<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
MARCH 28, 1997 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 May 6, 1997 there were 2,333,600 shares of the registrant's Common Stock
outstanding.
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
ASSETS March 28, 1997 December 27, 1996
-------------- -----------------
CURRENT ASSETS:
Accounts Receivable - net $ 1,883 $ 3,038
Inventory 24,989 17,765
Prepaid expenses 658 538
Promotional material 1,789 2,194
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Total current assets 29,319 23,535
PROPERTY AND EQUIPMENT - NET 4,296 4,355
---------- -----------
Total assets $ 33,615 $ 27,890
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft position $ 1,664 $ 3,539
Notes payable - bank 8,151 1,497
Current maturities of long-term
Obligations 52 52
Accounts payable 11,656 10,710
Accrued expenses 1,422 1,809
Customer deposits and other
liabilities 2,093 2,316
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Total current liabilities 25,038 19,923
Long-term debt
Related parties 1,795 1,795
Other 1,796 1,811
Deferred income taxes 486 486
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Total liabilities 29,115 24,015
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Series A Preferred Stock-$.01 par
value; 200,000 shares authorized;
20,000 shares issued and outstanding -- --
Common Stock-$.01 par value; 36,800,000
shares authorized; 2,333,600 shares
issued and outstanding 23 23
Additional paid-in capital 2,350 2,350
Retained earnings 2,127 1,502
---------- -----------
Total stockholders' equity 4,500 3,875
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Total liabilities & stockholders'
equity $ 33,615 $ 27,890
---------- -----------
---------- -----------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
2
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended
March 28, 1997 and March 29, 1996
(In thousands, except for per share data)
Thirteen Weeks Ended
------------------------------
March 28, 1997 March 29, 1996
-------------- --------------
Sales $27,876 $24,177
Cost of sales 17,360 16,100
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Gross profit 10,516 8,077
Selling, general and administrative expenses 9,424 7,731
merger related expenses (recovery) (100) 107
---------- ----------
Earnings from operations 1,192 239
Interest expense 239 160
Miscellaneous (income) expense (1) (1)
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Earnings before income taxes 954 80
Income tax expense 329 -
Net earnings $ 625 $ 80
---------- ----------
---------- ----------
Net earnings per common share $ .22 $ .03
---------- ----------
---------- ----------
Weighted average number of common and common
equivalent shares outstanding 2,815 2,334
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---------- ----------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
3
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended
March 28, 1997 and March 29, 1996
(In thousands of dollars)
Thirteen Weeks Ended
------------------------------
March 28, 1997 March 29, 1996
-------------- --------------
Cash flows from operating activities:
Net earnings $ 625 $ 80
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 317 238
Other (10) (6)
Changes in assets and liabilities:
Accounts receivable 1,155 334
Inventory (7,224) 1,631
Prepaid expenses (120) 174
Promotional material 405 703
Bank overdraft position (1,875) (1,125)
Accounts payable 946 (5,093)
Accrued expenses (387) 213
Customer deposits and other liabilities (223) (495)
---------- ----------
Cash flows used in operating activities (6,391) (3,346)
Cash flows from investing activities:
Purchases of property and equipment (258) (154)
---------- ----------
Cash flows used in investing activities (258) (154)
Cash flows from financing activities:
Net proceeds from revolving credit line 6,654 3,505
Payments on long-term debt (5) (5)
---------- ----------
Cash flows provided by financing
activities 6,649 3,500
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Increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents at beginning
of the period - -
---------- ----------
Cash and cash equivalents at end of the period $ - $ -
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the periods for:
Interest $ 185 $ 85
Income taxes $ 298 $ 1
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
4
<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: Net Earnings Per Common Share
Net earnings per common share is computed by dividing net
earnings by the weighted average number of common and common
equivalent shares outstanding. Net earnings per common share
was calculated using the modified treasury stock method for the
thirteen weeks ended March 28, 1997 and the treasury stock
method for the thirteen weeks ended March 29, 1996.
The FASB has issued Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE, which is effective for financial
statements issued after December 15, 1997. Early adoption of
the new standard is not permitted. The new standard eliminates
primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together
with disclosure of how the per share amounts were computed. The
effect of adopting this new standard has not been determined.
Note 3: Credit Facility
The Company amended its credit facility during the first quarter
of 1997, temporarily increasing the collateral base relating to
inventory to $8.0 million during March and April of 1997 and
increasing the limit available for documentary letters of credit to
$2.0 million. The interest rate on the facility was reduced to
1.25 percentage points over the bank's prime rate effective
February 1, 1997, as adjusted under the floating rate provision
of the credit agreement. All other terms and conditions of the
credit agreement remain unchanged.
On April 18, 1997 the Company entered into an Amended and
Restated Credit Agreement increasing the revolving credit line
to $15.0 million and extending the expiration to May 2000.
Funding under the credit line is subject to a collateral base
consisting of inventory, plus accounts receivable under the
installment plan (the "EZ Pay Plan") less customer liabilities.
The collateral base related to inventory is limited to $10.0
million December 16 through March 31 and $12.0 million April 1
through April 15 of each year. The credit facility contains a
sub-limit for documentary letters of credit not to exceed $5.0
million. The revolving credit facility may be used for working
capital and letters of credit.
5
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 3: Credit Facility (continued)
Borrowings under the Amended and Restated Credit Agreement bear
interest at the bank's prime rate. 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 $4.0
million, plus 80% of credit card receivables under the EZ Pay
Plan, and remaining at this level for not less than 15
consecutive days between December 1 and March 31 of each year.
The amended credit facility is secured by substantially all of
the assets of the Company. All borrowings are subject to
various monthly covenants. The most restrictive covenants
require the Company to maintain certain levels of year-to-date
earnings (loss), however the Company is required to meet a
minimum earnings level during each fiscal year, a minimum net
worth and limit the level of total liabilities to net worth.
Note 4: Stockholders' Equity
The Company's Board of Directors approved a one-for-ten reverse
stock split which was approved by the stockholders on March 5,
1997. All share and per share amounts have been presented to
reflect the effect of the reverse stock split.
6
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THE SPORTSMAN'S GUIDE, INC.
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 shareholders and other investors.
The Company amended its credit facility during the first quarter of 1997,
temporarily increasing the collateral base relating to inventory to $8.0
million during March and April 1997 and increasing the limit available for
documentary letters of credit to $2.0 million. The interest rate on the
facility was reduced to 1.25 percentage points over the bank's prime rate
effective February 1, as adjusted under the floating rate provision of the
credit agreement. All other terms and conditions of the credit agreement
remain unchanged. As of March 28, 1997, the Company borrowed $8.2 million
against the revolving credit line.
On April 18, 1997 the Company entered into an Amended and Restated Credit
Agreement increasing the revolving credit line to $15.0 million and
extending the expiration date to May 2000. Funding under the amended credit
line is subject to a collateral base consisting of inventory plus accounts
receivable under the installment plan (the "EZ Pay Plan") less customer
liabilities. The collateral base related to inventory is limited to $10.0
million December 16 through March 31 and $12.0 million April 1 through April
15 of each year. The amended credit facility contains a sub-limit for
documentary letters of credit not to exceed $5.0 million. The availability
of funding under the amended facility is subject to the principal balance and
letters of credit total being paid down to $4.0 million, plus 80% of
receivables under the EZ Pay Plan, and remaining at this level for not less
than 15 consecutive days between December 1 and March 31 of each year. The
interest rate under the amended credit facility has been reduced to the
bank's prime rate demonstrating the improved credit-worthiness of the Company.
The amended revolving credit facility may be used for working capital and
letters of credit and is secured by substantially all of the assets of the
Company. The credit agreement contains certain financial covenants which, among
other factors, requires the Company to maintain certain levels of year-to-date
earnings (loss), however the Company is required to meet a minimum earnings
level during each fiscal year, a minimum net worth, and limit the level of total
liabilities to net worth. The Company was in compliance with these covenants at
March 28, 1997.
The cash flow used in operating activities for the thirteen week period ended
March 28, 1997 was $6,391 thousand compared to $3,346 thousand for the same
period last year. This increase in cash flow used in operating activities was
primarily a result of increased inventory levels which were partially offset by
changes in the timing of accounts payable.
The Company had working capital of $4,281 thousand as of March 28, 1997, as
compared to working capital of $3,612 thousand as of December 27, 1996. The
improvement is the result of year-to-date earnings. The Company's current ratio
was 1.17 to 1.00 as of March 28, 1997, as compared to 1.18 to 1.00 as of
December 27, 1996. The
7
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THE SPORTSMAN'S GUIDE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Company's working capital requirements have increased during the thirteen week
period ended March 28, 1997 as compared to the same period one year ago
primarily as a result of higher inventory levels and lower inventory turnover
which are consistent with the Company's strategic plan to increase product
margins through purchasing more manufacturers' close-outs. Purchases of
manufacturers' close-outs are made at the time products are available which
may be a number of months before the product is offered for sale within a
catalog.
The Company believes it will have sufficient funds available to meet current and
future commitments.
Results of Operations
COMPARISON OF THE THIRTEEN WEEK PERIOD ENDED MARCH 28, 1997, TO THE THIRTEEN
WEEK PERIOD ENDED MARCH 29, 1996.
The Company's sales for the thirteen week period ending March 28, 1997
totaled $27.9 million, an increase of $3.7 million (15.3%) over the same
period last year. The record level first quarter sales were driven by a 17%
increase in catalog circulation and a slight increase in the average order
size, offset partially by slightly lower customer response rates. The
increase in the catalog circulation was primarily from a planned increase of
specialty catalogs, from two editions in the first quarter of 1996 to five
editions in the first quarter of 1997. Gross returns and allowances from mail
order operations for the thirteen week period ended March 28, 1997 were 10.6%
of sales compared to 8.4% of sales for the same period last year. The
increase was anticipated as part of the merchandising strategy to offer more
products in the apparel and footwear categories.
Gross profit for the thirteen week period ending March 28, 1997 was 37.7% of
sales compared to 33.4% of sales for the same period last year. The increase in
gross profit as a percentage of sales was primarily due to higher retail product
margins. Higher retail product margins were the result of the ongoing plan of
shifting a larger percentage of product offerings to manufacturers' close-outs
as well as an emphasis in higher margin product categories of apparel and
footwear.
Selling, general and administrative expenses for the thirteen week period
ended March 28, 1997 were $9,424 thousand or 33.8% of sales compared to
$7,731 thousand or 32.0% of sales for the same period last year. This
increase was largely due to the 17% increase in circulation and the higher
costs associated with the lower circulation specialty catalogs. Effective
advertising expenses as a percentage of sales for the thirteen week period
ending March 28, 1997 were 18.9% of sales compared to 17.6% of sales for the
same period last year.
The Company recorded $100 thousand from recovery of merger costs
during the thirteen week period ended March 28, 1997, as compared to $107
thousand of merger related expenses during the same period last year.
Earnings from operations for the thirteen week period ended March 28, 1997
were $1,192 thousand as compared to $239 thousand during the same period last
year.
8
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (continued)
Interest expense for the thirteen week period ended March 28, 1997 was $239
thousand as compared to $160 thousand during the same period last year.
Interest expense is up primarily due to the higher inventory levels required to
support the merchandising plan.
Income tax expense for the thirteen week period ended March 28, 1997 was $329
thousand. No tax expense was recorded during the same period last year due to
the utilization of net operating loss carryforwards.
As a result of the above, the Company recognized record first quarter earnings
of $625 thousand as compared to $80 thousand for the same period last year.
Net earnings as a percentage of sales was 2.2% during the quarter as
compared to .3% during the same period last year.
This report contains forward looking statements which are subject to change
based on various important factors, including but not limited to general
economic conditions, a changing market environment for the Company's products
and the market acceptance of the Company's catalogs.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibits Index at page 12 of this report.
(b) Reports on Form 8-K
None.
10
<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: May 6, 1997 /s/Charles B. Lingen
------------------------------
Charles B. Lingen
Sr. Vice President of Finance/CFO
11
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EXHIBIT INDEX
Exhibit Method of filing
- ------- ----------------
4.2 Form of Promissory Note dated April 18,
1997 issued by the Company.................. Filed herewith
electronically
10.16 Amended and Restated Credit and Security
Agreement between the Company and
Norwest Business Credit, Inc. dated
April 18, 1997........................... Filed herewith
electronically
27 Financial Data Schedule.................. Filed herewith
electronically
12
<PAGE>
TO AMEND AND RESTATED CREDIT AND SECURITY AGREEMENT
REVOLVING NOTE
$15,000,000.00 Minneapolis, Minnesota
April 18, 1997
For value received, the undersigned, The Sportsman's Guide, Inc., a Minnesota
corporation (the "Borrower"), hereby promises to pay on May 31, 2000 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 Fifteen Million
and 00/100 Dollars ($15,000,000.00) or, if less, the aggregate unpaid principal
amount of all advances made by the Lender to the Borrower pursuant to that
certain Amended and Restated Credit and Security Agreement (as the same may be
amended and/or restated from time to time, 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.
This Note is issued in substitution for, and not in payment or satisfaction of,
that certain Revolving Note dated October 18, 1996, executed by the Borrower and
payable to the order of the Lender in the maximum principal amount of
$11,500,000.
THE SPORTSMAN'S GUIDE, INC.
By: Charles Lingen
-----------------------------------
Its: Secretary
-----------------------------
<PAGE>
AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
Dated as of April 18, 1997
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 1.1 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 (or portion thereof indicated
below) 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:
The lesser of the
During the following percentage Or the following
period from of Eligible Inventory Dollar Amount
------------- ----------------------- ------------------
December 16 to March 31 60% $10,000,000
April 1 to April 14 60% $12,000,000
April 15 to May 31 60% $15,000,000
June 1 to July 15 75% $15,000,000
July 16 to September 15 70% $15,000,000
September 16 to October 15 65% $15,000,000
October 16 to December 15 60% $15,000,000; less
(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 6.16
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" means the "Collateral Account" established under
and defined in the Collateral Account Agreement.
"Collateral Account Agreement" means the collateral account agreement
by and between the Borrower and Norwest Bank Minnesota, National
Association, and accepted by the Lender, dated May 17, 1996.
"Commitment" means $15,000,000, unless said amount is reduced pursuant
to Section 2.10(c) hereof, in which event it means the amount to which said
amount is reduced.
"Computer Sale L/C" has the meaning specified in Section 2.4 hereof.
"Computer Sales L/C Account" means the outstanding face amount of the
Computer Sales L/C.
"Credit Card Agreement" means the agreement executed by the
Borrower, the Third Party Credit Card Processor and the Lender in
connection with the Prior Agreement 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)
-3-
<PAGE>
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:
(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;
-4-
<PAGE>
(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 lower
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:
(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.
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"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.
"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 Base Rate, which
Floating Rate shall change when and as the Base Rate changes.
"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.
"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
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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 2.9(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.
"Obligation of Reimbursement" has the meaning specified in
Section 2.5(a) 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:
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P.O. Box No. 239
411 Farwell Avenue South
South St. Paul, MN 55075-2039
"P.O. Box Agreement" means the agreement executed by the Borrower and
filed with the United States Postal Service (the "Postal Service") on May
8, 1996 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.
"Prior Agreement" has the meaning specified in Section 9.15 hereof.
"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.
"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 Agreement, the Subordination Agreements, the
Trademark Mortgage, and all L/C Applications heretofore and/or hereafter
executed by the Borrower each as described in Section 4.1 hereof, and as
any of the foregoing may be amended from time to time.
"Security Interest" has the meaning specified in Section 3.1 hereof.
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"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 2.6 and 3.6 hereof.
"Subordination Agreements" means all subordination agreements now or
hereafter executed by any holders of Subordinated Debt including, without
limitation, the various Subordination Agreements dated May 13, 14, 15 or
16, 1996 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.
"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 one or more other Subsidiaries,
or by one or more other Subsidiaries.
"Termination Date" means May 31, 2000.
"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 properly 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 excluded in determining the amount of Total
Assets.
"Trademark Mortgage" means the trademark mortgage executed and
delivered by the Borrower to the Lender, dated May 17, 1996 and recorded at
the United States Patent and Trademark Office on May 30, 1996, at Reel
1465, Page 0087.
"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.
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ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 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 2.10(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 and less the Computer Sales L/C Amount, provided, however, that in no
event shall the sum of the Advances plus the L/C Amount and plus the Computer
Sales 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 and less the Computer Sales 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 and plus the
Computer Sales 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 made
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 shall
agree in writing to 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
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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 2.2 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 2.3 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)
$5,000,000 or (b) the Borrowing Base less the sum of (i) all outstanding
and unpaid Advances hereunder (ii) 50% of the L/C Amount and (iii) the
Computer Sales L/C Amount; provided, however, that in no event shall the
sum of the Advances plus the L/C Amount and plus the Computer Sales 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) $5,000,000 or (ii) the Borrowing Base less the sum of (I) all
outstanding and unpaid Advances hereunder and (II) 50% of the L/C Amount
and (III) the Computer Sales 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 and plus the Computer Sales 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.
(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 hereof has been met, and (ii) the
statements set forth in Section 4.2 hereof are correct as of the time of
the request.
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Section 2.4 ISSUANCE OF COMPUTER SALES LETTER OF CREDIT. On
approximately November 15, 1996, on the terms and subject to the conditions
herein set forth, the Lender caused to be issued by an Issuer a standby
letter of credit for the account of the Borrower in favor of Computer Sales
International, Inc. (the "Computer Sales L/C") with a face amount of
$185,000. The Computer Sales L/C has an expiry date of May 10, 1998, and, at
the Borrower's request, so long as no Default or Event of Default has
occurred and continues, the Lender agrees to from time to time extend the
expiry date of the Computer Sales L/C to a date no later than the Termination
Date. The Computer Sales L/C was issued pursuant to a separate L/C
Application entered into by the Borrower and the Lender as co-applicants for
the benefit of the Issuer, and was completed in a manner satisfactory to the
Lender and the Issuer. The terms and conditions of such L/C Application
shall supplement the terms and conditions hereof, but in the event of
inconsistency between the terms of such L/C Application and the terms hereof,
the terms hereof shall control.
Section 2.5 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 and of the Computer Sales L/C 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 and/or under the Computer Sales L/C,
a sum equal to all amounts drawn under such Letter of Credit and/or under
the Computer Sales L/C, as the case may be, 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 2.5, 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 or the Computer Sales L/C
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 2.9 hereof.
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Section 2.6 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 2.10 or 2.11, while
any Letter of Credit or the Computer Sales L/C 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 be
drawn under all Letters of Credit then outstanding and under the Computer Sales
L/C, 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 Borrower at
such time as the Lender is required to release its security interest in the
Special Account under applicable law.
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Section 2.7 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 and/or the Computer Sales L/C, 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 and/or the Computer Sales L/C, 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 and/or
the Computer Sales L/C, 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 and/or the Computer Sales L/C 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 and/or the
Computer Sales L/C 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 Lender, 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
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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 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, the Computer Sales L/C, 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 2.8 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
and/or the Computer Sales L/C or any other agreement or instrument relating
to any Letter of Credit and/or the Computer Sales L/C (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 and/or the Computer Sales L/C (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 statement 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;
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(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 and/or the
Computer Sales L/C; or
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
Section 2.9 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 Event of
Default 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 2.9(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 2.9(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 2.9(a) hereof on the date and in the
manner provided in Section 2.9(a) hereof. Notwithstanding the foregoing,
so long as no Default or Event of Default has occurred and is continuing,
no Minimum Interest Charge shall be payable for the months of December or
January during any calendar year.
Section 2.10 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 in 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
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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 2.6 hereof. If the
prepayment is made on or prior to May 31, 1998, 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 31, 1998 and on or
prior to May 31, 1999, a prepayment fee shall be payable to the Lender
in an amount equal to one-half of one percent (1/2%) of the Commitment.
If the prepayment is made after May 31, 1999 and prior to the
Termination Date, a prepayment fee shall be payable to the Lender in an
amount equal to two-tenths of one percent (.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 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 (1) one percent (1%) of the amount of the Commitment if
the termination occurs on or prior to May 31, 1998, (2) one-half of one
percent (1/2%) of the amount of the Commitment if the termination occurs
after May 31, 1998 and on or prior to May 31, 1999, and (3) two-tenths of
one percent (.2%) of the amount of the Commitment if the termination occurs
after May 31, 1999 and prior to the Termination Date.
(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 plus the Computer Sales 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 (1) one percent (1%) of
the reduction if such reduction occurs on or prior to May 31, 1998, (2)
one-half of one percent (1/2%) of the reduction if such reduction occurs
after May 31, 1998 and on or prior to May 31, 1999, and (3) two-tenths of
one percent (.2%) of the reduction if such reduction occurs after May 31,
1999 and prior to the Termination Date. Notwithstanding the foregoing, so
long as no Default or Event of Default has occurred and is continuing, the
premium described in this Section 2.10(c) shall be waived on a one-time
basis in connection with a single reduction of the Commitment to an amount
no less than
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$8,000,000 if such reduction occurs in connection with and as the result
of the receipt by the Borrower of the proceeds of an equity infusion by
the Borrower.
Section 2.11 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 plus the
Computer Sales 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 2.11 or under
Section 2.10 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 as
the Lender, in its discretion, may from time to time determine.
Section 2.12 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 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 2.13 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 2.14 USE OF PROCEEDS. The proceeds of Advances, each Letter of
Credit issued or caused to be issued and the Computer Sales L/C shall be used by
the Borrower for ordinary working capital purposes.
Section 2.15 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 the Computer Sales L/C 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
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any Letters of Credit and the Computer Sales L/C 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 2.16 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 2.17 FEES.
(a) The Borrower hereby agrees to pay the Lender a fully earned and
non-refundable amendment, extension and renewal fee of $35,000 due and
payable upon the execution of this Agreement.
(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, 1997, 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 8.2 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 (i) 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), and (ii)
the Computer Sales L/C, accruing on a daily basis and computed at the
annual rate of three percent (3%) of the Computer Sales L/C Amount, in each
case from and including the date of issuance thereof until such date as
such Letter of Credit or the Computer Sales L/C, as the case may be, shall
terminate by its terms, payable in arrears, and prorated for any part of a
full calendar year in which such Letter of Credit or the Computer Sales
L/C, as the case may be, remains outstanding. The foregoing commissions
shall be in addition to any and all fees and charges of any Issuer of a
Letter of Credit and/or the Computer Sales L/C with respect thereto or in
connection therewith.
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(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 the Computer Sales L/C and any Letter of Credit, amendments
thereto, transfers thereof and all other activity with respect to the
Computer Sales L/C and/or 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 $62.50 per hour
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 $15,000 per
calendar year. Following the occurrence 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.
ARTICLE III
SECURITY INTEREST
Section 3.1 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 3.2 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 Lender so requests. At any time after the Borrower or the Lender
gives such notice to an account debtor or other obligor, the
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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 3.3 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 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 3.4 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
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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 the execution, delivery, existence, recordation,
performance or enforcement of this Agreement or the provisions of this
Section 3.4.
Section 3.5 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 3.6 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.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 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
or the Computer Sales L/C 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, if any,
pursuant to which the Borrower is leasing the Premises other than the
Premises located at 411 Farwell Avenue South, South St. Paul,
Minnesota 55475, together with a landlord's disclaimer and consent
with respect to each such lease.
(d) 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.
(e) 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
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Borrower, authorizing the execution, delivery and performance of this
Agreement, (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 and other
instruments, agreements and certificates, including Advance requests, on
behalf of the Borrower.
(f) 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.
(g) 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.
(h) An opinion of counsel to the Borrower, addressed to the Lender.
(i) 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.
(j) Payment of the fees and commissions due through the date of the
initial Advance or Letter of Credit or Computer Sales L/C under
Section 2.17 hereof and expenses incurred by the Lender through such date
and required to be paid by the Borrower under Section 9.7 hereof.
(k) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the
Lender to make each Advance or cause to be issued any Letter of Credit or the
Computer Sales L/C 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 or the Computer Sales
L/C, as the case may be, which constitutes a Default or an Event of
Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
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The Borrower represents and warrants to the Lender as follows:
Section 5.1 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 5.2 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 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 5.3 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 5.4 SUBSIDIARIES. Except as set forth in Exhibit B attached
hereto, the Borrower has no Subsidiaries.
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Section 5.5 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 27, 1996 and unaudited
financial statements of the Borrower for the months ended March 2, 1997, 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 5.6 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 5.7 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 5.8 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.
Section 5.9 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 5.10 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
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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 5.11 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 5.12 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
Environmental 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 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 5.13 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 5.14 FINANCING STATEMENTS. The Borrower has provided to the
Lender signed financing statement sufficient when filed to perfect the
Security Interests and the other security
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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 5.15 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 5.16 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 5.17 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.
Section 5.18 SUBORDINATED DEBT. All of the currently existing
Subordinated Debt of the Borrower is described on EXHIBIT F attached hereto.
ARTICLE VI
AFFIRMATIVE COVENANTS OF THE BORROWER
So long as the Note shall remain unpaid, the Credit Facility or any
Letter of Credit or the Computer Sales L/C shall be outstanding, the Borrower
will comply with the following requirements, unless the Lender shall
otherwise consent in writing:
Section 6.1 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:
(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
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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 6.16
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 occurrence 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 basis consistent 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 the
occurrence 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 6.16
and Section 7.10 hereof;
(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;
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(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 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;
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(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 6.2 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 accountant 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 at
any time during ordinary business hours.
Section 6.3 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.
Section 6.4 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
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that others use and keep the Collateral, only for lawful purposes, without
violation of any federal, state or local law, statute 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 6.5 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 by law 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 6.6 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 judgment 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 6.7 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 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
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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 6.8 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 6.9 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 6.10 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 other 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 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.
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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 or 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 6.11 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 6.12 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 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:
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DATES YEAR TO DATE INCOME
----- -------------------
January 1997 ($100,000)
February 1997 ( 100,000)
March 1997 ( 100,000)
April 1997 50,000
May 1997 ( 10,000)
June 1997 ( 220,000)
July 1997 ( 220,000)
August 1997 ( 135,000)
September 1997 245,000
October 1997 475,000
November 1997 930,000
December 1997 1,300,000
Section 6.13 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:
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BOOK NET WORTH PLUS
DATES SUBORDINATED DEBT
----- -------------------
January 1997 5,460,000
February 1997 5,460,000
March 1997 5,460,000
April 1997 7,335,000
May 1997 7,275,000
June 1997 7,065,000
July 1997 7,065,000
August 1997 7,150,000
September 1997 7,530,000
October 1997 7,760,000
November 1997 8,215,000
December 1997 8,585,000
Section 6.14 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:
DATES LEVERAGE RATIO
----- --------------
January 1997 3.30 to 1.0
February 1997 3.30 to 1.0
March 1997 3.30 to 1.0
April 1997 4.00 to 1.0
May 1997 4.00 to 1.0
June 1997 4.00 to 1.0
July 1997 4.00 to 1.0
August 1997 4.00 to 1.0
September 1997 4.00 to 1.0
October 1997 4.10 to 1.0
November 1997 4.00 to 1.0
December 1997 3.00 to 1.0
Section 6.15 NEW COVENANTS. On or before January 20 of each year
during the term hereof commencing with January 20, 1998, the Borrower and the
Lender shall agree on new covenant levels for Sections 6.12, 6.13 and 6.14
for the fiscal year beginning on or about the first day of each such January.
The new covenant levels will be established by the Lender in its discretion
based on the Borrower's projections for such periods and shall be no less
stringent than the present levels. Notwithstanding the foregoing, so long as
no Default or Event of Default has occurred and is continuing, (i), the Net
Income covenant will be set at fifty percent (50%) of the
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performance level for Net Income set forth in the Borrower's projections, on
a monthly basis, or will have a cushion of $300,000 below the monthly Net
Income projected by the Borrower, whichever is more beneficial for the
Borrower (provided, however, that in no event will the Net Income covenant
for the last period in any fiscal year of the Borrower be set at a level
lower than $1,000,000), (ii) the Book Net Worth plus Subordinated Debt
covenant will be established for each month of each year at a level equal to
the actual Book Net Worth plus Subordinated Debt as of the end of the
immediately preceding fiscal year of the Borrower plus the Net Income
covenant for each such month, and (iii) the Leverage Ratio will be set at 4.0
to 1.0 for each month of all subsequent periods (provided, however, that the
Leverage Ratio shall be set at 3.0 to 1.0 for the last month of each fiscal
year of the Borrower).
Section 6.16 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 plus the Computer Sales L/C Amount to an amount equal to or less than
the sum of $4,000,000 plus 80% of Eligible E-Z Pay Plan Accounts for a period
of at least fifteen (15) 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 6.17 SUBORDINATED DEBT. The Borrower shall at all times have at
least $3,413,000 of Subordinated Debt, provided that the Borrower may reduce
the amount of Subordinated Debt or eliminate the Subordinated Debt if and to
the extent that (1) the Borrower pays the principal of the Subordinated Debt
with the proceeds of an equity infusion by the Borrower, or (2) the Borrower
and the holders of the Subordinated Debt agree to convert the Subordinated
Debt to equity of the Borrower on terms and conditions acceptable to the
Lender in its sole discretion.
Section 6.18 EQUIPMENT APPRAISALS. 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 6.19 INVENTORY APPRAISAL. The Borrower shall, from time to time
at the Lender's request, deliver inventory appraisals 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.
Section 6.20 NEW PREMISES. The Borrower shall promptly after the
execution thereof deliver to the Lender true and correct copies of any and
all leases of Premises hereafter entered into by the Borrower, together with
a landlord's disclaimer and consent in form and substance acceptable to the
Lender with respect to each such lease (which disclaimer and consent shall be
delivered within ten (10) days of the date of execution of such lease).
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ARTICLE VII
NEGATIVE COVENANTS
So long as the Note shall remain unpaid, the Credit Facility shall
be outstanding or any Letter of Credit or the Computer Sales L/C shall be
outstanding, the Borrower agrees that, without the prior written consent of
the Lender:
Section 7.1 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
(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 7.2 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 7.3 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
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(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 7.4 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);
(ii) travel advances or loans to officers and employees of the
Borrower not exceeding at any one time an aggregate of $80,000; 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 7.5 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 taking into account any deduction for state income taxes
in calculating the federal income tax liability.
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Section 7.6 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 7.7 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 7.8 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 7.9 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.
Section 7.10 CAPITAL EXPENDITURES. The Borrower will not expend or
contract to expend Capital Expenditures more than (i) $1,500,000 in the
aggregate during the calendar year ending December 31, 1997, (ii) $1,750,000
in the aggregate during the calendar year ending December 31, 1998, or (iii)
more than $2,000,000 during any calendar year thereafter; or for any calendar
year, more than $400,000 in any one transaction; provided, however that, for
the period, if any, during calendar years 1997 and 1998 following the date on
which the Borrower receives net proceeds of an equity infusion by the
Borrower of at least $4,000,000, the dollar amounts set forth above for such
calendar year shall be increased to $2,500,000, and, if the Borrower receives
such proceeds during calendar year 1997 or 1998, the Borrower shall be
allowed to make a single transaction purchase of up to $1,000,000 to purchase
the AT&T phone switch presently used by the Borrower under an operating
lease, in addition to the otherwise applicable $400,000 limit on single
transactions.
Section 7.11 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 7.12 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
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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 7.13 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 7.14 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 7.15 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 7.16 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 7.17 SALARIES. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation. The Borrower will not increase the salary, commissions,
consultant fees or other compensation (other than bonuses) of any member of
the board of directors, officer or consultant, or any member of their
families, by more than fifteen percent (15%) 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.
The Borrower may pay bonuses to members of the board of directors, officers
or consultants of the Borrower in any year so long as, at the time of payment
of such bonus, no Default or Event of Default has occurred and exists, and so
long as no Default or Event of Default would occur or exist as a result of
the payment of such bonus.
Section 7.18 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 and all other items
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 7.19 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
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<PAGE>
Discover cards and should only accept credit card payments through Mastercard
and Visa pursuant to the Credit Card Agreement.
Section 7.20 SUBORDINATED DEBT. The currently existing Subordinated
Debt of the Borrower, which is described on EXHIBIT F attached hereto, all
matures on June 30, 1998, which is prior to the Termination Date. The
Borrower agrees that it shall not make any payments of principal on such
Subordinated Debt on June 30, 1998 or any other date, all as is set forth in
the Subordination Agreements; provided, however, that (i) the Borrower may
pay the principal of the Subordinated Debt, or any portion thereof, with the
net proceeds of an equity infusion by the Borrower, in an aggregate amount up
to but not exceeding the amount of such net proceeds; (ii) the Borrower may
pay the principal of the Subordinated Debt, or any portion thereof, with the
net proceeds of new Subordinated Debt in an aggregate amount up to but not
exceeding the amount of such net proceeds, and (iii) the Borrower may extend
the existing Subordinated Debt, or any portion thereof, so long as the terms
thereof are acceptable to the Lender in its sole discretion, and so long as
the holders thereof execute amendments to the Subordination Agreement or new
subordination agreements in each case in form and substance acceptable to the
Lender in its sole discretion.
ARTICLE VIII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 8.1 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 2.5
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 2.6 or 2.11 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 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
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<PAGE>
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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<PAGE>
(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 8.2 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 presentment, notice
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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 2.6, 2.11 and
3.6 hereof an amount equal to the maximum aggregate amount available to be
drawn under all Letters of Credit then outstanding and under the Computer
Sales L/C, 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 to 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 8.3 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.
ARTICLE IX
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MISCELLANEOUS
Section 9.1 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 9.2 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 9.3 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:
Bruce Teeters
Chernesky, Heyman & Kress
1100 Courthouse Plaza S.W.
P.O. 3808
Dayton Ohio, 45401
Telecopier: (513) 449-2834
If to the Lender:
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<PAGE>
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 9.4 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 Debtor:
The Sportsman's Guide, Inc.
411 Farwell Avenue South
South St. 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 9.5 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 9.6 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,
exercises reasonable care in the selection of the 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 9.7 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, any Letters of Credit, the Computer Sales L/C and any
other document or agreement related hereto or thereto, and the transactions
contemplated hereby, including without limitation all such costs, expenses
and fees incurred 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 9.8 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
or of the Computer Sales L/C, 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 or of the Computer Sales L/C, this Agreement and all other Loan
Documents or the use or intended use of the proceeds of the Advances or any
Letter of Credit or of the Computer Sales L/C (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
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<PAGE>
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 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 9.9 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 9.10 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 9.11 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 and supersedes all prior agreements, written or oral, 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.
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<PAGE>
Section 9.12 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 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 9.13 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 9.14 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.
Section 9.15 PRIOR AGREEMENT. This Agreement amends and restates in its
entirety that certain Credit and Security Agreement dated as of May 17, 1996
by and between the Borrower and the Lender, as amended (the "Prior
Agreement").
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
THE SPORTSMAN'S GUIDE, INC.
By Charles Lingen
----------------------------
Its Secretary
-------------------------
NORWEST BUSINESS CREDIT, INC.
By Warren Lindman
----------------------------
Its AVP
-------------------------
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF EARNINGS 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
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> MAR-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,097
<ALLOWANCES> 214
<INVENTORY> 24,989
<CURRENT-ASSETS> 29,319
<PP&E> 7,075
<DEPRECIATION> 2,779
<TOTAL-ASSETS> 33,615
<CURRENT-LIABILITIES> 25,038
<BONDS> 3,591
0
0
<COMMON> 23
<OTHER-SE> 4,477
<TOTAL-LIABILITY-AND-EQUITY> 33,615
<SALES> 27,876
<TOTAL-REVENUES> 27,876
<CGS> 17,360
<TOTAL-COSTS> 17,360
<OTHER-EXPENSES> (1)
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> 239
<INCOME-PRETAX> 954
<INCOME-TAX> 329
<INCOME-CONTINUING> 625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
