<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to .
--------------- -------------
Commission file number: 0-24636
THE SIRENA APPAREL GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2998726
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2825 SOUTH SANTA FE AVENUE
VERNON, CALIFORNIA 90058
(Address of principal executive offices)(Zip code)
(323)581-9700
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
At May 14, 1999, 5,077,391 shares of $0.01 par value Common Stock of the
Registrant were outstanding.
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FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets 3
March 31, 1999 and June 30, 1998
Statements of Operations 5
Three and nine months ended March 31, 1999
and 1998
Statements of Cash Flows 6
Nine months ended March 31, 1999 and 1998
Notes to Financial Statements 7
March 31, 1999
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SIRENA APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 107,000 $ 95,000
Accounts receivable, net of
allowance of $ 1,347,000
(March 31, 1999) and
$1,908,000 (June 30, 1998)
(Note 3) 12,651,000 6,884,000
Inventories (Note 4) 17,657,000 7,016,000
Prepaids and other current assets 906,000 408,000
------------ ------------
Total current assets 31,321,000 14,403,000
Equipment and leasehold improvements:
Furniture, fixtures and equipment 4,066,000 3,917,000
Leasehold improvements 1,067,000 903,000
Computer projects in progress 1,391,000 778,000
------------ ------------
6,524,000 5,598,000
Less accumulated depreciation
and amortization (3,854,000) (3,526,000)
------------ ------------
2,670,000 2,072,000
Equipment under capital lease,
less accumulated amortization
of $111,000 (March 31, 1999)
and $79,000 (June 30, 1998) 103,000 135,000
Intangible assets, less accumu-
lated amortization of $1,367,000
(March 31, 1999) and $1,145,000
(June 30, 1998) 5,049,000 5,271,000
Deposits 332,000 149,000
------------ ------------
Total assets $ 39,475,000 $ 22,030,000
============ ============
</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 2,348,000 $ 920,000
Due to factor 5,000,000 --
Accounts payable 9,027,000 1,968,000
Notes payable to American
Industries 2,000,000 --
Notes payable -- 237,000
Accrued liabilities 1,306,000 1,855,000
Current portion of
capital lease obligations 45,000 46,000
Current portion-note payable
to factor (Note 6) 200,000 200,000
------------ ------------
Total current liabilities 19,926,000 5,226,000
Capital lease obligations,
less current portion 63,000 95,000
Note payable to factor, less
current portion (Note 6) 67,000 217,000
Stockholders' equity
Common Stock,$.01 par value
Authorized, 20,000,000 shares
Issued and outstanding,
5,077,391 shares (March 31, 1999)
and 5,019,391 (June 30, 1998) 51,000 50,000
Additional paid-in capital 34,086,000 33,897,000
Accumulated deficit (14,718,000) (17,455,000)
------------ ------------
Total stockholders' equity 19,419,000 16,492,000
------------ ------------
Total liabilities and stock-
holders' equity $ 39,475,000 $ 22,030,000
============ ============
</TABLE>
See accompanying notes.
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THE SIRENA APPAREL GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $27,873,000 $23,520,000 $41,928,000 $34,680,000
Cost of goods sold 17,111,000 14,158,000 24,779,000 21,213,000
----------- ----------- ----------- -----------
Gross profit 10,762,000 9,362,000 17,149,000 13,467,000
Selling, general, & administrative expenses 5,836,000 5,170,000 13,383,000 10,725,000
----------- ----------- ----------- -----------
Total operating income 4,926,000 4,192,000 3,766,000 2,742,000
Interest expense 562,000 333,000 894,000 501,000
----------- ----------- ----------- -----------
Income before provision
for income taxes 4,364,000 3,859,000 2,872,000 2,241,000
Provision for income taxes(Note 5) 106,000 65,000 135,000 90,000
----------- ----------- ----------- -----------
Net income $ 4,258,000 $ 3,794,000 $ 2,737,000 $ 2,151,000
=========== =========== =========== ===========
Net income per share-basic $ 0.84 $ 0.82 $ 0.54 $ 0.46
=========== =========== =========== ===========
Net income per share-diluted $ 0.81 $ 0.80 $ 0.52 $ 0.46
=========== =========== =========== ===========
Weighted average number of
common shares outstanding:
Basic 5,067,391 4,649,340 5,042,858 4,649,340
Diluted 5,255,042 4,736,060 5,216,769 4,696,553
</TABLE>
See accompanying notes.
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THE SIRENA APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,737,000 $ 2,151,000
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 582,000 433,000
Changes in operating
assets and liabilities:
Accounts receivable and due
to/from factor (767,000) 921,000
Inventories (10,641,000) (7,501,000)
Prepaid and other assets (681,000) 105,000
Accounts payable 7,059,000 2,395,000
Accrued liabilities (549,000) (19,000)
------------ ------------
Net cash used in operat-
ing activities (2,260,000) (1,515,000)
INVESTING ACTIVITIES
Purchase of Jezebel -- (307,000)
Increase in other assets -- (4,000)
Purchases of property,
plant and equipment (926,000) (342,000)
------------ ------------
Net cash used in investing
activities (926,000) (653,000)
FINANCING ACTIVITIES
Payment of notes payable (387,000) --
Proceeds from notes payables
to American Industries 2,000,000 --
Proceeds from the exercise
of options 190,000 9,000
Payment on capital lease
obligations (33,000) (30,000)
Bank borrowings -- 467,000
Increase in bank
overdraft 1,428,000 1,654,000
------------ ------------
Net cash provided by
financing activities 3,198,000 2,100,000
------------ ------------
Increase (decrease) in cash 12,000 (68,000)
Cash at beginning of period 95,000 202,000
------------ ------------
Cash at end of period $ 107,000 $ 134,000
============ ============
</TABLE>
See accompanying notes.
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THE SIRENA APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals)considered necessary for a fair presentation of
the results of operations for the periods presented have been
included. Operating results for the nine months ended March 31, 1999
are not necessarily indicative of the results that may be expected
for the year ending June 30, 1999. For further information, refer to
the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30,
1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND AND NATURE OF BUSINESS - The Sirena Apparel Group,
Inc. (the "Company") was incorporated in Delaware and designs,
manufactures and markets branded and private label swimwear,
resortwear and intimate apparel for each principal part of the
women's market.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its majority owned
subsidiary, SIRENAMEX S.A. de C.V., a Mexican corporation. All the
significant intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION - The Company recognizes revenue as of the date
the merchandise is shipped to its customers. Allowance for estimated
returns and discounts is provided when the related revenue is
recorded based upon historical return rates and management's estimate
of future allowances.
ADVERTISING COSTS - The Company expenses nonreimbursable advertising
costs in the period incurred.
FOREIGN CURRENCY - The Company transacts with its Mexican subsidiary
in U.S. Dollars. The effect of foreign currency transaction
adjustments has been minor.
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3. ACCOUNTS RECEIVABLE
The Company factors substantially all of its accounts receivable with
Heller Financial, Inc. ("Heller"). Prior to April 21, 1999,under the
factoring agreement, the Company was able to draw short-term advances
up to 80% of uncollected receivables, less reserves as determined by
the factor. In addition, the Company was able to draw short-term
advances up to 50% of eligible inventory, as defined in the factoring
agreement, to a maximum of $5.0 million (in January and February) and
ranging to a maximum of $1.0 million (in June and July). The Company
was able to also borrow seasonal over-advances from September 1 to
March 31 each year up to a maximum of $2.0 million (in December and
January). Interest at the prime rate plus 0.375%, 2.0% and 3.0% was
charged on factor advances, short-term advances and seasonal
over-advances, respectively. Aggregate obligations under the
agreement could not exceed $25.0 million. The agreement included
certain financial covenants, including minimum tangible net worth,
working capital, and debt to tangible net worth. The Company was in
compliance with all covenants at March 31, 1999. On April 21, 1999,
in connection with the credit facility described below, the Company
and Heller entered into a modified factoring agreement. Under this
arrangement, Heller only factors the Company's accounts receivable,
and the amounts due to the Company as a result are part of the
collateral for the credit facility. The modified factoring agreement
expires on April 21, 2002.
On April 21, 1999 the Company entered into a Loan and Security
Agreement (the "Foothill Credit Facility") with Foothill Capital
Corporation which provides for advances and commercial letters of
credit of up to $32.0 million through April 21, 2002. The Foothill
Credit Facility has a sublimit of $1.0 million for commercial letters
of credit. Borrowings are limited to a predetermined percentage of
eligible factored and house accounts receivable, plus an inventory
advance of up to 30% of the cost of eligible domestic raw materials
on hand from March 1st through August 30th and up to 50% of the cost
from September 1st through February 28th plus up to 50% of the cost
of eligible domestic finished goods inventory from May 1st through
September 30th and 65% of the cost of finished goods inventory from
October 1st through April 30th. Interest on base borrowings is
charged at the Wells Fargo Bank, NA prime rate plus 0.25%. The
Foothill Credit Facility is collateralized by all the assets of the
Company. The Foothill Credit Facility includes certain financial
covenants, including profitability and tangible net worth.
The proceeds from the Foothill Credit Facility were used to refinance
the indebtedness owed the factor under the credit
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facility with Heller and for repayment of notes payable to American
Industries, Inc., a corporation controlled by Howard H. Hedinger, a
principal stockholder and a director of the Company.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 6,344,000 $ 4,001,000
Work-in-process 4,243,000 989,000
Finished goods 7,070,000 2,026,000
----------- -----------
Total $17,657,000 $ 7,016,000
=========== ===========
</TABLE>
5. INCOME TAXES
The provision for income taxes for the nine months ended March 31,
1999 is at a nominal tax rate based on the Company's anticipated
effective tax rate.
6. NOTE PAYABLE TO FACTOR
The Company had a $500,000 term loan with Heller to finance the
acquisition of Jezebel(balance was $267,000 at March 31, 1999). The
term loan bore interest at the rate established from time to time by
Bank of America plus 1.5% (9.25% at March 31, 1999), commenced on
January 29, 1998, and was payable in 29 equal monthly installments of
$16,667, with the remainder to be paid in full on June 30, 2000.
However, on April 22, 1999, the Company paid-off this loan from funds
obtained from the Foothill Credit Facility.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 which are subject to a variety
of risks and uncertainties. The Company's actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For a
discussion of some of the factors that could cause actual results to differ
materially from the Company's expectations, see "Item 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Factors That May
Affect Future Results" contained in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
The following discussion is intended to provide a better understanding of the
significant changes in the trends relating to the Company's financial condition
and results of operations. Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
accompanying consolidated financial statements and the notes thereto.
Net Sales. Net sales increased to $27,873,000 in the third quarter ended March
31, 1999 from $23,520,000 in the comparable period of the prior year, an
increase of 18.5%. Net sales for the nine months ended March 31, 1999 increased
to $41,928,000 from $34,680,000 in the comparable period of the prior year, an
increase of 21%.
The increase in net sales for the third quarter consisted of the following: (1)a
$2.4 million or 16.9% increase in the Branded swimwear division which increase
is mainly due to $0.3 million or 100% increase in the revenues of the
re-launched Rose Marie Reid brand, $0.7 million or 100% increase in the revenues
of the new Hang Ten brand, $1.0 million or 29% increase in the revenues of the
Anne Klein Brand, $0.4 million or 6.7% increase in the revenues of the Sirena
brand and $0.5 million or 12.9% increase in revenues of the Liz Claiborne brand
and the impact of lower merchandise returns as compared to the same period of
the prior year, offset by $0.5 million decrease in revenues of other brands; (2)
a $0.5 million or 15.5% increase in the revenues of the Resortwear division that
resulted from continued lower levels of returns and strong retail
sellthrough;(3) a $1.2 million or 23.7% increase in the revenues of the Private
Label division which was due to quick retail turns at mass merchandisers and a
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better fill rate on orders, resulting in fewer cancellations of orders; and (4)a
$0.3 million or 23.4% increase in the revenues from the Jezebel line which was
acquired in January 1998 for which there were only two months of sales in the
prior year's comparable period.
The increase in net sales for the nine months ended March 31, 1999 over the
comparable period last year resulted from: (1) increased revenues of the Liz
Claiborne swimwear line of $0.3 million or 7.3%, increase in revenues of the
Anne Klein swimwear line of $1.1 million or 19%, increase in revenues of the
re-launched Rose Marie Reid brand of $0.4 million or 366%, increase in revenues
of the new Hang Ten brand of $0.9 million or 100%, increase in revenues of the
Private Label division of $1.4 million or 18.8%, increase in the revenues of the
resortwear division of $0.4 million or 7.8% and an increase in the Jezebel
intimate apparel line for which there were only five months of sales in the
prior year; and (2) lower rates of returned merchandise (6.5% and 4.5% of gross
sales for the nine months ended March 31, 1998 and 1999, respectively).
Gross Profit. For the third quarter ended March 31,1999 gross profit increased
to $10,762,000 (38.6% of net sales) from $9,362,000 (39.8% of net sales) for the
comparable period last year, an overall increase of 15%. Gross profit in the
nine months ended March 31, 1999 increased to $17,149,000 (41% of net sales)
from $13,467,000 (39% of net sales) for the comparable period last year, an
overall increase of 27%.
The increase in gross profit for the third quarter ending March 31, 1999
resulted mainly from increased sales volume (18.5% increase for the three
months as compared to the prior year).
Higher gross profit for the nine months ended March 31, 1999 was due to the
following factors: increased sales volume (21% increase for the nine months as
compared to the prior year), improved performance of branded, resortwear and
intimate apparel divisions and 2% lower returns as compared to the prior year,
in addition to lower sales of prior season units at low margins, which primarily
helped margins in the first six months of fiscal 1999.
Operating Expenses. Operating expenses increased to $5,836,000(21% of net sales)
for the third quarter ended March 31, 1999 from $5,170,000 (22% of net sales) in
the comparable period last year, an increase of 13%. Operating expenses
increased to $13,383,000(32% of net sales) for the nine months ended March 31,
1999 from $10,725,000 (31% of net sales) in the comparable period last year, an
increase of 25%.
The increase in such expenses for the three and nine months ended March 31, 1999
was primarily due to:(1)higher operating expenses associated with the new Hang
Ten line (increase of $0.2 million and $0.3 million for the three and nine
months ended March 31, 1999, respectively) and Jezebel intimate apparel
line(increase of
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$0.3 million and $2.1 million for the three and nine months ended March 31,
1999, respectively) and the re-launching of the Rose Marie Reid label (increase
of $0.2 million and $0.7 million for three and nine months ended March 31, 1999,
respectively) and the costs associated with entering into the license agreement
for the Anne Klein intimate apparel line(approximately $0.1 million for the nine
months ended March 31, 1999); (2) charges relating to upgrading the Company's
computer system (approximately $0.2 million and $0.3 million for the three and
nine months ended March 31, 1999, respectively) and (3) costs related to the
move and relocation to the Company's new headquarters (approximately $0.1
million for the three and nine months ended March 31, 1999).
Interest Expense. Interest expense increased to $562,000 (2% of net sales) for
the third quarter ended March 31, 1999 from $333,000 (1.4% of net sales) in the
comparable period of the prior year, an increase of 69%. Interest expense for
the nine months ended March 31,1999 increased to $894,000 (2% of net sales) from
$501,000 (1.4% of net sales) in the comparable period of the prior year, an
increase of 78%.
The increase in interest expense for the third quarter and the nine months ended
March 31, 1999 is the result of higher borrowings on the seasonal line of credit
from the Company's factor in order to finance the Company's working capital
requirements.
Net Income. Net Income increased to $4,258,000, or $0.84 per common share-basic
and $0.81 per common share-diluted, for the third quarter ended March 31, 1999,
from $3,794,000, or $0.82 per common share-basic and $0.80 per common
share-diluted in the comparable period last year. Net income for the nine months
ended March 31, 1999 increased to $2,737,000, or $0.54 per common share-basic
and $0.52 per common share-diluted, from net income of $2,151,000, or $0.46 per
common share(both basic and diluted), in the comparable nine month period of the
prior year.
The increase in net income for the three and nine months ended March 31,1999 was
primarily due to the higher net sales and the related increase in gross profit
described above. These effects were partially offset by the increases in
selling, general and administrative expenses and higher interest expenses
described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds has been to finance its growth in sales and
inventory, the development of new product lines and the improvement of its
operating, manufacturing and customer service capabilities. The Company has
financed its working capital requirements from its cash flow from operations,
advances drawn under its factoring and revolving credit arrangements and
proceeds from its initial public offering in
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1994 and secondary public offering in November 1995. The Company regularly
evaluates its sources of working capital to enable it to finance its growth for
the foreseeable future. There can be no assurance that such sources will be
available or sufficient to meet the Company's needs.
Net cash used in operating activities for the nine months ended March 31, 1999
was $2,260,000 compared to $1,515,000 of cash used in the comparable period of
the prior year. Current year's cash usage was higher due to the relative
increases in inventories of $10.6 million and prepaid and other assets of $0.7
million, partially offset by increases in accounts payable of $7.0 million, cash
generated from increased net income of $2.7 million and decrease in accounts
receivable and due to/from factor of $0.8 million, as compared to the comparable
period of the prior year.
At March 31, 1999, working capital was approximately $11,395,000 compared to
$9,083,000 at March 31, 1998. The increase in working capital was primarily due
to increased accounts receivable of $6.9 million, increased prepaids and other
assets of $0.6 million and increased inventories of $5.1 million, offset by
increases in accounts payable of $3.8 million and seasonal advances from the
factor of $7.0 million. Inventory increased to $17,657,000 at March 31,1999 from
$12,562,000 at March 31, 1998, a $5,095,000 increase. This increase was a result
of increased purchases of raw materials due to the addition of the Jezebel
intimate apparel line and increased in purchases, in the swimwear division in
anticipation of an increase in forth quarter sales.
During the second quarter of fiscal 1999, the Company developed plans for sales
of its products over the Internet. The Company's Online Store opened to
consumers on April 1, 1999 and features swimwear, intimates and active wear
under the Company's Rose Marie Reid and Hot Water labels at normal retail
prices. The cost for the development of the Online Store was approximately
$100,000. The Company plans to support the Online Store with on-line
advertising, through hyperlinks to other web pages. The Company is also in
process of expanding its online store with recent addition of Anne Klein Woman,
the plus-size brand of Anne Klein swimwear.
In December 1998, the Company finalized its plans to relocate its South El Monte
executive offices, manufacturing and distribution facilities to a new location
in Vernon, California, formerly the manufacturing site for another apparel firm.
It is anticipated that the new facilities will require minimal leasehold
improvements and capital investments to make the facility fully functional for
the Company's needs.
On April 21, 1999 the Company entered into a Loan and Security Agreement (the
"Foothill Credit Facility") with Foothill Capital Corporation which provides for
advances and commercial letters of credit of up to $32.0 million through April
21, 2002. The
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Foothill Credit Facility has a sublimit of $1.0 million for commercial letters
of credit. Borrowings are limited to a predetermined percentage of eligible
factored and house accounts receivable, plus an inventory advance of up to 30%
of the cost of eligible domestic raw materials on hand from March 1st through
August 30th and up to 50% of the cost from September 1st through February 28th
plus up to 50% of the cost of eligible domestic finished goods inventory from
May 1st through September 30th and 65% of the cost of finished goods inventory
from October 1st through April 30th. Interest on base borrowings is charged at
the Wells Fargo Bank, NA prime rate plus 0.25%. The Foothill Credit Facility is
collateralized by all the assets of the Company. The Foothill Credit Facility
includes certain financial covenants, including profitability and tangible net
worth. In connection with the Foothill Credit Facility, the Company incurred
loan fees and other related debt issue costs of approximately $550,000.
The proceeds from the Foothill Credit Facility were used to refinance the
indebtedness owed the factor under the credit facility with Heller and for
general corporate purposes.
The Foothill Credit Facility also includes a $3,000,000 term loan of which
$1,000,000 is due on July 1, 1999 and the balance of $2,000,000 is due in 12
monthly installments of $166,667 each commencing August 1, 1999 until fully
paid. Interest on the term loan is payable monthly at 12%. The term loan is
collateralized by all of the assets of the Company.
YEAR 2000 COMPLIANCE
Following a comprehensive study of the Company's current systems and future
system requirements, the Company initiated a program in October 1997 to update
or replace existing systems with enhanced hardware and software applications.
The objectives of the new program are to achieve competitive benefits for the
Company, as well as assuring that all systems are Year 2000 compliant.
Implementation of this program is expected to require expenditures of
approximately $1,100,000 and to be completed in three phases by June 30,1999, of
which the first two phases have already been completed. The Company does not
track the cost and time that its own internal employees spend on addressing Year
2000 issues.
The first phase of the program, which involved updating the Company's financial
systems, was completed in August 1998 at a cost of $450,000. The second phase
involved updating and replacing the Company's systems relating to distribution
and manufacturing and was completed in October 1998 at a cost of approximately
$400,000. Phases 1 and 2 included a review of all hardware and software systems,
business functions and trading partners that contain and/or exchange
date-sensitive information. Critical IT systems, which include the Company's
information system, time clocks and e-mail are stated Year 2000 compliant. The
current phone system is not Year 2000 compliant and will be
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replaced with a Year 2000 compliant system during the month of November 1999.
Under the third and final phase of the program, which is expected to be fully
completed by August 31, 1999 at a cost of approximately $250,000, the Company
will update its manufacturing system, the software connecting the Company to its
other offices, perform diagnostics and implement Year 2000 compliant solutions
in its non-IT systems, such as manufacturing equipment and those systems
involved with facility management (security systems, air/heating systems, fire
supression systems). At this time, the Company believes that Phase 3 is
approximately 80% complete.
Should the Company and/or its third-party vendors and service providers upon
whom the Company relies fail to timely identify, address and correct material
Year 2000 issues, such failure could have a material adverse impact on the
Company's ability to operate. In addition, if corrections made by such
third-party vendors and service providers to address Year 2000 issues are
incompatible with the Company's systems, the Year 2000 issue could have a
material adverse impact on the Company's operations. The most reasonably likely
worst case Year 2000 scenario would be a system failure causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities. The range of adverse
impacts may include the requirement to pay significant overtime to manually
process certain transactions and added costs to process operating activity
through a centralized administrative function. At this time, the Company is
unable to predict with any certainty the estimated lost revenue it may
experience as a result of such failure or disruption. Despite the Company's
activities in regards to the Year 2000 issue, there can be no assurance that
partial or total systems interruptions or the costs to update software and
hardware will not have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects.
The Company has not yet established a contingency plan in the event that the
Company's Year 2000 program does not successfully convert its software and
hardware to be Year 2000 compliant. However, the Company intends to establish a
contingency plan by August 1999. Funding requirements have been incorporated
into the Company's capital and operating expenditure plans and are not expected
to have a material adverse effect on the Company's financial condition or
results of operations. The Company initiated formal communications with its
major customers, vendors and others in November 1997 to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 compliance issue and at this time does not believe that such
third parties' failure will have a material adverse effect on the Company's
financial condition or results of operations.
15
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SUBSEQUENT EVENTS
On April 22, 1999 the Company paid-off two separate promissory notes payable to
American Industries, Inc., a corporation controlled by Howard H. Hedinger, a
principal stockholder and a director of the Company, issued February 1999 in the
aggregate amount of $2,000,000 from proceeds received from its new credit
facility.
ANNE KLEIN INTIMATE APPAREL AGREEMENT
The Company signed an agreement on December 10, 1998 with Anne Klein Company to
license intimate apparel articles to include bras, daywear and shapewear as well
as large-sizes for these categories under "Anne Klein" and related labels. The
intimate apparel collection is planned to launch to the trade at August 1999
market for in-store deliveries beginning in December 1999.
NEW CORPORATE HEADQUARTERS
The Company is moving its entire facilities into a 208,000 square foot building
in Vernon, California effective May 10, 1999. The Company's new address and
phone number will be:
The Sirena Apparel Group, Inc.
2825 South Santa Fe Avenue
Vernon, California 90058-1408
Main Phone Number: (323)581-9700
Main Fax Number : (323)581-9100
The new building will house the Company's entire operations, including its
corporate headquarters, manufacturing, raw materials, trimming, design studios
and distribution facilities. The move will begin May 8,1999 and will conclude
with the transfer of the manufacturing facilities on June 1, 1999. The Company's
current 126,000 square foot South El Monte facility, in use since the Company
was started in 1959, will continue in operation until June 1, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other information. None
Item 6. Reports on Form 8-K.
(a) Exhibits.
10.1 Loan and Security Agreement by and between The Sirena
Apparel Group, Inc. and Foothill Capital Corporation dated
as of April 21, 1999.
10.2 Amended and Restated Collection Date Factoring Agreement
dated effective as of April 22, 1999 by and between Heller
Financial, Inc. and The Sirena Apparel Group, Inc.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SIRENA APPAREL GROUP, INC.
Date: May 14, 1999 By /S/ RICHARD A. GERHART
------------ ----------------------
Richard A. Gerhart
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Chief Accounting Officer)
18
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EXHIBIT 10.1
================================================================================
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
THE SIRENA APPAREL GROUP, INC.
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF APRIL 21, 1999
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. DEFINITIONS AND CONSTRUCTION.........................................................1
1.1 Definitions...................................................................1
1.2 Accounting Terms.............................................................20
1.3 Code.........................................................................20
1.4 Construction.................................................................21
1.5 Schedules and Exhibits.......................................................21
2. LOAN AND TERMS OF PAYMENT...........................................................21
2.1 Revolving Advances...........................................................21
2.2 Letters of Credit............................................................22
2.3 LIBOR Option.................................................................24
2.4 Term Loan....................................................................27
2.5 Overadvances.................................................................27
2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations.......27
2.7 Collection of Accounts.......................................................29
2.8 Crediting Payments; Application of Collections...............................29
2.9 Designated Account...........................................................29
2.10 Maintenance of Loan Account; Statements of Obligations.......................30
2.11 Fees.........................................................................30
3. CONDITIONS; TERM OF AGREEMENT.......................................................31
3.1 Conditions Precedent to the Initial Advance or Letter of Credit and the
Term Loan....................................................................31
3.2 Conditions Precedent to all Advances, all Letters of Credit, and the
Term Loan....................................................................33
3.3 Condition Subsequent.........................................................34
3.4 Term.........................................................................34
3.5 Effect of Termination........................................................34
3.6 Early Termination by Borrower................................................34
3.7 Termination Upon Event of Default............................................34
4. CREATION OF SECURITY INTEREST.......................................................35
4.1 Grant of Security Interest...................................................35
4.2 Negotiable Collateral........................................................35
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.......35
4.4 Delivery of Additional Documentation Required................................35
4.5 Power of Attorney............................................................36
4.6 Right to Inspect.............................................................36
5. REPRESENTATIONS AND WARRANTIES......................................................36
5.1 No Encumbrances..............................................................36
5.2 Eligible Accounts............................................................37
5.3 Eligible Inventory...........................................................37
5.4 Equipment....................................................................37
5.5 Location of Inventory and Equipment..........................................37
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
5.6 Inventory Records............................................................37
5.7 Location of Chief Executive Office; FEIN.....................................37
5.8 Due Organization and Qualification; Subsidiaries.............................37
5.9 Due Authorization; No Conflict...............................................38
5.10 Litigation...................................................................39
5.11 No Material Adverse Change...................................................39
5.12 Solvency.....................................................................39
5.13 Employee Benefits............................................................39
5.14 Environmental Condition......................................................39
5.15 Brokerage Fees...............................................................40
5.16 Year 2000 Compliance.........................................................40
6. AFFIRMATIVE COVENANTS...............................................................40
6.1 Accounting System............................................................40
6.2 Collateral Reporting.........................................................41
6.3 Financial Statements, Reports, Certificates..................................41
6.4 Tax Returns..................................................................42
6.5 Guarantor Reports............................................................42
6.6 Returns......................................................................43
6.7 Title to Equipment...........................................................43
6.8 Maintenance of Equipment.....................................................43
6.9 Taxes........................................................................43
6.10 Insurance....................................................................43
6.11 No Setoffs or Counterclaims..................................................45
6.12 Location of Inventory and Equipment..........................................45
6.13 Compliance with Laws.........................................................45
6.14 Employee Benefits............................................................45
6.15 Leases.......................................................................46
6.16 Brokerage Commissions........................................................46
6.17 Year 2000 Compliance.........................................................46
7. NEGATIVE COVENANTS..................................................................47
7.1 Indebtedness.................................................................47
7.2 Liens........................................................................47
7.3 Restrictions on Fundamental Changes..........................................47
7.4 Disposal of Assets...........................................................48
7.5 Change Name..................................................................48
7.6 Guarantee....................................................................48
7.7 Nature of Business...........................................................48
7.8 Prepayments and Amendments...................................................48
7.9 Change of Control............................................................48
7.10 Consignments.................................................................48
7.11 Distributions................................................................48
7.12 Accounting Methods...........................................................49
7.13 Investments..................................................................49
7.14 Transactions with Affiliates.................................................49
7.15 Suspension...................................................................49
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
7.16 [Intentionally Omitted.].....................................................49
7.17 Use of Proceeds..............................................................49
7.18 Change in Location of Chief Executive Office; Inventory and Equipment
with Bailees.................................................................49
7.19 No Prohibited Transactions Under ERISA.......................................49
7.20 Financial Covenants..........................................................50
7.21 Capital Expenditures.........................................................52
8. EVENTS OF DEFAULT...................................................................52
9. FOOTHILL'S RIGHTS AND REMEDIES......................................................54
9.1 Rights and Remedies..........................................................54
9.2 Remedies Cumulative..........................................................56
10. TAXES AND EXPENSES..................................................................57
11. WAIVERS; INDEMNIFICATION............................................................57
11.1 Demand; Protest; etc.........................................................57
11.2 Foothill's Liability for Collateral..........................................57
11.3 Indemnification..............................................................57
12. NOTICES.............................................................................58
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..........................................59
14. DESTRUCTION OF BORROWER'S DOCUMENTS.................................................60
15. GENERAL PROVISIONS..................................................................60
15.1 Effectiveness................................................................60
15.2 Successors and Assigns.......................................................60
15.3 Section Headings.............................................................60
15.4 Interpretation...............................................................60
15.5 Severability of Provisions...................................................60
15.6 Amendments in Writing........................................................60
15.7 Counterparts; Telefacsimile Execution........................................61
15.8 Revival and Reinstatement of Obligations.....................................61
15.9 Integration..................................................................61
</TABLE>
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<PAGE> 5
SCHEDULES AND EXHIBITS
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule R-1 Real Property Collateral
Schedule 5.8 Borrower's Subsidiaries
Schedule 5.10 Litigation
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Permitted Indebtedness
Exhibit C-1 Form of Compliance Certificate
Exhibit L-1 Form of LIBOR Notice
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<PAGE> 6
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered
into as of April 21, 1999, between FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333 and THE SIRENA APPAREL
GROUP, INC., a Delaware corporation ("Borrower"), with its chief executive
office located at 10333 Vacco Street, South El Monte, California 91733.
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. With respect to a Factored
Account, Account Debtor means such Person(s) who are obligated to Factor upon
the sale thereof by Borrower to Factor.
"Accounts" means all currently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to Borrower (or to
Factor, with respect to any Factored Account) arising out of the sale or lease
of goods or the rendition of services by Borrower, irrespective of whether
earned by performance, and any and all credit insurance, guaranties, or security
therefor. Accounts also include balances due from Factor to Borrower with
respect to Factored Accounts.
"Accounts Advance Percentage" means 85% with respect to Eligible House
Accounts and 90% with respect to Eligible Factored Accounts.
"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 Stock having ordinary voting power for the election of
directors (or comparable managers) or the direct or indirect power to direct the
management and policies of a Person.
"Agreement" has the meaning set forth in the preamble hereto.
"Applicable Percentage" means, during the period commencing on the
Closing Date and continuing through and including the one-year anniversary of
the Closing Date, 2%, during the period commencing on the day after the one-year
anniversary of the Closing Date
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<PAGE> 7
and continuing through and including the two-year anniversary of the Closing
Date, 1.5%, and, during the period commencing on the day after the two-year
anniversary of the Closing Date and continuing through and including the day
immediately preceding the Maturity Date, 1%.
"Authorized Person" means any officer or other employee of Borrower.
"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 the Term Loan Balance outstanding during the immediately preceding
month, plus, (ii) the average Daily Balance of Advances that were outstanding
during the immediately preceding month, plus (iii) the average Daily Balance of
the Letter of Credit Usage during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.
Section 101 et seq.), as amended, and any successor statute.
"Base LIBOR Rate" means the rate per annum (rounded upwards, if
necessary, to the next 1/16%) at which United States dollar deposits are offered
to major banks in the London interbank market on or about 11:00 a.m. (California
time) 2 Business Days prior to the commencement of the applicable Interest
Period, for a term and in amounts comparable to the Interest Period and amount
of the LIBOR Rate Advance requested by Borrower in accordance with this
Agreement.
"Benefit Plan" means a "defined benefit plan" (as defined in Section
3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA
Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within
the past six years.
"Borrower" has the meaning set forth in the preamble to this Agreement.
"Borrower's Books" means all of Borrower's books and records including:
ledgers; records indicating, summarizing, or evidencing Borrower's properties or
assets (including the Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disk or tape files, printouts, runs, or other computer prepared
information.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which national banks are authorized or required to close and, with
respect to provisions of the Agreement dealing with LIBOR Rate Advances, also
means a day on which banks in London, England are open for the transaction of
banking business.
"Change of Control" shall be deemed to have occurred at such time as:
(a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of
the Securities
2
<PAGE> 8
Exchange Act of 1934), other than a Permitted Investor, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934),
directly or indirectly, of more than 49% of the total voting power of all
classes of Stock then outstanding of Borrower entitled to vote in the election
of directors; or (b) as of any date of determination after the Closing Date, 50%
or more of the directors of Borrower then in office during the prior 12 month
period shall cease to be directors of Borrower.
"Closing Date" means the date of the first to occur of the making of the
initial Advance, the funding of the Term Loan, or the issuance of the initial
Letter of Credit.
"Code" means the California Uniform Commercial Code.
"Collateral" means all of Borrower's right, title, and interest in and
to each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(g) any Real Property Collateral,
(h) any money, or other assets of Borrower that now or hereafter come
into the possession, custody, or control of Foothill, and
(i) the proceeds and products, whether tangible or intangible, of any of
the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Borrower's Books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, Real Property, money, deposit
accounts, or other tangible or intangible property resulting from the sale,
exchange, collection, or other disposition of any of the foregoing, or any
portion thereof or interest therein, and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver, mortgagee waiver,
bailee letter, or acknowledgement 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 Foothill.
3
<PAGE> 9
"Collections" means all cash, checks, notes, instruments, and other
items of payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds).
"Compliance Certificate" means a certificate substantially in the form
of Exhibit C-1 and delivered by the chief financial officer of Borrower to
Foothill.
"Daily Balance" means the amount of an Obligation owed at the end of a
given day.
"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.
"Designated Account" means account number 1463-9-01514 of Borrower
maintained with Borrower's Designated Account Bank, or such other deposit
account of Borrower (located within the United States) that has been designated,
in writing and from time to time, by Borrower to Foothill.
"Designated Account Bank" means Bank of America, whose office is located
at 15625 E. Stafford Street, La Puente, CA 91744 , and whose ABA number is
121000358.
"Dilution" means, in each case based upon the experience of the
immediately prior 12 months, the result of dividing the Dollar amount of (a) bad
debt write-downs, discounts, advertising, returns, promotions, credits, or other
dilution with respect to the Accounts, by (b) Borrower's 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 Foothill's advance rate against Eligible Accounts by one
percentage point for each percentage point by which Dilution is in excess of 3%
"Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Foothill regarding the extensions of credit to be made
on the Closing Date, the form and substance of which shall be satisfactory to
Foothill.
"Dollars or $" means United States dollars.
"Early Termination Premium" means (a) unless this Agreement is
terminated by Borrower and the Obligations repaid in full by Borrower because of
the Early Termination Premium Exception and while the Early Termination Premium
Exception continues to exist, the Applicable Percentage of the Maximum Amount;
and (b) if this Agreement is terminated by Borrower and the Obligations repaid
in full by Borrower because of the Early Termination Premium Exception and while
the Early Termination Premium Exception continues to exist, zero Dollars.
4
<PAGE> 10
the "Early Termination Premium Exception" shall exist if Foothill ceases
to hold at least a majority of the outstanding Obligations and commitments
hereunder without the prior written consent of Borrower; provided that the Early
Termination Premium Exception shall cease to exist at the end of the day that is
90 days after the earliest date that Borrower has been notified that Foothill
has ceased to hold at least 51% of the outstanding Obligations and commitments
hereunder without the prior written consent of Borrower.
"EBITDA" means earnings before deduction of interest expense, taxes,
depreciation, and amortization, determined in accordance with GAAP.
"Eligible Accounts" means Eligible Factored Accounts and Eligible House
Accounts.
"Eligible Factored Accounts" means Accounts that would be Eligible House
Accounts if they had been retained by Borrower and not sold to Factor. For
purposes of calculating the Borrowing Base, the amount of Eligible Factored
Accounts at any date of determination shall be deemed to be the balance then due
Borrower from Factor with respect thereto.
"Eligible House Accounts" means those Accounts (other than Factored
Accounts) created by Borrower in the ordinary course of business, that arise out
of Borrower's sale of goods or rendition of services, that strictly comply with
each and all of the representations and warranties respecting Accounts made by
Borrower to Foothill in the Loan Documents, and that are and at all times
continue to be reasonably acceptable to Foothill in all respects; provided,
however, that standards of eligibility may be fixed and revised from time to
time by Foothill in Foothill's reasonable credit judgment. Eligible House
Accounts shall not include the following:
(a) (i) Accounts that the Account Debtor has failed to pay within 150
days of invoice date; (ii) without duplication of the foregoing clause (i),
Accounts in excess of $750,000 in the aggregate that the Account Debtors have
failed to pay within 90 days of invoice date; or (iii) Accounts that remain
unpaid for 60 or more days after their due dates;
(b) Accounts owed by an Account Debtor or its Affiliates where 50% or
more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed
ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an employee,
Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the Account Debtor may be conditional;
5
<PAGE> 11
(e) Accounts that are not payable in Dollars or with respect
to which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Foothill (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Foothill and is directly
drawable by Foothill, or (z) the Account is covered by credit insurance in form
and amount, and by an insurer, satisfactory to Foothill;
(f) Accounts with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Foothill, 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);
(g) Accounts with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Account, provided that if
only a portion of an Account is disputed or is subject to a right of setoff or a
claim, or if the claim of the Account Debtor as a creditor of Borrower is less
than the amount of the Account, the unaffected portion of such Account as
determined by Foothill in its reasonable judgment shall not be excluded from
Eligible House Accounts under this clause (g) unless in the reasonable judgment
of Foothill the collectibility of the entire Account has become doubtful by
virtue of the dispute, asserted right of setoff, or claim;
(h) Accounts with respect to an Account Debtor whose total obligations
owing to Borrower exceed 10% of all Eligible Accounts, to the extent of the
obligations owing by such Account Debtor in excess of such percentage;
(i) Accounts with respect to which the Account Debtor is subject to any
Insolvency Proceeding, or ceases to be Solvent, or goes out of business;
(j) Accounts the collection of which Foothill, 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, 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, Indiana, or West Virginia (or any other state
that requires a
6
<PAGE> 12
creditor to file a Business Activity Report or similar document in order to
bring suit or otherwise enforce its remedies against such Account Debtor in the
courts or through any judicial process of such state), unless Borrower has
qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or
such other states, or has filed a Notice of Business Activities Report with the
applicable division of taxation, the department of revenue, or with such other
state offices, as appropriate, for the then-current year, or is exempt from such
filing requirement;
(m) Accounts that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services; and
(n) accounts arising out of the sale or lease of goods or the
rendition of services by any Person other than Borrower and acquired by Borrower
by assignment or purchase from such other Person (including pursuant to a
Permitted Acquisition), except to the extent that Foothill has completed an
audit or appraisal of such acquired assets and the results of such audit or
appraisal are satisfactory to Foothill.
"Eligible In-Transit Inventory" means those items of Inventory
that do not qualify as Eligible Not-In-Transit Inventory solely because they are
not in a location set forth on Schedule E-1 but: (a) such Inventory is currently
in-transit within the contiguous 48 States of the United States of America from
a location not set forth on Schedule E-1 to a location set forth on Schedule
E-1, (b) title to such Inventory has passed to Borrower, (c) documents of title
with respect to such Inventory have been delivered to Foothill or its agent; (d)
such Inventory is insured against types of loss, damage, hazards, and risks, and
in amounts, satisfactory to Foothill in its discretion, and (e) such Inventory
has been paid for or, if purchased under an Inventory Letter of Credit, such
Inventory Letter of Credit either has been drawn upon in full and reimbursed, or
expired undrawn; in each case, with documentation therefor in form and substance
reasonably satisfactory to Foothill in its discretion.
"Eligible Inventory" means the Eligible In-Transit Inventory and
the Eligible Not-In-Transit Inventory.
"Eligible Not-In-Transit Inventory" means Inventory consisting of
first quality finished goods consisting of swimwear, resortwear, or intimate
apparel, held for sale in the ordinary course of Borrower's business, and raw
materials for such finished goods, that are located at or in-transit between
Borrower's premises identified on Schedule E-1, that strictly comply with each
and all of the representations and warranties respecting Inventory made by
Borrower to Foothill in the Loan Documents, and that are and at all times
continue to be acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time to time by Foothill
in Foothill's reasonable credit judgment. In determining the amount to be so
included, Inventory shall be valued at standard cost on a
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<PAGE> 13
basis consistent with Borrower's current and historical accounting practices. An
item of Inventory shall not be included in Eligible Not-In-Transit Inventory if:
(a) it is not owned solely by Borrower or Borrower does not have
good, valid, and marketable title thereto;
(b) it is not located within the contiguous 48 States of the
United States of America at one of the locations set forth on Schedule E-1;
(c) it is not located on property owned or leased by 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 Foothill;
(e) it consists of goods returned or rejected by Borrower's
customers or goods in transit;
(f) it is branded under a license from a third party and there is
no consent letter satisfactory to Foothill in effect with such third party
licensor authorizing the use by Foothill of the applicable trademarks,
tradenames, or related property in connection with a disposition of such
Inventory (provided that if Foothill has accepted a consent letter from a third
party licensor Foothill shall not thereafter require different or additional
consents from such third party licensor unless the contracts between Borrower
and such third party licensor are changed and the different or additional
required consents pertain to such changes);
(g) it is obsolete or slow moving, a restrictive or custom item,
trim not incorporated into finished goods, work-in-process, a component that is
not part of finished goods, or constitutes spare parts, packaging and shipping
materials, supplies used or consumed in Borrower's 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
(h) it is inventory of any Person other than Borrower and
acquired by Borrower by assignment or purchase from such other Person (including
pursuant to a Permitted Acquisition), except to the extent that Foothill has
completed an audit or appraisal of such acquired assets and the results of such
audit or appraisal are satisfactory to Foothill.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any interest of Borrower in any of
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<PAGE> 14
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. Sections 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of 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 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 Borrower or its Subsidiaries or any of their ERISA
Affiliates.
"Event of Default" has the meaning set forth in Section 8.
"Excess Availability" means, at any time of determination, the
aggregate additional amount of Advances (giving effect to currently outstanding
Obligations) that Borrower then would be entitled to borrow under this
Agreement, minus the aggregate amount, if any, of all trade payables of Borrower
aged in excess of Borrower's historical levels with respect thereto and all book
overdrafts in excess of Borrower's historical practices with respect thereto, in
each case as determined by Foothill in its discretion.
"Existing Lender" means Heller Financial, Inc.
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<PAGE> 15
"Factor" means Heller Financial, Inc., acting in the capacity of
a factor purchasing Accounts from Borrower, or any replacement factor acting in
such capacity that has entered into an intercreditor agreement or similar
agreement with Foothill that is acceptable to Foothill (and which intercreditor
agreement or similar agreement will be acceptable if it is on substantially the
same terms as the Intercreditor Agreement).
"Factored Account" means an Account that is sold by Borrower to
Factor.
"Factoring Agreement" means that certain Amended and Restated
Collection Date Factoring Agreement, dated as of April 21, 1999, between
Borrower and Factor.
"Family Member" means, with respect to any individual, any other
individual having a relationship by blood (to the second degree of
consanguinity), marriage, or adoption to such individual.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Account" has the meaning set forth in Section 2.7.
"Foothill Expenses" means all: costs or expenses (including
taxes, and insurance premiums) required to be paid by Borrower under any of the
Loan Documents that are paid or incurred by Foothill; fees or charges paid or
incurred by Foothill in connection with Foothill's transactions with Borrower,
including, fees or 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, if there should be any Real
Property Collateral), real estate surveys, real estate title policies and
endorsements, and environmental audits; costs and expenses incurred by Foothill
in the disbursement of funds to Borrower (by wire transfer or otherwise);
charges paid or incurred by Foothill resulting from the dishonor of checks;
costs and expenses paid or incurred by Foothill to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Personal Property Collateral or any Real
Property Collateral, or any portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by Foothill in examining
Borrower's Books; costs and expenses of third party claims or any other suit
paid or incurred by Foothill in enforcing or defending the Loan Documents or in
connection with the transactions contemplated by the Loan Documents or
Foothill's relationship with Borrower or any guarantor; and Foothill's
reasonable attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing (including
attorneys fees and expenses incurred in connection with a "workout," a
"restructuring," or an
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<PAGE> 16
Insolvency Proceeding concerning Borrower or any guarantor of the Obligations),
defending, or concerning the Loan Documents, irrespective of whether suit is
brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, 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 (including Inventory, machinery, and Equipment),
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 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.
"Hedinger Related Parties" means Mr. Howard Hedinger, his Family
Members, and the Hedinger Family Trusts.
"Hedinger Family Trusts" means trusts or other estate planning
vehicles established for the benefit of Family Members of Mr. Howard Hedinger
and in respect of which Mr. Howard Hedinger serves as trustee or in a similar
capacity.
"Indebtedness" means: (a) all obligations of Borrower for
borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
of Borrower in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of Borrower under
capital leases, (d) all obligations or liabilities of others secured by a Lien
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<PAGE> 17
on any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of Borrower guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person.
"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.
"Intercreditor Agreement" means an Assignment of Monies Due Under
Factoring Agreement, in form and substance satisfactory to Foothill, among
Borrower, Foothill, and Factor.
"Interest Period" means, with respect to each LIBOR Rate Advance,
a period commencing on the date of the making of such LIBOR Rate Advance and
ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest
Period would end on a day that is not a Business Day, such Interest Period shall
be extended (subject to clauses (c)-(e) below) to the next succeeding Business
Day, (b) interest shall accrue from and including the first day of each Interest
Period to, but excluding, the day on which any Interest Period expires, (c) any
Interest Period that would end on a day that is not a Business Day shall be
extended to the next succeeding Business Day unless such Business Day falls in
another calendar month, in which case such Interest Period shall on the next
preceding Business Day, (d) with respect to an Interest Period that begins on
the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period), the Interest Period shall end on the last Business Day of the calendar
month that is 1, 2, or 3 months after the date on which the Interest Period
began, as applicable, and (e) Borrower may not elect an Interest Period which
will end after the Maturity Date.
"Inventory" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"Inventory Advance Percentage" means (a) 30% with respect to raw
materials during March through August, inclusive, (b) 50% with respect to raw
materials during September through February, inclusive, (c) 50% with respect to
finished goods during May through September, inclusive, and (d) 65% with respect
to finished goods during October through April, inclusive.
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"Inventory Letter of Credit" means a documentary Letter of Credit
issued to support the purchase by Borrower of Inventory prior to transit to a
location set forth on Schedule E-1, that provides that all draws thereunder must
require presentation of customary documentation (including, if applicable,
commercial invoices, packing list, certificate of origin, bill of lading or
airwaybill, customs clearance documents, quota statement, inspection
certificate, beneficiaries statement, and bill of exchange, bills of lading,
dock warrants, dock receipts, warehouse receipts, or other documents of title)
in form and substance reasonably satisfactory to Foothill and reflecting the
passage to Borrower of title to first quality Inventory conforming to Borrower's
contract with the seller thereof. Any such Letter of Credit shall cease to be an
"Inventory Letter of Credit" at such time, if any, as the goods purchased
thereunder become Eligible Not-In-Transit Inventory.
"Inventory Letter of Credit Usage" means the sum of (a) the
undrawn amount of outstanding Inventory Letters of Credit, plus (b) the amount
of unreimbursed drawings under Inventory Letters of Credit.
"Inventory Reserves" means reserves (determined from time to time
by Foothill 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 In-Transit
Inventory by Borrower, plus (b) the estimated reclamation claims of unpaid
sellers of Inventory sold to Borrower, plus (c) past due royalty amounts, if any
(including past due prepayments of royalties, if any, to the extent that any
license agreement requires such royalties to be prepaid), due licensors with
respect to license agreements with third parties under which Borrower
manufactures or sells Inventory.
"Inverse Percentage" means, on any date of determination, with
respect to any Inventory Letter of Credit, the percentage rate equal to 100%
minus the Inventory Advance Percentage then applicable with respect to the
Inventory that is the subject of such Inventory Letter of Credit.
"Investment Property" means "investment property" as that term is
defined in Section 9115 of the Code.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Letter of Credit" means an L/C or an L/C Guaranty, as the
context requires.
"Letter of Credit Usage" means, as of the date of determination,
the sum of (a) the undrawn amount of outstanding Letters of Credit plus (b) the
amount of unreimbursed drawings under Letters of Credit.
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"LIBOR Notice" means a written notice in the form of Exhibit L-1
attached hereto.
"LIBOR Rate" means, for each Interest Period for each LIBOR Rate
Advance, the rate per annum (rounded upwards, if necessary, to the next 1/16%)
determined by dividing (a) the Base LIBOR Rate for such Interest Period, by (b)
100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of
the effective day of any change in the Reserve Percentage.
"LIBOR Rate Advance" means each Advance, or portion thereof,
bearing interest at a rate determined by reference to the LIBOR Rate.
"Licensor Consents" means written consents from third parties
that have granted licenses to Borrower with respect to the manufacture and sale
of branded Inventory, in form and substance reasonably satisfactory to Foothill,
acknowledging Foothill's security interest and providing for Foothill's ability
to dispose of Inventory manufactured under such licenses upon the occurrence and
during the continuance of an Event of Default.
"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.
"Liquidation Percentage" means the percentage of book value
estimated to be recoverable in an orderly liquidation of the Inventory, such
percentage to be as determined by a qualified auctioneering or appraisal company
selected by Foothill.
"Loan Account" has the meaning set forth in Section 2.10.
"Loan Documents" means this Agreement, the Disbursement Letter,
the Letters of Credit, any Mortgages (if any), the Trademark Security Agreement,
the Lockbox Agreements, Borrower's acknowledgement and consent to the
Intercreditor Agreement, any note or notes executed by Borrower and payable to
Foothill, and any other agreement entered into, now or in the future, in
connection with this Agreement.
"Lockbox Account" shall mean a depositary account established
pursuant to one of the Lockbox Agreements.
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<PAGE> 20
"Lockbox Agreements" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Foothill, each of which is among Borrower,
Foothill, and one of the Lockbox Banks.
"Lockbox Banks" means Wells Fargo Bank, National Association.
"Lockboxes" has the meaning set forth in Section 2.7.
"Material Adverse Change" means (a) a material adverse change
since the Closing Date (except to the extent that the use of such term in
context requires the existence or non-existence of a Material Adverse Change to
be measured from a different date, in which case such existence or non-existence
shall be measured from such other date as is appropriate in the context of the
usage of such term) in the business, prospects, operations, results of
operations, assets, liabilities or condition (financial or otherwise) of
Borrower, (b) the material impairment since the Closing Date (except to the
extent that the use of such term in context requires the existence or
non-existence of a Material Adverse Change to be measured from a different date,
in which case such existence or non-existence shall be measured from such other
date as is appropriate in the context of the usage of such term) of Borrower's
ability to perform its obligations under the Loan Documents to which it is a
party or of Foothill to enforce the Obligations or realize upon the Collateral,
(c) a material adverse effect since the Closing Date (except to the extent that
the use of such term in context requires the existence or non-existence of a
Material Adverse Change to be measured from a different date, in which case such
existence or non-existence shall be measured from such other date as is
appropriate in the context of the usage of such term) on the value of the
Collateral or the amount that Foothill would be likely to receive (after giving
consideration to delays in payment and costs of enforcement) in the liquidation
of such Collateral, or (d) a material impairment since the Closing Date (except
to the extent that the use of such term in context requires the existence or
non-existence of a Material Adverse Change to be measured from a different date,
in which case such existence or non-existence shall be measured from such other
date as is appropriate in the context of the usage of such term) of the priority
of Foothill's Liens with respect to the Collateral.
"Maturity Date" has the meaning set forth in Section 3.4.
"Maximum Amount" means $32,000,000.
"Mortgages" means one or more mortgages, deeds of trust, or deeds
to secure debt, if any, executed by Borrower in favor of Foothill, the form and
substance of which shall be satisfactory to Foothill, that encumber any Real
Property Collateral and the related improvements thereto.
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<PAGE> 21
"Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.
"Negotiable Collateral" means all of a Person's present and
future letters of credit, notes, drafts, instruments, Investment Property,
documents, personal property leases (wherein such Person is the lessor), chattel
paper, and Books relating to any of the foregoing.
"Newman Related Parties" means Mr. Maurice Newman, his Family
Members, and the Newman Family Trusts.
"Newman Family Trusts" means trusts or other estate planning
vehicles established for the benefit of Family Members of Mr. Maurice Newman and
in respect of which Mr. Maurice Newman serves as trustee or in a similar
capacity.
"Obligations" means all loans (including the Term Loan),
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 Borrower's
Loan Account pursuant hereto), obligations, fees, charges, costs, or Foothill
Expenses (including any fees or expenses that, but for the provisions of the
Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and
duties owing by Borrower to Foothill of any kind and description (whether
pursuant to or evidenced by the Loan Documents or pursuant to any other
agreement between Foothill and Borrower, and irrespective of whether for the
payment of money), whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to others that Foothill may have
obtained by assignment or otherwise, and further including all interest not paid
when due and all Foothill Expenses that Borrower is required to pay or reimburse
by the Loan Documents, by law, or otherwise.
"OLV Percentage" means 80% as of any date of determination
occurring during any period from May 1 through September 30, inclusive, of any
year, and 90% as of any other date of determination.
"Overadvance" has the meaning set forth in Section 2.5.
"Participant" means any Person to which Foothill has sold a
participation interest in its rights under the Loan Documents.
"Pay-Off Letter" means a letter, in form and substance reasonably
satisfactory to Foothill, from Existing Lender respecting the amount necessary
to repay in full all of the obligations of Borrower owing to Existing Lender
(other than obligations with respect to ongoing factoring of Factored Accounts
to Existing Lender in its capacity as Factor, pursuant
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<PAGE> 22
to factoring arrangements whereby Factor is purchasing Factored Accounts and is
not extending credit to Borrower or making loans or advances to Borrower) 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 Borrower (other than the
continuing rights of Factor with respect to Factored Accounts permitted to exist
under the Intercreditor Agreement).
"PBGC" means the Pension Benefit Guaranty Corporation as defined
in Title IV of ERISA, or any successor thereto.
"Permitted Acquisition" means an acquisition by Borrower of
another Person, or of the assets or a line of business of another Person, that
(a) would not result in a violation of Section 7.7, (b) is financed with the
proceeds of post-Closing Date equity capital investments or contributions or
Permitted Subordinated Indebtedness, and (c) has been approved in advance in
writing by Foothill.
"Permitted Investor" means (a) the Newman Related Parties, or (b)
the Hedinger Related Parties.
"Permitted Liens" means (a) Liens held by Foothill, (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) (i) the
interests of lessors under operating leases, and (ii) purchase money Liens and
the interests of lessors under capital leases to the extent that the acquisition
or lease of the underlying asset is permitted under Section 7.21 and so long as
the Lien only attaches to the asset purchased or acquired and only secures the
purchase price of the asset, (e) Liens arising by operation of law in favor of
warehousemen, landlords, carriers, mechanics, materialmen, laborers, or
suppliers, incurred in the ordinary course of business of Borrower and not in
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
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 Borrower and not in
connection with the borrowing of money, (h) Liens arising by reason of security
for surety or appeal bonds in the ordinary course of business of Borrower, (i)
Liens of or resulting from any judgment or award that reasonably could not be
expected to result in a Material Adverse Change and as to which the time for the
appeal or petition for rehearing of which has not yet expired, or in respect of
which Borrower is in good faith prosecuting an appeal or proceeding for a review
and in respect of which a stay of execution pending such appeal or proceeding
for review has been secured, (j) Liens with respect to any Real Property
Collateral that are exceptions to any commitments for title insurance issued in
connection with any Mortgages, as accepted by Foothill, (k) with respect to any
Real Property that is not part of any 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
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<PAGE> 23
Collateral by Borrower or the value of Foothill's Lien thereon or therein, or
materially interfere with the ordinary conduct of the business of Borrower, and
(l) Liens on Factored Accounts in favor of Factor governed by the Intercreditor
Agreement.
"Permitted Protest" means the right of Borrower to protest any
(i) Lien other than any such Lien that secures the Obligations, (ii) tax (other
than payroll taxes or taxes that are the subject of a United States federal tax
lien), or (iii) rental payment, provided that (a) a reserve with respect to such
obligation is established on the books of Borrower in an amount that is
reasonably satisfactory to Foothill (provided that reserves established in
accordance with GAAP shall be satisfactory to Foothill unless Foothill expresses
to Borrower a reasonable basis for requiring greater reserves), (b) any such
protest is instituted and diligently prosecuted by Borrower in good faith, and
(c) Foothill 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 Foothill in and to the Collateral.
"Permitted Subordinated Indebtedness" means Indebtedness of
Borrower that is unsecured, the terms of which have been approved by Foothill,
and that is subordinated in right of payment to the Obligations pursuant to the
terms of a written subordination agreement that is satisfactory in form and
substance to Foothill.
"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
any Real Property Collateral.
"Plan" means any employee benefit plan, program, or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability.
"Real Property" means any estates or interests in real property
now owned or hereafter acquired by Borrower.
"Real Property Collateral" means any parcel or parcels of real
property and the related improvements thereto identified on Schedule R-1, and
any Real Property hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest, per annum,
most recently announced by Wells Fargo Bank, N.A., or any successor thereto, as
its "prime rate" or "base rate," irrespective of whether such announced rate is
the best rate available from such financial institution.
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<PAGE> 24
"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.
"Reserve Percentage" means, on any day, that percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor governmental authority) for determining the reserve requirements
(including any basic, supplemental, marginal, or emergency reserves) that is in
effect on such date with respect to deposits of Dollars in a non-United States
or an international banking office of a bank used to fund a LIBOR Rate Advance.
"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.
"Royalties Reserve" means, as of any date of determination, a
reserve in an amount equal to the sum of: (a) the aggregate amount of royalties
payable by Borrower in respect of Borrower's then extant Inventory to all third
parties that have granted licenses to Borrower with respect to the manufacture
and sale of branded Inventory; and (b) the aggregate amount of all delinquent
payments or delinquent required prepayments of royalties then due and owing by
Borrower to all third parties that have granted licenses to Borrower with
respect to the manufacture and sale of branded Inventory.
"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.
"Stock" means all shares, options, warrants, interests,
participations, or other equivalents (regardless of how designated) of or in a
corporation or equivalent entity, whether voting or nonvoting, including common
stock, preferred stock, or any other "equity
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security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the SEC under the Exchange Act).
"Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of Stock having ordinary voting power to
elect a majority of the board of directors (or appoint other comparable
managers) of such corporation, partnership, limited liability company, or other
entity.
"Tangible Net Worth" means, as of any date of determination, the
result of (a) Borrower's total stockholder's equity, plus, (b) Permitted
Subordinated Indebtedness, minus (c) the sum of: (i) all Intangible Assets of
Borrower, (ii) all of Borrower's prepaid expenses, and (iii) all amounts due to
Borrower from Affiliates.
"Term Loan" has the meaning set forth in Section 2.4.
"Term Loan Balance" means, as of any date of determination, the
unpaid principal balance of the Term Loan.
"Trademark Security Agreement" means that certain Trademark
Security Agreement of even date herewith between Foothill and Borrower in form
and substance satisfaction to Foothill.
"Voidable Transfer" has the meaning set forth in Section 15.8.
"Warrants" means immediately exercisable written warrants,
exercisable for five years, to acquire up to 50,000 shares of common stock of
Borrower (subject to adjustment to prevent dilution) for an exercise price equal
to the closing price per share of Borrower's publicly traded common stock on the
Closing Date, containing terms, conditions, and provisions satisfactory to
Foothill, including registration rights under certain conditions.
"Year 2000 Compliant" means, with regard to any Person, that all
software in goods produced or sold by, or utilized by and material to the
business operations or financial condition of, such Person are able to interpret
and manipulate data on and involving all calendar dates correctly and without
causing any abnormal ending scenario, including in relation to dates on and
after the year 2000.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower on a consolidated
basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
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1.4 CONSTRUCTION. Unless the context of this Agreement 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
Foothill. Section, subsection, clause, schedule, and exhibit references are to
this Agreement unless otherwise specified. Any reference in this Agreement or in
the Loan Documents to this Agreement or any of the Loan Documents shall include
all alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements, thereto and thereof, as
applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached
to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an amount
outstanding not to exceed at any one time the lesser of (i) the Maximum Amount,
less (A) the Term Loan Balance, less (B) the Letter of Credit Usage, or (ii) the
Borrowing Base less (A) the Letter of Credit Usage (exclusive of Inventory
Letter of Credit Usage), less (B) the Inverse Percentage of the Inventory Letter
of Credit Usage (determined separately for each Inventory Letter of Credit, and
then aggregated, in the event that more than one Inverse Percentage is then
applicable), less (C) the aggregate amount of the Inventory Reserves. For
purposes of this Agreement, "Borrowing Base", as of any date of determination,
shall mean the result of:
(x) the Accounts Advance Percentage times Eligible Accounts
(determined separately for Eligible House Accounts and Eligible Factored
Accounts, and then aggregated), less the amount, if any, of the Dilution
Reserve, and provided that the portion of the foregoing amount
attributable to House Accounts shall not exceed $750,000, plus
(y) the lowest of (i) $14,000,000, (ii) the Inventory Advance
Percentage times the value of Eligible Inventory (determined separately
for different types of Inventory to the extent they bear different
Inventory Advance Percentages, and then aggregated), and (iii) the OLV
Percentage times the Liquidation Percentage times the book value of the
Eligible Inventory, minus
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(z) (i) the Royalties Reserve, and (ii) the aggregate amount of
reserves, if any, established by Foothill under Section 2.1(b).
(b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce its advance
rates based upon Eligible Accounts or Eligible Inventory without declaring an
Event of Default if it determines that there has occurred a Material Adverse
Change.
(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.
2.2 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue letters of credit for the account of 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
Borrower. Foothill shall have no obligation to issue a Letter of Credit if
either of the following would result:
(i) the sum of the Inverse Percentage of the Inventory Letter of
Credit Usage (determined separately for each Inventory Letter of Credit,
and then aggregated, in the event that more than one Inverse Percentage
is then applicable) plus 100% of the Letter of Credit Usage (exclusive
of Inventory Letter of Credit Usage), would exceed the Borrowing Base
less the amount of outstanding Advances less the aggregate amount of
Inventory Reserves and reserves established under Section 2.1(b); or
(ii) the aggregate amount of all undrawn or unreimbursed Letters
of Credit (including Inventory Letters of Credit) would exceed the lower
of: (x) the Maximum Amount, less the amount of outstanding Advances,
less the Term Loan Balance, less the aggregate amount of Inventory
Reserves and reserves established under Section 2.1(b); or (y)
$1,000,000.
Borrower expressly understands and agrees that Foothill shall have no obligation
to arrange for the issuance by issuing banks of the letters of credit that are
to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and agree
that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have an expiry date no later than 90 days prior to the date on which this
Agreement is scheduled to terminate under Section 3.4 (without regard to any
potential renewal term) and all such Letters of Credit shall be in form and
substance acceptable to Foothill in its sole discretion. If Foothill is
obligated to advance funds under a Letter of
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Credit, Borrower immediately shall reimburse such amount to Foothill 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 2.6.
(b) Borrower hereby agrees to indemnify, save, defend, and hold
Foothill harmless from any loss, cost, expense, or liability, including payments
made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill
arising out of or in connection with any Letter of Credit. Borrower agrees to be
bound by the issuing bank's regulations and interpretations of any Letters of
Credit guarantied by Foothill and opened to or for Borrower's account or by
Foothill's interpretations of any L/C issued by Foothill to or for Borrower's
account, even though this interpretation may be different from Borrower's own,
and Borrower understands and agrees that Foothill shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letter of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that the
L/C Guarantees may require Foothill to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify, save, defend, and hold Foothill
harmless with respect to any loss, cost, expense (including reasonable attorneys
fees), or liability incurred by Foothill under any L/C Guaranty as a result of
Foothill's indemnification of any such issuing bank.
(c) Borrower hereby authorizes and directs any bank that issues a
letter of credit guaranteed by Foothill to deliver to Foothill all instruments,
documents, and other writings and property received by the issuing bank pursuant
to such letter of credit, and to accept and rely upon Foothill's instructions
and agreements with respect to all matters arising in connection with such
letter of credit and the related application. Borrower may or may not be the
"applicant" or "account party" with respect to such letter of credit.
(d) Any and all charges, commissions, fees, and costs incurred by
Foothill relating to the letters of credit guaranteed by Foothill shall be
considered Foothill Expenses for purposes of this Agreement and immediately
shall be reimbursable by Borrower to Foothill.
(e) Immediately upon the termination of this Agreement, Borrower
agrees to either (i) provide cash collateral to be held by Foothill in an amount
equal to 105% of the maximum amount of Foothill's obligations under Letters of
Credit, or (ii) cause to be delivered to Foothill releases of all of Foothill's
obligations under outstanding Letters of Credit. At Foothill's discretion, any
proceeds of Collateral received by Foothill after the occurrence and during the
continuation of an Event of Default may be held as the cash collateral required
by this Section 2.2(e).
(f) 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
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any such applicable law, treaty, rule, or regulation, or (ii) compliance by the
issuing bank or Foothill with any direction, request, or requirement
(irrespective of whether having the force of law) of any governmental authority
or monetary authority including, without limitation, Regulation D of the Board
of Governors of the Federal Reserve System as from time to time in effect (and
any successor thereto):
(A) any reserve, deposit, or similar requirement is or shall be
imposed or modified in respect of any Letters of Credit issued
hereunder, or
(B) there shall be imposed on the issuing bank or Foothill 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 Foothill 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 Foothill, then, and
in any such case, Foothill may, at any time within a reasonable period after the
additional cost is incurred or the amount received is reduced, notify Borrower,
and Borrower shall pay on demand such amounts as the issuing bank or Foothill
may specify to be necessary to compensate the issuing bank or Foothill for such
additional cost or reduced receipt, together with interest on such amount from
the date of such demand until payment in full thereof at the rate set forth in
Section 2.6(a)(i) or (c)(i), as applicable. The determination by the issuing
bank or Foothill, 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.
2.3 LIBOR OPTION.
(a) INTEREST AND INTEREST PAYMENT DATES. In lieu of having
interest charged at the rate based upon the Reference Rate, Borrower shall have
the option (the "LIBOR Option") to have interest on a portion of the Advances be
charged at the LIBOR Rate. Interest on LIBOR Rate Advances shall be payable on
the last day of each month and on the last day of each Interest Period
applicable thereto. On the last day of each applicable Interest Period, unless
Borrower has properly exercised the LIBOR Option with respect thereto, the
interest rate applicable to such LIBOR Rate Advances automatically shall convert
to the rate of interest then applicable to non-LIBOR Rate Advances under Section
2.6 hereof. At any time that an Event of Default has occurred and is continuing,
Foothill shall have the right to convert the interest rate on all outstanding
LIBOR Rate Advances to the rate then applicable to non-LIBOR Rate Advances under
Section 2.6 hereof.
(b) LIBOR ELECTION.
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(i) Borrower may, at any time and from time to time, so
long as no Event of Default has occurred and is continuing,
elect to exercise the LIBOR Option by notifying Foothill prior
to 11:00 a.m. (California time) at least 2 Business Days prior
to the commencement of the proposed Interest Period (the "LIBOR
Deadline"). Notice of Borrower's election of the LIBOR Option
for a permitted portion of the Advances and an Interest Period
pursuant to this Section shall be made by delivery to Foothill
of a LIBOR Notice received by Foothill before the LIBOR
Deadline, or by telephonic notice received by Foothill before
the LIBOR Deadline (to be confirmed by delivery to Foothill of a
LIBOR Notice received by Foothill prior to 5:00 p.m. (California
time) on the same day; provided, however, that Borrower's
failure to deliver such confirming ------- LIBOR Notice shall
not affect the applicability of such rate if Borrower's election
is implemented by Foothill.
(ii) Each LIBOR Notice shall be irrevocable and binding
on Borrower. In connection with each LIBOR Rate Advance,
Borrower shall indemnify, defend, and hold Foothill harmless
against any loss, cost, or expense incurred by Foothill as a
result of any failure to fulfill, on or before the date
specified in the LIBOR Notice, the applicable conditions set
forth herein or the termination, prior to the end of the
applicable Interest Period, of the applicability of interest at
the LIBOR Rate, as provided hereunder, including any loss
(including loss of anticipated profits), cost, or expense
incurred by reason of the liquidation or reemployment of
deposits or other funds acquired or committed to be acquired by
Foothill or its Participants to fund the requested LIBOR Rate
Advances that, as a result of such failure, are not so employed
on such date (such losses, costs, and expenses, collectively,
"Funding Losses").
(iii) Borrower shall have not more than 5 Interest
Periods in effect at any given time. Borrower only may exercise
the LIBOR Option for LIBOR Rate Advances of at least $1,000,000
and integral multiples of $500,000 in excess thereof.
(c) PREPAYMENTS. Borrower may prepay LIBOR Rate Advances at any
time; provided, however, that in the event that Advances are prepaid on any date
that is not the last day of the Interest Period applicable thereto, including as
a result of any automatic prepayment through the required application by
Foothill of proceeds of Collections or for any other reason, including early
termination of the term of this Agreement or acceleration of the Obligations
pursuant to the terms hereof, Borrower shall indemnify,
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defend, and hold Foothill and its Participants harmless against any and all
Funding Losses that arise in connection with such prepayment.
(d) SPECIAL PROVISIONS APPLICABLE TO LIBOR RATE.
(i) The LIBOR Rate may be adjusted by Foothill on a
prospective basis to take into account any additional or
increased costs to Foothill of maintaining or obtaining any
eurodollar deposits or increased costs due to changes in
applicable law occurring subsequent to the commencement of the
then applicable Interest Period, including but not limited to
changes in tax laws (except changes of general applicability in
corporate income tax laws) and changes in the reserve
requirements imposed by the Board of Governors of the Federal
Reserve System (or any successor), excluding the Reserve
Percentage, which additional or increased costs would increase
the cost of funding loans bearing interest at the LIBOR Rate.
Foothill shall give Borrower notice of such a determination and
adjustment and Borrower may, by notice to Foothill (y) require
Foothill to furnish to Borrower a statement setting forth the
basis for adjusting such LIBOR Rate and the method for
determining the amount of such adjustment, or (z) repay the
LIBOR Rate Advances with respect to which such adjustment is
made.
(ii) In the event that any change in market conditions
or any law, regulation, treaty, or directive, or any change
therein or in the interpretation of application thereof, shall
at any time after the date hereof, in the reasonable opinion of
Foothill, make it unlawful or impractical for Foothill to fund
or maintain LIBOR Advances or to continue such funding or
maintaining, or to determine or charge interest rates at the
LIBOR Rate, Foothill shall give notice of such changed
circumstances to the Borrower and (y) in the case of any LIBOR
Rate Advances that are outstanding, the date specified in
Foothill's notice shall be deemed to be the last day of the
Interest Period of such LIBOR Rate Advances, and interest upon
the LIBOR Advances then outstanding shall thereafter accrue as
provided in Section 1.3 hereof, and (z) Borrower shall not be
entitled to elect the LIBOR Option until Foothill determines
that it would no longer be unlawful or impractical to do so.
(e) NO REQUIREMENT OF MATCHED FUNDING. Anything to the contrary
contained herein notwithstanding, neither Foothill nor any Participant is
required actually to acquire eurodollar deposits to fund or otherwise match fund
any Advances as to which interest accrues at the LIBOR Rate. The provisions of
this Section shall apply as if Foothill or its Participants had match funded any
Advances as to which interest is accruing at the
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LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the
amount of the LIBOR Rate Advances.
2.4 TERM LOAN. Foothill has agreed to make a term loan (the "Term Loan")
to Borrower in the original principal amount of $3,000,000. The Term Loan
Balance shall be repaid as follows: (a) $1,000,000 thereof shall be due and
payable on July 1, 1999; and (b) the remaining $2,000,000 thereof shall be due
and payable in 12 installments of principal in the amount of $166,667 each
(except that the last such installment shall not exceed the remaining Term Loan
Balance then outstanding), due and payable on the first day of each month
commencing on the first day of August, 1999, and continuing on the first day of
each succeeding month until and including the date on which the Term Loan
Balance is paid in full. The outstanding principal balance and all accrued and
unpaid interest under the Term Loan shall be due and payable upon the
termination of this Agreement, whether by its terms, by prepayment, by
acceleration, or otherwise. The Term Loan Balance may be prepaid in whole or in
part without penalty or premium at any time during the term of this Agreement
upon 10 days prior written notice by Borrower to Foothill, all such prepaid
amounts to be applied to the installments due on the Term Loan in the inverse
order of their maturity. All amounts outstanding under the Term Loan shall
constitute Obligations.
2.5 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 is
greater than either the Dollar or percentage limitations set forth in Sections
2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in
cash, the amount of such excess to be used by Foothill first, to repay Advances
outstanding under Section 2.1 and, thereafter, to be held by Foothill as cash
collateral to secure Borrower's obligation to repay Foothill for all amounts
paid pursuant to Letters of Credit.
2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS.
(a) Interest Rate. Except as otherwise provided in clause (c)
below, all Obligations (other than the Term Loan Balance) that are chargeable to
the Loan Account pursuant to the terms hereof shall bear interest on the Daily
Balance thereof as follows: (i) if a LIBOR Rate Advance, at a per annum rate of
3.00 percentage points above the LIBOR Rate, and (ii) otherwise, at a per annum
rate of 0.25 percentage points above the Reference Rate. Except as otherwise
provided in clause (c) below, the Term Loan balance shall bear interest on the
Daily Balance thereof at a per annum rate of 12.00%.
(b) Letter of Credit Fee. Borrower shall pay Foothill a fee (in
addition to the charges, commissions, fees, and costs set forth in Section
2.2(d)) equal to 1.50% per annum times the aggregate undrawn amount of all
outstanding Letters of Credit.
(c) Default Rate. Upon the occurrence and during the continuation
of an Event of Default, all Obligations that are chargeable to the Loan Account
pursuant to the
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terms hereof shall bear interest on the Daily Balance thereof at a per annum
rate equal to 3.00 percentage points above the rate otherwise applicable
thereto, and (ii) the Letter of Credit fee provided in Section 2.6(b) shall be
increased to 3.00% per annum times the amount of the undrawn Letters of Credit
that were outstanding during the immediately preceding month.
(d) Minimum Interest. In no event shall the rate of interest
chargeable hereunder for any day be less than 7.00% 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.
(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. Borrower hereby authorizes Foothill, at its option,
without prior notice to Borrower, to charge such interest and Letter of Credit
fees, all Foothill Expenses (as and when incurred), the 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 2.11 (as and when
accrued or incurred), and all installments or other payments due under the Term
Loan or otherwise due under any Loan Document to Borrower's Loan Account, which
amounts thereafter shall accrue interest at the rate then applicable to
non-LIBOR Rate Advances hereunder. Any interest not paid when due shall be
compounded and shall thereafter accrue interest at the rate then applicable to
non-LIBOR Rate Advances hereunder.
(f) Computation. The Reference Rate as of the date of this
Agreement is 7.75% per annum. 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. 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.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no event
shall the interest rate or rates payable under this Agreement, plus any other
amounts paid in connection herewith, exceed the highest rate permissible under
any law that a court of competent jurisdiction shall, in a final determination,
deem applicable. Borrower and Foothill, in executing and delivering this
Agreement, intend legally to agree upon the rate or rates of interest and manner
of payment stated within it; provided, however, that, anything contained herein
to the contrary notwithstanding, if said rate or rates of interest or manner of
payment exceeds the maximum allowable under applicable law, then, ipso facto as
of the date of this Agreement, Borrower is and shall be liable only for the
payment of such maximum as allowed by law, and payment received from Borrower in
excess of such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.
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2.7 COLLECTION OF ACCOUNTS. Borrower shall at all times maintain
lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall
instruct all Account Debtors (other than Account Debtors with respect to
Factored Accounts that are obligated to make payment to Factor) with respect to
the Accounts, General Intangibles, and Negotiable Collateral of Borrower (and
Factor, with respect to any balances due from Factor to Borrower) to remit all
Collections in respect thereof to such Lockboxes. Borrower, Foothill, and the
Lockbox Banks shall enter into the Lockbox Agreements, which among other things
shall provide for the opening of a Lockbox Account for the deposit of
Collections at a Lockbox Bank. Borrower agrees that all Collections and other
amounts received by Borrower from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account, or, in the
case of Collections received from Factor, transmitted directly by Factor to the
deposit account of Foothill specified by Foothill to Factor pursuant to the
Intercreditor Agreement. No Lockbox Agreement or arrangement contemplated
thereby shall be modified by Borrower without the prior written consent of
Foothill. Upon the terms and subject to the conditions set forth in the Lockbox
Agreements, all amounts received in each Lockbox Account shall be wired each
Business Day into an account (the "Foothill Account") maintained by Foothill at
a depositary selected by Foothill.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
Collections by Foothill (whether from transfers to Foothill by Factor pursuant
to the Intercreditor Agreement, by the Lockbox Banks pursuant to the Lockbox
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 Foothill Account or unless and until
such Collection item is honored when presented for payment. From and after the
Closing Date, Foothill shall be entitled to charge Borrower for one Business Day
of `clearance' or `float' at the non-LIBOR Rate Advance rate set forth in
Section 2.6(a) or Section 2.6(c), as applicable, on all Collections that are
received by Foothill (regardless of whether forwarded by Factor or the Lockbox
Banks to Foothill, whether provisionally applied to reduce the Obligations under
Section 2.1, or otherwise). This across-the-board one Business Day clearance or
float charge on all Collections is acknowledged by the parties to constitute an
integral aspect of the pricing of Foothill's financing of Borrower, and shall
apply irrespective of the characterization of whether receipts are owned by
Borrower or Foothill, and whether or not there are any outstanding Advances, the
effect of such clearance or float charge being the equivalent of charging one
Business Day of interest on such Collections. Should any Collection item not be
honored when presented for payment, then Borrower shall be deemed not to have
made such payment, and interest shall be recalculated accordingly. Anything to
the contrary contained herein notwithstanding, any Collection item shall be
deemed received by Foothill only if it is received into the Foothill Account on
a Business Day on or before 11:00 a.m. California time. If any Collection item
is received into the Foothill Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.
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2.9 DESIGNATED ACCOUNT. Foothill is authorized to fund the Term Loan,
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 2.6(e).
Borrower agrees to establish and maintain the Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
requested by Borrower and made by Foothill hereunder. Unless otherwise agreed by
Foothill and Borrower, the Term Loan and any Advance requested by Borrower and
made by Foothill hereunder shall be made to the Designated Account.
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Foothill
shall maintain an account on its books in the name of Borrower (the "Loan
Account") on which Borrower will be charged with the Term Loan and all Advances
made by Foothill to Borrower or for Borrower's account, including, accrued
interest, Foothill Expenses, and any other payment Obligations of Borrower. In
accordance with Section 2.8, the Loan Account will be credited with all payments
received by Foothill from Borrower or for Borrower's account, including all
amounts received in the Foothill Account from any Lockbox Bank. Foothill shall
render statements regarding the Loan Account to Borrower, including principal,
interest, fees, and including an itemization of all charges and expenses
constituting Foothill Expenses owing, and such statements shall be conclusively
presumed to be correct and accurate and constitute an account stated between
Borrower and Foothill unless, within 60 days after receipt thereof by Borrower,
Borrower shall deliver to Foothill written objection thereto describing the
error or errors contained in any such statements.
2.11 FEES. Borrower shall pay to Foothill the following fees:
(a) Facility Fee. A facility fee of $240,000, fully earned on the
Closing Date, and payable as follows: (i) $120,000 payable on the Closing Date;
and (ii) $120,000 payable on the earliest of (x) the one-year anniversary of the
Closing Date, (y) the date, if any, of repayment in full of the Obligations and
termination of this Agreement, and (z) the date, if any, of acceleration of the
maturity of the Obligations upon or following the occurrence and during the
continuance of an Event of Default;
(b) Unused Line Fee. On the first day of each month during the
term of this Agreement, in arrears, an unused line fee in an amount equal to
0.25% per annum times the Average Unused Portion of the Maximum Amount;
(c) Term Loan Funding Fee. A Term Loan funding fee of $60,000,
fully earned and payable on the Closing Date;
(d) Financial Examination, Documentation, and Appraisal Fees. (i)
Foothill's customary fee of $750 per day per examiner, plus out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Foothill; and the actual charges paid or
incurred by Foothill if it elects to employ the services of one or more third
Persons to perform such financial analyses and
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examinations (i.e., audits) of Borrower (provided that, so long as no Event of
Default has occurred and is continuing, Foothill will not charge Borrower for
more than four audits per year); and (ii) the actual charges and out-of-pocket
expenses paid or incurred by Foothill for each appraisal of the Collateral
performed by any appraisers used by Foothill;
(e) Servicing Fee. On the first day of each month during the term
of this Agreement, and thereafter so long as any Obligations are outstanding, a
servicing fee in an amount equal to $2,000; and
(f) A success fee of $250,000, which is fully earned on the
Closing Date, and payable on the earlier of (i) the date of termination of this
Agreement, and (ii) April 21, 2002.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE OR LETTER OF CREDIT AND
THE TERM LOAN.
The obligation of Foothill to make the initial Advance or to issue the
initial Letter of Credit or fund the Term Loan is subject to the fulfillment, to
the satisfaction of Foothill and its counsel, of each of the following
conditions on or before the Closing Date:
(a) the Closing Date shall occur on or before April 30, 1999;
(b) Foothill shall have received searches reflecting the filing
of its financing statements and fixture filings;
(c) Foothill shall have received each of the following documents,
duly executed, and each such document shall be in full force and effect:
(i) the Lockbox Agreements;
(ii) the Disbursement Letter;
(iii) 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 Borrower (except to the extent Factor is permitted to retain
Liens in accordance with the terms of this Agreement);
(iv) the Licensor Consents;
(v) the Intercreditor Agreement; and
(vi) the Trademark Security Agreement;
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(d) Foothill shall have received a certificate from the Secretary
of Borrower attesting to the resolutions of Borrower's Board of Directors
authorizing its execution, delivery, and performance of this Agreement and the
other Loan Documents to which Borrower is a party and authorizing specific
officers of Borrower to execute the same;
(e) Foothill shall have received copies of Borrower's Governing
Documents, as amended, modified, or supplemented to the Closing Date, certified
by the Secretary of Borrower;
(f) Foothill shall have received a certificate of status with
respect to Borrower, dated within 10 days of the Closing Date, such certificate
to be issued by the appropriate officer of the jurisdiction of organization of
Borrower, which certificate shall indicate that Borrower is in good standing in
such jurisdiction;
(g) except as provided in Section 3.3(c) hereof, Foothill shall
have received certificates of status with respect to Borrower, each dated within
15 days of the Closing Date, such certificates to be issued by the appropriate
officer of the jurisdictions in which its failure to be duly qualified or
licensed would constitute a Material Adverse Change, which certificates shall
indicate that Borrower is in good standing in such jurisdictions;
(h) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
form and substance of which shall be satisfactory to Foothill and its counsel;
(i) Foothill shall have received a copy of the Factoring
Agreement, certified by the Secretary of Borrower to be a true, correct, and
complete copy thereof;
(j) Foothill shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as
Foothill may require;
(k) Foothill shall have received an opinion of Borrower's counsel
in form and substance satisfactory to Foothill in its sole discretion;
(l) Foothill shall have received reference checks regarding
Borrower's senior management, the results of which are satisfactory to Foothill;
(m) Foothill shall have received an orderly liquidation value
appraisal of the Inventory of Borrower performed by an appraiser acceptable to
Foothill, and the results of which are acceptable to Foothill;
(n) If Borrower is making any repayments of subordinated
Indebtedness of Borrower on the Closing Date (which repayments shall not exceed
$2,000,000), or has made any such repayments within the 60 days preceding the
Closing Date, then, after giving effect to all such repayments, to all Advances
made on the Closing
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Date, to all Letters of Credit issued on the Closing Date, and to all transfers
by or for the benefit of Borrower on the Closing Date, Borrower shall have not
less than $1,500,000 in the aggregate of unrestricted cash or cash equivalents
on hand and Excess Availability;
(o) except for those certain taxes required by the States of New
York and Texas for foreign corporations qualified to do business in such states
as provided in Section 3.3(c), Foothill shall have received satisfactory
evidence that all tax returns required to be filed by Borrower have been timely
filed and all taxes upon Borrower or its properties, assets, income, and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency, except such taxes that are the subject of a Permitted
Protest; and
(p) 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 Foothill and its
counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES, ALL LETTERS OF CREDIT, AND THE
TERM LOAN.
The following shall be conditions precedent to all Advances, all Letters
of Credit hereunder, and the funding on the Closing Date of the Term Loan:
(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
Borrower, Foothill, or any of their Affiliates.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial closing
hereunder, Borrower shall perform or cause to be performed the following (the
failure by Borrower to so perform or cause to be performed constituting an Event
of Default):
(a) within 30 days of the Closing Date, deliver to Foothill the
certified copies of the policies of insurance, together with the endorsements
thereto, as are required by Section 6.10, the form and substance of which shall
be satisfactory to Foothill and its counsel.
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(b) within 30 days of the Closing Date, deliver to Foothill (i)
evidence satisfactory to Foothill that the Liens of any Person other than
Foothill in and to Borrower's trademarks have been terminated and (ii) chain of
title searches in form and substance satisfactory to Foothill relative to such
trademarks.
(c) within 30 days of the Closing Date, deliver to Foothill
certificates of status with respect to Borrower from the States of Florida,
Georgia, Texas, New York, and Illinois, such certificates to be issued by the
appropriate officer of such States, which certificates shall indicate that
Borrower is in good standing in such jurisdictions.
3.4 TERM. This Agreement shall become effective upon the execution and
delivery hereof by Borrower and Foothill and shall continue in full force and
effect for a term ending on the date (the "Maturity Date") that is three (3)
years from the Closing Date. The foregoing notwithstanding, Foothill shall have
the right to terminate its obligations under this Agreement immediately and
without notice upon the occurrence and during the continuation of an Event of
Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this Agreement,
all Obligations (including contingent reimbursement obligations of Borrower 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 Borrower of Borrower's duties, Obligations, or
covenants hereunder, and Foothill's continuing security interests in the
Collateral shall remain in effect until all Obligations have been fully and
finally discharged and Foothill's obligation to provide additional credit
hereunder is terminated.
3.6 EARLY TERMINATION BY BORROWER. The provisions of Section 3.4 that
allow termination of this Agreement by Borrower only on the Maturity Date
notwithstanding, Borrower has the option, at any time upon 90 days prior written
notice to Foothill (or 30 days prior written notice to Foothill if such
termination is because of the Early Termination Premium Exception), to terminate
this Agreement by paying to Foothill, in cash, the Obligations (including an
amount equal to 105% of the undrawn amount of the Letters of Credit), in full,
together with the Early Termination Premium.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates this
Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
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4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Foothill a
continuing security interest in all currently existing and hereafter acquired or
arising Personal Property Collateral in order to secure prompt repayment of any
and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Foothill's security
interests in the Personal Property Collateral shall attach to all Personal
Property Collateral without further act on the part of Foothill or Borrower.
Anything contained in this Agreement or any other Loan Document to the contrary
notwithstanding, except for the sale of Inventory to buyers in the ordinary
course of business (including ordinary course seasonal mark-downs), Borrower has
no authority, express or implied, to dispose of any item or portion of the
Personal Property Collateral or any Real Property Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrower,
immediately upon the request of Foothill, shall endorse and deliver physical
possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL.
At any time, Foothill or Foothill's designee may (a) notify customers or
Account Debtors of Borrower that the Accounts, General Intangibles, or
Negotiable Collateral have been assigned to Foothill or that Foothill has a
security interest therein, provided that in the case of Factored Accounts,
Foothill shall notify Factor and not the underlying Account Debtors, and (b)
collect the Accounts, General Intangibles, and Negotiable Collateral directly
and charge the collection costs and expenses to the Loan Account, provided that
in the case of Factored Accounts, collection shall be made from Factor and not
directly from the underlying Account Debtors. Borrower agrees that it will hold
in trust for Foothill, as Foothill's trustee, any Collections that it receives
and immediately will deliver said Collections to Foothill in their original form
as received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the
request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Foothill reasonably
may request, in form satisfactory to Foothill, to perfect and continue perfected
Foothill's security interests in the Collateral, and in order to fully
consummate all of the transactions contemplated hereby and under the other the
Loan Documents.
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4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes, constitutes,
and appoints Foothill (and any of Foothill's officers, employees, or agents
designated by Foothill) as Borrower's true and lawful attorney, with power to
(a) if Borrower refuses to, or fails timely to execute and deliver any of the
documents described in Section 4.4, sign the name of Borrower on any of the
documents described in Section 4.4 at any time that an Event of Default has
occurred and is continuing, sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors, in each case subject to and in compliance with the Intercreditor
Agreement, (c) send requests for verification of Accounts (except to underlying
Account Debtors on Factored Accounts), (d) endorse Borrower's name on any
Collection item that may come into Foothill's possession, (e) at any time that
an Event of Default has occurred and is continuing, notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Foothill, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower, (f) at any time that an Event of Default has occurred and is
continuing, make, settle, and adjust all claims under Borrower's policies of
insurance and make all determinations and decisions with respect to such
policies of insurance, and (g) at any time that an Event of Default has occurred
and is continuing, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be executed and delivered
any documents and releases that Foothill determines to be necessary. The
appointment of Foothill as Borrower's attorney, and each and every one of
Foothill's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully and finally repaid and performed
and Foothill's obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers, employees,
or agents) shall have the right, from time to time hereafter during normal
business hours to inspect Borrower's Books and to check, test, and appraise the
Collateral in order to verify Borrower's financial condition or the amount,
quality, value, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower makes
the following representations and warranties, each of which shall be true,
correct, and complete in all respects at and as of the date hereof, at and as of
the Closing Date, at and as of the date of the funding of the Term Loan, and at
and as of the date of the making of each Advance or Letter of Credit made
thereafter, as though made on and as of each such date (except to the extent
that such representations and warranties relate solely to an earlier date) and
such representations and warranties shall survive the execution and delivery of
this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted Liens.
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5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing
obligations created by the sale and delivery of Inventory or the rendition of
services to Account Debtors in the ordinary course of Borrower's business,
unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. The property giving rise to
such Eligible Accounts has been delivered to the Account Debtor, or to the
Account Debtor's agent for immediate shipment to and unconditional acceptance by
the Account Debtor. Borrower has not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
Account Debtor regarding any Eligible Account.
5.3 ELIGIBLE INVENTORY. All Eligible Inventory is of good and
merchantable quality, free from defects.
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are
not stored with a bailee, warehouseman, or similar party (without Foothill'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. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of the Inventory,
and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. Except as otherwise
specified below, the chief executive office of Borrower is located at the
address indicated in the preamble to this Agreement and Borrower's FEIN is
362998726. The parties acknowledge that Borrower intends to relocate its chief
executive office to 2825 South Santa Fe Avenue, Vernon, California 90058 soon
after the Closing Date. From and after the effective date of such relocation, as
specified in a written notice to be sent by Borrower to Foothill, the chief
executive office of Borrower is located at such latter address.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is: (i) duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation; and (ii)
qualified and licensed to do business in, and in good standing in, the states
set forth on Schedule 5.8 and, except as set forth on Schedule 5.8, 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
Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of
their incorporation; (ii) the number of shares of each class of common and
preferred Stock
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authorized for each of such Subsidiaries; and (iii) the number and the
percentage of the outstanding shares of each such class owned directly or
indirectly by Borrower. All of the outstanding Stock of each such Subsidiary has
been validly issued and is fully paid and nonassessable.
(c) Except as set forth on Schedule 5.8, no 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 Stock) of any direct or indirect Subsidiary of Borrower is
subject to the issuance of any security, instrument, warrant, option, purchase
right, conversion or exchange right, call, commitment or claim of any right,
title, or interest therein or thereto.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation (including
Regulations T, U, and X of the Federal Reserve Board) applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other governmental authority binding on Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time or both)
a default under any material contractual obligation or material lease of
Borrower, (iii) result in or require the creation or imposition of any Lien of
any nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any material contractual obligation of Borrower.
(c) Other than the filing of appropriate financing statements,
fixture filings, the execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which Borrower is a party do not and will
not require any registration with, consent, or approval of, or notice to, or
other action with or by, any federal, state, foreign, or other governmental
authority or other Person.
(d) This Agreement and the Loan Documents to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally.
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(e) The Liens granted by Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected (except for any Lien that is not perfected where
Borrower has no knowledge of such non-perfection), and first priority Liens,
subject only to Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for: (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters disclosed on
Schedule 5.10; and (c) matters arising after the date hereof that, if decided
adversely to Borrower, reasonably could not be expected to result in a Material
Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to
Borrower or any guarantor of the Obligations that have been delivered by
Borrower to Foothill have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present Borrower's (or such
guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
Material Adverse Change with respect to Borrower (or such guarantor, as
applicable) since the date of the latest financial statements submitted to
Foothill on or before the Closing Date.
5.12 SOLVENCY. Borrower is Solvent. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan Documents
with the intent to hinder, delay, or defraud either present or future creditors
of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries, or
any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 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 Borrower or its Subsidiaries, any ERISA Affiliate, or any
fiduciary of any Plan is subject to any direct or indirect liability with
respect to any Plan under any applicable law, treaty, rule, regulation, or
agreement that reasonably could be expected to result in a Material Adverse
Change. None of Borrower or its Subsidiaries or any ERISA Affiliate is required
to provide security to any Plan under Section 401(a)(29) of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets
has ever been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators in the disposal of, or to produce, store, handle,
treat, release, or transport, any Hazardous Materials. None of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a Hazardous
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Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute. No Lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned or operated by Borrower. Borrower has not received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal or state governmental agency concerning any action or omission by
Borrower resulting in the releasing or disposing of Hazardous Materials into the
environment.
5.15 BROKERAGE FEES. No brokerage commission or finders fees has or
shall be incurred or payable in connection with or as a result of Borrower's
obtaining financing from Foothill under this Agreement, and Borrower has not
utilized the services of any broker or finder in connection with Borrower's
obtaining financing from Foothill under this Agreement, except for a finders fee
payable to Meleen & Co., Inc. and/or EBI Securities Corporation in an aggregate
amount equal to 1.5% of the Maximum Amount, for which fee Borrower solely is
responsible.
5.16 YEAR 2000 COMPLIANCE. On the basis of a comprehensive inventory,
review, and assessment currently being undertaken by Borrower of computer
applications utilized by Borrower and upon inquiry made of Borrower's material
suppliers and vendors, Borrower's management is of the considered view that (a)
Borrower and its products will be Year 2000 Compliant before September 30, 1999,
and (b) all such material suppliers and vendors will be Year 2000 Compliant
before September 30, 1999, except to the extent that their failure to be
compliant reasonably could not be expected to result in a Material Adverse
Change. Borrower (i) has undertaken a detailed inventory, review, and assessment
of all areas within its business and operations that could be adversely affected
by the failure of Borrower or its products to be Year 2000 Compliant on a timely
basis, (ii) is developing a detailed plan and timeline for becoming Year 2000
Compliant on a timely basis, and (iii) to date, is implementing that plan in
accordance with that timetable in all material respects. Borrower reasonably
anticipates that it will be Year 2000 Compliant on a timely basis.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of the
following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral that contain
information as from time to time may be requested by Foothill. Borrower also
shall keep a modern inventory reporting system that shows all additions, sales,
claims, returns, and allowances with respect to the Inventory.
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6.2 COLLATERAL REPORTING. Provide Foothill with the following documents
at the following times in form satisfactory to Foothill: (a) on each Business
Day, a sales journal, collection journal, and credit register since the last
such schedule and a calculation of the Borrowing Base as of such date; (b) on a
monthly basis and, in any event, by no later than the 10th 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 Foothill; (c) on a monthly basis and, in any event, by no later than
the 10th day of each month during the term of this Agreement, (i) a summary
aging, by vendor, of Borrower's accounts payable and any book overdraft, and
(ii) a report detailing the status and currency of Borrower's payments to third
parties with respect to royalties due under license agreements relating to the
manufacture or sale of branded Inventory; (d) on a weekly basis, Inventory
reports specifying Borrower's cost of its Inventory by category, with additional
detail showing additions to and deletions from the Inventory; (e) upon request,
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
Borrower, purchase orders and invoices; (g) on a quarterly basis, a detailed
list of Borrower's customers; (h) on a monthly basis, a calculation of the
Dilution for the prior month; (i) on a monthly basis, a copy of the Client
Statement received from Factor; (j) each business day, information as to the
aggregate balances of the credit approved Factored Accounts and the client risk
Factored Accounts that are then outstanding on Factor's books; and (k) such
other reports as to the Collateral or the financial condition of Borrower as
Foothill may reasonably request from time to time. Original sales invoices
evidencing daily sales shall be mailed by Borrower to each Account Debtor and,
at Foothill's direction, the invoices (other than those with respect to Factored
Accounts) shall indicate on their face that the Account has been assigned to
Foothill and that all payments are to be made directly to Foothill.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Foothill:
(a) as soon as available, but in any event within 45 days after the end of each
month during each of Borrower's fiscal years, a company prepared balance sheet,
income statement, and statement of cash flow covering Borrower's operations
during such period; and (b) as soon as available, but in any event within 90
days after the end of each of Borrower's fiscal years, financial statements of
Borrower for each such fiscal year, audited by independent certified public
accountants reasonably acceptable to Foothill and certified, without any
qualifications, by such accountants to have been prepared in accordance with
GAAP, together with a certificate of such accountants addressed to Foothill
stating that such accountants do not have knowledge of the existence of any
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. If Borrower is a parent
company of one or more Subsidiaries or is a Subsidiary of another company, then,
in addition to the financial statements referred to above, Borrower agrees to
deliver financial statements
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<PAGE> 47
prepared on a consolidating basis so as to present Borrower and each such
related entity separately, and on a consolidated basis.
Together with the above, Borrower also shall deliver to Foothill
Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K
Current Reports, and any other filings made by Borrower with the Securities and
Exchange Commission, if any, as soon as the same are filed, or any other
information that is provided by Borrower to its shareholders, and any other
report reasonably requested by Foothill relating to the financial condition of
Borrower.
Each month, together with the financial statements provided pursuant to
Section 6.3(a), Borrower shall deliver to Foothill a certificate signed by its
chief financial officer to the effect that: (i) all financial statements
delivered or caused to be delivered to Foothill hereunder have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Borrower, (ii) the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents
are true and correct in all material respects on and as of the date of such
certificate, as though made on and as of such date (except to the extent that
such representations and warranties relate solely to an earlier date), (iii) for
each month that also is the date on which a financial covenant in 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 Foothill there does not exist any condition or event that constitutes a
Default or Event of Default (or, in the case of clauses (i), (ii), or (iii), to
the extent of any non-compliance, describing such non-compliance as to which he
or she may have knowledge and what action Borrower has taken, is taking, or
proposes to take with respect thereto).
Borrower shall have issued written instructions to its independent
certified public accountants authorizing them to communicate with Foothill and
to release to Foothill whatever financial information concerning Borrower that
Foothill may request. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to Foothill, at
Borrower's expense, copies of Borrower's financial statements, papers related
thereto, and other accounting records of any nature in their possession, and to
disclose to Foothill any information they may have regarding Borrower's business
affairs and financial conditions.
6.4 TAX RETURNS. Deliver to Foothill copies of each of Borrower's future
federal income tax returns, and any amendments thereto, within 30 days of the
filing thereof with the Internal Revenue Service.
6.5 GUARANTOR REPORTS. Cause any guarantor of any of the Obligations to
deliver its annual financial statements at the time when Borrower provides its
audited financial statements to Foothill and copies of all federal income tax
returns as soon as the
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<PAGE> 48
same are available and in any event no later than 30 days after the same are
required to be filed by law.
6.6 RETURNS. Cause returns and allowances, if any, as between Borrower
and its Account Debtors to be on terms that are reasonable and prudent. If, at a
time when no Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to Borrower, Borrower promptly shall determine the reason
for such return and, if Borrower accepts such return, issue a credit memorandum
(with a copy to be sent to Foothill) 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 Borrower, Borrower promptly shall
determine the reason for such return and, if Foothill consents (which consent
shall not be unreasonably withheld), issue a credit memorandum (with a copy to
be sent to Foothill) in the appropriate amount to such Account Debtor.
6.7 TITLE TO EQUIPMENT. Upon Foothill's request, Borrower immediately
shall deliver to Foothill, properly endorsed, any and all evidences of ownership
of, certificates of title, or applications for title to any items of Equipment.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Other than those items of Equipment that
constitute fixtures on the Closing Date, Borrower shall not permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and such Equipment shall at all times remain personal property.
6.9 TAXES. Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property 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. Borrower
shall make due and timely payment or deposit of all such federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Foothill, on demand, appropriate certificates attesting
to the payment thereof or deposit with respect thereto. Borrower will make
timely payment or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that Borrower
has made such payments or deposits.
6.10 INSURANCE.
(a) At its expense, keep the Personal Property Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and
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<PAGE> 49
property damage insurance relating to Borrower's ownership and use of the
Personal Property Collateral, as well as insurance against larceny,
embezzlement, and criminal misappropriation.
(b) At its expense, obtain and maintain (i) insurance of the type
necessary to insure any buildings or improvements to Real Property, and any
Equipment, Inventory or other chattels located thereon, 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 Foothill may require, but in any event in amounts sufficient to
prevent Borrower from becoming a co-insurer under such policies, (ii) combined
single limit bodily injury and property damages insurance against any loss,
liability, or damages on, about, or relating to each parcel of Real Property, in
an amount of not less than $1,000,000; and (iii) insurance for such other risks
as Foothill may require. Replacement costs, at Foothill's option, may be
redetermined by an insurance appraiser, satisfactory to Foothill, not more
frequently than once every 12 months at Borrower's cost.
(c) [Intentionally omitted.]
(d) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to
Foothill. All insurance required herein shall be written by companies which are
authorized to do insurance business in the State of California. All hazard
insurance and such other insurance as Foothill shall specify, shall contain a
California Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement
satisfactory to Foothill, showing Foothill 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 30 days prior written notice to Foothill and that any
loss payable thereunder shall be payable notwithstanding any act or negligence
of Borrower or Foothill 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 any Real Property for purposes more hazardous than permitted
by the terms of such policy, (ii) any foreclosure or other action or proceeding
taken by Foothill upon the happening of an Event of Default, or (iii) any change
in title or ownership of the Collateral. Borrower shall deliver to Foothill
certified copies of such policies of insurance and evidence of the payment of
all premiums therefor.
(e) Original policies or certificates thereof satisfactory to
Foothill evidencing such insurance shall be delivered to Foothill at least 30
days prior to the expiration of the existing or preceding policies. Borrower
shall give Foothill prompt notice of any loss covered by such insurance, and
Foothill shall have the right to adjust any loss. Foothill shall have the
exclusive right to adjust all losses payable under any such insurance policies
without any liability to Borrower whatsoever in respect of such adjustments. Any
monies received as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Foothill to be applied
at the option of Foothill
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<PAGE> 50
either to the prepayment of the Obligations without premium, in such order or
manner as Foothill may elect, or shall be disbursed to Borrower under stage
payment terms satisfactory to Foothill 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, Foothill shall have the
right to apply all prepaid premiums to the payment of the Obligations in such
order or form as Foothill shall determine.
(f) Borrower shall not take out separate insurance concurrent in
form or contributing in the event of loss with that required to be maintained
under this Section 6.10, unless Foothill is included thereon as named insured
with the loss payable to Foothill under a standard California 438BFU (NS)
mortgagee endorsement, or its local equivalent. Borrower immediately shall
notify Foothill whenever such separate insurance is taken out, specifying the
insurer thereunder and full particulars as to the policies evidencing the same,
and originals of such policies immediately shall be provided to Foothill.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the
other Loan Documents by or on behalf of Borrower without setoff or counterclaim
and free and clear of, and without deduction or withholding for or on account
of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and
Equipment only at the locations identified on Schedule 6.12; provided, however,
that Borrower may amend Schedule 6.12 so long as such amendment occurs by
written notice to Foothill not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's security
interests in such assets and also provides to Foothill a Collateral Access
Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not result in and reasonably could not
be expected to result in a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(a) Cause to be delivered to Foothill, each of the following: (i)
promptly, and in any event within 10 Business Days after Borrower or any of its
Subsidiaries knows or has reason to know that an ERISA Event has occurred that
reasonably could be expected to result in a Material Adverse Change, a written
statement of the chief financial
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<PAGE> 51
officer of Borrower describing such ERISA Event and any action that is being
taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate,
and any action taken or threatened by the IRS, Department of Labor, or PBGC.
Borrower or such Subsidiary, as applicable, shall be deemed to know all facts
known by the administrator of any Benefit Plan of which it is the plan sponsor,
(ii) promptly, and in any event within 3 Business Days after the filing thereof
with the IRS, a copy of each funding waiver request filed with respect to any
Benefit Plan and all communications received by Borrower, any of its
Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect
to such request, and (iii) promptly, and in any event within 3 Business Days
after receipt by Borrower, any of its Subsidiaries or, to the knowledge of
Borrower, 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 Foothill, upon Foothill's request,
each of the following: (i) a copy of each Plan (or, where any such plan is not
in writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the three most recent plan years, annual reports on Form
5500 Series required to be filed with any governmental agency for each Benefit
Plan; (iv) all actuarial reports prepared for the last three plan years for each
Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate
amount of the most recent annual contributions required to be made by Borrower
or any ERISA Affiliate to each such plan and copies of the collective bargaining
agreements requiring such contributions; (vi) any information that has been
provided to Borrower 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 Borrower or its Subsidiaries under any
Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable under any
leases to which Borrower is a party or by which Borrower's properties and assets
are bound, unless such payments are the subject of a Permitted Protest. To the
extent that Borrower fails timely to make payment of such rents and other
amounts payable when due under its leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 BROKERAGE COMMISSIONS. Pay any and all brokerage commission or
finders fees incurred by in connection with or as a result of Borrower's
obtaining financing from Foothill under this Agreement.
6.17 YEAR 2000 COMPLIANCE. Be Year 2000 Compliant by September 30, 1999.
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7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
will not do any of the following without Foothill's prior written consent:
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 in Schedule 7.1;
(c) Permitted Subordinated Indebtedness;
(d) Indebtedness secured by Permitted Liens;
(e) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b), (c), or (d) 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 (if effected prior to the stated maturity of such
Indebtedness) result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness;
(f) Indebtedness permitted by Section 7.6.
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 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
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<PAGE> 53
substantial part of its property or assets, other than sales of Inventory to
buyers in the ordinary course of Borrower's business as currently conducted
(including ordinary course seasonal mark-downs), and sales of Factored Accounts
to Factor.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or otherwise
dispose of any of Borrower's properties or assets other than sales of Inventory
to buyers in the ordinary course of Borrower's business as currently conducted
(including ordinary course seasonal mark-downs), and sales of Factored Accounts
to Factor.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate structure
(within the meaning of Section 9402(7) of the Code), or identity, or add any new
fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill or except as may be permitted by
Section 7.1.
7.7 NATURE OF BUSINESS. Make any change in the principal nature of
Borrower's 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.
(b) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under Sections 7.1(b), (c), or (d).
(c) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of the Factoring Agreement.
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 Stock) on, or purchase,
acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or
hereafter outstanding.
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<PAGE> 54
7.12 ACCOUNTING METHODS. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau agreeing to provide Foothill information
regarding the Collateral or Borrower's financial condition. Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.13 INVESTMENTS. Except for Permitted Acquisitions, 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, or (c)
the acquisition of all or substantially all of the properties or assets of a
Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms, that are fully disclosed to Foothill, and that are no
less favorable to Borrower than would be obtained in an arm's length transaction
with a non-Affiliate.
7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 [INTENTIONALLY OMITTED.]
7.17 USE OF PROCEEDS. Use the proceeds of the Term Loan and the Advances
made hereunder for any purpose other than (i) on the Closing Date, (y) to repay
in full the outstanding principal, accrued interest, and accrued fees and
expenses owing to Existing Lender, and (z) to pay transactional costs and
expenses incurred in connection with this Agreement, and (ii) thereafter,
consistent with the terms and conditions hereof, for its lawful and permitted
corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Foothill and so
long as, at the time of such written notification, Borrower provides any
financing statements or fixture filings necessary to perfect and continue
perfected Foothill's security interests and also provides to Foothill a
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 Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:
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<PAGE> 55
(a) engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to fail, to pay
timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower to terminate,
any Benefit Plan where such event would result in any liability of Borrower, any
of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA;
(e) fail, or permit any Subsidiary of Borrower to fail, to make
any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to fail, to pay
any required installment or any other payment required under Section 412 of the
IRC on or before the due date for such installment or other payment;
(g) amend, or permit any Subsidiary of Borrower to amend, a
Benefit Plan resulting in an increase in current liability for the plan year
such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate
is required to provide security to such Benefit Plan under Section 401(a)(29) of
the IRC; or
(h) withdraw, or permit any Subsidiary of Borrower to 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;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $50,000.
7.20 FINANCIAL COVENANTS. Fail to maintain:
(a) EBITDA. EBITDA for each of the following fiscal periods of
not less than the amount (<bracketed amounts> are negative) shown below for the
period corresponding thereto:
50
<PAGE> 56
<TABLE>
<CAPTION>
(b) Period (c) Required EBITDA
- ---------- -------------------
<S> <C>
(d) 3 month period ending 6/30/99 (e) $1,300,000
(f) 6 month period ending 9/30/99 (g) <$750,000>
(h) 9 month period ending 12/31/99 (i) $750,000
(j) 12 month period ending 3/31/00 (k) $7,500,000
(l) 12 month period ending 6/30/00 (m) $8,500,000
(n) 12 month period ending 9/30/00 (o) $8,500,000
(p) 12 month period ending 12/31/00 (q) $8,500,000
(r) 12 month period ending 3/31/01 (s) $8,500,000
(t) 12 month period ending 6/30/01 (u) $8,500,000
(v) 12 month period ending 9/30/01 (w) $8,500,000
(x) 12 month period ending 12/31/01 (y) $8,500,000
(z) 12 month period ending 3/31/02 (aa) $8,500,000
</TABLE>
(bb); and
(cc) Tangible Net Worth. Tangible Net Worth for each of the
following fiscal periods of not less than the amount shown below for the period
corresponding thereto:
<TABLE>
<CAPTION>
(dd) Period (ee) Required Tangible Net Worth
- ----------- ---------------------------
<S> <C>
(ff) fiscal quarter ending 6/30/99 (gg) $11,000,000
(hh) fiscal quarter ending 9/30/99 (ii) $9,000,000
(jj) fiscal quarter ending 12/31/99 (kk) $9,500,000
(ll) fiscal quarter ending 3/31/00 (mm) $15,000,000
(nn) fiscal quarter ending 6/30/00 (oo) $17,000,000
(pp) fiscal quarter ending 9/30/00 (qq) $15,000,000
</TABLE>
51
<PAGE> 57
<TABLE>
<S> <C>
(rr) fiscal quarter ending 12/31/00 (ss) $15,000,000
(tt) fiscal quarter ending 3/31/01 (uu) $17,000,000
(vv) fiscal quarter ending 6/30/01 (ww) $17,000,000
(xx) fiscal quarter ending 9/30/01 (yy) $17,000,000
(zz) fiscal quarter ending 12/31/01 (aaa) $17,000,000
(bbb) fiscal quarter ending 3/31/02 (ccc) $17,000,000
</TABLE>
7.21 CAPITAL EXPENDITURES. Make capital expenditures in any fiscal year
in excess of $1,200,000.
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:
.1 If Borrower fails to pay when due and payable or when declared due
and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts), fees and charges due Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
provided, however, that in the case of Overadvances that are caused by (a) the
charging of interest, fees, or Lender Expenses to the Loan Account, (b) the
imposition by Foothill of reserves, or (c) Accounts formerly constituting
Eligible House Accounts becoming ineligible solely under item (i) or item (j) in
the definition of "Eligible House Account"), such event shall not constitute an
Event of Default if, within 3 Business Days of its receipt of telephonic notice
of such Overadvance, Borrower eliminates such Overadvance;
.2 (a) If Borrower fails or neglects to perform, keep, or observe any
covenant or other provision contained in Sections 6.2, 6.3, 6.4, 6.11, 6.12, and
6.14 hereof and such failure or neglect continues for a period of 5 days after
the date on which such failure or neglect first occurs, (b) If Borrower fails or
neglects to perform, keep, or observe any covenant or other provision contained
in Sections 6.1 and 6.7 hereof and such failure or neglect is not cured within
15 days after the date on which such failure or neglect first occurs, or (c) If
Borrower fails or neglects to perform, keep, or observe any covenant or other
provision contained in any Section of this Agreement or the other Loan Documents
(other than a Section that is expressly provided for elsewhere in this Section
8);
.3 [Intentionally omitted];
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.4 If any material portion of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person;
.5 If an Insolvency Proceeding is commenced by Borrower;
.6 If an Insolvency Proceeding is commenced against Borrower and any of
the following events occur: (a) Borrower consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 45 calendar days of the date of
the filing thereof; provided, however, that, during the pendency of such period,
Foothill shall be relieved of its obligation to extend credit hereunder; (d) an
interim trustee is appointed to take possession of all or a substantial portion
of the properties or assets of, or to operate all or any substantial portion of
the business of, Borrower; or (e) an order for relief shall have been issued or
entered therein;
.7 If Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs;
.8 (a) If a notice of Lien, levy, or assessment is filed of record with
respect to any of Borrower's properties or assets by the United States
Government, or any department, agency, or instrumentality thereof, or if any
taxes or debts owing at any time hereafter to any one or more of such entities
becomes a Lien, whether choate or otherwise, upon any of Borrower's properties
or assets and the same is not paid on the payment date thereof; or
.9 (b) (i) (y) If a notice of Lien, levy, or assessment in excess of
$500,000 (less the aggregate of taxes or debts described in Section 8.8(b)(ii),
judgments or other claims described in Section 8.9, and obligations described in
Section 8.10(a)) in the aggregate is filed of record with respect to any of
Borrower's assets by any state, county, municipal, or other non-federal
governmental authority, or (z) if any taxes or debts owing at any time hereafter
to any one or more of such entities in excess of $500,000 (less the aggregate of
Liens, levies, and assessments described in Section 8.8(b)(i), judgments or
other claims described in Section 8.9, and obligations described in Section
8.10(a)) in the aggregate becomes a Lien upon any of Borrower's assets and the
same is not paid and (ii) the same is not released, discharged, or bonded
against before the earlier of 30 days after the date it first arises or 5 days
prior to the date when such asset is subject to being forfeited by Borrower;
.10 If a judgment or other claim becomes a Lien or encumbrance upon any
material portion of Borrower's properties or assets, except for judgments or
other claims aggregating not more than $500,000 (less the aggregate of Liens,
levies, and assessments described in Section 8.8(b)(i), taxes or debts described
in Section 8.8(b)(ii), and obligations described in Section 8.10(a)) that are
bonded or covered by insurance and of which execution is stayed;
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.11 (a) If there is a default in any material agreement to which
Borrower is a party with one or more third Persons affecting obligations of
$500,000 000 (less the aggregate of Liens, levies, and assessments described in
Section 8.8(b)(i), taxes or debts described in Section 8.8(b)(ii), and judgments
or other claims described in Section 8.9) or more in the aggregate and such
default (i) occurs at the final maturity of the obligations thereunder, or (ii)
results in a right by such third Person(s), irrespective of whether exercised,
to accelerate the maturity of Borrower's obligations thereunder; or
(b) If there is a default in the Factoring Agreement and such
default (i) occurs at the final maturity of the obligations thereunder, or (ii)
results in the termination of the Factoring Agreement or the acceleration of the
maturity of Borrower's obligations thereunder;
.12 If Borrower makes any payment on account of Indebtedness that has
been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
.13 If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by Borrower or any officer, employee, agent, or director of Borrower, or if any
such warranty or representation is withdrawn; or
.14 If the obligation of any guarantor under its guaranty or other third
Person under any Loan Document is limited or terminated by operation of law or
by the guarantor or other third Person thereunder, or any such guarantor or
other third Person becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan Documents
as to any future liability or obligation of Foothill, but without affecting
Foothill's rights and security interests in the Personal Property Collateral or
any Real Property Collateral and without affecting the Obligations;
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(d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Foothill considers advisable, and in
such cases, Foothill will credit Borrower's Loan Account with only the net
amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory as
the property of Foothill;
(f) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Foothill considers necessary or
reasonable to protect its security interests in the Collateral. Borrower agrees
to assemble the Personal Property Collateral if Foothill so requires, and to
make the Personal Property Collateral available to Foothill as Foothill may
designate. Borrower authorizes Foothill 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 Foothill's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's owned or leased
premises, Borrower hereby grants Foothill a license to enter into possession of
such premises and to occupy the same, without charge, for up to 120 days in
order to exercise any of Foothill's rights or remedies provided herein, at law,
in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Foothill (including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(h) Hold, as cash collateral, any and all balances and deposits
of Borrower held by Foothill, and any amounts received in the Lockbox Accounts,
to secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Personal Property Collateral. Foothill is hereby granted a license
or other right to use, without charge, Borrower's labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Personal Property Collateral, in completing production of,
advertising for sale, and selling any Personal Property Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
Foothill's benefit;
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(j) Sell the Personal Property Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Foothill determines is commercially reasonable. It is not necessary that the
Personal Property Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of the Personal
Property Collateral as follows:
(1) Foothill shall give Borrower and each holder of a
security interest in the Personal Property Collateral who has
filed with Foothill a written request for notice, a notice in
writing of the time and place of public sale, or, if the sale is
a private sale or some other disposition other than a public
sale is to be made of the Personal Property Collateral, then the
time on or after which the private sale or other disposition is
to be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in Section 12, at least
5 days before the date fixed for the sale, or at least 5 days
before the date on or after which the private sale or other
disposition is to be made; no notice needs to be given prior to
the disposition of any portion of the Personal Property
Collateral that is perishable or threatens to decline speedily
in value or that is of a type customarily sold on a recognized
market. Notice to Persons other than Borrower claiming an
interest in the Personal Property Collateral shall be sent to
such addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill also
shall give notice of the time and place by publishing a notice
one time at least 5 days before the date of the sale in a
newspaper of general circulation in the county in which the sale
is to be held;
(l) Foothill may credit bid and purchase at any public sale; and
(m) Any deficiency that exists after disposition of the Personal
Property Collateral as provided above will be paid immediately by Borrower. Any
excess will be returned, without interest and subject to the rights of third
Persons, by Foothill to Borrower.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill shall
constitute a waiver, election, or acquiescence by it.
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10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by Borrower is reasonably likely to result in a
Material Adverse Change, in its discretion and without prior notice to Borrower,
Foothill may do any or all of the following: (a) make payment of the same or any
part thereof; (b) set up such reserves in Borrower's Loan Account as Foothill
deems necessary to protect Foothill from the exposure created by such failure;
or (c) obtain and maintain insurance policies of the type described in Section
6.10, and take any action with respect to such policies as Foothill deems
prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses.
Any such payments made by Foothill shall not constitute an agreement by Foothill
to make similar payments in the future or a waiver by Foothill of any Event of
Default under this Agreement. Foothill need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill complies
with its obligations, if any, under Section 9207 of the Code, Foothill shall not
in any way or manner be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage thereto occurring or arising in any manner or
fashion from any cause; (c) any diminution in the value thereof; or (d) any act
or default of any carrier, warehouseman, bailee, forwarding agency, or other
Person, except for any of the foregoing as may be caused by Foothill's gross
negligence or willful misconduct. All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold
Foothill, 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
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related to the execution, delivery, enforcement, performance, and administration
of this Agreement and any other Loan Documents or the transactions contemplated
herein, and with respect to any investigation, litigation, or proceeding related
to this Agreement, any other Loan Document, or the use of the proceeds of the
credit provided hereunder (irrespective of whether any Indemnified Person is a
party thereto), or any act, omission, event or circumstance in any manner
related thereto (all the foregoing, collectively, the "Indemnified
Liabilities"). Borrower shall have no obligation to any Indemnified Person under
this Section 11.3 with respect to any Indemnified Liability resulting 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 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
Foothill, as the case may be, at its address set forth below:
If to Borrower: THE SIRENA APPAREL GROUP, INC.
10333 Vacco Street
South El Monte, California 91733
Attn: Mr. Richard Gerhart
Fax No. 626.442.2280
With copies to: MANATT, PHELPS, & PHILLIPS, LLP
11355 West Olympic Boulevard
Los Angeles, California 90064
Attn: Paul Irving, Esquire
Fax No. 310.312.4224
If to Borrower: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
With copies to: BROBECK, PHLEGER & HARRISON LLP
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Fax No. 213.745.3345
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The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 12, other
than notices by Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or 3 days
after the deposit thereof in the mail. Borrower acknowledges and agrees that
notices sent by Foothill in connection with Sections 9504 or 9505 of the Code
shall be deemed sent when deposited in the mail or personally delivered, or,
where permitted by law, transmitted telefacsimile or other similar method set
forth above.
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 AN 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 CALIFORNIA. 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 LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH
FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND
FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH
MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO
THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
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14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered to
Foothill may be destroyed or otherwise disposed of by Foothill 4 months after
they are delivered to or received by Foothill, unless Borrower requests, in
writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective
when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign this Agreement
and its rights and duties hereunder and no consent or approval by Borrower is
required in connection with any such assignment. Foothill reserves the right to
sell, assign, transfer, negotiate, or grant participations in all or any part
of, or any interest in Foothill's rights and benefits hereunder. In connection
with any such assignment or participation, Foothill may disclose all documents
and information which Foothill now or hereafter may have relating to Borrower or
Borrower's business. To the extent that Foothill assigns its rights and
obligations hereunder to a third Person, Foothill thereafter shall be released
from such assigned obligations to Borrower and such assignment shall effect a
novation between Borrower and such third Person.
15.3 SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended by a
writing signed by both Foothill and Borrower.
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15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of 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.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, 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.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in Los Angeles, California.
THE SIRENA APPAREL GROUP, INC.,
a Delaware corporation
/s/ RICHARD GERHART
------------------------------------------
By: Richard Gerhart
Title: CFO
FOOTHILL CAPITAL CORPORATION,
a California corporation
/s/ BRIAN DUFFY
------------------------------------------
By: Brian Duffy
Title: Vice President
S-1
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
COLLECTION DATE FACTORING AGREEMENT
This Amended and Restated Collection Date Factoring Agreement (this
"AGREEMENT"), dated and effective as of the Effective Date, is entered into
between HELLER FINANCIAL, INC. ("HELLER"), with offices at 505 N. Brand
Boulevard, Glendale, CA 91203, Telecopy No: (818) 409-1846, and THE SIRENA
APPAREL GROUP, INC. ("CLIENT"), whose address is 10333 Vacco Street, South El
Monte, California 91733, Telecopy No. (818) 442-2280, and will constitute the
terms upon which Heller will act as the sole factor of Client.
This Agreement shall amend and restate in its entirety that certain Factoring,
Credit and Security Agreement dated August 19, 1994 by and between Heller and
Client, as amended from time to time, and the security interests created
thereunder, and the perfection thereof, shall continue in full force and effect.
Capitalized terms used herein will have the meanings assigned to such terms in
Section 12 of this Agreement.
SECTION 1. SALE AND APPROVAL OF ACCOUNTS
1.1 Client does hereby sell, assign and transfer to Heller, and Heller
hereby agrees to purchase, certain of Client's Accounts, with full
power to Heller to collect and otherwise deal with such Accounts as
the sole and exclusive owner thereof.
1.2 (a) Client will submit for Heller's credit approval the credit
requirements of Client's customers, a description of Client's normal
selling terms and such other information as Heller requests
concerning Client's customers. Heller may, in Heller's sole credit
judgment, establish credit lines for sales to Client's customers on
Client's normal selling terms or on other selling terms approved by
Heller by Written Notice. Client may also submit for Heller's credit
approval specific orders from Client's customers and Heller may, in
Heller's sole credit judgment, approve such orders on a single order
credit approval basis. All of Heller's credit approvals will be
delivered to Client by Written Notice and/or Transmission.
(b) Heller may amend or withdraw a credit line or single order credit
approval at any time prior to Delivery by notifying Client verbally
and/or by Written Notice or Transmission. A single order credit
approval will be automatically withdrawn: (i) in the event Delivery
is not made on or prior to the expiration date indicated on the
single order credit confirmation form Heller sends to Client by
Written Notice or Transmission; or (ii) in the event any change is
made in any of the terms of the Account without Heller's prior
approval by Written Notice or Transmission.
(c) Heller will have no liability to Client or to any customer for
Heller's refusal to credit approve an Account or Heller's withdrawal
or amendment of a credit approval.
1.3 Heller will assume the Credit Risk on all Approved Accounts. Heller
will have full recourse to Client for all Non-Approved Accounts.
1.4 In the event that monies are at any time owing by a customer for both
Approved Accounts and Non-Approved Accounts, any amount when paid by
or credited to the customer will be applied as follows:
(a) If Heller issued single order approvals, all amounts paid by or
credited to the customer will be deemed applied first to Approved
Accounts.
<PAGE> 2
(b) If Heller established a credit line for such customer and if the
credit line was in force at the time amounts were received from or
credited to the customer, such amounts will be deemed applied first
to Non-Approved Accounts. If the credit line is canceled, any amount
thereafter received or credited will be deemed applied first to
Approved Accounts.
1.5 So long as any credit approval to any particular customer remains
outstanding, all Accounts to such customer, whether or not Approved
Accounts, will be assigned to Heller
1.6 If a bankruptcy or insolvency proceeding is instituted by or against
a customer and if Heller agrees by Written Notice to Client to make a
claim in such proceeding for Non-Approved Accounts, all amounts
distributed to Heller in such proceeding will be shared pro rata
between Approved Accounts and Non-Approved Accounts.
SECTION 2. PAYMENT AND FEES
2.1 As payment for an Account, (a) the Collected Amount of the Purchase
Price of an Account will be credited to Client's account on the first
Monday after the Collection Date and (b) if an Approved Account which
remains partially or fully unpaid solely as a result of the financial
inability of the customer thereon to pay such Approved Account and if
such Account is not subject to a Dispute, the Purchase Price of such
Approved Account less any Collected Amounts previously credited to
Client's account with respect to such Approved Account will be
credited to Client's account on the first Monday after the Approved
Payment Date for such Approved Account. The payments, when credited
to Client's account, shall first be applied to all interest and other
amounts due Heller hereunder.
2.2 At the time Heller purchases an Account, Heller will charge Client's
account with a factoring commission of 0.625% of the Net Amount of
the Account in the first Contract Year, and 0.60% of the Net Amount
of the Account in the second Contract Year and thereafter. On
Accounts bearing payment terms in excess of sixty (60) days, the
factoring commission will be increased by one quarter of one percent
(0.25%) for each thirty (30) days or part thereof that the stated
terms exceed sixty (60) days and on credit approved High Risk
Accounts, the factoring commission will be increased by the Standard
Surcharge.
2.3 During each Contract Year Client agrees to pay Heller factoring
commissions of at least the amounts set forth below ("MINIMUM ANNUAL
COMMISSION"). If during any Quarter of a Contract Year the aggregate
of factoring commissions paid by Client is less than the respective
amount set forth below ("MINIMUM QUARTERLY COMMISSION"), then Client
will pay to Heller, or Heller may charge Client's account with, an
amount equal to the difference between the Minimum Quarterly
Commission and the factoring commissions actually paid during that
Quarter ("DEFICIENCY CHARGE"). If at the end of any Quarter Client
exceeds the Minimum Annual Commission, the Minimum Quarterly
Commission will be waived for the remainder of the Contract Year, and
any Deficiency Charges paid during such Contract Year that are not
required to attain the Minimum Annual Commission will be credited to
Client's account. If Client terminates this Agreement at any time
during a Contract Year or if Heller terminates this Agreement at any
time during a Contract Year upon the occurrence of an Event of
Default, Client will nevertheless remain obligated to pay the Minimum
Annual Commission for such Contract Year.
<TABLE>
<CAPTION>
MINIMUM ANNUAL MINIMUM QUARTERLY
PERIOD COMMISSION COMMISSION
------ ---------- ----------
<S> <C> <C>
First Contract Year $375,000 $ 93,750
Second Contract Year $480,000 $120,000
</TABLE>
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<TABLE>
<S> <C> <C>
Third Contract Year and each
Contract Year thereafter $600,000 $150,000
</TABLE>
2.4 Client will pay to Heller or Heller may charge Client's account with
(i) wire transfer fees on all wire transfers; (ii) all data
transmission telephone charges relating to Transmissions; (iii)
exchanges on checks, charges for returned items and all other bank
charges; (iv) all Costs; (v) all other amounts owing by Client to
Heller under the Agreement; and (vi) all other Obligations. Client
will also pay to Heller or Heller may charge Client's account with
the sum of $25,000.00 for Heller's efforts and services in connection
with the negotiation, preparation and conclusion of this Agreement.
SECTION 3. INTEREST AND COLLECTION CLEARANCE CHARGE
3.1 Client will pay Heller interest on all Obligations, except those
specifying a different rate, from the date incurred through the date
paid. Interest will be calculated daily at a rate per annum equal to
2% plus the Base Rate (the "INTEREST RATE") and will be charged to
Client's account monthly at the end of each month. Any publicly
announced decrease or increase in the Base Rate will result in an
adjustment to the Interest Rate on the next Business Day. After the
occurrence of an Event of Default and for so long as such Event of
Default continues, all the Obligations will, at Heller's option, bear
interest at a rate per annum equal to three percent (3.0%) plus the
Interest Rate. Interest will be calculated on the basis of a 360-day
year for the actual number of days elapsed. In no event will the
total amount of interest received by Heller pursuant to the terms of
this Agreement exceed the maximum rate permitted by applicable law
and in the event excess interest is determined by a court of
competent jurisdiction to have been paid by Client to Heller, such
excess interest will be applied as a credit against the outstanding
Obligations and Client will not have any action against Heller for
any damages arising out of the payment or collection of such excess
interest.
3.2 To allow for collection clearance on all checks and other payments
remitted by Client's customers, Client will, in addition to interest,
pay Heller each month a collection clearance charge based on four (4)
business days for that month's collections at the Interest Rate.
Heller will charge Client's account at the end of each month for the
collection clearance charge.
3.3 If funds remain with Heller past the first Monday after the Payment
Date, and there are no outstanding Obligations ("matured funds"),
Heller will credit Client's account with interest on such matured
funds at the rate per annum equal to the Base Rate minus three
percent (3.0%).
3.4 If an Account or any payment is charged back to Client after the
first Monday after the Payment Date, Client will pay Heller interest
at the Interest Rate on the Net Amount of such Account or on such
payment from the Payment Date to the charge back date.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 Client represents, warrants and covenants as to each Account that, at
the time of its sale and assignment to Heller, the Account is a
valid, bona fide account, representing an undisputed indebtedness
incurred by the named customer for goods actually sold and delivered
or for services completely rendered; the Account is payable in United
States dollars; there are no setoffs, offsets, counterclaims or other
defenses, genuine or otherwise, to the payment or collection of the
Account; the Account does not represent a sale to any of Client's
subsidiaries, affiliates, directors, officers, agents, stockholders,
or employees, or a consignment sale, guaranteed sale, or bill and
hold transaction, or a cash on delivery
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sale; no agreement exists permitting any deduction or discount (other
than the discount stated on the invoice); Client is the lawful owner
of the Account and has the right to sell and assign the same to
Heller; the Account is free of all security interests, liens and
encumbrances (including tax liens) other than those in favor of
Heller and those in favor of Foothill Capital Corporation, and the
Account is due and payable in accordance with its terms.
4.2 Client will not grant or suffer to exist in favor of any party other
than Heller any lien upon or security interest in Client's inventory,
other than the liens of Foothill Capital Corporation.
4.3 Client is a solvent corporation, duly incorporated and in good
standing under the laws of the State of Delaware and qualified in all
States where such qualification is required; the execution, delivery
and performance of this Agreement have been duly authorized and are
not in contravention of any applicable law, Client's corporate
charter or by-laws or any agreement or order by which Client is
bound; Client is not, to the best of Client's knowledge, in violation
of any law, ordinance, rule, regulation, order or other requirement
of any government or any instrumentality or agency thereof.
4.4 Client will not change Client's corporate name or the location of
Client's office or open any new offices without giving Heller at
least thirty (30) days prior Written Notice. At the present time,
Client carries on business only at the above address and the
addresses set forth below.
3631 Union Pacific Avenue, Los Angeles, Ca 90023
10333 Vacco Street, South El Monte, Ca
1554 Santa Anita Avenue, South El Monte, Ca
1411 Broadway , New York, New York
350 North Orleans Street, Chicago, Illinois
110 East Ninth Street, Los Angeles, Ca
777 N.W. 72Nd Street, Miami, Fla
2300 Stemmons Freeway, Dallas, Tx
4.5 All books and records pertaining to the Accounts or to any inventory
owned by Client will be maintained solely and exclusively at the
above address or the addresses listed in Section 4.4 hereof and no
such books and records will be moved or transferred without giving
Heller thirty (30) days prior Written Notice.
4.6 After Heller's request, Client will hold all returned, replevined or
reclaimed goods relating to Accounts coming into Client's possession
in trust for Heller and all such goods will be segregated and
identified as held in trust for Heller's benefit and Client will, at
Heller's request, and at Client's expense, deliver such goods to such
place or places as Heller may designate.
4.7 The trade names or styles set forth below are the only trade names or
styles under which Client transacts business or has transacted
business during the last five (5) years; Accounts sold to Heller
hereunder and represented by invoices bearing such trade names or
styles are wholly owned by Client; the undertakings, representations
and warranties made in connection therewith will be identical to and
of the same force and effect as those made with respect to invoices
bearing Client's corporate name; Client's use of any trade names or
styles is in compliance with all laws regarding the use of such trade
names or styles. Client will give Heller thirty (30) days prior
Written Notice of the change of any trade name or style or Client's
use of any new trade name or style.
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Sirena Jezebel
Sirena Kids Liz Claiborne Swimwear
Anne Klein Swimwear Look & Sea
Body Jewels by Jezebel Rose Marie Reid
Hang Ten Renee of Hollywood
Hot Water WearAbouts
Client hereby assigns, transfers, and conveys to Heller, effective
upon the occurrence of any Event of Default hereunder, the
non-exclusive right and license to use all trade names, marks and
styles owned or used by Client together with any goodwill associated
therewith, all to the extent necessary to enable Heller to realize on
any assets of Client in which Client has granted Heller a security
interest. Such right and license is granted free of charge without
requirement that any monetary payment whatsoever be made to Client or
any third party by Heller.
4.8 Client may, in the ordinary course of business, issue, grant or allow
discounts, credits and allowances on Accounts to customers and accept
returns until Heller notifies Client to the contrary by Written
Notice or Transmission. Such discounts, credits or allowances once
issued may be claimed only by the customer. Client will promptly
issue and assign to Heller all full invoice credit memos and promptly
notify Heller of any other credit memos.
4.9 To the best of Client's knowledge, (a) there are no judgments
outstanding against or affecting Client, its officers, directors or
affiliates or any of Client's property, (b) there are no actions,
charges, claims, demands, suits, proceedings, or governmental
investigations now pending or threatened against Client or any of
Client's property, and (c) none of Client's inventory has been
produced in violation of the Fair Labor Standards Act or any similar
law, nor imported in violation of any United States customs
regulation.
4.10 Client agrees that no provision in this Agreement and no course of
dealing between the parties shall be deemed to create any fiduciary
duty by Heller to Client. Client agrees that neither Heller nor any
of Heller's affiliates, officers, directors, shareholders, employees,
attorneys, or agents shall have any liability with respect to, and
Client hereby waives, releases, and agrees not to sue any of them
upon, any claim for any special, indirect, incidental, consequential
or punitive damages suffered or incurred by Client in connection
with, arising out of, or in any way related to this Agreement or any
of the transactions contemplated by this Agreement.
4.11 Client has made an assessment of the microchip and computer-based
systems and the software used in its business and based upon such
assessment believes that it will be "Year 2000 Compliant" by January
1, 2000. For purposes of this paragraph, "Year 2000 Compliant" means
that all software, embedded microchips and other processing
capabilities utilized by, and material to the business operations or
financial condition of Client are able to interpret, store, transmit,
receive and manipulate data involving all calendar dates correctly
and without causing any abnormal ending scenarios in relation to
dates in and after the Year 2000. From time to time, at the request
of Heller, Client shall provide to Heller such updated information as
is requested regarding the status of its efforts to become Year 2000
Compliant.
SECTION 5. DISPUTES, CHARGEBACKS AND RESERVES
5.1 With respect to any Account, upon the occurrence of a breach of
any of the representations or warranties contained in Section 4.1, or
upon the assertion by a customer of a Dispute, such Account may, at
Heller's option, be charged back to Client. In the event Client does
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<PAGE> 6
not, within fifteen (15) days of Heller's request, deliver to Heller
a copy of the invoice and such other information as Heller requests
relating to an Account with respect to which information was
transmitted to Heller through Transmission, Heller will have the
right to charge back such Account to Client.
5.2 Client will promptly notify Heller, by Written Notice, in the event
that a customer alleges any Dispute, or returns or desires to return
any goods purchased from Client relating to an Account. After an
Event of Default, Heller may but is not obligated to settle,
compromise, adjust or litigate all such Disputes or returns upon such
terms as Heller deems advisable. If an unadjusted Dispute delays the
payment of any Approved Account when due, Heller will have the right
to charge back to Client that Account.
5.3 Client will supply customers, in the format required by customers,
with all forms, documents, certificates, etc. that customer requires
to process the Account for payment. If Heller notifies Client
verbally and/or by Written Notice or Transmission that a customer
which only accepts invoices for payment from Client through
Transmission is requesting that Client review its invoice data for
correctness and re-transmit invoices by Transmission and if after
thirty (30) days from the date of such Notice such invoices remain
unposted to such customer's records, Heller will place the Accounts
evidenced by such invoices in Dispute.
5.4 Heller may, at Heller's option, charge back to Client all amounts
owing on Non-Approved Accounts which are not paid when due.
5.5 Client will pay Heller, or Heller may charge Client's account with,
the amount of any payment which Heller receives with respect to a
Non-Approved Account if such payment is subsequently disgorged by
Heller, whether as a result of any proceeding in bankruptcy or
otherwise.
5.6 Client shall purchase promptly all Accounts charged back by Heller,
provided, however, that until payment by Client to Heller of all
monies due with respect to such charged back Account, title thereto
shall remain with Heller. At such time as Client shall pay to Heller
all monies due with respect to such charged back account, title shall
pass to Client subject, however, to Heller's security interest
therein. Client agrees to indemnify and save Heller harmless from and
against any and all loss, costs and expenses caused by or arising out
of disputed Accounts, including, but not limited to, collection
expenses and attorney's fees incurred with respect thereto.
5.7 Heller may maintain such reserves as Heller, in Heller's sole
discretion, deems advisable as security for the payment and
performance of the Obligations, including, without limitation,
reserves for the amount of any Account which is subject to a Dispute.
SECTION 6. ADMINISTRATION
6.1 Client will, from time to time, (i) execute and deliver to Heller
confirmatory schedules of Accounts assigned to Heller (each an
"ASSIGNMENT SCHEDULE"), together with one copy of each invoice,
acceptable evidence of shipment and such other documentation and
proofs of delivery as Heller may require or (ii) transmit to Heller
by Transmission information concerning Accounts in a format
acceptable to Heller and, upon Heller's request, deliver to Heller
copies of invoices, acceptable evidence of shipment and such other
documentation and proofs of delivery as Heller may require relating
to Accounts so transmitted. Client will not deliver Assignment
Schedules in connection with Transmissions, but Client acknowledges
and agrees that every invoice transmitted to Heller by Transmission
will be
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deemed to have been sent pursuant to the terms and conditions of an
Assignment Schedule. Each invoice relating to an Account and all
copies and Transmissions thereof will bear a notice, in form
satisfactory to Heller, that the Account has been sold and assigned
to and is payable only to Heller. Client agrees that Client will not
change such notice on invoices and will not direct its customers to
pay Client or any third party amounts due under invoices. Client
agrees to prepare and mail (or when required, send by Transmission)
all invoices relating to Accounts, but Heller may do so at Heller's
option. Client agrees to execute and deliver to Heller such further
instruments of assignment, financing statements and instruments of
further assurance as Heller may reasonably require. Client authorizes
Heller to execute on Client's behalf and file such UCC financing
statements as Heller may deem necessary in order to perfect and
maintain the security interests granted by Client in accordance with
this Agreement. Client further agrees that Heller may file this
Agreement or a copy thereof as such UCC financing statement.
6.2 If any remittances are made directly to Client or Client's employees
or agents, Client will act as trustee of an express trust for
Heller's benefit, hold the same as Heller's property and deliver the
same to Heller forthwith in kind. Heller and/or such designee as
Heller may from time to time appoint are hereby appointed Client's
attorney-in-fact to endorse Client's name on any and all checks or
other forms of remittances received by Heller where such endorsement
is required to effect collection and to transmit notices to
customers, in Client's or Heller's name, that amounts owing by them
have been assigned and are payable directly to Heller; this power,
being coupled with an interest, is irrevocable.
6.3 Client shall permit Heller and any representatives designated by
Heller to visit and inspect any of the properties of Client,
including its financial and accounting records, and to make copies
and take extracts therefrom, and to discuss its affairs, finances,
and business with its officers at such times during normal business
hours and as often as Heller requests. Heller may, at any time after
the occurrence of an Event of Default, remove from Client's premises
all such records, files and books relating to Accounts.
6.4 If Heller determines that the credit standing of a customer has
deteriorated after Heller has assumed the Credit Risk on an Account,
Client will, at Heller's request, exercise such rights as Client may
have to reclaim or stop the goods in transit, and Client hereby
grants to Heller the right to take such steps in Client's or Heller's
name.
6.5 Heller will render a monthly statement of account to Client within
twenty (20) days after the end of each month. Such statement of
account will constitute an account stated and Client agrees to be
bound by the contents thereof unless Client makes objection thereto
by Written Notice within one hundred eighty (180) days from the date
such statement is rendered to Client.
6.6 Client will maintain a system of accounting established and
administered in accordance with sound business practices to permit
preparation of financial statements in conformity with GAAP. Client
will promptly furnish Heller with such statements prepared by or for
Client showing Client's financial condition and the results of
Client's operations as Heller requests verbally or by Written Notice.
Client authorizes Heller to communicate directly with Client's
independent certified public accountants and authorizes such
accountants to discuss Client's financial condition and financial
statements directly with Heller.
6.7 Client authorizes Heller to disclose such information as Heller deems
appropriate to persons making credit inquiries about Client.
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6.8 Heller will maintain a High Risk Accounts list which shall designate
all customers that are subject to a surcharge and the amount of such
surcharge. A current copy of the list will be available to Client at
any time upon request; however, the list is subject to change at any
time. All single order approvals on high risk customers will specify
"subject to surcharge".
SECTION 7. COLLATERAL SECURITY
As collateral security for all Obligations, Client hereby assigns and grants to
Heller a continuing security interest in all of the following property, whether
now owned by Client or hereafter created or acquired by Client or arising in
Client's favor: (i) Accounts other than Non-Factored Accounts; (ii) monies,
securities and other property now or hereafter held or received by, or in
transit to Heller from or for Client, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all of Client's deposits, reserves,
and credit balances in Heller's possession; (iii) books, records and other
property at any time evidencing or relating to any of the foregoing property;
and (iv) proceeds of any of the foregoing property including, without
limitation, the proceeds of any insurance policies covering any of the foregoing
property. Recourse to the collateral security herein provided will not be
required, and Client will at all times remain liable for the payment and
performance of the Obligations upon demand by Heller.
SECTION 8. EVENTS OF DEFAULT
The occurrence of any of the following acts or events will constitute an Event
of Default: (a) if Client fails to make payment of any of the Obligations when
due; (b) if Client fails to make any remittance required by this Agreement; (c)
if Client commits any breach of any of the terms, representations, warranties,
covenants, conditions or provisions of this Agreement, or of any present or
future supplement or amendment hereto or of any other agreement between Heller
and Client; (d) if Client becomes insolvent or unable to meet Client's debts as
they mature; (e) if Client fails to pay when due any material obligations or
liabilities owing by Client to any person or entity (including without
limitation, any United States and state taxes); (f) if Client delivers to Heller
a false financial statement or if any representation, warranty, certification,
or other statement made by Client to Heller is false in any material respect
when made; (g) if Client calls, or has called by a third party, a meeting of
creditors; (h) if any bankruptcy proceeding, insolvency arrangement or similar
proceeding is commenced by or against Client; (i) if Client suspends or
discontinues doing business for any reason; (j) if a receiver or trustee of any
kind is appointed for Client or any of Client's property; (k) if any guarantor
of Client's Obligations dies or becomes insolvent or has commenced by or against
such guarantor any bankruptcy proceeding, insolvency arrangement or similar
proceeding; (l) if any guaranty of Client's Obligations is terminated or any
guarantor alleges that the guaranty is unenforceable, or if there is a default
under any such guaranty; (m) if there shall be a change in the beneficial
ownership and control, directly or indirectly, of the majority of the
outstanding voting securities or other interests entitled (without regard to the
occurrence of any contingency) to elect or appoint members of the board of
directors or other managing body of Client; (n) if a notice of lien, money
judgment, levy, assessment, seizure or writ, or warrant of attachment is entered
or filed against Client or with respect to the Accounts or any other collateral
in which Client has granted Heller a security interest in an amount in excess of
$500,000; or (o) if Client sells, leases, transfers or otherwise disposes of all
or substantially all of Client's property or assets, or consolidates with or
merges into or with any corporation or entity.
Client shall have the following cure periods for the following Events of
Default:
(8.1) Client shall have a cure period of five days from the applicable
due date for payment or remittance under subparts (a) and (b)
above.
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(8.2) Client shall have a cure period of sixty days from the
commencement of any meeting or proceeding under subpart
(g) to the extent the meeting was not called by Client,
(h) to the extent Client did not commence the proceeding,
and (k) to the extent such guarantor did not commence the
proceeding.
If Client fails to cure or have cured an Event of Default for which there is a
cure period within the applicable cure period, Heller will have the right to
terminate this Agreement and all other arrangements existing between Client and
Heller forthwith and without notice, and the Obligations will mature and become
immediately due and payable and Heller will have the right to withhold any
further payments to Client until all Obligations have been paid in full. In
addition Heller will have all of the rights of a secured party under the UCC,
including, without limitation, the right to take possession of any collateral in
which Heller has a security interest and to dispose of same at public or private
sale and Client will be liable for any deficiency. Heller will not be required
to proceed against any collateral but may proceed against Client directly.
If either party to this Agreement shall bring any action for any relief against
the other, declaratory or otherwise, arising out of this Agreement, the losing
party shall pay to the prevailing party a reasonable sum for attorney fees
incurred in bringing such suit and/or enforcing any judgment granted therein,
all of which shall be deemed to have accrued upon the commencement of such
action and shall be paid whether or not such action is prosecuted to judgment.
Any judgment or order entered in such action shall contain a specific provision
providing for the recovery of attorney fees and costs incurred in enforcing such
judgment. For the purposes of this section, attorney fees shall include, without
limitation, fees incurred in the following: (1) postjudgment motions; (2)
contempt proceedings; (3) garnishment, levy, and debtor and third party
examinations; (4) discovery; and (5) bankruptcy litigation.
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SECTION 9. TERM AND TERMINATION
This Agreement will continue in force and effect for an original term of three
(3) years from the Effective Date and from year to year thereafter, but may be
terminated at the end of the original term or at the end of any subsequent one
year term by either Heller or Client giving the other party not less than sixty
(60) days prior Written Notice thereof; provided, however, that Client will not
terminate this Agreement so long as Client is indebted or obligated to Heller in
connection with any other agreements between Heller and Client.
Notwithstanding any such Written Notice of termination, Client's and Heller's
respective rights and obligations arising out of transactions having their
inception prior to the date of termination of this Agreement will not be
affected by the termination of this Agreement and all terms, provisions and
conditions hereof, including but not limited to, the security interests
hereinabove granted to Heller (including Heller's security interest in Accounts
arising, acquired or created after the date of termination of this Agreement),
will continue in full force and effect until all Obligations have been paid in
full. All of the representations, warranties, indemnities and covenants made by
Client herein (including without limitation the undertaking set forth in Section
5.5 hereof) will survive the termination of this Agreement.
SECTION 10. MODIFICATIONS, WAIVERS, NOTICES AND MISCELLANEOUS PROVISIONS
This Agreement embodies the entire agreement among the parties hereto and
supersedes all prior commitments, agreements, representations, and
understandings, whether written or oral, relating to the subject matter hereof,
and may not be contradicted or varied by evidence of prior, contemporaneous, or
subsequent oral agreements or discussions of the parties hereto. This Agreement
will be binding upon Client's and Heller's respective successors and assigns,
but may not be assigned by Client without Heller's prior written consent. No
delay or failure on Heller's part in exercising any right, privilege, or option
hereunder will operate as a waiver thereof or of any other right, privilege or
option. No waiver whatsoever will be valid unless in a Written Notice, signed by
Heller, and then only to the extent therein set forth. If any term or provision
of this Agreement is held invalid under any statute, rule or regulation of any
jurisdiction competent to make such a decision, the remaining terms and
provisions will not be affected, but will remain in full force and effect.
Any Written Notice to be given under this Agreement will be in writing addressed
to the respective party as set forth in the heading to this Agreement (or such
other address as may have been designated in a Written Notice) and will be
personally served, telecopied or sent by overnight courier service or United
States mail and will be deemed to have been given: (a) if delivered in person,
when delivered; (b) if delivered by telecopy, on the date of transmission if
transmitted on a Business Day before 4:00 p.m. Los Angeles time or, if not, on
the next succeeding Business Day; (c) if delivered by overnight courier, two (2)
days after delivery to such courier properly addressed; or (d) if by U.S. Mail,
four (4) Business Days after depositing in the United States mail, with postage
prepaid and properly addressed.
Heller conducts business under California Finance Lender License number
603-2495.
SECTION 11. GOVERNING LAW, VENUE AND WAIVER OF JURY
APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
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CONSENT TO JURISDICTION. CLIENT HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE
OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA
AND IRREVOCABLY AGREES THAT, SUBJECT TO HELLER'S ELECTION, ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN
SUCH COURTS. CLIENT EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. CLIENT HEREBY
WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE
OF PROCESS MAY BE MADE UPON CLIENT BY CERTIFIED OR REGISTERED MAIL, RETURN
RECEIPT REQUESTED, ADDRESSED TO CLIENT, AT THE ADDRESS SET FORTH IN THIS
AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS
BEEN POSTED.
WAIVER OF JURY TRIAL. CLIENT AND HELLER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT. CLIENT AND HELLER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL
INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE
WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON
THE WAIVER IN THEIR RELATED FUTURE DEALINGS. CLIENT AND HELLER WARRANT AND
REPRESENT THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH
LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS.
SECTION 12. DEFINITIONS
"Accounts" -- All presently existing or outstanding and all hereafter created or
acquired accounts (as that term is defined in the UCC) and all contract rights,
documents, notes, drafts, instruments and other forms of obligations owed to or
owned by Client arising or resulting from the sale of goods or the rendering of
services by Client, all general intangibles relating thereto, all proceeds
thereof, all guaranties and security therefor, and all goods and rights
represented thereby or arising therefrom, including, but not limited to,
returned, reclaimed and repossessed goods and the rights of stoppage in transit,
replevin and reclamation.
"Approved Account" -- An Account representing a sale to a customer within the
credit line established for such customer on Client's normal selling terms or
within the single order credit approval given by Heller for orders from such
customer provided that Delivery is completed while the credit line or single
order credit approval remains in effect and which has not been charged back to
Client.
"Approved Payment Date" -- The date which is one hundred twenty (120) days after
the due date for payment of an Approved Account.
"Base Rate" -- The rate of interest publicly announced from time to time by Bank
of America National Trust and Savings Association as its Prime, Base or
equivalent rate.
"Business Day" -- Any day excluding Saturday, Sunday and any day which is a
legal holiday under the laws of the States of Illinois, Pennsylvania, or
California or is a day on which banking institutions located in any such state
are closed.
"Collected Amount" -- The amount received by Heller from a customer in payment
of an Account up to the Net Amount of such Account.
"Collection Date" -- The date on which Heller receives payment of an Account.
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"Contract Year" -- The twelve month period commencing on the Effective Date or
any anniversary thereof.
"Costs" -- All costs fees and expenses (including attorney's fees and the
allocated costs of internal counsel) incurred by Heller in connection with (i)
the creation, negotiation or administration of this Agreement, any related
instrument, document or agreement, or any waiver, forbearance, amendment or
modification thereof (ii) the perfection, protection, preservation or
enforcement of Heller's rights in any collateral in which Heller has been
granted a security interest and (iii) all filing fees, filing taxes or search
reports.
"Credit Risk" -- The risk that a customer will be financially unable to pay an
Account at maturity, provided that the merchandise has been received or services
rendered and accepted by the customer without Dispute.
"Delivery" -- The delivery of goods or performance of services in accordance
with the terms agreed to in writing between Client and a customer, provided that
if no such terms are specified in writing, delivery shall mean delivery of goods
or performance of services at the customer's place of business.
"Dispute" -- A dispute or claim, bona fide or otherwise, as to price, terms,
quantity, quality, Delivery, or any claim or defense to collection or payment of
an Account whatsoever other than the financial inability of a customer to pay
the Account.
"Effective Date" -- The date set forth below Heller's signature hereto.
"GAAP" -- Generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board that are applicable to the circumstances as of the
date of determination.
"Heller Clients" -- Any persons, corporations, partnerships, companies,
associations or entities (other than Client) which have entered into factoring,
intercredit or financing agreements with Heller.
"High Risk Accounts" -- the Accounts that are due from customers that are
designated by Heller as high credit risk.
"Ledger Debt" -- Indebtedness owing by Client to Heller as a result of Heller's
purchases of invoices evidencing sales to Client by Heller Clients.
"Net Amount" -- The gross amount of an Account less the discount offered by
Client and taken by Heller at the time Heller purchases such Account.
"Non-Approved Account" -- (a) An Account with respect to which Heller has not
issued a credit approval or has subsequently withdrawn a credit approval or (b)
an Approved Account that has been charged back to Client.
"Non-Factored Account"-- all Accounts that are not purchased by Heller pursuant
to this Agreement.
"Obligations" -- All loans, debts, liabilities, obligations, covenants and
duties owing by Client to Heller, direct or indirect, absolute or contingent,
due or to become due, now existing or hereafter arising, including, without
limitation, Ledger Debt and indebtedness arising under any guaranty made by
Client for Heller's benefit or issued by Heller on Client's behalf.
"Payment Date" -- The Collection Date or the Approved Payment Date as
applicable.
12
<PAGE> 13
"Purchase Price" -- An amount equal to the Net Amount of an Account, less
factoring commissions, credits (including, without limitation, merchandise
returns and credit memos), charge backs, allowances, and all other fees and
charges provided hereunder.
"Standard Surcharge" -- the surcharge rate designated on the High Risk Accounts
list.
"Transmission" -- Transmission through Heller's proprietary system or through
Electronic Data Interchange.
"UCC" -- The Uniform Commercial Code as in effect on the date hereof in the
State of California, as amended from time to time, and any successor statute.
"Written Notice" -- Notice given in writing in accordance with Section 10 of
this Agreement.
In Witness Whereof, the undersigned have caused this agreement to be executed
and delivered by their thereunto duly authorized officers as of the Effective
Date.
HELLER FINANCIAL, INC. THE SIRENA APPAREL GROUP, INC.
By: /s/ D. E. PLANEAUX By: /s/ RICHARD GERHART
------------------------------- ---------------------------
Name: D. E. Planeaux Name: Richard Gerhart
Title: S.V.P. Title: CFO
Effective Date: April 22, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 107,000
<SECURITIES> 0
<RECEIVABLES> 13,998,000
<ALLOWANCES> 1,347,000
<INVENTORY> 17,657,000
<CURRENT-ASSETS> 31,321,000
<PP&E> 6,524,000
<DEPRECIATION> 3,854,000
<TOTAL-ASSETS> 39,475,000
<CURRENT-LIABILITIES> 19,926,000
<BONDS> 130,000
0
0
<COMMON> 51,000
<OTHER-SE> 19,368,000
<TOTAL-LIABILITY-AND-EQUITY> 39,475,000
<SALES> 41,928,000
<TOTAL-REVENUES> 41,928,000
<CGS> 24,779,000
<TOTAL-COSTS> 13,332,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 51,000
<INTEREST-EXPENSE> 894,000
<INCOME-PRETAX> 2,872,000
<INCOME-TAX> 135,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,737,000
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.52
</TABLE>
