior written notice to Agent (for the ratable benefit of the Lenders)
and that any loss payable thereunder shall be payable notwithstanding any act or
negligence of a Borrower or the Lender Group which might, absent such agreement,
result in a forfeiture of all or a part of such insurance payment and
notwithstanding (i) occupancy or use of the Real Property Collateral for
purposes more hazardous than permitted by the terms of such policy, (ii) any
foreclosure or other action or proceeding taken by the Lender Group pursuant to
the Mortgages upon the happening of an Event of Default, or (iii) any change in
title or ownership of the Real Property Collateral. Borrowers shall deliver to
Agent certified copies of such policies of insurance and evidence of the payment
of all premiums therefor.
(e) Original policies or certificates thereof satisfactory
to Agent evidencing such insurance shall be delivered to Agent at least thirty
(30) days prior to the expiration of the existing or preceding policies.
Borrowers shall give Agent prompt notice of any loss covered by such insurance,
and Agent shall have the right to adjust any loss. Agent shall have the
exclusive right to adjust all losses payable under any such insurance policies
without any liability to any Borrower Party whatsoever in respect of such
adjustments. Any monies received as payment for any loss under any insurance
policy including the insurance policies mentioned above, shall be paid over to
Agent (for the ratable benefit of Lenders) to be applied at the option of Agent
either to the prepayment of the Obligations without premium, in such order or
manner as Agent may elect, or shall be disbursed to Borrowers under stage
payment terms satisfactory to Agent for application to the cost of repairs,
replacements, or restorations. All repairs, replacements, or restorations shall
be effected with reasonable promptness and shall be of a value at least equal to
the value of the items or property destroyed prior to such damage or
destruction. Upon the occurrence of an Event of Default, Agent shall have the
right to apply all prepaid premiums to the payment of the Obligations in such
order or form as Agent shall determine.
(f) No Borrower shall, nor shall any Borrower permit its
Subsidiaries to, take out separate insurance concurrent in form or contributing
in the event of loss with that required to be maintained under this SECTION
6.10, unless Agent is included thereon as named insured with the loss payable to
Agent (for the ratable benefit of Lenders) under a standard California 438BFU
(NS) Mortgagee endorsement, or its local equivalent. Borrowers immediately shall
notify Agent whenever such separate insurance is taken out, specifying the
insurer thereunder
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and full particulars as to the policies evidencing the same, and originals of
such policies immediately shall be provided to Agent.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and
under the other Loan Documents by or on behalf of any Borrower Party without
setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and
Equipment only at the locations identified on SCHEDULE 6.12; PROVIDED, HOWEVER,
that Borrowers may amend SCHEDULE 6.12 so long as such amendment occurs by
written notice to Agent 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, Borrowers provide any financing statements or
fixture filings necessary to perfect and continue perfected (the Lien of Agent
for the benefit of the Lender Group) security interests in such assets and also
provide to Agent a Collateral Access Agreement.
6.13 COMPLIANCE WITH LAWS. Comply, and cause each of its
Subsidiaries to 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 cause a
Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(a) Deliver to Agent: (i) Promptly, and in any event within
ten (10) Business Days after any Borrower Party knows or has reason to know that
an ERISA Event has occurred that reasonably could be expected to result in a
Material Adverse Change, a written statement of the chief financial officer or
corporate controller of Parent describing such ERISA Event and any action that
is being taking with respect thereto by the Borrower Parties, or any of them, or
any ERISA Affiliate, and any action taken or threatened by the IRS, Department
of Labor, or PBGC. A Borrower Party shall be deemed to know all facts known by
the administrator of any Benefit Plan of which it is the plan sponsor, (ii)
promptly, and in any event within three (3) Business Days after the filing
thereof with the IRS, a copy of each funding waiver request filed with respect
to any Benefit Plan and all communications received by such Borrower Party, any
of its Subsidiaries or, to the knowledge of such Borrower Party, any ERISA
Affiliate with respect to such request, and (iii) promptly, and in any event
within three (3) Business Days after receipt by such Borrower Party, any of its
Subsidiaries or, to the knowledge of such Borrower Party, any ERISA Affiliate,
of the PBGC's intention to terminate a Benefit Plan or to have a trustee
appointed to administer a Benefit Plan, copies of each such notice.
(b) Cause to be delivered to Agent, upon Agent's request,
each of the following: (i) a copy of each Plan (or, where any such plan is not
in writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of each Borrower Party or its
Subsidiaries; (ii) the most recent determination letter issued by the IRS with
respect to each Benefit Plan; (iii) for the three (3) most recent plan years,
annual reports on Form 5500 Series required to be filed with any governmental
agency for each Benefit Plan; (iv) all actuarial reports prepared for the last
three (3) plan years for each Benefit Plan; (v) a listing of all Multiemployer
Plans, with the aggregate
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amount of the most recent annual contributions required to be made by any
Borrower Party or any ERISA Affiliate to each such plan and copies of the
collective bargaining agreements requiring such contributions; (vi) any
information that has been provided to any Borrower Party or any ERISA Affiliate
regarding withdrawal liability under any Multiemployer Plan; and (vii) the
aggregate amount of the most recent annual payments made to former employees of
each Borrower Party under any Retiree Health Plan.
6.15 LEASES. Pay when due, and cause each of their Subsidiaries to
pay when due, all rents and other amounts payable under any leases to which a
Borrower Party is a party or by which a Borrower Party's properties and assets
are bound, unless such payments are the subject of a Permitted Protest. To the
extent that a Borrower Party fails timely to make payment of such rents and
other amounts payable when due under its leases, Agent shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 NEW MEXICO PROPERTY. If the applicable Borrower does not sell
the New Mexico Property on or before February 15, 2000, on or before such date,
such Borrower shall grant to Agent a first priority mortgage, security deed or
deed of trust on such real estate in form and substance reasonably satisfactory
to Agent and deliver to Agent such other documentation and opinions in
connection with the grant of such security interest as Agent shall reasonably
request including without limitation policies of title insurance, phase I and,
if necessary phase II, environmental reports, flood zone certificates, financing
statements, fixture filings, surveys and appraisals; and Borrowers shall pay all
recording costs, intangibles taxes and other fees and costs including without
limitation reasonable attorneys' fees and expenses of counsel to Agent incurred
in connection therewith.
7. NEGATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower will not, and will not permit any of its Subsidiaries
to, do any of the following:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement, together with
Indebtedness to issuers of letters of credit that are the subject of L/C
Guarantees;
(b) Indebtedness set forth on SCHEDULE 7.1;
(c) Indebtedness (other than the Indebtedness under the
Senior Subordinated Notes) secured by Permitted Liens;
(d) Indebtedness under the Senior Subordinated Notes;
PROVIDED, HOWEVER, that the principal amount outstanding under the Senior
Subordinated Notes shall not exceed $96,000,000 in the aggregate at any time;
(e) Unsecured Indebtedness of Everythingdecor in an amount
not to exceed $2,000,000 in the aggregate at any time so long as such
Indebtedness is non-recourse to any other Borrower Party;
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(f) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b), (c) 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 the Lender Group 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 only encumber those assets
or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any 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 property or assets; PROVIDED, HOWEVER, that Everythingdecor may consummate
any of the foregoing so long as (a) any interest in connection therewith
retained by Borrowers shall be subject to Agent's Lien, (b) Borrower Parties
provide to Agent any documentation necessary to continue Agent's Lien in any
such interest retained and (c) any Net Proceeds received by any Borrower Party
in connection therewith are remitted to Agent for the benefit of the Lender
Group to be applied to the Obligations; PROVIDED FURTHER, HOWEVER, Borrowers may
sell the Capital Stock or assets of CarpetsPlus of America, Inc. to the Persons
who sold such entity to Borrowers so long as at least eighty percent (80%) of
the purchase price therefor is paid in cash and the Net Proceeds therefor are
remitted to Agent for the benefit of the Lender Group to be applied to the
Obligations.
7.4 DISPOSAL OF ASSETS. Except as otherwise permitted by SECTIONS
7.3 and 7.22, sell, lease, assign, transfer, or otherwise dispose of any of any
Borrower Party's properties or assets other than sales of Inventory to buyers in
the ordinary course of Borrower's business as currently conducted; PROVIDED,
HOWEVER, that Borrowers may sell and lease-back the New Headquarters so long as
the Net Proceeds therefor are not less than $14,000,000 and such Net Proceeds
are remitted to Agent for the benefit of the Lender Group to be applied to the
Obligations; PROVIDED FURTHER, HOWEVER, that Borrowers may sell each other
parcel of Real Estate so long as the Net Proceeds therefor are not less than the
release price set forth on SCHEDULE 7.4 with respect to such parcel of Real
Estate and such Net Proceeds are remitted to Agent for the benefit of the Lender
Group to be applied to the Obligations.
7.5 CHANGE NAME. Change any Borrower Party's name, FEIN,
corporate structure (within the meaning of Section 9-402(7) of the Code), or
identity, or add any new fictitious name; PROVIDED, HOWEVER, that a Borrower
Party may change its name so long as Borrowers provide Agent with thirty (30)
days written notice thereof and so long as, at the time of such written
notification or promptly thereafter (but not later than fifteen (15) days before
such name change is effective), the applicable Borrower Party provides any
financing statements or other
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documents necessary to perfect and continue perfected the Lien of Agent (for the
benefit of Lender Group).
7.6 GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of a Borrower or
which are transmitted or turned over to Agent.
7.7 NATURE OF BUSINESS. Make any change in the principal nature
of Borrowers' business.
7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by
SECTION 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise acquire
any Indebtedness owing to any third Person, other than the Obligations in
accordance with this Agreement; PROVIDED HOWEVER, that Parent may make the
Original Proposed Redemption so long as (i) no Default or Event of Default
exists or would be caused thereby and (ii) either (A) the Availability hereunder
on the date of such Redemption after giving effect to such redemption, less any
reserve created by Agent in its reasonable judgment for any deterioration in
Borrowers' accounts payable since completion of Agent's pre-Closing Date audit
of Borrowers, is in excess of $10,000,000, or (B) (x) the Availability hereunder
on the date of such Redemption after giving effect to such redemption, less any
reserve created by Agent in its reasonable judgment for any deterioration in
Borrowers' accounts payable since completion of Agent's pre-Closing Date audit
of Borrowers, is in excess of $5,000,000 and (y) Borrowers have provided to
Agent Borrowers' then current thirteen (13) week cash flow forecast which
forecast is acceptable to Agent in its reasonable judgment and in form and
substance satisfactory to Agent; PROVIDED FURTHER, HOWEVER, that Parent may make
any subsequent mandatory redemptions of the Senior Subordinated Notes as
required by the Indenture so long as (i) no Default or Event of Default exists
or would be caused thereby, (ii) the average Availability hereunder for the four
(4) months prior to any such redemption payment (or, in the case of any payment
to be made prior to the date four (4) months following the Closing Date, for the
period from the Closing Date to the date of such payment) less the amount of
such redemption payment, less any reserve created by Agent in its reasonable
judgment for any deterioration in Borrowers' accounts payable, is in excess of
$10,000,000, and (iii) the Availability hereunder on the date of such redemption
after giving effect to such redemption, less any reserve created by Agent in its
reasonable judgment for any deterioration in Borrowers' accounts payable, is in
excess of $10,000,000;
(b) Make any principal payment on a Seller Note; provided,
however, that Borrowers may make payments on the Seller Notes so long as (i) no
Default or Event of Default exists or would be caused thereby, (ii) the average
Availability hereunder for the four (4) months prior to any such payments (or,
in the case of any payment to be made prior to the date four (4) months
following the Closing Date, for the period from the Closing Date to the date of
such payment) less the amount of such payments, less any reserve created by
Agent in its reasonable judgment for any deterioration in Borrowers' accounts
payable, is in excess of $10,000,000, and (iii) the Availability hereunder on
the date of such payments after giving effect to such payments, less any reserve
created by Agent in its reasonable judgment for any deterioration in Borrowers'
accounts payable, is in excess of $10,000,000;
(c) Except for refinancing permitted by SECTION 7.1(f),
directly or indirectly, amend, modify, alter, increase, or change any of the
terms or conditions of any
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agreement, instrument, document, indenture, or other writing evidencing or
concerning Indebtedness permitted under SECTIONS 7.1(b), (c), (d), (e) OR (f),
including without limitation any Indenture Documents; provided, however, that
(i) Parent shall be permitted to enter into a Fifth Supplemental Indenture with
the Indenture Trustee in the form of the draft of such document provided to
Agent prior to the Closing Date or such other form as is acceptable to Agent and
(ii) Borrowers shall be permitted to grant Liens to the Indenture Trustee in
connection therewith pursuant to documentation acceptable to Agent and
substantially in the form of such documentation provided to Agent prior to the
Closing Date, so long as in each case the Indenture Trustee executes and
delivers to Agent at such time an intercreditor agreement in form and substance
satisfactory to Agent; and
(d) Amend or modify any Borrower Party's certificate or
articles of incorporation or formation, by-laws, partnership agreement or
operating agreement, as applicable.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 CONSIGNMENTS. Consign any Inventory or sell any Inventory on
bill and hold, sale or return, sale on approval, or other conditional terms of
sale.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding.
7.12 ACCOUNTING METHODS. Modify or change its method of accounting
or enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of any Borrower Party's accounting records
without said accounting firm or service bureau agreeing to provide Agent
information regarding the Collateral or any Borrower Party's financial
condition. Each 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 Agent pursuant to or in accordance with this
Agreement, and agrees that Agent may contact directly any such accounting firm
or service bureau in order to obtain such information.
7.13 INVESTMENTS. Except as permitted by Section 7.22(b), directly
or indirectly make, acquire, or incur any liabilities (including contingent
obligations) for or in connection with (a) the acquisition of the securities
(whether debt or equity) of, or other interests in, a Person, (b) loans,
advances, capital contributions, or transfers of property to a Person, except
for travel and like advances to employees, officers, independent contractors,
affiliates and directors in the ordinary course of business to the extent such
advances do not exceed $200,000 in the aggregate at any time outstanding, or (c)
the acquisition of all or substantially all of the properties or assets of a
Person; PROVIDED, HOWEVER, that any Borrower Party is permitted to make any such
investment in any other Borrower Party (excluding Everythingdecor).
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of the applicable
Borrower's business, upon fair and reasonable terms, that are fully disclosed to
Agent, and that are no less favorable to such Borrower than would be obtained in
an arm's length transaction with a non-Affiliate.
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7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business; PROVIDED, HOWEVER, that Maxim Industries, Inc., a Delaware
corporation, may be dissolved.
7.16 INTENTIONALLY OMITTED.
7.17 USE OF PROCEEDS. Use the proceeds of the Advances for any
purpose other than (a) on the Closing Date, (i) to repay in full the outstanding
principal, accrued interest, and accrued fees and expenses owing to Existing
Lender, and (ii) to pay transactional costs and expenses incurred in connection
with this Agreement, and (b) thereafter, consistent with the terms and
conditions hereof, for its lawful and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate any Borrower Party's chief executive office to
a new location without providing thirty (30) days prior written notification
thereof to Agent and so long as, at the time of such written notification or
promptly thereafter (but not later than fifteen (15) days before such
relocation), such Borrower Party provides any financing statements or fixture
filings necessary to perfect and continue perfected the Lien of Agent (for the
benefit of the Lender Group) and also provides to Agent a Collateral Access
Agreement with respect to such new location. The Inventory and Equipment shall
not at any time now or hereafter be stored with a bailee, warehouseman, or
similar party without Agent's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or
indirectly:
(a) engage in any prohibited transaction which is reasonably
likely to result in a civil penalty or excise tax described in Sections 406 of
ERISA or 4975 of the IRC for which a statutory or class exemption is not
available or a private exemption has not been previously obtained from the
Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
(c) fail to pay timely required contributions or annual
installments due with respect to any waived funding deficiency to any Benefit
Plan;
(d) terminate any Benefit Plan where such event would result
in any liability of any Borrower Party or any ERISA Affiliate under Title IV of
ERISA;
(e) fail to make any required contribution or payment to any
Multiemployer Plan;
(f) fail to pay any required installment or any other
payment required under Section 412 of the IRC on or before the due date for such
installment or other payment;
(g) amend a Plan resulting in an increase in current
liability for the plan year such that either of any Borrower Party or any ERISA
Affiliate is required to provide security to such Plan under Section 401(a)(29)
of the IRC; or
(h) withdraw from any Multiemployer Plan where such
withdrawal is reasonably likely to result in any liability of any such entity
under Title IV of ERISA;
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which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrowers, or any ERISA
Affiliate in excess of $250,000.
7.20 FINANCIAL COVENANTS. Fail to maintain:
(a) EBITDA. As of the last day of the fiscal quarter ending
closest to April 30, 2000, and as of the last day of each fiscal quarter
thereafter, EBITDA of at least the amount set forth in the table below (i) with
respect to the fiscal quarter ending closest to April 30, 2000, for the
immediately preceding one (1) fiscal quarter, (ii) with respect to the fiscal
quarter ending closest to July 31, 2000, for the immediately preceding two (2)
fiscal quarters, (iii) with respect to the fiscal quarter ending closest to
October 31, 2000, for the immediately preceding three (3) fiscal quarters, and
(iv) with respect to each fiscal quarter thereafter, for the immediately
preceding four (4) fiscal quarters:
<TABLE>
<CAPTION>
--------------------------------------------------------
For the fiscal period EBITDA shall not
ending closest to: be less than:
--------------------------------------------------------
<S> <C>
April 30, 2000 $ 2,400,000
--------------------------------------------------------
July 31, 2000 $ 8,000,000
--------------------------------------------------------
October 31, 2000 $13,000,000
--------------------------------------------------------
January 31, 2001 $15,000,000
--------------------------------------------------------
April 30, 2001 through
January 31, 2002 $20,000,000
--------------------------------------------------------
April 30, 2002 and thereafter $25,000,000
--------------------------------------------------------
</TABLE>
(b) Tangible Net Worth. Tangible Net Worth of at least the
amount set forth in the table below as of the last day of the fiscal quarter
ending closest to April 30, 2000 and as of the last day of each fiscal quarter
thereafter:
<TABLE>
<CAPTION>
--------------------------------------------------------
As of the fiscal quarter Tangible Net Worth
ending closest to: shall not be less than:
--------------------------------------------------------
<S> <C>
April 30, 2000 through
January 31, 2001 $37,000,000
--------------------------------------------------------
April 30, 2001 through
January 31, 2002 $38,000,000
--------------------------------------------------------
April 30, 2002 through
January 31, 2003 $42,000,000
--------------------------------------------------------
April 30, 2003 and thereafter $45,000,000
--------------------------------------------------------
</TABLE>
(c) Fixed Charge Coverage Ratio. As of the last day of the
fiscal quarter ending closest to April 30, 2000, and as of the last day of each
fiscal quarter thereafter, a Fixed Charge Coverage Ratio of at least the amount
set forth in the table below (i) with respect to the fiscal quarter ending
closest to April 30, 2000, for the immediately preceding one (1) fiscal quarter,
(ii) with respect to the fiscal quarter ending closest to July 31, 2000, for the
immediately
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preceding two (2) fiscal quarters, (iii) with respect to the fiscal
quarter ending closest to October 31, 2000, for the immediately preceding three
(3) fiscal quarters, and (iv) with respect to each fiscal quarter thereafter,
for the immediately preceding four (4) fiscal quarters:
<TABLE>
<CAPTION>
----------------------------------------------------------------
For the fiscal period Fixed Charge Coverage Ratio
ending closest to: shall not be less than:
----------------------------------------------------------------
<S> <C>
April 30, 2000 1.50 to 1.00
----------------------------------------------------------------
Thereafter 2.00 to 1.00
----------------------------------------------------------------
</TABLE>
7.21 CAPITAL EXPENDITURES. Make capital expenditures in any fiscal
year in excess of the amount set forth in the table below for the applicable
fiscal year:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
For the fiscal year ending closest to: Capital expenditures
shall not be more than:
--------------------------------------------------------------------
<S> <C>
January 31, 2001 $15,000,000
--------------------------------------------------------------------
January 31, 2002 $17,500,000
--------------------------------------------------------------------
January 31, 2003 $20,000,000
--------------------------------------------------------------------
January 31, 2004 $22,000,000
--------------------------------------------------------------------
</TABLE>
7.22 RETAIL STORE CLOSINGS. Commit to close, or close, or commit
to sell, or sell, any retail store location at which a Borrower maintains,
offers for sale, or stores any of the Personal Property Collateral; PROVIDED,
HOWEVER, that Borrowers may close or sell up to fifteen (15) retail store
locations in the aggregate during the term of this Agreement upon thirty (30)
days prior written notice to Agent and (a) in the case of store closings,
approval by Agent of Borrowers' liquidation plan for Inventory and Equipment at
such retail store locations and payment of the Net Proceeds therefor to Agent
for the benefit of the Lender Group to be applied to the Obligations, and (b)
with respect to the sale of any stores, approval by Agent of the sales price
therefor and terms of such sales and payment of the Net Proceeds therefor to
Agent for the benefit of the Lender Group to be applied to the Obligations;
PROVIDED FURTHER, HOWEVER, that Borrowers may sell the retail stores identified
on Schedule 7.22 so long as the Net Proceeds therefor are not less than the
amount set forth on Schedule 7.22 with respect to each applicable retail store
and so long as the Net Proceeds therefor are paid to Agent for the benefit of
the Lender Group to be applied to the Obligations.
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 Borrowers fail 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
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charges due the Lender Group, reimbursement of Lender Group Expenses, or other
amounts constituting Obligations);
8.2 (a) If any Borrower fails or neglects to perform, keep, or
observe any term, provision, condition, covenant, or agreement contained in
SECTIONS 6.2 (Collateral and Financial Reporting), 6.4 (Tax Returns), 6.7 (Title
to Equipment), 6.12 (Location of Inventory and Equipment), 6.13 (Compliance with
Laws), 6.14 (Employee Benefits), or 6.15 (Leases) of this Agreement and such
failure continues for a period of five (5) Business Days; (b) if any Borrower
fails or neglects to perform, keep, or observe any term, provision, condition,
covenant, or agreement contained in SECTIONS 6.1 (Accounting System) or 6.8
(Maintenance of Equipment) of this Agreement and such failure continues for a
period of fifteen (15) Business Days; or (c) if any Borrower or any Subsidiary
of any Borrower fails or neglects to perform, keep, or observe any other term,
provision, condition, covenant, or agreement contained in this Agreement, or in
any of the other Loan Documents (giving effect to any grace periods, if any,
expressly provided for in such Loan Documents) or in any other present or future
agreement between any Borrower or any Subsidiary of any Borrower, as applicable,
and the Lender Group, or any of them (giving effect to any grace periods, if
any, expressly provided for in such agreements); in each case, other than any
such term, provision, condition, covenant, or agreement that is the subject of
another provision of this SECTION 8, (in which event such other provision of
this SECTION 8 shall govern); PROVIDED that, during any period of time that any
such failure or neglect of any Borrower or any Subsidiary of any Borrower
referred to in this paragraph exists, even if such failure or neglect is not yet
an Event of Default by virtue of the existence of a grace period, if any,
Lenders shall not be required during such period to make Advances to Borrowers;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of any Borrower Party'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 any Borrower
Party;
8.6 If an Insolvency Proceeding is commenced against any Borrower
Party and any of the following events occur: (a) such Borrower Party 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, the Lender Group shall be relieved of its
obligation to extend credit hereunder; (d) an interim trustee is appointed to
take possession of all or a substantial portion of the properties or assets of,
or to operate all or any substantial portion of the business of, such Borrower
Party; or (e) an order for relief shall have been issued or entered therein;
8.7 If any Borrower Party 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 in respect of a
claim in excess of $250,000 is filed of record with respect to any of any
Borrower Party'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 in excess of
$250,000 owing at any time hereafter to any one or more of such entities becomes
a Lien, whether choate or otherwise, upon any of any Borrower Party's properties
or assets and the same is not paid on
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the payment date thereof; PROVIDED, HOWEVER, that Agent may create a reserve in
the amount of any such claim, taxes or debt to the extent such claim is equal to
or less than $250,000;
8.9 If a judgment or other claim in excess of $250,000 becomes a
Lien or encumbrance upon any material portion of any Borrower Party's properties
or assets and execution on such judgment or claim is not stayed; PROVIDED,
HOWEVER, that Agent may create a reserve in the amount of any such judgment or
claim to the extent such judgment or claim is equal to or less than $250,000 or,
if in excess of $250,000, to the extent execution on such judgment or claim is
stayed;
8.10 If there is a default in any material agreement to which any
Borrower Party is a party with one or more third Persons and such default (a)
occurs at the final maturity of the obligations thereunder, or (b) results in a
right by such third Person(s), irrespective of whether exercised, to accelerate
the maturity of Borrower's obligations thereunder;
8.11 If any Borrower Party 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 the
Lender Group by any Borrower Party or any officer, employee, agent, or director
of any Borrower Party, or if any such warranty or representation is withdrawn;
8.13 If the obligation of any guarantor under its guaranty or
other third Person under any Loan Document is limited or terminated by operation
of law or by the guarantor or other third Person thereunder, or any such
guarantor or other third Person becomes the subject of an Insolvency Proceeding;
or
8.14 If any default, event of default or termination event (other
than the Existing Indenture Default) occurs under any Indenture Document or
under the Shaw Industries Note or if the indebtedness under any Indenture
Document or under the Shaw Industries Note is accelerated on account of the
Existing Indenture Default or otherwise.
9. THE LENDER GROUP'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Agent may, pursuant to SECTIONS 17.4 AND
17.5, without notice of its election and without demand, do any one or more of
the following, all of which are authorized by Borrowers:
(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 Borrowers under this Agreement, under any of the Loan Documents, or
under any other agreement between any Borrower and the Lender Group;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of the Lender Group, but
without affecting the Lender Group's
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rights and security interests in the Personal Property Collateral or the Real
Property Collateral and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Agent considers advisable, and
in such cases, Agent will credit Borrowers' Loan Account with only the net
amounts received by Agent in payment of such disputed Accounts after deducting
all Lender Group Expenses incurred or expended in connection therewith;
(e) Cause Borrowers to hold all returned Inventory in trust
for the Lender Group, segregate all returned Inventory from all other property
of Borrowers or in Borrowers' possession and conspicuously label said returned
Inventory as the property of the Lender Group;
(f) Without notice to or demand upon any Borrower Party or
any guarantor, make such payments and do such acts as Agent considers necessary
or reasonable to protect its security interests in the Collateral. Borrowers
agree to assemble the Personal Property Collateral if Agent so requires, and to
make the Personal Property Collateral available to Agent as Agent may designate.
Borrowers authorize Agent to enter the premises where the Personal Property
Collateral is located, to take and maintain possession of the Personal Property
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in Agent's determination appears to conflict
with the Liens of Agent (for the benefit of the Lender Group) in the Collateral
and to pay all expenses incurred in connection therewith. With respect to any of
any Borrowers' owned or leased premises, Borrowers hereby grant Agent a license
to enter into possession of such premises and to occupy the same, without
charge, for up to one hundred twenty (120) days in order to exercise any of the
Lender Group's rights or remedies provided herein, at law, in equity, or
otherwise;
(g) Without notice to any Borrower Party (such notice being
expressly waived by Borrowers), and without constituting a retention of any
collateral in satisfaction of an obligation (within the meaning of Section 9-505
of the Code), set off and apply to the Obligations any and all (i) balances and
deposits of any Borrower Party held by the Lender Group (including any amounts
received in the Blocked Accounts), or (ii) indebtedness at any time owing to or
for the credit or the account of any Borrower Party held by the Lender Group;
(h) Hold, as cash collateral, any and all balances and
deposits of any Borrower Party held by the Lender Group, and any amounts
received in the Blocked Accounts, to secure the full and final repayment of all
of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Personal Property Collateral. Agent is hereby granted a license or
other right to use, without charge, each Borrower Party's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar nature, as
it pertains to the Personal Property Collateral, in completing production of,
advertising for sale, and selling any Personal Property Collateral and each
Borrower Party's rights under all licenses and all franchise agreements shall
inure to the Lender Group's benefit;
(j) Seek the appointment of a receiver or keeper to take
possession of the Collateral and to enforce any remedies provided for herein, at
law or in equity with respect to such appointment without prior notice of
hearing;
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(k) Sell the Personal Property Collateral at either a public
or private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including any Borrower
Party's premises) as Agent determines is commercially reasonable. It is not
necessary that the Personal Property Collateral be present at any such sale;
(l) Agent shall give notice of the disposition of the
Personal Property Collateral as follows:
(A) Agent shall give Borrowers and each holder of a
security interest in the Personal Property Collateral who has filed with Agent a
written request for notice, a notice in writing of the time and place of public
sale, or, if the sale is a private sale or some other disposition other than a
public sale is to be made of the Personal Property Collateral, then the time on
or after which the private sale or other disposition is to be made;
(B) The notice shall be personally delivered or mailed,
postage prepaid, to Borrowers as provided in SECTION 12, at least ten (10) days
before the date fixed for the sale, or at least ten (10) days before the date on
or after which the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of the Personal
Property Collateral that is perishable or threatens to decline speedily in value
or that is of a type customarily sold on a recognized market. Notice to Persons
other than Borrowers claiming an interest in the Personal Property Collateral
shall be sent to such addresses as they have furnished to Agent;
(C) If the sale is to be a public sale, Agent also
shall give notice of the time and place by publishing a notice once a week for
two (2) weeks before the date of the sale in a newspaper in which legal notices
are published in the county in which the sale is to be held and at least one
time at least ten (10) days before the date of the sale in a newspaper of
general circulation in the county in which the sale is to be held;
(m) Agent may credit bid and purchase at any public
sale; and
(n) Any deficiency that exists after disposition of the
Personal Property Collateral as provided above will be paid immediately by
Borrowers. Any excess will be returned, without interest and subject to the
rights of third Persons, by Agent to Borrowers.
9.2 REMEDIES CUMULATIVE. The Lender Group's rights and remedies
under this Agreement, the Loan Documents, and all other agreements shall be
cumulative. The Lender Group shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by the Lender Group of one right or remedy shall be deemed an election,
and no waiver by the Lender Group of any Event of Default shall be deemed a
continuing waiver. No delay by the Lender Group shall constitute a waiver,
election, or acquiescence by it.
10. TAXES AND EXPENSES.
If any Borrower Party fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased properties or assets,
rents or other amounts payable under such leases) due to third Persons, or fails
to make any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Agent
determines that such failure by such Borrower Party could result in a Material
Adverse
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Change, in its discretion and without prior notice to Borrowers, Agent may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrowers' Loan Account as Agent deems necessary to
protect the Lender Group from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type described in SECTION 6.10,
and take any action with respect to such policies as Agent deems prudent. Any
such amounts paid by Agent shall constitute Lender Group Expenses. Any such
payments made by Agent shall not constitute an agreement by the Lender Group to
make similar payments in the future or a waiver by the Lender Group of any Event
of Default under this Agreement. Agent need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Except as expressly set forth herein,
each Borrower waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees at any time held by the Lender Group
on which such Borrower may in any way be liable.
11.2 THE LENDER GROUP'S LIABILITY FOR COLLATERAL. So long as the
Lender Group complies with its obligations, if any, under Section 9-207 of the
Code, the Lender Group 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 Borrowers.
11.3 INDEMNIFICATION. Each Borrower shall pay, indemnify, defend,
and hold each Agent-Related Person, each Lender, each Participant, and each of
their respective officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorneys
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration of this Agreement and any
other Loan Documents or the transactions contemplated herein, and with respect
to any investigation, litigation, or proceeding related to this Agreement, any
other Loan Document, or the use of the proceeds of the credit provided hereunder
(irrespective of whether any Indemnified Person is a party thereto), or any act,
omission, event or circumstance in any manner related thereto (all the
foregoing, collectively, the "Indemnified Liabilities"). No Borrower shall have
any obligation to any Indemnified Person under this SECTION 11.3 with respect to
any Indemnified Liability that a court of competent jurisdiction finally
determines to have resulted from the gross negligence or willful misconduct of
such Indemnified Person. This provision shall survive the termination of this
Agreement and the repayment of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial
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statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by registered or
certified mail (postage prepaid, return receipt requested), overnight courier,
or telefacsimile to Borrower or to Agent, as the case may be, at its address set
forth below:
IF TO BORROWERS: FLOORING AMERICA, INC.
210 TownPark Drive
Kennesaw, Georgia 30144
Attn: Tom Leahey
Fax No. (678) 355-4996
WITH COPIES TO: SMITH, GAMBRELL & RUSSELL, LLP
Suite 3100, Promenade II
1230 Peachtree St., NE
Atlanta, GA 30309
Attn: Richard Greenstein, Esq.
Fax No. (404) 815-3509
IF TO AGENT OR THE FOOTHILL CAPITAL CORPORATION
LENDER GROUP IN CASE 11111 Santa Monica Boulevard
OF AGENT: Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. (310) 478-9788
WITH COPIES TO: FOOTHILL CAPITAL CORPORATION,
Foothill Capital Corporation
60 State Street, Suite 1150
Boston, Massachusetts 02109
Attn: Todd Colpitts
Senior Account Executive
Vice President
Fax No.: (617) 722-9493
WITH COPIES TO: Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308-2222
Attn: Jesse H. Austin, III, Esq.
Fax No. (404) 815-2424
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 Agent in connection with Sections 9-504 or 9-505 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. Borrowers acknowledge and agree
that notices sent by Agent in connection with Sections 9-504 or 9- 505 of the
Code shall be deemed sent when deposited in the mail or personally delivered,
or, where permitted by law, transmitted via telefacsimile or other similar
method set forth above.
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13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE
STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF FULTON, STATE OF GEORGIA OR,
AT THE SOLE OPTION OF THE LENDER GROUP, IN ANY OTHER COURT IN WHICH THE LENDER
GROUP SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH BORROWER AND EACH MEMBER OF
THE LENDER GROUP WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT
IT 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. EACH
BORROWER AND EACH MEMBER OF THE LENDER GROUP HEREBY WAIVES ITS RIGHT 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. EACH BORROWER AND EACH MEMBER OF THE LENDER GROUP REPRESENTS
THAT IT HAS REVIEWED THIS WAIVER AND IT KNOWINGLY AND VOLUNTARILY WAIVES ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWERS' DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Agent may be destroyed or otherwise disposed of by Agent four (4)
months after they are delivered to or received by Agent, unless Borrowers
request, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrowers' expense, for their return.
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.
15.1 ASSIGNMENTS AND PARTICIPATIONS.
(a) Any Lender may, with the written consent of Agent, assign and
delegate to one or more Eligible Transferees (each an "Assignee") all, or any
ratable part, of the Obligations, the Commitments, and the other rights and
obligations of such Lender hereunder and under the other Loan Documents, in a
minimum amount of $5,000,000; PROVIDED, HOWEVER, that Borrowers and Agent may
continue to deal solely and directly with such Lender in connection with the
interest so assigned to an Assignee until (i) written notice of such assignment,
together with
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payment instructions, addresses, and related information with respect to the
Assignee, shall have been given to Borrowers and Agent by such Lender and the
Assignee; (ii) such Lender and its Assignee shall have delivered to Borrowers
and Agent a fully executed Assignment and Acceptance ("Assignment and
Acceptance") in the form of EXHIBIT A; and (iii) the assignor Lender or Assignee
has paid to Agent for Agent's sole and separate account a processing fee in the
amount of $5,000. Anything contained herein to the contrary notwithstanding, the
consent of Agent shall not be required (and payment of any fees shall not be
required) if such assignment is in connection with any merger, consolidation,
sale, transfer, or other disposition of all or any substantial portion of the
business or loan portfolio of such Lender.
(b) From and after the date that Agent notifies the assignor
Lender that it has received a fully executed Assignment and Acceptance and
payment of the above-referenced processing fee, (i) the Assignee thereunder
shall be a party hereto and, to the extent that rights and obligations hereunder
have been assigned to it pursuant to such Assignment and Acceptance, shall have
the rights and obligations of a Lender under the Loan Documents, and (ii) the
assignor Lender shall, to the extent that rights and obligations hereunder and
under the other Loan Documents have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its
obligations under this Agreement (and in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement and the other Loan Documents, such Lender
shall cease to be a party hereto and thereto), and such assignment shall effect
a novation between Borrowers and the Assignor.
(c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the Assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (1) other than as
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties, or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency, or value of this Agreement or any other Loan Document furnished
pursuant hereto; (2) such assigning Lender makes no representation or warranty
and assumes no responsibility with respect to the financial condition of any
Borrower Party or any guarantor or the performance or observance by each
Borrower Party or any guarantor of any of its obligations under this Agreement
or any other Loan Document furnished pursuant hereto; (3) such Assignee confirms
that it has received a copy of this Agreement, together with such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (4) such
Assignee will, independently and without reliance upon Agent, such assigning
Lender, or any other Lender, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (5) such Assignee appoints and
authorizes Agent to take such action as agent on its behalf and to exercise such
powers under this Agreement as are delegated to Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and (6) such
Assignee agrees that it will perform in accordance with their terms all of the
obligations which by the terms of this Agreement are required to be performed by
it as a Lender.
(d) Immediately upon each Assignee's making its processing fee
payment under the Assignment and Acceptance, this Agreement shall be deemed to
be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments of the
Assignor and Assignee arising therefrom. The Commitment allocated to each
Assignee shall reduce such Commitment of the assigning Lender PRO TANTO.
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(e) Any Lender may at any time, with the written consent of
Agent, which consent shall not be unreasonably withheld, sell to one or more
Persons (a "Participant") participating interests in the Obligations, the
Commitment, and the other rights and interests of that Lender (the "Originating
Lender") hereunder and under the other Loan Documents; PROVIDED, HOWEVER, that
(i) the Originating Lender's obligations under this Agreement shall remain
unchanged, (ii) the Originating Lender shall remain solely responsible for the
performance of such obligations, (iii) Borrowers and Agent shall continue to
deal solely and directly with the Originating Lender in connection with the
Originating Lender's rights and obligations under this Agreement and the other
Loan Documents, (iv) no Originating Lender shall transfer or grant any
participating interest under which the Participant has the sole and exclusive
right to approve any amendment to, or any consent or waiver with respect to,
this Agreement or any other Loan Document, except to the extent such amendment
to, or consent or waiver with respect to this Agreement or of any other Loan
Document would (A) extend the final maturity date of the Obligations hereunder
in which such participant is participating; (B) reduce the interest rate
applicable to the Obligations hereunder in which such Participant is
participating; (C) release all or a material portion of the Collateral (except
to the extent expressly provided herein or in any of the Loan Documents)
supporting the Obligations hereunder in which such Participant is participating;
(D) postpone the payment of, or reduce the amount of, the interest or fees
hereunder in which such Participant is participating; or (E) change the amount
or due dates of scheduled principal repayments or prepayments or premiums in
respect of the Obligations hereunder in which such Participant is participating;
and (v) all amounts payable by Borrowers hereunder shall be determined as if
such Originating Lender had not sold such participation; except that, if amounts
outstanding under this Agreement are due and unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under this Agreement to the same extent
as if the amount of its participating interest were owing directly to it as a
Lender under this Agreement; PROVIDED, HOWEVER, that no Participant may exercise
any such right of setoff without the notice to and consent of Agent. The rights
of any Participant shall only be derivative through the Originating Lender with
whom such Participant participates and no Participant shall have any direct
rights as to the other Lenders, Agent, Borrowers, the Collections, the
Collateral, or otherwise in respect of the Advances or the Letters of Credit. No
Participant shall have the right to participate directly in the making of
decisions by the Lenders among themselves. The provisions of this SECTION
15.1(E) are solely for the benefit of the Lender Group, and Borrowers shall have
no rights as a third party beneficiary of any of such provisions.
(f) In connection with any such assignment or participation or
proposed assignment or participation, a Lender may disclose to a third party all
documents and information which it now or hereafter may have relating to the
Borrower Parties or Borrower Parties' business, subject to the confidentiality
requirements of SECTION 17.16.
(g) Notwithstanding any other provision in this Agreement, any
Lender may at any time create a security interest in, or pledge, all or any
portion of its rights under and interest in this Agreement in favor of any
Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury
Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such
pledge or security interest in any manner permitted under applicable law.
15.2 SUCCESSORS. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
PROVIDED, HOWEVER, that no Borrower may assign this Agreement or any rights or
duties hereunder without the Lenders' prior written consent and any prohibited
assignment shall be absolutely void. No consent to assignment by the Lenders
shall release any Borrower from its Obligations. A Lender may assign this
Agreement and its rights
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and duties hereunder pursuant to SECTION 15.1 and, except as expressly required
pursuant to SECTION 15.1, no consent or approval by Borrowers is required in
connection with any such assignment.
16. AMENDMENTS; WAIVERS.
16.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by any Borrower therefrom, shall be effective unless
the same shall be in writing and signed by the Required Lenders (or by Agent at
the written request of the Required Lenders) and Borrowers and then any such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given; PROVIDED, HOWEVER, that no such waiver,
amendment, or consent shall, unless in writing and signed by all the Lenders and
Borrowers and acknowledged by Agent, do any of the following:
(a) extend the Commitment of any Lender or increase the
Commitments in an amount in excess of the amount permitted by SECTION 2.17;
(b) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment of principal, interest, fees, or other
amounts due to the Lenders (or any of them) hereunder or under any other Loan
Document;
(c) reduce the principal of, or the rate of interest specified
herein on, any Advance, or any fees or other amounts payable hereunder or under
any other Loan Document;
(d) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Advances, which is required for the
Lenders or any of them to take any action hereunder;
(e) increase the advance rate with respect to Advances (except
for the restoration of an advance rate after the prior reduction thereof), or
change SECTION 2.1(b);
(f) amend this Section or any provision of the Agreement
providing for consent or other action by all Lenders;
(g) release Collateral other than as permitted by SECTION
17.11;
(h) change the definition of "Required Lenders";
(i) release Borrower from any Obligation for the payment of
money; or
(j) amend any of the provisions of ARTICLE 17.
and, PROVIDED FURTHER, no amendment shall increase the Commitment of any Lender
unless in writing signed by such Lender; PROVIDED FURTHER, that no amendment,
waiver or consent shall, unless in writing and signed by Agent, affect the
rights or duties of Agent under this Agreement or any other Loan Document; and,
PROVIDED FURTHER, that the limitation contained in clause (e) above shall not be
deemed to limit the ability of Agent to make Advances or Agent Loans, as
applicable, in accordance with the provisions of SECTIONS 2.1(g), (h), OR (l).
The foregoing notwithstanding, any amendment, modification, waiver, consent,
termination, or release of or with respect to any
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provision of this Agreement or any other Loan Document that relates only to the
relationship of the Lender Group among themselves, and that does not affect the
rights or obligations of Borrowers, shall not require consent by or the
agreement of Borrowers.
16.2 NO WAIVERS; CUMULATIVE REMEDIES. No failure by Agent or any
Lender to exercise any right, remedy, or option under this Agreement, any other
Loan Document, or any present or future supplement hereto or thereto, or in any
other agreement between or among any Borrower and Agent and/or any Lender, or
delay by Agent or any Lender in exercising the same, will operate as a waiver
thereof. No waiver by Agent or any Lender will be effective unless it is in
writing, and then only to the extent specifically stated. No waiver by Agent or
the Lenders on any occasion shall affect or diminish Agent's and each Lender's
rights thereafter to require strict performance by Borrowers of any provision of
this Agreement. Agent's and each Lender's rights under this Agreement and the
other Loan Documents will be cumulative and not exclusive of any other right or
remedy which Agent or any Lender may have.
17. AGENT; THE LENDER GROUP.
17.1 APPOINTMENT AND AUTHORIZATION OF AGENT. Each Lender hereby
designates and appoints Foothill as its Agent under this Agreement and the other
Loan Documents and each Lender hereby irrevocably authorizes Agent to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto. Agent agrees to
act as such on the express conditions contained in this ARTICLE 17. The
provisions of this ARTICLE 17 are solely for the benefit of Agent and the
Lenders, and Borrowers shall not have any rights as third party beneficiaries of
any of the provisions contained herein; PROVIDED, HOWEVER, that the provisions
of SECTIONS 17.10, 17.11, and 17.16(d) also shall be for the benefit of
Borrowers. Any provision to the contrary contained elsewhere in this Agreement
or in any other Loan Document notwithstanding, Agent shall not have any duties
or responsibilities, except those expressly set forth herein, nor shall Agent
have or be deemed to have any fiduciary relationship with any Lender, and no
implied covenants, functions, responsibilities, duties, obligations, or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against Agent. Except as expressly otherwise provided in this
Agreement, Agent shall have and may use its sole discretion with respect to
exercising or refraining from exercising any discretionary rights or taking or
refraining from taking any actions which Agent is expressly entitled to take or
assert under or pursuant to this Agreement and the other Loan Documents,
including making the determinations contemplated by SECTION 2.1(b). Without
limiting the generality of the foregoing, or of any other provision of the Loan
Documents that provides rights or powers to Agent, Lenders agree that Agent
shall have the right to exercise the following powers as long as this Agreement
remains in effect: (a) maintain, in accordance with its customary business
practices, ledgers and records reflecting the status of the Advances, the
Collateral, the Collections, and related matters; (b) execute and/or file any
and all financing or similar statements or notices, amendments, renewals,
supplements, documents, instruments, proofs of claim for Lenders, notices and
other written agreements with respect to the Loan Documents; (c) make Advances
for itself or on behalf of Lenders as provided in the Loan Documents; (d)
exclusively receive, apply, and distribute the Collections as provided in the
Loan Documents; (e) open and maintain such bank accounts and lock boxes as Agent
deems necessary and appropriate in accordance with the Loan Documents for the
foregoing purposes with respect to the Collateral and the Collections; (f)
perform, exercise, and enforce any and all other rights and remedies of the
Lender Group with respect to Borrowers, the Advances, the Collateral, the
Collections, or otherwise related to any of same as provided in the Loan
Documents; and (g) incur
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and pay such Lender Group Expenses as Agent may deem necessary or appropriate
for the performance and fulfillment of its functions and powers pursuant to the
Loan Documents.
17.2 DELEGATION OF DUTIES. Except as otherwise provided in this
Section, Agent may execute any of its duties under this Agreement or any other
Loan Document by or through agents, employees, or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
Agent shall not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects as long as such selection was made in
compliance with this Section and without gross negligence or willful misconduct.
The foregoing notwithstanding, Agent shall not make any material delegation of
duties to subagents or non-employee delegees without the prior written consent
of Required Lenders (it being understood that routine delegation of such
administrative matters as filing financing statements, or conducting appraisals
or audits, is not viewed as a material delegation that requires prior Required
Lender approval).
17.3 LIABILITY OF AGENT-RELATED PERSONS. None of the Agent-Related
Persons shall (i) be liable for any action taken or omitted to be taken by any
of them under or in connection with this Agreement or any other Loan Document or
the transactions contemplated hereby (except for its own gross negligence or
willful misconduct), or, (ii) be responsible in any manner to any of the Lenders
for any recital, statement, representation or warranty made by any Borrower, or
any Subsidiary or Affiliate of any Borrower, or any officer or director thereof,
contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement, or other document referred to or provided for
in, or received by Agent under or in connection with, this Agreement or any
other Loan Document, or the validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Loan Document, or for any failure
of any Borrower or any other party to any Loan Document to perform its
obligations hereunder or thereunder. No Agent-Related Person shall be under any
obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement or any other Loan Document, or to inspect the properties, books, or
records of any Borrower, or any Subsidiary or Affiliate of any Borrower.
17.4 RELIANCE BY AGENT. Agent shall be entitled to rely, and shall
be fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex, or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent, or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to Borrowers or counsel to any Lender), independent accountants, and other
experts selected by Agent. Agent shall be fully justified in failing or refusing
to take any action under this Agreement or any other Loan Document unless it
shall first receive such advice or concurrence of the Required Lenders or all
Lenders, as applicable, and until such instructions are received, Agent shall
act, or refrain from acting, as it deems advisable so long as it is not grossly
negligent or guilty of wilful misconduct. If Agent so requests, it shall first
be indemnified to its reasonable satisfaction by Lenders against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. Agent shall in all cases be fully protected
in acting, or in refraining from acting, under this Agreement or any other Loan
Document in accordance with a request or consent of the Required Lenders or all
Lenders, as applicable, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Lenders.
17.5 NOTICE OF DEFAULT OR EVENT OF DEFAULT. Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default, except with respect to defaults in the payment of principal, interest,
fees, and expenses required to be paid to Agent
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for the account of Agent or the Lenders, except with respect to actual knowledge
of the existence of an Overadvance, and except with respect to Defaults and
Events of Default of which Agent has actual knowledge, unless Agent shall have
received written notice from a Lender or a Borrower referring to this Agreement,
describing such Default or Event of Default, and stating that such notice is a
"notice of default." Agent promptly will notify the Lenders of its receipt of
any such notice or of any Event of Default of which Agent has, or is deemed to
have, actual knowledge. If any Lender obtains actual knowledge of any Event of
Default, such Lender promptly shall notify the other Lenders and Agent of such
Event of Default. Each Lender shall be solely responsible for giving any notices
to its Participants, if any. Subject to SECTION 17.4, Agent shall take such
action with respect to such Default or Event of Default as may be requested by
the Required Lenders; PROVIDED, HOWEVER, that:
(a) At all times, Agent may propose and, with the consent of
Required Lenders (which shall not be unreasonably withheld and which shall be
deemed to have been given by a Lender unless such Lender has notified Agent to
the contrary in writing within three (3) days of notification of such proposed
actions by Agent) exercise, any remedies on behalf of the Lender Group; and
(b) At all times, once Required Lenders or all Lenders, as the
case may be, have approved the exercise of a particular remedy or pursuit of a
course of action, Agent may, but shall not be obligated to, make all
administrative decisions in connection therewith or take all other actions
reasonably incidental thereto (for example, if the Required Lenders approve the
foreclosure of certain Collateral, Agent shall not be required to seek consent
for the administrative aspects of conducting such sale or handling of such
Collateral).
17.6 CREDIT DECISION. Each Lender acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by Agent hereinafter taken, including any review of the affairs of Borrowers
and their Subsidiaries or Affiliates, shall be deemed to constitute any
representation or warranty by any Agent-Related Person to any Lender. Each
Lender represents to Agent that it has, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition, and
creditworthiness of Borrowers and any other Person (other than the Lender Group)
party to a Loan Document, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to Borrowers. Each Lender also represents
that it will, independently and without reliance upon any Agent-Related Person
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals, and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigations as it deems necessary to inform itself as to the
business, prospects, operations, property, financial and other condition, and
creditworthiness of Borrowers, and any other Person (other than the Lender
Group) party to a Loan Document. Except for notices, reports, and other
documents expressly herein required to be furnished to the Lenders by Agent,
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the business, prospects, operations,
property, financial and other condition, or creditworthiness of Borrowers, and
any other Person party to a Loan Document that may come into the possession of
any of the Agent-Related Persons.
17.7 COSTS AND EXPENSES; INDEMNIFICATION. Agent may incur and pay
Lender Group Expenses to the extent Agent deems reasonably necessary or
appropriate for the performance and fulfillment of its functions, powers, and
obligations pursuant to the Loan
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Documents, including without limiting the generality of the foregoing, but
subject to any requirements of the Loan Documents that it obtain any applicable
consents or engage in any required consultation, court costs, reasonable
attorneys fees and expenses, costs of collection by outside collection agencies
and auctioneer fees and costs of security guards or insurance premiums paid to
maintain the Collateral, whether or not Borrowers are obligated to reimburse
Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise.
Agent is authorized and directed to deduct and retain sufficient amounts from
Collections to reimburse Agent for such out-of-pocket costs and expenses prior
to the distribution of any amounts to Lenders. In the event Agent is not
reimbursed for such costs and expenses from Collections, each Lender hereby
agrees that it is and shall be obligated to pay to or reimburse Agent for the
amount of such Lender's Pro Rata Share thereof. Whether or not the transactions
contemplated hereby are consummated, the Lenders shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrowers
and without limiting the obligation of Borrowers to do so), according to their
Pro Rata Shares, from and against any and all Indemnified Liabilities; PROVIDED,
HOWEVER, that no Lender shall be liable for the payment to the Agent-Related
Persons of any portion of such Indemnified Liabilities resulting solely from
such Person's gross negligence, bad faith, or willful misconduct. Without
limitation of the foregoing, each Lender shall reimburse Agent upon demand for
its ratable share of any costs or out-of-pocket expenses (including attorney
fees and expenses) incurred by Agent in connection with the preparation,
execution, delivery, administration, modification, amendment, or enforcement
(whether through negotiations, legal proceedings or otherwise) of, or legal
advice in respect of rights or responsibilities under, this Agreement, any other
Loan Document, or any document contemplated by or referred to herein, to the
extent that Agent is not reimbursed for such expenses by or on behalf of
Borrowers. The undertaking in this SECTION 17.7 shall survive the payment of all
Obligations hereunder and the resignation or replacement of Agent.
17.8 AGENT IN INDIVIDUAL CAPACITY. Foothill and its Affiliates may
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests, in and generally engage in any kind of banking, trust,
financial advisory, underwriting, or other business with Borrowers and their
Subsidiaries and Affiliates and any other Person party to any Loan Documents as
though Foothill were not Agent hereunder without notice to or consent of the
Lenders. The Lenders acknowledge that, pursuant to such activities, Foothill and
its Affiliates may receive information regarding Borrowers or their Affiliates
and any other Person party to any Loan Documents that is subject to
confidentiality obligations in favor of Borrowers or such other Person and that
prohibit the disclosure of such information to the Lenders, and the Lenders
acknowledge that, in such circumstances (and in the absence of a waiver of such
confidentiality obligations, which waiver Agent will use its reasonable best
efforts to obtain), Agent shall be under no obligation to provide such
information to them. With respect to the Agent Loans and Agent Advances,
Foothill shall have the same rights and powers under this Agreement as any other
Lender and may exercise the same as though it were not Agent, and the terms
"Lender" and "Lenders" include Foothill in its individual capacity.
17.9 SUCCESSOR AGENT. Agent may resign as Agent following notice
of such resignation ("Notice") to the Lenders and Borrowers, and effective upon
the appointment of and acceptance of such appointment by, a successor Agent. If
Agent resigns under this Agreement, the Required Lenders shall appoint any
Lender or Eligible Transferee as successor Agent for the Lenders. If no
successor Agent is appointed within thirty (30) days of such retiring Agent's
Notice, Agent may appoint a successor Agent, after consulting with the Lenders
and Borrowers. In any such event, upon the acceptance of its appointment as
successor Agent hereunder, such successor Agent shall succeed to all the rights,
powers and duties of the retiring Agent and the term "Agent" shall mean such
successor Agent and the retiring Agent's appointment, powers, and duties as
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Agent shall be terminated. After any retiring Agent's resignation hereunder as
Agent, the provisions of this SECTION 17 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
17.10 WITHHOLDING TAX.
(a) If any Lender is a "foreign corporation, partnership or
trust" within the meaning of the IRC and such Lender claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such
Lender agrees with and in favor of Agent and Borrowers, to deliver to Agent and
Borrowers:
(i) if such Lender claims an exemption from, or a
reduction of, withholding tax under a United States tax treaty, properly
completed IRS Forms 1001 and W-8 before the payment of any interest in the first
calendar year and before the payment of any interest in each third succeeding
calendar year during which interest may be paid under this Agreement;
(ii) if such Lender claims that interest paid under this
Agreement is exempt from United States withholding tax because it is effectively
connected with a United States trade or business of such Lender, two properly
completed and executed copies of IRS Form 4224 before the payment of any
interest is due in the first taxable year of such Lender and in each succeeding
taxable year of such Lender during which interest may be paid under this
Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be required under
the IRC or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.
Such Lender agrees to promptly notify Agent and Borrowers of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Lender claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form 1001 and
such Lender sells, assigns, grants a participation in, or otherwise transfers
all or part of the Obligations of Borrowers, such Lender agrees to notify Agent
and Borrowers of the percentage amount in which it is no longer the beneficial
owner of Obligations of Borrowers to such Lender. To the extent of such
percentage amount, Agent and Borrowers will treat such Lender's IRS Form 1001 as
no longer valid.
(c) If any Lender claiming exemption from United States
withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of
Borrowers to such Lender, such Lender agrees to undertake sole responsibility
for complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the IRC.
(d) If any Lender is entitled to a reduction in the applicable
withholding tax, Agent may withhold from any interest payment to such Lender an
amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to Agent, then Agent may withhold from any
interest payment to such Lender not providing such forms or other documentation
an amount equivalent to the applicable withholding tax.
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(e) If the IRS or any other governmental authority of the
United States or other jurisdiction asserts a claim that Agent or Borrowers did
not properly withhold tax from amounts paid to or for the account of any Lender
(because the appropriate form was not delivered, was not properly executed, or
because such Lender failed to notify Agent and Borrowers of a change in
circumstances which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason) such Lender shall indemnify Agent and
Borrowers fully for all amounts paid, directly or indirectly, by Agent or
Borrowers as tax or otherwise, including penalties and interest, and including
any taxes imposed by any jurisdiction on the amounts payable to Agent or
Borrowers under this Section, together with all costs and expenses (including
attorneys fees and expenses). The obligation of the Lenders under this
subsection shall survive the payment of all Obligations and the resignation of
Agent.
17.11 COLLATERAL MATTERS.
(a) The Lenders hereby irrevocably authorize Agent, to release
any Lien on any Collateral (i) upon the termination of the Commitments and
payment and satisfaction in full by Borrowers of all Obligations; and upon such
termination and payment Agent shall deliver to Borrowers, at Borrowers' sole
cost and expense, all UCC termination statements and any other documents
necessary to terminate the Loan Documents and release the Liens with respect to
the Collateral; (ii) constituting property being sold or disposed of if a
release is required or desirable in connection therewith and if Borrowers
certify to Agent that the sale or disposition is permitted under SECTION 7.4 of
this Agreement or the other Loan Documents (and Agent may rely conclusively on
any such certificate, without further inquiry); (iii) constituting property in
which no Borrower owned an interest at the time the Lien was granted or at any
time thereafter; or (iv) constituting property leased to a Borrower under a
lease that has expired or been terminated in a transaction permitted under this
Agreement. Except as provided above, Agent will not release any Lien on any
Collateral without the prior written authorization of the Lenders. Upon request
by Agent or Borrowers at any time, the Lenders will confirm in writing Agent's
authority to release any such Liens on particular types or items of Collateral
pursuant to this SECTION 17.11; PROVIDED, HOWEVER, that (i) Agent shall not be
required to execute any document necessary to evidence such release on terms
that, in Agent's opinion, would expose Agent to liability or create any
obligation or entail any consequence other than the release of such Lien without
recourse, representation, or warranty, and (ii) such release shall not in any
manner discharge, affect or impair the Obligations or any Liens (other than
those expressly being released), upon (or obligations of Borrowers in respect
of) all interests retained by Borrowers, including, the proceeds of any sale,
all of which shall continue to constitute part of the Collateral.
(b) Agent shall have no obligation whatsoever to any of the
Lenders to assure that the Collateral exists or is owned by Borrowers, is cared
for, protected, or insured or has been encumbered, or that the Liens of Agent
(for the benefit of the Lender Group) have been properly or sufficiently or
lawfully created, perfected, protected, or enforced or are entitled to any
particular priority, or to exercise at all or in any particular manner or under
any duty of care, disclosure, or fidelity, or to continue exercising, any of the
rights, authorities and powers granted or available to Agent pursuant to any of
the Loan Documents, it being understood and agreed that in respect of the
Collateral, or any act, omission or event related thereto, subject to the terms
and conditions contained herein, Agent may act in any manner it may deem
appropriate, in its sole discretion given Agent's own interest in the Collateral
in its capacity as one of the Lenders and that Agent shall have no other duty or
liability whatsoever to any Lender as to any of the foregoing, except as
otherwise provided herein.
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17.12 RESTRICTIONS ON ACTIONS BY LENDERS; SHARING OF PAYMENTS.
(a) Each of the Lenders agrees that it shall not, without the
express consent of Agent, and that it shall, to the extent it is lawfully
entitled to do so, upon the request of Agent, set off against the Obligations
any amounts owing by such Lender to Borrowers or any accounts of Borrowers now
or hereafter maintained with such Lender. Each of the Lenders further agrees
that it shall not, unless specifically requested to do so by Agent, take or
cause to be taken any action, including the commencement of any legal or
equitable proceedings, to foreclose any Lien on, or otherwise enforce any
security interest in, any of the Collateral the purpose of which is, or could
be, to give such Lender any preference or priority against the other Lenders
with respect to the Collateral.
(b) Subject to SECTION 17.8, if, at any time or times any
Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any
proceeds of Collateral or any payments with respect to the Obligations of
Borrowers to such Lender arising under, or relating to, this Agreement or the
other Loan Documents, except for any such proceeds or payments received by such
Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from
Agent in excess of such Lender's Pro Rata Share of all such distributions by
Agent, such Lender shall promptly (1) turn the same over to Agent, in kind, and
with such endorsements as may be required to negotiate the same to Agent, or in
same day funds, as applicable, for the account of all of the Lenders and for
application to the Obligations in accordance with the applicable provisions of
this Agreement, or (2) purchase, without recourse or warranty, an undivided
interest and participation in the Obligations owed to the other Lenders so that
such excess payment received shall be applied ratably as among the Lenders in
accordance with their Pro Rata Shares; PROVIDED, HOWEVER, that if all or part of
such excess payment received by the purchasing party is thereafter recovered
from it, those purchases of participations shall be rescinded in whole or in
part, as applicable, and the applicable portion of the purchase price paid
therefor shall be returned to such purchasing party, but without interest except
to the extent that such purchasing party is required to pay interest in
connection with the recovery of the excess payment.
17.13 AGENCY FOR PERFECTION. Agent and each Lender hereby appoints
each other Lender as agent for the purpose of perfecting the Liens of the Lender
Group in assets which, in accordance with Division 9 of the UCC can be perfected
only by possession. Should any Lender obtain possession of any such Collateral,
such Lender shall notify Agent thereof, and, promptly upon Agent's request
therefor shall deliver such Collateral to Agent or in accordance with Agent's
instructions.
17.14 PAYMENTS BY AGENT TO THE LENDERS. All payments to be made by
Agent to the Lenders shall be made by bank wire transfer or internal transfer of
immediately available funds pursuant to the instructions set forth on SCHEDULE
C-1, or pursuant to such other wire transfer instructions as each party may
designate for itself by written notice to Agent. Concurrently with each such
payment, Agent shall identify whether such payment (or any portion thereof)
represents principal, premium or interest on revolving advances or otherwise.
17.15 CONCERNING THE COLLATERAL AND RELATED LOAN DOCUMENTS. Each
member of the Lender Group authorizes and directs Agent to enter into this
Agreement and the other Loan Documents relating to the Collateral, for the
ratable benefit (subject to SECTIONS 2.5(b) AND 4.1) of the Lender Group. Each
member of the Lender Group agrees that any action taken by Agent, Required
Lenders, or all Lenders, as applicable, in accordance with the terms of this
Agreement or the other Loan Documents relating to the Collateral and the
exercise by Agent, Required Lenders, or all Lenders, as applicable, of their
respective powers set forth therein or
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herein, together with such other powers that are reasonably incidental thereto,
shall be binding upon all of the Lenders.
17.16 FIELD AUDITS AND EXAMINATION REPORTS; CONFIDENTIALITY;
DISCLAIMERS BY LENDERS; OTHER REPORTS AND INFORMATION. By signing this
Agreement, each Lender;
(a) is deemed to have requested that Agent furnish such
Lender, promptly after it becomes available, a copy of each field audit or
examination report (each a "Report" and collectively, "Reports") prepared by
Agent, and Agent shall so furnish each Lender with such Reports;
(b) expressly agrees and acknowledges that Agent (i) does not
make any representation or warranty as to the accuracy of any Report, and (ii)
shall not be liable for any information contained in any Report;
(c) expressly agrees and acknowledges that the Reports are not
comprehensive audits or examinations, that Agent or other party performing any
audit or examination will inspect only specific information regarding Borrowers
and will rely significantly upon Borrowers' books and records, as well as on
representations of Borrowers' personnel;
(d) agrees to keep all Reports and other material information
obtained by it pursuant to the requirements of this Agreement in accordance with
its reasonable customary procedures for handling confidential information; it
being understood and agreed by Borrowers that in any event such Lender may make
disclosures (i) reasonably required by any BONA FIDE potential or actual
Assignee, transferee, or Participant in connection with any contemplated or
actual assignment or transfer by such Lender of an interest herein or any
participation interest in such Lender's rights hereunder, provided that such
potential or actual Assignee, transferee or Participant agrees to be bound by
the confidentiality provisions hereof, (ii) of information that has become
public by disclosures made by Persons other than such Lender, its Affiliates,
assignees, transferees, or participants, or (iii) as required or requested by
any court, governmental or administrative agency, pursuant to any subpoena or
other legal process, or by any law, statute, regulation, or court order;
PROVIDED, HOWEVER, that, unless prohibited by applicable law, statute,
regulation, or court order, such Lender shall notify Borrowers of any request by
any court, governmental or administrative agency, or pursuant to any subpoena or
other legal process for disclosure of any such non-public material information
concurrent with, or where practicable, prior to the disclosure thereof; and
(e) without limiting the generality of any other
indemnification provision contained in this Agreement, agrees: (i) to hold Agent
and any such other Lender preparing a Report harmless from any action the
indemnifying Lender may take or conclusion the indemnifying Lender may reach or
draw from any Report in connection with any loans or other credit accommodations
that the indemnifying Lender has made or may make to Borrowers, or the
indemnifying Lender's participation in, or the indemnifying Lender's purchase
of, a loan or loans of Borrowers; and (ii) to pay and protect, and indemnify,
defend, and hold Agent and any such other Lender preparing a Report harmless
from and against, the claims, actions, proceedings, damages, costs, expenses and
other amounts (including, attorney costs) incurred by Agent and any such other
Lender preparing a Report as the direct or indirect result of any third parties
who might obtain all or part of any Report through the indemnifying Lender.
In addition to the foregoing: (x) any Lender may from time to time request of
Agent in writing that Agent provide to such Lender a copy of any report or
document provided by any Borrower to
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Agent, and, upon receipt of such request, Agent shall provide a copy of same to
such Lender promptly upon receipt thereof; (y) to the extent that Agent is
entitled, under any provision of the Loan Documents, to request additional
reports or information from Borrowers, any Lender may, from time to time,
reasonably request Agent to exercise such right as specified in such Lender's
notice to Agent, whereupon Agent promptly shall request of Borrowers the
additional reports or information specified by such Lender, and, upon receipt
thereof, Agent promptly shall provide a copy of same to such Lender; and (z) any
time that Agent renders to Borrowers a statement regarding the Loan Account,
Agent shall send a copy of such statement to each Lender.
17.17 SEVERAL OBLIGATIONS; NO LIABILITY. Notwithstanding that
certain of the Loan Documents now or hereafter may have been or will be executed
only by or in favor of Agent in its capacity as such, and not by or in favor of
the Lenders, any and all obligations on the part of Agent (if any) to make any
Advances shall constitute the several (and not joint) obligations of the
respective Lenders on a ratable basis, according to their respective
Commitments, to make an amount of such Advances not to exceed, in principal
amount, at any one time outstanding, the amount of their respective Commitments.
Nothing contained herein shall confer upon any Lender any interest in, or
subject any Lender to any liability for, or in respect of, the business, assets,
profits, losses, or liabilities of any other Lender. Each Lender shall be solely
responsible for notifying its Participants of any matters relating to the Loan
Documents to the extent any such notice may be required, and no Lender shall
have any obligation, duty, or liability to any Participant of any other Lender.
Except as provided in SECTION 17.7, no member of the Lender Group shall have any
liability for the acts of any other member of the Lender Group. No Lender shall
be responsible to Borrower or any other Person for any failure by any other
Lender to fulfill its obligations to make Advances, nor to advance for it or on
its behalf in connection with its Commitment, nor to take any other action on
its behalf hereunder or in connection with the financing contemplated herein.
17.18 ARRANGER. The Arranger (a) is so nominated by the Lenders,
(b) shall not have any duties or responsibilities except as specifically
provided in the Loan Documents, (c) has not been relied upon by the Lenders, and
(d) shall have the same rights and protection as Agent under Sections 11.3 and
17.7.
18. GENERAL PROVISIONS.
18.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and the Lender Group.
18.2 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
18.3 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against the Lender Group or
Borrowers, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
18.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
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18.5 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
18.6 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence
or payment of the Obligations by any Borrower or any guarantor of the
Obligations or the transfer by any or all of such parties to the Lender Group of
any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal law
relating to creditors' rights, including provisions of the Bankruptcy Code
relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if the Lender Group is required to repay or restore,
in whole or in part, any such Voidable Transfer, or elects to do so upon the
reasonable advice of its counsel, then, as to any such Voidable Transfer, or the
amount thereof that the Lender Group is required or elects to repay or restore,
and as to all reasonable costs, expenses, and attorneys fees of the Lender Group
related thereto, the liability of such Borrower or such guarantor automatically
shall be revived, reinstated, and restored and shall exist as though such
Voidable Transfer had never been made.
18.7 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
18.8 TIME IS OF THE ESSENCE. Time is of the essence of this
Agreement.
18.9 REVISED ARTICLE 9.
The parties acknowledge and agree to the following provisions of
this Agreement in anticipation of the possible application, in one or more
jurisdictions to the transactions contemplated hereby, of the revised Article 9
of the Uniform Commercial Code in the form or substantially in the form approved
by the American Law Institute and the National Conference of Commissioners on
Uniform State Law and contained in the 1999 official text of Revised Article 9
("Revised Article 9").
(a) ATTACHMENT. In applying the law of any jurisdiction in which
Revised Article 9 is in effect, the Collateral is all assets of the Borrowers,
whether or not within the scope of Revised Article 9. The Collateral shall
include the following categories of assets as defined in Revised Article 9:
goods (including inventory, equipment and any accessions thereto), instruments
(including promissory notes), documents, accounts (including health-care
insurance receivables), chattel paper (whether tangible or electronic), deposit
accounts, letter-of-credit rights (whether or not the letter of credit is
evidenced by a writing), commercial tort claims, securities and all other
investment property, general intangibles (including payment intangibles and
software), supporting obligations and any and all proceeds of any thereof,
wherever located, whether now owned and hereafter acquired. If any Borrower
shall at any time, whether or not Revised Article 9 is in effect in any
particular jurisdiction, acquire a commercial tort claim, as defined in Revised
Article 9, such
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Borrower shall immediately notify Agent in writing signed by such Borrower of
the brief details thereof and grant to Agent in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance satisfactory to Agent.
(b) PERFECTION BY FILING. Agent may at any time and from time
to time, pursuant to the provisions of SECTION 4.5, file financing statements,
continuation statements and amendments thereto that describe the Collateral as
all assets of any Borrower or words of similar effect and which contain any
other information required by Part 5 of Revised Article 9 for the sufficiency or
filing office acceptance of any financing statement, continuation statement or
amendment, including whether such Borrower in an organization, the type of
organization and any organization identification number issued to such Borrower.
Each Borrower agrees to furnish any such information to Agent promptly upon
request. Any such financing statements, continuation statements or amendments
may be signed by Agent on behalf of the Company, as provided in SECTION 4.5, and
may be filed at any time in any jurisdiction whether or not Revised Article 9 is
then in effect in that jurisdiction.
(c) OTHER PERFECTION, ETC. Each Borrower shall at any time and
from time to time, whether or not Revised Article 9 is, in effect in any
particular jurisdiction, take such steps as Agent may reasonably request for
Agent (a) to obtain an acknowledgment, in form and substance satisfactory to
Agent, of any bailee having possession of any of the Collateral that the bailee
holds such Collateral for Agent, (b) to obtain "control" of any investment
property, deposit accounts, letter-of-credit rights or electronic chattel paper
(as such terms are defined in Revised Article 9 with corresponding provisions in
Rev. Sections 9-104, 9-105, 9-106 and 9-107 relating to what constitutes
"control" for such items of Collateral), with any agreements establishing
control to be in form and substance satisfactory to Agent, and (c) otherwise to
insure the continued perfection and priority of Agent's security interest in any
of the Collateral and of the preservation of its rights therein, whether in
anticipation and following the effectiveness or Revised Article 9 in any
jurisdiction.
(d) SAVINGS CLAUSE. Nothing contained in this SECTION 18.9
shall be construed to narrow the scope of Agent's security interest in any of
the Collateral or the perfection or priority thereof or to impair or otherwise
limit any of the rights, powers, privileges or remedies of Agent or any other
member of the Lender Group hereunder except (and then only to the extent)
mandated by Revised Article 9 to the extent then applicable.
[remainder of page intentionally left blank]
84
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in Atlanta, Georgia.
FLOORING AMERICA, INC.,
a Delaware corporation
By
-------------------------------------------------
Title:
---------------------------------------------
4 FLOORS, INC.,
an Ohio corporation
By
-------------------------------------------------
Title:
---------------------------------------------
ADVANCE FLOOR DECORATORS, INC.,
a Michigan corporation
By
-------------------------------------------------
Title:
---------------------------------------------
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC.,
a Tennessee corporation
By
-------------------------------------------------
Title:
---------------------------------------------
CARPETMAX OF UTAH, INC.,
a Utah corporation
By
-------------------------------------------------
Title:
---------------------------------------------
LOAN AND SECURITY AGREEMENT
SIGNATURE PAGE 1
<PAGE>
FLOORING AMERICA FRANCHISING, L.P.,
a Georgia limited partnership
By: Flooring America, Inc., its general partner
By
-------------------------------------------------
Title:
---------------------------------------------
CARPETMAX RETAIL STORES, INC.,
a Delaware corporation
By
-------------------------------------------------
Title:
---------------------------------------------
MANASOTA CARPET, INC.,
a Florida corporation
By
-------------------------------------------------
Title:
---------------------------------------------
WADSWORTH & OWENS DECORATING
CENTER, INC.,
a Florida corporation
By
-------------------------------------------------
Title:
---------------------------------------------
CARPETSPLUS OF AMERICA, INC.,
a Georgia corporation
By
-------------------------------------------------
Title:
---------------------------------------------
LOAN AND SECURITY AGREEMENT
SIGNATURE PAGE 2
<PAGE>
GCO CARPET OUTLET, INC.,
an Alabama corporation
By
------------------------------------------------
Title:
---------------------------------------------
KAREN'S INC.,
a Michigan corporation
By
-------------------------------------------------
Title:
---------------------------------------------
MAXIM RETAIL GROUP, INC.,
a Georgia corporation
By
-------------------------------------------------
Title:
---------------------------------------------
MAXIM RETAIL STORES, INC.,
a Georgia corporation
By
-------------------------------------------------
Title:
---------------------------------------------
C&S TEXTILES, INC.,
an Idaho corporation
By
-------------------------------------------------
Title:
---------------------------------------------
LOAN AND SECURITY AGREEMENT
SIGNATURE PAGE 3
<PAGE>
COLORADO CARPET & RUGS, INC.,
a Colorado corporation
By
-------------------------------------------------
Title:
---------------------------------------------
TRI-R OF ORLANDO, INC.,
a Georgia corporation
By
-------------------------------------------------
Title:
---------------------------------------------
GCO, INC.,
a Nevada corporation
By
-------------------------------------------------
Title:
---------------------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation with an office in Atlanta,
Georgia, as Agent and as a Lender
By
-------------------------------------------------
Title:
---------------------------------------------
LOAN AND SECURITY AGREEMENT
SIGNATURE PAGE 4
<PAGE>
COMMITMENTS ON CLOSING DATE
<TABLE>
<S> <C>
Foothill Capital Corporation $45,000,000
-----------
Total $45,000,000
</TABLE>
<PAGE>
Exhibit 10.17
FIRST AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This First Amendment to Loan and Security Agreement (the
"Amendment"), made as of the 23rd day of February, 2000, among FLOORING AMERICA,
INC., a Delaware corporation, 4 FLOORS, INC., an Ohio corporation, ADVANCE FLOOR
DECORATORS, INC., a Michigan corporation, BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC., a Tennessee corporation, CARPETMAX OF UTAH, INC., a Utah
corporation, FLOORING AMERICA FRANCHISING, L.P. (f/k/a Carpetmax, L.P.), a
Georgia limited partnership, CARPETMAX RETAIL STORES, INC., a Delaware
corporation, MANASOTA CARPET, INC., a Florida corporation, WADSWORTH & OWENS
DECORATING CENTER, INC., a Florida corporation, CARPETSPLUS OF AMERICA, INC., a
Georgia corporation, GCO CARPET OUTLET, INC., an Alabama corporation, KAREN'S
INC., a Michigan corporation, MAXIM RETAIL GROUP, INC., a Georgia corporation,
MAXIM RETAIL STORES, INC., a Georgia corporation, C & S TEXTILES, INC., an Idaho
corporation, COLORADO CARPET & RUGS, INC., a Colorado corporation, TRI-R OF
ORLANDO, INC., a Georgia corporation, and GCO, INC., a Nevada corporation, as
borrowers ("Borrowers" and each "Borrower"), the LENDERS (as defined below), and
FOOTHILL CAPITAL CORPORATION, as agent for the Lenders (the "Agent"),
W I T N E S S E T H:
WHEREAS, the Borrowers, the financial institutions party thereto
(such financial institutions, together with their respective successors and
assigns, are referred to hereinafter each individually as a "Lender" and
collectively as the "Lenders"), and the Agent are parties to that certain Loan
and Security Agreement dated as of January 28, 2000 (the "Loan Agreement"); and
WHEREAS, the Agent has agreed to enter into a Blocked Account
Agreement (as defined in the Loan Agreement) with SunTrust Bank so long as the
Borrowers covenant and agree to replace such Blocked Account Agreement with an
acceptable Blocked Account Agreement as set forth in this Amendment; and
WHEREAS, the Borrowers have requested that certain other terms and
conditions of the Loan Agreement be amended; and
WHEREAS, the Agent and the Lenders have agreed to the requested
amendments on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above,
the terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree that all capitalized terms used but not otherwise defined herein
shall have the meanings ascribed thereto in the Loan Agreement, and further
agree as follows:
<PAGE>
1. AMENDMENTS TO ARTICLE 3 OF THE LOAN AGREEMENT.
(a) Article 3 of the Loan Agreement, CONDITIONS
SUBSEQUENT, is hereby modified and amended to delete the reference to "February
7, 2000" in subsection (c) thereof and to substitute "March 1, 2000" therefor.
(b) Article 3 of the Loan Agreement, CONDITIONS
SUBSEQUENT, is hereby modified and amended to delete the reference to "February
14, 2000" in subsection (e) thereof and to substitute "March 1, 2000" therefor.
(c) Article 3 of the Loan Agreement, CONDITIONS
SUBSEQUENT, is hereby modified and amended to delete subsection (g) thereof in
its entirety and to substitute the following therefor:
"(g) on or before March 1, 2000, Borrowers shall
have delivered to Agent evidence that the Liens referenced on
Schedule 3.3 have been terminated. Prior to such date, such Liens
shall be deemed to be Permitted Liens;"
(d) Article 3 of the Loan Agreement, CONDITIONS
SUBSEQUENT, is hereby modified and amended to delete subsection (j) thereof in
its entirety and to substitute the following therefor:
"(j) on or before the date forty-five (45) days
following the Closing Date, Borrowers shall have delivered to
Agent a Blocked Account Agreement in form and substance reasonably
acceptable to Agent for a new Concentration Account and Credit
Card Concentration Account, evidence that the Concentration
Account and the Credit Card Concentration Account in existence on
the Closing Date have been closed, and all documentation necessary
to provide that all Collections deposited into any Blocked Account
(other than the new Concentration Account and the new Credit Card
Concentration Account) will thereafter be transferred to the new
Concentration Account or the new Credit Card Concentration
Account, as the case may be, on a daily basis as otherwise
provided for in the relevant Blocked Account Agreement;"
(d) Article 3 of the Loan Agreement, CONDITIONS
SUBSEQUENT, is hereby modified and amended to delete subsection (o) thereof in
its entirety and to substitute the following therefor:
"(o) on or before May 17, 2000, Borrowers shall
deliver to Agent a certificate of title for each vehicle owned by a Borrower."
2. WAIVER. Any Defaults with respect to Section 3.3(c), (e)
or (g) existing on the date hereof immediately prior to the effectiveness of
this Amendment and the Events of Default existing on the date hereof immediately
prior to the effectiveness of this Amendment under Section 8.2 arising out of
Borrowers' failure to satisfy the conditions set forth in Section 3.3(c), (e)
and (g) are hereby waived.
-2-
<PAGE>
3. NO OTHER AMENDMENT OR WAIVER. The execution, delivery and
effectiveness of this Amendment shall not, except as expressly provided above,
operate as a waiver of any right, power or remedy of the Agent or the Lenders
under the Loan Agreement or any of the other Loan Documents, nor constitute a
waiver of any provision of the Loan Agreement or any of the other Loan
Documents. Except for the amendments and waiver expressly set forth above, the
text of the Loan Agreement and all other Loan Documents shall remain unchanged
and in full force and effect and the Borrowers hereby ratify and confirm their
obligations thereunder, including without limitation their obligations under
Section 3.3 of the Loan Agreement, as amended hereby. This Amendment shall not
constitute a modification of the Loan Agreement or a course of dealing with the
Agent or the Lenders at variance with the Loan Agreement such as to require
further notice by the Agent or the Lenders to require strict compliance with the
terms of the Loan Agreement and the other Loan Documents in the future, except
as expressly set forth herein. The Borrowers acknowledge and expressly agree
that the Agent and the Lenders reserve the right to, and do in fact, require
strict compliance with all terms and provisions of the Loan Agreement and the
other Loan Documents, including without limitation Section 3.3 of the Loan
Agreement, as amended hereby. The Borrowers have no knowledge of any challenge
to the Agent's or the Lenders' claims arising under the Loan Documents or the
effectiveness of the Loan Documents.
4. CONDITIONS OF EFFECTIVENESS.
This Amendment shall become effective as of the date
hereof when, and only when, the Agent, on behalf of the Lenders, shall have
received, in form and substance satisfactory to it:
(a) counterparts of this Amendment executed by the
Borrowers, the Agent and each of the Lenders; and
(b) such other information, documents, instruments or
approvals as the Agent, the Lenders or the Agent's counsel may require.
5. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
Each Borrower represents and warrants as follows:
(a) Such Borrower is a corporation or limited
partnership, as the case may be, organized, validly existing and in good
standing under the laws of the jurisdiction indicated at the beginning of this
Amendment;
(b) The execution, delivery and performance by such
Borrower of this Amendment and the Loan Documents, as amended hereby, are within
such Borrower's corporate powers, have been duly authorized by all necessary
corporate action and do not contravene (i) such Borrower's articles or
certificate of incorporation, or (ii) law or any contractual restriction binding
on or affecting such Borrower;
-3-
<PAGE>
(c) Except for approvals which have been obtained, no
authorization, approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body, is required for the due execution,
delivery and performance by such Borrower of this Amendment or any of the Loan
Documents, as amended hereby, to which such Borrower is or will be a party;
(d) This Amendment and each of the other Loan
Documents, as amended hereby, to which such Borrower is a party, constitute
legal, valid and binding obligations of such Borrower, enforceable against such
Borrower in accordance with their respective terms; and
(e) Except for the Defaults and Events of Default
waived as set forth in Section 3 hereof, no Default or Event of Default is
existing.
6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. Upon the
effectiveness of this Amendment, on and after the date hereof each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof" or words of like
import referring to the Loan Agreement, and each reference in the other Loan
Documents to "the Loan Agreement," "thereunder," "thereof" or words of like
import referring to the Loan Agreement, shall mean and be a reference to the
Loan Agreement as amended hereby.
7. COSTS, EXPENSES AND TAXES. Each Borrower, jointly and
severally, agrees to pay on demand all reasonable costs and expenses in
connection with the preparation, execution, delivery, administration,
modification and amendment of this Amendment and the other instruments and
documents to be delivered hereunder, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Agent with respect
thereto and with respect to advising the Agent as to its rights and
responsibilities hereunder and thereunder.
8. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Georgia, without regard to
conflict of laws principles of such state.
9. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan
Document for all purposes.
10. COUNTERPARTS. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, each of which
shall be deemed an original and all of which, taken together, shall be deemed to
constitute one and the same instrument. Delivery of an executed counterpart of
this Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart hereof.
[remainder of page intentionally left blank]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their
respective duly authorized officers or representatives to execute and deliver
this Amendment as of the day and year first written above.
FLOORING AMERICA, INC.,
a Delaware corporation
By:
Name: Thomas Leahey
Title: Executive Vice President
4 FLOORS, INC.,
an Ohio corporation
By:
Name: Thomas Leahey
Title: Vice President
ADVANCE FLOOR DECORATORS, INC.,
a Michigan corporation
By:
Name: Thomas Leahey
Title: Vice President
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC.,
a Tennessee corporation
By:
Name: Thomas Leahey
Title: Vice President
CARPETMAX OF UTAH, INC.,
a Utah corporation
By:
Name: Thomas Leahey
Title: Vice President
<PAGE>
FLOORING AMERICA FRANCHISING, L.P.,
a Georgia limited partnership
By: Flooring America, Inc., its
general partner
By:
Name: Thomas Leahey
Title: Executive Vice President
CARPETMAX RETAIL STORES, INC.,
a Delaware corporation
By:
Name: Thomas Leahey
Title: Vice President
MANASOTA CARPET, INC.,
a Florida corporation
By:
Name: Thomas Leahey
Title: Vice President
WADSWORTH & OWENS DECORATING
CENTER, INC.,
a Florida corporation
By:
Name: Thomas Leahey
Title: Vice President
CARPETSPLUS OF AMERICA, INC.,
a Georgia corporation
By:
Name: Thomas Leahey
Title: Vice President
<PAGE>
GCO CARPET OUTLET, INC.,
an Alabama corporation
By:
Name: Thomas Leahey
Title: Vice President
KAREN'S INC.,
a Michigan corporation
By:
Name: Thomas Leahey
Title: Vice President
MAXIM RETAIL GROUP, INC.,
a Georgia corporation
By:
Name: Thomas Leahey
Title: Vice President
MAXIM RETAIL STORES, INC.,
a Georgia corporation
By:
Name: Thomas Leahey
Title: Vice President
C&S TEXTILES, INC.,
an Idaho corporation
By:
Name: Thomas Leahey
Title: Vice President
<PAGE>
COLORADO CARPET & RUGS, INC.,
a Colorado corporation
By:
Name: Thomas Leahey
Title: Vice President
TRI-R OF ORLANDO, INC.,
a Georgia corporation
By:
Name: Thomas Leahey
Title: Vice President
GCO, INC.,
a Nevada corporation
By:
Name: Thomas Leahey
Title: Vice President
FOOTHILL CAPITAL CORPORATION,
a California corporation with an office
in Atlanta, Georgia, as Agent and as a
Lender
By:
Name: Todd Colpitts
Title: Vice President
<PAGE>
Exhibit 10.18
SECOND AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Second Amendment to Loan and Security Agreement (the
"Amendment"), made as of the ___ day of March, 2000, among FLOORING AMERICA,
INC., a Delaware corporation, 4 FLOORS, INC., an Ohio corporation, ADVANCE FLOOR
DECORATORS, INC., a Michigan corporation, BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC., a Tennessee corporation, CARPETMAX OF UTAH, INC., a Utah
corporation, FLOORING AMERICA FRANCHISING, L.P. (f/k/a Carpetmax, L.P.), a
Georgia limited partnership, CARPETMAX RETAIL STORES, INC., a Delaware
corporation, MANASOTA CARPET, INC., a Florida corporation, WADSWORTH & OWENS
DECORATING CENTER, INC., a Florida corporation, CARPETSPLUS OF AMERICA, INC., a
Georgia corporation, GCO CARPET OUTLET, INC., an Alabama corporation, KAREN'S
INC., a Michigan corporation, MAXIM RETAIL GROUP, INC., a Georgia corporation,
MAXIM RETAIL STORES, INC., a Georgia corporation, C & S TEXTILES, INC., an Idaho
corporation, COLORADO CARPET & RUGS, INC., a Colorado corporation, TRI-R OF
ORLANDO, INC., a Georgia corporation, and GCO, INC., a Nevada corporation, as
borrowers ("Borrowers" and each "Borrower"), the LENDERS (as defined below), and
FOOTHILL CAPITAL CORPORATION, as agent for the Lenders (the "Agent"),
W I T N E S S E T H:
WHEREAS, the Borrowers, the financial institutions party thereto
(such financial institutions, together with their respective successors and
assigns, are referred to hereinafter each individually as a "Lender" and
collectively as the "Lenders"), and the Agent are parties to that certain Loan
and Security Agreement dated as of January 28, 2000, as modified and amended by
that certain First Amendment to Loan and Security Agreement dated as of February
23, 2000 (the "Loan Agreement"); and
WHEREAS, the terms of that certain Offer to Purchase and Consent
Solicitation dated as of November 1, 1999 with respect to the Senior
Subordinated Notes (as defined in the Loan Agreement)(the "Consent
Solicitation") have been modified and amended pursuant to that certain Amendment
No. 1 (dated March 3, 2000) to Offer to Purchase and Consent Solicitation; and
WHEREAS, the Borrower has requested that the Loan Agreement be
modified and amended to contemplate such amendment to the Consent Solicitation;
and
WHEREAS, the Agent and the Lender have agreed to such amendment as
set forth in this Amendment and pursuant to the terms and conditions of this
Amendment;
NOW, THEREFORE, in consideration of the premises set forth above,
the terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree that all capitalized terms used
<PAGE>
but not otherwise defined herein shall have the meanings ascribed thereto in the
Loan Agreement, and further agree as follows:
1. AMENDMENT TO ARTICLE 1 OF THE LOAN AGREEMENT.
(a) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the following definition of "FIFTH
SUPPLEMENTAL INDENTURE" immediately after the existing definition of "FEIN":
""FIFTH SUPPLEMENTAL INDENTURE" means that certain Fifth
Supplemental Indenture among Parent, as issuer, the guarantors
party thereto, and the Indenture Trustee, relating to the Senior
Subordinated Notes, dated the Settlement Date (as defined in the
Offer and Solicitation)."
(b) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to delete the existing definitions of "INDENTURE"
and "INDENTURE DOCUMENTS" in their entirety and to substitute the following
therefor:
""INDENTURE" means that certain Indenture dated as of
October 16, 1997, as supplemented by that certain First
Supplemental Indenture dated as of January 30, 1998, as further
supplemented by that certain Second Supplemental Indenture dated
as of August 9, 1998, as further supplemented by that certain
Third Supplemental Indenture dated as of November 25, 1998, as
further supplemented by that certain Fourth Supplemental Indenture
dated as of July 31, 1999, as further supplemented by the Fifth
Supplemental Indenture, among Parent, as issuer, the guarantors
party thereto, and the Indenture Trustee, relating to the Senior
Subordinated Notes.
"INDENTURE DOCUMENTS" means collectively, the Indenture
and each document executed in connection therewith, including
without limitation the Indenture Security Documents, executed in
connection therewith.
"INDENTURE SECURITY DOCUMENTS" means, collectively, that
certain Security Agreement, Conditional Assignment and Trademark
Security Agreement, Pledge Agreement and the mortgages described
on Schedule 1 of the Second Amendment, in each case dated as of
the date of the Second Amendment, among the Borrower Parties and
the Indenture Trustee, and any other documents executed in
connection with the Indenture providing for the grant by a
Borrower Party in favor of the Indenture Trustee or any holder of
the Senior Subordinated Notes (in its capacity as such a holder)
of a security interest in any assets of any Borrower Party."
(c) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the following definition of "INTERCREDITOR
AGREEMENT" immediately after the existing definition of "INTANGIBLE ASSETS":
""INTERCREDITOR AGREEMENT" means that certain
Intercreditor Agreement dated as of the date of the Fifth
Supplemental Indenture among Borrowers, the Indenture
-2-
<PAGE>
Trustee and Agent, in form and substance satisfactory to
Agent, as the same may be modified, amended or restated from
time to time."
(d) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the words "the Intercreditor Agreement"
immediately after the words "Lender Group" in the definition of "LOAN
DOCUMENTS".
(e) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the following definition of "Offer and
Solicitation" immediately after the existing definition of "Obligations:"
""OFFER AND SOLICITATION" means that certain Offer to
Purchase and Consent Solicitation with respect to the Senior
Subordinated Notes dated November 1, 1999, as modified and amended
pursuant to that certain Amendment No. 1 (dated March 3, 2000) to
such Offer to Purchase and Consent Solicitation."
(f) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to delete the existing definition of "ORIGINAL
PROPOSED REDEMPTION" and to substitute the following therefor:
""ORIGINAL PROPOSED REDEMPTION" means a redemption of the
Senior Subordinated Notes in the aggregate principal amount of
$25,000,000, plus accrued and unpaid interest and fees owing
thereon, all as more particularly set forth in the Offer and
Solicitation."
(g) Article 1 of the Loan Agreement, DEFINITIONS,
is hereby modified and amended to delete subsection (l) of the definition of
"PERMITTED LIENS" and to substitute the following therefor:
"(l) subject to the Intercreditor Agreement, Liens in
favor of the Indenture Trustee."
(h) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the following definition of "Second
Amendment" immediately after the existing definition of "REVOLVING FACILITY
USAGE":
""SECOND AMENDMENT" means that certain Second Amendment to
Loan and Security Agreement dated as of March ___, 2000 among
Borrowers, the Lenders, and Agent."
2. AMENDMENT TO ARTICLE 3 OF THE LOAN AGREEMENT. Section 3.2
of the Loan Agreement, CONDITIONS PRECEDENT TO ALL ADVANCES AND ALL LETTERS OF
CREDIT, is hereby modified and amended to delete the word "and" at the end of
subsection (b) thereof, and to add the following additional subsection
immediately following subsection (c) thereof:
-3-
<PAGE>
"; and
(d) until the date Borrowers deliver to Agent Borrowers'
then current thirteen (13) week cash flow forecast which forecast
is satisfactory to Agent in its reasonable judgment and in form
satisfactory to Agent, after giving effect to any Advance or the
issue of any Letter of Credit hereunder and any reserve created by
Agent in its reasonable judgment for any deterioration in
Borrowers' accounts payable since completion of Agent's
pre-Closing Date audit of Borrowers, there shall exist
Availability of not less than $2,000,000."
3. AMENDMENT TO ARTICLE 7 OF THE LOAN AGREEMENT.
(a) Section 7.8 of the Loan Agreement, PREPAYMENTS
AND AMENDMENTS, is hereby modified and amended to delete the first and second
provisos of Section 7.8(a) and to substitute the following therefor:
"; PROVIDED, HOWEVER, that Parent may make the Original Proposed
Redemption so long as (i) no Default or Event of Default exists or
would be caused thereby; (ii) either (A) the Availability
hereunder on the date of such Original Proposed Redemption after
giving effect to such redemption, less any reserve created by
Agent in its reasonable judgment for any deterioration in
Borrowers' accounts payable since completion of Agent's
pre-Closing Date audit of Borrowers, is in excess of $10,000,000,
or (B) (x) the Availability hereunder on the date of such Original
Proposed Redemption after giving effect to such redemption, less
any reserve created by Agent in its reasonable judgment for any
deterioration in Borrowers' accounts payable since completion of
Agent's pre-Closing Date audit of Borrowers, is in excess of
$5,000,000 and (y) Borrowers have provided to Agent Borrowers'
then current thirteen (13) week cash flow forecast which forecast
is acceptable to Agent in its reasonable judgment and in form and
substance satisfactory to Agent, and (iii) such Original Proposed
Redemption is consummated on or before March 3, 2000; PROVIDED
FURTHER, HOWEVER, that Parent may make any subsequent mandatory
redemptions (including without limitation any redemptions pursuant
to the Initial Deferred Offer and the Second Deferred Offer (each
as defined in the Fifth Supplemental Indenture) of the Senior
Subordinated Notes as required by the Indenture so long as (i) no
Default or Event of Default exists or would be caused thereby,
(ii) the average Availability hereunder for the four (4) months
prior to any such redemption payment (or, in the case of any
payment to be made prior to the date four (4) months following the
Closing Date, for the period from the Closing Date to the date of
such payment) less the amount of such redemption payment, less any
reserve created by Agent in its reasonable judgment for any
deterioration in Borrowers' accounts payable, is in
excess of $10,000,000, and (iii) the Availability hereunder on the
date of such redemption after giving effect to such redemption,
less any reserve created by Agent in its reasonable judgment for
any deterioration in Borrowers' accounts payable, is in excess of
$10,000,000. For purposes of this paragraph (a) of this Section
7.8, the date of the Original Proposed
-4-
<PAGE>
Redemption or of any other redemption permitted hereunder
shall be the date on which Senior Subordinated Notes tendered
for purchase in accordance with the terms of the Offer and
Solicitation, Initial Deferred Offer, Second Deferred Offer or
other offer to purchase made in connection therewith, as the
case may be, shall have been accepted by the Parent for
purchase;"
(b) Section 7.8 of the Loan Agreement, PREPAYMENTS AND
AMENDMENTS, is hereby modified and amended to delete the proviso of Section
7.8(c) in its entirety.
4. WAIVER. The Agent and the Lenders waive any Default caused
by the Borrower's failure to comply with clause (y) of subsection (ii)(B) of the
first proviso of Section 7.8(a) of the Loan Agreement as of the effective date
of this Amendment and any Event of Default under Section 8.2 of the Loan
Agreement caused thereby.
5. NO OTHER AMENDMENT OR WAIVER. The execution, delivery and
effectiveness of this Amendment shall not, except as expressly provided above,
operate as an amendment or waiver of any right, power or remedy of the Agent or
the Lenders under the Loan Agreement or any of the other Loan Documents, nor
constitute a waiver of any provision of the Loan Agreement or any of the other
Loan Documents. Except for the amendments and waiver expressly set forth above,
the text of the Loan Agreement and all other Loan Documents shall remain
unchanged and in full force and effect and the Borrowers hereby ratify and
confirm their obligations thereunder. This Amendment shall not constitute a
modification of the Loan Agreement or a course of dealing with the Agent or the
Lenders at variance with the Loan Agreement such as to require further notice by
the Agent or the Lenders to require strict compliance with the terms of the Loan
Agreement and the other Loan Documents in the future, except as expressly set
forth herein. The Borrowers acknowledge and expressly agree that the Agent and
the Lenders reserve the right to, and do in fact, require strict compliance with
all terms and provisions of the Loan Agreement and the other Loan Documents. The
Borrowers have no knowledge of any challenge to the Agent's or the Lenders'
claims arising under the Loan Documents or the effectiveness of the Loan
Documents.
6. CONDITIONS OF EFFECTIVENESS.
This Amendment shall become effective as of the date
hereof when, and only when, the Agent, on behalf of the Lenders, shall have
received, in form and substance satisfactory to it:
(a) counterparts of this Amendment executed by the
Borrowers, the Agent and each of the Lenders;
(b) counterparts of the Intercreditor Agreement
executed by Indenture Trustee and acknowledged by the Credit Parties and in form
and substance satisfactory to the Agent;
-5-
<PAGE>
(c) executed copies of the Fifth Supplemental
Indenture and the Indenture Security Documents (each as defined in the Loan
Agreement, as amended by this Amendment), each in form and substance
satisfactory to the Agent;
(d) payment by the Borrowers of an amendment and
waiver fee of $25,000, which shall be fully earned and due on the date hereof
and nonrefundable when paid (it being understood that, by execution and delivery
of this Amendment, the Borrowers authorize the Agent to charge the Borrowers'
Loan Account for such fee and such amount shall thereafter accrue interest at
the rate applicable to Advances under the Loan Agreement in accordance with
Section 2.7(e) of the Loan Agreement); and
(e) such other information, documents, instruments or
approvals as the Agent, the Lenders or the Agent's counsel may require.
7. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
Each Borrower represents and warrants as follows:
(a) Such Borrower is a corporation or limited
partnership, as the case may be, organized, validly existing and in good
standing under the laws of the jurisdiction indicated at the beginning of this
Amendment;
(b) The execution, delivery and performance by such
Borrower of this Amendment and the Loan Documents, as amended hereby, are within
such Borrower's corporate powers, have been duly authorized by all necessary
corporate action and do not contravene (i) such Borrower's articles or
certificate of incorporation, or (ii) law or any contractual restriction binding
on or affecting such Borrower;
(c) Except for approvals which have been obtained, no
authorization, approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body, is required for the due execution,
delivery and performance by such Borrower of this Amendment or any of the Loan
Documents, as amended hereby, to which such Borrower is or will be a party;
(d) This Amendment and each of the other Loan
Documents, as amended hereby, to which such Borrower is a party, constitute
legal, valid and binding obligations of such Borrower, enforceable against such
Borrower in accordance with their respective terms; and
(e) No Default or Event of Default is existing.
8. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. Upon the
effectiveness of this Amendment, on and after the date hereof each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof" or words of like
import referring to the Loan Agreement, and each reference in the other Loan
Documents to "the Loan Agreement," "thereunder," "thereof" or words of like
import referring to the Loan Agreement, shall mean and be a reference to the
Loan Agreement as amended hereby.
-6-
<PAGE>
9. COSTS, EXPENSES AND TAXES. Each Borrower, jointly and
severally, agrees to pay on demand all reasonable costs and expenses in
connection with the preparation, execution, delivery, administration,
modification and amendment of this Amendment and the other instruments and
documents to be delivered hereunder, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Agent with respect
thereto and with respect to advising the Agent as to its rights and
responsibilities hereunder and thereunder.
10. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Georgia, without regard to
conflict of laws principles of such state.
11. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan
Document for all purposes.
12. COUNTERPARTS. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, each of which
shall be deemed an original and all of which, taken together, shall be deemed to
constitute one and the same instrument. Delivery of an executed counterpart of
this Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart hereof.
[remainder of page intentionally left blank]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their
respective duly authorized officers or representatives to execute and deliver
this Amendment as of the day and year first written above.
FLOORING AMERICA, INC.,
a Delaware corporation
By:
______________________________
Name: Thomas Leahey
Title: Executive Vice President
4 FLOORS, INC.,
an Ohio corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
ADVANCE FLOOR DECORATORS, INC.,
a Michigan corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC.,
a Tennessee corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
CARPETMAX OF UTAH, INC.,
a Utah corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
<PAGE>
FLOORING AMERICA FRANCHISING, L.P.,
a Georgia limited partnership
By: Flooring America, Inc., its general
partner
By:
______________________________
Name: Thomas Leahey
Title: Executive Vice President
CARPETMAX RETAIL STORES, INC.,
a Delaware corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
MANASOTA CARPET, INC.,
a Florida corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
WADSWORTH & OWENS DECORATING
CENTER, INC.,
a Florida corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
<PAGE>
CARPETSPLUS OF AMERICA, INC.,
a Georgia corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
GCO CARPET OUTLET, INC.,
an Alabama corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
KAREN'S INC.,
a Michigan corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
MAXIM RETAIL GROUP, INC.,
a Georgia corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
MAXIM RETAIL STORES, INC.,
a Georgia corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
<PAGE>
C&S TEXTILES, INC.,
an Idaho corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
COLORADO CARPET & RUGS, INC.,
a Colorado corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
TRI-R OF ORLANDO, INC.,
a Georgia corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
GCO, INC.,
a Nevada corporation
By:
______________________________
Name: Thomas Leahey
Title: Vice President
FOOTHILL CAPITAL CORPORATION,
a California corporation with an office
in Atlanta, Georgia, as
Agent and as a Lender
By:
______________________________
Name: Todd Colpitts
Title: Vice President
<PAGE>
Schedule 1
Mortgages
1. Deed of Trust, Security Agreement and Fixture Filing (Texas) to be
recorded in the real estate records of Harris County, Texas and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
2. Deed of Trust, Security Agreement and Fixture Filing (Tennessee) to be
recorded in the real estate records of Knox County, Tennessee and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
3. Deed to Secure Debt to be recorded in the real estate records of Cobb
County, Georgia and granting a Lien on the applicable real property
described on Schedule R-1 of the Loan Agreement;
4. Mortgage, Security Agreement and Fixture Filing (Indiana) to be
recorded in the real estate records of Grant County, Indiana and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
5. Mortgage, Security Agreement and Fixture Filing (Indiana) to be
recorded in the real estate records of Hamilton County, Indiana and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
6. Mortgage, Security Agreement and Fixture Filing (Indiana) to be
recorded in the real estate records of Delaware County, Indiana and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
7. Mortgage, Security Agreement and Fixture Filing (Indiana) to be
recorded in the real estate records of Marion County, Indiana and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
8. Deed of Trust, Security Agreement and Fixture Filing (Arizona) to be
recorded in the real estate records of Maricopa County, Arizona and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
9. Mortgage, Security Agreement and Fixture Filing (Florida) to be
recorded in the real estate records of Hillsborough County, Florida and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement;
10. Mortgage, Security Agreement and Fixture Filing (Florida) to be
recorded in the real estate records of Volusia County, Florida and
granting a Lien on the applicable real property described on Schedule
R-1 of the Loan Agreement.
<PAGE>
Exhibit 10.19
THIRD AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Third Amendment to Loan and Security Agreement (the
"Amendment"), made as of the 15th day of May, 2000, among FLOORING AMERICA,
INC., a Delaware corporation, 4 FLOORS, INC., an Ohio corporation, ADVANCE FLOOR
DECORATORS, INC., a Michigan corporation, BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC., a Tennessee corporation, CARPETMAX OF UTAH, INC., a Utah
corporation, FLOORING AMERICA FRANCHISING, L.P. (f/k/a Carpetmax, L.P.), a
Georgia limited partnership, CARPETMAX RETAIL STORES, INC., a Delaware
corporation, MANASOTA CARPET, INC., a Florida corporation, WADSWORTH & OWENS
DECORATING CENTER, INC., a Florida corporation, CARPETSPLUS OF AMERICA, INC., a
Georgia corporation, GCO CARPET OUTLET, INC., an Alabama corporation, KAREN'S
INC., a Michigan corporation, MAXIM RETAIL GROUP, INC., a Georgia corporation,
MAXIM RETAIL STORES, INC., a Georgia corporation, C & S TEXTILES, INC., an Idaho
corporation, COLORADO CARPET & RUGS, INC., a Colorado corporation, TRI-R OF
ORLANDO, INC., a Georgia corporation, and GCO, INC., a Nevada corporation, as
borrowers ("Borrowers" and each "Borrower"), the LENDERS (as defined below), and
FOOTHILL CAPITAL CORPORATION, as agent for the Lenders (the "Agent"),
W I T N E S S E T H:
WHEREAS, the Borrowers, the financial institutions party thereto
(such financial institutions, together with their respective successors and
assigns, are referred to hereinafter each individually as a "Lender" and
collectively as the "Lenders"), and the Agent are parties to that certain Loan
and Security Agreement dated as of January 28, 2000, as modified and amended by
that certain First Amendment to Loan and Security Agreement dated as of February
23, 2000, as modified and amended by that certain Second Amendment to Loan and
Security Agreement dated as of March 17, 2000 (the "Loan Agreement"); and
WHEREAS, the Borrower has requested that certain terms of the Loan
Agreement be modified and amended; and
WHEREAS, the Agent and the Lender have agreed to such amendment as
set forth in this Amendment and pursuant to the terms and conditions of this
Amendment;
NOW, THEREFORE, in consideration of the premises set forth above,
the terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree that all capitalized terms used but not otherwise defined herein
shall have the meanings ascribed thereto in the Loan Agreement, and further
agree as follows:
<PAGE>
1. AMENDMENT TO ARTICLE 1 OF THE LOAN AGREEMENT.
(a) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to delete in their entirety the existing definitions
of "INCREASED MAXIMUM AMOUNT ACTIVATION NOTICE," "INCREASED MAXIMUM AMOUNT
CLOSING DATE," "INVENTORY
ADVANCE RATE CHANGE DATE" and "TAX REFUND BORROWING BASE."
(b) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the following definition of "BUSINESS PLAN"
immediately after the existing definition of "BUSINESS DAY":
"BUSINESS PLAN" has the meaning set forth in Section
7.20(d)."
(c) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to delete the existing definition of "MAXIMUM
AMOUNT" and to substitute the following therefor:
"MAXIMUM AMOUNT" means, as of any date of determination,
$45,000,000."
(d) Article 1 of the Loan Agreement, DEFINITIONS, is
hereby modified and amended to add the following definition of "THIRD AMENDMENT"
immediately after the existing definition of "TANGIBLE NET WORTH:"
"THIRD AMENDMENT" means that certain Third Amendment to
Loan and Security Agreement dated as of May 15, 2000 among the
Borrowers, the Lender and the Agent."
2. AMENDMENTS TO ARTICLE 2 OF THE LOAN AGREEMENT.
(a) Section 2.1 of the Loan Agreement, REVOLVING
ADVANCES, is hereby modified and amended to delete the second sentence of
subsection (a) thereof and to substitute the following therefor:
"For purposes of this Agreement, "Borrowing Base", as of
any date of determination, shall mean the result of:
(w) THE LESSER OF --
(I) the sum of --
(i) eighty-five percent (85%) of Eligible
Accounts, LESS the amount, if any, of the Dilution
Reserve, and
(ii) the least of (A)$25,000,000 and (B)
THE LESSER OF (aa) thirty percent (30%) of the Cost
of Eligible Inventory and (bb) seventy percent (70%)
of the most recently determined Net Liquidation Value
-2-
<PAGE>
multiplied by the Cost of the Inventory, MINUS the
Inventory Reserves, and (C) one hundred fifty percent
(150%) of the amount of credit availability created
by clause (w)(I)(i) above,
(II) an amount equal to
Borrowers' Collections with respect to Accounts
for the immediately preceding thirty (30) day
period, PLUS
(x) (I) until the earlier of December
20, 2000 and the date Agent, for the benefit of the
Lenders, receives the Net Proceeds from the sale,
sale/leaseback or other disposition of the New
Headquarters, $10,000,000 and (II) thereafter $-0- (the
"Real Estate Borrowing Base"), PLUS
(y) (I) from May 8, 2000 through the
earlier of May 12, 2000 and the date immediately preceding
the date any cash payment of interest or otherwise is made
in respect of the Senior Subordinated Notes, $2,000,000,
and (II) from May 13, 2000 through the earlier of May 19,
2000 and the date immediately preceding the date any cash
payment of interest or otherwise is made in respect of the
Senior Subordinated Notes, $1,000,000 MINUS
(z) the aggregate amount of reserves, if
any, established by Agent under SECTIONS 2.1(B), 6.15 AND
10."
(b) Section 2.1(d) of the Loan Agreement, PROCEDURE
FOR BORROWING, is hereby modified and amended to delete the references to
"$5,000,000" therein and to substitute "$3,000,000" therefor.
(c) Section 2.7(a) of the Loan Agreement, INTEREST
RATE, is hereby deleted in its entirety and the following is hereby substituted
therefor:
"(a) INTEREST RATE. Except as provided
in clause (c) below, (i) all Eurodollar Rate Loans shall
bear interest at a per annum rate equal to the Adjusted
Eurodollar Rate plus two and three-quarters of one percent
(2.75%), (ii) Reference Rate Loans shall bear interest at
a per annum rate equal to the Reference Rate plus two and
one-half of one percent (2.50%), and (iii) all other
Obligations shall bear interest at the per annum rate
equal to the Reference Rate plus two and one-half of one
percent (2.50%)."
(d) Section 2.7(b) of the Loan Agreement, LETTER OF
CREDIT FEE, is hereby amended to delete the reference to "one and one-half of
one percent (1.50%)" therein and to substitute "two and one-half of one percent
(2.50%)" therefor.
(e) Section 2.7(c) of the Loan Agreement, DEFAULT
RATE, is hereby deleted in its entirety and the following is hereby substituted
therefor:
"(c) DEFAULT RATE. Upon the occurrence
and during the continuation of an Event of Default, (i)
all Obligations (except for undrawn
-3-
<PAGE>
Letters of Credit) shall bear interest at a per annum
rate equal to four and one-half of one percent above
the rate otherwise applicable to such Obligations,
and (ii) the Letter of Credit fee provided in SECTION
2.7(b) shall be increased to seven percent (7.00%)
per annum times the amount of the aggregate undrawn
amount of all outstanding Letters of Credit."
(f) Section 2.7(d) of the Loan Agreement,
INTENTIONALLY OMITTED, is hereby deleted in its entirety and the following is
hereby substituted therefor:
"(d) MINIMUM INTEREST. In no event shall
the rate of interest chargeable hereunder for any day be
less than eight percent (8.00%) per annum. To the extent
that interest accrued hereunder at the rate set forth
herein would be less than the foregoing minimum daily
rate, the interest rate chargeable hereunder for such day
automatically shall be deemed increased to the minimum
rate."
(g) Section 2.9 of the Loan Agreement, CREDITING
PAYMENTS; APPLICATION OF COLLECTIONS, is hereby modified and amended to delete
the references to "one (1)" therein and to substitute "one and one-half (1.5)"
therefor.
(h) Section 2.13 of the Loan Agreement, EURODOLLAR
RATE LOANS, is hereby modified and amended to delete the first sentence of
subsection (a) thereof in its entirety and to substitute the following therefor:
"Any Borrower may from time to time, on or after the
Closing Date and prior to the date of the Third Amendment,
request in writing to Agent: (i) Advances to constitute
Eurodollar Rate Loans; (ii) that Reference Rate Loans be
converted into Eurodollar Rate Loans; or (iii) that
existing Eurodollar Rate Loans continue for an additional
Interest Period; PROVIDED, HOWEVER, that notwithstanding
anything herein which may be construed to the contrary, at
all times that the Real Estate Borrowing Base is in effect
at least $10,000,000 of Advances must constitute Reference
Rate Loans. Accordingly, at no time on or after the date
of the Third Amendment will Advances be made as, converted
to or continued (at the expiration of the Interest Period
thereof) as Eurodollar Rate Loans. "
(i) Section 2.17 of the Loan Agreement, INCREASED
MAXIMUM AMOUNT, is hereby deleted in its entirety and "2.17 INTENTIONALLY
OMITTED" is hereby substituted therefor.
3. AMENDMENT TO ARTICLE 3 OF THE LOAN AGREEMENT. Section 3.3
of the Loan Agreement, CONDITIONS SUBSEQUENT, is hereby deleted in its entirety
and the following is hereby substituted therefor:
"3.3 CONDITION SUBSEQUENT. As a condition subsequent to
initial closing hereunder, Borrowers shall perform or cause to be
performed the following (the failure
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<PAGE>
by any Borrower to so perform or cause to be performed
constituting an Event of Default):
(a) on or before May 22, 2000, Borrowers shall
have conducted an interview of a nationally known crisis manager
or such other crisis manager as shall be acceptable to the Agent
in its reasonable discretion at Borrowers' headquarters and at
Borrower expense;
(b) on or before May 26, 2000, Borrowers shall
have delivered to Agent Blocked Account Agreements with respect to
Borrowers accounts maintained at Wells Fargo Bank, National
Association, Norwest Bank Minnesota, National Association, Fleet
National Bank and BankOne;
(c) on or before May 26, 2000, Borrowers shall
have delivered to Agent a Credit Card Agreement from Norwest Bank
Minnesota, National Association;
(d) on or before May 26, 2000, Borrowers shall
have delivered to Agent evidence that the Liens referenced on
Schedule 3.3 have been terminated. Prior to such date, such Liens
shall be deemed to be Permitted Liens;
(e) on or before May 26, 2000, Borrowers shall
have delivered to Agent certified copies of the policies of
insurance, as are required by SECTION 6.10, the form and substance
of which shall be reasonably satisfactory to Agent and its
counsel;
(f) on or before June 5, 2000, Borrowers shall
deliver to Agent certificates of title for all of Borrowers'
vehicles; and
(g) on or before December 20, 2000, Borrowers
shall have used their best efforts to consummate a sale,
sale/leaseback or other disposition of the New Headquarters."
4. AMENDMENT TO ARTICLE 4 OF THE LOAN AGREEMENT. Section 4.6
of the Loan Agreement, RIGHT TO INSPECT, is hereby modified and amended to
delete the second sentence thereof in its entirety.
5. AMENDMENTS TO ARTICLE 7 OF THE LOAN AGREEMENT.
(a) Section 7.4 of the Loan Agreement, DISPOSAL OF
ASSETS, is hereby modified and amended to delete the first proviso thereof and
to substitute the following therefor:
" PROVIDED, HOWEVER, that Borrowers may sell, sell and
lease-back or otherwise dispose of the New Headquarters so
long as the Net Proceeds therefor are not less than
$14,000,000 and such Net Proceeds are remitted to Agent
for the benefit of the Lender Group to be applied to the
Obligations;"
-5-
<PAGE>
(b) Section 7.8 of the Loan Agreement, PREPAYMENTS
AND AMENDMENTS, is hereby modified and amended to delete the word "and" at the
end of subsection (c) thereof and to add the following additional subsection
immediately after the existing subsection (d):
"and;
(e) Make any cash interest payment on the Senior
Subordinated Notes or the Seller Notes; PROVIDED, HOWEVER,
that Borrowers may make any cash interest payment on the
Senior Subordinated Notes or any Seller Note so long as
(i) no Default or Event of Default exists or would be
caused thereby, (ii) the average Availability hereunder
for the four (4) months prior to any such interest payment
(or, in the case of any payment to be made prior to the
date four (4) months following the Closing Date, for the
period from the Closing Date to the date of such payment)
less the amount of such interest payment, less any reserve
created by Agent in its reasonable judgment for any
deterioration in Borrowers' accounts payable, is in excess
of the amount of such interest payment made; PROVIDED
FURTHER, HOWEVER, that Borrowers may make the cash
interest payment on the Senior Subordinated Notes
originally due on April 15, 2000 so long as (i) no Default
or Event of Default exists or would be caused thereby,
(ii) the Availability hereunder on the date of such
interest payment less the amount of such interest payment
is in excess of the amount of such interest payment made."
(c) Section 7.20 of the Loan Agreement, FINANCIAL
COVENANTS, is hereby modified and amended to delete in their entirety
subsections (a), (b), and (c) and to substitute the following therefor and to
add additional subsection (d):
"(a) EBITDA. As of the last day of the fiscal
month ending closest to April 30, 2000, and as of the last
day of each fiscal month thereafter, EBITDA of at least
the amount set forth in the table below for the
immediately preceding one (1) fiscal month:
<TABLE>
<CAPTION>
For the fiscal month EBITDA shall not
ending closest to: be less than:
<S> <C>
April 30, 2000 $ 450,000
May 31, 2000 $1,500,000
June 30, 2000 $2,000,000
July 31, 2000 $2,500,000
August 31, 2000 $2,200,000
September 30, 2000 $1,800,000
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
October 31, 2000 $2,500,000
November 30, 2000 $2,100,000
December 31, 2000 $1,600,000
January 31, 2001 ($2,100,000)
</TABLE>
For the period from the fiscal month ending
closest to April 30, 2000, and continuing to and through
January 31, 2001, the calculation of EBITDA shall exclude
any severance costs (both cash and non-cash costs)
resulting from or otherwise incurred by Borrower for any
severance of those six most highly compensated individuals
identified in Borrower's most recently filed proxy
statement dated May 24, 2000 for the Borrower's annual
stockholders meeting scheduled for June 23, 2000.
(b) Tangible Net Worth. Tangible Net Worth of at
least the amount set forth in the table below as of the
last day of the fiscal quarter ending closest to April 30,
2000 and as of the last day of each fiscal quarter
thereafter:
<TABLE>
<CAPTION>
As of the fiscal quarter Tangible Net Worth
ending closest to: shall not be less than:
<S> <C>
April 30, 2000 ($34,500,000)
July 31, 2000 ($36,500,000)
October 31, 2000 ($36,000,000)
January 31, 2001 ($41,250,000)
</TABLE>
(c) Fixed Charge Coverage Ratio. As of the last
day of the fiscal quarter ending closest to April 30,
2000, and as of the last day of each fiscal quarter
thereafter, a Fixed Charge Coverage Ratio of at least the
amount set forth in the table below (i) with respect to
the fiscal quarter ending closest to April 30, 2000, for
the immediately preceding one (1) fiscal quarter, (ii)
with respect to the fiscal quarter ending closest to July
31, 2000, for the immediately preceding two (2) fiscal
quarters, (iii) with respect to the fiscal quarter ending
closest to October 31, 2000, for the immediately preceding
three (3) fiscal quarters, and (iv) with respect to each
fiscal quarter thereafter, for the immediately preceding
four (4) fiscal quarters:
<TABLE>
<CAPTION>
For the fiscal period Fixed Charge Coverage Ratio
ending closest to: shall not be less than:
<S> <C>
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C>
April 30, 2000 through January 31, Not applicable
2001
</TABLE>
(d) On or before June 30, 2000, Borrower agrees to deliver
to Agent Borrower's revised business plan for the remainder of Borrower's 2001
fiscal year, which plan should be reasonably acceptable to Agent in all
respects. On or before December 1, 2000, and on each December 1, thereafter,
Borrower agrees to deliver to Agent Borrower's business plan for its upcoming
fiscal year commencing on February 6, 2001 and each February of such fiscal year
thereafter (the "Business Plan"), which plan shall be reasonably acceptable to
Agent in all respects. Based upon the Business Plan for each such fiscal year,
Agent shall establish the quarterly minimum EBITDA, minimum Tangible Net Worth
and minimum Fixed Charge Coverage Ratio covenants for the fiscal year in
question using the same methodology as utilized for the 2001 fiscal year
financial covenants, and the new covenant levels shall be presented to Borrower
for its approval, which approval shall not be unreasonably withheld. In the
event that Borrower does not approve the proposed covenant levels, Agent shall
establish the covenant levels in its reasonable discretion, based upon the
Business Plan for the applicable fiscal year.
6. WAIVER. The Agent and the Lenders waive any Default caused
by the Borrower's failure to comply with Sections 3.3 and 7.20 of the Loan
Agreement prior to the effective date of this Amendment and any Event of Default
under Section 8.2 of the Loan Agreement caused thereby.
7. NO OTHER AMENDMENT OR WAIVER. The execution, delivery and
effectiveness of this Amendment shall not, except as expressly provided above,
operate as an amendment or waiver of any right, power or remedy of the Agent or
the Lenders under the Loan Agreement or any of the other Loan Documents, nor
constitute a waiver of any provision of the Loan Agreement or any of the other
Loan Documents. Except for the amendments and waiver expressly set forth above,
the text of the Loan Agreement and all other Loan Documents shall remain
unchanged and in full force and effect and the Borrowers hereby ratify and
confirm their obligations thereunder. This Amendment shall not constitute a
modification of the Loan Agreement or a course of dealing with the Agent or the
Lenders at variance with the Loan Agreement such as to require further notice by
the Agent or the Lenders to require strict compliance with the terms of the Loan
Agreement and the other Loan Documents in the future, except as expressly set
forth herein. The Borrowers acknowledge and expressly agree that the Agent and
the Lenders reserve the right to, and do in fact, require strict compliance with
all terms and provisions of the Loan Agreement and the other Loan Documents. The
Borrowers have no knowledge of any challenge to the Agent's or the Lenders'
claims arising under the Loan Documents or the effectiveness of the Loan
Documents.
8. CONDITIONS OF EFFECTIVENESS.
This Amendment shall become effective as of the date
hereof when, and only when, the Agent, on behalf of the Lenders, shall have
received, in form and substance satisfactory to it:
-8-
<PAGE>
(a) counterparts of this Amendment executed by the
Borrowers, the Agent and each of the Lenders;
(b) payment by the Borrowers of an amendment and
waiver fee of $25,000, which shall be fully earned and due on the date hereof
and nonrefundable when paid (it being understood that, by execution and delivery
of this Amendment, the Borrowers authorize the Agent to charge the Borrowers'
Loan Account for such fee and such amount shall thereafter accrue interest at
the rate applicable to Advances under the Loan Agreement in accordance with
Section 2.7(e) of the Loan Agreement);
(c) updated projections of the Borrowers for the
period from the date hereof until the Maturity Date, together with revised
thirteen week cash flow projections, in each case, in form and substance
satisfactory to the Agent in its sole discretion; and
(d) such other information, documents, instruments or
approvals as the Agent, the Lenders or the Agent's counsel may require.
9. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS.
Each Borrower represents and warrants as follows:
(a) Such Borrower is a corporation or limited
partnership, as the case may be, organized, validly existing and in good
standing under the laws of the jurisdiction indicated at the beginning of this
Amendment;
(b) The execution, delivery and performance by such
Borrower of this Amendment and the Loan Documents, as amended hereby, are within
such Borrower's corporate powers, have been duly authorized by all necessary
corporate action and do not contravene (i) such Borrower's articles or
certificate of incorporation, or (ii) law or any contractual restriction binding
on or affecting such Borrower;
(c) Except for approvals which have been obtained, no
authorization, approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body, is required for the due execution,
delivery and performance by such Borrower of this Amendment or any of the Loan
Documents, as amended hereby, to which such Borrower is or will be a party;
(d) This Amendment and each of the other Loan
Documents, as amended hereby, to which such Borrower is a party, constitute
legal, valid and binding obligations of such Borrower, enforceable against such
Borrower in accordance with their respective terms; and
(e) No Default or Event of Default is existing.
10. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. Upon the
effectiveness of this Amendment, on and after the date hereof each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof" or words of like
import referring to the Loan Agreement,
-9-
<PAGE>
and each reference in the other Loan Documents to "the Loan Agreement,"
"thereunder," "thereof" or words of like import referring to the Loan Agreement,
shall mean and be a reference to the Loan Agreement as amended hereby.
11. COSTS, EXPENSES AND TAXES. Each Borrower, jointly and
severally, agrees to pay on demand all reasonable costs and expenses in
connection with the preparation, execution, delivery, administration,
modification and amendment of this Amendment and the other instruments and
documents to be delivered hereunder, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Agent with respect
thereto and with respect to advising the Agent as to its rights and
responsibilities hereunder and thereunder.
12. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Georgia, without regard to
conflict of laws principles of such state.
13. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan
Document for all purposes.
14. COUNTERPARTS. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, each of which
shall be deemed an original and all of which, taken together, shall be deemed to
constitute one and the same instrument. Delivery of an executed counterpart of
this Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart hereof.
[remainder of page intentionally left blank]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their
respective duly authorized officers or representatives to execute and deliver
this Amendment as of the day and year first written above.
FLOORING AMERICA, INC.,
a Delaware corporation
By:
_______________________________________
Name:
Title:
4 FLOORS, INC.,
an Ohio corporation
By:
_______________________________________
Name:
Title:
ADVANCE FLOOR DECORATORS, INC.,
a Michigan corporation
By:
_______________________________________
Name:
Title:
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC.,
a Tennessee corporation
By:
_______________________________________
Name:
Title:
CARPETMAX OF UTAH, INC.,
a Utah corporation
By:
_______________________________________
Name:
Title:
<PAGE>
FLOORING AMERICA FRANCHISING, L.P.,
a Georgia limited partnership
By: Flooring America, Inc., its general partner
By:
_______________________________________
Name:
Title:
CARPETMAX RETAIL STORES, INC.,
a Delaware corporation
By:
_______________________________________
Name:
Title:
MANASOTA CARPET, INC.,
a Florida corporation
By:
_______________________________________
Name:
Title:
WADSWORTH & OWENS DECORATING
CENTER, INC.,
a Florida corporation
By:
_______________________________________
Name:
Title:
<PAGE>
CARPETSPLUS OF AMERICA, INC.,
a Georgia corporation
By:
_______________________________________
Name:
Title:
GCO CARPET OUTLET, INC.,
an Alabama corporation
By:
_______________________________________
Name:
Title:
KAREN'S INC.,
a Michigan corporation
By:
_______________________________________
Name:
Title:
MAXIM RETAIL GROUP, INC.,
a Georgia corporation
By:
_______________________________________
Name:
Title:
MAXIM RETAIL STORES, INC.,
a Georgia corporation
By:
_______________________________________
Name:
Title:
<PAGE>
C&S TEXTILES, INC.,
an Idaho corporation
By:
_______________________________________
Name:
Title:
COLORADO CARPET & RUGS, INC.,
a Colorado corporation
By:
_______________________________________
Name:
Title:
TRI-R OF ORLANDO, INC.,
a Georgia corporation
By:
_______________________________________
Name:
Title:
GCO, INC.,
a Nevada corporation
By:
_______________________________________
Name:
Title:
FOOTHILL CAPITAL CORPORATION,
a California corporation with an office in
Atlanta, Georgia, as Agent and as a Lender
By:
_______________________________________
Name: Todd Colpitts
Title: Vice President
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Advance Floor Decorators, Inc., a Michigan corporation
Bailey & Roberts CarpetMax of Tennessee, Inc., a Tennessee corporation
Flooring America Franchising, L.P., a Georgia limited partnership
C&S Textiles, Inc., an Idaho corporation
CarpetMAX Retail Stores, Inc., a Delaware corporation
CarpetMAX of Utah, Inc., a Utah corporation
CarpetsPlus of America, Inc., a Georgia corporation
Colorado Carpet & Rugs, Inc., a Colorado corporation
Everythingdecor, Inc., a Georgia corporation
Floor Source Distributors, Inc., a Georgia corporation
4 Floors, Inc., an Ohio corporation
GCO Carpet Outlet, Inc., an Alabama corporation
GCO, Inc., a Nevada corporation
Investor Management, Inc., an Alabama corporation
Karen's Inc., a Michigan corporation
Manasota Carpet, Inc., a Florida corporation
Maxim Equipment Leasing Company, Inc., a Georgia corporation
Maxim Industries, Inc., a Delaware corporation
Maxim Retail Group, Inc., a Georgia corporation
Maxim Retail Stores, Inc., a Georgia corporation
Tri-R of Orlando, Inc., a Georgia corporation
Wadsworth & Owens Decorating Center, Inc., a Florida corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-80984, 33-81002, 333-19691,
333-19693, 333-47299 and 333-59423).
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 23, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and
333-59423) pertaining to the 1993 Stock Option Plan and RSO Plan of Flooring
America, Inc. of our report dated May 23, 2000 with respect to the consolidated
financial statements and schedules of Flooring America, Inc. included in the
Annual Report (Form 10-K) for the year ended February 5, 2000.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
May 23, 2000
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<NAME> FLOORING AMERICA, INC.
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