<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1998
-----------------
[ ] 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 O-4136
------
Lifecore Biomedical, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0948334
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3515 Lyman Boulevard
Chaska, Minnesota 55318
- ------------------------------- ----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 612-368-4300
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----
The number of shares outstanding of the registrant's Common Stock, $.01 per
value, as of January 15, 1999 was 12,409,872 shares.
1
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Operations for Three
Months and Six Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
Six Months Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. Other Information
Item 6. a. Exhibit Index 16
b. Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 661,000 $ 2,092,000
Short-term investments -- 3,953,000
Accounts receivable 5,609,000 4,609,000
Inventories 13,729,000 12,918,000
Prepaid expenses 603,000 503,000
------------- -------------
20,602,000 24,075,000
Property, plant and equipment
Land, building and equipment 40,811,000 39,840,000
Less accumulated depreciation (8,281,000) (6,948,000)
------------- -------------
32,530,000 32,892,000
Other assets
Intangibles 5,524,000 5,786,000
Security deposits 869,000 848,000
Inventories 4,970,000 2,775,000
Other 519,000 572,000
------------- -------------
11,882,000 9,981,000
------------- -------------
$ 65,014,000 $ 66,948,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 1,333,000 $ 1,733,000
Line of credit 593,000 --
Accounts payable 1,754,000 3,783,000
Accrued compensation 459,000 804,000
Accrued expenses 588,000 671,000
------------- -------------
4,727,000 6,991,000
Long-term obligations 6,591,000 6,658,000
Shareholders' equity 53,696,000 53,299,000
------------- -------------
$ 65,014,000 $ 66,948,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
----------------------------------- ------------------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 6,881,000 $ 6,258,000 $ 12,386,000 $ 11,472,000
Cost of goods sold 2,692,000 2,838,000 5,029,000 5,365,000
------------ ------------ ------------ ------------
Gross profit 4,189,000 3,420,000 7,357,000 6,107,000
Operating expenses
Research and development 917,000 1,140,000 2,026,000 2,484,000
Marketing and sales 1,842,000 1,852,000 3,481,000 3,582,000
General and administrative 810,000 849,000 1,708,000 1,606,000
------------ ------------ ------------ ------------
3,569,000 3,841,000 7,215,000 7,672,000
------------ ------------ ------------ ------------
Operating income (loss) 620,000 (421,000) 142,000 (1,565,000)
Other income (expense)
Interest income 31,000 253,000 165,000 548,000
Interest expense (201,000) (7,000) (449,000) (61,000)
------------ ------------ ------------ ------------
(170,000) 246,000 (284,000) 487,000
------------ ------------ ------------ ------------
Net income (loss) $ 450,000 $ (175,000) $ (142,000) $ (1,078,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share
Basic $ .04 $ (.01) $ (.01) $ (.09)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ .04 $ (.01) $ (.01) $ (.09)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average
shares outstanding
Basic 12,402,230 12,239,438 12,382,335 12,232,232
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 12,470,147 12,239,438 12,382,335 12,232,232
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net cash used in operating activities $ (5,097,000) $ (2,457,000)
Cash flows from investing activities:
Purchases of property, plant and equipment (971,000) (5,956,000)
Purchases of investments (2,485,000) (2,984,000)
Maturities of investments 6,438,000 11,652,000
Purchases of intangibles (25,000) (24,000)
Other 44,000 207,000
------------ ------------
Net cash provided from investing activities 3,001,000 2,895,000
Cash flows from financing activities:
Payment of long-term obligations (467,000) (61,000)
Net advances on line of credit 593,000 --
Proceeds from stock issuance 539,000 292,000
------------ ------------
Net cash provided from financing activities 665,000 231,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,431,000) 669,000
Cash and cash equivalents at beginning of period 2,092,000 1,371,000
------------ ------------
Cash and cash equivalents at end of period $ 661,000 $ 2,040,000
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 453,000 $ 353,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
NOTE A - FINANCIAL INFORMATION
Lifecore Biomedical, Inc. (the "Company" or "Lifecore"), develops, manufactures,
and markets surgically implantable materials and devices through its two
divisions, the Hyaluronate Division and the Oral Restorative Division at its
facility in Chaska, Minnesota. The Hyaluronate Division markets its products
through OEM and contract manufacturing alliances in the fields of ophthalmology,
veterinary and wound care management. The Oral Restorative Division markets its
products through direct sales in the United States and Italy and through
distributors in other foreign countries.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations. Results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year or of the results for
any future periods.
In preparation of the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
NOTE B - INVESTMENTS
The Company has invested its excess cash in commercial paper and medium term
corporate notes. These investments are classified as held-to-maturity given the
Company's intent and ability to hold the securities to maturity and are carried
at amortized cost. Investments that have maturities of less than one year have
been classified as short-term investments. At December 31, 1998 and June 30,
1998, amortized cost approximates fair value of held-to-maturity investments
which consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------- ----------
(Unaudited)
<S> <C> <C>
Short-term investments:
Medium term corporate notes $ -- $3,953,000
------------- ----------
$ -- $3,953,000
------------- ----------
------------- ----------
</TABLE>
6
<PAGE>
NOTE C - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories not expected to be consumed within one year are classified
as a long-term asset. Finished good inventories include hyaluronic acid,
packaged aseptic and oral restorative products. Inventories consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Raw materials $ 4,028,000 $ 4,236,000
Work in progress 95,000 204,000
Finished goods 14,576,000 11,253,000
------------- -------------
$ 18,699,000 $ 15,693,000
------------- -------------
------------- -------------
</TABLE>
NOTE D - AGREEMENTS
In 1994, Lifecore and Ethicon, Inc. ("Ethicon"), a subsidiary of Johnson &
Johnson, entered into a Conveyance, License, Development and Supply Agreement
(the "Ethicon Agreement"). Under the terms of the Ethicon Agreement, Ethicon
transferred to Lifecore its ownership in certain technology related to research
and development previously conducted on the Company's sodium hyaluronate
material. The technology transferred to Lifecore includes written technical
documents related to Ethicon's research and development of a product to inhibit
the formation of surgical adhesions. These documents include product
specifications, methods and techniques, technology, know-how and certain
patents. Lifecore has assumed responsibility for continuing the anti-adhesion
development project including conducting human clinical trials on INTERGEL-TM-
Adhesion Prevention Solution (formerly known as LUBRICOAT Gel), a second
generation hyaluronate-based product. Lifecore has granted Ethicon exclusive
worldwide marketing rights through 2008 to the products developed by Lifecore
within defined fields of use.
The Company has made and continues to make a significant investment in the
development and testing of INTERGEL-TM- Adhesion Prevention Solution, a product
designed to reduce the incidence of postsurgical adhesions. If the product is
successfully developed and the Company receives clearance from the United States
Food and Drug Administration ("FDA"), there can be no assurance that it will
receive market acceptance. Failure to achieve significant sales of the product
could have a material adverse effect on future prospects for the Company's
operations.
NOTE E - COMMITMENTS
The Company has completed the expansion of its manufacturing and distribution
capabilities at its Chaska, Minnesota location. The expansion included building
and equipment expenditures for warehouse and distribution capabilities, and
aseptic-packaging facilities for finished products. At June 30, 1998, the
expansion assets were placed in service. At June 30, 1998, firm purchase
commitments related to the expansion of approximately $1,770,000 were recorded
in accounts payable.
7
<PAGE>
NOTE F - CAPITALIZED INTEREST
During the three-and six-month periods ended December 31, 1997, $192,000 and
$345,000 of interest was capitalized in conjunction with the facility expansion
project.
NOTE G - LINE OF CREDIT
On December 28, 1998, the Company renewed its agreement with a bank for a
$5,000,000 line of credit. The agreement allows for advances against eligible
accounts receivable and inventories, subject to a borrowing base certificate.
Interest is accrued at the prime rate, which was 7.75% at December 31, 1998. The
agreement is for a three-year term with a maturity of December 28, 2001. At
December 31, 1998, there was $593,000 outstanding under this line of credit.
NOTE H - NOTE PAYABLE ON ACQUISITION OF TEFGEN MEMBRANE PRODUCT LINE
In May 1997, the Company acquired the technology and regulatory rights in the
TefGen membrane product line from Bridger Biomed, Inc. As consideration for the
$2,400,000 acquisition price, the Company paid $800,000 in cash and issued a
note payable for $1,600,000. The note, as amended, bears interest at 6% per
annum with a principal payment of $400,000 plus interest made in July 1998 and a
principal payment of $1,200,000 plus interest due in May 1999. The principal
payments may be made in cash or the Company's common stock at the Company's
option. If the Company chooses its common stock as the form of payment, the note
holder has certain registration rights. The Company exercised its option to make
the July 1998 principal payment of $400,000 plus interest in the form of the
Company's common stock, and accordingly, 28,413 shares of common stock were
issued in July 1998 under the formula described in the note. The note is secured
by the purchased assets. The cost of the technology and regulatory rights is
being amortized on a straight-line basis over 15 years.
NOTE I - NET INCOME (LOSS) PER SHARE
The Company's basic net income (loss) per share amounts have been computed by
dividing net income (loss) by the weighted average number of outstanding common
shares. The Company's diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For the three months ended December 31, 1998, 67,917 shares of common stock
equivalents were included in the computation of diluted net income per share.
For the three months ended December 31, 1997 and the six months ended December
31, 1998 and 1997, the Company reported net losses and as such, no common share
equivalents were included in the computation of diluted net loss per share.
However, if the Company would have reported net income in the three months ended
December 31, 1997 and the six months ended December 31, 1998 and 1997, the
common share equivalents that would have been included in the computation of
diluted net income per share were 473,425, 72,059 and 321,410, respectively.
Options to purchase 1,488,568 and 233,500 shares of common stock with a weighted
average exercise price of $15.71 and $20.24 were outstanding at December 31,
1998 and 1997, respectively, but were excluded from the computation of common
share equivalents because their exercise prices were greater than the average
market price of the common shares on such dates.
8
<PAGE>
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income includes
certain changes in equity that were excluded from net earnings. The adoption of
this statement did not impact the Company's consolidated financial statements;
historically, there have been no differences between net earnings and
comprehensive income.
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of and Enterprise and Related Information." This statement
requires companies to disclose financial and other information about its
business segments as part of their consolidated financial statements. The
Company will include the required business segment disclosures in its June 30,
1999 Annual Report.
9
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
(Unaudited) HYALURONATE ORAL RESTORATIVE
DIVISION DIVISION
------------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,291,000 $ 2,262,000 $ 4,590,000 $ 3,996,000
Cost of goods sold 1,010,000 1,220,000 1,682,000 1,618,000
----------- ----------- ----------- -----------
Gross profit 1,281,000 1,042,000 2,908,000 2,378,000
Operating expenses
Research and development 799,000 1,008,000 118,000 132,000
Marketing and sales 23,000 50,000 1,819,000 1,802,000
General and administrative 325,000 357,000 485,000 492,000
----------- ----------- ----------- -----------
1,147,000 1,415,000 2,422,000 2,426,000
----------- ----------- ----------- -----------
Operating income (loss) $ 134,000 $ (373,000) $ 486,000 $ (48,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
CONSOLIDATED
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 6,881,000 $ 6,258,000
Cost of goods sold 2,692,000 2,838,000
----------- -----------
Gross profit 4,189,000 3,420,000
Operating expenses
Research and development 917,000 1,140,000
Marketing and sales 1,842,000 1,852,000
General and administrative 810,000 849,000
----------- -----------
3,569,000 3,841,000
----------- -----------
Operating income (loss) $ 620,000 $ (421,000)
----------- -----------
----------- -----------
</TABLE>
Net sales for the quarter ended December 31, 1998 increased $623,000 or 10% as
compared to the same quarter of last fiscal year. Hyaluronate product sales for
the current quarter increased $29,000 as compared to the same quarter of last
fiscal year. The sales increase was from higher ophthalmic revenues offset by
lower product development revenues compared to the prior year. Oral restorative
product sales for the current quarter increased 15% compared to the same quarter
of last fiscal year. This increase is from the tissue regeneration and implant
product lines. Oral restorative product sales increased in the domestic market,
but were flat in the international market when compared with the same quarter of
last fiscal year.
Consolidated gross margin increased to 61% for the current quarter from 55% for
the same quarter of last fiscal year. The gross margin for the Hyaluronate
Division increased to 56% from 46% due to the expanded utilization of the
Company's aseptic and hyaluronate production capacity. The gross margin for the
Oral Restorative Division increased to 63% for the current quarter from 60% for
the same quarter of last fiscal year. The increase is the result of a focus on
improved sales margins and, to a lesser extent, the leveraging of overhead costs
over a greater sales base.
Research and development expenses decreased $223,000 or 20% for the current
quarter as compared to the same quarter of last fiscal year. The decrease
resulted principally from decreased costs associated with human clinical trials
on INTERGEL-TM- Adhesion Prevention Solution as the study enrollment has ended
for the laparotomy trial, but continues for the laparoscopy trial.
Marketing and sales expenses decreased slightly for the current quarter as
compared to the same quarter of last fiscal year. Advertising and marketing
expenses were higher a year ago due to the introduction of the tissue
regeneration products. This decrease was partially offset by higher compensation
costs for
10
<PAGE>
LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION - (CONT.)
additional sales personnel and commissions on an increased oral restorative
sales base for the current quarter.
General and administrative expenses decreased 5% for the current quarter as
compared to the same quarter last fiscal year. The year ago period included
outside professional services related to Year 2000.
Other income (expense) decreased $416,000 for the current quarter as compared to
the same quarter of last fiscal year. The $222,000 decrease in interest income
results from a lower average amount of cash to invest than in the same quarter
of last fiscal year. Interest expense increased $194,000 for the current quarter
principally due to capitalization of interest expense associated with the
facility expansion project in the quarter a year ago. The facility expansion was
complete as of June 30, 1998 and thus, no interest was capitalized during the
current quarter.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1997
<TABLE>
(Unaudited) Hyaluronate Oral Restorative
Division Division
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 3,580,000 $ 4,209,000 $ 8,806,000 $ 7,263,000
Cost of goods sold 1,688,000 2,314,000 3,341,000 3,051,000
------------ ------------ ------------ ------------
Gross profit 1,892,000 1,895,000 5,465,000 4,212,000
Operating expenses
Research and development 1,807,000 2,232,000 219,000 252,000
Marketing and sales 51,000 88,000 3,430,000 3,494,000
General and administrative 711,000 658,000 997,000 948,000
------------ ------------ ------------ ------------
2,569,000 2,978,000 4,646,000 4,694,000
------------ ------------ ------------ ------------
Operating income (loss) $ (677,000) $ (1,083,000) $ 819,000 $ (482,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
Consolidated
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 12,386,000 $ 11,472,000
Cost of goods sold 5,029,000 5,365,000
------------ ------------
Gross profit 7,357,000 6,107,000
Operating expenses
Research and development 2,026,000 2,484,000
Marketing and sales 3,481,000 3,582,000
General and administrative 1,708,000 1,606,000
------------ ------------
7,215,000 7,672,000
------------ ------------
Operating income (loss) $ 142,000 $ (1,565,000)
------------ ------------
------------ ------------
</TABLE>
Net sales for the six months ended December 31, 1998 increased $914,000 or 8% as
compared to the same period of last fiscal year. Hyaluronate product sales for
the period decreased $629,000 as compared to the same period of last fiscal
year. The sales decrease was the result of lower ophthalmic revenues compared to
the same period of last fiscal year, offset by sales of INTERGEL-TM- Solution in
the first quarter of fiscal year 1999. Oral restorative product sales for the
current period increased 21% compared to the same period of last fiscal year.
This increase is from the tissue regeneration and implant product lines. Oral
restorative product sales increased in both the domestic and the international
markets when compared with the same period of last fiscal year.
Consolidated gross margin increased to 59% for the current period from 53% for
the same period of last fiscal year. The gross margin for the Hyaluronate
Division increased to 53% from 45% due to the expanded utilization of the
Company's aseptic and hyaluronate production capacity. The gross margin for the
Oral Restorative Division increased to 62% for the current period from 58% for
the same period of last
11
<PAGE>
fiscal year. The increase is the result of a focus on improved sales margins
and, to a lesser extent, the leveraging of overhead costs over a greater
sales base.
Research and development expenses decreased $458,000 or 18% for the current
period as compared to the same period of last fiscal year. The decrease resulted
principally from decreased costs associated with human clinical trials on
INTERGEL-TM- Adhesion Prevention Solution as the study enrollment has ended for
the laparotomy trial, but continues for the laparoscopy trial.
Marketing and sales expenses decreased $101,000 or 3% for the current period as
compared to the same period of last fiscal year. Advertising and marketing
expenses were higher a year ago due to the introduction of the tissue
regeneration products. This decrease was partially offset by higher compensation
costs for additional sales personnel and commissions on an increased oral
restorative sales base for the current period.
General and administrative expenses increased $102,000 or 6% for the current
period as compared to the same period last fiscal year. The increase is
principally from higher personnel related costs and expenses from outside
professional services.
Other income (expense) decreased $771,000 for the current period as compared to
the same period of last fiscal year. The $383,000 decrease in interest income
results from a lower average amount of cash to invest than in the same period of
last fiscal year. Interest expense increased $388,000 for the current period
principally due to capitalization of interest expense associated with the
facility expansion project in the period a year ago. The facility expansion was
complete as of June 30, 1998 and thus, no interest was capitalized during the
current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Annual Report on Form 10-K for the year ended June 30, 1998
contains a detailed discussion of Lifecore's liquidity and capital resources. In
conjunction with this Quarterly Report on Form 10-Q, investors should read the
1998 Form 10-K.
Inventories consist mainly of finished hyaluronate and oral restorative products
and related raw materials. The portion of finished hyaluronate inventory that is
not expected to be consumed within the next twelve months is classified as
long-term. The finished hyaluronate inventory is maintained in a frozen state
and has a shelf life in excess of five years. Total inventory increased during
the current period as compared to the same period of a year ago principally due
to building of hyaluronate inventory levels in anticipation of the demand for
INTERGEL Solution.
The Company has had significant operating cash flow deficits for the last three
fiscal years. As the Hyaluronate Division's production levels increase, its
related production efficiencies increase. However, marketing and sales expenses
for the oral restorative products are expected to continue at a high level, and
personnel costs have increased. The ongoing research and development costs for
INTERGEL-TM- Adhesion Prevention Solution will continue throughout this fiscal
year, but the costs should be at a lower rate than the previous year. During
fiscal 1998 and 1997, the Company expanded its manufacturing and distribution
capabilities at its Chaska, Minnesota location. The expansion included building
and equipment expenditures for warehouse and distribution capabilities and
scale-up of aseptic-packaging facilities for finished products. The cost of the
expansion totaled approximately $19 million and was completed in June
12
<PAGE>
1998. The expansion was funded from the proceeds of investment maturities.
This expansion provides future capacity, but increases the level of fixed
charges to be absorbed by operations.
On December 28, 1998, the Company renewed its agreement with a bank for a
$5,000,000 line of credit. The agreement allows for advances against eligible
accounts receivable and inventories, subject to a borrowing base certificate.
Interest is accrued at the prime rate. The line of credit matures on December
28, 2001.
The Company's ability to generate positive cash flow from operations and achieve
profitability is dependent upon the continued expansion of revenue from its
hyaluronate and oral restorative businesses. Growth in the Hyaluronate Division
is unpredictable due to the complex governmental regulatory environment for new
medical products and the early stage of certain of these markets. Similarly,
expansion of the Company's Oral Restorative Division sales is also dependent
upon increased revenue from new and existing customers, as well as successfully
competing in a more mature market. With the completion of the facility
expansion, the Company expects its cash generated from anticipated operations
and the availability of the line of credit to satisfy cash flow needs in the
near term. No assurance can be given that the Company will attain and maintain
positive cash flow before its capital resources are exhausted. While the
Company's capital resources appear adequate today, unforeseen events, prior to
achieving and maintaining positive cash flow, could require additional
financing. If additional financing is necessary, no assurance can be given that
such financing will be available and, if available, will be on terms favorable
to the Company and its shareholders.
YEAR 2000 COMPLIANCE
With the assistance of a consulting firm, the Company has completed an
assessment of Year 2000 compliance for its critical operating and application
systems. Through this assessment, no major issues were discovered. The Company
expects to be fully Year 2000 compliant by December 31, 1999. The cost
associated with the assessment and any modifications necessary was less than
$50,000.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the actions taken by the Company, but also on the way in which the Year 2000
issue is addressed by customers, vendors, service providers, utilities,
governmental agencies and other entities with which the Company does business.
The Company is communicating with these parties to learn how they are addressing
the Year 2000 issue and to evaluate any likely impact on the Company. The
Company has requested commitment dates from the various parties as to their Year
2000 readiness and delivery of compliant software and other products. This
process will continue throughout fiscal 1999. The Year 2000 efforts of third
parties are not within the Company's control, however, and their failure to
respond to Year 2000 issues successfully could result in business disruption and
increased operating cost for the Company. At the present time, it is not
possible to determine whether any such events are likely to occur, or to
quantify any potential negative impact they may have on the Company's future
results of operations and financial condition. The Company expects to assess its
need for contingency plans during 1999.
The foregoing discussion regarding the Year 2000 Project's timing,
effectiveness, implementation, and cost, contains forward-looking statements,
which are based on management's best estimates derived using assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited too,
the availability of key Year 2000 personnel, the Company's ability to locate and
correct all relevant computer codes, the readiness of third parties, and the
13
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Company's ability to respond to unforeseen Year 2000 complications. Such
material differences could result in, among other things, business disruption,
operational problems, financial loss, legal liability and similar risks.
CAUTIONARY STATEMENT
Certain statements in this Form 10-Q are forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. Such statements imply
continued financial improvement. Because of numerous risks and uncertainties in
Lifecore's business activity, actual results may differ materially from those
implied. Investors are referred to a more detailed discussion of those risks
presented in Management's Discussion and Analysis of Financial Condition and
Results of Operations section in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
14
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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds and highly
rated corporate debt securities. All investments are held-to-maturity. The
market risk on such investments is minimal.
All receivables from sales to foreign customers are denominated in U.S. Dollars.
Transactions at the Company's foreign subsidiary, Lifecore Biomedical SpA, are
in Italian Lire. The market risk on the Company's foreign operations is minimal.
At December 31, 1998, all of the Company's outstanding long-term debt carry
interest at a fixed rate. There is no material market risk relating to the
Company's long-term debt.
15
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits and Exhibit Index
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated
July 13, 1988, to Form 10-Q for the quarter ended December 31,
1987), as amended by Amendment No. 2, (incorporated by reference
to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997)
3.2 Amended Bylaws, (incorporated by reference to Exhibit 3.2 to Form
10-K/A for the year ended June 30, 1995)
3.3 Form of Rights Agreement, dated as of May 23, 1996, between the
Company and Norwest Bank Minnesota, National Association
(incorporated by reference to Exhibit 1 to the Company's Form 8-A
Registration Statement dated May 31, 1996)
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to 1987 S-2 Registration Statement [File No.
33-12970])
10.1 Credit and Security Agreement, dated December 28, 1998, between
U.S. Bank National Association and the Company, filed herewith
27 Financial Data Schedule
b. Reports on Form 8-K
None
16
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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.
LIFECORE BIOMEDICAL, INC.
Dated: January 29, 1999 /s/ James W. Bracke
---------------------------------------
James W. Bracke
President & Chief Executive Officer
Dated: January 29, 1999 /s/ Dennis J. Allingham
---------------------------------------
Dennis J. Allingham
Executive Vice President
& Chief Financial Officer
(Principal Financial Officer)
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CREDIT AND SECURITY AGREEMENT
THIS AGREEMENT is made as of December 29th, 1998 by and between U.S.
BANK NATIONAL ASSOCIATION, a national banking association (the "LENDER"), and
LIFECORE BIOMEDICAL, INC., a Minnesota corporation (the "BORROWER").
In consideration of the mutual agreements herein contained, the
parties hereto agree as follows:
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINITIONS. In addition to terms defined elsewhere in this
Agreement or any Supplement, Exhibit or Schedule hereto, the following terms
shall have the following respective meanings (and such meanings shall be
equally applicable to both the singular and plural forms of the terms
defined, as the context may require):
"ACCOUNT DEBTOR": Any Person who is or who may become obligated to
the Borrower under, with respect to, or on account of an Account Receivable,
General Intangible or other Collateral.
"ACCOUNT RECEIVABLE": Any account of the Borrower and any other
right of the Borrower to payment for goods sold or leased or for services
rendered, whether or not evidenced by an instrument or chattel paper and
whether or not yet earned by performance.
"ACCOUNTS RECEIVABLE AVAILABILITY": The term "Accounts Receivable
Availability" shall have the meaning given such term in SUPPLEMENT A.
"ADVERSE EVENT": The occurrence of any event that could have a
material adverse effect on the business, operations, property, assets or
condition (financial or otherwise) of the Borrower and the Subsidiaries as a
consolidated enterprise or on the ability of the Borrower or any other
Obligor to perform its obligations under the Loan Documents.
"AFFILIATE": Any Person which directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, the Lender. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through ownership of stock, by contract or
otherwise.
"AGREEMENT": This Credit and Security Agreement, as it may be
amended, modified, supplemented, restated or replaced from time to time.
"ATTORNEYS' FEES": The value of the services (and costs, charges and
expenses related thereto) of the attorneys employed by the Lender (including,
without limitation, attorneys and paralegals who are employees of the Lender)
from time to time (a) in connection with the negotiation, preparation,
execution, delivery, administration and enforcement of the Loan
<PAGE>
Documents, (b) to prepare documentation related to the Loans and other
Obligations, (c) to represent the Lender in any litigation, contest, dispute,
suit or proceeding or to commence, defend or intervene in any litigation
contest, dispute, suit or proceeding or to file a petition, complaint,
answer, motion or other pleading, or to take any other action in or with
respect to, any litigation, contest, dispute, suit or proceeding (whether
instituted by the Lender, the Borrower or any other Person and whether in
bankruptcy or otherwise) in any way or respect relating to the Collateral,
any Third Party Collateral, the Loan Documents, or the Borrower's or any
other Obligor's or any Subsidiary's affairs, (d) to protect, collect, lease,
sell, take possession of, or liquidate any of the Collateral or any Third
Party Collateral, (e) to attempt to enforce any security interest in any of
the Collateral or any Third Party Collateral or to give any advice with
respect to such enforcement, and (f) to enforce any of the Lender's rights to
collect any of the Obligations.
"BORROWING BASE": The term "Borrowing Base" shall have the meaning
given such term in SUPPLEMENT A.
"BORROWING BASE CERTIFICATE": The term "Borrowing Base Certificate"
shall have the meaning given such term in SECTION 2.5(c).
"BUSINESS DAY": Any day (other than a Saturday, Sunday or legal
holiday in the State of Minnesota) on which Lender is open and carrying on
business transactions of the type contemplated by this Agreement.
"CAPITAL EXPENDITURE": Any amount debited to the fixed asset account
on the consolidated balance sheet of the Borrower in respect of (a) the
acquisition (including, without limitation, acquisition by entry into a
Capitalized Lease), construction, improvement, replacement or betterment of
land, buildings, machinery, equipment or of any other fixed assets or
leaseholds, and (b) to the extent related to and not included in CLAUSE (a),
materials, contract labor and direct labor (excluding expenditures properly
chargeable to repairs or maintenance in accordance with GAAP).
"CAPITALIZED LEASE": Any lease which is or should be capitalized on
the books of the lessee in accordance with GAAP.
"CODE": The Internal Revenue Code of 1986, as amended, or any
successor statute, together with the regulations thereunder.
"COLLATERAL": The term "Collateral" shall have the meaning given
such term in SECTION 3.1.
"COLLATERAL ACCOUNT": The term "Collateral Account" shall have the
meaning given such term in SECTION 3.2(b).
2
<PAGE>
"CONTROLLED DISBURSEMENT ACCOUNT": The term "Controlled Disbursement
Account" shall have the meaning given such term in SECTION 2.3(c).
"CREDIT": The facility established under this Agreement pursuant to
which the Lender will make Loans to the Borrower for the account of the
Borrower.
"CREDIT AMOUNT": The term "Credit Amount" shall have the meaning
given such term in SUPPLEMENT A.
"DAILY UNUSED CREDIT AMOUNT": For any date of determination, the
amount obtained by subtracting from the Credit Amount (determined as of (i)
the last day of the month in which such date falls, or (ii) the date the
Credit is terminated if the Credit terminates on a day other than the last
day of a month) the sum of the outstanding principal balance of Loans on such
date.
"DEFAULT RATE": The term "Default Rate" shall have the meaning given
such term in SUPPLEMENT A.
"DISBURSEMENT ACCOUNT": The term "Disbursement Account" shall have
the meaning given such term in SECTION 2.3(b).
"EBIT": For any period of determination, the consolidated net income
of the Borrower and its Subsidiaries before provision for income taxes and
interest expense (including, without limitation, implicit interest expense on
Capitalized Leases), all as determined in accordance with GAAP, excluding
therefrom (to the extent included): (a) non-operating gains (including,
without limitation, extraordinary or nonrecurring gains, gains from
discontinuance of operations and gains arising from the sale of assets other
than Inventory) during the applicable period; and (b) similar non-operating
losses during such period.
"ELIGIBLE ACCOUNT RECEIVABLE": An Account Receivable owing to the
Borrower which meets the following requirements:
(a) it is genuine and in all respects what it purports to
be;
(b) it arises from either (i) the performance of services
by the Borrower, which services have been fully performed
and, if applicable, acknowledged and/or accepted by the Account
Debtor with respect thereto; or (ii) the sale or lease of goods by
the Borrower and (A) such goods comply with such Account Debtor's
specifications (if any) and have been shipped to, or delivered to
and accepted by, such Account Debtor, (B) the Borrower has
possession of, or has delivered to the Lender, at the Lender's
request, shipping and delivery receipts evidencing such shipment,
delivery and acceptance, and (C) such goods have not been returned
to the Borrower;
(c) it (i) is evidenced by an invoice rendered to the
Account Debtor with respect thereto which (A) is dated not earlier
than the date of shipment or performance
3
<PAGE>
and (B) has payment terms not unacceptable to the Lender; and (ii)
meets the Eligible Account Receivable requirements set forth in
SUPPLEMENT A;
(d) it is not subject to any assignment, claim or Lien
other than (i) a first priority Lien in favor of the Lender and (ii)
Liens consented to by the Lender in writing;
(e) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor with respect thereto and is not
subject to setoff, counterclaim, credit or allowance (except any
credit or allowance which has been deducted in computing the net
amount of the applicable invoice as shown in the original schedule
or Borrowing Base Certificate furnished to the Lender identifying or
including such Account Receivable) or adjustment by the Account
Debtor with respect thereto, or to any claim by such Account Debtor
denying liability thereunder in whole or in part, and such Account
Debtor has not refused to accept any of the goods or services which
are the subject of such Account Receivable or offered or attempted
to return any of such goods;
(f) there are no proceedings or actions which are then
threatened or pending against the Account Debtor with respect
thereto or to which such Account Debtor is a party which might
result in any material adverse change in such Account Debtor's
financial condition or in its ability to pay any Account Receivable
in full when due;
(g) it does not arise out of a contract or order which, by
its terms, forbids, restricts or makes void or unenforceable the
assignment by the Borrower to the Lender of such Account Receivable;
(h) the Account Debtor with respect thereto is not a
Subsidiary, Related Party or Obligor, or a director, officer,
employee or agent of the Borrower, a Subsidiary, Related Party or
Obligor;
(i) the Account Debtor with respect thereto is a resident
or citizen of and is located within the United States of America
unless the sale of goods giving rise to such Account Receivable is
on letter of credit, banker's acceptance or other credit support
terms satisfactory to the Lender;
(j) it does not arise from a "sale on approval," "sale or
return" or "consignment," nor is it subject to any other repurchase
or return agreement;
(k) it is not an Account Receivable with respect to which
possession and/or control of the goods sold giving rise thereto is
held, maintained or retained by the Borrower, any Subsidiary,
Related Party or Obligor (or by any agent or custodian of the
Borrower, any Subsidiary, Related Party or Obligor) for the account
of or subject to further and/or future direction from the Account
Debtor with respect thereto;
4
<PAGE>
(l) it does not, in any way, violate or fail to meet any
warranty, representation or covenant contained in the Loan Documents
relating directly or indirectly to the Borrower's Accounts
Receivable;
(m) the Account Debtor with respect thereto is not located
in the States of Indiana, New Jersey or Alabama or any other state
which prohibits a Person from availing itself of the benefits of
that state's courts unless such Person is qualified to do business
or has filed a notice of business activities; PROVIDED, HOWEVER,
that such restriction shall not apply if: (i) the Borrower is
qualified to do business in such state; (ii) the Borrower has filed
and has effective a notice of business activities report with the
appropriate office or agency of such state for the then current year
or is exempt from the filing of such report; or (iii) upon the
Borrower's written request and at the Borrower's sole cost and
expense (including, without limitation, the payment of Lender's
reasonable Attorneys Fees), Lender determines, in its reasonable
business judgment, that it can avail itself of the benefits of the
relevant state's courts to collect such Account Debtor's Accounts
Receivable, regardless of whether the Borrower can do;
(n) it arises in the ordinary course of the Borrower's
business;
(o) if the Account Debtor with respect thereto is the
United States of America or any department, agency or
instrumentality thereof (a "FEDERAL GOVERNMENTAL AUTHORITY"), or any
state, county or local governmental authority, or any department,
agency or instrumentality thereof, the Borrower has assigned its
right to payment of such Account Receivable to the Lender pursuant
to the Assignment of Claims Act of 1940 as amended in the case of
the a Federal Governmental Authority, or pursuant to applicable
state law, if any, in all other instances, and such assignment has
been accepted and acknowledged by the appropriate government
officers;
(p) if the Lender, in its reasonable business judgment, has
established a credit limit for the Account Debtor with respect
thereto, the aggregate dollar amount of Accounts Receivable due from
such Account Debtor, including such Account Receivable, does not
exceed such credit limit; and
(q) if it is evidenced by chattel paper or instruments, (i)
the Lender shall have specifically agreed to include such Account
Receivable as an Eligible Account Receivable, (ii) only payments
then due and payable under such chattel paper or instrument shall be
included as an Eligible Account Receivable and (iii) the originals
of such chattel paper or instruments have been assigned and
delivered to the Lender in a manner satisfactory to the Lender.
An Account Receivable which is at any time an Eligible Account Receivable but
which subsequently fails to meet any of the foregoing requirements shall
forthwith cease to be an Eligible Account Receivable. Further, with respect
to any Account Receivable, if the Lender at any time or times hereafter
determines, in its reasonable business judgment, that the prospect of
5
<PAGE>
payment or performance by the Account Debtor with respect thereto is or will
be impaired for any reason whatsoever, notwithstanding anything to the
contrary contained above, such Account Receivable shall forthwith cease to be
an Eligible Account Receivable.
"ELIGIBLE INVENTORY": Inventory of the Borrower which meets the
following requirements:
(a) it is owned by the Borrower and is not subject to any
prior assignment, claim or Lien other than (i) a first priority Lien
in favor of the Lender and (ii) Liens consented to by the Lender in
writing;
(b) if held for sale or lease or furnishing under contracts
of service, it is (except as the Lender may otherwise consent in
writing) new and unused;
(c) except as the Lender may otherwise consent, it is not
stored with a bailee, warehouseman or similar party; or, if so
stored with the Lender's consent, such bailee, warehouseman or
similar party has issued and delivered to the Lender, in form and
substance acceptable to the Lender, such documents and agreements as
the Lender may require, including, without limitation, warehouse
receipts therefor in the Lender's name;
(d) the Lender has determined, in its reasonable business
judgment, that it is not unacceptable due to age, type, category,
quality and/or quantity;
(e) it is not held by the Borrower on "consignment" and is
not subject to any other repurchase or return agreement;
(f) it complies with all standards imposed by any
governmental agency having regulatory authority over such goods
and/or their use, manufacture or sale;
(g) it does not, in any way, violate or fail to meet any
warranty, representation or covenant contained in the Loan Documents
relating directly or indirectly to the Borrower's Inventory; and
(h) it satisfies the Eligible Inventory requirements, if
any, set forth in SUPPLEMENT A.
Inventory of the Borrower which is at any time Eligible Inventory but which
subsequently fails to meet any of the foregoing requirements shall forthwith
cease to be Eligible Inventory.
"ENVIRONMENTAL LAWS": The Resource Conservation and Recovery Act of
1987, the Comprehensive Environmental Response, Compensation and Liability
Act, any so-called "superfund" or "superlien" law, the Toxic Substances
Control Act, and any other federal, state or local statue, law, ordinance,
code, rule, regulation, order or decree regulating, relating to, or imposing
liability or standards of conduct concerning any Hazardous Materials or other
6
<PAGE>
hazardous, toxic or dangerous waste, substance or constituent, or other
substance, whether solid, liquid or gas, as now or at any time hereafter in
effect.
"ENVIRONMENTAL LIEN": A Lien in favor of any governmental entity for
(a) any liability under any Environmental Law, or (b) damages arising from or
costs incurred by such governmental entity in response to a spillage,
disposal, or release into the environment of any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance.
"EQUIPMENT": All equipment of the Borrower of every description,
including, without limitation, fixtures, furniture, vehicles and trade
fixtures, together with any and all accessions, parts and equipment attached
thereto or used in connection therewith, and any substitutions therefor and
replacements thereof.
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended, or any successor statute, together with the regulations thereunder.
"ERISA AFFILIATE": Any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member
and which is treated as a single employer under Section 414 of the Code.
"EVENT OF DEFAULT": The term "Event of Default" shall have the
meaning given such term in SECTION 7.1.
"FEDERAL RESERVE BOARD": The Board of Governors of the Federal
Reserve System or any successor thereto.
"GAAP": Generally accepted accounting principles promulgated by the
Financial Accounting Standards Board, as applied in the preparation of the
audited financial statement of the Borrower referred to in SECTION 4.6.
"GENERAL INTANGIBLES": All of the Borrower's intangible personal
property including things in action, causes of action and all other personal
property of the Borrower of every kind and nature (other than goods,
accounts, chattel paper, documents, instruments and money) including, without
limitation, corporate or other business records, inventions, designs,
patents, patent applications, trademarks, trademark applications, trade
names, trade secrets, goodwill, copyrights, registrations, leases, licenses,
franchises, customer lists, tax refund claims, claims against carriers and
shippers, guarantee claims, security interests, security deposits or other
security held by or granted to the Borrower to secure payment by an Account
Debtor of any of the Accounts Receivable, any other rights to payment,
including, without limitation, rights to reimbursement or indemnification,
and any other rights of whatsoever nature, whether earned or unearned.
7
<PAGE>
"GUARANTOR": Individually and/or collectively, any Person who may,
at any time or from time to time, guaranty the Obligations.
"GUARANTY": Individually and/or collectively, each guaranty executed
by a Guarantor at any time, together with any amendments, modifications,
supplements, or replacements thereto.
"HAZARDOUS MATERIALS": Any hazardous substance or pollutant or
contaminant defined as such in (or for the purposes of) any Environmental Law
including, without limitation, petroleum and petroleum products, including
crude oil or any fraction thereof which is liquid at standard conditions of
temperature or pressure (60 degrees Fahrenheit and 14.7 pounds per square
inch absolute), any radioactive material, including any source, special
nuclear or by-product material as defined at 42 U.S.C. section 2011 ET. SEQ.,
as amended or hereafter amended, and asbestos in any form or condition.
"INDEBTEDNESS": Without duplication, all obligations, contingent or
otherwise, which in accordance with GAAP should be classified upon the
Person's balance sheet as liabilities, but in any event including the
following (whether or not they should be classified as liabilities upon such
balance sheet): (a) any obligation secured by any mortgage, pledge, security
interest, lien, charge or other encumbrance existing on property owned or
acquired subject thereto, whether or not such obligation shall have been
assumed and whether or not such obligation is the obligation of the owner or
another party; (b) any obligation on account of deposits or advances; (c) any
obligation for the deferred purchase price of any property or services,
except accounts payable arising in the ordinary course of business; (d) any
obligation as lessee under any Capitalized Lease; (e) any guaranty,
endorsement or other contingent obligation in respect to indebtedness of
others; and (f) any undertaking or agreement to reimburse or indemnify
issuers of letters of credit. For all purposes of this Agreement, the
Indebtedness of any Person shall include the Indebtedness of any partnership
or joint venture in which such Person is a general partner or a joint
venturer.
"INDEMNIFIED LIABILITIES": The term "Indemnified Liabilities" shall
have the meaning given such term in SECTION 10.2.
"INDEMNITEES": The term "Indemnitees" shall have the meaning given
such term in SECTION 10.2.
"INVENTORY": Any and all of the Borrower's goods, including, without
limitation, goods in transit, wheresoever located which are or may at any
time be leased by the Borrower to a lessee, held for sale or lease, furnished
under any contract of service or held as raw materials, work in process, or
supplies or materials used or consumed in the Borrower's business, or which
are held for use in connection with the manufacture, packing, shipping,
advertising, selling or finishing of such goods, and all goods, the sale or
other disposition of which has given rise to an Account Receivable, which are
returned to and/or repossessed and/or stopped in transit by the Borrower or
the Lender, or at any time hereafter in the possession or under the control
of the Borrower or
8
<PAGE>
the Lender, or any agent or bailee of either thereof, and all documents of
title or other documents representing the same.
"INVENTORY AVAILABILITY": The term "Inventory Availability" shall
have the meaning given such term in SUPPLEMENT A.
"INVENTORY AVAILABILITY SUBLIMIT": The term "Inventory Availability
Sublimit" shall have the meaning given such term in SUPPLEMENT A.
"INVESTMENT": The acquisition, purchase, making or holding of any
stock or other security, any loan, advance, contribution to capital,
extension of credit (except for trade and customer accounts receivable for
inventory sold or services rendered in the ordinary course of business and
payable in accordance with customary trade terms), any acquisitions of real
and personal property (other than real and personal property acquired in the
ordinary course of business) and any purchase or commitment or option to
purchase stock or other debt or equity securities of, or any interest in,
another Person or any integral part of any business or the assets comprising
such business or part thereof.
"LIEN": Any security interest, mortgage, pledge, lien,
hypothecation, statutory lien, judgment lien or similar legal process,
charge, encumbrance, title retention agreement or analogous instrument or
device (including, without limitation, the interest of a lessor under
Capitalized Leases and the interest of a vendor under any conditional sale or
other title retention agreement).
"LOAN": A Loan referred to in SECTION 2.1 and any other loans or
advances made to the Borrower by the Lender under or pursuant to this
Agreement.
"LOAN ACCOUNT": The term "Loan Account" shall have the meaning given
such term in SECTION 2.3(a).
"LOAN AVAILABILITY": The lesser of (a) the Credit Amount and (b) the
Borrowing Base.
"LOAN DOCUMENTS": This Agreement, any Note, and each other
instrument, document, guaranty, mortgage, deed of trust, chattel mortgage,
pledge, power of attorney, consent, assignment, contract, notice, security
agreement, lease, financing statement, subordination agreement, trust account
agreement, or other agreement executed and delivered by the Borrower or any
Guarantor or party granting a security interest in connection with this
Agreement, the Loans or the Collateral, as the same may be amended, modified,
restated or replaced from time to time.
"LOAN YEAR": The period from the date of this Agreement (or its
anniversary date in a succeeding calendar year) through the day preceding the
anniversary date of this Agreement in the immediately following calendar year.
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"MULTIEMPLOYER PLAN": A multiemployer plan, as such term is defined
in Section 4001(a)(3) of ERISA, which is, or which has been, within five
years of the date of this Agreement, or at any time after the date of this
Agreement, maintained for the employees of the Borrower or any ERISA
Affiliate.
"NET WORTH": At any determination date, the total of all assets
appearing on a consolidated balance sheet of the Borrower at such date,
prepared in accordance with GAAP, after deducting all proper reserves
(including without limitation, reserves for depreciation, obsolescence,
amortization and taxes related to a LIFO to FIFO conversion) MINUS all
liabilities which in accordance with GAAP would be included on the liability
side of a consolidated balance sheet.
"NOTE": Any promissory note of the Borrower evidencing any loan or
advance (including but not limited to the Loans) made by the Lender to the
Borrower pursuant to this Agreement, as the same may be amended, modified,
restated or replaced from time to time.
"OBLIGATIONS": All of the liabilities, obligations and indebtedness
of the Borrower to the Lender, or any Affiliate, of any kind or nature,
however created, arising or evidenced, whether direct or indirect, absolute
or contingent, now or hereafter existing or due or to become due, and whether
joint, several or joint and several including, without limitation, (a) the
Borrower's obligations under the Loan Documents, including obligations of
performance, and (b) interest, fees, charges, expenses, Attorneys' Fees and
other sums chargeable to the Borrower by the Lender or any Affiliate under
the Loan Documents. "Obligations" shall also include any and all amendments,
extensions, renewals, refundings or refinancings of any of the foregoing.
"OBLIGOR": The Borrower, each Guarantor and each other Person who is
or shall become primarily or secondarily liable on any Obligations or who
grants to the Lender a Lien on any property of such Person as security for
any Obligations.
"OCCUPATIONAL SAFETY AND HEALTH LAW": The Occupational Safety and
Health Act of 1970 as amended from time to time, or any successor statute,
together with the regulations thereunder and any other federal, state or
local statute, law, ordinance, code, rule, regulation, order or decree
regulating, relating to or imposing liability or standards of conduct
concerning employee health and/or safety.
"OVER ADVANCE": The term "Over Advance" shall have the meaning given
such term in SECTION 2.8.
"OVERDRAFT LOAN": The term "Overdraft Loan" shall have the meaning
given such term in SECTION 2.7.
"PARTICIPANT": Any Person, now or at any time or times hereafter,
participating with the Lender in the Loans made to the Borrower hereunder.
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"PBGC": The Pension Benefit Guaranty Corporation, established
pursuant to Subtitle A of Title IV of ERISA, or any successor thereto or to
the functions thereof.
"PERSON": Any natural person, corporation, partnership, joint
venture, firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision thereof, or any other entity,
whether acting in an individual, fiduciary or other capacity.
"PLAN": Each employee pension or benefit plan (as those terms are
defined in Section 3 of ERISA) maintained for the benefit of employees,
officers or directors of the Borrower or of any ERISA Affiliate.
"PROHIBITED TRANSACTION": The respective meanings assigned to such
term in Section 4975 of the Code and Section 406 of ERISA.
"REFERENCE RATE": The rate of interest from time to time publicly
announced by the Lender as its "reference rate." The Lender may lend to its
customers at rates that are at, above or below the Reference Rate. For
purposes of determining any interest rate which is based on the Reference
Rate, such interest rate shall change on the effective date of any change in
the Reference Rate.
"RELATED PARTY": Any Person (other than a Subsidiary): (a) which
directly or indirectly, through one of more intermediaries, controls, is
controlled by or is under common control with, the Borrower, (b) which
beneficially owns or holds 5% or more of the equity interest of the Borrower,
or (c) 5% or more of the equity interest of which is beneficially owned or
held by the Borrower or a Subsidiary. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"REPORTABLE EVENT": A reportable event, as defined in Section 4043
of ERISA and the regulations issued under such Section, with respect to a
Plan, excluding, however, such events as to which the PBGC by regulation has
waived the requirement of Section 4043(a) of ERISA that it be notified within
30 days of the occurrence of such event; PROVIDED, that for purposes of this
Agreement, a failure to meet the minimum funding standard of Section 412 of
the Code and Section 302 of ERISA shall be a Reportable Event regardless of
the issuance of any waiver in accordance with Section 412(d) of the Code.
"SUBSIDIARY": Any Person of which or in which the Borrower and its
other Subsidiaries own, alone or in combination, directly or indirectly, 50%
or more of: (a) the combined voting power of all classes of stock having
general voting power under ordinary circumstances to elect a majority of the
board of directors of such Person, if it is a corporation, (b) the capital
interest or profits interest of such Person, if it is a partnership, joint
venture or similar entity, or (c) the beneficial interest of such Person, if
it is a trust, association or other unincorporated organization.
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"SUPPLEMENTAL DOCUMENTATION": The term "Supplemental Documentation"
shall have the meaning given such term in SECTION 3.5.
"TAXES": With respect to any Person means taxes, assessments or
other governmental charges or levies imposed upon such Person, its income or
any of its properties, franchises or assets.
"TERMINATION DATE": The term "Termination Date" shall have the
meaning given such term in SUPPLEMENT A.
"THIRD PARTY COLLATERAL": Any property of any Person other than the
Borrower which secures payment or performance of any Obligations.
"UCC": The Uniform Commercial Code as in effect in the State of
Minnesota and any successor statute, together with any regulations
thereunder, in each case as in effect from time to time. References to
sections of the UCC shall be construed to also refer to any successor
sections.
"UNMATURED EVENT OF DEFAULT": Any event which, with the giving of
notice to the Borrower or lapse of time, or both, would constitute an Event
of Default.
"UNUSED CREDIT FEE": The term "Unused Credit Fee" shall have the
meaning given such term in Supplement A.
1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be expressly
provided to the contrary herein, all accounting terms used herein or in any
certificate or other document made or delivered pursuant hereto shall be
interpreted and all accounting determinations hereunder (including, without
limitation, determination of compliance with financial ratios and
restrictions in ARTICLES V and VI and in SUPPLEMENT A) shall be made in
accordance with GAAP consistently applied, using a first in-first out method
of Inventory valuation. Any reference to "consolidated" financial terms apply
to circumstances in which the Borrower has Subsidiaries and shall be deemed
to refer to those financial terms as applied to the Borrower and the
Subsidiaries in accordance with GAAP. If, in Lender's reasonable business
judgment, a material change occurs in GAAP, then either (a) the Lender and
the Borrower shall amend, in writing, the covenants in this Agreement,
Supplement A, and the other Loan Documents which are calculated on the basis
of GAAP to reflect such change, or (b) if the Lender and the Borrower fail to
agree on and enter into such an amendment, then the Lender shall have the
right to deem such change in GAAP to be an Event of Default.
1.3 OTHER DEFINITIONAL PROVISIONS. Unless otherwise defined therein,
all terms defined in this Agreement shall have such defined meanings when
used in any other Loan Document. Terms used in this Agreement which are
defined in any Supplement, Exhibit or Schedule hereto shall, unless the
context otherwise indicates, have the meanings given them in such Supplement,
Exhibit or Schedule. Other terms used in this Agreement and not otherwise
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defined herein shall, unless the context otherwise indicates, have the
meanings given such terms in the Minnesota Uniform Commercial Code to the
extent the same are used or defined therein. Reference to "this Agreement"
shall include the provisions of SUPPLEMENT A. References to Sections,
Exhibits, Schedules and like references are to this Agreement unless
otherwise expressly provided.
1.4 RULES OF CONSTRUCTION. Section captions used in this Agreement
are for convenience only, and shall not affect the construction of this
Agreement. The words "hereof," "herein," and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement. Gender references are
freely interchangeable and shall refer to the masculine, feminine or neuter.
ARTICLE II LOANS; OTHER MATTERS
2.1 LOANS.
(a) AMOUNT, AUTHORITY TO MAKE CERTAIN ADVANCES. Subject to
the terms and conditions of the Loan Documents, and in reliance upon
the representations and warranties of the Borrower set forth herein
and in the other Loan Documents, the Lender agrees to make loans
(individually, a "LOAN" and collectively, the "LOANS") to the
Borrower during the period from and after the date hereof to the
date on which the Credit terminates, in such amounts, in the type of
Advance and at such times as the Borrower may from time to time
request, up to but not in excess of the Loan Availability. Loans
made by the Lender may be repaid and, subject to the terms and
conditions hereof, reborrowed to the date on which the Credit
terminates.
(b) MANDATORY PAYMENTS. All Loans and other Obligations
hereunder shall be paid by the Borrower on the Termination Date
unless payable sooner pursuant to the provisions of this Agreement.
In addition, Borrower shall pay to the Lender all proceeds of
Collateral in accordance with the provisions of this Agreement and
other Loan Documents for application against the Obligations in such
order and manner as Lender may deem appropriate. If the aggregate
outstanding principal balance of the Loans exceeds the Loan
Availability or there is a negative Loan Availability, then, unless
the Lender shall otherwise consent in writing, the Borrower shall
immediately and without notice of any kind make such payments as
shall be necessary to eliminate such excess or negative Loan
Availability or take such other action (including, without
limitation, delivery of cash collateral) as Lender may require.
(c) RECOURSE TO COLLATERAL. Borrower's payment obligations
under this Agreement and under any Note and any other Loan Document
are primary and absolute and Lender shall not be required to seek
recourse to Collateral, Third Party Collateral or other security at
any time.
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2.2 LETTERS OF CREDIT.
Intentionally Deleted.
2.3 LOAN ACCOUNT; DISBURSEMENT ACCOUNT; CONTROLLED DISBURSEMENT
ACCOUNT.
(a) LOAN ACCOUNT. The Lender shall establish or cause to be
established on its books in the Borrower's name one or more accounts
(each, a "LOAN ACCOUNT") to evidence Loans made to the Borrower. Any
amounts advanced as a Loan pursuant to this Agreement will be
debited to the applicable Loan Account and result in an increase in
the principal balance outstanding in such Loan Account in the amount
thereof, PROVIDED, HOWEVER, any failure by Lender to debit such Loan
Account in respect of any such Loans shall not affect Borrower's
obligation to repay such Loans in accordance with the provisions of
this Agreement or any Note. Any amount received by the Lender and
applied by the Lender as principal payments in accordance with the
provisions hereof, will be credited to the applicable Loan Account
and result in a reduction in the principal balance outstanding in
such Loan Account.
(b) DISBURSEMENT ACCOUNT. Unless otherwise provided in this
Agreement, the Lender will credit or cause to be credited to a
commercial account (the "DISBURSEMENT ACCOUNT") maintained by the
Borrower at the Lender's U.S. Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402-4302 office the amount of any sums
advanced as Loans.
(c) Controlled Disbursement Account. The Borrower shall
maintain in its name a commercial account (the "CONTROLLED
DISBURSEMENT ACCOUNT") with U. S. Bank, Havre, Montana into which
deposits from the Disbursement Account may be authorized by the
Borrower and/or the Lender and from which the Borrower may draw
checks for corporate purposes. Borrower, Lender and depository bank
shall enter into an agreement satisfactory to Lender regarding,
among other things, the Controlled Disbursement Account and access
to amounts on deposit therein or attributable thereto.
2.4 INTEREST; FEES.
(a) INTEREST. The outstanding principal balance of each
Loan to the Borrower hereunder shall bear interest at the rate(s)
applicable to such Loan as set forth in SUPPLEMENT A; PROVIDED,
HOWEVER, that no provision of this Agreement or of any Note shall
require the payment or permit the collection of interest in excess
of the rate permitted by applicable law. Interest as aforesaid shall
be charged for the actual number of days elapsed over a year
consisting of 360 days on the actual daily balance of such Loan.
Interest on the unpaid principal of any Loan shall accrue from the
date such Loan is made to the date such Loan is paid in full.
Interest shall be paid by the Borrower on the last day of each
month, commencing on the first such day to occur after the date
hereof, and on the Termination Date or other date on which the
Credit terminates. Any
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accrued or accruing interest after the Termination Date or other
date on which the Credit terminates shall be payable on demand.
(b) INTEREST AFTER DEFAULT. At any time that an Event of
Default has occurred and is continuing, the outstanding principal
amount of all Loans, all past due interest and all past due fees and
other sums payable to the Lender hereunder or under any Loan
Document shall bear interest at the Default Rate.
(c) UNUSED CREDIT FEE. The Borrower shall pay to the Lender
an Unused Credit Fee for the period from and after the date hereof
through and including the date the Credit is terminated in the
amount and at the times set forth in SUPPLEMENT A.
(d) CREDIT TERMINATION FEE. Upon termination or
cancellation of the Credit prior to the Termination Date, the
Borrower shall pay to the Lender a termination fee in the amount
indicated in SUPPLEMENT A.
2.5 REQUESTS FOR LOANS; BORROWING BASE CERTIFICATES; OTHER INFORMATION.
(a) LOAN REQUESTS. Except as otherwise expressly provided
elsewhere in this Agreement, Loans shall be requested by telephone
and shall be promptly confirmed in writing. The Borrower's failure
to confirm any such telephonic request or otherwise comply with the
provisions of this SECTION 2.5(a) shall not in any manner affect the
obligation of the Borrower to repay such Loan in accordance with the
terms of this Agreement.
(b) ADDITIONAL INFORMATION. In the event that the Borrower
shall at any time, or from time to time, (i) make a request for a
Loan, or (ii) be deemed to have requested an Overdraft Loan, the
Borrower agrees to forthwith provide the Lender with such
information, at such frequency and in such format, as is required by
the Lender, such information to be current as of the time of such
request.
(c) BORROWING BASE CERTIFICATE. As soon as available and in
any event within twenty-five (25) days after the end of each month
of each fiscal year of the Borrower, the Borrower agrees to provide
to the Lender a current borrowing base certificate ("BORROWING BASE
CERTIFICATE") as at the end of such month and to further provide to
the Lender a Borrowing Base Certificate at such other times as the
Lender may request. Such Borrowing Base Certificate shall be in
substantially the form of EXHIBIT A, and include such supporting
documentation as Lender may require and shall be executed and
certified as accurate by such person or persons as the Borrower
designates, from time to time, in writing to the Lender as provided
herein.
(d) BORROWER'S AUTHORIZED REPRESENTATIVES. The Borrower
shall provide the Lender with documentation satisfactory to the
Lender indicating the names of those employees of the Borrower
authorized by the Borrower to sign, among other things,
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Borrowing Base Certificates, and/or to make a telephone request for
a Loan, and/or to authorize disbursement of the proceeds of a Loan
by wire transfer or otherwise. The Lender shall be entitled to rely
upon such documentation until notified in writing by the Borrower of
any change(s) in the names of persons so authorized. The Lender
shall be entitled to act on the instructions of anyone identifying
himself as one of the persons authorized to request Loans or
disbursements of Loan proceeds by telephone and the Borrower shall
be bound thereby in the same manner as if the person were actually
so authorized. The Borrower agrees to indemnify and hold the Lender
harmless from any and all claims, damages, liabilities, losses,
costs and expenses (including Attorneys' Fees) which may arise or be
created by the acceptance of instructions (telephonic or otherwise)
for making Loans or disbursing Loan proceeds by wire transfer or
otherwise, or for application of payments.
2.6 NOTES. Lender, in its sole and absolute discretion, may require
that any and all Loans hereunder be evidenced by a Note. Whether or not
evidenced by a Note, all Loans and payments thereof shall be recorded on the
Lender's books, which shall be rebuttable presumptive evidence of the amount
of such Loans outstanding at any time hereunder. The Lender will account
monthly as to all Loans and payments hereunder and each monthly accounting
will be fully binding on the Borrower unless, within 15 days following the
Borrower's receipt thereof, the Borrower shall provide the Lender with a
specific listing of exceptions. Notwithstanding any term or condition of this
Agreement to the contrary, the failure of the Lender to record the date and
amount of any Loan shall not limit or otherwise affect the obligation of the
Borrower to repay any such Loan.
2.7 OVERDRAFT LOANS. The Lender, in its sole and absolute discretion
and subject to the terms hereof, may make a Loan to the Borrower in an amount
equal to the amount of any overdraft which may from time to time exist with
respect to the Disbursement Account or any other bank account which the
Borrower may now or hereafter have with Lender or any other Affiliate. The
existence of such overdraft shall be deemed to be a request by the Borrower
for such Loan. The Borrower acknowledges that the Lender is under no duty or
obligation to make any Loan to the Borrower to cover any overdraft. The
Borrower further agrees that an overdraft shall constitute a separate Loan
under this Agreement (an "OVERDRAFT LOAN"), which shall bear interest, from
the date on which the overdraft occurred until paid, in an amount equal to
the greater of 130% of the highest rate of interest then charged for Loans
(other than Overdraft Loans or Over Advances) made hereunder, or $50.00 per
day. If the Lender, in its sole and absolute discretion, decides not to make
a Loan to cover part or all of any overdraft, the Lender may return any
check(s) which created such overdraft.
2.8 OVER ADVANCES. The Lender, in its sole and absolute discretion,
may make Loans to the Borrower, either at the Borrower's request or to pay
amounts due to the Lender under this Agreement or any other Loan Document, in
excess of the Loan Availability or permit the total Loans to exceed the Loan
Availability at any time (such excess Obligations are hereinafter referred to
as "OVER ADVANCES"). No Over Advance or series of Over Advances shall cause
or constitute a waiver by the Lender of its right to refuse to make any
further Loan or to
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issue, or cause to be issued, any Letters of Credit at any time that an Over
Advance exists or would result therefrom. During any period in which an Over
Advance exists, the amount of the Over Advances shall bear interest at a rate
equal to 130% of the highest rate of interest then charged for Loans (other
than Overdraft Loans or Over Advances) made hereunder.
2.9 ALL LOANS ONE OBLIGATION. All Loans under this Agreement shall
constitute one Loan, and all Obligations shall constitute one general
obligation, secured by the Lien granted by the Borrower hereunder on all of
the Collateral and by all other Liens heretofore, now or at any time or times
hereafter granted by the Borrower or any other Obligor to secure the
Obligations. The Borrower agrees that all of the rights of the Lender set
forth in the Loan Documents shall, unless otherwise agreed to in writing,
apply to any modification of or supplement to the Loan Documents.
2.10 MAKING OF PAYMENTS; APPLICATION OF COLLECTIONS; CHARGING OF
ACCOUNTS.
(a) All payments hereunder (including payments with respect
to any Notes) shall be made without set-off or counterclaim and
shall be made to the Lender in immediately available funds (or as
the Lender may otherwise consent) prior to 11:00 a.m., Minneapolis
time, on the date due at its office at U.S. Bank Place, 601 Second
Avenue South, Minneapolis, Minnesota 55402-4302, or at such other
place as may be designated by the Lender to the Borrower in writing
from time to time. Any payments received after such time shall be
deemed received on the next Business Day. Whenever any payment to be
made hereunder or under any Note shall be stated to be due on a date
other than a Business Day such payment may be made on the next
succeeding Business Day and such extension of time shall be included
in the computation of payment of interest or any fees.
(b) The Borrower authorizes the Lender to, and the Lender
will, subject to the provisions of this SECTION 2.10(b), apply the
whole or any part of any amounts received by the Lender, or any
Affiliate (whether deposited in the Collateral Account or otherwise
received by the Lender or any Affiliate) from the collection of
items of payment and proceeds of any Collateral or Third Party
Collateral against the principal and/or interest of any Loans made
hereunder and/or any other Obligations, whether or not then due, in
such order of application as the Lender may determine, unless such
payments or proceeds are, in the Lender's sole and absolute
discretion, released to the Borrower. No checks, drafts or other
instruments received by the Lender, or any Affiliate, shall
constitute final payment to the Lender unless and until such item of
payment has actually been collected. All items or amounts which are
delivered to the Lender by or on behalf of the Borrower or any
Obligor or any Account Debtor on account of partial or full payment
or otherwise as proceeds of any of the Collateral or Third Party
Collateral (including any items or amounts which may have been
deposited to the Collateral Account) may from time to time, in the
Lender's sole and absolute discretion, be released to the Borrower
or may be applied by the Lender towards such of the Obligations,
whether or not then due, in such order of application as the Lender
may determine. Notwithstanding anything to the contrary herein, (i)
solely for purposes of determining the occurrence of an Event of
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Default hereunder, shall be deemed received upon actual receipt by
the Lender unless the same is subsequently dishonored for any reason
whatsoever, (ii) solely for purposes of determining whether, under
SECTIONS 2.1 and 2.2, there is Loan Availability, all cash, checks,
instruments and other items of payment shall be applied against the
Obligations no later than the first Business Day following receipt
thereof by the Lender in Minneapolis, Minnesota or the same Business
Day on which the Lender initiates an ACH transaction from the
Collateral Account, and (iii) solely for purposes of interest
calculation hereunder, all cash, checks, instruments and other items
of payment shall be deemed to have been applied against the
Obligations no later than the first Business Day following receipt
thereof by the Lender in Minneapolis, Minnesota or the same Business
Day on which the Lender initiates an ACH transaction from the
Collateral Account.
(c) The Borrower hereby irrevocably authorizes the Lender
and the Lender may, in its sole and absolute discretion, at any time
and from time to time, pay all or any portion of any Obligations
including, without limitation, interest, Attorneys' Fees and other
fees, costs and expenses of the Lender for which the Borrower is
liable pursuant to the terms of the Loan Documents, by charging the
Disbursement Account or any other bank account of the Borrower
maintained with Lender or by advancing the amount thereof to the
Borrower as a Loan and applying the proceeds of such Loan against
such Obligations; PROVIDED, HOWEVER, that the provisions of this
SECTION 2.10(c) shall not affect the Borrower's obligation to pay
when due all amounts payable by the Borrower under any of the Loan
Documents whether or not there are sufficient funds therefor in the
Disbursement Account or any such other bank account of the Borrower
with Lender, or sufficient Loan Availability.
2.11 LENDER'S ELECTION NOT TO ENFORCE. Notwithstanding any term or
condition of this Agreement to the contrary, the Lender, in its sole and
absolute discretion, at any time and from time to time may suspend or refrain
from enforcing any or all of the restrictions imposed in this ARTICLE II but
no such suspension or failure to enforce shall impair the Lender's right and
power under this Agreement to refrain from making a Loan if all conditions
precedent to the Lender's obligation to make such Loan have not been
satisfied.
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ARTICLE III COLLATERAL
3.1 GRANT OF SECURITY INTEREST. As security for the payment of all
Loans now or hereafter made by the Lender to the Borrower hereunder or under
any Note, and as security for the payment or other satisfaction of all other
Obligations, the Borrower hereby pledges, assigns and grants to the Lender,
and its Affiliates, a security interest in all of the Borrower's right, title
and interest in and to the following property of the Borrower, whether now
owned or existing, or hereafter acquired or coming into existence, wherever
now or hereafter located (all such property is hereinafter referred to
collectively as the "COLLATERAL"):
(a) Accounts Receivable (whether or not Eligible Accounts
Receivable), including all other rights and interests (including all
liens and security interests) that the Borrower may at any time have
by law or agreement against any Account Debtor or other obligor
obligated to make any such payment or against any of the property of
such Account Debtor or other obligor;
(b) Equipment;
(c) Inventory (whether or not Eligible Inventory);
(d) General Intangibles;
(e) documents;
(f) all chattel paper and instruments evidencing, arising
out of or relating to any obligation to the Borrower for goods sold
or leased or services rendered or otherwise arising out of or
relating to any property described in CLAUSES (a) through (e) above;
(g) goods, instruments, documents or chattel paper that are
in the possession or control of, or in transit to, the Lender or any
Affiliate or any agent or bailee for the Lender or any Affiliate for
any reason and all interest on, dividends and distributions and
other rights in connection with such property, and any and all
balances, credits, deposits (general or special, time or demand,
provisional or final), accounts or monies of or in the name of the
Borrower now or hereafter with the Lender, or any Affiliate, and any
and all property of every kind or description of or in the name of
the Borrower now or hereafter, for any reason or purpose whatsoever,
in the possession or control of, in transit to or standing to the
Borrower's credit on the books of, the Lender, any Affiliate, any
agent or bailee for the Lender or any Affiliate, or any Participant
and all items in any lockbox;
(h) all interest of the Borrower in any goods the sale or
lease of which shall have given or shall give rise to, and in all
guaranties and other property securing the payment of or performance
under, any Accounts Receivable, General Intangibles or any chattel
paper or instruments referred to in CLAUSE (f) above;
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(i) any and all other property of the Borrower of any kind
or description, including, without limitation, real estate of the
Borrower, subject to a separate mortgage, pledge or security
interest in favor of the Lender or in which the Lender now or
hereafter has or acquires a security interest securing any
Obligations, pursuant to any written agreement or instrument other
than this Agreement;
(j) all replacements, substitutions, additions or
accessions to or for any of the foregoing;
(k) to the extent related to the property described in
CLAUSES (a) through (j) above, all books, correspondence, credit
files, records, invoices and other papers and documents, including,
without limitation, to the extent so related, all tapes, cards,
computer runs, computer programs and other papers and documents in
the possession or control of the Borrower or any computer bureau
from time to time acting for the Borrower, and, to the extent so
related, all rights in, to and under all policies of insurance,
including claims of rights to payments thereunder and proceeds
therefrom and refunds of unearned premiums related thereto,
including, without limitation, any credit insurance; and
(l) all products and proceeds of any of the foregoing
(including, without limitation, any Accounts Receivable or other
proceeds arising from the sale or other disposition of any
Collateral, any returns of any Equipment or Inventory sold by the
Borrower and the proceeds of any insurance or condemnation awards
covering any of the Collateral).
3.2 ACCOUNTS RECEIVABLE.
(a) ADJUSTMENTS. The Borrower shall notify the Lender
immediately of all disputes and claims by any Account Debtor in
excess of $50,000 in the aggregate for any one Account Debtor in any
one fiscal month or in excess of $100,000 in the aggregate for all
Account Debtors in any one fiscal month and settle or adjust all
disputes and claims at no expense to the Lender. The Borrower shall
not grant any discount or credit allowance to any Account Debtor
except that the Borrower may do so in the ordinary course of
business so long as. (i) no Event of Default or Unmatured Event of
Default has occurred and is continuing; and (ii) the discounts and
credit allowances do not exceed $50,000 in the aggregate for any one
Account Debtor in any one fiscal month or $100,000 in the aggregate
for all Account Debtors in any one fiscal month. All Account Debtor
payments and all net amounts received by the Lender in settlement,
adjustment or liquidation of any Account Receivable may be applied
by the Lender to the Obligations or credited to the Disbursement
Account (subject to collection), as the Lender may deem appropriate,
as more fully described in SECTION 2.10. If requested by the Lender,
the Borrower will make proper entries in its books, disclosing the
assignment of Accounts Receivable to the Lender.
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(b) COLLATERAL ACCOUNT. Unless otherwise consented to by
the Lender in writing, the Borrower will, forthwith upon receipt by
the Borrower of any and all checks, drafts, cash and other
remittances in payment or as proceeds of, or on account of, any of
the Accounts Receivable or other Collateral, deposit the same in a
special bank account (the "COLLATERAL ACCOUNT") with the Lender or
such other bank or financial institution as the Lender shall
consent, over which the Lender alone has power of withdrawal, and
will designate with each such deposit the particular Accounts
Receivable or other item of Collateral upon which the remittance was
made. The Borrower acknowledges that the maintenance of the
Collateral Account is solely for the convenience of the Lender in
facilitating its own operations and the Borrower does not and shall
not have any right, title or interest in the Collateral Account or
in the amounts at any time appearing to the credit thereof. Said
proceeds shall be deposited in precisely the form received except
for the Borrower's endorsement where necessary to permit collection
of items, which endorsement the Borrower agrees to make. Borrower
shall be liable as endorsee on all items deposited in the Collateral
Account, whether or not in fact endorsed by Borrower. Pending such
deposit, the Borrower agrees not to commingle any such checks,
drafts, cash and other remittances with any of its funds or
property, but will hold them separate and apart therefrom and upon
an express trust for the Lender until deposit thereof if made in the
Collateral Account. Upon the full and final liquidation of all
Obligations and termination of the Credit, the Lender will pay over
to the Borrower any excess amounts received by the Lender as payment
or proceeds of Collateral, whether received by the Lender as a
deposit in the Collateral Account or received by the Lender as a
direct payment on any of the sums due hereunder.
(c) LOCKBOX. The Lender may request and upon such request
the Borrower will irrevocably direct all present and future Account
Debtors and other Persons obligated to make payments on Accounts
Receivable or other Collateral to make such payments to a special
lockbox (the "Lockbox") under the control of Lender or an Affiliate;
PROVIDED, HOWEVER, that the Borrower's obligations to do so shall
terminate upon payment in full of the Obligations after the
occurrence of the Termination Date. After such request, all of
Borrower's invoices, account statements and other written or oral
communication directing, instructing, requesting or demanding
payment of any Account Receivable or other amount constituting
Collateral shall direct that all payments be made to the Lockbox and
shall include the Lockbox address. All payments received in the
Lockbox shall be processed to the Collateral Account. Borrower
agrees to execute and deliver all documentation required by Lender
related to the establishment and maintenance of the Lockbox.
(d) GOVERNMENT CLAIMS. If any Accounts Receivable, chattel
paper or General Intangible arises out of contracts or other
transactions with the United States of America or any department,
agency, or instrumentality thereof (a "FEDERAL GOVERNMENTAL
AUTHORITY") or with any state, county of local government authority
or any department, agency or instrumentality thereof (collectively,
the "OTHER GOVERNMENTAL AUTHORITIES"), the Borrower will, unless the
Lender shall otherwise agree in writing, immediately notify
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the Lender in writing and execute any instruments and take any steps
required by the Lender in order that all monies due and to become
due under such contracts or other transactions shall be assigned to
the Lender and, with respect to Federal Governmental Authorities,
notice thereof given to the government under the Federal Assignment
of Claims Act of 1940, as amended, and/or with respect to all Other
Governmental Authorities, notice thereof given to the appropriate
authority.
(d) CHATTEL PAPER. If any Account Receivable is evidenced
by chattel paper or instruments, the Borrower will, unless the
Lender shall otherwise agree, deliver the originals of same to the
Lender, appropriately endorsed to the Lender's order and, regardless
of the form of such endorsement, the Borrower hereby expressly
waives presentment, demand, notice of dishonor, protest and notice
of protest and all other notices with respect thereto.
3.3 INVENTORY.
(a) Unless the Lender shall otherwise agree in writing, if
the Borrower sells Inventory for cash, all full and partial payments
therefor shall immediately be delivered by the Borrower to the
Lender in their original form for deposit in the Collateral Account
or application to payment of the Obligations in such order and
manner as Lender shall determine. All such cash shall be held by the
Borrower in trust for the Lender and shall be remitted to the Lender
at the end of the day received or at such other time as the Lender
may designate.
(b) The Lender shall not be liable or responsible in any
way for the safekeeping of any Inventory delivered to it, to any
bailee appointed by or for it, to any warehouseman, or under any
other circumstances. The Lender shall not be responsible for
collection of any proceeds or for losses in collected proceeds held
by the Borrower in trust for the Lender. Any and all risk of loss
for any or all of the foregoing shall be upon the Borrower except
for such loss as shall result from the Lender's gross negligence or
willful misconduct.
(c) The Borrower shall, upon acquiring an interest in any
Inventory, deliver to the Lender schedules of such Inventory,
together with supplier's invoices, warranties, production, cost and
other records as the Lender may request. If requested by the Lender,
the Borrower shall deliver to the Lender schedules of the sale of
any Inventory immediately upon its sale. Any material change in the
value or condition of any Inventory and any errors discovered in
schedules delivered to the Lender shall be reported to the Lender
immediately.
(d) The Borrower shall notify the Lender immediately if the
Borrower obtains possession (by return, repossession or otherwise)
of any Inventory in excess of $50,000 in the aggregate for any one
Account Debtor in any one fiscal month or in excess of $100,000 in
the aggregate for all Account Debtors in any one fiscal month which
has
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been sold and shall inform the Lender of the identity of the
returned or repossessed Inventory, the applicable Account Debtor and
the amount of the applicable Account Receivable. Regardless of
whether the Borrower is obligated to notify the Lender pursuant to
the immediately preceding sentence with respect to any item of
Inventory, the Borrower shall receive such Inventory in trust and
resell such Inventory for the Lender unless instructed to deliver it
to the Lender.
3.4 EQUIPMENT.
(a) In the event any Equipment is sold, transferred or
otherwise disposed of, unless the Lender shall agree otherwise in
writing, the Borrower shall deliver all of the proceeds of any such
sale, transfer or disposition to the Lender in their original form
for deposit in the Collateral Account or application to payment of
the Obligations in such order and manner as Lender shall determine.
(b) The Borrower will, upon request of the Lender, submit
to the Lender a current listing of all of the Borrower's Equipment
which listing shall indicate the type, model, serial number and
location of such Equipment except that, so long as no Unmatured
Event of Default or Event of Default has occurred and is consisting,
such listing shall be in substantially the form of the Borrower's
"net book value report" delivered to the Lender prior to the date
hereof.
3.5 SUPPLEMENTAL DOCUMENTATION. At the Lender's request, the
Borrower shall execute and/or deliver to the Lender, at any time or times
hereafter, such agreements, assignments, documents, financing statements,
warehouse receipts, bills of lading, notices of assignment of Accounts
Receivable, schedules of Accounts Receivable assigned, and other written
matter necessary or requested by the Lender to perfect and maintain a
perfected security interest in the Collateral granted hereunder (all the
above hereinafter referred to as "SUPPLEMENTAL DOCUMENTATION"), in form and
substance acceptable to the Lender, and pay all taxes, fees and other costs
and expenses associated with any recording or filing of the same. Borrower
agrees to reimburse the Lender for the costs of all searches and updates of
searches in public records deemed necessary by the Lender in connection with
the protection of its security interest. The Borrower hereby irrevocably
makes, constitutes and appoints the Lender (and all Persons designated by the
Lender for that purpose) as the Borrower's true and lawful attorney (and
agent-in-fact) to sign the name of the Borrower on any of the Supplemental
Documentation and to deliver any of the Supplemental Documentation to such
Persons as the Lender in its sole and absolute discretion, may elect. The
Borrower agrees that a carbon, photographic, photostatic, and other
reproduction of this Agreement or of a financing statement is sufficient as a
financing statement.
3.6 POWER OF ATTORNEY. The Borrower irrevocably designates, makes,
constitutes, and appoints the Lender (and all Persons designated by the
Lender) as the Borrower's true and lawful attorney (and agent-in-fact) and
the Lender, or the Lender's agent, may, without notice to the Borrower:
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(a) at such time or times hereafter as the Lender or said
agent, in its sole and absolute discretion, may determine, in the
Borrower's or the Lender's name, (i) endorse the Borrower's name on
any checks, notes, drafts or any other items of payment relating to
and/or proceeds of the Collateral which come into the possession of
the Lender or under the Lender's control and deposit the same in the
Collateral Account or apply such payment or proceeds to the
Obligations in such manner as Lender shall determine; and (ii)
endorse the Borrower's name on any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar
document or agreement in the Lender's possession relating to
Accounts Receivable, Inventory, Equipment or any other Collateral;
and
(b) at any time after an Event of Default, as the Lender or
said agent, in its sole and absolute discretion, may determine, in
the Borrower's or the Lender's name: (i) notify and/or require the
Borrower to notify, any Account Debtor or other Person obligated
under or in respect of any Collateral, of the fact of the Lender's
Lien thereon and of the collateral assignment thereof to the Lender;
(ii) direct and/or require the Borrower to direct, any Account
Debtor or other Person obligated under or in respect of any
Collateral, to make payment directly to the Lender of any amounts
due or to become due thereunder or with respect thereto;(iii)
receive, open and dispose of all mail received at the street address
or any post office box address of the Borrower; (iv) demand,
collect, surrender, release or exchange all or any part of any
Collateral or any amounts due thereunder or with respect thereto;
(v) settle, adjust, compromise, extend or renew for any period
(whether or not longer than the initial period) any and all sums
which are now or may hereafter become due or owing upon or with
respect to any of the Collateral; (vi) enforce, by suit or
otherwise, payment or performance of any of the Collateral; (vii)
settle, adjust or compromise any legal proceedings brought to
collect any sums due or owing upon or with respect to any of the
Collateral; (viii) exercise all of the Borrower's rights and
remedies with respect to the collection of any amounts due upon or
with respect to any of the Collateral; (ix) if permitted by
applicable law, sell or assign the Collateral upon such terms, for
such amounts and at such time or times as the Lender may deem
advisable; (x) discharge and release the Collateral; (xi) prepare,
file and sign the Borrower's name on any proof of claim in
bankruptcy or similar document against any Account Debtor; (xii)
prepare, file and sign the Borrower's name on any notice of lien,
assignment or satisfaction of lien or similar document in connection
with the Accounts Receivable and/or other Collateral; and (xiii) do
all acts and things necessary, in the Lender's sole and absolute
discretion, to obtain repayment of the Obligations and to fulfill
the Borrower's other obligations under this Agreement.
(c) at such time or times after the assertion by the Lender
that an Event of Default has occurred and is continuing (whether or
not an Event of Default has in fact occurred), as the Lender or said
agent, in its reasonable discretion, may determine, in the
Borrower's or the Lender's name, notify the post office authorities
to change the address for delivery of the Borrower's mail to an
address designated by the Lender.
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This power, being coupled with an interest, is irrevocable until all
Obligations are paid in full and the Credit is terminated. Under no
circumstances shall the Lender be under any duty to act in regard to any of
the foregoing matters. The costs relating to any of the foregoing matters,
including Attorneys' Fees and out-of-pocket expenses shall be borne solely by
the Borrower whether the same are incurred by the Lender or the Borrower.
The Lender and Affiliates and their respective directors, officers, employees
or agents shall not be liable for any acts of commission or omission nor for
any error in judgment or mistake of fact or law, unless the same shall have
resulted from gross negligence or willful misconduct.
3.7 LICENSE. The Borrower grants to Lender and its Affiliates a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all leases, licenses, trademarks, franchises, tradenames, copyrights and
patents of the Borrower (to the extent permissible under the terms of such
agreements) for the purposes of selling, leasing, preparing for sale or
disposing or enforcing its rights in any or all of the Collateral; PROVIDED,
HOWEVER, that such license may be exercised only after the occurrence of an
Event of Default.
ARTICLE IV REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to make Loans
to the Borrower for the account of Borrower hereunder, the Borrower makes the
following representations and warranties, all of which shall be true and
correct as of the date the each Loan is made and survive the execution of
this Agreement and the making of the initial Loan:
4.1 ORGANIZATION, NAME. The Borrower and each of its corporate
Subsidiaries are corporations duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of their respective
incorporation. All of the Borrower's other Subsidiaries, if any, are entities
duly organized, validly existing and in good standing under the laws of the
jurisdictions of their respective organization. The Borrower and all of the
Subsidiaries are in good standing and are duly qualified to do business in
each state where, because of the nature of their respective activities or
properties, such qualification is required. During the last ten years, the
Borrower and each Subsidiary has done business solely in the names set forth
on SCHEDULE 4.1 and has no trade names, styles or doing business forms except
as disclosed on SCHEDULE 4.1. The Borrower's taxpayer identification number
is 41-0948334.
4.2 AUTHORIZATION. The Borrower is duly authorized to execute and
deliver the Loan Documents and any Supplemental Documentation contemplated by
this Agreement, and is and will continue to be duly authorized to borrow
monies hereunder and to perform its obligations under the Loan Documents and
any Supplemental Documentation contemplated by this Agreement and the
borrowings hereunder do not and will not require any consent or approval of
any governmental agency or authority.
4.3 NO CONFLICTS. The execution, delivery and performance by the
Borrower of the Loan Documents and any Supplemental Documentation
contemplated by this Agreement, do not
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and will not conflict with (a) any provision of law, (b) the charter or
by-laws of the Borrower, (c) any agreement binding upon the Borrower, or (d)
any court or administrative order or decree applicable to the Borrower, and
do not and will not require, or result in, the creation or imposition of any
Lien on any asset of the Borrower or any of the Subsidiaries except as
provided herein.
4.4 VALIDITY AND BINDING EFFECT. The Loan Documents constitute (and
any Supplemental Documentation contemplated by this Agreement, when duly
executed and delivered will constitute) the legal, valid and binding
obligations of the Borrower and each Obligor, enforceable against the
Borrower and each Obligor in accordance with their respective terms. The
execution, delivery and performance of the Loan Documents by Borrower and any
Obligor, and the borrowing of money, incurring of obligations and granting of
Liens thereunder are within their respective corporate powers and have been
duly authorized by all necessary corporate action.
4.5 NO DEFAULT. Neither the Borrower nor any of the Subsidiaries is
in default under any agreement or instrument to which the Borrower or any
Subsidiary is a party or by which any of their respective properties or
assets is bound or affected, which default (a) might materially and adversely
affect the Lender's Lien on or rights with respect to any Collateral or Third
Party Collateral or (b) constitutes an Adverse Event. No Event of Default or
Unmatured Event of Default has occurred and is continuing.
4.6 FINANCIAL STATEMENTS. The Borrower's audited consolidated
financial statement as at June 30, 1998 and the Borrower's unaudited
consolidated financial statement as at October 31, 1998, copies of which have
been furnished to the Lender, have been prepared in conformity with GAAP and
applied on a basis consistent with that of the preceding fiscal year and
period and present fairly the financial condition of the Borrower and the
Subsidiaries as at such dates and the results of their operations for the
periods then ended, subject (in the case of the interim financial statement)
to year-end audit adjustments. Since June 30, 1998, no Adverse Event has
occurred.
4.7 INSURANCE. SCHEDULE 4.7 sets forth a summary of the property and
casualty insurance program carried by the Borrower and the Subsidiaries on
the date hereof, including the insurer's(s') name(s), policy number(s),
expiration date(s), amount(s) of coverage, type(s) of coverage, the annual
premium(s), Best's policyholder's and financial size ratings of the insurers,
exclusions, deductibles and self-insured retention, and describes in detail
any retrospective rating plan, fronting arrangement or any other
self-insurance or risk assumption agreed to by the Borrower or any Subsidiary
or imposed upon the Borrower or any Subsidiary by any such insurer. This
summary also includes any self-insurance program that is in effect.
4.8 LITIGATION; CONTINGENT LIABILITIES.
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(a) Except for those referred to in SCHEDULE 4.8, no claims
litigation, arbitration proceedings or governmental proceedings are
pending or threatened against or are affecting the Borrower or any
Subsidiary.
(b) Other than any liability incident to the claims,
litigation or proceedings disclosed in SCHEDULE 4.8, neither the
Borrower nor any the Subsidiary has any contingent liabilities which
are material to the Borrower or any Subsidiary.
4.9 OWNERSHIP OF PROPERTY, LIENS. Each of the Borrower and the
Subsidiaries has good and marketable title to its real properties and good
and sufficient title to its other properties, including all properties and
assets referred to as owned by the Borrower and/or its Subsidiaries in the
audited financial statement of the Borrower referred to in SECTION 4.6 (other
than property disposed of since the date of such financial statement in the
ordinary course of business as permitted by this Agreement). None of the
Collateral or other property or assets of the Borrower or any Subsidiary is
subject to any Lien (including, without limitation, Liens pursuant to
Capitalized Leases under which the Borrower or any Subsidiary is a lessee)
except: (a) Liens in favor of the Lender; (b) Liens for current Taxes not
delinquent or Taxes being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate provisions as
may be required by GAAP are being maintained; (c) statutory Liens, such as
carriers', loggers', warehousemen's, mechanics', materialmen's and
repairmen's' Liens, arising in the ordinary course of business securing
obligations which are not overdue or which are being contested in good faith
and by appropriate proceedings and as to which such reserves or other
appropriate provisions as may be required by GAAP are being maintained; and
(d) Liens permitted on SCHEDULE 4.9.
4.10 SUBSIDIARIES, OWNERSHIP. The Borrower has no Subsidiaries
except as listed on SCHEDULE 4.10. The ownership of the Borrower and each of
the Subsidiaries is as set forth on SCHEDULE 4.10, which schedule shows the
name(s) of each Person having an ownership interest, and the percentage of
such ownership interest in the respective entity. Except as set forth on
SCHEDULE 4.10, no part of the ownership interest of any Person in Borrower or
any Subsidiary is subject to any shareholder agreement, voting trust or other
agreement limiting or otherwise pertaining to the ownership interest of such
Person.
4.11 PARTNERSHIPS; JOINT VENTURES; LLCS. Neither the Borrower nor
any of the Subsidiaries is a partner or joint venturer or member in any
partnership, joint venture or limited liability company other than the
partnerships, joint ventures and limited liability companies listed on
SCHEDULE 4.11.
4.12 BUSINESS LOCATIONS. On the date hereof, the Borrower's and each
Subsidiary's chief executive office and principal place of business are
located at the respective addresses set forth on SCHEDULE 4.12. The
Borrower's and each Subsidiary's books and records relating to its business
and the Accounts Receivable and other Collateral are kept at such locations.
All of Borrower's and each Subsidiary's other locations or places of business
are as set forth on SCHEDULE 4.12. Borrower and each Subsidiary is the lawful
owner of fee title or of the lessee's
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interest under a valid and existing lease with respect to the locations
business described on SCHEDULE 4.12. For each locations subject to a lease or
mortgage, the legal description(s) of the real property and the name(s) of
the record owner and any mortgagee of such real property is set forth in
SCHEDULE 4.12.
4.13 COLLATERAL LOCATIONS. On the date hereof the Borrower's
Inventory, Equipment and, if applicable, fixtures (except any part thereof
which prior to the execution of this Agreement the Borrower shall have
advised the Lender in writing consists of Collateral normally used in more
than one state) are located at the addresses set forth in SCHEDULE 4.13. For
each location subject to a lease or mortgage, the legal descriptions of the
real property on which any Collateral is located and the name(s) of the
record owner and any mortgagee of such real property is set forth in SCHEDULE
4.13.
4.14 ELIGIBILITY OF COLLATERAL. (a) All of the Accounts Receivable
are and will continue to be bona fide existing obligations created by the
sale of goods, the rendering of services, or the furnishing of other good and
sufficient consideration to Account Debtors in the regular course of business
and all shipping or delivery receipts and other documents furnished or to be
furnished to the Lender in connection therewith are and will be genuine; (b)
each Account Receivable, item of Inventory or item of Equipment which the
Borrower shall, expressly or by implication, request the Lender to classify
as an Eligible Account Receivable or as Eligible Inventory, respectively,
will, as of the time when such request is made, conform in all respects to
the requirements of such classification set forth in the respective
definitions of "Eligible Account Receivable" and "Eligible Inventory" set
forth herein; (c) with respect to each schedule of Inventory delivered to the
Lender pursuant to SECTION 3.3: (i) the descriptions, origins, size,
qualities, quantities, weights, and markings of all goods stated thereon, or
on any attachment thereto, are true and correct in all material respects;
(ii) all goods stated thereon have been produced by the Borrower in
compliance with all requirements of the Fair Labor Standards Act; and (iii)
none of the goods stated thereon are defective, of second quality, used, or
goods returned after shipment, except where described as such; and (iv) all
Inventory not included on such schedule has been previously scheduled.
4.15 CONTROL OF COLLATERAL; LEASE OF PROPERTY. The Borrower is not
now conducting, or permitting or suffering to be conducted, any activities
pursuant to or in conjunction with which any of the Collateral is now, or
will be (while any Obligations exist or this Agreement is in effect), in the
possession or control of, any Subsidiary, Obligor (other than the Borrower)
or Related Party. Except as listed on SCHEDULE 4.15, none of the machinery,
equipment or real property used by the Borrower or any Subsidiary is subject
to a lease (excluding only Capitalized Leases included on SCHEDULE 6.12)
under which the Borrower or such Subsidiary is the lessee.
4.16 PATENTS, TRADEMARKS, ETC. The Borrower and each of the
Subsidiaries possesses or has the right to use all of the patents,
trademarks, trade names, service marks and copyrights, and applications
therefor, and all technology, know-how, processes, methods and designs used
in or necessary for the conduct of its business, without known conflict with
the rights of others. All
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such licenses, patents, trademarks, trade names, service marks and
copyrights, and applications therefor existing on the date hereof are listed
on SCHEDULE 4.16.
4.17 SOLVENCY. The Borrower and each of the Subsidiaries now has
capital sufficient to carry on its respective business and transactions and
all business and transactions in which it is about to engage and is now
solvent and able to pay its respective debts as they mature, and the Borrower
and each of the Subsidiaries now owns property having a value, greater than
the amount required to pay the Borrower's or such Subsidiary's debts.
4.18 CONTRACTS; LABOR MATTERS. Except as disclosed on SCHEDULE 4.18:
(a) neither the Borrower nor any Subsidiary is a party to any contract or
agreement, or subject to any charge, corporate restriction, judgment, decree
or order, the performance of which constitutes an Adverse Event; (b) no labor
contract to which the Borrower or any Subsidiary is subject is scheduled to
expire during the original term of this Agreement; and (c) on the date of
this Agreement (i) neither the Borrower nor any Subsidiary is a party to any
labor dispute and (ii) there are no strikes or walkouts relating to any labor
contracts to which the Borrower or any Subsidiary is subject.
4.19 ERISA. Each Plan is in substantial compliance with all
applicable requirements of ERISA and the Code and with all material
applicable rulings and regulations issued under the provisions of ERISA and
the Code setting forth those requirements. No Reportable Event has occurred
and is continuing with respect to any Plan. All of the minimum funding
standards applicable to such Plans have been satisfied and there exists no
event or condition which would reasonably be expected to result in the
institution of proceedings to terminate any Plan under Section 4042 of ERISA.
With respect to each Plan subject to Title IV of ERISA, as of the most recent
valuation date for such Plan, the present value (determined on the basis of
reasonable assumptions employed by the independent actuary for such Plan and
previously furnished in writing to the Lender of such Plan's projected
benefit obligations did not exceed the fair market value of such Plan's
assets. Except as required under Section 4890B of the Code, Section 601 of
ERISA or applicable state law, neither the Borrower nor any Subsidiary is
obligated to provide post-retirement medical or insurance benefits with
respect to employees or former employees.
4.20 REGULATION U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (as
defined in Regulation U of the Federal Reserve Board), and no part of the
proceeds of any Loan will be used to purchase or carry margin stock or for
any other purpose which would violate any of the margin requirements of the
Federal Reserve Board.
4.21 COMPLIANCE. The Borrower and each of the Subsidiaries are in
material compliance with all statutes and governmental rules and regulations
applicable to them. All Inventory of the Borrower has been produced in
compliance with all requirements of the Fair Labor Standards Act.
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4.22 TAXES. The Borrower and each Subsidiary has filed all federal,
state and local tax returns required to be filed and has paid, or made
adequate provisions for the payment of, all Taxes due and payable pursuant to
such returns and pursuant to any assessments made against it or any of its
property (other than Taxes the amount or validity of which is currently being
contested in good faith by appropriate proceedings and with respect to which
reserves in accordance with GAAP have been provided on the books of the
Borrower). No tax Liens have been filed and no material claims are being
asserted with respect to any such Taxes. The charges, accruals and reserves
on the books of the Borrower in respect of Taxes are adequate. The Borrower
and the Subsidiaries have not been audited by the Internal Revenue Service
for any tax years up to and including the tax year ended June 30, 1998. The
Borrower is not aware of any proposed assessment against the Borrower or any
Subsidiary for additional Taxes (or any basis for any such assessment) which
might be material to the Borrower and the Subsidiaries taken as a whole.
4.23 INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary
is an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
4.24 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor
any Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company" or an "affiliate" of a "holding company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
4.25 ENVIRONMENTAL AND SAFETY AND HEALTH MATTERS. Except as
disclosed on SCHEDULE 4.25: (a) the operations of the Borrower and each of
the Subsidiaries complies in all respects with (i) all applicable
Environmental Laws, and (ii) all applicable Occupational Safety and Health
Laws; (b) none of the operations of the Borrower or any Subsidiary are
subject to any judicial or administrative proceeding alleging the violation
of any Environmental Law or Occupational Safety and Health Law; (c) none of
the operations of the Borrower or any Subsidiary is the subject of federal or
state investigation evaluating whether any remedial action is needed to
respond to (i) a spillage, disposal or release into the environment of any
Hazardous Material or other hazardous, toxic or dangerous waste, substance or
constituent, or other substance, or (ii) any unsafe or unhealthful condition
at any premises of the Borrower or any Subsidiary; (d) neither the Borrower
nor any Subsidiary has received or filed any notice under any Environmental
Law or Occupation Safety and Health Law indicating or reporting (i) any past
or present spillage, disposal or release into the environment of, or
treatment, storage or disposal of, any Hazardous Material or other hazardous,
toxic or dangerous waste, substance or constituent, or other substance or
(ii) any unsafe or unhealthful condition at any premises of the Borrower or
any Subsidiary; (e) neither the Borrower nor any Subsidiary has any known
contingent liability in connection with (i) any spillage, disposal or release
into the environment of, or otherwise with respect to, any Hazardous Material
or other hazardous, toxic or dangerous waste, substance or constituent, or
other substance, or (ii) any unsafe or unhealthful condition at any premises
of the Borrower or any Subsidiary; and (f) Borrower and each Subsidiary has
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secured and is maintaining all necessary permits, licenses and approvals
necessary under any Environmental Law to Borrower's or such Subsidiary's
business.
4.26 SECURITIES ACT. Borrower has not issued any unregistered
securities in violation of the registration requirements of Section 5 of the
Securities Act of 1933, as amended, or any other law, and is not violating
any rule, regulation or requirement under the Securities Act of 1933, as
amended, or the Securities Act of 1934, as amended, in any material respect.
4.27 CONSENTS. No consent of the shareholders of Borrower or any
Subsidiary or any other Person and no order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by, any governmental or public body or authority is required on the
part of Borrower or any Subsidiary to authorize or is required in connection
with the execution, delivery and performance of, or the legality, validity,
binding effect or enforceability of, the Loan Documents.
ARTICLE V AFFIRMATIVE COVENANTS
From the date of this Agreement and thereafter until all Obligations are paid
in full and the Credit has terminated, the Borrower agrees that unless the
Lender shall otherwise consent in writing, it will:
5.1 FINANCIAL STATEMENTS AND OTHER REPORTS.
5.1.1 FINANCIAL REPORTS. Furnish to the Lender in form satisfactory
to the Lender:
(a) ANNUAL AUDIT REPORT. As soon as available and in any
event within one hundred-twenty (120) days after the end of each
fiscal year of the Borrower, the annual audit report of the Borrower
and the Subsidiaries prepared on a consolidated basis in conformity
with GAAP, consisting of at least statements of income, cash flow
and stockholders' equity, and a consolidated balance sheet as at the
end of such year, setting forth in each case in comparative form
corresponding figures from the previous annual audit, certified,
without qualification, by independent certified public accountants
of recognized standing selected by the Borrower and acceptable to
the Lender.
(b) ACCOUNTANT'S CERTIFICATE. Together with the audited
financial statements required under SECTION 5.1.1(a): (i) a debt
compliance certificate from the accounting firm performing such
audit stating to the effect that it has reviewed this Agreement and
that in performing its examination, nothing came to its attention
that caused it to believe that any Event of Default or Unmatured
Event of Default exists, or, if such Unmatured Event of Default or
Event of Default exists, describing its nature; and (ii) a copy of
the management letter, if any, delivered to the Borrower by such
accounting firm and the Borrower's response thereto.
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(c) MONTHLY FINANCIAL STATEMENT. As soon as available and
in any event within twenty-five (25) days after the end of each
month of each fiscal year of the Borrower, a copy of the unaudited
financial statement of the Borrower and the Subsidiaries prepared in
the same manner as the audit report referred to in SECTION 5.1.1(a),
signed by the Borrower's chief financial officer and consisting of
at least consolidated statements of income, cash flow and
stockholders' equity for the Borrower and the Subsidiaries for such
month and for the period from the beginning of such fiscal year to
the end of such month, and a consolidated balance sheet of the
Borrower as at the end of such month.
(d) PROJECTIONS. As soon as available and in any event not
later than fifteen (15) days preceding the last day of each fiscal
year of the Borrower, a projected financial statement of the
Borrower and the Subsidiaries prepared in the same manner as the
unaudited financial statements referred to in SECTION 5.1.1(c),
signed by the Borrower's chief financial officer and presenting
fairly the Borrower's best good faith projections of the financial
position and results of operations of the Borrower and the
Subsidiaries for each month of the following fiscal year.
(e) OFFICER'S CERTIFICATE. Together with the financial
statements furnished by the Borrower under SECTION 5.1.1(a) and (c),
a certificate of the Borrower's chief financial officer, in
substantially the form of EXHIBIT B hereto, dated the date of such
annual audit report or such monthly financial statement, as the case
may be, to the effect that no Event of Default or Unmatured Event of
Default has occurred and is continuing, or, if there is any such
event, describing it and the steps, if any, being taken to cure it,
and containing a computation of, and showing compliance with, each
of the financial ratios and restrictions contained in ARTICLES V and
VI and SUPPLEMENT A.
5.1.2 AGINGS; INELIGIBLE ACCOUNTS RECEIVABLE CERTIFICATION. Within
twenty-five (25) days after the end of each month: (a) a detailed aging of
all Accounts Receivable by invoice, including, without limitation, a
reconciliation to the aging report delivered to the Lender for the preceding
month, (b) a certification of ineligible Accounts Receivable and (c) an aging
of all accounts payable as of the end of the preceding month, each in form
and content acceptable to the Lender, and (d) a reconciliation of Accounts
Receivable to the Borrower's general ledger and Lender's records each in form
and content acceptable to the Lender.
5.1.3 INVENTORY CERTIFICATION. Within twenty-five (25)days after the
end of each month, an Inventory certification report as of the end of the
preceding month for all Inventory locations, in form and content acceptable
to the Lender.
5.1.4 SALES AND COLLECTION REPORTS. Intentionally Deleted.
5.1.5 OTHER REPORTS.
(a) SEC AND OTHER REPORTS. Promptly upon the making or
filing thereof, copies of all financial statements, reports and
proxy statements mailed to the Borrower's
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shareholders, and copies of all registration statements, periodic
reports and other documents filed with the Securities and Exchange
Commission (or any successor thereto) or any national securities
exchange.
(b) REPORT OF CHANGE IN SUBSIDIARIES OR OTHER ENTITIES.
Subject to SECTION 6.7, promptly upon the occurrence thereof, a
written report of any change in the list of the Borrower's
Subsidiaries set forth on SCHEDULE 4.10 or in the list of
partnerships, joint ventures or limited liability companies set
forth on SCHEDULE 4.11.
(c) PATENTS, ETC. Promptly upon the occurrence thereof, a
written report of any change to the list of patents, trademarks,
copyrights and other information set forth in SCHEDULE 4.16.
(d) INSURANCE UPDATES. If requested, provide to the Lender
within 45 days of such request, a certificate signed by its chief
financial officer that attests to and summarizes the property and
casualty insurance program carried by the Borrower and the
Subsidiaries. This summary shall include each insurer's name, policy
number(s), expiration date(s), amount(s) of coverage, type(s) of
coverage, the annual premium(s), Best's policyholder's and financial
size ratings of each insurer, exclusions, deductibles and
self-insured retention and shall describe in detail any
retrospective rating plan, fronting arrangement or any other
self-insurance or risk assumption agreed to by the Borrower or any
Subsidiary or imposed upon the Borrower or any Subsidiary by any
such insurer, as well as any self-insurance program that is in
effect.
(e) OTHER REPORTS. The information required to be provided
pursuant to other provisions of this Agreement, and such other
reports from time to time requested by the Lender.
5.2 NOTICES. By no later than five (5) Business Days after the
Borrower becomes aware of any of the following, notify the Lender in writing
of such occurrence thereof, describing the same and, if applicable, the steps
being taken by the Person(s) affected with respect thereto:
(a) DEFAULT. The occurrence of (i) any Event of Default or
Unmatured Event of Default, and (ii) to the extent not included in
CLAUSE (i) above, the default by the Borrower, any other Obligor or
any Subsidiary under any note, indenture, loan agreement, mortgage,
lease, deed or other material similar agreement to which the
Borrower, any other Obligor or any Subsidiary, as appropriate, is a
party or by which it is bound.
(b) LITIGATION. The institution of any litigation,
arbitration proceeding or governmental proceeding affecting the
Borrower, any other Obligor, any Subsidiary, any Collateral or any
Third Party Collateral, whether or not considered to be covered by
insurance.
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(c) JUDGMENT. The entry of any judgment or decree against
the Borrower, any other Obligor or any Subsidiary, if the amount of
such judgment exceeds $250,000.
(d) ERISA. With respect to any Plan, the occurrence of a
Reportable Event or Prohibited Transaction, a notice specifying the
nature thereof and what action the Borrower proposes to take with
respect thereto, and, when received, copies of any notice from PBGC
of intention to terminate or have a trustee appointed for any Plan.
(e) CHANGE IN COLLATERAL LOCATIONS. Subject to the
provisions of SECTION 6.5, any change in location of any of the
Borrower's Inventory or Equipment TO locations other than those
identified in this Agreement or in SCHEDULE 4.12 or 4.13, together
with a list of such new location(s), the legal description of the
location and the name and address of any landlord and/or mortgagee.
At Lender's request, Borrower shall deliver to Lender a landlord's
waiver and/or mortgagee's waiver in form and substance satisfactory
to Lender with respect to Collateral at such new locations.
(f) CHANGE IN PLACE(s) OF BUSINESS. Subject to the
provisions of SECTION 6.5, any proposed opening, closing or other
change in the list of offices and other places of business of the
Borrower and each Subsidiary set forth in SCHEDULE 4.12, and any
opening, closing or other change in the offices and other places of
business of each other Obligor, together with a list of such new
location(s) the legal description of the location and the name and
address of any landlord and/or mortgagee. At Lender's request,
Borrower shall deliver to Lender a landlord's waiver and/or
mortgagee's waiver in form and substance satisfactory to Lender with
respect to Collateral at such new locations.
(g) CHANGE OF NAME. Subject to the provisions of SECTION
6.5, any change in the name of the Borrower, any other Obligor or
any Subsidiary, and any change in the list of trade names and trade
styles set forth in SCHEDULE 4.1.
(h) ENVIRONMENTAL AND SAFETY AND HEALTH MATTERS.
Non-compliance with and/or receipt of any notice that the operations
of the Borrower, any other Obligor or any Subsidiary are not in full
compliance with the requirements of any applicable Environmental Law
or any Occupational Safety and Health Law; the occurrence of and/or
receipt of notice that the Borrower, any other Obligor or any
Subsidiary is subject to federal, state or local investigation
evaluating whether any remedial action is needed to respond to (i)
any spillage, disposal or release into the environment of any
Hazardous Material or other hazardous, toxic or dangerous waste,
substance or constituent, or other substance, or (ii) any unsafe or
unhealthful condition at any premises of the Borrower, any other
Obligor or any Subsidiary; or receipt of notice that any properties
or assets of the Borrower any other Obligor or any Subsidiary are
subject to an Environmental Lien.
(i) ADVERSE EVENT. The occurrence of an Adverse Event.
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(j) DEFAULT BY OTHERS. Any material default by any Account
Debtor or other Person obligated to the Borrower, any other Obligor, or
any Subsidiary, under any contract, chattel paper, note or other
evidence of amounts payable or due or to become due to the Borrower,
such Obligor or Subsidiary if the amount payable under such contract,
chattel paper, note or other evidence of amounts payable or due or to
become due is material.
(k) MOVEABLE COLLATERAL. If any of the Collateral or Third
Party Collateral shall consist of goods of a type normally used in more
than one state, whether or not actually so used, any use of any such
goods in any state other than a state in which the Borrower shall have
previously advised the Lender such goods will be used. The Borrower
agrees that such goods will not, unless the Lender shall otherwise
consent in writing, be used outside the continental United States or in
Louisiana.
(l) CHANGE IN MANAGEMENT OR LINE(s) OF BUSINESS. Any change in
James Bracke's management responsibilities, or any material change in
the Borrower's or any Subsidiary's line(s) of business.
(m) CHANGE IN INSURANCE. In addition, the Borrower shall (a)
notify the Lender in writing at least 30 days prior to any cancellation
or material change of any such insurance by the Borrower or any
Subsidiary and (b) within five business days after receipt of any
notice (whether formal or informal) of any cancellation or change in
any of its insurance by any of its insurers or any material change in
the cost thereof or which reduces the policyholder's or financial size
ratings of the insurance carriers of the Borrower or any Subsidiary, as
established by BEST'S INSURANCE REPORTS.
(n) OTHER EVENTS. The occurrence of such other events as the
Lender may from time to time specify.
5.3 EXISTENCE. Maintain and preserve, and cause each Subsidiary to
maintain and preserve, its respective existence as a corporation or other
form of business organization, as the case may be, and all rights,
privileges, licenses, patents, patent rights, copyrights, trademarks, trade
names, franchises and other authority to the extent material and necessary
for the conduct of its respective business in the ordinary course as
conducted from time to time.
5.4 NATURE OF BUSINESS. Engage, and cause each Subsidiary to engage,
in substantially the same fields of business as it is engaged in on the date
hereof.
5.5 BOOKS AND RECORDS, ACCESS. Maintain, and cause each Subsidiary
to maintain, complete and accurate books and records (including, without
limitation, records relating to Accounts Receivable, Inventory, Equipment and
other Collateral), in which full and correct entries in conformity with GAAP
shall be made of all dealings and transactions in relation to its respective
business and activities. Cause its books and records as at the end of any
calendar month to be posted and closed not more than thirty (30) days after
the last business day of such
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month. Permit, and cause each Subsidiary to permit, access by the Lender and
its agents or employees to the books and records of the Borrower and such
Subsidiary at the Borrower's or such Subsidiary's place or places of business
at intervals to be determined by the Lender and without hindrance or delay,
and permit, and cause each Subsidiary to permit, the Lender or its agents and
employees to inspect the Borrower's Inventory and Equipment and such
Subsidiary's inventory and equipment, and to inspect, audit, check and make
copies and/or extracts from the books, records, journals, orders, receipts,
correspondence and other data relating to Inventory, Accounts Receivable,
chattel paper, General Intangibles, Equipment and any other Collateral or
Third Party Collateral, or to any other transactions between the parties
hereto; PROVIDED, HOWEVER, that so long as no Event of Default or Unmatured
Event of Default has occurred and is continuing, the Lender agrees to notify
the Borrower of the Lender's intent to conduct any such inspection or audit
at least five (5) days prior to the commencement date thereof. Any and all
such inspections and/or audits shall be at the Borrower's expense; provided,
HOWEVER, that so long as no Event of Default or Unmatured Event of Default
has occurred and is continuing, Borrower's obligations to pay for such
inspections and/or audits shall be limited to $500 per day plus expenses.
5.6 INSURANCE. Maintain, and cause each Subsidiary to maintain,
insurance to such extent and against such hazards and liabilities as is
commonly maintained by companies similarly situated or as the Lender may
request from time to time. Keep the Collateral properly housed and insured
for its full insurable value against loss or damage by fire, theft,
explosion, sprinklers, collision (in the case of motor vehicles) and such
other risks as are customarily insured against by persons engaged in business
similar to that of the Borrower, with such companies, in such amounts and
under policies in such form as shall be satisfactory to the Lender. From time
to time, prior to the expiration of any such insurance, Borrower shall
deliver to Lender certificates evidencing the renewal of such policies of
insurance and showing Lender as loss payee (under a lender's or mortgagee's
loss payee endorsement) with respect to any casualty loss insurance covering
the Collateral and an additional insured with respect to any liability
insurance together with evidence of payment of all premiums therefor. The
Borrower hereby directs all insurers under such casualty loss policies of
insurance to pay all proceeds payable thereunder directly to the Lender in
accordance with the lender's or mortgagee's loss payee endorsement. The
Borrower irrevocably makes, constitutes and appoints the Lender and any
Person whom the Lender may from time to time designate (and all officers,
employees or agents designated by the Lender or such Person) as the
Borrower's true and lawful attorney (and agent-in-fact) for the purpose of
making, settling and adjusting claims under such policies of insurance,
endorsing the name of the Borrower on any check, draft, instrument or other
item of payment for the proceeds of such policies of insurance and for making
all determinations and decisions with respect to such policies of insurance;
PROVIDED, HOWEVER, that: (a) the Lender may exercise its power-of-attorney
only after the occurrence and during the continuance of an Event of Default;
and (b) so long as no Event of Default or Unmatured Event of Default has
occurred and is continuing, the Borrower may itself make, settle and adjust
claims of up to $500,000 in losses during any of the Borrower's fiscal years
without first obtaining the Lender's consent. Any Lender's consent required
by this SECTION shall not be unreasonably withheld or delayed. In the event
the Borrower at any time or times hereafter shall fail to obtain or maintain
any of the
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policies of insurance required herein or to pay any premium in whole or in
part relating thereto, the Lender, without waiving or releasing any
obligations or default by the Borrower hereunder, may at any time or times
thereafter (but shall be under no obligation to do so) obtain and maintain
such policies of insurance and pay such premiums and take any other action
with respect thereto which the Lender deems advisable. All sums so disbursed
by the Lender, including reasonable Attorneys' Fees, court costs, expenses
and other charges relating thereto, shall be deemed an Advance hereunder and
shall be payable on demand by the Borrower to the Lender.
5.7 INSURANCE RISK MANAGEMENT SURVEY. Within 45 days after Lender's
request therefor, Borrower shall have a risk management survey completed by a
recognized independent risk management consultant acceptable to Borrower and
the Lender which will identify, quantify and assess any catastrophic
uninsured, underinsured or self-insured exposures faced by the Borrower and
the Subsidiaries; PROVIDED, HOWEVER, that Lender agrees that it will not
request a survey unless: (a) an Unmatured Event of Default or Event of
Default has occurred and is continuing; or (b) the Lender determines, in its
reasonable business judgment, that the Borrower's casualty loss insurance
coverage does not adequately protect the Lender's interest in the Collateral.
The cost of such survey shall be borne solely by the Borrower. A copy of the
results of each such survey shall be promptly delivered by the Borrower to
the Lender.
5.8 REPAIR. Maintain, preserve and keep, and cause each Subsidiary
to maintain, preserve and keep, its properties in good repair, working order
and condition, and from time to time make, and cause each Subsidiary to make,
all necessary and proper repairs, renewals, replacements, additions,
betterments and improvements thereto so that at all times the efficiency
thereof shall be fully preserved and maintained.
5.9 TAXES. File its federal income tax return for each taxable year
when due and pay, and cause each Subsidiary to pay, when due, all of its
Taxes, unless and only to the extent that the Borrower or such Subsidiary, as
the case may be, is contesting such Taxes in good faith and by appropriate
proceedings and the Borrower or such Subsidiary has set aside on its books
such reserves or other appropriate provisions therefor as may be required by
GAAP.
5.10 COMPLIANCE. Comply, and cause each Subsidiary to comply, with
all federal, state and local statutes and governmental rules and regulations
applicable to it, including, without limitation, the Fair Labor Standards
Act, all Environmental Laws and all Occupational Safety and Health Laws.
5.11 ERISA. Maintain, and cause each ERISA Affiliate to maintain,
each Plan in compliance with all material applicable requirements of ERISA
and of the Code and with all applicable rulings and regulations issued under
the provisions of ERISA and of the Code and not and not permit any of the
ERISA Affiliates to (a) engage in any transaction in connection with which
the Borrower or any of the ERISA Affiliates would be subject to either a
civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed
by Section 4975 of the Code, in either case in an amount exceeding
$50,000.00,(b) fail to make full payment when due of all
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amounts which, under the provisions of any Plan, the Borrower or any ERISA
Affiliate is required to pay as contributions thereto, or permit to exist any
accumulated funding deficiency (as such term is defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, with respect to
any Plan in an aggregate amount exceeding $50,000.00 or (c) fail to make any
payments in an aggregate amount exceeding $50,000.00 to any Multiemployer
Plan that the Borrower or any of the ERISA Affiliates may be required to make
under any agreement relating to such Multiemployer Plan or any law pertaining
thereto.
5.12 COLLATERAL MONITORING. Permit the Lender to (a) use the
Borrower's stationery and sign the name of the Borrower to request
verification of Accounts Receivable or other Collateral from Account Debtors,
and (b) use the information recorded on or contained in any data processing
equipment and computer hardware and software to which the Borrower has access
relating to Accounts Receivable, Inventory, Equipment and/or other Collateral.
ARTICLE VI NEGATIVE COVENANTS
From the date of this Agreement and thereafter until all Obligations
are paid in full and the Credit has terminated, the Borrower agrees that,
unless the Lender shall otherwise consent in writing, it will not, and will
not permit any Subsidiary to, do any of the following:
6.1 MERGER. Merge or consolidate or enter into any analogous
reorganization or transaction with any Person.
6.2 SALE OF ASSETS. Sell, transfer, convey, lease, assign or
otherwise dispose (with or without recourse) of any of its assets (including,
without limitation, any Accounts Receivable, instruments or chattel paper)
except for: (a) sales and leases of Inventory in the ordinary course of
business; or (b) sales of Equipment which the Borrower has determined have
become obsolete or unusable in the ordinary course of business so long as:
(i) no Unmatured Event of Default or Event of Default has occurred and is
continuing; or (ii) the aggregate fair market value of the Equipment to be
sold in any such transaction (or related series of transactions) does not
exceed $100,000 or the aggregate fair market value of the Equipment to be
sold in all such transactions during any fiscal year does not exceed $250,000
on a consolidated basis.
6.3 PURCHASE OF ASSETS. Purchase or lease or otherwise acquire all
or substantially all the assets of any Person except for Investments
permitted by SECTION 6.11.
6.4 ERISA. Permit any event to occur or condition to exist which
would permit any Plan to terminate under any circumstances which would cause
the Lien provided for in Section 4068 of ERISA to attach to any assets of the
Borrower; and the Borrower will not permit, as of the most recent valuation
date for any Plan subject to Title IV of ERISA, the present value (determined
on the basis of reasonable assumptions employed by the independent actuary
for such Plan and previously furnished in writing to the Lender) of such
Plan's projected benefit obligations to exceed the fair market value of such
Plan's assets.
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6.5 CHANGES IN COLLATERAL OR BUSINESS LOCATIONS. Change (a) the
location of its chief executive office or chief place of business; (b) its
name; or (c) the locations where it stores or maintains Inventory or
Equipment without, in each case, at least 30 days' prior written notice to
the Lender.
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6.6 FISCAL YEAR. Change the end of its fiscal year from June 30.
6.7 SUBSIDIARIES, PARTNERSHIPS AND JOINT VENTURES. Either: (a) form
or acquire any corporation which would thereby become a Subsidiary; or (b)
form or enter into any partnership as a limited or general partner or into
any joint venture or any limited liability company or other similar entity
except, in either case, Investments permitted by SECTION 6.11.
6.8 OTHER AGREEMENTS. Enter into any agreement, bond, note or other
instrument with or for the benefit of any Person other than the Lender which
would (a) prohibit the Borrower or such Subsidiary from granting, or
otherwise limit the ability of the Borrower or such Subsidiary to grant, to
the Lender any Lien on any assets or properties of the Borrower or such
Subsidiary, or (b) be violated or breached by the Borrower's performance of
its obligations under the Loan Documents.
6.9 RESTRICTED PAYMENTS. Purchase or redeem or otherwise acquire for
value any shares of the Borrower's or any Subsidiary's stock, declare or pay
any dividends thereon (other than stock and other dividends payable to the
Borrower), make any distribution to stockholders as such (other than the
Borrower) directly or indirectly, or set aside any funds for any such
purpose; prepay, purchase or redeem any subordinated Indebtedness of the
Borrower or any Subsidiary; and not take any action which will result in a
decrease in the Borrower's or any Subsidiary's ownership interest in any
Subsidiary.
6.10 LEASES. Except as listed on SCHEDULE 4.15, enter into or permit
to exist any arrangements for the leasing by the Borrower or any Subsidiary,
as lessee, of any real or personal property (or any interest therein) under
leases (other than Capitalized Leases), or which require the payment by the
Borrower and the Subsidiaries on a consolidated basis of rental amounts in
the aggregate in excess of (a) $200,000 in any one fiscal year, or (b)
$1,000,000 during the full remaining terms of such leases.
6.11 INVESTMENTS. Acquire for value, make, have or hold any
Investments, except: (a) advances to employees of the Borrower or any
Subsidiary for travel or other ordinary business expenses; (b) advances to
subcontractors and suppliers in maximum aggregate amounts reasonably
acceptable to the Lender; (c) extensions of credit in the nature of Accounts
Receivable or notes receivable arising from the sale of goods and services in
the ordinary course of business; (d) shares of stock, obligations or other
securities received in settlement of claims arising in the ordinary course of
business; (e) Investments (other than Investments in the nature of loans or
advances) outstanding on the date hereof in Subsidiaries by the Borrower and
other Subsidiaries; (f) additional Investments (including, without
limitation, through loans and advances) in Subsidiaries existing on the date
hereof by the Borrower and other Subsidiaries so long as the sum of: (i) the
aggregate amount of such additional Investments; plus (ii) the amount of the
Indebtedness guarantied by the Borrower pursuant to SECTION 6.14 does not
exceed $500,000; (g) other Investments outstanding on the date hereof and
listed on SCHEDULE 6.11; and (h) other Investments consented to by the Lender
in writing.
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6.12 INDEBTEDNESS. Incur, create, issue, assume or suffer to exist
any Indebtedness, including, without limitation, Indebtedness as lessee under
any Capitalized Lease, except: (a) Indebtedness under the terms of this
Agreement; (b) Subordinated Debt listed on SCHEDULE 6.12; (c) Indebtedness
hereafter incurred in connection with Liens permitted under SECTION 6.13(d);
(d) other Indebtedness outstanding on the date hereof and listed on SCHEDULE
6.12; and (e) other Indebtedness approved in writing by the Lender.
6.13 LIENS. Create, incur, assume or suffer to exist any Lien with
respect to any property, revenues or assets now owned or hereafter arising or
acquired, except: (a) Liens for current Taxes not delinquent or Taxes being
contested in good faith and by appropriate proceedings and as to which such
reserves or other appropriate provisions as may be required by GAAP are being
maintained; (b) statutory Liens, such as carriers', loggers', warehousemen's,
mechanics', materialmen's, and repairmen's Liens, arising in the ordinary
course of business securing obligations which are not overdue or which are
being contested in good faith and by appropriate proceedings and as to which
such reserves or other appropriate provisions as may be required by GAAP are
being maintained; (c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security legislation;
(d) Liens in connection with Capital Expenditures permitted under Supplement
A attaching only to the property being acquired if the Indebtedness secured
thereby does not exceed 100% of the fair market value of such property at the
time of acquisition thereof; (e) Liens in favor of the Lender; (f) Liens
permitted on SCHEDULE 4.9; and (g) Liens consented to by the Lender in
writing.
6.14 CONTINGENT LIABILITIES. Either: (a) endorse, guarantee,
contingently agree to purchase or to provide funds for the payment of, or
otherwise become contingently liable upon, any obligation of any other
Person, except: (i) by the endorsement of negotiable instruments for deposit
or collection (or similar transactions) in the ordinary course of business;
or (ii) Guaranties described on SCHEDULE 6.14; or (b) agree to maintain the
net worth or working capital of, or provide funds to satisfy any other
financial test applicable to, any other Person except for Guaranties
described on SCHEDULE 6.14; PROVIDED, HOWEVER, that the sum of: (x) the
maximum amount of the Indebtedness permitted to be guarantied pursuant to
SECTION 6.14(a)(ii); PLUS (y) or the maximum contingent liability permitted
by SECTION 6.14 (b); PLUS (z) the aggregate amount of the additional
Investments made in accordance with SECTION 6.11(f) shall not exceed
$500,000.00.
6.15 CHANGE IN ACCOUNTS RECEIVABLE. After the occurrence of an Event
of Default and receipt of notice from the Lender that the Lender intends to
commence direct collection of Accounts Receivable, permit or agree to any
extension, compromise or settlement or make any change or modification of any
kind or nature with respect to any Account Receivable, including any of the
terms relating thereto.
6.16 UNCONDITIONAL PURCHASE OBLIGATIONS. Enter into or be a party to
any contract for the purchase of materials, supplies or other property or
services, if such contract requires that
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payment be made by it regardless of whether or not delivery is ever made of
such materials, supplies or other property or services.
6.17 USE OF PROCEEDS. Use or permit any proceeds of the Loans to be
used, either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of "purchasing or carrying any margin stock" within
the meaning of Regulation U of the Federal Reserve Board, as amended from
time to time, and furnish to the Lender upon request, a statement in
conformity with the requirements of Federal Reserve Form U-1 referred to in
Regulation U of the Federal Reserve Board.
6.18 TRANSACTIONS WITH RELATED PARTIES. Enter into or be a party to
any transaction or arrangement, including, without limitation, the purchase,
sale, lease or exchange of property or the rendering of any service, with any
Related Party, except in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's or such Subsidiary's business and
upon fair and reasonable terms no less favorable to the Borrower or such
Subsidiary than would obtain in a comparable arm's-length transaction with a
Person not a Related Party.
ARTICLE VII EVENTS OF DEFAULT AND REMEDIES
7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a) NON-PAYMENT. The Borrower shall fail to pay, when due,
whether by acceleration, maturity or otherwise, any Obligations;
(b) NON-PAYMENT OF OTHER INDEBTEDNESS. The Borrower, any other
Obligor or any Subsidiary shall fail to pay, when due, whether by
acceleration or otherwise (subject to any applicable grace period), any
Indebtedness of, or guaranteed by, the Borrower, such other Obligor or
such Subsidiary that exceeds an aggregate amount of $250,000.
(c) ACCELERATION OF OTHER INDEBTEDNESS. Any event or condition
shall occur which results in the acceleration of the maturity of any
Indebtedness of, or guaranteed by, the Borrower, any other Obligor or
any Subsidiary that exceeds an aggregate amount of $250,000 or enables
the holder or holders of such other Indebtedness or any trustee or
agent for such holders (any required notice of default having been
given and any applicable grace period having expired) to accelerate the
maturity of such other Indebtedness;
(d) OTHER OBLIGATIONS. The Borrower, any other Obligor or any
Subsidiary shall fail to pay, when due, whether by acceleration or
otherwise, or perform or observe (subject to any applicable grace
period or waiver of such default) (i) any obligation or agreement of
the Borrower, such other Obligor or such Subsidiary to or with the
Lender (other than any obligation or agreement of the Borrower
hereunder and under any Notes)
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or (ii) any obligation or agreement of the Borrower, such other
Obligor or such Subsidiary to or with any other Person that exceeds
an aggregate amount of $250,000 (other than (A) any such obligation
or agreement constituting or related to Indebtedness, (B) accounts
payable arising in the ordinary course of business, and (C) any
obligation or agreement of any Subsidiary to the Borrower or to any
other Subsidiary), except only to the extent that the occurrence of
any such failure is being contested by the Borrower, such other
Obligor or such Subsidiary, as the case may be, in good faith and
by appropriate proceedings and the Borrower, such other Obligor or
such Subsidiary, as applicable, shall have set aside on its books
such reserves or other appropriate provisions therefor as may be
required by GAAP;
(e) INSOLVENCY. The Borrower, any other Obligor or any
Subsidiary becomes insolvent, or generally fails to pay, or admits in
writing its inability to pay, its debts as they mature, or applies for,
consents to, or acquiesces in, the appointment of a trustee, receiver
or other custodian for the Borrower, such other Obligor or such
Subsidiary, or for a substantial part of the property of the Borrower,
such other Obligor or such Subsidiary, or makes a general assignment
for the benefit of creditors; or, in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is
appointed for the Borrower, any other Obligor or any Subsidiary or for
a substantial part of the property of the Borrower, any other Obligor
or any Subsidiary; or any bankruptcy, reorganization, debt arrangement
or other proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding, is instituted by or against the
Borrower, any other Obligor or any Subsidiary; or any warrant of
attachment or similar legal process is issued against any substantial
part of the property of the Borrower, any other Obligor or any
Subsidiary;
(f) ERISA. The institution by the Borrower or any ERISA
Affiliate of steps to terminate any Plan if, in order to effectuate
such termination, the Borrower or any ERISA Affiliate would be required
to make a contribution to such Plan or would incur a liability or
obligation to such Plan, in excess of $250,000; or the institution by
the PBGC of steps to terminate any Plan;
(g) NON-COMPLIANCE WITH THIS AGREEMENT.
(i) The Borrower shall fail to comply with any of the
Borrower's agreements set forth in SECTION 5.3 , SECTION
5.6, any provision of ARTICLE VI or any provision of Section
7 of SUPPLEMENT A; or
(ii) The Borrower shall fail to comply with any of
the Borrower's agreements set forth in this Agreement (and
not constituting an Event of Default under any of the other
subsections of this SECTION 7.1, including, without
limitation, SECTION 7.1(g)(i)), and such failure to comply
shall continue for twenty (20) days;
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(h) NON-COMPLIANCE WITH OTHER LOAN DOCUMENTS. Failure by the
Borrower, any other Obligor or any Subsidiary to comply with any of its
respective agreements set forth in any Loan Documents other than this
Agreement (and not constituting an Event of Default under any of the
other subsections of this SECTION 7.1), and such failure to comply
shall continue after the grace period (if any) set forth therein;
(i) REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made by the Borrower or any other Obligor in any of the Loan
Documents is untrue or misleading in any material respect when made or
deemed made; or any schedule, statement, report, notice, certificate or
other writing furnished by the Borrower or any other Obligor to the
Lender is untrue or misleading in any material respect on the date as
of which the facts set forth therein are stated or certified; or any
certification made or deemed made by the Borrower or any other Obligor
to the Lender is untrue or misleading in any material respect on or as
of the date made or deemed made;
(j) LITIGATION. There shall be entered against any one of the
Borrower, any other Obligor or any Subsidiary one or more judgments or
decrees in excess of $250,000 in the aggregate at any one time
outstanding, excluding those judgments or decrees (i) that shall have
been outstanding less than 30 calendar days from the entry thereof or
(ii) for and to the extent which the Borrower, such Obligor or such
Subsidiary, as applicable, is insured and with respect to which the
insurer has assumed responsibility in writing or for and to the extent
which the Borrower, such Obligor or such Subsidiary, as applicable, is
otherwise indemnified if the terms of such indemnification are
satisfactory to the Lender;
(k) DEATH OR INCOMPETENCE OF OBLIGOR. If any natural person
who is an Obligor, partner in a partnership which is an Obligor, or
owner of a material interest in a corporate Obligor, shall die or be
declared legally incompetent;
(l) VALIDITY. If the validity or enforceability of any of the
Loan Documents shall be challenged by the Borrower, any other Obligor
or any other Person, or shall fail to remain in full force and effect;
(m) CONDUCT OF BUSINESS. If the Borrower, any other Obligor or
any Subsidiary is enjoined, restrained or in any way prevented by court
order, which has not been dissolved or stayed within five Business
Days, from conducting all or any material part of its business affairs;
(n) ADVERSE EVENT. The Lender shall have determined in good
faith (which determination shall be conclusive) that (i) an Adverse
Event has occurred or (ii) the Lender's interest in any material
Collateral or Third Party Collateral has been materially adversely
affected or impaired, or the value thereof to the Lender has been
diminished to a material extent, or (iii) the prospect of payment or
performance of any obligation or agreement of the Borrower or any other
Obligor under any of the Loan Documents is
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materially impaired, and the condition giving rise to such
determination does not constitute an Event of Default under any of the
other subsections of this SECTION 7.1;
(o) CHANGE IN MANAGEMENT OR LINE(s) OF BUSINESS. James Bracke
shall cease to be the Borrower's President or shall cease to perform
the duties associated with such office as of the date of this Agreement
or any material change occurs in the Borrower's line(s) of business,
and
(p) OWNERSHIP. Any Person, or group of Persons acting in
concert, shall have acquired more than 40% of the shares of the voting
stock of the Borrower.
7.2 EFFECT OF EVENT OF DEFAULT; REMEDIES.
(a) In the event that one or more Events of Default described
in Section 7.1(e) shall occur, then the Credit extended under this
Agreement shall terminate and all Obligations shall be immediately due
and payable without demand, notice or declaration of any kind
whatsoever.
(b) Upon the occurrence of an Event of Default, or at any time
thereafter during the continuance thereof, (other than one described in
Section 7.1(e)) the Lender may declare all Obligations immediately due
and payable without demand or notice of any kind whatsoever, whereupon
the Credit extended under this Agreement shall terminate and all
Obligations shall be immediately due and payable without demand or
notice of any kind whatsoever. The Lender shall promptly advise the
Borrower of any such declaration, but failure to do so shall not impair
the effect of such declaration.
(c) Upon the occurrence of an Event of Default, or at any time
thereafter during the continuance thereof, the Lender may exercise any
one or more or all of the following remedies, all of which are
cumulative and non-exclusive:
(i) any other remedy contained in this Agreement, the
other Loan Documents or any Supplemental Documentation;
(ii) any rights and remedies available to the Lender
under the Uniform Commercial Code as enacted in Minnesota as
of the date of this Agreement, and any other applicable law;
(iii) without notice, demand or legal process of any
kind, the Lender may take possession of any or all of the
Collateral (in addition to Collateral which it might already
have in its possession), wherever it might be found, and for
that purpose may pursue the same wherever it may be found,
and may enter into any premises where any of the Collateral
may be or is supposed to be, and search for, take possession
of, remove, keep and store any of the Collateral until the
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same shall be sold or otherwise disposed of, and the Lender
shall have the right to store the same in any of the
Borrower's premises without cost to the Lender;
(iv) at the Lender's request, the Borrower will, at
the Borrower's expense, assemble the Collateral and make it
available to the Lender at a place or places to be
designated by the Lender and reasonably convenient to the
Lender and the Borrower; and
(v) the Lender at its option, and pursuant to
notification given to the Borrower as provided for below,
may sell any Collateral actually or constructively in its
possession at public or private sale and apply the proceeds
thereof as provided in SECTION 8.2 below.
7.3 SETOFF. In addition to and not in limitation of all rights of
offset that the Lender, any Affiliate, or any other holder of any interest in
this Agreement or any Note may have under applicable law, upon the occurrence
and during the continuation of any Event of Default, or any Unmatured Event
of Default, Lender and any Affiliate shall have the right, in its sole
discretion and without demand and without notice to anyone, to appropriate or
set off and apply to the payment of the Obligations, whether or not due, any
and all balances, credits, deposits, accounts or moneys of the Borrower then
or thereafter with such Person and any and all other liabilities owed to the
Borrower by such Person.
7.4 USE OF PREMISES. Borrower hereby irrevocably grants to Lender
the right, subject to the rights of any landlord of the premises, to enter
upon and hold the premises of Borrower wherever located at any time following
the occurrence of an Event of Default and during the continuation thereof;
PROVIDED, HOWEVER, that the Borrower's obligations to do so shall terminate
upon payment in full of the Obligations after the occurrence of the
Termination Date. Lender may use the premises to hold, process, manufacture,
sell, use, store, liquidate, realize upon or otherwise dispose of Collateral
and for other purposes that the Lender may in good faith deem to be related
or incidental purposes. Lender's right to hold the premises shall cease and
terminate upon the earlier of (i) payment in full of all Obligations,
expiration or termination of all Letters of Credit and termination of the
Credit or (ii) final sale or disposition of all goods constituting Collateral
and delivery of all such goods to purchasers. The Lender shall not be
obligated to pay any rent or other compensation for the occupancy or use of
any of the premises unless required by the landlord of such premises,
PROVIDED, HOWEVER, if Lender does pay or account for any rent or other
compensation for the occupancy or use of any of the premises, such rent or
compensation shall be considered an Advance under this Agreement and shall
constitute part of the Obligations.
ARTICLE VIII COLLATERAL AND THE LENDER'S RIGHTS
8.1 NOTICE OF DISPOSITION OF COLLATERAL. Any notification of intended
disposition of any of the Collateral required by law shall be deemed reasonably
and properly given if given at least ten calendar days before such disposition.
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8.2 APPLICATION OF PROCEEDS OF COLLATERAL. Any proceeds of any
disposition by the Lender of any of the Collateral may be applied by the
Lender to the payment of expenses in connection with the taking possession
of, storing, preparing for sale, and disposition of Collateral, including
Attorneys' Fees and legal expenses, and any balance of such proceeds may be
applied by the Lender toward the payment of such of the Obligations, and in
such order of application, as the Lender may from time to time elect.
8.3 CARE OF COLLATERAL. The Lender shall be deemed to have exercised
reasonable care in the custody and preservation of any Collateral in its
possession if it takes such action for that purpose as the Borrower requests
in writing, but failure of the Lender to comply with such request shall not,
of itself, be deemed a failure to exercise reasonable care, and no failure of
the Lender to preserve or protect any rights with respect to such Collateral
against prior parties, or to do any act with respect to the preservation of
such Collateral not so requested by the Borrower, shall be deemed a failure
to exercise reasonable care in the custody or preservation of such Collateral.
8.4 PERFORMANCE OF BORROWER'S OBLIGATIONS. The Lender shall have the
right, but shall not be obligated, to discharge any claims against or Liens,
and any Taxes at any time levied or placed upon any or all Collateral
including, without limitation, those arising under statute or in favor of
landlords, taxing authorities, government, public and/or private
warehousemen, common and/or private carriers, processors, finishers, draymen,
coopers, dryers, mechanics, artisans, laborers, attorneys, courts, or others.
The Lender may also pay for maintenance and preservation of Collateral. The
Lender may, but is not obligated to, perform or fulfill any of the Borrower's
responsibilities under this Agreement which the Borrower has failed to
perform or fulfill. All amounts expended by Lender under this SECTION 8.4
shall be deemed to be an Advance under this Agreement.
8.5 LENDER'S RIGHTS. None of the following shall affect the
obligations of the Borrower to the Lender under this Agreement or the
Lender's rights with respect to the Collateral or any Third Party Collateral
(any or all of which actions may be taken by the Lender at any time, whether
before or after an Event of Default, at its sole and absolute discretion and
without notice to the Borrower):
(a) acceptance or retention by the Lender of other property or
interests in property as security for the Obligations, or acceptance or
retention of any Obligor(s), in addition to the Borrower, with respect
to any Obligations;
(b) release of its security interest in, or surrender or
release of, or the substitution or exchange of or for, all or any part
of the Collateral or any Third Party Collateral or any other property
securing any Obligations (including, without limitation, any property
of any Obligor other than the Borrower), or any extension or renewal
for one or more periods (whether or not longer than the original
period), or release, compromise,
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alteration or exchange, of any obligations of any Guarantor or other
Obligor with respect to any Collateral or any such property;
(c) extension or renewal for one or more periods (whether or
not longer than the original period), or release, compromise,
alteration or exchange of any Obligations, or release or compromise of
any obligation of any Obligor with respect to any Obligations; or
(d) failure by the Lender to resort to other security or
pursue any Person liable for any Obligations before resorting to the
Collateral.
ARTICLE IX CONDITIONS PRECEDENT
9.1 CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of the Lender
to make the initial Loan shall be subject to the satisfaction of the following
conditions precedent, in addition to the applicable conditions precedent set
forth in SECTION 9.2:
9.1.1 NO CHANGE IN CONDITION. No change in the condition or
operations, financial or otherwise, of the Borrower, any other Obligor
or any Subsidiary, shall have occurred which change, in the sole credit
judgment of the Lender, may constitute an Adverse Event or have a
material adverse effect on any Collateral or Third Party Collateral or
the Lender's interest therein.
9.1.2 ACCOUNTING METHODS. The Borrower shall not have made any
material, as determined by the Lender, change in its accounting methods
or principles.
9.1.3 SURVEY. The Lender shall have completed its updated
survey of the business, operations and assets of the Borrower, each
Subsidiary and each other Obligor, and such survey shall provide the
Lender with results and information which, in the Lender's
determination, are satisfactory to the Lender.
9.1.4 NO MATERIAL TRANSACTION. None of the Borrower, any other
Obligor or any Subsidiary shall have entered into any material, as
determined by the Lender, commitment or transaction, including, without
limitation, transactions for borrowings and Capital Expenditures, which
are not in the ordinary course of their respective businesses.
9.1.5 LITIGATION. No litigation shall be outstanding or have
been instituted or threatened which the Lender determines to be
material against the Borrower, any other Obligor or any Subsidiary.
9.1.6 FILING OF DOCUMENTS. All financing statements, mortgages
and other documents relating to the Collateral and Third Party
Collateral shall have been filed or recorded, as appropriate.
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9.1.7 DELIVERY OF DOCUMENTS. The Borrower shall have delivered
or cause to be delivered to the Lender with each of the following, each
in form and substance satisfactory to the lender in all respects and
each duly executed and dated the date of the initial Loan or such
earlier date as shall be acceptable to the Lender:
(a) THIS AGREEMENT. Duly executed by Borrower and
Lender.
(b) OTHER AGREEMENTS. Duly executed copies of each of
the Loan Documents not specifically identified herein which
the Lender determines to be necessary or desirable, each in
form and content satisfactory to the Lender;
(c) RESOLUTIONS OF BORROWER. A copy, duly certified
by the secretary or an assistant secretary of the Borrower, of
(i) the resolutions of the Board of Directors of the Borrower
authorizing (A) the borrowings by the Borrower hereunder, (B)
the execution, delivery and performance by the Borrower of the
Loan Documents to which the Borrower is a party or by which it
is bound, (C) the conveyance of a lien on assets of Borrower
to Lender, and (D) certain officers or employees of the
Borrower to request borrowings by telephone and to execute
Borrowing Base Certificates; (ii) all documents evidencing
other necessary corporate action; and (iii) all approvals or
consents, if any, with respect to the Loan Documents;
(d) INCUMBENCY CERTIFICATE OF BORROWER. A certificate
of the secretary or an assistant secretary of each Borrower,
certifying the names of the officers of such Borrower
authorized to sign the Loan Documents to which it is a party
and any Supplemental Documentation, together with the true
signatures of such officers;
(e) BYLAWS OF BORROWER. A copy, duly certified by the
secretary or an assistant secretary of the Borrower, of the
Borrower's Bylaws;
(f) ARTICLES OF INCORPORATION OF BORROWER. A copy,
duly certified by the Secretary of State of Borrower's state
of incorporation, of the Borrower's Articles of Incorporation;
(g) GOOD STANDING CERTIFICATES OF BORROWER.
Certificates of good standing as to the Borrower issued by the
Secretary of State of the state in which the Borrower is
organized, and each other state in which the failure of the
Borrower to be in good standing would constitute an Adverse
Event or have a material adverse effect on the Lender's rights
in any Collateral;
(h) OPINION. A legal opinion of Dorsey & Whitney,
LLP, counsel to the Borrower;
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(i) BORROWER'S CERTIFICATE. The certificate of the
President of each Borrower certifying, to the best of his/her
knowledge after diligent inquiry, to the fulfillment of all
conditions precedent to closing and funding the secured
financing transaction contemplated by this Agreement and to
the truth and accuracy, as of such date, of the
representations and warranties of such Borrower contained in
the Loan Documents to which such Borrower is a party;
(j) INSURANCE. Evidence satisfactory to the Lender of
the existence of insurance on the Collateral and Third Party
Collateral in amounts and with insurers acceptable to the
Lender, together with evidence establishing that the Lender is
named as a loss payee and, if required by the Lender,
additional insured, on all related insurance policies and an
endorsement or an independent instrument from each issuer of
an insurance policy substantially in the form set forth as
EXHIBIT C;
(k) LANDLORD, MORTGAGEE AND WAREHOUSEMEN WAIVERS. If
required by the Lender, (i) from each lessor or landlord
identified on SCHEDULE 4.12 or SCHEDULE 4.13, a landlord
waiver; (ii) from each mortgagee identified on SCHEDULE 4.12
or SCHEDULE 4.13, a mortgagee's waiver; and (ii) from each
operator of a public warehouse where Inventory is stored, a
letter from such operator, in each case in form acceptable to
the Lender; and
(v) OTHER. Such other documents, instruments or
agreements as the Lender shall determine to be necessary or
desirable.
9.1.8 SECURITY INTEREST. The Lien in the Collateral and Third
Party Collateral granted to the Lender to secure the Obligations shall
be senior, perfected Liens except as otherwise agreed by the Lender.
9.1.9 SPECIAL ACCOUNTS. The Borrower shall have entered into
(a) a Restricted Access Lockbox; Collateral Account and Disbursement
Account Agreement, substantially in the form of EXHIBIT D, with the
Lender, and (b) a Controlled Disbursement Account Agreement,
substantially in the form set forth as EXHIBIT E, with U.S. Bank and
the Lender for, among other things, the collection and remittance to
the Lender of cash proceeds of the Collateral.
9.1.10 EFFECT OF LAW. No law or regulation affecting the
Lender's entering into the secured financing transaction contemplated
by this Agreement shall impose upon the Lender any material obligation,
fee, liability, loss, cost, expense or damage.
9.1.11 EXHIBITS; SCHEDULES. All Exhibits and Schedules to the
Loan Documents shall have been completed in form and substance
satisfactory to the Lender and shall
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contain no facts or information which the Lender, in its sole
judgment, determines to be unacceptable.
9.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Lender to
make any Loan (including the initial Loan) shall be subject to the satisfaction
of the following conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Borrower and each other Obligor set forth in the
Loan Documents to which the Borrower or such other Obligor, as
applicable, is a party shall be true and correct.
(b) EVENT OF DEFAULT. Immediately before and after making such
Loan, no Event of Default or Unmatured Event of Default shall exist or
be continuing.
ARTICLE X INDEMNITY
10.1 ENVIRONMENTAL AND SAFETY AND HEALTH INDEMNITY. The Borrower hereby
indemnifies the Lender and Affiliates and agrees to hold the Lender and
Affiliates harmless from and against any and all losses, liabilities, damages,
injuries, costs, expenses and claims of any and every kind whatsoever
(including, without limitation, court costs and Attorneys' Fees) which at any
time or from time to time may be paid, incurred or suffered by, or asserted
against, the Lender or any Affiliate (a) for, with respect to, or as a direct or
indirect result of the violation by the Borrower or any Subsidiary, of any
Environmental Law or Occupational Safety and Health Law; or (b) with respect to,
or as a direct or indirect result of (i) the presence on or under, or the
escape, seepage, leakage, spillage, disposal, discharge, emission or release
from, properties owned or utilized by the Borrower and/or any Subsidiary in the
conduct of its business into or upon any land, the atmosphere, or any
watercourse, body of water or wetland, of any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance (including, without limitation, any losses, liabilities, damages,
injuries, costs, expenses or claims asserted or arising under the Environmental
Laws) or (ii) the existence of any unsafe or unhealthful condition on or at any
premises owned or utilized by the Borrower and/or any Subsidiary in the conduct
of its business. The provisions of and undertakings and indemnification set out
in this SECTION 10.1 shall survive satisfaction and payment of the Obligations
and termination of this Agreement.
10.2 GENERAL INDEMNITY. In addition to the payment of expenses pursuant
to SECTION 12.3, whether or not the transactions contemplated hereby shall be
consummated, the Borrower hereby indemnifies, and agrees to pay and hold the
Lender, its Affiliates and any holder of any Notes, and their respective
officers, directors, employees, agents, successors and assigns (collectively
called the "INDEMNITEES") harmless from and against, any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of counsel
for any of such Indemnitees in connection with any
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investigative, administrative or judicial proceeding commenced or threatened,
whether or not any of such Indemnitees shall be designated a party thereto),
that may be imposed on, incurred by, or asserted against the Indemnitees (or
any of them), in any manner relating to or arising out of the Loan Documents,
the statements contained in any commitment letters delivered by the Lender,
the Lender's agreement to make the Loans or to issue Letters of Credit
hereunder, or the use or intended use of any Letters of Credit, or the use or
intended use of the proceeds of any of the Loans (the "INDEMNIFIED
LIABILITIES"); PROVIDED, HOWEVER, that the Borrower shall have no obligation
to an Indemnitee hereunder with respect to Indemnified Liabilities arising
from the gross negligence or willful misconduct of an Indemnitee. To the
extent that the undertaking to indemnify, pay and hold harmless set forth in
the preceding sentence may be unenforceable because it is violative of any
law or public policy, the Borrower shall contribute the maximum portion that
it is permitted to pay and satisfy under applicable law, to the payment and
satisfaction of all Indemnified Liabilities incurred by the Indemnitees or
any of them. The provisions of the undertakings and indemnification set out
in this SECTION 10.2 shall survive satisfaction and payment of the
Obligations and termination of this Agreement.
10.3 CAPITAL ADEQUACY. If the Lender shall reasonably determine that
the application or adoption of any law, rule, regulation, directive,
interpretation, treaty or guideline regarding capital adequacy, or any change
therein or in the interpretation or administration thereof, whether or not
having the force or law (including, without limitation, application of
changes to Regulation H and Regulation Y of the Federal Reserve Board issued
by the Federal Reserve Board on January 19, 1989 and regulations of the
Comptroller of the Currency, Department of the Treasury, 12 CFR Part 3,
Appendix A, issued by the Comptroller of the Currency on January 27, 1989)
increases the amount of capital required or expected to be maintained by the
Lender or any Person controlling the Lender, and such increase is based upon
the existence of the Lender's obligations hereunder and other commitments of
this type, then from time to time, within 10 days after demand from the
Lender, the Borrower shall pay to the Lender such amount or amounts as will
compensate the Lender or such controlling Person, as the case may be, for
such increased capital requirement. The determination of any amount to be
paid by the Borrower under this SECTION 10 shall take into consideration the
policies of the Lender or any Person controlling the Lender with respect to
capital adequacy and shall be based upon any reasonable averaging,
attribution and allocation methods. A certificate of the Lender setting forth
the amount or amounts as shall be necessary to compensate the Lender as
specified in this SECTION 10.3 shall be delivered to the Borrower and shall
be conclusive in the absence of manifest error. The amounts set forth in said
certificate shall be payable on demand.
ARTICLE XI ADDITIONAL PROVISIONS
Additional provisions are set forth in SUPPLEMENT A.
ARTICLE XII GENERAL
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12.1 BORROWER'S WAIVER. Except as otherwise provided for in this
Agreement, the Borrower waives (a) presentment, demand and protest and notice
of presentment, protest, default, non-payment, maturity, release, compromise,
settlement, one or more extensions or renewals of any or all commercial
paper, accounts, documents, instruments, chattel paper and guaranties at any
time held by the Lender on which the Borrower may in any way be liable and
hereby ratifies and confirms whatever the Lender may do in this regard; (b)
all rights to notice and a hearing prior to the Lender's taking possession or
control of, or the Lender's relevy, attachment or levy on or of, the
Collateral or any bond or security which might be required by any court prior
to allowing the Lender to exercise any of the Lender's remedies; and (c) the
benefit of all valuation, appraisement and exemption laws.
12.2 BORROWER'S ACKNOWLEDGMENT. The Borrower acknowledges that it
has read and understands this Agreement and has been advised by counsel of
its choice with respect to this Agreement and the transactions evidenced by
this Agreement or has knowingly waived its right to such counsel.
12.3 EXPENSES; ATTORNEY'S FEES. The Borrower agrees, whether or not
any Loan is made hereunder, to pay the Lender upon demand for all expenses
and Attorneys' Fees, including, without limitation, those incurred by the
Lender in connection with (a) the preparation, negotiation and execution of
the Loan Documents; PROVIDED, HOWEVER, that the Borrower's obligations to pay
Attorneys' Fee under this subsection (a) shall be limited to $7,500, (b) the
preparation of any and all amendments to the Loan Documents and all other
instruments or documents provided for therein or delivered or to be delivered
thereunder or in connection therewith, (c) the collection or enforcement of
the Borrower's or any other Obligor's obligations under any of the Loan
Documents, (d) the costs of all searches and updates of searches in public
records deemed necessary by the Lender in connection with the protection of
its security interest, and (e) the collection or enforcement of any of the
Lender's rights in or to any Collateral or Third Party Collateral. The
Borrower also (y) hereby indemnifies and holds the Lender harmless from any
loss or expense which may arise or be created by the acceptance of telephonic
or other instructions for making Loans and (z) agrees to pay, and save the
Lender harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Agreement or the
issuance of any Note or of any other instruments or documents provided for
herein or to be delivered hereunder or in connection herewith. The Borrower's
foregoing obligations shall survive any termination of this Agreement.
12.4 LENDER FEES AND CHARGES. The Borrower agrees to pay the Lender,
or any Affiliate, on demand the customary fees and charges of the Lender, or
such Affiliate, for maintenance of accounts with the Lender, or such
Affiliate, or for providing other services to the Borrower. The Lender may,
in its sole and absolute discretion, provide for such payment by charging the
Disbursement Account or any other account of the Borrower with Lender or any
other Affiliate, or advancing the amount thereof to the Borrower as a Loan.
12.5 NO WAIVER BY LENDER; AMENDMENTS. No failure or delay on the
part of the Lender in the exercise of any power or right, and no course of
dealing between the Borrower and
53
<PAGE>
the Lender shall operate as a waiver of such power or right, nor shall any
single or partial exercise of any power or right preclude other or further
exercise thereof or the exercise of any other power or right. The remedies
provided for herein are cumulative and not exclusive of any remedies which
may be available to the Lender at law or in equity or otherwise by agreement.
No notice to or demand on the Borrower not required hereunder shall in any
event entitle the Borrower to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the right of the
Lender to any other or further action in any circumstances without notice or
demand. No amendment, modification or waiver of, or consent with respect to,
any provision of this Agreement shall in any event be effective unless the
same shall be in writing and signed and delivered by the Lender. Any waiver
of any provision of this Agreement, and any consent to any departure by the
Borrower from the terms of any provision of this Agreement, shall be
effective only in the specific instance and for the specific purpose for
which given.
12.6 NOTICE. Except as otherwise expressly provided herein, any
notice hereunder to the Borrower or the Lender shall be in writing (including
telecopy communication) and shall be given to the Borrower or the Lender at
its address or fax number set forth on the signature pages hereof or at such
other address, or telecopier number as the Borrower or the Lender may, by
written notice, designate as its address or fax number for purposes of notice
hereunder. All such notices shall be deemed to be given (i) when transmitted
by fax on the date the appropriate answer back is received, (ii) when
delivered by a commercially recognized courier service on the date specified
for delivery in the instructions to the courier, (iii) on the date personally
delivered or, (iv) in the case of notice by mail, three days following
deposit in the United States mails, certified mail, return receipt requested
properly addressed as herein provided, with proper postage prepaid PROVIDED,
HOWEVER, that any notice to the Lender under ARTICLE II hereof shall be
deemed to have been given only when received by the Lender.
12.7 PARTICIPATIONS; INFORMATION. With the prior written consent of
the Borrower (other than with respect to any of the transactions described in
the proviso clause hereto (an "Exempt Transfer")), which consent shall not be
unreasonably withheld or delayed by the Borrower, the Lender may grant
participations in or sell, assign, transfer or other disposition, at any time
and from time to time hereafter, of the Loan Documents, or of any portion of
any thereof, including without limitation Lender's rights, titles, interests,
remedies, powers and/or duties; PROVIDED, HOWEVER, that no Borrower consent
shall be required with respect to any assignment made: (a) during any period
when an Event of Default has occurred and is continuing; (b) to another
subsidiary or affiliate of U.S. Bancorp; (c) in connection with the sale of
all or substantially all of the Lender's assets; or (d) in response to any
regulatory action affecting the Lender. The Lender may furnish any
information concerning the Borrower in the possession of the Lender from time
to time to assignees of the rights and/or obligations of the Lender hereunder
and to participants in any Loan (including prospective assignees and
participants) and may furnish information in response to credit inquiries
consistent with general banking practice.
12.8 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such
54
<PAGE>
prohibition or unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of such provision in any
other jurisdiction.
12.9 SUCCESSORS. This Agreement shall be binding upon the Borrower
and the Lender and their respective successors and assigns, and shall inure
to the benefit of the Borrower and the Lender and the successors and assigns
of the Lender. The Borrower shall not assign its rights or duties hereunder
without the consent of the Lender. The Lender may assign its rights and
duties hereunder subject to any Borrower consent required by SECTION 12.7.
12.10 ENTIRE AGREEMENT. This Agreement and the other Loan Documents
embody the entire agreement and understanding between the Borrower and the
Lender with respect to the subject matter hereof and thereof. This Agreement
supersedes all prior agreements and understandings relating to the subject
matter hereof.
12.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
12.12 CONSTRUCTION. The Borrower acknowledges that this Agreement
shall not be binding upon the Lender or become effective until and unless
accepted by the Lender, in writing. If so accepted by the Lender, THE LOAN
DOCUMENTS AND ANY SUPPLEMENTAL DOCUMENTATION SHALL, UNLESS OTHERWISE
EXPRESSLY PROVIDED THEREIN, BE DEEMED TO HAVE BEEN NEGOTIATED AND ENTERED
INTO IN, AND SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF, THE
STATE OF MINNESOTA WITHOUT GIVING EFFECT TO CHOICE OF LAW PROVISIONS AS TO
INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, CHOICE OF LAW,
AND IN ALL OTHER RESPECTS, INCLUDING, BUT NOT LIMITED TO, THE LEGALITY OF THE
INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF SECURITY
INTERESTS AND LIENS WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE
RELEVANT JURISDICTION.
12.13 CONSENT TO JURISDICTION. To induce the Lender to accept this
Agreement, the Borrower, irrevocably, agrees that, subject to the Lender's
sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR
RESPECT, ARISING OUT OF OR FROM OR RELATED TO THE LOAN DOCUMENTS OR ANY
SUPPLEMENTAL DOCUMENTATION OR THE COLLATERAL SHALL BE LITIGATED IN COURTS
HAVING SITUS WITHIN THE CITY OF MINNEAPOLIS, STATE OF MINNESOTA. THE BORROWER
HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR
FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE AND WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON THE BORROWER, AND CONSENTS THAT ALL SUCH SERVICE
OF PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESS
STATED ON THE SIGNATURE PAGE HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED UPON ACTUAL RECEIPT THEREOF.
55
<PAGE>
12.14 SUBSIDIARY REFERENCE. Any reference herein to a Subsidiary or
Subsidiaries of the Borrower, and any financial definition, ratio,
restriction or other provision of this Agreement which is stated to be
applicable to "the Borrower and the Subsidiaries" or which is to be
determined on a "consolidated" basis, shall apply only to the extent the
Borrower has any Subsidiaries and, where applicable, to the extent any such
Subsidiaries are consolidated with the Borrower for financial reporting
purposes.
12.15 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH WAIVES
ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND
ANY RIGHTS (a) UNDER THE LOAN DOCUMENTS OR UNDER ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION THEREWITH OR (b) ARISING FROM ANY RELATIONSHIP EXISTING IN
CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
LIFECORE BIOMEDICAL, INC.
By: /s/ James Bracke
-------------------------------
Title: President
----------------------------
Address:
3515 Lyman Boulevard
Chaska, Minnesota 55318-3051
Attention: James Bracke, President
Telephone: 612-368-4300
Fax No.: 612-368-3411
U.S. BANK NATIONAL ASSOCIATION
By: /s/ David W. Slavik
-------------------------------
Title: Assistant Vice President
----------------------------
Address:
601 Second Avenue South, MPFP0512
Minneapolis, Minnesota 55402
Attention: Mr. David Slavik/Asset Based Lending
Telephone: 612-973-2453
Fax No.: 612-973-0829
57
<PAGE>
EXHIBITS
Exhibit A - Form of Borrowing Base Certificate
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Insurance Endorsement
Exhibit D - Form of Restricted Access Lockbox; Collateral Account; and
Disbursement Account Agreement
Exhibit E - Form of Controlled Disbursement Account Agreement
SCHEDULES
Schedule 4.1 - Trade Names, Etc.
Schedule 4.7 - Insurance
Schedule 4.8 - Litigation and Contingent Liabilities
Schedule 4.9 - Liens
Schedule 4.10 - Subsidiaries/Ownership
Schedule 4.11 - Partnerships; Joint Ventures; LLCs
Schedule 4.12 - Business Locations
Principal offices
Other locations
Schedule 4.13 - Collateral Locations
Owned by Borrower
Owned by others
Schedule 4.15 - Leases
Schedule 4.16 - Patents, Trademarks, Copyrights
Schedule 4.18 - Contracts and Labor Disputes
Schedule 4.25 - Environmental Matters
Schedule 6.11 - Investments
Schedule 6.12 - Indebtedness
Schedule 6.14 - Guaranties
58
<PAGE>
SUPPLEMENT A
EFFECTIVE AS OF DECEMBER 29, 1998
TO
CREDIT AND SECURITY AGREEMENT
BETWEEN
U.S. BANK NATIONAL ASSOCIATION (THE "LENDER")
AND
LIFECORE BIOMEDICAL, INC. (THE "BORROWER")
1. CREDIT AGREEMENT REFERENCE. This Supplement A, as it may be
amended or modified from time to time, is a part of the Credit and Security
Agreement, dated as of December 29, 1998, between the Borrower and the Lender
(together with all amendments, modifications and supplements thereto, the
"CREDIT AGREEMENT"). Capitalized terms used herein which are defined in the
Credit Agreement shall have the meanings given such terms in the Credit
Agreement unless the context otherwise requires.
2. DEFINITIONS.
2.1 CREDIT AMOUNT. The term "Credit Amount" shall be Five
Million and No/100ths ($5,000,000.00).
2.2 BORROWING BASE. The term "Borrowing Base" shall mean:
(i) an amount (the "ACCOUNTS RECEIVABLE
AVAILABILITY") of up to the sum of: (1) 85% of the net amount
(as determined by the Lender after deduction of such reserves
and allowances as the Lender deems proper and necessary) of
the Borrower's Eligible Accounts Receivable other than the
Eligible Accounts Receivable arising from purchase agreements
or contracts permitting to pay such Account Receivable through
installments ( such Accounts Receivable being an "Installment
Accounts Receivable"); PLUS (2) 50% of the net amount (as
determined by the Lender after deduction of such reserves and
allowances as the Lender deems proper and necessary) of the
Borrower's Eligible Accounts Receivable that are Installment
Accounts Receivable; PLUS
(ii) an amount (the "INVENTORY AVAILABILITY") of up
to the sum of:
(1) the lesser of (A) 50% of the net value
(the lower of the cost, determined on a first in
first out basis, or market value of such Inventory,
as determined by the Lender after deduction of such
reserves and allowances as the Lender deems proper
and necessary)(such value is hereinafter called the
"Net Value") of the Borrower's Oral Restorative
Division`s Eligible Inventory comprised of finished
goods inventory; or (B) $1,500,000, such dollar
amount is hereinafter called the "ORAL RESTORATIVE
DIVISION'S INVENTORY AVAILABILITY SUBLIMIT"); PLUS
<PAGE>
(2) the lesser of (A) the sum of: (i) 50% of
the Net Value of the Borrower's Hyaluronate
Division`s Eligible Inventory comprised of aseptic
fill finished goods inventory ; PLUS (ii) 20% of the
Net Value of the Borrower's Hyaluronate Division`s
Eligible Inventory comprised of raw materials
inventory; PLUS (iii) an amount of the Hyaluronate
Division`s Eligible Inventory comprised of
hyaluronate powder to the extent subject to a
contract between the Borrower and Alcon Laboratories
("Alcon") requiring Alcon to purchase such amount of
hyaluronate powder but in no event shall the
Borrowing Base amount of hyaluronate powder exceed
$1,100,000; or (B) $2,000,000, such dollar amount is
hereinafter called the "HYALURONATE DIVISION'S
INVENTORY AVAILABILITY SUBLIMIT;" and together with
the Oral Restorative Division's Inventory
Availability Sublimit being sometimes hereinafter
referred to as an Inventory Availability Sublimit").
2.3 LETTER OF CREDIT SUBLIMIT. Intentionally Deleted.
2.4 TERMINATION DATE. The term "Termination Date" shall mean
the earliest of (i) December 29, 2001, or (ii) the date on which the
Credit is terminated pursuant to SECTION 7.2 of the Credit Agreement.
3. INTEREST; FEES.
3.1 LOANS.
(a) INTEREST RATE. The unpaid principal balance of
the Loans (other than Overdraft Loans and Over Advances) shall
bear interest at the Reference Rate.
(b) DEFAULT RATE. The rate per annum equal to 2.00 %
in excess of the Reference Rate from time to time in effect.
(c) MINIMUM INTEREST CHARGE. If the aggregate
interest accrued on the Loans during any Loan Year is less
than $96,000, then the Borrower shall pay the difference
between $96,000 and the actual interest accrued on the Loans
during such Loan Year. The amount payable under this SECTION
is immediately due and payable upon the Lender's submission of
an invoice therefor.
3.2 OVERDRAFT LOANS; OVER ADVANCES. Overdraft Loans and Over
Advances shall bear interest at the rate(s) determined pursuant to
SECTION 2.7 or SECTION 2.8 of the Credit Agreement, as applicable.
3.3 UNUSED CREDIT FEE. The Unused Credit Fee shall be an
amount equal to 0.25% per annum of the average Daily Unused Credit
Amount, calculated on the basis of
<PAGE>
actual days elapsed over a year of 360 days and twelve 30-day
months. The Unused Credit Fee shall be and is payable quarterly in
arrears on the last day of each March, June, September and
December, commencing on the first such day to occur after the date
hereof, and on the date the Credit terminates.
3.4 LETTER OF CREDIT COMMISSION. Intentionally Deleted.
3.5 CREDIT TERMINATION FEE. Upon termination or cancellation
of the Credit prior the stated Termination Date described in Section
2.4(i) of this Supplement A, the Borrower shall pay to the Lender a
termination fee in an amount equal to: (a) two percent percent (2.00%)
of the Credit Amount in the event that the Credit is terminated or
cancelled during the first Loan Year, and (b) one percent (1.00 %) of
the Credit Amount thereafter; PROVIDED, that no credit termination fee
is payable if Lender refinances the credit facility provided by the
Credit Agreement..
4. ELIGIBLE ACCOUNT RECEIVABLE REQUIREMENTS. The Account Receivable,
other than an Installment Account Receivable, cannot be payable in installments.
The Account Receivable, other than an Installment Account Receivable, must not
be unpaid on the date that is the earlier of 91 days after the date of the
invoice evidencing such Account Receivable or 60 days after the original due
date stated in such invoice or, if such unpaid, such Account Receivable shall
cease to be an Eligible Account Receivable. If any installment on any
Installment Account Receivable remains unpaid more than 31 days past its
original due date, then such Installment Account Receivable shall cease to be an
Eligible Account Receivable in its entirety. If 10% or more of the unpaid net
amount of all Accounts Receivable from any one Account Debtor cease to be
Eligible Accounts Receivable pursuant to this Section 4 where such percentage is
calculated based on all of such Account Debtor's Accounts Receivable regardless
of type, then all of such Account Debtor's Accounts Receivable shall cease to be
Eligible Accounts Receivable.
5. ELIGIBLE INVENTORY REQUIREMENTS. Inclusion of hyaluronate powder in
the Borrowing Base is conditioned upon the existence of a contract between the
Borrower and Alcon requiring Alcon to purchase hyaluronate powder.
6. ELIGIBLE EQUIPMENT REQUIREMENTS. Intentionally Deleted.
7. ADDITIONAL COVENANTS. From the date of this Supplement A and
thereafter until all of the Borrower's Obligations under the Credit Agreement
are paid in full, the Borrower agrees that, unless the Lender shall otherwise
consent in writing, it will not, and will not permit any Subsidiary to, do any
of the following:
7.1 NET WORTH Permit at any time the Borrower's Net Worth to
be less than the sum of: (a) (i) from the Closing Date through and
including June 30, 1999, $51,000,000; or (ii) at any time thereafter,
the sum of: (A) $51,000,000; PLUS (B) 50% of the Borrower's cumulative
after-tax net income (without any deduction for losses) earned
<PAGE>
on or after July 1, 1998; PLUS (b) 100% of the book value increase
resulting from the issuance of any capital stock including, without
limitation, any increase in paid-in-capital resulting from such
issuance.
7.2 CAPITAL EXPENDITURES. Make Capital Expenditures in an
amount exceeding on a consolidated basis: (a) $2,000,000 during the
Borrower's 1999 fiscal year; (b) $3,000,000 during the Borrower's 2000
fiscal year; or (c) $4,500,000 during the Borrower's 2001 fiscal year.
7.5 INTEREST COVERAGE RATIO. As of the last day of any fiscal
quarter, commencing with the fiscal quarter ending on June 30, 1999,
permit the ratio of (a) the Borrower's EBIT for 12 consecutive fiscal
months ending on that date to (b) its consolidated interest expense
(including, without limitation, imputed interest expense on Capitalized
Leases) for the same period to be less than 1.0 to 1.0.
Borrower's Initials JWB
-------
Lender's Initials DWS
-------
Date December 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LIFECORE
BIOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANACIAL STATEMENTS.
</LEGEND>
<CIK> 0000028626
<NAME> LIFECORE BIOMEDICAL
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 661,000
<SECURITIES> 0
<RECEIVABLES> 5,984,000
<ALLOWANCES> 375,000
<INVENTORY> 18,699,000
<CURRENT-ASSETS> 20,602,000
<PP&E> 40,811,000
<DEPRECIATION> 8,281,000
<TOTAL-ASSETS> 65,014,000
<CURRENT-LIABILITIES> 4,727,000
<BONDS> 6,591,000
0
0
<COMMON> 124,000
<OTHER-SE> 53,572,000
<TOTAL-LIABILITY-AND-EQUITY> 65,014,000
<SALES> 12,386,000
<TOTAL-REVENUES> 12,386,000
<CGS> 5,029,000
<TOTAL-COSTS> 12,244,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 449,000
<INCOME-PRETAX> (142,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (142,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (142,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
