<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934. FOR THE QUARTERLY FISCAL PERIOD ENDED
JUNE 28, 1996, OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM
____________ TO __________.
Commission File No. 015767
The Sportsman's Guide, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1293081
(State or other jurisdiction (I.R.S. Employer I.D. Number)
of incorporation or organization)
411 Farwell Ave., So. St. Paul, Minnesota 55075
(Address of principal executive offices)
(612) 451-3030
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
----- -----
As of August 9, 1996 there were 23,335,833 shares of the registrant's Common
Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(UNAUDITED)
(In thousands of dollars)
ASSETS
<TABLE>
<CAPTION>
June 28, December 29,
1996 1995
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable $ 1,727 $ 2,231
Inventory 15,662 14,208
Prepaid expenses 800 858
Promotional material 2,503 2,114
----------- ------------
Total current assets 20,692 19,411
PROPERTY AND EQUIPMENT - NET 4,201 4,298
----------- ------------
Total assets $ 24,893 $ 23,709
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft position $ 1,465 $ 1,619
Notes payable - bank 8,013 965
Current maturities of long-term debt
Related parties - 2,095
Other 51 1,368
Accounts payable 8,950 13,554
Accrued expenses 683 794
Customer deposits and other liabilities 941 1,479
----------- ------------
Total current liabilities 20,103 21,874
LONG-TERM OBLIGATIONS:
Long-term debt
Related parties 1,795 -
Other 1,790 220
Other long-term obligations 48 67
----------- ------------
Total long-term obligations 3,633 287
----------- ------------
Total liabilities 23,736 22,161
----------- ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Series A Preferred Stock-$.01 par value;
200,000 shares authorized, issued and
outstanding 2 2
Common Stock-$.01 par value; 36,800,000
shares authorized; 23,335,833 shares
issued and outstanding 233 233
Additional paid-in capital 2,138 2,138
Retained deficit (1,216) (825)
----------- ------------
Total stockholders' equity 1,157 1,548
Total liabilities & stockholders' equity $ 24,893 $ 23,709
=========== ============
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks and Twenty-six Weeks Ended
June 28, 1996 and June 30, 1995
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-six Weeks
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 18,611 $ 17,612 $ 42,788 $ 41,471
Cost of sales 12,300 11,905 28,400 27,140
--------- --------- --------- ---------
Gross profit 6,311 5,707 14,388 14,331
Selling, general and administrative
expenses 6,460 6,916 14,191 15,264
Merger related expenses 99 - 206 -
--------- --------- --------- ---------
Loss from operations (248) (1,209) (9) (933)
Interest expense (231) (239) (391) (388)
Miscellaneous income 8 9 9 15
--------- --------- --------- ---------
Loss before income taxes (471) (1,439) (391) (1,306)
Income tax benefit - 393 - 350
--------- --------- --------- ---------
Net loss $ (471) $ (1,046) $ (391) $ (956)
========= ========= ========= =========
Net loss per common share $ (.02) $ (.04) $ (.02) $ (.04)
========= ========= ========= =========
Weighted average number of common
shares outstanding 23,336 23,336 23,336 23,336
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks and Twenty-six Weeks Ended
June 28, 1996 and June 30, 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-six Weeks
------------------- -----------------
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (471) $ (1,046) $ (391) $ (956)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 253 155 491 305
Other (20) (11) (25) (17)
Changes in assets and liabilities:
Accounts receivable 170 211 504 278
Inventory (3,085) (4,103) (1,454) (7,486)
Prepaid expenses (116) (791) 58 (872)
Promotional material (1,092) 935 (389) 1,132
Bank overdraft 971 2,403 (154) 2,403
Accounts payable 489 263 (4,604) (1,652)
Accrued expenses (324) (695) (111) (927)
Customer deposits & other
liabilities (46) (161) (541) (98)
-------- --------- -------- --------
Cash flows used in operating
activities (3,271) (2,840) (6,616) (7,890)
Cash flows from investing activities:
Purchases of property and equipment (241) (421) (396) (1,200)
Disposals of property and equipment - - - 149
-------- --------- -------- --------
Cash flows used in investing
activities (241) (421) (396) (1,051)
Cash flows from financing activities:
Gross borrowings under line of credit 19,946 9,395 30,776 18,540
Gross payments under line of credit (16,403) (6,270) (23,728) (9,195)
Payments on trade creditors' obligation - (561) - (561)
Borrowings under long-term obligation - - - -
Payments under long-term obligation (31) (76) (36) (496)
-------- --------- -------- --------
Cash flows provided by financing
activities 3,512 2,488 7,012 8,288
Decrease in cash and cash equivalents - (773) - (653)
Cash and cash equivalents at beginning
of the period - 773 - 653
-------- --------- -------- --------
Cash and cash equivalents at end of the
period $ - $ - $ - $ -
======== ========= ======== ========
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Thirteen Weeks and Twenty-six Weeks Ended
June 28, 1996 and June 30, 1995
(In thousands of dollars)
<TABLE>
<Caption
Thirteen Weeks Twenty-six Weeks
---------------- ----------------
1996 1995 1996 1995
------- ------- ------- ------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow
- ------------------------------------
information
- -----------
Cash paid during the periods for:
Interest $ 223 $ 241 $ 459 $ 395
Income taxes $ 1 $ 110 $ 2 $ 190
Supplemental noncash investing activities
- -----------------------------------------
Fixed assets purchased with a capital lease $ - $ - $ - $ 17
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying financial statements are unaudited and reflect all
adjustments which are normal and recurring in nature, and which,
in the opinion of management, are necessary for a fair presentation
of operations and cash flows. Reclassifications have been made to
prior year financial information wherever necessary to conform to
the current year presentation. Results of operations for the
interim periods are not necessarily indicative of full-year results.
Note 2: Per Share Data
The computation of earnings per common share for the thirteen and
twenty-six week periods of 1996 and 1995 is based on the weighted
average number of shares outstanding during the periods. The
exercise of outstanding options and warrants is not considered in
the computation because their inclusion would have been anti-dilutive
for all periods presented.
Note 3: Credit Facility
On May 17, 1996, the Company entered into a new credit facility
providing a revolving line of credit up to $10.0 million, subject to
an adequate collateral base, expiring May 1998. The credit facility
provides for an available base amount of $6.0 million with an
additional seasonal availability of $1.0 million in April, and $4.0
million May 1 through November 30 of each year. The revolving credit
facility will be for working capital and letters of credit. Letters
of credit may not exceed $1.0 million at any time.
Borrowings under the credit facility bear interest at the Company's
primary lender's prime rate plus 1.50 percentage points. The
availability of funding under this revolving line of credit is
subject to the principal balance and letter(s) of credit total being
paid down to $2.0 million, plus 80% of credit card receivables under
an installment plan, and remaining at this level for not less than
30 consecutive days between December 1 and March 31 of each year.
The credit facility is secured by substantially all of the assets of
the Company. All borrowings are subject to various monthly
covenants. The most restrictive convenants require minimum year to
date monthly profits or place limits on the maximum year to date
monthly losses, a minimum net worth and limit the level of total
liabilities to net worth.
6
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 4: Stockholders' Equity
On May 16, 1996, the Company renewed $3.4 million of subordinated
notes payable which mature on June 15, 1998. The notes bear interest
at the Company's primary lender's prime rate plus 1.75 percentage
points, provided however that in the event the primary lender's prime
rate plus 1.75 percentage points is less than 9% during any period of
time, interest shall accrue at 9% per annum. Payments of interest
only are due quarterly. In connection with the subordinated debt
extension the Company issued warrants to purchase 3,413,000 shares
of common stock at an exercise price of $.18079 per share. The
notes are secured by substantially all of the assets of the Company
and subordinated to the bank credit facility. The notes are subject to
certain covenants including maintaining all covenants under the
revolving credit facility.
Note 5: Merger Agreement
The Company has terminated the Agreement and Plan of Merger
(the "Agreement") dated as of March 8, 1996, by and among The
Sportsman's Guide, Inc., VISTA 2000, Inc. and VISTA Acquisition
Subsidiary, Inc.
Completion of the merger contemplated by the Agreement would have
resulted in The Sportsman's Guide, Inc. being merged into a
wholly-owned subsidiary of VISTA 2000, Inc. The Company
terminated the Merger Agreement based on various breaches of the
Agreement by VISTA 2000, Inc. The Company is reviewing all
possible legal remedies to recover merger related expenses, the
outcome of which is unknown at this time. All merger related
costs have been appropriately expensed in the statement of
operations during the twenty-six week period ended June 30, 1996.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company meets its operating cash requirements through funds generated from
operations, borrowings under its revolving line of credit and subordinated
debt with existing shareholders and new investors. Effective May 17, 1996,
the Company entered into a new credit facility providing a revolving line of
credit up to $10.0 million, subject to an adequate collateral base, expiring
May 1998. The revolving credit facility provides for an available base amount
of $6.0 million with an additional seasonal availability of $1.0 million in
April, and $4.0 million May 1 through November 30 of each year. The
availability of funding under the facility is subject to the principal balance
and letter(s) of credit total being paid down to $2.0 million, plus 80% of
credit card receivables under an installment plan, and remaining at this level
for not less than 30 consecutive days between December 1 and March 31 of each
year. The revolving line of credit is secured by substantially all of the
assets of the Company. On May 16, 1996, the Company renewed $3.4 million of
subordinated notes payable which mature June 1998. As of June 28, 1996, the
Company borrowed $8,013,000 against the revolving line of credit.
The cash flow used in operating activities for the thirteen week period ended
June 28, 1996, was $3,271,000 compared to $2,840,000 for the same period last
year. This increase in cash flow used in operating activities was primarily a
result of higher promotional materials purchases and a lower bank overdraft
position which more than offset decreased cash flow needs arising from lower
inventory levels. The larger promotional materials balance is due to earlier
catalog in-home dates planned with the timing of the United States Post Office
rate reclassification effective July 1, 1996. The cash flow used in operating
activities for the twenty-six week period ended June 28, 1996, was $6,616,000
compared to $7,890,000 for the same period last year. This decrease in cash
flow used in operating activities was primarily a result of carrying lower
inventory levels which more than offset lower balances of bank overdraft and
accounts payable.
The Company's liquidity in terms of working capital was $589,000 as of
June 28, 1996, as compared to a working capital deficit of $2,463,000 as of
December 29, 1995. The improvement is primarily the result of the renewal of
$3,413,000 of subordinated notes to June 1998. The Company's current ratio
was 1.03 to 1.00 as of June 28, 1996, as compared to .89 to 1.00 as of
December 29, 1995. The Company's working capital requirements have declined
during the twenty-six week period ended June 28, 1996, as compared to the
same period one year ago primarily as a result of lower seasonal inventory
levels, including a significant improvement in inventory turnover.
The Company believes that the new credit facility combined with the
subordinated debt renewal provides sufficient operating funds to meet current
and future commitments.
8
<PAGE>
Results of Operations
Comparison of the thirteen and twenty-six week periods ended June 28, 1996, to
- ------------------------------------------------------------------------------
the thirteen and twenty-six week periods ended June 30, 1995
- ------------------------------------------------------------
The Company's sales for the thirteen and twenty-six week periods ended
June 28, 1996, increased $999,000 and $1,317,000 or 5.7% and 3.2%,
respectively, from the same periods last year. Sales in the second quarter
and first half of 1996 were up despite a 24% reduction in year to date
circulation. For both periods, an overall improvement in customer response
levels due to an improved circulation plan and a higher average order size
more than offset the reduction in catalog circulation.
Gross profit for the thirteen and twenty-six week periods ended June 28, 1996,
was 33.9% and 33.6% of sales, respectively, compared to 32.4% and 34.6% of
sales, respectively, for the same periods last year. Year over year
improvement in the gross profit as a percentage of sales for the thirteen
week period was primarily related to a higher recovery of shipping and
handling costs. The year to date decrease in gross profit as a percentage of
sales was primarily due to lower retail product margins experienced during
the first quarter which were effected by aggressive pricing in most product
categories.
Selling, general and administrative expenses for the thirteen week period
ended June 28, 1996, were $6,460,000 or 34.7% of sales compared to $6,916,000
or 39.3% of sales for the same period last year. Selling, general and
administrative expenses for the twenty-six week period ended June 28, 1996,
were $14,191,000 or 33.2% of sales compared to $15,264,000 or 36.8% of sales
for the same period last year. The decrease in the dollar spending level for
the thirteen and twenty-six week periods ended June 28, 1996, was primarily
the result of a planned reduction in catalog circulation with a focus on
balancing direct advertising and customer acquisition costs with response
rates, while maximizing profits on the existing customer base. The Company
maintains an assertive posture to control advertising costs and implement
operational efficiencies. Effective advertising expenses as a percentage of
sales for the thirteen and twenty-six week periods ended June 28, 1996, were
19.1% and 18.2%, respectively, as compared to 22.1% and 21.2%, respectively,
for the same periods last year.
Merger related expenses for the thirteen and twenty-six week periods ended
June 28, 1996, were $99,000 and $206,000, respectively. During May 1996, the
Company terminated the Agreement and Plan of Merger (the "Agreement") dated
as of March 8, 1996, by and among The Sportsman's Guide, Inc., VISTA 2000,
Inc. and VISTA Acquisition Subsidiary, Inc. The Company terminated the
Agreement based on various breaches of the Agreement by VISTA 2000, Inc. and
is reviewing all possible legal remedies to recover merger related expenses.
All merger related costs have been appropriately expensed in the statement of
operations during the thirteen and twenty-six week periods ended June 28,
1996. Earnings (loss) from operations before merger related expenses for the
thirteen and twenty-six week periods ended June 28, 1996, were ($149,000) and
$197,000, respectively, compared to ($1,209,000) and ($933,000) for the same
periods one year ago. Loss from operations after merger related expenses for
the thirteen and twenty-six week periods ended June 28, 1996, was $248,000
and $9,000, respectively.
9
<PAGE>
Results of Operations (continued)
Comparison of the thirteen and twenty-six week periods ended June 28, 1996, to
- ------------------------------------------------------------------------------
the thirteen and twenty-six week periods ended June 30, 1995
- ------------------------------------------------------------
Interest expense for the thirteen and twenty-six week periods ended June 28,
1996, was $231,000 and $391,000, respectively as compared to $239,000 and
$388,000 for the same periods last year.
No income tax benefit was recorded during the thirteen and twenty-six week
periods ended June 28, 1996. Income tax benefit for the thirteen and
twenty-six week periods ended June 30, 1995, was $393,000 and $350,000,
respectively. The income tax benefit for the periods ended June 30, 1995
represents recoverable income taxes from the prior year.
As a result of the above, the net loss for the thirteen and twenty-six week
periods ended June 28, 1996, was $471,000 and $391,000, respectively, as
compared to net loss of $1,046,000 and $956,000, respectively, for the same
periods last year.
10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS:
See Exhibit Index at page 13 of this report.
(B) REPORTS ON FORM 8-K:
On May 29, 1996, the Company filed a Current Report on Form 8-K,
under Item 5, announcing that it had terminated the Agreement and
Plan of Merger dated as of March 8, 1996, by and among The
Sportsman's Guide, Inc., VISTA 2000, Inc. and VISTA Acquisition
Subsidiary, Inc.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTSMAN'S GUIDE, INC.
Date: August 9, 1996 BY: /s/ Charles B. Lingen
---------------------
Charles B. Lingen
Vice President Finance/CFO
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
- ----------- -----------------------------
<S> <C> <C>
4.3 Form of Promissory Note dated
May 16, 1996 issued by the Company Filed herewith electronically
10.15 Credit and Security Agreement
between the Company and Norwest
Business Credit, Inc.
dated May 17, 1996 Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
13
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS
AMENDED (THE "ACT") AND APPLICABLE STATE SECURITIES LAWS. THEY HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF WITHIN
THE MEANING OF THE ACT AND THE RULES AND REGULATIONS THEREUNDER. ACCORDINGLY,
THESE SECURITIES MAY NOT BE SOLD, ASSIGNED, ENCUMBERED OR OTHERWISE DISPOSED
OF UNLESS OR UNTIL: (1) A REGISTRATION STATEMENT UNDER THE ACT COVERING SUCH
SECURITIES HAS BECOME EFFECTIVE UNDER THE ACT, OR (2) THE COMPANY HAS RECEIVED
EVIDENCE SATISFACTORY TO IT THAT ANY SUCH SALE OR OTHER DISPOSITION OF SUCH
SECURITIES WILL BE MADE IN COMPLIANCE WITH RULE 144, AND THE APPLICABLE STATE
SECURITIES LAWS, OR (3) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO IT THAT REGISTRATION UNDER THE ACT, AND APPLICABLE
STATE SECURITIES LAWS, ARE NOT REQUIRED.
THIS NOTE IS SUBJECT TO THE PROVISIONS OF A DEBT SUBORDINATION AGREEMENT
BETWEEN THE PAYEE NAMED HEREIN AND NORWEST BUSINESS CREDIT, INC., NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION AND THEIR REPRESENTATIVES, AFFILIATES,
SUCCESSORS AND ASSIGNS.
PROMISSORY NOTE
--------------------------------
$__________________ May 16, 1996
Executed and Delivered
at Eagan, Minnesota
FOR VALUE RECEIVED, THE SPORTSMAN'S GUIDE, INC., a Minnesota
corporation (the "Corporation"), promises to pay to the order of
______________________________________________________________
(the "Payee") at such address as the holder hereof may from time to time
designate, the principal sum of ____________________________________
___________DOLLARS ($______________ ) together with interest on the
unpaid principal balance at a rate equal to the base rate of interest as
announced by Norwest Bank Minnesota from time to time (the "Base Rate")
plus 1.75% provided however that in the event the Base Rate plus 1.75% is
-------- -------
less than 9% during any period of time, interest shall accrue on the
outstanding principal amount of the Promissory Note at the rate of 9% per
annum during such period. Such principal and interest shall be paid in
installments as follows:
(a) Commencing on August 31, 1996, installments in the amount of
all accrued and unpaid interest shall be due and payable on February 28,
May 31, August 31 and November 30 of each year until the unpaid balance
of principal and all accrued interest have been paid in full.
(b) On June 15, 1998, an installment in the amount of _____________
________________________________________ DOLLARS ($_____________ ), plus all
accrued and unpaid interest, shall be due and payable.
TERMS AND CONDITIONS
---------------------------------------
1. The Note. This Note is a duly authorized Promissory Note
---------
of the Corporation.
<PAGE>
2. Subordination of Note. This Note is subject to the provisions of a
----------------------
Debt Subordination Agreement dated of even date herewith between Payee and
Norwest Business Credit, Inc., Norwest Bank Minnesota, National Association
and their representatives, affiliates, successors and assigns.
3. Security. This Note evidences a loan and is secured by a lien on all
---------
of the Corporation's assets and property (the "Security Interest") of even
date, such Security Interest to be subordinate to any lien, encumbrance or
Security Interest held by Norwest Business Credit, Inc. or Norwest Bank
Minnesota, National Association and their representatives, affiliates,
successors and assigns. All provisions of the Security Interest are made a
part of this Note. The priority of this Note and the Security Interest is in
pari passu with all other notes and security interests executed and delivered
by the Corporation on even date herewith (collectively, the "Additional
Notes"). Should the Security Interest securing the Additional Notes be
subject to foreclosure, the Payee agrees that any payment to the Payee shall
be on a pro-rata basis of the payments to the holders of the Additional Notes.
4. Defaults.
---------
4.1 Events of Default. If any of the following events (herein called
------------------
"Events of Default") shall occur:
(a) the Corporation shall default in the payment of any part of
the principal or interest due on this Note when the same shall become due
and payable and the default continues for more than ten (10) days after
written notice of such default; or
(b) the Corporation shall default (as principal or guarantor or
other surety) either in the payment of the principal of or interest on
any indebtedness for borrowed money (other than this Note) or with
respect to any of the provisions of any instrument evidencing
indebtedness for borrowed money or of any agreement relating thereto, and
such default shall continue without waiver thereof beyond any grace
period provided in respect thereof and the holder of such indebtedness
accelerates the amount due and payable thereunder; or
(c) the Corporation shall default in the observance or
performance of any other of the terms, conditions, agreements or
covenants contained in this Note or the Security Interest securing this
Note and required on the Corporation's part to be observed or performed,
and such default shall not have been remedied within 30 days after
written notice thereof shall have been given to the Corporation by Payee
(or, if the matter complained of cannot reasonably be cured within thirty
(30) days, the Corporation fails to promptly commence and diligently
proceed to effect the cure within a reasonable time); or
2
<PAGE>
(d) the Corporation shall make a general assignment for the
benefit of creditors or file a petition in bankruptcy, or if a petition
in bankruptcy shall be filed against the Corporation and the Corporation
is adjudicated bankrupt or insolvent, or is a receiver of any of the
Corporation's property or assets shall be appointed, and such appointment
is not vacated within 60 days thereafter;
then and in any such event the Payee may at any time (unless all defaults
theretofore shall have been remedied) at his option, by written notice or
notices to the Corporation, declare the principal of this Note together with
all accrued interest thereon, to be immediately due and payable, and upon any
such declaration the same shall become and be immediately due and payable
without presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived by the Corporation.
5.2 No Implied Waivers. No course of dealing between the
-------------------
Corporation and the Payee and no failure or delay on the part of the Payee in
exercising any right hereunder shall operate as a waiver of such right, nor
shall any single or partial exercise of any right hereunder prevent any other
or further exercise of such right or of any other right hereunder.
5.3 Costs and Expenses of Collection. The Corporation covenants
---------------------------------
and agrees that, in the case of a default in the payment of any principal of,
or interest on this Note, it will pay to the Payee, to the extent permitted by
applicable law, such costs and expenses of collection, including reasonable
attorneys' fees.
6. Prepayment. Upon giving not less than fifteen (15) days prior
-----------
written notice to the holder of this Note, the Corporation may prepay at any
time without penalty the whole or part of the principal outstanding
hereunder, together with accrued interest and any other amounts due and
payable hereunder to the date of such prepayment.
7. Governing Law. This Note shall be construed in accordance with and
--------------
governed by the laws of the State of Ohio as applicable to agreements
executed and fully performed in the State of Ohio.
8. Presentment, etc. Presentment, protest, notice of dishonor, demand
-----------------
for payment, notice of protest and notice of nonpayment are hereby waived.
THE SPORTSMAN'S GUIDE, INC.
By /s/ Gary Olen
-------------------------
Gary Olen, President
3
<PAGE>
CREDIT AND SECURITY AGREEMENT
Dated as of May 17, 1996
The Sportsman's Guide, Inc., a Minnesota corporation (the
"Borrower"), and Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), hereby agree as follows:
ARTICLE I
Definitions
-----------
Section I.1 Definitions. For all purposes of this Agreement, except
as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles.
"Accounts" means the aggregate unpaid obligations of customers
and other account debtors to the Borrower arising out of the sale or
lease of goods or rendition of services by the Borrower on an open
account or deferred payment basis.
"Advance" means an advance to the Borrower by the Lender under
the Credit Facility.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including
(without limitation) any Subsidiary of the Borrower. For purposes of
this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as amended
from time to time.
"American Express" means American Express Travel Related Services
Company, Inc., and its subsidiaries, affiliates and licensees that
issue American Express credit cards.
"Banking Day" means a day other than a Saturday on which banks
are generally open for business in Minneapolis, Minnesota.
<PAGE>
"Base Rate" means the rate of interest publicly announced from
time to time by Norwest Bank Minnesota, National Association as its
"base rate" or, if such bank ceases to announce a rate so designated,
any similar successor rate designated by the Lender.
"Book Net Worth" means, as of the date of determination, Total
Assets minus Indebtedness.
"Borrowing Base" means, at any time and subject to change from
time to time in the Lender's sole discretion, the lesser of
(a) the Commitment, or
(b) the sum of
(i) 80% of Eligible E-Z Pay Plan Accounts, plus
(ii) for and during each month of each calendar year (or
portion thereof) during the term hereof, the lesser
of (A) the following percentages of Eligible
Inventory or (B) the following dollar amounts:
<TABLE>
<CAPTION>
The lesser of the
For the following percentage Or the following
Month(s) of of Eligible Inventory Dollar Amount
----------- --------------------- ----------------
<S> <C> <C>
January, February 50% $ 6,000,000
and March
April 50% $ 7,000,000
May 60% $ 10,000,000
June 75% $ 10,000,000
July and August 65% $ 10,000,000
September 60% $ 10,000,000
October 55% $ 10,000,000
November 50% $ 10,000,000
December 50% $ 6,000,000
less
----
</TABLE>
(iii) 100% of Customer Liabilities.
"Capital Expenditures" means, for any specified period, the
aggregate of all gross expenditures during such period for the purchase
or construction of capital assets, or for improvements, replacements,
substitutions or additions therefor or thereto, which are required to
be capitalized on the balance sheet, including the balance sheet amount
of any lease obligations incurred during such period.
"Clean Period" shall have the meaning specified in Section 6.15
hereof.
2
<PAGE>
"Collateral" means all of the Equipment, General Intangibles,
Inventory and Receivables, together with all substitutions and
replacements for and products of any of the foregoing and together with
proceeds of any and all of the foregoing and, in the case of all
tangible Collateral, together with all accessions and together with
(i) all accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any such
goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
"Collateral Account" has the meaning specified in Section 4.1(d)
hereof.
"Commitment" means $10,000,000, unless said amount is reduced
pursuant to Section 2.9(c) hereof, in which event it means the amount
to which said amount is reduced.
"Credit Card Agreement" means an agreement executed by the
Borrower and each Third Party Credit Card Processor pursuant to which
the Third Party Credit Card Processor agrees, among other things, to
transfer, via ACH or wire transfer, on a daily basis, to an account to
be determined by the Lender (and maintained on terms and conditions
acceptable to the Lender), all proceeds of Collateral received by such
Third Party Credit Card Processor on the previous day, and agrees that
the Lender will have the right to submit charges against the credit
card accounts of the Borrower's customers even though the Lender is
not the merchant from whom the underlying goods were purchased.
"Credit Facility" means the credit facility being made available
to the Borrower by the Lender pursuant to Article II hereof.
"Customer Liabilities" means, at any time and subject to change
from time to time in the Lender's sole discretion, the sum of (i)
customer deposits (which shall mean the sum of (I) payments received
by the Borrower for items on backorder, plus (II) check and credit card
credits pending, plus (III) vendor drop ship (check received, vendor
shipping) plus (IV) credit card holds for investigation, plus (V)
tickets issued, (not shipped)), plus (ii) pending customer refunds,
plus (iii) deferred gift certificate income, plus (iv) the greater of
the Borrower's actual reserve for outstanding coupons or $10,000, plus
(v) deferred G.O. buyers club membership fees, plus (vi) any other
liabilities of the Borrower to its customers, other than the Borrower's
return reserve.
"Default" means an event that, with giving of notice or passage
of time or both, would constitute an Event of Default.
"Default Rate" means at any time two percent (2%) over the
Floating Rate, which Default Rate shall change when and as the Floating
Rate changes.
"Eligible E-Z Pay Plan Accounts" means all unpaid E-Z Pay Plan
Accounts, net of any credits, except the following shall not in any
event be deemed Eligible E-Z Pay Plan Accounts:
3
<PAGE>
(1) That portion of E-Z Pay Plan Accounts that have been
declined by a Third Party Credit Card Processor, and any
subsequent installments payable in connection with such E-Z Pay
Plan Accounts;
(2) That portion of E-Z Pay Plan Accounts that are
disputed or subject to a claim of offset or a contra account,
and any subsequent installments payable in connection with such
E-Z Pay Plan Accounts;
(3) That portion of E-Z Pay Plan Accounts not yet earned
by the final delivery of goods or rendition of services, as
applicable, by the Borrower to the customer;
(4) E-Z Pay Plan Accounts owed by any unit of government,
whether foreign or domestic (provided, however, that there shall
be included in Eligible E-Z Pay Plan Accounts that portion of
Accounts owed by such units of government with respect to which
the Borrower has provided evidence satisfactory to the Lender
that (A) the Lender has a first priority perfected security
interest and (B) such E-Z Pay Plan Accounts may be enforced by
the Lender directly against such unit of government under all
applicable laws);
(5) E-Z Pay Plan Accounts owed by an account debtor
located outside the United States;
(6) E-Z Pay Plan Accounts owed by an account debtor that
is the subject of bankruptcy proceedings or has gone out of
business;
(7) E-Z Pay Plan Accounts owed by a shareholder,
subsidiary, Affiliate, officer or employee of the Borrower;
(8) E-Z Pay Plan Accounts not subject to a duly perfected
security interest in favor of the Lender or which are subject to
any lien, security interest or claim in favor of any Person
other than the Lender;
(9) That portion of E-Z Pay Plan Accounts that have been
restructured, extended, amended or modified, and any subsequent
installments payable in connection with such E-Z Pay Plan
Accounts;
(10) That portion of E-Z Pay Plan Accounts that
constitutes finance charges, service charges or sales or excise
taxes; and
(11) E-Z Pay Plan Accounts, or portions thereof, otherwise
deemed ineligible by the Lender in its sole discretion.
"Eligible Inventory" means all inventory of the Borrower, at the
ower of cost or market value as determined in accordance with generally
accepted accounting principles; provided, however, that the following
shall not in any event be deemed Eligible Inventory:
4
<PAGE>
(1) Inventory that is: in-transit; located at any
warehouse or other premises not approved by the Lender in
writing; located outside of the states, or localities, as
applicable, in which the Lender has filed financing statements
to perfect a first priority security interest in such inventory;
covered by any negotiable or non-negotiable warehouse receipt,
bill of lading or other document of title; on consignment to or
from any other person or subject to any bailment;
(2) Samples, supplies, packaging or parts inventory;
(3) Capitalized labor, returns or freight costs;
(4) Inventory that is damaged, slow moving (Inventory
shall be deemed to be slow moving if less than ten (10) of such
items of Inventory have been sold in the last nine (9) months),
obsolete, discontinued or not currently saleable in the normal
course of the Borrower's operations;
(5) Inventory that the Borrower has returned, has
attempted to return, is in the process of returning or intends to
return to the vendor thereof;
(6) Inventory that is subject to a security interest in
favor of any Person other than the Lender; and
(7) Inventory otherwise deemed ineligible by the Lender
in its sole discretion.
"Environmental Laws" has the meaning specified in Section 5.12
hereof.
"Equipment" means all of the Borrower's equipment, as such term
is defined in the UCC, whether now owned or hereafter acquired, including
but not limited to all present and future machinery, vehicles, furniture,
fixtures, manufacturing equipment, shop equipment, office and
recordkeeping equipment, parts, tools, supplies, and including
specifically (without limitation) the goods described in any equipment
schedule or list herewith or hereafter furnished to the Lender by the
Borrower.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Event of Default" has the meaning specified in Section 8.1
hereof.
"Excess Availability" means, as of the date hereof, the Borrowing
Base minus (i) the outstanding and unpaid Advances plus the L/C Amount
(which Advances shall be in an amount sufficient to pay (a) in full the
Borrower's existing primary lender, (b) the Borrower's accounts payable
to the extent necessary so that no such accounts payable shall be more
than 34 days past due as of the date hereof, and (c) the
5
<PAGE>
Borrower's accounts payable to the extent necessary so that none of the
Borrower's existing vendors will require the Borrower to pay on a
"cash-on-delivery" basis (other than those vendors that require
"cash-on'delivery" payments in the normal course of their business in
connection with the sale to the Borrower of "close-out" items, so long
as such vendors require "cash-on-delivery" payments with respect to such
"close-out" items only)) and minus (ii) the amount of the Borrower's
book overdraft as of the date hereof.
"E-Z Pay Plan Accounts" means all Accounts when the Borrower's
customer has elected to have the Borrower bill the customer's credit
card for one-fourth of the customer's total order at the time of
purchase, and for the balance of the customer's total order in three (3)
equal monthly installments over the three (3) months following the date
of purchase.
"Floating Rate" means an annual rate equal to the sum of the Base
Rate plus one and one-half percent (1.5%), which Floating Rate shall
change when and as the Base Rate changes; provided, that, on the first
day of the month in which the Lender receives the Borrower's annual
audited financial statements during each year during the term hereof,
and so long as no Default or Event of Default shall have occurred, the
Floating Rate shall be adjusted, effective as of the first day of the
month in which such statements are received, in accordance with the
following schedule:
<TABLE>
<CAPTION>
Borrower's Leverage Ratio as of
December 31 (based upon audited
financial statements of the Borrower
for the fiscal year then ending): Interest Rate
------------------------------------ -------------
<S> <C>
a. greater than 3.0 to 1.0 Base + 1.50%
b. greater than 2.75 to 1.0 but
less than 3.0 to 1.0 Base + 1.25%
c. greater than 2.50 to 1.0 but
less than 2.75 to 1.0 Base + 1.00%
d. greater than 2.25 to 1.0 but
less than 2.50 to 1.0 Base + .75%
e. greater than 2.0 to 1.0 but
less than 2.25 to 1.0 Base + .50%
f. less than 2.0 to 1.0 Base
</TABLE>
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade names,
trade secrets, customer or supplier lists and contracts, manuals,
operating instructions, permits, franchises, the right to use the
Borrower's name, and the goodwill of the Borrower's business.
6
<PAGE>
"Guarantors" means Gary Olen, Chuck Lingen, Greg Binkley, Bill
Luth, and Larry Popps.
"Indebtedness" means, collectively, (i) all items which, in
accordance with generally accepted accounting principles, would be
included on the liability side of a balance sheet as of the date on
which Indebtedness is to be determined, excluding capital stock, surplus
capital and retained earnings, (ii) all indebtedness secured by any
mortgage, pledge, security interest or lien existing on property owned
subject to such mortgage, pledge, security interest or lien, whether or
not the indebtedness secured thereby shall have been assumed, (iii) all
amounts representing the capitalization of rentals in accordance with
generally accepted accounting principles, and (iv) all guaranties,
endorsements and other contingent obligations.
"Inventory" means all of the Borrower's inventory, as such term
is defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or
under service contracts or for manufacture or processing, and wherever
located.
"Issuer" means the issuer of any Letter of Credit.
"Loan Documents" means this Agreement, the Note and the Security
Documents, as any of the foregoing Loan Documents may be amended from
time to time.
"L/C Amount" means the sum of (i) the aggregate face amount of
any issued and outstanding Letters of Credit and (ii) the unpaid amount
of the Obligation of Reimbursement.
"L/C Application" means an application and agreement for letters
of credit in a form acceptable to the Issuer and the Lender.
"Letter of Credit" has the meaning specified in Section 2.3
hereof.
"Leverage Ratio" means (i) Indebtedness minus Subordinated Debt
divided by (ii) Book Net Worth plus Subordinated Debt.
"Minimum Interest Charge" has the meaning specified in Section
2.8(c) hereof.
"Net Income" means, for any specified period, the Borrower's net
after-tax income for such period as determined in accordance with
generally accepted accounting principles, consistently applied.
"Note" means the Revolving Note of the Borrower payable to the
order of the Lender in substantially the form attached hereto as Exhibit
A.
"Obligations" has the meaning specified in Section 3.1 hereof.
7
<PAGE>
"Obligation of Reimbursement" has the meaning specified in
Section 2.4 hereof.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained
for employees of the Borrower and covered by Title IV of ERISA.
"P.O. Box" means post office box no. 239 established by the
Borrower at the United States Post Office located at 236 North Concord
Exchange, South St. Paul, MN 55075 with the following address:
P.O. Box No. 239
411 Farwell Avenue South
South St. Paul, MN 55075-2039
"P.O. Box Agreement" means an agreement executed by the Borrower
and filed with the United States Postal Service (the "Postal Service")
pursuant to which the Borrower and the Postal Service agree that the
Lender shall be entitled to remove all items delivered to the P.O. Box.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without limitation)
the premises legally described in Exhibit E attached hereto.
"Proposed Merger" means the proposed merger of the Borrower into
Vista 2000, Inc. or an affiliate thereof.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or
other disposition of goods or other property, out of a rendering of
services, out of a loan, out of the overpayment of taxes or other
liabilities, or otherwise arises under any contract or agreement,
whether such right to payment is created, generated or earned by the
Borrower or by some other person who subsequently transfers such person's
interest to the Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may
be evidenced, together with all other rights and interests (including
all liens and security interests) which 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 property of such
account debtor or other obligor; all including but not limited to all
present and future accounts, contract rights, loans and obligations
receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles.
8
<PAGE>
"Reportable Event" shall have the meaning assigned to that term
in Title IV of ERISA.
"Security Documents" means the Collateral Account Agreement, the
P.O. Box Agreement, the Credit Card Agreements, the Subordination
Agreements, and the Trademark Mortgage, each as described in Section 4.1
hereof.
"Security Interest" has the meaning specified in Section 3.1
hereof.
"Special Account" means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Sections 2.5 and
3.6 hereof.
"Subordination Agreements" means all subordination agreements
now or hereafter executed by any holders of Subordinated Debt including,
without limitation, the Subordination Agreements (i) executed by the
existing holders of Subordinated Debt, as of the date hereof, as
described on Exhibit F attached hereto, in the aggregate principal
amount of $3,413,000, and (ii) to be executed by Vista 2000, Inc. or an
affiliate thereof in the event Vista 2000, Inc. or an affiliate thereof
pays off the existing holders of Subordinated Debt in connection with
the Proposed Merger.
"Subordinated Debt" means any and all present or future
Indebtedness of the Borrower which is subordinated to the Obligations on
terms and conditions, and pursuant to a Subordination Agreement in form
and substance acceptable to the Lender in its sole discretion.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of
such corporation, irrespective of whether or not at the time stock of
any other class or classes shall have or might have voting power by
reason of the happening of any contingency, is at the time directly or
indirectly owned by the Borrower, by the Borrower and on or more
Subsidiaries, or by one or more Subsidiaries.
"Termination Date" means May 17, 1998.
"Third Party Credit Card Processor" means First USA Merchants
Services, Inc.
"Total Assets" means, as of the date of determination, all assets
of the Borrower as of such date which should propertly be classified as
assets on a balance sheet of the Borrower, prepared in accordance with
generally accepted accounting principles, consistently applied.
Notwithstanding the foregoing definition of Total Assets, all unrealized
appreciation and all increases in value shall be executed in determining
the amount of Total Assets.
9
<PAGE>
"Trademark Mortgage" means the trademark mortgage executed and
delivered by the Borrower to the Lender.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.12 hereof as the state whose
laws shall govern this Agreement, or in any other state whose laws are
held to govern this Agreement or any portion hereof.
ARTICLE II
Amount and Terms of the Credit Facility
---------------------------------------
Section II.1 Advances. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make Advances to the Borrower from time to
time during the period from the date hereof to and including the Termination
Date, or the earlier date of termination in whole of the Credit Facility
pursuant to Sections 2.9(a) or 8.2 hereof, in an aggregate amount at any time
outstanding not to exceed the Borrowing Base less 50% of the L/C Amount,
provided, however, that in no event shall the sum of the Advances plus the L/C
Amount at any time exceed the Commitment. The Advances shall be secured by
the Collateral as provided in Article III hereof and by any other collateral
pursuant to the Security Documents. The Credit Facility shall be a revolving
facility and it is contemplated that the Borrower will request Advances, make
prepayments and request additional Advances. The Borrower agrees to comply
with the following procedures in requesting Advances under this Section 2.1:
(a) The Lender shall not make any Advance under this Section 2.1
if, after giving effect to such requested Advance, the sum of the
outstanding and unpaid Advances under this Section 2.1 or otherwise would
exceed the Borrowing Base less 50% of the L/C Amount; provided, however,
that in no event will the Lender make any Advance under this Section 2.1
if, after giving effect to such Advance, the sum of the outstanding and
unpaid Advances plus the L/C Amount would exceed the Commitment.
(b) Each request for an Advance under this Section 2.1 shall be
made to the Lender prior to 1:00 p.m. (Minneapolis time) of the day of
the requested Advance by the Borrower. Each request for an Advance may
be in writing or by telephone, specifying the date of the requested
Advance and the amount thereof, and shall be by (i) any officer of the
Borrower; or (ii) any person designated as the Borrower's agent by any
officer of the Borrower in a writing delivered to the Lender; or (iii)
any person reasonably believed by the Lender to be an officer of the
Borrower or such a designated agent.
(c) Upon fulfillment of the applicable conditions set forth in
Article IV hereof, the Lender shall disburse loan proceeds by crediting
the same to the Borrower's demand deposit account maintained with Norwest
Bank Minnesota, National Association unless the Lender and the Borrower
agree in writing to
10
<PAGE>
another manner of disbursement. Upon request of the Lender, the
Borrower shall promptly confirm each telephonic request for an Advance by
executing and delivering an appropriate confirmation certificate to the
Lender. The Borrower shall be obligated to repay all Advances under this
Section 2.1 notwithstanding the failure of the Lender to receive such
confirmation and notwithstanding the fact that the person requesting the
same was not in fact authorized to do so. Any request for an Advance
under this Section 2.1, whether written or telephonic, shall be deemed to
be a representation by the Borrower that (i) the condition set forth in
Section 2.1(a) hereof has been met, and (ii) the conditions set forth in
Section 4.2 hereof have been satisfied as of the time of the request.
Section II.2 Note. All Advances made by the Lender under this Article
II shall be evidenced by and repayable with interest in accordance with the
Note. The principal of the Note shall be payable as provided herein and on
the earlier of the Termination Date or acceleration by the Lender pursuant to
Section 8.2 hereof, and shall bear interest as provided herein.
Section II.3 Issuance of Letters of Credit.
(a) The Lender agrees, on the terms and subject to the conditions
herein set forth, to cause to be issued by an Issuer one or more
documentary letters of credit for the account of the Borrower (each a
"Letter of Credit") from time to time during the period from the date
hereof until the earlier of the Termination Date or date the Credit
Facility has been terminated pursuant to Section 8.2(a) hereof, in an
aggregate amount at any time outstanding not to exceed the lesser of (a)
$1,000,000 or (b) the Borrowing Base less the sum of (i) all outstanding
and unpaid Advances hereunder and (ii) 50% of the L/C Amount; provided,
however that in no event shall the sum of the Advances plus the L/C
Amount at any time exceed the Commitment. Each Letter of Credit, if any,
shall be issued pursuant to a separate L/C Application entered into the
Borrower and the Lender as co-applicants for the benefit of the Issuer,
completed in a manner satisfactory to the Lender and the Issuer. The
terms and conditions set forth in each such L/C Application shall
supplement the terms and conditions hereof, but in the event of
inconsistency between the terms of any such L/C Application and the terms
hereof, the terms hereof shall control.
(b) No Letter of Credit shall be issued under this Section 2.3 if,
after the issuance of such requested Letter of Credit, the sum of the
face amounts of all issued and outstanding Letters of Credit would exceed
the lesser of (i) $1,000,000 or (ii) the Borrowing Base less the sum of
(I) all outstanding and unpaid Advances hereunder and (II) 50% of the L/C
Amount; provided, that in no event shall any Letter of Credit be issued
if, after the issuance of such requested Letter of Credit, the sum of the
outstanding and unpaid Advances plus the L/C Amount would exceed the
Commitment.
(c) No Letter of Credit shall be issued with an expiry date later
than the Termination Date in effect as of the date of issuance.
11
<PAGE>
(d) Any request for the issuance of a Letter of Credit under this
Section 2.3 shall be deemed to be a representation by the Borrower that
(i) the condition set forth in Section 2.3(b) hereof has been met, and
(ii) the statements set forth in Section 4.2 hereof are correct as of
the time of the request.
Section II.4 Payment of Amounts Drawn Under Letters of Credit. The
Borrower acknowledges that the Lender, as co-applicant, will be liable to the
Issuer of any Letter of Credit for reimbursement of any and all draws
thereunder and all other amounts required to be paid under the applicable L/C
Application. Accordingly, the Borrower agrees to pay to the Lender any and
all amounts required to be paid under the applicable L/C Application, when and
as required to be paid thereby, and the amounts designated below, when and as
designated:
(a) The Borrower hereby agrees to pay the Lender on the day a draft
is honored under any Letter of Credit a sum equal to all amounts drawn
under such Letter of Credit plus any and all reasonable charges and
expenses that the Issuer or the Lender may pay or incur relative to such
draw, plus interest on all such amounts, charges and expenses as set
forth below (all such amounts are hereinafter referred to, collectively,
as the "Obligation of Reimbursement").
(b) The Borrower hereby agrees to pay the Lender on demand interest
on all amounts, charges and expenses payable by the Borrower to the
Lender under this Section 2.4, accrued from the date any such draft,
charge or expense is paid by the Issuer until payment in full by the
Borrower at the Default Rate.
If the Borrower fails to pay to the Lender promptly the amount of its
Obligation of Reimbursement in accordance with the terms hereof and the L/C
Application pursuant to which such Letter of Credit was issued, the Lender is
hereby irrevocably authorized and directed, in its sole discretion, to make an
Advance in an amount sufficient to discharge the Obligation of Reimbursement,
including all interest accrued thereon but unpaid at the time of such Advance,
and such Advance shall be evidenced by the Note and shall bear interest as
provided in Section 2.8 hereof.
Section II.5 Special Account. If the Lender terminates the Credit
Facility pursuant to Section 8.2(a), or the Credit Facility is otherwise
terminated for any reason whatsoever, or if the Note is prepaid in whole or in
part (whether such payment is voluntary or mandatory) pursuant to Sections 2.9
or 2.10, while any Letter of Credit is outstanding, the Borrower shall
thereupon pay the Lender in immediately available funds for deposit in the
Special Account an amount equal to the maximum aggregate amount available to
de drawn under all Letters of Credit then outstanding, assuming compliance
with all conditions for drawing thereunder. The Special Account shall be
maintained for the Lender by any financial institution acceptable to the
Lender. Any interest earned on amounts deposited in the Special Account shall
be credited to the Special Account. Amounts on deposit in the Special Account
may be applied by the Lender at any time or from time to time to the
Borrower's Obligation of Reimbursement or any other Obligations, in the
Lender's sole discretion, and shall not be subject to withdrawal by the
Borrower so long as the Lender maintains a security interest therein. The
Lender agrees to transfer any balance in the Special Account to the
12
<PAGE>
Borrower at such time as the Lender is required to release its security
interest in the Special Account under applicable law.
Section II.6 Increased Costs and Reduced Return.
(a) If the Lender shall determine that, after the date hereof,
the adoption of any applicable law, rule or regulation, or any change
therein, or any change in the interpretation or administration thereof
by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by the
Issuer or the Lender or its parent corporation with any requirement or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency:
(i) shall subject the Issuer or the Lender or its parent
corporation to any tax, duty or other similar charge with respect to
any Letter of Credit, the Advances or the Note or shall change the
basis of taxation of payments to the Issuer or the Lender or its
parent corporation of the Reimbursement Obligation, of the principal
of or interest on the Advances or of any other amounts due under
this Agreement in respect of any Letter of Credit, the Advances or
the Note (except for any change in respect of any tax imposed on the
overall income of the Issuer or the Lender or its parent
(corporation); or
(ii) shall impose, modify or deem applicable any reserve,
special deposit or similar requirement (including, without
limitation, any such requirement imposed by the Board of Governors
of the Federal Reserve System) against assets of, deposits with or
for the account of, or credit extended by, the Issuer or the Lender
or its parent corporation or shall impose on the Issuer or the
Lender or its parent corporation any other condition affecting any
Letter of Credit, the Advances or the Note;
and the result of any of the foregoing is to increase the cost to the
Issuer or the Lender or its parent corporation of issuing or maintaining
any Letter of Credit or of making or maintaining any Advances, or to
reduce the amount of any sum received or receivable by the Issuer or the
Lender or its parent corporation under the application and agreement
pursuant to which the Letter of Credit was issued, this Agreement or the
Note with respect thereto, by an amount deemed by the Lender or its
parent corporation to be material, then upon demand by the Lendor, the
Borrower shall pay to the Lender such additional amount or amounts as
will compensate the Issuer or the Lender or its parent corporation for
such increased cost or reduction.
(b) If the Lender shall determine that the adoption after the date
hereof of any applicable law, rule or regulation regarding capital
adequacy, or any change therein after the date hereof, any change after
the date hereof in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by the
Lender or its parent corporation with any guideline or request issued
after the date hereof regarding capital adequacy (whether nor not having
the force of law of any
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such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on the Lender's or the Lender's
parent corporation's capital as a consequence of any Letters of Credit,
Advances or the Lender's obligations hereunder to a level below that
which the Lender or its parent corporation could have achieved but for
such adoption, change or compliance (taking into consideration the
Lender's policies with respect to capital adequacy and those of the
Lender's parent corporation) by an amount deemed to the Lender, or its
parent corporation to be material, then from time to time on demand by
the Lender, the Borrower shall pay to the Lender such additional amount
or amounts as will compensate the Lender or its parent corporation for
such reduction.
(c) Certificates of the Lender sent to the Borrower from time to
time claiming compensation under this Section, stating the reason
therefor and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to the Lender hereunder shall be
conclusive absent manifest error. In determining such amounts, the
Lender or its parent corporation may use any reasonable averaging and
attribution methods.
Section II.7 Obligations Absolute. The obligations of the Borrower
arising under this Agreement shall be absolute, unconditional and irrevocable,
and shall be paid strictly in accordance with the terms of this Agreement,
under all circumstances whatsoever, including (without limitation) the
following circumstances:
(a) any lack of validity or enforceability of any Letter of Credit
or any other agreement or instrument relating to any Letter of Credit
(collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure from all
or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right which
the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom
any such beneficiary or any such transferee may be acting), or other
person or entity, whether in connection with this Agreement, the
transactions contemplated herein or in the Related Documents or any
unrelated transactions;
(d) any statment or any other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any
respect whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under any
Letter of Credit against presentation of a draft or certificate which
does not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
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Section 2.8 Interest.
(a) The principal of the Advances outstanding from time to time
during any month shall bear interest (computed on the basis of actual
days elapsed in a 360-day year) at the Floating Rate; provided, however,
that from the first day of any month during which any Default or Default
Event occurs or exists at any time, in the Lender's discretion and
without waiving any of its other rights and remedies, the principal of
the Advances outstanding from time to time shall bear interest at the
Default Rate; and provided, further, that in any event no rate change
shall be put into effect which would result in a rate greater than the
highest rate permitted by law. Interest accruing on the principal
balance of the Advances outstanding from time to time shall be payable on
the first day of the next succeeding month and on the Termination Date or
prepayment in full.
(b) If any Person shall acquire a participation in Advances under
this Agreement, the Borrower shall be obligated to the Lender to pay the
full amount of all interest calculated under Section 2.8(a) hereof, along
with all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than the Floating Rate, or otherwise elects
to accept less than its prorata share of such fees, charges and other
amounts due under this Agreement.
(c) Notwithstanding the interest payable pursuant to Section 2.8(a)
hereof, the Borrower shall be liable to the Lender for interest hereunder
of not less than $15,000 per calendar month (the "Minimum Interest
Charge") during the term of this Agreement, and the Borrower shall pay
any deficiency between the Minimum Interest Charge and the amount of
interest otherwise calculated under Section 2.8(a) hereof on the date and
in the manner provided in Section 2.8(a) hereof. Notwithstanding the
foregoing, no Minimum Interest Charge shall be payable for any month in
which all or any portion of the Clean Period shall occur.
Section II.9 Voluntary Prepayment; Termination of Agreement by the
Borrower; Permanent Reduction of the Commitment.
(a) Except as otherwise provided herein, the Borrower may, in its
discretion, prepay the Advances in whole at any time or from time to time
in part. If the Advances are paid or prepaid, in whole or in part, from
the proceeds of a refinancing with another party (other than the Lender)
or from any source other than the cash flow from operations of the
Borrower, then the Note shall, at the option of the Lender, be subject to
mandatory prepayment in full and, at the option of the Lender, the
Borrower shall pay to the LEnder for deposit in the Special Account all
amounts required under Section 2.5 hereof. If the prepayment is made on
or prior to May 17, 1997, a prepayment fee shall be payable to the Lender
in an amount equal to one percent (1%) of the Commitment. If the
prepayment is made after May 17,1997, a prepayment fee shall be payable
to the Lender in an amount equal to one-half of one percent (1.2%) of the
Commitment. The Borrower acknowledges that the prepayment fee is an
integral part of the pricing of the Credit Facility and has been
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established in conjunction with the interest rate under the Note and the
commission with respect to each Letter of Credit and that establishment
of the prepayment fee in lieu of increasing the margin used to compute
the interest rate under the Note or the commission with respect to each
Letter of Credit. The Borrower hereby acknowledges that such prepayment
fee is reasonable.
(b) The Borrower may terminate this Agreement at any time, so long
as no Letter of Credit has been issued and is outstanding with an
expiration date after such date, and, subject to payment and performance
of all of the Obligations, may obtain any release or termination of the
Security Interest to which the Borrower is otherwise entitled by law by
(i) giving at least 30 days prior written notice to the Lender of the
Borrower's intention to terminate this agreement, and (ii) paying the
Lender a termination fee in an amount equal to one percent (1%) of the
amount of the Commitment if the termination occurs on or prior to
May 17, 1997, and (2) one-half of one percent (1/2%) of the amount of
the Commitment if the termination occurs after May 17, 1997.
(c) The Borrower may at any time and from time to time, upon at
least 30 days prior written notice to the Lender, permanently reduce in
part the Commitment; provided, however, that no reduction shall reduce
the Commitment to an amount less than the then aggregate amount of the
Advances plus the L/C Amount; and provided further, that if the Borrower
shall elect to permanently reduce in part the Commitment at any time
other than the Termination Date, the Borrower shall pay to the Lender a
premium in an amount equal to one percent (1%) of the reduction if such
reduction occurs on or prior to May 17, 1997, and one-half of one percent
(1/2%) of the reduction if such reduction occurs after May 17, 1997.
Section II.10 Mandatory Prepayment. Without notice or demand, if
either (a) the sum of the outstanding principal balance of the Advances
plus the 50% of the L/C Amount shall at any time exceed the Borrowing
Base, or (b) the sum of the outstanding principal balance of the Advances
plus the L/C Amount shall at any time exceed the Commitment, then the
Borrower shall (i) first, immediately prepay the Advances to the extent
necessary to eliminate such excess; and (ii) if prepayment in full of the
Advances is insufficient to eliminate such excess, pay to the Lender in
immediately available funds for deposit in the Special Account an amount
equal to the remaining excess. The Borrower shall also make a mandatory
prepayment of the Advances (or make a payment to the Lender in
immediately available funds for deposit in the Special Account) from
time to time as required by Section 6.16 hereof. Any payment received
by the Lender under this Section 2.10 or under Section 2.9 may be applied
to the Obligation of Reimbursement or the Advances, including interest
thereon and any fees, commissions, costs and expenses hereunder and under
the Security Documents, in such order and in such amounts in its
discretion may from time to time determine.
Section II.11 Payment. All payments of principal of and interest
on the Advances, the Obligation of Reimbursement, the commissions and
fees hereunder and amounts required to be paid to the Lender for deposit
in the Special Account shall be made to the Lender in immediately
available funds. The Borrower hereby authorizes the Lender, in its
discretion at
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any time or from time to time and without request by the Borrower, to
make an Advance to the extent necessary to pay any such amounts and any
fees, costs or expenses hereunder or under the Security Documents.
Section II.12 Payment on Non-Banking Days. Whenever any payment to
be made hereunder shall be stated to be due on a day which is not a
Banking Day, such payment may be made on the next succeeding Banking Day,
and such extension of time shall in such case be included in the
computation of interest on the Advances or the fees hereunder, as the
case may be.
Section II.13 Use of Proceeds. The proceeds of Advances and each
Letter of Credit issued or caused to be issued shall be used by the
Borrower for ordinary working capital purposes.
Section II.14 Liability Records. The Lender may maintain from
time to time, at its discretion, liability records as to any and all
Advances made or repaid, interest accrued or paid under this Agreement,
outstanding Letters of Credit and fees thereon and the Borrower's
Obligation of Reimbursement. All entries made on any such record shall
be presumed correct until the Borrower establishes the contrary. On
demand by the Lender, the Borrower will admit and certify in writing the
exact principal balance that the Borrower then asserts to be outstanding
to the Lender for Advances under this Agreement and the amount of any
Letters of Credit outstanding. Any billing statement or accounting
rendered by the Lender shall be conclusive and fully binding on the
Borrower unless specific written notice of exception is given to the
Lender by the Borrower within 30 days after its receipt by the Borrower.
Section II.15 Setoff. The Borrower agrees that the Lender may at
any time or from time to time, at its sole discretion and without demand
and without notice to anyone, setoff any liability owed to the Borrower
by the Lender, whether or not due, against any indebtedness owed to the
Lender by the Borrower (for Advances, the Obligation of Reimbursement or
the amounts required to be paid to the Lender for deposit in the Special
Account or for any other transaction or event), whether or not due. In
addition, each other person holding a participating interest in any
Advances made to the Borrower by the Lender shall have the right to
appropriate or setoff any deposit or other liability then owed by such
Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had
lent directly to the Borrower the amount of such participating interest.
Section II.16 Fees.
(a) The Borrower hereby agrees to pay the Lender a fully
earned and non-refundable origination fee of $55,000, $20,000 of
which has been previously paid and with respect to which the Lender
hereby acknowledges receipt, $10,000 of which is due and payable
upon the execution of this Agreement, and $25,000 of which shall
be due and payable on the earlier of (i) April 1, 1997, or (ii)
voluntary or mandatory prepayment of the Advances, in whole or in
part, or termination of this Agreement, or reduction of the
Commitment, in whole or in part, all pursuant to Sections 2.9 or
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2.10 hereof, or (iii) the Lender's receipt of the Borrower's annual
audited financial statements for the fiscal year ending December 31,
1996 indicating that the Borrowers' Net Income for such fiscal year
is less than $750,000. If none of the events described in clauses
(i) or (ii) has occurred by March 31, 1997, and if the Borrowers'
Net Income for the fiscal year ended on or about December 31, 1996
is at least $750,000, according to the Borrower's audited financial
statements for such fiscal year, then the Borrower shall not be
required to make such final $25,000 payment.
(b) The Borrower agrees to pay to the Lender a commitment fee
at the rate of one-eighth of one percent (1/8%) per month on the
average daily unused portion of the Commitment from the date hereof
to and including the Termination Date, due and payable quarterly in
arrears on the first day of each fiscal quarter of the Borrower,
commencing July 1, 1996, provided that any such commitment fee
remaining unpaid on the prepayment (whether voluntary or mandatory
and whether in whole or in part) of the Advances or termination of
the Credit Facility or acceleration of the Note by the Lender
pursuant to Section 2.8 hereof shall be due and payable on the date
of such termination or acceleration. Such fee shall be calculated
on the basis of actual days elapsed in a 360-day year.
(c) The Borrower agrees to pay the Lender a commission with
respect to each Letter of Credit, if any, accruing on a daily basis
and computed at the annual rate of two percent (2%) of the available
amount of such Letter of Credit (as it may be changed from time to
time) from and including the date of issuance of such Letter of
Credit until such date as such Letter of Credit shall terminate by
its terms, payable monthly in arrears, and prorated for any part of
a full calendar year in which such Letter of Credit remains
outstanding. The foregoing commission shall be in addition to any
and all fees and charges of any Issuer of a Letter of Credit with
respect to or in connection with such Letter of Credit.
(d) The Borrower agrees to pay the Lender, on written demand,
the administrative fees charged by the Issuer in connection with the
honoring of drafts under any Letter of Credit, amendments thereto,
transfers thereof and all other activity with respect to the Letters
of Credit.
(e) The Borrower hereby agrees to pay the Lender, on demand,
the Lender's then current audit fees (which fees are currently $400
per day per auditor) in connection with any audits or inspections by
the Lender of any collateral or the operations or business of the
Borrower, together with all actual out-of-pocket costs and expenses
incurred in conducting any such audit or inspection. So long as no
Default or Event of Default has occurred, the Borrower's obligation
to pay the Lender for the Lender's internal collateral monitoring
costs shall be limited to $9,000 per calendar year. Following the
occurence of a Default or an Event of Default, the obligation of
the Borrower to pay the Lender for such costs shall be unlimited.
The frequency and number of audits (either before or after the
occurrence of a Default or an Event of Default) shall be determined
by the Lender in its sole discretion.
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ARTICLE III
Security Interest
Section III.1 Grant of Security Interest. The Borrower hereby
assigns and grants to the Lender a security interest (collectively referred
to as the "Security Interests") in the Collateral, as security for the payment
and performance of each and every debt, liability and obligation of every type
and description which the Borrower may now or at any time hereafter owe to the
Lender (whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower, and
whether it is direct or indirect, due or to become due, absolute or
contingent, primary or secondary, liquidated or unliquidated, or sole, joint,
several or joint and several, and including specifically, but not limited to,
the Obligation of Reimbursement and all indebtedness of the Borrower arising
under this Agreement, the Note, any L/C Application completed by the Borrower
or any other loan or credit agreement or guaranty between the Borrower and the
Lender, whether now in effect or hereafter entered into; all such debts,
liabilities and obligations are herein collectively referred to as the
"Obligations").
Section III.2 Notification of Account Debtors and Other Obligors. In
addition to the rights of the Lender under Section 6.10 hereof, with respect
to any and all rights to payment constituting Collateral the Lender may at any
time (after the occurrence of an Event of Default) notify any account debtor
or other person obligated to pay the amount due that such right to payment has
been assigned or transferred to the Lender for security and shall be paid
directly to the Lender. The Borrower will join in giving such notice if the
Lendor so requests. At any time the Borrower or the Lender gives such notice
to an account debtor or other obligor, the Lender may, but need not, in the
Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as agent and attorney in fact of the
Borrower, notify the United States Postal Service to change the address for
delivery of the Borrower's mail to any address designated by the Lender,
otherwise intercept the Borrower's mail, and receive, open and dispose of the
Borrower's mail, applying all Collateral as permitted under this Agreement and
holding all other mail for the Borrower's account or forwarding such mail to
the Borrower's last known address.
Section III.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of
insurance and refunds of unearned premiums) due or to become due under, and
all other rights of the Borrower with respect to, any and all policies of
insurance now or at any time hereafter covering the Collateral or any evidence
thereof or any business records or valuable papers pertaining thereto, and the
Borrower hereby directs the issuer of any such policy to pay all such monies
directly to the Lender. At any time, whether before or after the occurrence
of any Event of Default, the Lender may (but need not), in the Lender's name
or in the Borrower's name, execute and
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deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section III.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of the Premises at any time after the
occurrence and during the continuance of an Event of Default.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.
(c) The right of the Lender to hold the Premises shall cease
and terminate upon the earlier of (1) payment in full and discharge of
all Obligations, and (2) final sale or disposition of all goods
constituting Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for any
rent or other compensation for the possession, occupancy or use of any
of the Premises; provided, however, in the event that the Lender does
pay or account for any rent or other compensation for the possession,
occupancy or use of any of the Premises, the Borrower shall reimburse
the Lender promptly for the full amount thereof. In addition, the
Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or
imposed upon the Lender by reason of execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the
provisions of this Section 3.4.
Section III.5 License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the
Borrower for the purpose of selling, leasing or otherwise disposing of any or
all Collateral following an Event of Default.
Section III.6 Security Interest in Special Account and Collateral
Account. The Borrower hereby pledges, and grants to the Lender a security
interest in, all funds held in the Special Account and in the Collateral
Account from time to time and all proceeds thereof, as security for the
payment of all present and future Obligations of Reimbursement and all other
Obligations.
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ARTICLE IV
Conditions of Lending
Section IV.1 Conditions Precedent to Making the Initial Advance or
Issuing the Initial Letter of Credit. The obligation of the Lender to make
the initial Advance or issuing or causing to be issued any Letter of Credit
under the Credit Facility shall be subject to the condition precedent that
the Lender shall have received all of the following, each in form and
substance satisfactory to the Lender:
(a) This Agreement, properly executed on behalf of the Borrower.
(b) The Note, properly executed on behalf of the Borrower.
(c) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease.
(d) A Collateral Account Agreement, duly executed by the
Borrower and a financial institution acceptable to the Lender, pursuant to
which the Borrower and the institution establish a depository account (the
"Collateral Account") in the name of and under the sole and exclusive
control of the Lender, from which such institution agrees to transfer
finally collected funds to the Lender for application to the Advances.
(e) The P.O. Box Agreement, duly executed by the Borrower and
filed with the Postal Service, together with a key to the P.O. Box.
(f) The Credit Card Agreements, duly executed by the parties
thereto.
(g) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements have been filed and
remain in effect against the Borrower, except those financing statements
relating to liens permitted pursuant to Section 7.1 hereof and those
financing statements filed by the Lender, and (iii) the Lender has duly
filed all financing statements necessary to perfect the Security Interests
granted hereunder, to the extent the Security Interests are capable of
being perfected by filing.
(h) A certificate of the Secretary or an Assistant Secretary
of the Borrower, certifying as to (i) the resolutions of the directors
and, if required, the shareholders of the Borrower, authorizing the
execution, delivery and performance of this Agreement and the Security
Documents, (ii) the articles of incorporation and bylaws of the Borrower,
and (iii) the signatures of the officers or agents of the Borrower
authorized to execute and deliver this Agreement, the Security Documents
and other instruments, agreements and certificates, including Advance
requests, on behalf of the Borrower.
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(i) A current certificate issued by the Secretary of State of
the state of the Borrower's incorporation, certifying that the Borrower
is in compliance with all corporate organizational requirements of such
state.
(j) Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary.
(k) An opinion of counsel to the Borrower, addressed to the
Lender.
(l) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in favor
of the Lender and with all liability insurance naming the Lender as an
additional insured.
(m) Validity Guaranties, properly executed by each of the
Guarantors.
(n) Subordination Agreements, duly executed by all of the
existing holders of Subordinated Debt as of the date hereof, together
with copies of the notes evidencing such Subordinated Debt, duly legended
to reflect the subordination of such notes effected by the Subordination
Agreements.
(o) An opinion of counsel to each Guarantor, addressed to the
Lender.
(p) The Trademark Mortgage, duly executed by the parties
thereto.
(q) The Borrower shall have Excess Availability as of the date
hereof of at least $500,000.
(r) An appraisal of the equipment of the Borrower prepared by
an appraiser acceptable to the Lender, which appraisal shall be in form
and substance acceptable to the Lender, reflecting an orderly liquidation
value of the equipment of the Borrower in an amount acceptable to the
Lender, together with such documents as may be necessary to permit the
Lender to rely upon such appraisal.
(s) An appraisal of the inventory of the Borrower prepared by
an appraiser acceptable to the Lender, which appraisal shall be in form
and substance acceptable to the Lender, reflecting an orderly liquidation
value of the inventory of the Borrower in an amount acceptable to the
Lender, together with such documents as may be necessary to permit the
Lender to rely upon such appraisal.
(t) Payment of the fees and commissions due through the date of
the initial Advance or Letter of Credit under Section 2.16 hereof and
expenses incurred by the Lender through such date and required to be
paid by the Borrower under Section 9.7 hereof.
(u) Such other documents as the Lender in its sole discretion
may require.
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Section IV.2 Conditions Precedent to All Advances. The obligation of
the Lender to make each Advance or cause to be issued any Letter of Credit
shall be subject to the further conditions precedent that on such date:
(a) the representations and warranties contained in Article V
hereof are correct on and as of the date of such Advance or issuance of
Letter of Credit as though made on and as of such date, except to the
extent that such representations and warranties relate solely to an
earlier date;
(b) no event has occurred and is continuing, or would result
from such Advance or the issuance of such Letter of Credit, as the case
may be, which constitutes a Default or an Event of Default.
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section V.1 Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Tax Identification Number. The Borrower is
a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Minnesota, and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary. The Borrower has all requisite power
and authority, corporate or otherwise, to conduct its business to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. During its corporate existence, the Borrower has
done business solely under the names set forth in Exhibit B hereto. The chief
executive office and principal place of business of the Borrower is located at
the address set forth in Exhibit B hereto, and all of the Borrower's records
relating to its business or the Collateral are kept at that location. All
Inventory and Equipment is located at that location or at one of the other
locations set forth in Exhibit B hereto. The Borrower's tax identification
number is correctly set forth in Section 9.4.
Section V.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the
Loan Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (a)
require any consent or approval of the stockholders of the Borrower, (b)
require any authorization, consent or approval by, or registration,
declaration or filing with, or notice to, any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,or
any third party except such authorization, consent, approval, registration,
declaration, filing or notice as has been obtained, accomplished or given
prior to the date hereof, (c) violate any provision of any law, rule or
regulation (including, without limitation, Regulation X of the Board of
Governors of the Federal Reserve System) or of any order, writ, injunction or
decree presently in effect having applicability to the Borrower or of the
Articles of Incorporation or Bylaws of the Borrower, (d) result in a breach
of or constitute a default
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under any indenture or loan or credit agreement or any other material
agreement, lease or instrument to which the Borrower is a party or by which
it or its properties may be bound or affected, or (e) result in, or require,
the creation or imposition of any mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance of any nature (other than
the Security Interests) upon or with respect to any of the properties now
owned or hereafter acquired by the Borrower.
Section V.3 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms.
Section V.4 Subsidiaries. Except as set forth in Exhibit B attached
hereto, the Borrower has no Subsidiaries.
Section V.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements of the
Borrower for its fiscal year ended December 29, 1995 and unaudited financial
statements of the Borrower for the months ended March 31, 1996, and those
statements fairly present the financial condition of the Borrower on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there
has been no material adverse change in the business, properties or condition
(financial or otherwise) of the Borrower.
Section V.6 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Affiliates or the properties of the Borrower or any
of its Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations
of the Borrower or any of its Affiliates.
Section V.7 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
Section V.8 Taxes. The Borrower and its Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local
taxes required to be withheld by each of them. The Borrower and its
Affiliates have filed all federal, state and local tax returns which to the
knowledge of the officers of the Borrower or any Affiliate, as the case may
be, are required to be filed, and the Borrower and its Affiliates have paid or
caused to be paid to the respective taxing authorities all taxes as shown on
said returns or on any assessment received by any of them to the extent such
taxes have become due.
24
<PAGE>
Section V.9 Titles and Liens. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender
and all other Collateral, properties and assets reflected in the latest
balance sheet referred to in Section 5.5 hereof and all proceeds thereof,
free and clear of all mortgages, security interests, liens and encumbrances,
except for (i) mortgages, security interests and liens permitted by Section
7.1 hereof, and (ii) in the case of any such property which is not Collateral
or other collateral described in the Security Documents, covenants,
restrictions, rights, easements and minor irregularities in title which do not
materially interfere with the business or operations of the Borrower as
presently conducted. No financing statement naming the Borrower as debtor is
on file in any office except to perfect only security interests permitted by
Section 7.1 hereof.
Section V.10 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains
or has maintained any Plan. Neither the Borrower nor any Affiliate has
received any notice or has any knowledge to the effect that it is not in full
compliance with any of the requirements of ERISA. No Reportable Event or
other fact or circumstance which may have an adverse effect on the Plan's tax
qualified status exists in connection with any Plan. Neither the Borrower nor
any of its Affiliates has:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or any
participant in connection with any Plan (other than accrued benefits
which or which may become payable to participants or beneficiaries of any
such Plan).
Section V.11 Default. The Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or
by which it or its property is bound or affected, the breach or default of
which could have a material adverse effect on the financial condition,
properties or operations of the Borrower.
Section V.12 Environmental Protection. The Borrower has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws and regulations relating to emissions, discharges,
releases of pollutants, contaminants, hazardous or toxic materials, or wastes
into ambient air, surface water, ground water or land, or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants or hazardous or
toxic materials or wastes ("Environmental Laws") at the Borrower's facilities
or in connection with the operation of its facilities. Except as previously
disclosed to the Lender in writing, the Borrower and all activities of the
Borrower at its facilities comply with all Environmental Laws and with all
terms and conditions of any required permits, licenses and authorizations
applicable to the Borrower with respect thereto. Except as previously
disclosed to the Lender in writing, the Borrower is also in compliance with
all limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations schedules and timetables contained in Enviromental
Laws or contained in any plan, order, decree, judgment or notice of which the
Borrower is aware. Except as previously disclosed to the Lender in writing,
the
25
<PAGE>
Borrower is not aware of, nor has the Borrower received notice of, any events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may interfere with or prevent continued compliance with, or which may
give rise to any liability under, any Environmental Laws.
Section V.13 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section V.14 Financing Statements. The Borrower has provided to the
Lender signed financing statement sufficient when filed to perfect the
Security Interests and the other security interests created by the Security
Documents. When such financing statements are filed in the offices noted
therein, the Lender will have a valid and perfected security interest in all
Collateral and all other collateral described in the Security Documents which
is capable of being perfected by filing financing statements. None of the
Collateral or other collateral covered by the Security Documents is or will
become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.
Section V.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents
is (or, in the case of all future Collateral or such other collateral, will be
when arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
Section V.16 Trademarks and Patents. Except as set forth on Exhibit G
attached hereto, the Borrower does not own any interest in any copyrights,
patents or trademarks that are registered under either federal or state law.
Section V.17 Vehicles. Except as set forth on Exhibit H attached
hereto, the Borrower does not own any interest in any certificated vehicles
or certificated piece of equipment.
ARTICLE VI
Affirmative Covenants of the Borrower
So long as the Note shall remain unpaid, the Credit Facility or any
Letter of Credit shall be outstanding, the Borrower will comply with the
following requirements, unless the Lender shall otherwise consent in writing:
Section VI.1 Reporting Requirements. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
26
<PAGE>
(a) as soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, audited financial statements
of the Borrower with the unqualified opinion of independent certified
public accountants selected by the Borrower and acceptable to the Lender,
which annual financial statements shall include the balance sheet of the
Borrower as at the end of such fiscal year and the related statements of
income, retained earnings and cash flows of the Borrower for the fiscal
year then ended, prepared, if the Lender so requests, on a consolidating
and consolidated basis to include any Affiliates, all in reasonable
detail and prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices
applied in the financial statements referred to in Section 5.5 hereof,
together with (i) copies of any management letters delivered by the
accounting firm in connection with such audited statements, and (ii) a
report signed by such accountants stating that in making the
investigations necessary for said opinion they obtained no knowledge,
except as specifically stated, of any Default or Event of Default
hereunder and all relevant facts in reasonable detail to evidence, and
the computations as to, whether or not the Borrower is in compliance with
the requirements set forth in Sections 6.12 through 6.15 and Section 7.10
hereof; and (iii) a certificate of the chief financial officer of the
Borrower stating that such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
basis consistent with the accounting practices reflected in the annual
financial statements referred to in Section 5.5 hereof and whether or not
such officer has knowledge of the occurence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
(b) as soon as available and in any event within 20 days after the
end of each month, an unaudited/internal balance sheet and statements of
income and retained earnings of the Borrower as at the end of and for
such month and for the year to date period then ended, prepared, if the
Lender so requests, on a consolidating and consolidated basis to include
any Affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with generally accepted accounting principles
applied on a consistent basis with the accounting practices reflected in
the financial statements referred to in Section 5.5 hereof, subject to
year-end audit adjustments; and accompanied by a certificate of the chief
financial officer of the Borrower, substantially in the form of Exhibit D
hereto stating (i) that such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
basis consistent with the accounting practices reflected in the financial
statements referred to in Section 5.5 hereof, subject to year-end audit
adjustments, (ii) whether or not such officer has knowledge of any
Default or Event of Default hereunder not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with respect
thereto, and (iii) all relevant facts in reasonable detail to evidence,
and the computations as to, whether or not the Borrower is in compliance
with the requirements set forth in Sections 6.12 through 6.15 and
Section 7.10 hereof;
27
<PAGE>
(c) by 11:00 a.m. (Minneapolis time) on each Monday, a report of
sales and collections for the previous week and such other documents
regarding the Borrower's accounts receivable and inventory as the Lender
may request on forms provided by the Lender;
(d) by 11:00 a.m. (Minneapolis time) on each Monday and Thursday,
an inventory report indicating the Borrower's inventory as of the close
of business on the previous day, on forms provided by the Lender;
(e) within 15 days after the end of each month, an aging of the
Borrower's accounts payable, an inventory certification report and a
summary report of Eligible E-Z Pay Plan Accounts and ineligible E-Z Pay
Plan Accounts as at the end of such month;
(f) at least 30 days before the beginning of each fiscal year of
the Borrower, the projected balance sheets and income statements for each
month of such year, each in reasonable detail, representing the good
faith projections of the Borrower and certified by the Borrower's chief
financial officer as being the most accurate projections available and
identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as the
Lender may in its discretion require;
(g) immediately after the commencement thereof, notice in writing
of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in
Section 5.6 hereof or which seek a monetary recovery against the
Borrower in excess of $50,000;
(h) as promptly as practicable (but in any event not later than
five business days) after an officer of the Borrower obtains knowledge of
the occurrence of any breach, default or event of default under any
Security Document or any event which constitutes a Default or Event of
Default hereunder, notice of such occurrence, together with a detailed
statement by a responsible officer of the Borrower of the steps being
taken by the Borrower to cure the effect of such breach, default or
event;
(i) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with
respect to any Plan has occurred, the statement of the chief financial
officer of the Borrower setting forth details as to such Reportable
Event and the action which the Borrower proposes to take with respect
thereto, together with a copy of the notice of such Reportable Event
to the Pension Benefit Guaranty Corporation;
(j) as soon as possible, and in any event within 10 days after the
Borrower fails to make any quarterly contribution required with respect
to any Plan under Section 412(m) of the Internal Revenue Code of 1986,
as amended, the statement of the chief financial officer of the Borrower
setting forth details as to such failure and the action which the
Borrower proposes to take with respect thereto, together with a
28
<PAGE>
copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation;
(k) promptly upon knowledge thereof, notice of (i) any disputes or
claims by customers of the Borrower; (ii) any goods returned to or
recovered by the Borrower; and (iii) any change in the persons
constituting the officers and directors of the Borrower;
(l) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral
or such other collateral or the prospect of payment thereof;
(m) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have
sent to its stockholders;
(n) promptly after the sending or filing thereof, copies of all
regular and periodic financial reports which the Borrower shall file
with the Securities and Exchange Commission or any national securities
exchange;
(o) promptly upon knowledge thereof, notice of the violation by the
Borrower of any law, rule or regulation, the non-compliance with which
could materially and adversely affect its business or its financial
condition; and
(p) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents
and delivery receipts for goods sold, and such other material, reports,
records or information as the Lender may request.
Section VI.2 Books and Records; Inspection and Examination. The
Borrower will keep accurate books of record and account for itself pertaining
to the Collateral and pertaining to the Borrower's business and financial
condition and such other matters as the Lender may from time to time request
in which true and complete entries will be made in accordance with generally
accepted accounting principles consistently applied and, upon request of the
Lender, will permit any officer, employee, attorney or account for the Lender
to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
affairs of the Borrower with any of its directors, officers, employees or
agents. The Borrower will permit the Lender, or its employees, accountants,
attorneys or agents, to examine and inspect any Collateral, other collateral
covered by the Security Documents or any other property of the Borrower any
time during ordinary business hours.
Section VI.3 Account Verification. The Lender may, and Borrower will,
at any time and from time to time upon request of the Lender, send requests
for verification of accounts or notices of assignment to account debtors and
other obligors.
29
<PAGE>
Section VI.4 Compliance with Laws; Environmental Indemnity. The
Borrower will (a) comply with the requirements of applicable laws and
regulations, the non-compliance with which would materially and adversely
affect its business or its financial condition, (b) comply with all applicable
Environmental Laws and obtain any permits, licenses or similar approvals
required by any such Environmental Laws, and (c) use and keep the Collateral,
and will require that others use and keep the Collateral, only for lawful
purposes, without violation of any federal, state or local law or ordinance.
The Borrower will indemnify, defend and hold the Lender harmless from and
against any claims, loss or damage to which the Lender may be subjected as a
result of any past, present or future existence, use, handling, storage,
transportation or disposal of any hazardous waste or substance or toxic
substance by the Borrower or on property owned, leased or controlled by the
Borrower. This indemnification agreement shall survive the termination of
this Agreement and payment of the indebtedness hereunder.
Section VI.5 Payment of Taxes and Other Claims. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interests,
prior to the date on which penalties attach thereto, (b) all federal, state
and local taxes required to be withheld by it, and (c) all lawful claims for
labor, materials and supplies which, if unpaid might become a lien or charge
upon any properties of the Borrower; provided, that the Borrower shall not
be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
Section VI.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.6 shall prevent the Borrower
from discontinuing the operation and maintenance of any of its properties
if such discontinuance is, in the judgement of the Lender, desirable in
the conduct of the Borrower's business and not disadvantageous in any
material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral
or any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security
interests, liens and encumbrances except the Security Interests and
other security interests permitted by Section 7.1 hereof.
Section VI.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible
and reputable, in such amounts and against such risks as may from time to time
be required by the Lender, but in all events in
30
<PAGE>
such amounts and against such risks as is usually carried by companies
engaged in similar business and owning similar properties in the same general
areas in which the Borrower operates. Without limiting the generality of the
foregoing, the Borrower will at all times keep all tangible Collateral insured
against risks of fire (including so-called extended coverage), theft,
collision (for Collateral consisting of motor vehicles) and such other risks
and in such amounts as the Lender may reasonably request, with any loss
payable to the Lender to the extent of its interest, and all policies of such
insurance shall contain a lender's loss payable endorsement for the benefit of
the Lender. All policies of liability insurance required hereunder shall name
the Lender as an additional insured.
Section VI.8 Preservation of Corporate Existence. The Borrower will
preserve and maintain its corporate existence and all of its rights,
privileges and franchises necessary or desirable in the normal conduct of its
business and shall conduct its business in an orderly, efficient and regular
manner.
Section VI.9 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or
assigned by the Borrower.
Section VI.10 P.O. Box; Collateral Account.
(a) The Borrower will irrevocably direct all present and future
Account debtors and other Persons obligated to make payments constituting
Collateral to make such payments directly to the P.O. Box. All of the
Borrower's invoices, account statements and other written or oral
communications directing, instructing, demanding or requesting payment of
any Account or any other amount constituting Collateral shall
conspicuously direct that all payments be made to the P.O. Box and shall
include the P.O. Box address.
(b) The Borrower agrees to instruct all present and future Third
Party Credit Card Processors to deposit all funds payable to the Borrower
under all present and future agreements between the Borrower and each
such Third Party Credit Card Processors directly into the Collateral
Account. The Borrower agrees to deposit in the Collateral Account or,
at the Lender's option, to deliver to the Lender all collections on
Accounts, contract rights, chattel paper and other rights to payment
constituting Collateral, and all proceeds of Collateral which are
received in the P.O. Box, and/or which the Borrower may receive directly
notwithstanding its direction to Account debtors and other obligors to
make payments to the P.O. Box, immediately upon receipt thereof, in the
form received, except for the Borrower's endorsement when deemed
necessary. Until delivered to the Lender or deposited in the Collateral
Account, all proceeds or collections of Collateral shall be held in trust
by the Borrower for and as the property of the Lender and shall not be
commingled with any funds or property of the Borrower. Amounts deposited
in the Collateral Account shall not bear interest and shall not be
subject to withdrawal by the Borrower, except after full payment and
discharge of all Obligations. All such collections shall constitute
proceeds of Collateral and shall not constitute payment of any
Obligation. Collected funds from the Collateral Account shall be
transferred to
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<PAGE>
the Lender's general account, and the Lender may deposit in its general
account or in the Collateral Account any and all collections received by
it directly from the Borrower. The Lender may commingle such funds with
other property of the Lender or any other person. The Lender from time
to time at its discretion may, (i) after allowing 0 Banking Days for
funds received in the Collateral Account via ACH or wire transfer and on
or before 12:30 p.m. (Minneapolis time), (ii) 1 Banking Day for funds
received in the Collateral Account via ACH or wire transfer after 12:30
p.m. (Minneapolis time) and (iii) after allowing 2 Banking Days, for
funds received in the Collateral Account in any manner other than ACH or
wire transfer, apply such funds to the payment of any and all
Obligations, in any order or manner of application satisfactory to the
Lender. All items delivered to the Lender of deposited in the Collateral
Account shall be subject to final payment. If any such item is returned
uncollected, the Borrower will immediately pay the Lender, or, for items
deposited in the Collateral Account, the bank maintaining such account,
the amount of that item, or such bank the Lender at its discretion may
charge any uncollected item to the Borrower's commercial account or other
account. The Borrower shall be liable as an endorser on all items
deposited in the Collateral Account, whether or not in fact endorsed by
the Borrower.
Section VI.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a
period of ten calendar days after the Lender gives the Borrower written notice
thereof (or in the case of the agreements contained in Sections 6.5, 6.7 and
6.10 hereof, immediately upon the occurrence of such failure, without notice
or lapse of time), the Lender may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of the Borrower (or, at
the Lender's option, in the Lender's name) and may, but need not, take any and
all other actions which the Lender may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of taxes,
the satisfaction of security interests, liens or encumbrances, the performance
of obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements
and financing statements, and the endorsement of instruments); and the
Borrower shall thereupon pay to the Lender on demand the amount of all monies
expended and all costs and expenses (including reasonable attorneys' fees and
legal expenses) incurred by the Lender in connection with or as a result of
the performance or observance of such agreements or the taking of such action
by the Lender, together with interest thereon from the date expended or
incurred at the Floating Rate. To facilitate the performance or observance
by the Lender of such covenants of the Borrower, the Borrower hereby
irrevocably appoints the Lender, or the delegate of the Lender, acting alone,
as the attorney in fact of the Borrower (which appointment is coupled with an
interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of the Borrower any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or
endorsed by the Borrower under this Section 6.11.
Section VI.12 Net Income. The Borrower shall at all times maintain
(exclusive of any Subsidiaries or Affiliates unless the Lender specifically
consents in writing to their inclusion
32
<PAGE>
in such calculation) a fiscal year-to-date Net Income of at least the
following, calculated as of the last day of the following fiscal months:
<TABLE>
<CAPTION>
Dates Year to Date Income
----- -------------------
<S> <C>
May 1996 ($525,000)
June 1996 ( 775,000)
July 1996 ( 735,000)
August 1996 ( 640,000)
September 1996 ( 370,000)
October 1996 ( 250,000)
November 1996 400,000
December 1996 600,000
January 1997 ( 100,000)
February 1997 ( 100,000)
March 1997 ( 100,000)
April 1997 ( 310,000)
May 1997 ( 325,000)
June 1997 ( 630,000)
July 1997 ( 535,000)
August 1997 ( 340,000)
September 1997 ( 100,000)
October 1997 ( 50,000)
November 1997 400,000
December 1997 800,000
January 1998 ( 100,000)
February 1998 ( 100,000)
March 1998 ( 100,000)
April 1998 ( 300,000)
</TABLE>
Section VI.13 Book Net Worth plus Subordinated Debt. The Borrower shall
at all times maintain (exclusive of any Subsidiaries or Affiliates unless the
Lender specifically consents in writing to their inclusion in such
calculation) a Book Net Worth plus Subordinated Debt of at least the
following, calculated as of the last day of the following fiscal months:
<TABLE>
<CAPTION>
Dates Book Net Worth plus
----- Subordinated Debt
-------------------
<S> <C>
May 1996 $4,435,000
June 1996 4,185,000
July 1996 4,225,000
August 1996 4,320,000
September 1996 4,590,000
October 1996 4,710,000
November 1996 5,360,000
December 1996 5,560,000
January 1997 5,460,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Dates Book Net Worth plus
----- Subordinated Debt
-------------------
<S> <C>
February 1997 5,460,000
March 1997 5,460,000
April 1997 5,250,000
May 1997 5,235,000
June 1997 4,930,000
July 1997 5,025,000
August 1997 5,220,000
September 1997 5,460,000
October 1997 5,510,000
November 1997 5,960,000
December 1997 6,360,000
January 1998 6,260,000
February 1998 6,260,000
March 1998 6,260,000
April 1998 6,060,000
</TABLE>
Section VI.14 Leverage Ratio. The Borrower shall at all times maintain
(exclusive of any Subsidiaries or Affiliates unless the Lender specifically
consents in writing to their inclusion in such calculation) a Leverage Ratio
of no greater than the following, calculated as of the last day of the
following fiscal months:
<TABLE>
<CAPTION>
Dates Leverage Ratio
----- --------------
<S> <C>
May 1996 3.95 to 1.0
June 1996 4.85 to 1.0
July 1996 5.80 to 1.0
August 1996 5.90 to 1.0
September 1996 5.55 to 1.0
October 1996 5.80 to 1.0
November 1996 4.65 to 1.0
December 1996 3.50 to 1.0
January 1997 3.30 to 1.0
February 1997 3.30 to 1.0
March 1997 3.30 to 1.0
April 1997 3.35 to 1.0
May 1997 3.50 to 1.0
June 1997 4.30 to 1.0
July 1997 5.15 to 1.0
August 1997 5.20 to 1.0
September 1997 5.25 to 1.0
October 1997 5.35 to 1.0
November 1997 4.65 to 1.0
December 1997 3.50 to 1.0
January 1998 3.20 to 1.0
February 1998 3.20 to 1.0
March 1998 3.20 to 1.0
April 1998 3.30 to 1.0
</TABLE>
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<PAGE>
Section VI.15 Clean Period. The Borrower shall make a mandatory
prepayment of the Advances (or make a payment to the Lender in immediately
available funds for deposit in the Special Account) to the extent necessary
to reduce the outstanding principal balance of the Advances plus the L/C
Amount to an amount equal to or less than the sum of $2,000,000 plus 80% of
Eligible E-Z Pay Plan Accounts for a period of at least 30 consecutive days
("Clean Period") during each four-month period beginning on December 1 and
ending on March 31 which occurs while the Credit Facility is outstanding.
Section VI.16 Subordinated Debt. The Borrower shall at all times have
at least $3,413,000 of Subordinated Debt.
Section VI.17 Equipment Appraisals. In the event the Lender determines
to waive the condition precedent set forth in Section 4.01(s) of this
Agreement regarding delivery of an equipment appraisal prior to closing, the
Borrower shall, from time to time at the request of the Lender, deliver
equipment appraisals to the Lender prepared by an appraiser acceptable to the
Lender reflecting an orderly liquidation value of the Equipment in an amount
acceptable to the Lender, together with such documents as may be necessary to
permit the Lender to rely thereon.
Section VI.18 Inventory Appraisal. The Borrower shall, from time to
time at the Lender's request, deliver inventory appraisal to the Lender
prepared by an appraiser acceptable to the Lender and in form and substance
acceptable to the Lender reflecting an orderly liquidation value of the
Inventory of the Borrower in an amount acceptable to the Lender, together with
such documents as may be necessary to permit the Lender to rely thereon.
ARTICLE VII
Negative Covenants
So long as the Note shall remain unpaid, the Credit Facility
shall be outstanding or any Letter of Credit shall be outstanding, the
Borrower agrees that, without the prior written consent of the Lender:
Section VII.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing:
(a) mortgages, deeds of trust, pledges, liens, security interests
and assignments in existence on the date hereof and listed in Exhibit C
hereto, securing indebtedness for borrowed money permitted under Section 7.2
hereof;
(b) the Security Interests; and
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(c) purchase money security interests relating to the acquisition
of machinery and equipment of the Borrower so long as the Borrower is in,
and maintains, compliance with every other provision of this Agreement.
Section VII.2 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations,
except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date hereof
and listed in Exhibit C hereto; and
(c) indebtedness relating to liens permitted in accordance with
Section 7.1(c) hereof.
Section VII.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in
existence on the date hereof and listed in Exhibit C hereto.
Section VII.4 Investments and Subsidiaries.
(a) The Borrower will not purchase or hold beneficially any stock
or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any
interest whatsoever in, any other Person, including specifically but
without limitation any partnership or joint venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States
of America having a maturity of one year or less, commercial paper
issued by U.S. corporations rated "A-1" or "A-2" by Standard &
Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity
of one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
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(ii) travel advances or loans to officers and employees of
the Borrower not exceeding at any one time an aggregate of $50,000;
and
(iii) advances in the form of progress payments, prepaid rent
or security deposits.
(b) The Borrower will not create or permit to exist any Subsidiary,
other than any Subsidiary in existence on the date hereof and listed in
Exhibit B hereto.
Section VII.5 Dividends. The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on
any class of its stock or make any payment on account of the purchase,
redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly; provided,
however, that if the Borrower is an S Corporation within the meaning of the
Internal Revenue Code of 1986, as amended, or shall become such an S
Corporation with the Lender's consent under Section 7.16 hereof, and after
first providing such supporting documentation as the Lender may request, the
Borrower may pay dividends in an amount equal to the amount of state and
federal income tax which would be due by each shareholder with respect to
income deemed to be received by such shareholder from the Borrower as a result
of the Borrower's status as an S Corporation at the highest marginal income
tax rate for federal and state (for the state or states in which each
shareholder is liable for income taxes with respect to such income) income tax
purposes, after takiing into account any deduction for state income taxes in
calculating the federal income tax liability.
Section VII.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section VII.7 Consolidation and Merger; Asset Acquisitions. The
Borrower will not consolidate with or merge into any Person, or permit any
other Person to merge into it, or acquire (in a transaction analogous in
purpose or effect to a consolidation or merger) all or substantially all the
assets of any other Person.
Section VII.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the
Borrower shall sell or transfer any real or personal property, whether now
owned or hereafter acquired, and then or thereafter rent or lease as lessee
such property or any part thereof or any other property which the Borrower
intends to use for substantially the same purpose or purposes as the property
being sold or transferred.
Section VII.9 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently
engaged in by the Borrower and will not purchase, lease or otherwise acquire
assets not related to its business.
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Section VII.10 Capital Expenditures. The Borrower will not expend or
contract to expend Capital Expenditures more than $1,100,000 in the aggregate
during the calendar year ending December 31, 1996, or more than $1,250,000
during any calendar year thereafter, or more than $250,000 in any one
transaction.
Section VII.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by generally accepted
accounting principles. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
Section VII.12 Discounts, etc. The Borrower will not, after notice from
the Lender after the occurrence of a Default or an Event of Default, grant any
discount, credit or allowance to any customer of the Borrower or accept any
return of goods sold, or at any time (whether before after notice from the
Lender) modify, amend, subordinate, cancel or terminate the obligation of any
account debtor or other obligor of the Borrower.
Section VII.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10 hereof.
Section VII.14 Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement,
indenture, lease, mortgage, contract for deed, security agreement or other
contractual obligation binding upon the Borrower.
Section VII.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any
tangible Collateral or any records pertaining to the Collateral to be located
in any state or area in which, in the event of such location, a financing
statement covering such Collateral would be required to be, but has not in
fact been, filed in order to perfect the Security Interests. The Borrower
will not change its name.
Section VII.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation within
the meaning of the Internal Revenue Code of 1986, as amended, or, if the
Borrower already is such an S Corporation, it shall not change or rescind its
status as an S Corporation.
Section VII.17 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation the Borrower will not increase the salary, bonus, commissions,
consultant fees or other compensation of any director, officer or consultant,
or any member of their families, by more than 10% in any one year, either
individually or for all such persons in the aggregate, or pay any such
increase from any source other than profits earned in the year of payment;
provided, that, notwithstanding the foregoing, so long as no Default of Event
of Default has occurred or would occur as a result of such payment, the
Borrower may pay bonuses to directors or officers in any one year up to the
following percentage of such director's or officer's salary:
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<TABLE>
<CAPTION>
Director or Officer Bonus Percentage
------------------- ----------------
<S> <C>
Gary Olen 43%
Greg Binkley 30%
Chuck Lingen 28%
Bill Luth 28%
Larry Popps 28%
Other Directors or Officers 11%
</TABLE>
Section VII.18 P.O. Box. Following the occurrence of a Default or
an Event of Default, and upon receipt of written notice from the Lender, the
Borrower shall cease the removal of any and all letters from the P.O. Box.
The Borrower shall not establish any post office box other than the P.O. Box.
The Borrower shall not amend or modify the P.O. Box Agreement.
Section VII.19 American Express and Discover Cards. Following the
occurrence of a Default or an Event of Default, and upon receipt of written
notice from the Lender, the Borrower shall cease accepting payments from its
customers through American Express and through Discover cards and should only
accept credit card payments through Mastercard and Visa pursuant to the Credit
Card Agreement.
ARTICLE VIII
Events of Default, Rights and Remedies
Section VIII.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or principal of the
Note when it becomes due and payable; or
(b) Failure to pay when due any amount specified in Section 2.4
hereof relating to the Borrower's Obligation of Reimbursement, or
failure to pay immediately when due or upon termination of the Credit
Facility any amounts required to be paid for deposit in the Special
Account under Section 2.5 or 2.10 hereof; or
(c) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement; or
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement; or
(e) The Borrower shall be or become insolvent, or admit in writing
its inability to pay its debts as they mature, or make an assignment for
the benefit of creditors; or the Borrower shall apply for or consent to
the appointment of any
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receiver, trustee, or similar officer for it or for all or any
substantial part of its property; or such receiver, trustee or similar
officer shall be appointed without the application or consent of the
Borrower, as the case may be; or the Borrower shall institute (by
petition, application, answer, consent or otherwise) any bankruptcy,
insolvency, reorganization, arrangement readjustment of debt,
dissolution, liquidation or similar proceeding relating to it under the
laws of any jurisdiction; or any such proceeding shall be instituted (by
petition, application or otherwise) against the Borrower; or any
judgment, writ, warrant of attachment, garnishment or execution or
similar process shall be issued or levied against a substantial part of
the property of the Borrower; or
(f) A petition shall be filed by or against the Borrower under the
United States Bankruptcy Code naming the Borrower as debtor; or
(g) Any representation or warranty made by the Borrower in this
Agreement, by any Guarantor in any guaranty delivered to the Lender or by
the Borrower (or any of its officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with
this Agreement or any such guaranty shall prove to have been incorrect
in any material respect when deemed to be effective; or
(h) The rendering against the Borrower of a final judgment, decree
or order for the payment of money in excess of $50,000 which is not paid
in full by insurance and the continuance of such judgment, decree or
order unsatisfied and in effect for any period of 30 consecutive days
without a stay of execution; or
(i) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower owed to any Person other than the Lender,
or under any indenture or other instrument under which any such evidence
of indebtedness has been issued or by which it is governed, or under any
lease of any of the Premises, and the expiration of the applicable period
of grace, if any, specified in such evidence of indebtedness, indenture,
other instrument or lease; or
(j) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee
to administer any Plan, shall have occurred and be continuing 30 days
after written notice to such effect shall have been given to the Borrower
by the Lender; or a trustee shall have been appointed by an appropriate
United States District Court to administer any Plan; or the Pension
Benefit Guaranty Corporation shall have instituted proceedings to
terminate any Plan or to appoint a trustee to administer any Plan; or the
Borrower shall have filed for a distress termination of any Plan under
Title IV of ERISA; or the Borrower shall have failed to make any
quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such
failures that the Lender may determine are likely to occur in the future,
result in the imposition of a lien on the assets of the Borrower in favor
of the Plan; or
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(k) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment
or other instrument or agreement securing any obligations of the Borrower
hereunder or under any note; or
(l) The Borrower shall liquidate, dissolve, terminate or suspend
its business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the prior written consent of the Lender; or
(m) The Borrower shall fail to pay, withhold, collect or remit any
tax or tax deficiency when assessed or due (other than any tax deficiency
which is being contested in good faith and by proper proceedings and for
which it shall have set aside on its books adequate reserves therefor) or
notice of any state or federal tax liens shall be filed or issued; or
(n) Default in the payment of any amount owed by the Borrower to
the Lender other than any indebtedness arising hereunder; or
(o) Any Guarantor shall repudiate, purport to revoke or fail to
perform any such Guarantor's obligations under such Guarantor's guaranty
in favor of the Lender; or
(p) Any Guarantor shall reject or attempt to reject such
Guarantor's Guaranty, and the Borrower shall fail to provide a replacement
guarantor (who signs a Guaranty in the same form as the Guaranty executed
by such Guarantor) acceptable to the Lender in its sole discretion within
thirty (30) days following the rejection or attempted rejection of such
Guaranty; or
(q) Any breach, default or event of default by or attributable to
any Affiliate under any agreement between such Affiliate and the Lender;
or
(r) The Borrower shall become a subsidiary of any Person, or any
Person shall acquire more than 50% of the issued and outstanding capital
stock of the Borrower.
Section VIII.2 Rights and Remedies. Upon the occurrence of an Event of
Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
(a) The Lender may, by notice to the Borrower, declare the Credit
Facility to be terminated, whereupon the same shall forthwith terminate;
(b) The Lender may, by notice to the Borrower, declare to be
forthwith due and payable the entire unpaid principal amount of the Note
then outstanding, all interest accrued and unpaid thereon, all amounts
payable under this Agreement and any other Obligations, whereupon the
Note, all such accrued interest and all such amounts and Obligations
shall become and be forthwith due and payable, without
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presentment, notice of dishonor, protest or further notice of any kind,
all of which are hereby expressly waived by the Borrower;
(c) The Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the
Borrower, including without limitation any funds on deposit with the
Lender, whether or not matured, to the payment of the Advances,
including interest accrued thereon, and of all other sums then owing by
the Borrower hereunder, including, without limitation, the Obligation
of Reimbursement;
(d) The Lender may make demand upon the Borrower and, forthwith
upon such demand, the Borrower will pay to the Lender in immediately
available funds for deposit in the Special Account pursuant to Sections
2.10 and 3.6 hereof an amount equal to the maximum aggregate amount
available to be drawn under all Letters of Credit then outstanding,
assuming compliance with all conditions for drawing thereunder;
(e) The Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right t take possession of
Collateral, or any evidence thereof, proceeding without judicial process
or by judicial process (without a prior hearing or notice thereof, which
the Borrower hereby expressly waives) and the right to sell, lease or
otherwise dispose of any or all of the Collateral, and, in connection
therewith, the Borrower will on demand assemble the Collateral and make
it available to the Lender at a place to be designated by the Lender
which is reasonably convenient to both parties;
(f) the Lender may exercise and enforce its rights and remedies
under the Loan Documents; and
(g) the Lender may exercise any other rights and remedies available
to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 8.1(f) hereof, the entire unpaid principal amount of the
Note and the Obligation of Reimbursement (whether contingent or funded), all
interest accrued and unpaid thereon, all other amounts payable under this
Agreement and any other Obligations shall be immediately due and payable
automatically without presentment, demand, protest or notice of any kind.
Section VIII.3 Certain Notices. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required
by law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.3) at least ten
calendar days prior to the date of intended disposition or other action.
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ARTICLE IX
Miscellaneous
Section IX.1 No Waiver; Cumulative Remedies. No failure or delay on the
part of the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative
and not exclusive of any remedies provided by law.
Section IX.2 Amendments, Etc. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure
by the Borrower therefrom or any release of a Security Interest shall be
effective unless the same shall be in writing and signed by the Lender, and
then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given. No notice to or demand on the
Borrower in any case shall entitle the Borrower to any other or further notice
or demand in similar or other circumstances.
Section IX.3 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed to the party to whom notice is being given at its address
as set forth below and, if telecopied, transmitted to that party at its
telecopier number set forth below:
If to the Borrower:
The Sportsman's Guide, Inc.
411 Farwell Avenue South
South St. Paul, MN 55075
Telecopier: (612) 450-6130
Attention: David Kolkind
with a copy to:
Robert J. Gronek
Chernesky, Heyman & Kress
1100 Courthouse Plaza S.W.
P.O. 3808
Dayton Ohio, 45401
Telecopier: (513) 449-2834
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If to the Lender:
Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0239
Telecopier: (612) 341-2472
Attention: Warren G. Lindman
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given
on (a) the date received if personally delivered, (b) when deposited in the
mail if delivered by mail, (c) the date sent if sent by overnight courier, or
(d) the date of transmission if delivered by telecopy, except that notices or
requests to the Lender pursuant to any of the provisions of Article II hereof
shall not be effective until received by the Lender.
Section IX.4 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a
financing statement in any state to perfect the security interests granted
hereby. For this purpose, the following information is set forth:
Name and address of the Debtor:
The Sportsman's Guide, Inc.
411 Farwell Avenue South
South Saint Paul, MN 55075
Federal Tax Identification No.: 41-1293081
If to the Lender:
Norwest Business Credit, Inc.
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0239
Section IX.5 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents,
conveyances, assignments, security agreements, financing statements and other
agreements and writings that the Lender may reasonably request in order to
secure, protect, perfect or enforce the Security Interests or the rights of
the Lender under this Agreement (but any failure to request or assure that
the Borrower executes, delivers or endorses any such item shall not affect
or impair the validity, sufficiency, or enforceability of this Agreement and
the Security Interests, regardless of whether any such item was or was not
executed, delivered or endorsed in a similar context or on a prior occasion).
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Section IX.6 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any
deficiency. The Lender's duty of care with respect to Collateral in its
possession (as imposed by law) shall be deemed fulfilled if it exercises
reasonable care in physically keeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
and the Lender need not otherwise preserve, protect, insure or care for any
Collateral. The Lender shall not be obligated to preserve any rights the
Borrower may have against prior parties, to realize on the Collateral at all
or in any particular manner or order or to apply any cash proceeds of the
Collateral in any particular order of application.
Section IX.7 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) attorneys' fees,
incurred by the Lender in connection with the Obligations, this Agreement, the
Loan Documents, and Letters of Credit, and any other document or agreement
related hereto or thereto, and the transactions in connection with the
negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interests.
Section IX.8 Indemnity. In addition to the payment of expenses pursuant
to Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4
hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees and agents of the foregoing (the
"Indemnitees"), from and against (i) any and all transfer taxes, documentary
taxes, assessments or charges made by any governmental authority by reason of
the execution and delivery of this Agreement and the other Loan Documents or
the making of the Advances or issuance of any Letter of Credit, and (ii) any
and all liabilities, losses, damages, penalties, judgments, suits, claims,
costs and expenses of any kind or nature whatsoever (including, without
limitation, the reasonable fees and disbursements of counsel) in connection
with any investigative, administrative or judicial proceedings, whether or not
such Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against such Indemnitee, in any manner relating to
or arising out of or in connection with the making of the Advances, the
issuance of any Letter of Credit, this Agreement and all other Loan Documents
or the use or intended use of the proceeds of the Advances or any Letter of
Credit (the "Indemnified Liabilities"). If any investigative, judicial or
administrative proceeding arising from any of the foregoing is brought against
any Indemnitee, upon request of such Indemnitee, the Borrower, or counsel
designated by the Borrower and satisfactory to the Indemnitee, will resist
and defend such action, suit or proceeding to the extent and in the manner
directed by the Indemnitee, at the Borrower's sole cost and expense. Each
Indemnitee will use its best efforts to cooperate in the defense of any such
action, suit or proceeding. If the foregoing undertaking to indemnify,
defend and hold harmless may be held to be unenforceable because it violates
any law or public policy, the Borrower shall nevertheless make the maximum
contribution to the payment and satisfaction of each of the
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Indemnified Liabilities which is permissible under applicable law. The
obligation of the Borrower under this Section 9.8 shall survive the
termination of this Agreement and the discharge of the Borrower's other
Obligations.
Section IX.9 Participants. The Lender and its participants, if any,
are not partners or joint venturers, and the Lender shall not have any
liability or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender
may be transferred or delegated to any of the participants, successors or
assigns of the Lender.
Section IX.10 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when
so executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same
instrument.
Section IX.11 Binding Effect; Assignment; Complete Agreement; Sharing
of Information. The Loan Documents shall be binding upon and inure to the
benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its
rights thereunder or any interest therein without the prior written consent of
the Lender. This Agreement, together with the Loan Documents, comprises the
complete and integrated agreement of the parties on the subject matter hereof.
Without limitation of the Lender's right to share information regarding the
Borrower and its Affiliates with Lender's participants, accountants, lawyers
and other advisors (collectively, the "Consultants"), the Lender may share at
any time with Norwest Corporation, and all direct and indirect subsidiaries
of Norwest Corporation (collectively, "Norwest"), any and all information the
Lender may have in its possession regarding the Borrower and its Affiliates;
provided, that the Lender, the Consultants and Norwest shall keep confidential
all information which is nonpublic or confidential or proprietary in nature,
disclosed or furnished to the Lender by the Borrower pursuant to this
Agreement or otherwise (whether disclosed or furnished before or after the
date hereof), and shall not, without the prior written consent of the
Borrower, disclose in any manner whatsoever, in whole or in part, any of such
information to any other Person, except that the Lender, the Consultants
and/or Norwest shall be permitted to disclose any of such information (i) to
any regulatory agency having jurisdiction over the Lender, the Consultants
and/or Norwest in connection with such agency's regulatory function, (ii)
otherwise as required by law or court order or in connection with any
investigation, action or proceeding arising out of the transactions
contemplated by this Agreement, (iii) to any prospective assignee, transferee
or participant provided that, prior to such disclosure, such assignee,
transferee or participant enters into a confidentiality agreement with the
Borrower the terms of which are no less restrictive than this Section 9.11,
and (iv) to the extent necessary to allow the Lender to exercise its powers,
rights and remedies and perform its duties hereunder and under the Loan
Documents.
Section IX.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. Each
party consents to the personal
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jurisdiction of the state and federal courts located in the State of Minnesota
in connection with any controversy related to this Agreement, waives any
argument that venue in any such forum is not convenient and agrees that any
litigation initiated by any of them in connection with this Agreement shall be
venued in either the District Court of Hennepin County, Minnesota, or the
United States District Court, District of Minnesota, Fourth Division. The
parties waive any right to trial by jury in any action or proceeding based on
or pertaining to this Agreement.
Section IX.13 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section IX.14 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute
a part of this Agreement for any other purpose.
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 above written.
THE SPORTSMAN'S GUIDE, INC.
By /s/ Charles Lingen
--------------------------
Its Secretary
_________________________
NORWEST BUSINESS CREDIT, INC.
By /s/ Warren Lindman
____________________________
Its AVP
_________________________
47
<PAGE>
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$10,000,000.00 Minneapolis, Minnesota
May 17, 1996
For value received, the undersigned, The Sportsman's Guide, Inc., a Minnesota
corporation (the "Borrower"), hereby promises to pay on May 17, 1998 to the
order of Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), at its main office in Minneapolis, Minnesota, or at any other
place designated at any time by the holder hereof, in lawful money of the
United States of America and in immediately available funds, the principal sum
of Ten Million and 00/100 Dollars ($10,000,000.00) or, if less, the aggregate
unpaid principal amount of all advances made by the Lender to the Borrower
prusuant to that certain Credit and Security Agreement (the "Credit
Agreement") of even date herewith by and between the Lender and the Borrower,
together with interest on the principal amount hereunder remaining unpaid
from time to time, computed on the basis of the actual number of days elapsed
and a 360-day year, from the date hereof until this Note is fully paid at the
rate from time to time in effect under the Credit Agreement. The principal
hereof and interest accruing thereon shall be due and payable as provided in
the Credit Agreement. This Note may be prepaid only in accordance with the
Credit Agreement.
This Note is issued pursuant, and is subject to, the Credit Agreement, which
provides, among other things, for acceleration hereof. This Note is the Note
referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit Agreement and
the Security Documents as therein defined, and may now or hereafter be secured
by one or more other security agreements, mortgages, deeds of trust,
assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when
due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE SPORTSMAN'S GUIDE, INC.
By: ___________________________________
Its: ______________________________
A-1
<PAGE>
Exhibit B to Credit and Security Agreement
Names
The Sportsman's Guide, Inc.
The Olen Company
The Fun to Read Catalog
Chief Executive Office/Principal Place of Business
411 Farwell Avenue South
South St. Paul, MN 55075
Other Inventory and Equipment Locations
None
Subsidiaries
None
B-1
<PAGE>
Exhibit C to Credit and Security Agreement
Permitted Liens, Indebtedness and Guaranties
Liens
See attached pages C-2 through C-5 for a listing of existing liens.
Items #1, 2, 4, 6, 7, 16 and 17 - Bank One Dayton, N.A. will be released upon
the closing of the Norwest Loan.
Indebtedness
<TABLE>
<S> <C>
Crown Credit $ 43,215.00
Housing and Redevelopment
Authority of South St. Paul, MN 220,000.00
Subordinated Debt Described
on Exhibit F 3,413,428.26
</TABLE>
Guaranties
None
C-1
<PAGE>
Exhibit D to Credit and Security Agreement
Compliance Certificate
In accordance with our Credit and Security Agreement dated as of May 17, 1996
(the "Credit Agreement"), attached are the financial statements of The
Sportsman's Guide, Inc. (the "Borrower") as of and for the month and
year-to-date period ended _________________, 199__ (the "Current Financials").
I certify that the Current Financials have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with
the accounting practices reflected in the financial statements referred to in
Section 5.5 of the Credit Agreement, subject to year-end audit adjustments.
Defaults and Events of Default (check one)
___ I have no knowledge of the occurrence of any Default or Event of
Default under the Credit Agreement which has not previously been
reported to you and remedied.
___ Attached is a detailed description of all Defaults and Events of
Default of which I have knowledge and which have not previously
been reported to you and remedied.
For the date and periods covered by the Current Financials, the Borrower is
in compliance with the covenants set forth in Sections 6.12 through _____ and
7.10 of the Credit Agreement, except as indicated below. The calculations
made to determine compliance are as follows:
<TABLE>
<CAPTION>
Covenant Actual Requirement
-------- ------ -----------
<S> <C> <C>
6.12) Net Income $___________ $_________________
6.13) Book Net Worth plus
Subordinated Debt $___________ $_________________
6.14) Leverage Ratio ____ to ____ _____ to _____
7.10) Capital Expenditures
Aggregate fiscal
year-to-date
expenditures $__________ Maximum $________
D-1
<PAGE>
</TABLE>
<TABLE>
<S> <C> <C>
Any individual
expenditures in
excess of maximum
permitted? $__________ Maximum $250,000
</TABLE>
________________________________________
_________________ of
The Sportsman's Guide, Inc.
D-2
<PAGE>
Exhibit E to Credit and Security Agreement
Premises
The Premises referred to in the Credit and Security Agreement are located in
Dakota County and are legally described as follows:
That part of the NE 1/4 of Sec. 27, Twn. 28 N., R22 W, described as
follows: Commencing at the SE corner of said NE 1/4; thence S 89
degrees, 26 minutes, 30 seconds W, along the S line of said NE 1/4,
50 feet to the W right of way line of the Chicago & North Western
Railway; thence N 0 degrees, 00 minutes E, along said right of way
line 177.43 feet to the point of beginning of the property to be
described; thence S 63 degrees, 25 minutes W, 356.37 feet; thence
N 26 degrees, 35 minutes W, 490.08 feet, thence S 63 degrees, 25
minutes W. 387.0 feet to the NEly right of way line of the Stockyards
Road (a public road with a right of way 25 feet on each side of the
centerline); thence N 26 degrees, 35 minutes West, along said right
of way line 549.31 feet to the SEly right of way line of Armour Avenue
(a private road 66 feet wide); thence N 63 degrees, 25 minutes East,
along said right of way line 983.32 feet to the Westerly right of way
line of the Chicago and North Western Railway; thence S 26 degrees,
31 minutes E along said right of way line 345.57 feet; thence Southerly
along said right of way line on a tangent curve concave to the W,
central angle 22 degrees, 46 minutes, 55 seconds, radius of 933.4 feet,
arc distance 371.14 feet to a point 50 feet W of the E line of said NE
1/4; thence S 0 degrees, 00 minutes W, along said right of way line
372.12 feet to the point of beginning, containing 771,338 square feet
or 17.707 acres, more or less.
E-1
<PAGE>
Exhibit F to Credit and Security Agreement
Existing Holders of Subordinated Debt
<TABLE>
<S> <C>
Vince Shiel, trustee
under an Amended Agreement of Trust dated 1/18/89 $ 752,740.00
Fred Kroger 723,333.50
Ruth Conway 300,000.00
Helen Shiel, trustee
under an Amended Agreement of Trust dated 1/23/89 233,333.50
Thomas Smith, trustee
under the Vincent W. Shiel Grantor Trust dated 9/1/92
Len Paletz 180,094.76
Ralph Heyman, trustee
under the Helen M. Shiel Retained Income Trust dated 1/23/89 175,000.00
Ralph Heyman, trustee
under the Cap Toy Grantor Retained Income Trust dated 9/1/92 125,000.00
S. Andrew Shiel 100,000.00
John Flege, Jr. 100,000.00
V.P. Serodino 100,000.00
Ruth J. Conway 78,400.00
Frederic Mayerson 78,334.00
Richard Steiner 55,833.00
Philip Steiner 55,833.00
Mark Kroger 31,666.50
Ruth J. Conway 25,000.00
Ralph Heyman, trustee
under the Shiel Grantor Trust #3 dated 12/1/92
f/b/o William Buford III 20,000.00
Ralph Heyman, trustee
of the Helen M. Shiel Grandchildren's Trust dated 4/8/88
f/b/o Hunter G. Patterson 20,000.00
Ralph Heyman, trustee
under the Shiel Grantor Trust #3 dated 12/1/92
f/b/o Deryl L. Patterson 20,000.00
Ralph Heyman, trustee
under the Vincent W. Shiel Grandchildren's Trust dated 4/8/88
f/b/o Andrew V. Shiel 19,990.00
Ralph Heyman, trustee
of the Helen M. Shiel Grandchildren's Trust dated 4/8/88
f/b/o Austin D. Patterson 10,000.00
Ralph Heyman, trustee
of the Helen M. Shiel Grandchildren's Trust dated 4/8/88
f/b/o Sarah Patterson 7,270.00
Christopher Mills 1,600.00
Total $3,413,428.26
</TABLE>
F-1
<PAGE>
Exhibit G to Credit and Security Agreement
Patents, Trademarks, Copyrights
THE SPORTSMAN'S GUIDE... Trademark Registration #1,436,014
The "FUN TO READ" CATALOG Trademark Registration #1,864,041
G-1
<PAGE>
Exhibit H to Credit and Security Agreement
Vehicles
None
H-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 2 AND 3 OF THE
COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> JUN-28-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,727
<ALLOWANCES> 0
<INVENTORY> 15,662
<CURRENT-ASSETS> 20,692
<PP&E> 6,062
<DEPRECIATION> 1,861
<TOTAL-ASSETS> 24,893
<CURRENT-LIABILITIES> 20,103
<BONDS> 3,633
0
2
<COMMON> 233
<OTHER-SE> 922
<TOTAL-LIABILITY-AND-EQUITY> 24,893
<SALES> 42,788
<TOTAL-REVENUES> 42,788
<CGS> 28,400
<TOTAL-COSTS> 28,400
<OTHER-EXPENSES> (9)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 391
<INCOME-PRETAX> (391)
<INCOME-TAX> 0
<INCOME-CONTINUING> (391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
