<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY FISCAL PERIOD ENDED JUNE 28, 1998
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)
(651) 451-3030
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of August 7, 1998 there were 4,744,560 shares of the registrant's Common
Stock outstanding
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable--net............................................................... $ 2,787 $ 4,180
Inventory.............................................................................. 32,762 23,841
Promotional material................................................................... 3,727 3,714
Prepaid expenses....................................................................... 920 1,163
--------- ------------
Total current assets............................................................... 40,196 32,898
PROPERTY AND EQUIPMENT--NET.............................................................. 4,441 4,316
OTHER ASSETS............................................................................. 191 --
--------- ------------
Total assets....................................................................... $ 44,828 $ 37,214
--------- ------------
--------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of bank balances.............................................. $ 1,266 $ 2,383
Notes payable--bank.................................................................... 11,837 1,690
Current maturities of long-term debt
Related parties...................................................................... -- 1,795
Other................................................................................ 30 1,657
Accounts payable
Trade................................................................................ 11,959 16,866
Related parties...................................................................... 61 470
Accrued expenses....................................................................... 898 2,239
Customer deposits and other liabilities................................................ 1,895 3,140
--------- ------------
Total current liabilities.......................................................... 27,946 30,240
LONG-TERM LIABILITIES
Long-term debt......................................................................... 78 115
Deferred income taxes.................................................................. 494 494
--------- ------------
Total liabilities.................................................................. 28,518 30,849
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Series A Preferred Stock-$.01 par value; 200,000 shares authorized; no shares issued
and outstanding at June 28, 1998 and 20,000 shares issued and outstanding at December
28, 1997............................................................................. -- --
Common Stock-$.01 par value; 36,800,000 shares authorized; 4,743,560 and 2,339,225
shares issued and outstanding at June 28, 1998 and December 28, 1997................. 47 23
Additional paid-in capital............................................................. 11,551 2,365
Retained earnings...................................................................... 4,712 3,977
--------- ------------
Total shareholders' equity......................................................... 16,310 6,365
--------- ------------
Total liabilities & shareholders' equity........................................... $ 44,828 $ 37,214
--------- ------------
--------- ------------
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
2
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED
JUNE 28, 1998 AND JUNE 27, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales................................................................. $ 28,273 $ 23,245 $ 59,970 $ 51,121
Cost of sales......................................................... 15,836 14,064 34,241 31,424
--------- --------- --------- ---------
Gross profit........................................................ 12,437 9,181 25,729 19,697
Selling, general and administrative expenses.......................... 12,114 8,719 24,238 18,043
--------- --------- --------- ---------
Earnings from operations............................................ 323 462 1,491 1,654
Interest expense...................................................... (213) (350) (381) (589)
Miscellaneous income (expense), net................................... 11 (5) 12 (4)
--------- --------- --------- ---------
Earnings before income taxes........................................ 121 107 1,122 1,061
Income taxes.......................................................... 42 37 387 366
--------- --------- --------- ---------
Net earnings........................................................ $ 79 $ 70 $ 735 $ 695
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings per share:
Basic............................................................... $ .02 $ .03 $ .18 $ .30
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................. $ .02 $ .02 $ .17 $ .25
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding:
Basic............................................................... 4,726 2,334 4,122 2,334
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................. 4,848 2,871 4,438 2,819
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS
3
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THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED
JUNE 28, 1998 AND JUNE 27, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings............................................................................ $ 735 $ 695
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization......................................................... 734 654
Deferred income taxes................................................................. -- 210
Other................................................................................. 48 (32)
Changes in assets and liabilities:
Accounts receivable................................................................. 1,393 500
Inventory........................................................................... (8,921) (8,701)
Promotional material................................................................ (13) (1,423)
Prepaid expenses.................................................................... 243 (900)
Other assets........................................................................ (191) --
Checks written in excess of bank balances........................................... (1,117) (2,209)
Accounts payable.................................................................... (5,316) 1,941
Accrued expenses.................................................................... (1,341) (958)
Customer deposits and other liabilities............................................. (1,225) (877)
---------- ----------
Cash flows used in operating activities........................................... (14,971) (11,100)
Cash flows from investing activities:
Purchases of property and equipment..................................................... (859) (583)
---------- ----------
Cash flows used in investing activities........................................... (859) (583)
Cash flows from financing activities:
Net proceeds from revolving credit line................................................. 10,147 11,718
Payments on long-term debt.............................................................. (3,447) (35)
Proceeds from exercise of stock options and stock warrants.............................. 1,658 --
Repurchase of preferred stock........................................................... (1,000) --
Net proceeds from issuance of common stock.............................................. 8,472 --
---------- ----------
Cash flows provided by financing activities....................................... 15,830 11,683
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............................................................................ $ 363 $ 522
Income taxes........................................................................ 1,194 956
</TABLE>
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 thereof. 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 SHARE
The Company's basic net earnings per share amounts have been computed by
dividing net earnings by the weighted average number of outstanding common
shares. The Company's diluted net earnings per share amounts have been computed
by dividing net earnings by the weighted average number of outstanding common
shares and common share equivalents relating to stock options and warrants, when
dilutive.
For the thirteen week periods ended June 28, 1998 and June 27, 1997, 122,405
and 537,333 shares of common stock equivalents were included in the computation
of diluted net earnings per share. For the twenty-six week periods ended June
28, 1998 and June 27, 1997, 315,580 and 485,229 shares of common stock
equivalents were included in the computation of diluted net earnings per share.
Options and warrants to purchase 293,025 and 35,677 shares of common stock
with a weighted average exercise price of $7.28 and $7.13 were outstanding
during the thirteen week periods ended June 28, 1998 and June 27, 1997 but were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive.
Options and warrants to purchase 204,400 and 35,677 shares of common stock
with a weighted average exercise price of $7.62 and $7.13 were outstanding
during the twenty-six week periods ended June 28, 1998 and June 27, 1997, but
were not included in the computation of diluted earnings per share because to do
so would have been anti-dilutive.
NOTE 3: PUBLIC OFFERING
On February 10, 1998, the Company received net proceeds of approximately
$8.5 million from the sale of 1.6 million shares of its common stock through a
public offering. On February 10, 1998, the Company paid $3.4 million of
subordinated notes payable and repurchased all of its Series A Preferred stock
for $1.0 million.
During the first quarter, the Company received net proceeds of approximately
$1.4 million from the exercise of warrants to purchase 716,027 shares of common
stock. The warrants had been issued in connection with private placements of
subordinated notes payable. All of the warrants contained a provision for the
warrants to expire if not exercised within 30 days after the public offering.
On February 5, 1998, the Company granted to certain officers of the Company,
options to purchase 177,500 shares of common stock in connection with the
completion of the Company's public offering. The exercise price of $6.50 is the
same as the price to public in the offering and 25% of the options vest
immediately upon the date of grant with the balance vesting over the next three
years. The options will expire ten years from the date of grant.
As part of the public offering, the Company issued to the Representatives of
the Underwriters five-year warrants to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $8.45.
5
<PAGE>
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4: REVOLVING CREDIT FACILITY
On June 26, 1998, the Company entered into a $20.0 million revolving line of
credit through a syndicate led by Norwest Bank Minnesota, N.A. The credit
facility is subject to an adequate borrowing base and expires July 31, 1999. The
borrowing base related to inventory is limited to $17.0 million. The revolving
line of credit is for working capital and letters of credit. Letters of credit
may not exceed $7.5 million at any time. Borrowings under the revolving line of
credit bear interest at the bank's base (prime) rate less 0.5% or, at the
Company's option, fixed over short term periods not to exceed six months at
LIBOR plus 1.80 percentage points. The availability of funding under the
facility is subject to the sum of the principal balance and letters of credit
being paid down to $6.0 million, plus 80% of installment receivables. The
pay-down requirement must be maintained for not less than 30 consecutive days
between December 1 and March 1 of each fiscal year. The revolving line of credit
is collateralized by substantially all of the assets of the Company.
All borrowings are subject to various covenants. The most restrictive
covenants require a maximum debt to net worth ratio, quarterly measure of
minimum tangible net worth and minimum net income over the most recent four
quarters, a maximum annual spending level for capital assets and prohibit the
payment of dividends to shareholders. As of June 28, 1998, the Company was in
compliance with all applicable covenants under the revolving line of credit
agreement.
NOTE 5: NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which was required to be adopted in the first quarter of 1998. SFAS No. 130
established standards for the reporting and display of comprehensive income and
its components. Comprehensive income includes certain non-owner changes in
equity that are currently excluded from net income. Because the Company
historically has not experienced transactions that would be included in
comprehensive income, the adoption of SFAS No. 130 did not have a material
effect on the financial position, results of operations or cash flows of the
Company.
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION effective December 29, 1997. SFAS No. 131
requires public companies to report certain information about operating segments
in their financial statements, and establishes related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 does
not need to be applied to interim financial statements in the initial year of
application; however, comparative information for interim periods in the initial
year of application will be reported in the financial statements for interim
periods in fiscal 1999.
The AICPA's Accounting Standard Executive Committee has issued SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. Capitalized costs of internal-use software projects consist of external
direct costs of materials and services used to develop or purchase internal-use
software, payroll and payroll-related costs, and interest costs incurred during
the development of internal-use software. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998 for costs incurred in those fiscal years for
all projects, including projects in progress when the SOP is adopted. The
adoption of this standard is not expected to have a material effect on the
financial statements of the Company.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 28, 1998 COMPARED TO THIRTEEN AND
TWENTY-SIX WEEKS ENDED JUNE 27, 1997
SALES. Sales for the thirteen and twenty-six weeks ended June 28, 1998 of
$28.3 million and $60.0 million were $5.0 million or 21.6% and $8.9 million or
17.3% higher than sales of $23.3 million and $51.1 million during the same
periods last year. The increase in sales for the thirteen and twenty-six weeks
ended June 28, 1998 was due to increased catalog circulation of 47% and 43%,
offset partially in both periods by lower than anticipated customer response
rates, and additionally year to date by softness in sales of cold weather
merchandise due to the warmer than normal winter caused by El Nino. The Company
mailed nine catalog editions, including seven specialty editions, during the
thirteen weeks ended June 28, 1998, compared to six editions, including four
specialty editions during the same period last year. Year to date the Company
has mailed nineteen catalog editions, including fourteen specialty editions,
compared to fourteen editions, including nine specialty editions, during the
same period last year. Specialty catalog editions are primarily marketed to
existing customers.
Gross returns and allowances for the thirteen and twenty-six weeks ended
June 28, 1998 were $3.1 million or 10.0% of gross sales and $7.1 million or
10.6% of gross sales compared to $2.9 million or 11.0% of gross sales and $6.1
million or 10.7% of gross sales during the same periods last year. Gross returns
and allowances as a percentage of gross sales decreased during the second
quarter of 1998, compared to the same period last year, due to actual returns on
1997 catalogs being lower than previously estimated. Year to date gross returns
and allowances as a percentage of sales is even with the same period last year
as changes in the sales mix of high return product categories, apparel and
footwear, are less significant.
GROSS PROFIT. Gross profit for the thirteen and twenty-six weeks ended June
28, 1998 was $12.4 million or 44.0% of sales and $25.7 million or 42.9% of sales
compared to $9.2 million or 39.5% of sales and $19.7 million or 38.5% of sales
during the same periods last year. The increase in gross profit as a percentage
of sales was primarily due to higher retail product margins resulting from
offering a larger percentage of close-out and direct import merchandise and due
to higher shipping and handling margins due to a planned price increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the thirteen and twenty-six weeks ended June 28,
1998 were $12.1 million or 42.8% of sales and $24.2 million or 40.4% of sales
compared to $8.7 million or 37.5% of sales and $18.0 million or 35.3% of sales
for the same periods last year. The dollar increase for both periods was
primarily due to increased catalog circulation of 47% and 43%. Total circulation
during the second quarter and first half of 1998 was 17.7 million and 34.1
million catalogs compared to 12.0 million and 23.8 million catalogs during the
same periods last year. The increase in catalog circulation was primarily due to
a planned increase in the number of specialty catalog editions and increased
efforts to develop new customers. Advertising expense for the thirteen and
twenty-six week periods ended June 28, 1998 was $7.6 million or 26.9% of sales
and $14.8 million or 24.7% of sales compared to $5.2 million or 22.5% of sales
and $10.5 million or 20.5% of sales for the same periods last year. The increase
as a percentage of sales during both periods was due to lower customer response
rates than planned which management believes was primarily caused by the
increased number of specialty catalog editions mailed to existing customers and
additionally year to date by softness in sales of cold weather merchandise due
to the warmer than normal winter caused by El Nino.
EARNINGS FROM OPERATIONS. Earnings from operations for the thirteen and
twenty-six weeks ended June 28, 1998 were $323,000 or 1.1% of sales and $1.5
million or 2.5% of sales compared to $462,000 or 2.0% of sales and $1.7 million
or 3.2% of sales for the same periods last year.
7
<PAGE>
INTEREST EXPENSE. Interest expense for the thirteen and twenty-six weeks
ended June 28, 1998 was $213,000 and $381,000 compared to $350,000 and $589,000
for the same periods last year. The decrease in interest expense was primarily
due to the availability of additional working capital from the public offering
and retirement of subordinated notes payable, both completed in February 1998.
NET EARNINGS. Net earnings for the thirteen and twenty-six weeks ended June
28, 1998 were $79,000 or 0.3% of sales and $735,000 or 1.2% of sales compared to
$70,000 or 0.3% of sales and $695,000 or 1.4% of sales for the same periods last
year.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors, including: the timing of new merchandise and catalog offerings;
recognition of costs or sales contributed by new merchandise and catalog
offerings; fluctuations in response rates; fluctuations in postage, paper and
printing costs and in merchandise returns; adverse weather conditions that
affect response, distribution or shipping; shifts in the timing of holidays; and
changes in the Company's product mix. The Company recognizes the cost of catalog
production and mailing over the estimated useful lives of the catalogs, ranging
from four to six months from the catalog's in-home date. Consequently,
quarter-to-quarter sales and expense comparisons will be impacted by the timing
of the mailing of the Company's catalog editions.
The majority of the Company's sales historically occur during the third and
fourth fiscal quarters. The seasonal nature of the Company's business is due to
the catalog's focus on hunting merchandise and related accessories for the fall,
as well as winter apparel and gifts for the holiday season. The Company expects
this seasonality will continue in the future. In anticipation of increased sales
activity during the third and fourth fiscal quarters, the Company incurs
significant additional expenses for hiring employees and building inventory
levels.
The following table sets forth certain unaudited quarterly financial
information for the Company for the periods shown. In the opinion of management,
this unaudited information has been prepared on the same basis as the audited
information and includes all normal recurring adjustments necessary to present
fairly, in all material respects, the information set forth therein.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
FISCAL 1998
Sales............................................................... $ 31,697 $ 28,273
Gross profit........................................................ 13,292 12,437
Earnings from operations............................................ 1,168 323
Net earnings........................................................ 656 79
FISCAL 1997
Sales............................................................... $ 27,876 $ 23,245 $ 26,490 $ 50,502
Gross profit........................................................ 10,516 9,181 10,680 21,502
Earnings (loss) from operations..................................... 1,192 462 (169) 3,564
Net earnings (loss)................................................. 625 70 (356) 2,136
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating cash requirements through funds generated
from operations and borrowings under its revolving line of credit. On February
10, 1998, the Company received net proceeds of $8.5 million from the sale of 1.6
million shares of its common stock through a public offering. The Company used a
portion of the offering proceeds to pay $3.4 million of subordinated notes
payable and
8
<PAGE>
repurchase all of the Company's Series A Preferred Stock for $1.0 million. The
remaining $4.1 million is being used as additional working capital.
The Company had working capital of $12.3 million as of June 28, 1998,
compared to $2.7 million as of December 28, 1997. The increase of $9.6 million
was primarily due to the proceeds from the public offering, proceeds from the
exercise of options and warrants, and year-to-date net earnings.
The Company's working capital requirements have increased during the
twenty-six weeks ended June 28, 1998 compared to the same period in the previous
year 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 and direct
imports and higher inventory levels associated with lower than anticipated
customer response rates. The Company purchases large quantities of
manufacturers' close-outs and other individual product items on an opportunistic
or when-available basis, particularly in the case of footwear and apparel. The
seasonal nature of the merchandise or the time of acquisition may require that
it be held for several months before being offered in a catalog. This can result
in increased inventory levels thereby increasing the Company's working capital
requirements and related carrying costs. Inventory carryover of cold weather
merchandise is up approximately $2.5 million over the same period last year due
to the decrease in sales demand which management believes was the effect of El
Nino.
The Company offers its customers an installment credit plan with no finance
fees, known as the "G.O. Painless 4-Pay Plan". Each of the four consecutive
monthly installments is billed directly to customers' credit cards. The Company
had installment receivables of $1.9 million at June 28, 1998 compared to $3.6
million at December 28, 1997. The installment plan will continue to require the
allocation of working capital which the Company expects to fund from operations
and availability under its revolving credit facility.
On June 26, 1998, the Company entered into a $20.0 million revolving line of
credit through a syndicate led by Norwest Bank Minnesota, N.A. The credit
facility is subject to an adequate borrowing base and expires July 31, 1999. The
borrowing base related to inventory is limited to $17.0 million. The revolving
line of credit is for working capital and letters of credit. Letters of credit
may not exceed $7.5 million at any time. Borrowings under the revolving line of
credit bear interest at the bank's base (prime) rate less 0.5% or, at the
Company's option, fixed over short term periods not to exceed six months at
LIBOR plus 1.80 percentage points. The availability of funding under the
facility is subject to the sum of the principal balance and letters of credit
being paid down to $6.0 million, plus 80% of installment receivables. The
pay-down requirement must be maintained for not less than 30 consecutive days
between December 1 and March 1 of each fiscal year. The revolving line of credit
is collateralized by substantially all of the assets of the Company.
All borrowings are subject to various covenants. The most restrictive
covenants require a maximum debt to net worth ratio, quarterly measure of
minimum tangible net worth and minimum net income over the most recent four
quarters, a maximum annual spending level for capital assets and prohibit the
payment of dividends to shareholders. As of June 28, 1998, the Company was in
compliance with all applicable covenants under the revolving line of credit
agreement. As of June 28, 1998, the Company has borrowed $11.8 million against
the revolving credit line compared to $1.7 million at December 28, 1997.
Cash flows used in operating activities for the twenty-six weeks ended June
28, 1998 were $15.0 million compared to $11.1 million for the same period last
year. The increase in cash flows used in operating activities year-to-date was
primarily the result of a decrease in accounts payable. Accounts payable has
decreased as a result of aggressively pursuing cash discounts with the working
capital available subsequent to the February stock offering.
9
<PAGE>
Cash flows used in investing activities for the twenty-six weeks ended June
28, 1998 were $859,000 compared to $583,000 for the same period last year. The
Company plans to expend approximately $1.5 million for capital additions during
1998.
Cash flows provided by financing activities during the twenty-six weeks
ended June 28, 1998 were $15.8 million compared to $11.7 million during the same
period last year. The Company received $8.5 million in net proceeds from a
public offering completed during February. A portion of the proceeds were used
to pay $3.4 million of subordinated notes payable and to repurchase all of the
Company's Series A Preferred Stock for $1.0 million. The Company also received
proceeds from the exercise of stock warrants and options totaling $1.7 million.
The warrants were to expire 30 days after the public offering unless exercised.
The Company believes that cash flow from operations and borrowing capacity
under its revolving credit facility will be sufficient to fund operations and
future growth for the next 12 months.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of the
federal securities laws. Actual results could differ materially from those
projected in the forward-looking statements due to a number of factors,
including general economic conditions, a changing market environment for the
Company's products and the market acceptance of the Company's catalogs as well
as the factors set forth under "Risk Factors" in the Company's prospectus dated
February 5, 1998 filed with the Securities and Exchange Commission pursuant to
Rule 424(b) under the Securities Act of 1933.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on April 23, 1998, at
which the following matters were submitted to a vote of shareholders:
1. Election of seven directors. The vote on this matter was as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
- ----------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Vincent W. Shiel....................................................... 2,862,769 1,915
Gary Olen.............................................................. 2,862,769 1,915
Leonard M. Paletz...................................................... 2,862,769 1,915
Mark F. Kroger......................................................... 2,862,769 1,915
William T. Sena........................................................ 2,861,769 2,915
Gregory R. Binkley..................................................... 2,862,769 1,915
Charles Lingen......................................................... 2,862,769 1,915
</TABLE>
2. Ratification of the engagement of Grant Thornton LLP as independent
certified public accountants to audit the Company's financial statements
for the fiscal year ending January 3, 1999. The vote on this matter was
as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
- ---------- ----------- -----------
<S> <C> <C>
2,860,294 135 4,255
</TABLE>
ITEM 5. OTHER INFORMATION
Shareholder proposals intended to be submitted at the Company's 1999 Annual
Meeting of Shareholders outside the processes of Rule 14a-8 will be considered
untimely under Rule 14a-4(c)(1) if not
10
<PAGE>
received by the Company on or before February 8, 1999. If the Company does not
receive timely notice of such matter, the proxy holders will vote on the matter,
if presented at the meeting, in their discretion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
10.1 Amendment to Industrial Real Estate Lease between the Company and American Real Estate Holdings, L.P. dated
February 23, 1998.
10.2 Credit Agreement between the Company, Norwest Bank Minnesota, N.A. and M&I Marshall and Ilsley Bank dated
June 26, 1998.
27. Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the thirteen weeks ended June 28,
1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE SPORTSMAN'S GUIDE, INC.
</TABLE>
Date: August 7, 1998
<TABLE>
<S> <C> <C>
By: /s/ CHARLES B. LINGEN
-----------------------------------------
Charles B. Lingen
SENIOR VICE PRESIDENT FINANCE/CFO
</TABLE>
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<PAGE>
SIXTH AMENDMENT TO INDUSTRIAL REAL ESTATE LEASE
This Sixth Amendment to Industrial Real Estate Lease is entered into as
of this 23 day of February, 1998, by and between American Real Estate
Holdings, L.P. ("Landlord") and The Sportman's Guide, Inc. ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Industrial Real Estate
Lease dated April 22, 1993, covering a portion of the building (the
"Project") located at 411 Farwell Avenue, South St. Paul, Minnesota, as
amended by that certain Amendment to Industrial Real Estate Lease dated
September 8, 1993, as further amended by that certain Second Amendment to
Industrial Real Estate Lease dated September 22, 1993, as further amended by
that certain Third Amendment to Industrial Real Estate Lease dated February
16, 1994, as further amended by that certain Fourth Amendment to Industrial
Real Estate Lease dated April 7, 1994, and as further amended by that certain
Fifth Amendment to Industrial Real Estate Lease dated November 2, 1994
(collectively, the "Lease").
B. The Lease Term expires March 31, 1999.
C. Tenant currently occupies 317,159 square feet of the Project as
identified on attached Exhibit A (the "Property") and the Project contains
422,727 square feet.
D. Tenant's Pro Rata Share of Common Area Expenses equals 76.67%.
E. Landlord and Tenant desire to further amend the terms of the Lease
pursuant to the terms and conditions stated herein.
F. All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Lease.
AGREEMENT
NOW, THEREFORE, for One Dollar and No/100 ($1.00) and other good
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. EXTENSION OF LEASE TERM. The Lease Term is hereby extended from
April 1, 1999 to March 31, 2004 (the "Extended Term") upon the same terms and
conditions as set forth in the Lease, except that Base Rent for the Property
during the Extended Term shall be increased to Two Dollars and 75/100 ($2.75)
per square foot annually.
2. EXTENSION OPTIONS. Tenant shall have the option to extend the Lease
Term with respect to all (but not less than all) of the Property for three
(3) additional terms of five (5) years each (referred to herein as "First,
Second, and Third Extension Options" or individually as an
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<PAGE>
"Extension Option."), commencing on the date immediately following the
expiration date of the preceding Lease Term.
A. CONDITIONS. Tenant's right to exercise an Extension Option is
subject to the following terms and conditions:
i. Tenant must deliver to Landlord written notice (the "Extension
Notice") of its election to exercise each Extension Option not
less than three hundred and sixty (360) days prior to the
expiration of the preceding Lease Term;
ii. Tenant must not be in default under the Lease either on the
date Tenant exercises an Extension Option or on the
commencement date of an Extension Option, unless waived in
writing by Landlord; and
iii. With respect to the Second and Third Extension Options, Tenant
must have exercised the First and Second Extension Option,
respectively, pursuant to the terms set forth herein.
B. FIRST EXTENSION OPTION. If Tenant exercises the First Extension
Option, then all terms and conditions of this Lease shall be applicable
to such First Extension Option, except that the Base Rent for the First
Extension Option shall be increased by the increase in the CPI-U, as
hereinafter defined, from the date of the commencement of the Extended
Term to the date of the expiration of said Extended Term. The CPI-U
shall be defined as the Consumer Price Index seasonally adjusted U.S.
City Average for all Items for all Urban Consumers published in the
"Monthly Labor Review" of the Bureau of Labor and Statistics of the
United States Department of Labor (the "CPI-U"). When the percentage
increase in the CPI-U has been determined for such period, the Base Rent
for the Extension Term shall be multiplied by that figure and the
product shall be added to the Base Rent payable during the Extended
Term. That sum will constitute the Base Rent payable for the First
Extension Option. In no event, however, shall the Base Rent be less than
the Base Rent paid during the preceding Lease Term or greater than Three
Dollars and 19/100 ($3.19) per square foot annually. Landlord shall
notify Tenant in writing of the increase in the Base Rent within a
reasonable time after the applicable CPI-U figures become publicly
available (the "Rental Notice"). The Rental Notice may be delivered to
Tenant after the commencement of the First Extension Option and Tenant
shall continue to pay Base Rent in the amount payable during the
Extended Term until the first day of the month following Tenant's
receipt of such Rental Notice. Within ten (10) days following receipt of
the Rental Notice, Tenant shall pay Landlord the accrued rental
adjustment for the months elapsed between the commencement of the First
Extension Term and the first day of the month following receipt of the
Rental Notice.
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<PAGE>
C. SECOND AND THIRD EXTENSION OPTION. If Tenant exercises the Second or
Third Extension Option, then all of the terms and conditions of the
Lease shall be applicable to such Second or Third Extension Options,
except that the Base Rent for the Second and Third Extension Options
shall be equal to the greater of (i) the Fair Market Rental Rate, as
hereinafter defined, of the Property as of the commencement date of the
applicable Extension Option; or (ii) the Base Rent payable during the
preceding Lease Term. Tenant and Landlord shall have a period of thirty
(30) days following Landlord's receipt of the Extension Notice in which
to agree on the Fair Market Rental Rate of the Property. If Landlord and
Tenant agree on the Fair Market Rental Rate for the Property, then they
shall immediately execute an amendment to this Lease stating and
incorporating such agreed upon Fair Market Rental Rate as the Base Rent
for the applicable Extended Term. If Landlord and Tenant are unable to
agree upon the Fair Market Rental Rate within thirty (30) days following
Tenant's delivery of the Extension Notice, then the dispute shall
proceed to arbitration pursuant to the terms described herein.
i. ARBITRATION.
(a) Not later than ten (10) days after the expiration of such
thirty (30) day period, each party shall appoint an arbitrator
and notify the other party of such appointment by identifying
the appointee. Each party hereto agrees to select as its
respective appointee a licensed real estate appraiser, who is
an individual of substantial experience with respect to
industrial building ownership, management and marketing in the
Minneapolis/St. Paul metropolitan area, which person shall not
be regularly employed or have been retained during the last
two (2) years as a consultant by the party selecting such
person. Neither party may consult directly or indirectly with
any arbitrator regarding the Fair Market Rental Rate prior to
appointment, or after appointment, outside the presence of the
other party. The arbitration shall be conducted in Minneapolis,
Minnesota, under the provisions of the commercial arbitration
rules of the American Arbitration Association and the laws of
the State of Minnesota.
(b) Not later than ten (10) days after both arbitrators are
appointed, each party shall separately, but simultaneously,
submit in a sealed envelope to each arbitrator their separate
suggested Fair Market Rental Rate and shall provide a copy of
such submission to the other party. The two (2) selected
arbitrators, after reviewing such submissions, shall determine
whether Landlord's or Tenant's estimate of Fair Market Rental
Rate is closer to the actual Fair Market Rental Rate for the
Property. If both arbitrators agree that one of said declared
estimates is closer to the actual Fair Market
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<PAGE>
Rental Rate, they shall declare the estimate to be the Fair
Market Rental Rate, and their decision shall be final and
binding upon the parties.
(c) If the two selected arbitrators are unable to agree on
the Fair Market Rental Rate within thirty (30) days after
receipt of Landlord's and Tenant's submitted estimates, then
the arbitrators shall inform the parties. Unless the parties
shall both otherwise then direct, said arbitrators shall
select a third arbitrator, no later than ten (10) days after
the expiration of said thirty (30) day period. If no
arbitrator is selected within such ten (10) day period, either
party may immediately petition a court with appropriate
jurisdiction to appoint such third arbitrator. The third
arbitrator shall have the qualifications and restrictions set
forth in herein, and shall conduct an arbitration pursuant to
the commercial arbitration rules of the American Arbitration
Association. The third arbitrator's decision shall be final
and binding as to which estimate (as between Landlord's and
Tenant's) of the Fair Market Rental Rate is closer to the
actual Fair Market Rental Rate. Such third arbitrator shall
make a decision not later than thirty (30) days after
appointment.
(d) Each party shall be responsible for the costs, charges
and/or fees of its respective appointee, and the parties shall
share equally in the costs, charges and/or fees of the third
arbitrator. The decision of the arbitrator(s) may be entered
in any court having jurisdiction thereof.
(e) The term Fair Market Rental Rate shall be defined as the
Base Rent of the Property which would be paid by a willing
tenant to a willing landlord, neither of whom is compelled to
rent, for a term of five (5) years, disregarding tenant
concessions. The term tenant concessions shall include,
without limitation, such inducements as free rent, free
parking, standard tenant improvement allowances or work
letter, and landlord's assumption of existing leases. The Fair
Market Rental Rate shall not reflect the value of any
improvements to the Property made by Tenant which Tenant has
the right to remove at the end of the Lease Term.
3. ASSIGNMENT OR SUBLEASE OF BELL SPACE. Landlord currently leases
approximately ninety-six thousand five hundred twenty-two (96,522) square feet
within the Project to Bell Industries, Inc. ("Bell") as identified on attached
Exhibit A (the "Bell Space"). Landlord hereby agrees to approve any assignment
or sublease from Bell to Tenant of the Bell Space subject to the following terms
and conditions:
A. This Lease must be in full force and effect;
4
<PAGE>
B. Tenant shall not be in default under the Lease;
C. Base Rent payable to Landlord for that portion of the Bell Space
assigned or sublet to Tenant shall equal the Base Rent payable by Bell
pursuant to the Bell Lease; and
D. Bell shall not be released from any obligations or liabilities under
the Bell Lease, unless Tenant provides to Landlord additional security
that is acceptable to Landlord in its sole discretion.
4. EXPANSION SPACE. During the Lease Term, Tenant shall have a right of
first offer ("Right of First Offer") to lease the Bell Space subject to the
terms described herein.
A. CONDITIONS. At the time Landlord delivers to Tenant the First Offer
Leasing Notice (as defined herein):
i. The Lease must be in full force and effect;
ii. Tenant shall not be in default under the Lease upon the
exercise of the Right of First Offer or at the Commencement
Date for the Bell Space (as defined herein); and
iii. Tenant must simultaneously exercise the First Extension Option.
B. SPACE SUBJECT TO OFFER. Subject to the other terms of this Section,
after the Bell Space has or will "become available" for leasing by the
Landlord (as defined herein), Landlord shall not, during the Lease Term,
lease to another tenant the Bell Space without first offering Tenant the
right to lease the Bell Space pursuant to the terms and conditions
described herein.
C. AVAILABLE SPACE. The Bell Space shall be deemed to "become
available" on the earlier of (i) August 31, 2001; or (ii) when the Bell
Lease is otherwise terminated.
D. LANDLORD NOTICE. Landlord shall offer the Bell Space to Tenant in
writing (the "First Offer Leasing Notice"). Landlord shall have the
right to lease the Bell Space to another tenant if Tenant either rejects
such offer or fails to deliver to Landlord written notice of its
acceptance of such offer within fifteen (15) days from Landlord's
delivery of the First Offer Leasing Notice to Tenant, whichever occurs
first. The First Offer Leasing Notice shall contain the following
Information:
i. A description of the Bell Space (which description shall
include the square footage amount and location of such Bell
Space);
ii. The anticipated Commencement Date for the Bell Space.
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<PAGE>
iii. The increase in Base Rent as calculated pursuant to the terms
of this Section; and
iv. The adjustment to Tenant's Pro Rata Share of Common Area
Expenses.
E. TENANT ACCEPTANCE. If Tenant timely delivers to Landlord, in
accordance with the conditions of this Section, written notice of
Tenant's exercise of the Right of First Offer for the Bell Space and
Landlord determines that Tenant has satisfied all of the conditions
provided in this Section, then the Bell Space shall be deemed added to
the Property and subject to the terms and conditions in the Lease, with
the exception of those Lease modifications set forth below.
F. TENANT'S REJECTION OR FAILURE TO MEET CONDITIONS. If Tenant
declines or fails to duly and timely exercise its Right of First Offer
or fails to meet all of the conditions provided in this Section,
Landlord shall thereafter be free to lease the Bell Space in portions or
in its entirety to any third-party tenant at any time without regard to
the restrictions in this Section and on whatever terms and conditions
Landlord may decide in its sole discretion.
G. CHANGES TO LEASE. If Tenant leases the Bell Space pursuant to the
terms of this Section, all the obligations, terms, and conditions under
the Lease shall also apply to the Bell Space, except that:
i. COMMENCEMENT DATE. The commencement date for the Bell Space
("the Commencement Date for the Bell Space") shall be the day
the Bell Space is delivered to the Tenant free of tenants or
other occupants, in its then "as is" condition;
ii. THE PROPERTY. As of the Commencement Date for the Bell Space,
the Bell Space shall be deemed part of the Property;
iii. PRO RATA SHARE. As of the Commencement Date for the Bell
Space, Tenant's Pro Rata Share of Common Area Expenses shall
be increased to one hundred percent (100%) of the Project; and
iv. RENT. As of the Commencement Date for the Bell Space, the
Base Rent shall be increased to an amount computed by
multiplying the square footage dollar amount that is then
payable with respect to the Property for the month in which
the Commencement Date for the Bell Space shall occur by the
number of rentable square feet contained in the Bell Space
taken by Tenant; provided, however, that the Bell Space shall
be subject to the same rental increases as the Property.
6
<PAGE>
H. CONFIRMING LEASE AMENDMENT. Within thirty (30) days after the
Commencement Date for the Bell Space, Landlord and Tenant shall confirm
the following in a written amendment to the Lease:
i. The Commencement Date for the Bell Space;
ii. The location and size of the Bell Space that was leased by
Tenant with an exhibit annexed showing that space crosshatched;
iii. The new Base Rent to be paid by Tenant, and
iv. The adjustment to the Tenant's Pro Rata Share of Common Area
Expenses.
I. INVALID AFTER ASSIGNMENT/SUBLEASE. This Right of First Offer is
personal to the Tenant and shall become null and void upon the
occurrence of an assignment of the Lease or a sublet of all or a part of
the Property.
5. BROKERAGE COMMISSIONS. Landlord hereby agrees to pay the following
brokerage commissions, subject to the terms and conditions contained herein:
A. COMMISSION TO CB COMMERCIAL REAL ESTATE GROUP, INC. Upon the
condition that no event of default exists under the Lease, Landlord
agrees to pay to CB Commercial Real Estate Group, Inc. ("CB Commercial")
a real estate commission in the amount of 2.5% of the Base Rent payable
during the Extended Term. Subject to the condition set forth herein,
such commission shall be payable on or before April 1, 1999. Except as
specifically provided herein, no commission shall be payable to CB
Commercial with respect to the Lease.
B. COMMISSION PAYABLE TO KEEWAYDIN GROUP: Landlord hereby agrees to pay
the following commission to the Keewaydin Group ("Keewaydin"):
i. EXTENDED TERM. Upon the condition that no event of default
exists at the time the payment is due or at the time the
Extension Term commences, Landlord agrees to pay Keewaydin a
commission in the amount of 2.5% of the Base Rent payable
during the Extended Term. Subject to the conditions set forth
herein, one-half (1/2) of such commission shall be payable on
or before April 1, 1998, and the balance shall be payable on
or before April 1, 1999.
ii. FIRST EXTENSION OPTION. Upon that condition that (i) Tenant
exercises the First Extension Option pursuant to the terms set
forth herein, without modification; (ii) no event of default
exists at the commencement of the First Extension Option; and
(iii) Keewaydin remains the sole and exclusive representative
of Tenant, then Landlord agrees to pay to Keewaydin a
commission in the amount of 1% of the Base Rent payable
7
<PAGE>
during the First Extension Option. Subject to the conditions
set forth herein, such commission shall be due and payable on
or before the commencement of the First Extension Option.
Except as specifically provided herein, no commission shall be payable
to Keewaydin with respect to this Lease.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year above written.
AMERICAN REAL ESTATE HOLDINGS, L.P. THE SPORTSMAN'S GUIDE, INC.
By: American Property Investors, Inc. By: /s/ Gregory R. Binkley
Its Sole General Partner --------------------------------
Its: EVP/COO
By: /s/ Martin Hirsch -------------------------------
-----------------------------------
Its: Vice-President
----------------------------------
8
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the "Agreement") dated as of June 26, 1998 (the
"Effective Date") is between THE SPORTSMAN'S GUIDE, INC. (the "Borrower"),
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION ("Norwest") and M&I MARSHALL &
ILSLEY BANK ("M&I") (M&I and Norwest each referred to herein as a "Bank" and
collectively as "Banks"), and Norwest as agent for the Banks (in such
capacity, the "Agent").
BACKGROUND
The Borrower has requested the Banks to provide it with a $20,000,000.00
committed revolving line of credit (the "Line"). The Borrower intends to use
the Line for general corporate purposes, including the issuance of standby
and documentary letters of credit.
The Banks are willing to grant the request of the Borrower, subject to the
terms and conditions hereof.
In consideration of the above premises, the Borrower and the Banks agree as
follows:
1. DEFINITIONS
1.1 In addition to those terms defined in the above Recitals, as used herein:
"Advance" shall mean an advance of funds under the Line.
"Agreement" shall mean this Credit Agreement and all amendments and
supplements hereto which may from time to time become effective hereafter.
"Base Rate" shall mean the "base" or "prime" rate of interest
established by Norwest as in effect and announced from time to time.
"Base Rate Borrowing" shall mean those Advances bearing interest at all
times at a variable rate determined by reference to the Base Rate.
"Borrowed Money" shall mean funds obtained by incurring contractual
indebtedness, but shall not include money borrowed from any Bank.
"Borrowing Base" shall mean 80% of Eligible Accounts Receivable plus 60%
of Eligible Inventory; provided that (i) the maximum amount of borrowing base
availability based on Eligible Inventory shall be $17,000,000.00, and (ii)
the Banks shall have the right to modify the percentages contained in this
Section based upon reasonable commercial standards and upon 30 days prior
written notice to the Borrower.
"Business Day" shall mean for all purposes other than those described
in the following clause (i), any day on which the Agent is open for
transacting substantially all of its commercial business, and (ii) with
respect to all notices and determinations in connection with, and payments of
principal of and interest on, LIBOR Borrowings, any Business Day described in
preceding clause (i) on which trading by and between banks in United States
Dollar deposits in the London Interbank LIBOR market is transacted.
"Closing Date" shall mean the date on which this Agreement is fully
executed and delivered to the Agent.
<PAGE>
"Deferred Payment Plan" shall mean the Borrower's payment plan whereby
the customer is billed on their credit card for the full amount of the
customer's total order on a date which is up to 100 days following the date
of shipment.
"Documentary L/C" shall mean a documentary letter of credit issued by
the Agent for the account of the Borrower pursuant to Section 2.12 hereof.
"Documentary L/C Agreement" shall mean any Master Security Agreement for
Irrevocable Letter of Credit (Commercial) or replacement document that is
executed by the Borrower and delivered to the Agent during the term of this
Agreement.
"Documents" shall mean the Revolving Notes, each Standby L/C Agreement,
the Documentary L/C Agreement, the Security Agreement and this Agreement.
"Eligible Accounts Receivable" shall mean all accounts receivable owed
to the Borrower, less ineligibles as defined in the form of Borrowing Base
Certificate attached hereto.
"Eligible Inventory" shall mean all inventory owned by the Borrower,
plus inventory being purchased under Documentary L/Cs, less the exclusions
described in the form of Borrowing Base Certificate attached hereto.
"Events of Default" shall mean any and all events of default described
in Section 8 hereof.
"E-Z Pay Plan" shall mean the Borrower's payment plan whereby the
customer is billed on their credit card for one-fourth of the customer's
total order at the time of purchase, and for the balance in three equal
monthly installments over the next three months following the date of
purchase.
"Facility Fee" shall mean the fee payable to the Banks under Section 3.1
hereof.
"GAAP" shall mean Generally Accepted Accounting Principles applied on a
basis consistent with those reflected in the financial statements referred to
in Section 6(e) hereof.
"Interest Period" means, with respect to any LIBOR Borrowing, the period
commencing on, as the case may be, the date on which such LIBOR Borrowing is
made or the date on which such LIBOR Borrowing results from the conversion of
a Base Rate Borrowing, and ending seven days or one, two, three or six months
thereafter, or such other time period as the Agent may quote to the Borrower,
as selected in a notice of borrowing, continuance or conversion as provided
herein; provided, however, that (i) if any Interest Period would otherwise
end on a day that is not a Business Day, that Interest Period shall be
extended to the next succeeding Business Day unless the result of such
extension would be to carry such Interest Period into another calendar month,
in which event such Interest Period shall end on the immediately preceding
Business Day, (ii) the Borrower may not select an Interest Period that would
otherwise extend beyond the Line Expiration Date, (iii) if no notice is given
with respect to selection of an Interest Period, the affected LIBOR Borrowing
shall be converted to a Base Rate Borrowing on the last day of the Interest
Period then in effect, and (iv) any Interest Period that begins on the last
Business Day of a calendar month (or on a date for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period), other than an Interest Period of less than one month, shall
end on the last Business Day of a calendar month.
"LIBOR Borrowing" shall mean those Advances bearing interest at all
times during the relevant Interest Period, at a fixed rate determined by
reference to the LIBOR Rate.
"LIBOR Rate" shall mean, with respect to any Interest Period for any
LIBOR Borrowing, the rate per annum equal to the offered quotation to the
Agent in the London Interbank LIBOR market for United States Dollar deposits
for delivery on the first day of such Interest Period, for the number of days
in such
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<PAGE>
Interest Period, and in an amount comparable to the principal amount of the
related LIBOR Borrowing to be outstanding during such Interest Period,
determined as of approximately 12:00 Noon, Minneapolis time, two Business
Days before the beginning of such Interest Period.
"Line" shall mean a revolving line of credit established by the Banks
for the benefit of the Borrower in the aggregate amount of $20,000,000.00.
"Line Expiration Date" shall mean, initially July 31, 1998; provided
that such date shall be automatically extended in one-year increments (but in
no event beyond July 31, 2003) unless any party hereto gives written notice
to the other parties on or before the May 31 immediately preceding the then
current Line Expiration Date, commencing May 31, 1999, stating that the Line
Expiration Date will not be extended.
"Line Percentages" shall mean, relative to any Bank, the percentages
identified as such set forth opposite the signature block for such Bank on
the last page of this Agreement.
"Net Income" means, with respect to any period, the net income (or the
net deficit, if expenses and charges exceed revenues and other proper income
credits) for such period determined in accordance with generally accepted
accounting principles as in effect from time to time.
"Permitted Liens" shall mean (i) liens in favor of Norwest as Agent for
the Banks on a pro rata basis, (ii) liens existing as of the Closing Date and
disclosed to the Banks in writing, (iii) liens for taxes not delinquent or
which the Borrower is contesting in good faith in a manner that prevents
enforcement of the matters being contested and for which adequate reserves
have been provided, and (iv) purchase money liens securing indebtedness
otherwise permitted under this Agreement, but only extending to the goods so
acquired.
"Reserve Adjusted LIBOR Rate" shall mean, for any Interest Period, a
rate per annum equal to the rate obtained by dividing (i) the LIBOR Rate for
such Interest Period by (ii) a percentage equal to 1 minus the Reserve
Requirement in effect from time to time during such Interest Period.
"Reserve Requirement" shall mean, relative to the Interest Period
applicable to any LIBOR Borrowing, a percentage (expressed as a decimal)
equal to the aggregate maximum reserve requirement (including all basic,
supplemental, marginal and other reserves and taking into account any
transitional adjustments or other scheduled changes in reserve requirements
during such Interest Period) on the first day of such Interest Period, as
specified under F.R.S. Board Regulation D or any other F.R.S. Board
regulation then in effect which prescribes reserve requirements applicable to
non-personal time deposits (as currently defined in such Regulation D),
applicable to the class of banks of which the Banks are members, on deposits
of the type used as a reference in determining the Reserve Adjusted LIBOR
Rate and having a maturity approximately equal to such Interest Period.
"Required Banks" shall mean any group of Banks which, in the aggregate,
has commitments of 66.67% or more of the aggregate amount of the Line.
"Revolving Notes" shall mean the promissory notes of the Borrower
substantially in the form of attached Exhibits A-1 and A-2, evidencing
Advances under the Line.
"Service Fee" shall mean that portion of interest to be retained by the
Agent from each payment made by the Borrower under the Line (in addition to
interest earned by the Agent in its capacity as a Bank) which fees shall be
equal to five basis points with respect to LIBOR Borrowings, fifteen basis
points with respect to Base Rate Borrowings, and five basis points with
respect to Standby L/C and Documentary L/C credit fees.
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<PAGE>
"Standby L/C" shall mean a standby letter of credit issued by the Agent
for the account of the Borrower pursuant to Section 2.11 hereof.
"Standby L/C Agreement" shall mean any Application and Agreement for
Irrevocable Standby Letter of Credit or replacement document that is executed
by the Borrower and delivered to the Agent during the term of this Agreement.
"Tangible Net Worth" means Total Net Worth less the following types of
assets: (1) leasehold improvements; (2) receivables and other investments
in or amounts due from any shareholder, director, officer, employee or other
person or entity related to or affiliated with the Borrower; and (3)
goodwill, patents, copyrights, mailing lists, trade names, trademarks,
servicing rights, organizational and franchise costs, bond underwriting costs
and other like assets properly classified as intangible.
"Total Liabilities" shall mean the aggregate amount of the Borrower's
total liabilities, determined according to generally accepted accounting
principles.
"Total Net Worth" means total assets less Total Liabilities, determined
according to generally accepted accounting principles.
2. THE LINE
2.1 ADVANCES. Subject to the other provisions of this Agreement, each Bank
shall make Advances to the Borrower under the Line from time to time from the
effective date hereof until the Line Expiration Date in aggregate principal
amounts not exceeding such Bank's Line Percentage of the lesser of the
Borrowing Base or TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00), at any
one time outstanding. Each Advance will be requested to the Agent in writing
by an authorized employee of the Borrower. Each Advance shall be made on a
Business Day, and shall be comprised of either a Base Rate Borrowing or a
LIBOR Borrowing, as requested by the Borrower. Any Advance for which the
Borrower fails to specify at the time of the related request either a Base
Rate Borrowing or a LIBOR Borrowing shall be a Base Rate Borrowing. Requests
for Advances must be received by the Agent no later than 12:00 Noon,
Minneapolis time, on the day of an Advance comprised of a Base Rate
Borrowing, and no later than 12:00 Noon, Minneapolis time, on the second
Business Day immediately preceding an Advance comprised of a LIBOR Borrowing.
The person making the request may ask the Agent to quote an indication of
the LIBOR Rate which would be applicable to the Advance for an Interest
Period specified by such person. If the person does not immediately accept
the quoted LIBOR Rate, the related Advance shall be a Base Rate Borrowing.
If the quoted LIBOR Rate is immediately accepted, the requested Advance shall
be a LIBOR Borrowing; provided, however, that each Advance comprised of a
LIBOR Borrowing shall be in the amount of $500,000.00, or greater. Each
request for an advance shall be deemed a representation and warranty by the
Borrower that the representations and warranties set forth in Section 6
hereof are true as of the date of such request. Each Advance will be
evidenced by a notation on each Bank's records, which shall be conclusive
evidence of such Advance. Within the limits of the Line and subject to the
terms and conditions hereof, the Borrower may borrow, prepay pursuant to
Section 2.8 hereof and reborrow pursuant to this Section 2.1.
2.2 ADVANCE PROCEDURES. The Agent shall notify each Bank of each request
for an Advance by telephone or fax no later than 1:00 p.m., Minneapolis time
on the day on which the Agent received the request. Subject to the notice
requirements of Section 2.1 hereof and to the further provisions of this
Section 2.2, the Agent will make the Advance to the Borrower no later than
4:30 p.m., Minneapolis time, on the Business Day requested by the Borrower.
On or before 3:30 p.m., Minneapolis time, on such Business Day, each Bank
shall deposit with the Agent same-day funds in an amount equal to such Bank's
Percentage of the related Advance. Such deposit will be made to an account
which the Agent shall specify from time to time by notice to the Banks. To
the extent funds are received from the Banks in accordance with this Section
2.2, the Agent shall make such funds available to the Borrower by wire
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transfer or internal transfer to the account(s) the Borrower shall have
designated to the Agent at or before the time of the related request. Unless
the Agent shall have received notice from a Bank prior to the date on which
such Bank is to provide funds to the Agent for an Advance to be made by such
Bank that such Bank will not make available to the Agent such funds, the
Agent may assume that such Bank has made such funds available to the Agent on
the date of such Advance in accordance with Section 2.2 and the Agent in its
sole discretion may, but shall not be obligated to, in reliance upon such
assumption, make available to the Borrower on such date a corresponding
amount.
2.3 CONTINUATION OF LIBOR BORROWINGS. LIBOR Borrowings may be continued as
such upon the expiration of an Interest Period with respect thereto by
compliance with the notice provisions set forth in Section 2.1 hereof. If
the Borrower shall fail to notify the Agent of its desire to continue a LIBOR
Borrowing as described in the first sentence of this Section 2.3, such
borrowing shall be automatically converted to a Base Rate Borrowing on the
last day of the existing Interest Period.
2.4 CONVERSION. For so long as there exists no Event of Default, and
subject to the dollar restrictions specified in Section 2.1 hereof, the
Borrower may elect to convert any Base Rate Borrowing to a LIBOR Borrowing by
compliance with the notice provisions set forth in Section 2.1 hereof. The
Borrower may elect to convert any LIBOR Borrowing to a Base Rate Borrowing on
the last day of the related Interest Period by compliance with the notice
provisions set forth in Section 2.1 hereof.
2.5 INTEREST RATES. (a) Interest on that portion of the outstanding
principal of the Revolving Notes comprised of Base Rate Borrowings shall
be calculated at an annual rate equal to the Base Rate in effect from
time to time less one-half of one percent (0.50%), and shall change as
and when the Base Rate changes. Interest shall be calculated on the
basis of the actual number of days elapsed in a year of 360 days.
(b) Interest on the unpaid principal of LIBOR Borrowings shall be
calculated for each Interest Period at a fixed annual rate equal to the
sum of the Reserve Adjusted LIBOR Rate determined for such Interest
Period plus one and eight-tenths percent (1.80%). Interest shall be
calculated on the basis of the actual number of days elapsed in a year
of 360 days.
2.6 INTEREST PAYMENTS. Interest on the unpaid principal of Base Rate
Borrowings shall be payable monthly, on the first day of each month, and on the
Line Expiration Date. Interest on the unpaid principal of each LIBOR Borrowing
shall be payable monthly, on the first day of each month, and on the final day
of each Interest Period and on the Line Expiration Date.
2.7 PRINCIPAL PAYMENTS. The principal of the Revolving Notes shall be
repayable on the Line Expiration Date. In addition, between December 1 and
March 1 of each fiscal year, the Borrower shall pay down the principal of the
Revolving Notes for at least 30 consecutive days to an amount not exceeding
$6,000,000.00 plus 80% of Eligible Accounts Receivable under the E-Z Pay Plan as
of the previous month-end.
2.8 PREPAYMENTS. The Borrower may at any time prepay Base Rate
Borrowings in whole or from time to time in part without premium or penalty.
Any prepayment of a LIBOR Borrowing on a date other than the last day of the
relevant Interest Period shall be accompanied by a prepayment fee equal to the
amount, if any, by which:
(1) the additional interest expense that would have been incurred by
the Banks for LIBOR cost in the amount prepaid, if it had not been
prepaid until the last day of the applicable Interest Period, exceeds
(2) the interest that would have been recoverable by the banks by
reinvesting the amount of principal prepaid from the prepayment date to
the last day of the applicable interest period in U.S. Government
securities having a maturity date on or about that date.
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This is expressed as:
[LIBOR Cost X $ X days] - [Treasury Bill Rate X $ X days]
----------------------- -------------------------------
360 360
2.9 METHOD OF PAYMENTS. The Borrower shall make each payment under this
Agreement and under the Revolving Notes not later than 1:00 P.M. (Minneapolis
time) on the date when due in lawful money of the United States to the Agent
at its Principal Office for the account of each Bank in immediately available
funds. The Agent will, by 3:30 P.M. (Minneapolis time), cause to be
distributed (1) such payments of principal and interest (less the Service Fee
retained by the Agent) in immediately available funds to each Bank in the
proportion that such Bank's Line Percentage bears to the total amount of the
payment, and (2) other fees payable to any Bank to be applied in accordance
with the terms of this Agreement. The Borrower hereby authorizes each Bank,
if and to the extent payment is not made when due under this Agreement or
under the Revolving Notes, to charge from time to time against any account of
the Borrower with such Bank any amount as due. Whenever any payment to be
made under this Agreement or under the Revolving Notes shall be stated to be
due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall be included in
the computation of the payment of interest and the Facility Fee, as the case
may be.
2.10 UNAVAILABILITY OF LIBOR BORROWINGS. Notwithstanding any other
provision hereof, if any law, regulation, treaty or directive or any change
therein or in the interpretation or application thereof by any governmental
authority, agency or instrumentality or any court makes it unlawful for any
Bank to make or maintain LIBOR Borrowings as contemplated by this Agreement,
such Bank and the Agent shall give notice (by telephone confirmed in writing)
thereof to the Borrower, and (i) such Bank's commitment to make LIBOR
Borrowings shall forthwith be canceled, (ii) each then-outstanding LIBOR
Borrowing (if any) shall automatically be converted to a Base Rate Borrowing
on the last day of the then-current Interest Period for such LIBOR Borrowing
or within such earlier period as required by law, and (iii) such Bank shall
thereafter make any requested LIBOR Borrowing available as a Base Rate
Borrowing. The Borrower hereby agrees promptly to pay such Bank, upon
demand, any additional amount necessary to compensate such Bank for any costs
incurred by such Bank in making any conversion of LIBOR Borrowings in
accordance with this Section 2.10, including (but not limited to) any
interest or fees payable by such Bank to lenders of funds obtained by it in
order to make or maintain such LIBOR Borrowings (the Bank's notice of such
costs, as certified to the Borrower, to be conclusive absent manifest error).
2.11 STANDBY LETTERS OF CREDIT. Norwest is hereby designated as Agent to
issue Standby Letters of Credit on behalf of the Banks. Any draw under a
Standby L/C that is not reimbursed on the same day shall be considered a loan
by the Banks under the Line.
(a) ISSUANCE AND EXPIRATION. Prior to the Line Expiration Date, the Agent
agrees to issue Standby L/Cs for the account of the Borrower, provided
that the Borrower is in compliance with the terms of this Agreement.
Each Standby L/C must have a maximum expiry of no later than the Line
Expiration Date, unless approved for a longer time period by the Banks
in their discretion. Prior to the issuance of a Standby L/C, the
Borrower will execute the Agent's standard Application and Agreement
for Irrevocable Standby Letter of Credit (the "Standby L/C Agreement")
and such other documents as the Agent deems necessary. At its
discretion, the Agent may issue Standby L/Cs in currencies other than
U.S. Dollars.
The face amount of Standby L/Cs and Documentary L/Cs issued under the
Line and any unreimbursed draws shall not at any one time outstanding
exceed $ 7,500,000.00.
(b) FEES AND EXPENSES. The Borrower shall pay to the Agent a credit fee of
1.80% per annum on the face amount of each Standby L/C, and calculated
on the basis of actual days elapsed in a 360-day year, with a minimum
fee of $300.00. The Service Fee and a $300.00 minimum fee shall be
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retained by the Agent and the balance shall be paid by the Agent to the
Banks according to their respective Line Percentages. This fee shall
be paid in advance and is in addition to all other fees or expenses
provided for in the L/C Application, which shall be for the account of
the Agent.
(c) REDUCTION OF LINE AVAILABILITY. Availability under the Line shall be
reduced dollar for dollar by the face amount of all outstanding Standby
L/Cs, plus any unreimbursed draws. Without limiting any rights and
remedies available to the Agent under any Standby L/C Agreement, any
draw under a Standby L/C may, at the Agent's option, be repaid through
an automatic advance under the Line, which shall be repayable according
to the terms of this Agreement.
(d) CASH COLLATERALIZATION OF OUTSTANDING STANDBY L/Cs. For so long as any
Event of Default exists under this Agreement or upon expiration of the
Line, the Banks may require the Borrower to deposit with it in an
account, immediately available funds equal to the face amount of
outstanding Standby L/Cs. The Borrower hereby grants the Banks a
security interest in these funds as security for all of the Borrower's
obligations to the Banks.
2.12 DOCUMENTARY LETTERS OF CREDIT. Norwest is hereby designated as Agent
to issue Documentary Letters of Credit on behalf of the Banks. Any
draw under a Documentary L/C that is not reimbursed on the same day
shall be considered a loan by the Banks under the Line.
(a) ISSUANCE AND EXPIRATION. Prior to the Line Expiration Date, the Agent
agrees to issue Documentary L/Cs for the account of the Borrower,
provided that the Borrower is in compliance with the terms of this
Agreement. Each Documentary L/C must have a maximum expiry of no later
than three months beyond the Line Expiration Date and must require
drafts payable at sight or for acceptance up to 90 days, but not
exceeding three months beyond the Line Expiration Date. Prior to the
issuance of a Documentary L/C, the Borrower will execute the Agent's
standard Master Security Agreement for Irrevocable Letter of Credit
(Commercial) (the "Documentary L/C Agreement") and such other documents
as the Agent deems necessary. At its discretion, the Agent may issue
Documentary L/Cs in currencies other than U.S. Dollars.
The face amount of Documentary L/Cs and Standby L/Cs issued under the
Line and any unreimbursed draws shall not at any one time outstanding
exceed $ 7,500,000.00.
(b) FEES AND EXPENSES. The Agent's standard operational charges and fees
will be charged for each Documentary L/C and shall be for the account
of the Agent. In addition, the Borrower shall pay to the Agent a
credit fee of 1.80% per annum on the face amount of each Documentary
L/C and time draft, calculated on the basis of actual days elapsed in a
360-day year. The Service Fee shall be retained by the Agent and the
balance shall be paid by the Agent to the Banks according to their
respective Line Percentages. This fee shall be paid in advance at the
time of issuance of each Documentary L/C, based upon the combined tenor
of the Documentary L/C and any related time drafts and is in addition
to all other fees or expenses provided for in the L/C Application,
which shall be for the account of the Agent.
(c) REDUCTION OF LINE AVAILABILITY. Availability under the Line shall be
reduced dollar for dollar by the face amount of all outstanding
Documentary L/Cs, plus any unreimbursed draws. Without limiting any
rights and remedies available to the Agent under the Documentary L/C
Agreement and related documents, any draw under a Documentary L/C may,
at the Agent's option, be repaid through an automatic advance under the
Line, which shall be repayable according to the terms of this Agreement.
(d) CASH COLLATERALIZATION OF OUTSTANDING DOCUMENTARY L/Cs. For so long as
any Event of Default exists under this Agreement or upon expiration of
the Line, the Banks may require the Borrower to deposit with it in an
account immediately available funds equal to the face amount of
outstanding
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Documentary L/Cs. The Borrower hereby grants the Banks a security
interest in these funds as security for all of the Borrower's
obligations to the Banks.
3. FEES AND EXPENSES
3.1 FACILITY FEE. Prior to the Line Expiration Date, the Borrower will pay
the Agent, quarterly in advance, on behalf of the Banks, the Facility
Fee, which shall be calculated as one-eighth of one percent (0.125%)
per annum of the amount of the Line. This fee shall be calculated on
the basis of actual days elapsed in a 360 day year.
3.2 DOCUMENTATION EXPENSES. The Borrower agrees to reimburse the Agent for
its reasonable expenses relating to the preparation of the Documents
and any possible future amendments to the Documents, which
reimbursement may include, but shall not be limited to, reimbursement
of reasonable attorneys' fees, including the allocated costs of the
Agent's in-house counsel, provided that reimbursement for preparation
of the Documents shall not be in excess of $3,000.00. Despite the
payment by the Borrower of the legal expenses of the Agent, Agent's
counsel is engaged solely to represent the Agent and does not and
cannot represent the Borrower.
3.3 COLLECTION EXPENSES. In the event the Borrower fails to pay the Banks
any amounts due under this Agreement or under the Documents, the
Borrower will pay all costs of collection, including reasonable
attorneys' fees and legal expenses incurred by the Banks.
4. SECURITY
To secure the Revolving Notes and the performance of its additional
obligations as set forth hereunder, prior to or simultaneous with the
first borrowing hereunder, the Borrower shall execute and deliver to
the Banks a security agreement and financing statements, in form and
substance satisfactory to the Banks, granting to the Agent on behalf of
the Banks a first security interest in all Borrower's present and
after-acquired accounts, inventory, equipment and general intangibles,
wherever located.
5. CONDITIONS PRECEDENT
The Borrower must deliver to the Banks the documents described in
Exhibit B, properly executed and in form and content acceptable to the
Banks, prior to the Banks' initial advance or disbursement under this
Agreement.
6. REPRESENTATIONS AND WARRANTIES
To induce the Banks to enter into this Agreement, the Borrower, to the
best of its knowledge and upon due inquiry, makes the representations
and warranties set forth below. Each request for an Advance under this
Agreement constitutes a reaffirmation of these representations and
warranties.
(a) ORGANIZATIONAL STATUS. The Borrower is a corporation duly organized
and in good standing under the laws of the State of Minnesota.
(b) OTHER JURISDICTIONS. The Borrower is duly qualified to do business and
is in good standing in any additional jurisdictions where, on advice of
legal counsel, registration was deemed necessary.
(c) AUTHORIZATION. This Agreement, and the execution and delivery of the
Documents required hereunder, is within the Borrower's powers, has been
duly authorized and does not conflict with any of its organizational
documents or any other agreement by which the Borrower is bound, and
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has been signed by all persons authorized and required to do so under
its organizational documents.
(d) ENFORCEABILITY. This Agreement is, and the Revolving Notes when issued
will be, valid and binding in accordance with their terms.
(e) FINANCIAL REPORTS. The Borrower has provided the Banks with its annual
audited financial statement dated December 28,1997 and its unaudited
interim financial statement dated May 31, 1998, and these statements
fairly represent the financial condition of the Borrower as of their
respective dates and were prepared in accordance with GAAP.
(f) LITIGATION. There is no litigation or governmental proceeding pending
or threatened against the Borrower which could have a material adverse
effect on the Borrower's financial condition or business.
(g) INSURANCE. The Borrower is in compliance with the insurance
requirements contained in Section 7.3(e) of this Agreement.
(h) TAXES. The Borrower has paid when due all federal, state and local
taxes.
(i) NO DEFAULT. There is no event which is, or with notice or the lapse of
time would be, an Event of Default under this Agreement.
(j) ERISA. The Borrower is in compliance in all material respects with
ERISA and has received no notice to the contrary from the PBGC or other
governmental entity.
(k) ENVIRONMENTAL MATTERS. To its knowledge, 1) The Borrower is in
compliance in all material respects with all health and environmental
laws applicable to the Borrower and its operations and knows of no
conditions or circumstances that could interfere with such compliance
in the future; 2) the Borrower has obtained all environmental permits
and approvals required by law for the operation of its business; and 3)
the Borrower has not identified any "recognized environmental
conditions", as that term is defined by the American Society for
Testing and Materials in its standards for environmental due diligence,
which could subject the Borrower to enforcement action if brought to
the attention of appropriate governmental authorities.
7. COVENANTS
During the time period that credit is available under the Line or there
are any outstanding Standby L/Cs or Documentary L/Cs or unreimbursed
draws thereunder, and thereafter until all amounts due under the
Documents are paid in full, unless the Banks shall otherwise agree in
writing, the Borrower agrees to:
7.1 FINANCIAL INFORMATION
(a) Annual Requirements
(i) ANNUAL AUDITED FINANCIAL STATEMENTS. Provide the Banks within 90 days
of the Borrower's fiscal year end, the Borrower's annual financial
statements. The statements must be audited with an unqualified opinion
by an independent certified public accountant acceptable to the Banks
and be accompanied by: (i) a compliance certificate from such
accountant in form acceptable to the Banks, and (ii) any management
letter or management's discussion and analysis related to such
financial statements.
(b) Quarterly Requirements
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(i) INTERIM FINANCIAL STATEMENTS. Provide the Banks within 45 days of each
fiscal quarter end, the Borrower's interim financial statements in the
form submitted to the Securities and Exchange Commission, accompanied
by any related management's discussion and analysis.
(c) Monthly Requirements. Provide the Banks within 30 days of each fiscal
month end (except for the Borrowing Base Certificate):
(i) INTERIM FINANCIAL STATEMENTS. The Borrower's interim financial
statements in form acceptable to the Banks and certified as correct by
an officer acceptable to the Banks, accompanied by any related
management's discussion and analysis.
(ii) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. An accounts receivable aging
report and an accounts payable aging report in form acceptable to the
Banks, current through the end of that period and certified as correct
by an officer of the Borrower acceptable to the Banks.
(iii) INVENTORY AGING. An inventory aging in form acceptable to the Banks,
current through the end of that period and certified as correct by an
officer of the Borrower acceptable to the Banks.
(iv) COMPLIANCE CERTIFICATE. A compliance certificate in the form of Exhibit
C hereto and certified as correct by an officer of the Borrower
acceptable to the Banks.
(v) BORROWING BASE CERTIFICATE. Provide the Banks within 15 days of each
fiscal month end, a Borrowing Base Certificate in the form of Exhibit
D, current through the end of that period and certified as correct by
an officer of the Borrower acceptable to the Banks.
(d) Other Requirements
(i) FINANCIAL PROJECTIONS AND BUDGET. Provide the Banks no later than 30
days prior to each fiscal year end, a monthly budget for the next
fiscal year and financial projections on an annual basis for the
Borrower's operations for the next two fiscal years, all in form
acceptable to the Banks, and all of which shall be treated as
confidential by the Banks according to their normal commercial
standards.
(ii) NOTICES. Provide the Banks prompt written notice of: 1) any event
which has or might after the passage of time or the giving of notice,
or both, constitute an event of default under the Documents, 2) any
event that would cause the representations and warranties contained in
this Agreement to be untrue, or 3) any change of ownership of any
leased real estate, upon Borrower's knowledge thereof.
(iii) ADDITIONAL INFORMATION. Provide the Banks with, promptly upon filing,
copies of any reports filed with the Securities and Exchange
Commission, copies of any press releases issued by the Borrower and
such other information as the Banks may reasonably request, and permit
the Banks to visit and inspect its properties and examine its books and
records.
7.2 FINANCIAL COVENANTS
(a) TANGIBLE NET WORTH. Maintain at all times a minimum Tangible Net Worth
of at least $13,000,000 plus 50% of cumulative positive Net Income
reported for each fiscal quarter end beginning with the quarter ending
March 29, 1998.
(b) TOTAL LIABILITIES TO TOTAL NET WORTH RATIO. Maintain at all times a
ratio of Total Liabilities to Total Net Worth of less than 2.25 to 1.0.
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(c) NET INCOME. Achieve a minimum Net Income of $2,000,000 reported as of
each fiscal quarter end on a rolling four quarters basis.
7.3 OTHER COVENANTS
(a) OTHER LIENS. Refrain from allowing any security interest or lien on
property it or any subsidiary owns now or in the future, except:
(i) liens in favor of the Banks;
(ii) liens for taxes not delinquent or which the Borrower is
contesting in good faith;
(iii) liens outstanding on the date of this Agreement as shown
on Schedule 1 to this Agreement; or
(iv) purchase money security interests.
(b) ADDITIONAL BORROWINGS. Refrain from incurring any indebtedness except
(i) existing indebtedness as shown on Schedule 2 to this Agreement, and
(ii) purchase money indebtedness (including capitalized leases) for the
acquisition of fixed assets in the ordinary course of business.
(c) GUARANTIES. Refrain from assuming, guaranteeing, endorsing or
otherwise becoming contingently liable for any obligations of any other
person, except for those guaranties outstanding as of the Effective
Date as shown on Schedule 3 to this Agreement.
(d) CAPITAL EXPENDITURES. Refrain from making, or committing to make,
capital expenditures (including the total amount of any capital leases)
in an aggregate amount exceeding $3,000,000 in any single fiscal year.
(e) INSURANCE. Cause its properties to be adequately insured by a
reputable insurance company against loss or damage and to carry such
other insurance (including business interruption insurance) as is
usually carried by persons engaged in the same or similar business.
(f) TAXES. Pay, when due, all taxes assessed against it or its property
except to the extent and so long as contested in good faith.
(g) CORPORATE EXISTENCE. Maintain its corporate existence and comply with
all laws and regulations applicable thereto.
(h) MERGER OR DISSOLUTION. Refrain from entering into any transaction of
merger or consolidation, or transferring, selling, assigning, leasing
or otherwise disposing of all or a substantial part of its properties
or assets (including a transfer, sale, assignment or lease to a
subsidiary or affiliate), or any assets or properties necessary or
desirable for the proper conduct of its business, or changing the
nature of its business, or winding up, liquidating or dissolving, or
agreeing to do any of the foregoing.
(i) MAINTENANCE OF PROPERTIES. Make all repairs, renewals or replacements
necessary to keep its plant, properties and equipment in good working
condition.
(j) BOOKS AND RECORDS. Maintain adequate books and records and refrain
from making any material changes in its accounting procedures whether
for tax purposes or otherwise.
(k) COMPLIANCE WITH LAWS. Comply in all material respects with all laws
applicable to its business and the ownership of its property.
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(l) PRESERVATION OF RIGHTS. Maintain and preserve all rights, privileges,
charters and franchises it now has that are material to the conduct of
its business.
(m) DIVIDENDS. Without the prior written consent of the Banks, refrain
from: (1) declaring or paying any dividends on any of its capital
stock, or (2) purchasing, redeeming or otherwise acquiring any of its
capital stock.
(n) INVESTMENTS AND ACQUISITIONS. Without the prior written consent of the
Banks, which shall not be unreasonably withheld, refrain from making or
permitting to exist any investments or commitments therefor (including
the acquisition, creation of or investment in any subsidiary), except:
(i) Short-term obligations of, or fully guaranteed by, the United
States of America.
(ii) Commercial paper rated A-1 or better by Standard and Poor's
Corporation or P-1 or better by Moody's Investors Service, Inc.
(iii) Demand deposit accounts maintained in the ordinary course of
business.
(iv) Certificates of deposit issued by and time deposits with
commercial banks (whether domestic or foreign) having capital
and surplus in excess of $50,000,000.
(o) DEPOSIT ACCOUNTS. Maintain substantially all of its deposit accounts
with the Agent.
(p) COLLATERAL AUDITS. Permit, and reimburse the Agent for the cost of,
two collateral audits during each calendar year, one to be performed by
the Agent and one to be performed by Hilco/Great American Appraisal and
Valuation Services, Inc., or other party selected by the Agent.
8. EVENTS OF DEFAULT AND REMEDIES
8.1 DEFAULT
Upon the occurrence of any one or more of the following Events of
Default, or at any time afterward unless the default has been cured,
the Banks may declare the Line to be terminated and in its discretion
accelerate and declare the unpaid principal, accrued interest and all
other amounts payable under the Revolving Notes and the Documents to be
immediately due and payable:
(a) Default by the Borrower in the payment when due of any principal or
interest due under any Revolving Note or any Standby L/C Agreement or
the Documentary L/C Agreement and continuance for 5 days.
(b) Default by the Borrower in the observance or performance of any
covenant or agreement contained in this Agreement, and continuance for
more than 15 days following written notice from the Agent or any of the
Banks.
(c) Default by the Borrower in the observance or performance of any
covenant or agreement contained in the Documents, or any of them,
excluding this Agreement, after giving effect to any applicable grace
period.
(d) Default by the Borrower in any agreement with the Banks or any other
lender that relates to indebtedness or guaranties or other indirect
liabilities which would allow the maturity of such obligation to be
accelerated.
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(e) Any representation or warranty made by the Borrower to the Banks is
untrue in any material respect.
(f) A garnishment, levy or writ of attachment, or any local, state, or
federal notice of tax lien or levy is served upon any Bank for the
attachment of property of the Borrower in any Bank's possession or
indebtedness owed to the Borrower by any Bank.
(g) A material adverse change occurs in the Borrower's financial condition
or which materially affects its ability to repay its obligations to the
Banks.
8.2 IMMEDIATE DEFAULT
If, with or without the Borrower's consent, a custodian, trustee or
receiver is appointed for any of the Borrower's properties, or if a
petition is filed by or against the Borrower under the United States
Bankruptcy Code, then the Line shall immediately terminate and the
unpaid principal, accrued interest and all other amounts payable under
the Revolving Notes and the Documents will become immediately due and
payable without notice or demand.
9 THE AGENT
9.1 Each Bank hereby appoints Norwest as its Agent under and for the
purpose of this Agreement, the Revolving Notes, and each other related
document. Each Bank authorizes the Agent to act on behalf of such Bank under
this Agreement, the Revolving Notes, and each other related document and, in
the absence of other written instructions from the Required Banks received
from time to time by the Agent (with respect to which the Agent agrees that
it will comply, except as otherwise provided in this Section 9 or as
otherwise advised by counsel that such compliance would be unlawful), to
exercise such powers hereunder and thereunder as are specially delegated to
or required of the Agent by the terms hereof and thereof, together with such
powers as may be reasonably incidental thereto. Notwithstanding any other
provision in this Agreement, the Agent shall not, without the prior written
consent of EACH Bank, (i) increase the amount of the Line, or the Line
Percentages, (ii) modify any interest rate or fee applicable to the Revolving
Notes, (iii) modify the Line Expiration Date, the last day of any Interest
Period, or the date on which any payment in respect of the Revolving Notes is
due, (iv) forgive all or any portion of any payment of principal or interest
due under the Revolving Notes, (v) release any guaranty or any material
portion of collateral, or (vi) modify any provision of this sentence. All
other provisions set forth in this Agreement, other than those specified in
the immediately preceding sentence, may be modified only with the approval of
the Required Banks. The Agent is hereby expressly authorized by the Banks
without hereby limiting any implied authority, (i) to receive on behalf of
the Banks all payments of principal of and interest on the Advances, and all
other amounts due to the Banks hereunder, and promptly to distribute to each
Bank its proper share of each payment so received, and (ii) to give notice on
behalf of each of the Banks to the Borrower of any Event of Default specified
in this Agreement of which the Agent has actual knowledge acquired in
connection with its agency hereunder. Each Bank hereby indemnifies (which
indemnity shall survive any termination of this Agreement) the Agent, in its
capacity as Agent, PRO RATA according to such Bank's Line Percentage, from
and against any and all liabilities, obligations, losses, damages, claims,
costs or expenses of any kind or nature whatsoever which may at any time be
imposed on, incurred by, or asserted against, the Agent in any way relating
to or arising out of this Agreement, the Revolving Notes, and any other
related document, including reasonable attorneys' fees, and as to which the
Agent is not reimbursed by the Borrower; provided, however, that no Bank
shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, claims, costs or expenses which are determined
by a court of competent jurisdiction in a final proceeding to have resulted
solely from the Agent's gross negligence or willful misconduct. The Agent
shall not be required to take any action hereunder, under the Revolving
Notes, or under any other related document, or to prosecute or defend any
suit in respect of this Agreement, the Revolving Notes, or any other related
document, unless it is indemnified hereunder to its satisfaction. If any
indemnity in favor of the Agent shall be or become, in the
-13-
<PAGE>
Agent's determination, inadequate, the Agent may call for additional
indemnification from the Banks and cease to do the acts indemnified against
hereunder until such additional indemnity is given.
9.2 Unless the Agent shall have been notified by telephone, confirmed in
writing, by any Bank by 3:00 p.m., Minneapolis time, on the day of the making
of any Advance that such Bank will not make available the amount which would
constitute its Line Percentage of such Advance on the date specified
therefor, the Agent may assume that such Bank has made such amount available
to the Agent and, in reliance upon such assumption, make available to the
Borrower a corresponding amount. If any amounts payable hereunder by a Bank
to the Agent or by the Agent to a Bank are not paid on the date such payment
is due, such amount shall accrue interest until paid at the overnight federal
funds rate as established by the Federal Reserve Bank of New York.
9.3 Neither the Agent nor any of its directors, officers, employees or
agents shall be liable to any Bank for any action taken or omitted to be
taken by the Agent under this Agreement or any other related document, or in
connection herewith or therewith, except for its own willful misconduct or
gross negligence, nor responsible for any recitals or warranties herein or
therein, nor for the effectiveness, enforceability, validity or due execution
of this Agreement or any other related document, nor for the creation,
perfection or priority of any liens purported to be created by any related
documents, or the validity, genuineness, enforceability, existence, value or
sufficiency of any collateral security, nor to make any inquiry respecting
the performance by the Borrower of its obligations hereunder or under any
other related document. Any such inquiry which may be made by the Agent
shall not obligate it to make any further inquiry or to take any action. The
Agent shall be entitled to rely upon advice of counsel concerning legal
maters and upon any notice, consent, certificate, statement or writing which
the Agent believes to be genuine and to have been presented by a proper
person.
9.4 The Agent may resign as such at any time upon at least 30 days prior
notice to the Borrower and all Banks. If the Agent at any time shall resign,
the Required Banks may appoint another Bank as a successor Agent which shall
thereupon become the Agent hereunder. If no successor Agent shall have been
so appointed by the Required Banks, and shall have accepted such appointment,
within 30 days after the retiring Agents' giving notice of resignation, then
the retiring Agent may, on behalf of the Banks, appoint a successor Agent,
which shall be one of the Banks or a commercial banking institution organized
under the laws of the United States (or any state thereof) or a U.S. branch
or agency of a commercial banking institution, and having a combined capital
and surplus of at least $500,000,000. Upon the acceptance of any appointment
as agent hereunder by a successor Agent, such successor Agent shall be
entitled to receive from any retiring Agent such documents of transfer and
assignment as such successor Agent may reasonably request, and shall
thereupon succeed to and become vested with all rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligation under this Agreement. After any retiring
Agent's resignation hereunder as the Agent, the provisions of this Section 9
shall continue to inure to its benefit as to any actions taken or omitted to
be taken by it while it was the Agent under this Agreement.
9.5 Norwest shall have the same rights and powers with respect to (i) loans
made by it or any of its affiliates, and (ii) promissory notes held by it or
any of its affiliates as any other Bank and may prosecute the same as if it
were not the Agent. Norwest and its affiliates may accept deposits from,
lend money to, and generally engage in any kind of business with the Borrower
or any affiliate of the Borrower as if Norwest were not the Agent hereunder.
9.6 Each Bank acknowledges that it has, independently of the Agent and each
other Bank, and based on such Bank's review of the financial information of
the Borrower, this Agreement, the other related documents (the terms and
provisions of which being satisfactory to such Bank) and such other
documents, information and investigations as such Bank has deemed
appropriate, made its own credit decision to enter into this Agreement. Each
Bank also acknowledges that it will, independently of the Agent and each
other Bank, and based on such other documents, information and investigations
as it shall deem appropriate at any time, continue to make its own credit
decisions as to exercising or not
-14-
<PAGE>
exercising from time to time any rights and privileges available to it under
this Agreement or any other related document.
9.7 Except as permitted under the terms and conditions of this Section 9.7
or, with respect to participations, under Section 9.8 hereof, no Bank may
sell, assign or transfer its rights or obligations under this Agreement or
its interest in any Revolving Note. Any Bank, at any time upon at least five
(5) Business Days prior written notice to the Agent and the Borrower, may
assign such Bank's Revolving Note, or a portion thereof (so long as any such
portion is not less than $2,500,000.00 and is in equal percentages of such
assigning Bank's interest in the Line), to a domestic bank (an "Applicant")
on any date (the "Adjustment Date") selected by such Bank, but only so long
as the Borrower and the Agent shall have provided their prior written
approval of such proposed Applicant, which prior written approval will not be
unreasonably withheld. Notwithstanding the foregoing, (i) assignments may be
made by a Bank to another Bank already a party to this Agreement in an amount
not less than $1,000,000.00, and (ii) no such consent of the Borrower shall
be required to sale of an interest to an affiliate of a Bank or, in any
event, if an Event of Default shall exist. Upon receipt of such approval and
to confirm the status of each additional Bank as a party to this Agreement
and to evidence the assignment in accordance herewith:
A. The Agent, the Borrower, the assigning Bank and such
Applicant shall, on or before the Adjustment Date, execute and deliver
to the Agent an Assignment Certificate in substantially the form of
Exhibit E (an "Assignment Certificate");
B. The Borrower will execute and deliver to the Agent, for
delivery by the Agent in accordance with the terms of the Assignment
Certificate, (i) a new Revolving Note payable to the order of the
Applicant in an amount corresponding to the applicable commitment
acquired by such Applicant, and (ii) a new Revolving Note payable to
the order of the assigning Bank in an amount corresponding to the
retained Line Percentage. Such new notes shall be in an aggregate
principal amount equal to the aggregate principal amount of the notes
to be replaced by such new notes, shall be dated the effective date of
such assignment and shall otherwise be in the form of the notes to be
replaced thereby. Such new notes shall be issued in substitution for,
but not in satisfaction or payment of, the notes being replaced thereby
and such new notes shall be treated as notes for purposes of this
Agreement; and,
C. The assigning Bank shall pay to the applicable Agent an
administrative fee of $2,500.00.
Upon the execution and delivery of such Assignment Certificate and such new
Revolving Notes, and effective as of the effective date thereof, (i) this
Agreement shall be deemed to be amended to the extent, and only to the
extent, necessary to reflect the addition of such additional Bank and the
resulting adjustment of the Line Percentages arising therefrom, (ii) the
assigning Bank shall be relieved of all obligations hereunder to the extent
of the reduction of the assigning Bank's Line Percentages, and (iii) the
Applicant shall become a party hereto and shall be entitled to all rights,
benefits and privileges accorded to a Bank herein and in each other document
or instrument executed pursuant hereto and subject to all obligations of a
Bank hereunder, including, without limitation, the right to approve or
disapprove actions which, in accordance with the terms hereof, require the
approval of the Required Banks or all Banks. Promptly after the execution of
any Assignment Certificate, a copy thereof shall be delivered by the Agent to
each Bank and to the Borrowers. In order to facilitate the addition of
additional Banks hereto, the Borrower and the Banks shall cooperate fully
with the Agent in connection therewith and shall provide all reasonable
assistance requested by the Agent relating thereto, including, without
limitation, the furnishing of such written materials and financial
information regarding the Borrower as the Agent may reasonably request, the
execution of such documents as the Agent may reasonably request with respect
thereto, and the participation by officers of the Borrower, and the Banks in
a meeting or teleconference call with any Applicant upon the request of the
Agent.
-15-
<PAGE>
9.8 In addition to the rights granted in Section 9.7 hereof, each Bank may
grant participations in all or a portion of its Revolving Note to any
domestic or foreign commercial bank (having a branch office in the United
States), insurance company, financial institution or an affiliate of such
Bank. No holder of any such participation, however, shall be entitled to
require any Bank to take or omit to take any action hereunder except those
actions described in Section 9.1 hereof requiring consent of all Banks. The
Banks shall not, as among the Borrowers, the Agent and the Banks, be relieved
of any of their respective obligations hereunder as a result of any such
grant of a participation. The Borrowers hereby acknowledge and agree that
any participation described in this Section 9.8 may rely upon, and possess
all rights under, any opinions, certificates, or other instruments or
documents delivered under or in connection with any Loan Document. Except as
set forth in this Section 9.8, no Bank may grant any participation in the
Line.
9.9 Each Bank hereby agrees with each other Bank that if such Bank shall
receive and retain any payment, whether by set-off or application of deposit
balances or otherwise ("Set-off"), in respect of any Advance, in excess of
its ratable share of payments based on its Line Percentage, then such Bank
shall purchase for cash at face value, but without recourse, ratably from
each of the other Banks such amount of the Advances, or participations
therein, held by each such other Banks (or interest therein) as shall be
necessary to cause such Bank to share such excess payment ratably with all
the other Banks; provided, however, that if any such purchase is made by any
Bank, and if such excess payment or part thereof is thereafter recovered from
such purchasing Bank, the related purchases from the other Banks shall be
rescinded ratably and the purchase price restored as to the portion of such
excess payment so recovered, but without interest.
10. MISCELLANEOUS.
(a) 360 DAY YEAR. All interest and fees due under this Agreement will be
calculated on the basis of actual days elapsed in a 360 day year.
(b) GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Banks and all calculations for compliance
with financial covenants will be made using generally accepted
accounting principles consistently applied ("GAAP").
(c) NO WAIVER; CUMULATIVE REMEDIES. No failure or delay by the Banks in
exercising any rights under this Agreement shall be deemed a waiver of
those rights. The remedies provided for in the Agreement are
cumulative and not exclusive of any remedies provided by law.
(d) AMENDMENTS OR MODIFICATIONS. No amendment, modification, termination,
or waiver of any provision of any Document to which the Borrower is a
party, nor consent to any departure by the Borrower from any Document
to which it is a party, shall in any event be effective unless the same
shall be in writing and signed by the Required Banks, and then such
waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given, provided, however, that no
amendment, waiver or consent shall, unless in writing and signed by all
the Banks, do any of the following: (a) increase the Commitments of the
Banks or subject the Banks to any additional obligations; (b) reduce
the principal of, or interest on, the Revolving Notes or any fees
hereunder; (c) postpone any date fixed for any payment of principal of,
or interest on, the Revolving Notes or any fees hereunder; (d) release
any guaranty or any material portion of collateral, (e) change the
percentage of the Commitments or of the aggregate unpaid principal
amount of the Revolving Notes or the number of Banks which shall be
required for the Banks or any of them to take action hereunder; or (f)
amend, modify or waive any provision of this Section 10(d), and
provided further than no amendment, waiver, or consent shall, unless in
writing and signed by the Agent in addition to the Banks required above
to take such action, affect the rights or duties of the Agent under any
of the Loan Documents.
(e) BINDING EFFECT: ASSIGNMENT. This Agreement and the Documents are
binding on the successors and assigns of the Borrower and Banks. The
Borrower may not assign its rights under this
-16-
<PAGE>
Agreement and the Documents without the Banks' prior written consent.
The Banks may sell participations in or assign the Documents and
exchange financial information about the Borrower with actual or
potential participants or assignees. Any assignee or participant shall
be subject to the same standards of confidentiality as apply to the
Banks.
(f) MINNESOTA LAW. This Agreement and the Documents will be governed by
the substantive laws of the State of Minnesota.
(g) SEVERABILITY OF PROVISIONS. If any part of this Agreement or the
Documents are unenforceable, the rest of this Agreement or the
Documents may still be enforced.
(h) INTEGRATION. This Agreement and the Documents describe the entire
understanding and agreement of the parties and supersedes all prior
agreements between the Banks and the Borrower relating to each credit
facility subject to this Agreement, whether verbal or in writing.
(i) WAIVER OF JURY TRIAL. The Borrower hereby waives the right to a trial
by jury in any action relating to this Agreement or any Documents.
(j) COUNTERPARTS. This Agreement may be executed by one or more of the
parties to this Agreement on any number of separate counterparts and
all of said counterparts taken together shall constitute one and the
same instrument.
<TABLE>
<S> <C>
Address for notices to Agent: Address for notices to Borrower:
Norwest Bank Minnesota, The Sportsman's Guide, Inc.
National Association 411 Farwell Avenue
55 East Fifth Street South Saint Paul, Minnesota 55075-0239
St. Paul, Minnesota 55101 Attention: David M. Kolkind
Attention: Thomas L. Falck, Controller and Assistant Treasurer
Vice President and Senior Banker
NORWEST BANK MINNESOTA, THE SPORTSMAN'S GUIDE, INC.
NATIONAL ASSOCIATION, AS AGENT
BY: /s/ Thomas L. Falck BY: /s/ Charles Lingen
----------------------------------- ---------------------------------
THOMAS L. FALCK
ITS: VICE PRESIDENT AND SENIOR BANKER ITS: CFO
--------------------------------
Address for notices to Norwest: Address for notices to M&I:
Norwest Bank Minnesota, M&I Marshall & Ilsley Bank
National Association 4135 Multifoods Tower
55 East Fifth Street 33 South Sixth Street
St. Paul, Minnesota 55101 Minneapolis, Minnesota 55402
Attention: Thomas L. Falck, Attention: B. Douglas Pudvah
Vice President and Senior Banker Vice President
-17-
<PAGE>
NORWEST BANK MINNESOTA, M&I MARSHALL & ILSLEY BANK
NATIONAL ASSOCIATION
BY: /s/ Thomas L. Falck BY: /s/ Stephen F. Geimer
----------------------------------- ---------------------------------
THOMAS L. FALCK ITS: Vice President
ITS: VICE PRESIDENT AND SENIOR BANKER --------------------------------
AND BY: /s/ Douglas Nelson
-----------------------------
ITS: Vice President
-------------------------------
Percentage Interest: 65.0 Percentage Interest: 35.0
Maximum Commitment: $13,000,000.00 Maximum Commitment: $7,000,000.00
</TABLE>
-18-
<PAGE>
EXHIBIT A-1
REVOLVING NOTE
$7,000,000.00 June 26, 1998
FOR VALUE RECEIVED, The Sportsman's Guide, Inc. (the "Borrower") promises to
pay to the order of M&I Marshall & Ilsley Bank (the "Bank"), to Norwest Bank
Minnesota, National Association, as Agent, at the Agent's main office in
Minneapolis, Minnesota, for the account of the Bank, the principal sum of
Seven Million and 00/100 Dollars ($7,000,000.00), or the amount shown on the
Bank's records to be outstanding, plus interest (calculated on the basis of
actual days elapsed in a 360-day year) accruing on the unpaid balance at an
annual rate and in payment amounts determined in accordance with the
provisions of the Credit Agreement defined below. Absent manifest error the
Bank's records will be conclusive evidence of the principal and accrued
interest owing hereunder.
This Note constitutes one of the Revolving Notes issued pursuant to
the provisions of that certain Credit Agreement of even date herewith (the
"Credit Agreement") made between the undersigned, Norwest Bank Minnesota,
National Association and M&I Marshall & Ilsley Bank. Reference is hereby
made to the Credit Agreement for statements of the terms pursuant to which
accrued interest on this Note is payable. Reference is also hereby made to
the Credit Agreement for statements of the terms pursuant to which the
indebtedness evidenced hereby was created, may be prepaid voluntarily, may be
reborrowed and may be accelerated.
REPAYMENT TERMS
INTEREST. Interest accruing under this Note will be payable on the first day
of each month, commencing July 1, 1998, and at other times as set forth in
the Credit Agreement.
PRINCIPAL. All outstanding principal and any unpaid interest will be due on
the Line Expiration Date, as established pursuant to the Credit Agreement,
which in no event shall exceed July 31, 2003.
ADDITIONAL TERMS AND CONDITIONS. The Borrower agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses incurred
by the Bank in the event this Revolving Note is not duly paid. Demand,
presentment, protest and notice of nonpayment and dishonor of this Revolving
Note are expressly waived. This Revolving Note will be governed by the
substantive laws of the State of Minnesota.
THE SPORTSMAN'S GUIDE, INC.
BY:
---------------------------------
ITS:
--------------------------------
<PAGE>
EXHIBIT A-2
REVOLVING NOTE
$13,000,000.00 June 26, 1998
FOR VALUE RECEIVED, The Sportsman's Guide, Inc. (the "Borrower") promises to
pay to the order of Norwest Bank Minnesota, National Association (the
"Bank"), to Norwest Bank Minnesota, National Association, as Agent, at the
Agent's main office in Minneapolis, Minnesota, for the account of the Bank,
the principal sum of Thirteen Million and 00/100 Dollars ($13,000,000.00), or
the amount shown on the Bank's records to be outstanding, plus interest
(calculated on the basis of actual days elapsed in a 360-day year) accruing
on the unpaid balance at an annual rate and in payment amounts determined in
accordance with the provisions of the Credit Agreement defined below. Absent
manifest error the Bank's records will be conclusive evidence of the
principal and accrued interest owing hereunder.
This Note constitutes one of the Revolving Notes issued pursuant to the
provisions of that certain Credit Agreement of even date herewith (the
"Credit Agreement") made between the undersigned, Norwest Bank Minnesota,
National Association and M&I Marshall & Ilsley Bank. Reference is hereby
made to the Credit Agreement for statements of the terms pursuant to which
accrued interest on this Note is payable. Reference is also hereby made to
the Credit Agreement for statements of the terms pursuant to which the
indebtedness evidenced hereby was created, may be prepaid voluntarily, may be
reborrowed and may be accelerated.
REPAYMENT TERMS
INTEREST. Interest accruing under this Note will be payable on the first day
of each month, commencing July 1, 1998, and at other times as set forth in
the Credit Agreement.
PRINCIPAL. All outstanding principal and any unpaid interest will be due on
the Line Expiration Date, as established pursuant to the Credit Agreement,
which in no event shall exceed July 31, 2003.
ADDITIONAL TERMS AND CONDITIONS. The Borrower agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses incurred
by the Bank in the event this Revolving Note is not duly paid. Demand,
presentment, protest and notice of nonpayment and dishonor of this Revolving
Note are expressly waived. This Revolving Note will be governed by the
substantive laws of the State of Minnesota.
THE SPORTSMAN'S GUIDE, INC.
BY:
---------------------------------
ITS:
--------------------------------
<PAGE>
EXHIBIT B
CONDITIONS PRECEDENT TO INITIAL ADVANCE
NOTES
The Revolving Notes
SECURITY DOCUMENTS
Security Agreement and UCC-1 financing statements from the Borrower covering
all accounts, inventory, equipment and general intangibles.
Landlord Waivers from any location where inventory or equipment is located in
facilities not owned by the Borrower.
Releases of existing UCC filings as may be required by the Banks.
AUTHORIZATION
CORPORATE CERTIFICATE OF AUTHORITY. A certificate of the Borrower's
corporate secretary as to the incumbency and signatures of the officers of
the Borrower signing the Documents and containing a copy of resolutions of
the Borrower's board of directors authorizing execution of the Documents and
performance in accordance with the terms of the Agreement.
ORGANIZATION
ARTICLES OF INCORPORATION AND BY-LAWS. A certified copy of the Borrower's
Articles of Incorporation and By-Laws and any amendments, if applicable.
CERTIFICATE OF GOOD STANDING. A copy of the Borrower's Certificate of Good
Standing, recently certified by the Minnesota Secretary of State.
OTHER
EVIDENCE OF INSURANCE. Evidence that the insurance required under Section
7.3(e) of this Agreement is in force.
LEGAL OPINION. A signed opinion of counsel for the Borrower, addressed to
the Banks, opining that: 1) the Borrower is duly organized and in good
standing in its state of organization; 2) the Borrower is qualified in each
state in which it does business and is legally required to be qualified; 3)
the Borrower has the power to execute and deliver the Documents and to borrow
money and perform in accordance with the terms of the Documents; 4) all
corporate action and consent necessary to the validity of the Documents has
been obtained; 5) the Documents have been duly signed and are the valid and
binding obligation of the Borrower and enforceable in accordance with their
terms; and 6) to the best of counsel's knowledge, the Documents and the
transactions contemplated thereunder do not conflict with any provision of
the articles of incorporation or by-laws of Borrower or any agreement binding
upon the Borrower or its properties.
<PAGE>
EXHIBIT C
OFFICER'S CERTIFICATE OF COMPLIANCE
THE SPORTSMAN'S GUIDE, INC.
TO: Norwest Bank Minnesota, National Association,
and
M&I Marshall & Ilsley Bank
(the "Banks")
I am an officer of The Sportsman's Guide, Inc. (the "Borrower") and
under the terms of a Credit Agreement (the "Agreement") between the Banks and
the Borrower dated June 26, 1998, certify that:
1. The attached financial statements of the Borrower from
____________________ through ____________________ (the "Statement Date") are
true and correct and have been accurately prepared in accordance with
generally accepted accounting principles applied consistently with the
Borrower's most recent annual financial statement; and
2. I have read and am familiar with the Agreement and have no knowledge
of an existing event of default under the Agreement or of any event which
would, after the lapse of time or the giving of notice, or both, constitute
an event of default under the Agreement.
The calculations regarding each financial covenant, as of the Statement
Date, and regardless of whether the Borrower must be in compliance with each
covenant as of the Statement Date, are as follows:
<TABLE>
<CAPTION>
COVENANT ACTUAL REQUIRED
<S> <C> <C>
TANGIBLE NET WORTH
Total Net Worth
------------
(-) Intangible Assets
------------
Tangible Net Worth $ $13,000,000 plus 50% positive
------------ net income reported quarterly,
------------ starting 3/29/98
TOTAL LIABILITIES TO TOTAL NET WORTH RATIO
Total Liabilities ------------
Total Net Worth ------------
Total Liabilities/Total Net Worth ------------ 2.25 to 1.0
------------
NET INCOME $ $2,000,000 on rolling four
------------ quarters basis
------------
CAPITAL EXPENDITURES
Capital Expenditures for fiscal year Maximum $3,000,000 each
through the Statement Date fiscal year.
------------
</TABLE>
THE SPORTSMAN'S GUIDE, INC.
BY: DATE:
----------------------------- -------------------------
ITS:
----------------------------
<PAGE>
Exhibit D
BORROWING BASE CERTIFICATE
THE SPORTSMAN'S GUIDE, INC.
TO: Norwest Bank Minnesota, National Association,
and
M&I Marshall & Ilsley Bank
(the "Banks")
The Sportsman's Guide, Inc. (the "Borrower") certifies that the
following computation of the Borrowing Base was performed as of
__________________________ in accordance with the Borrowing Base definitions
set forth below and in the Credit Agreement entered into between the Banks
and the Borrower dated June 26, 1998.
Eligible Accounts Receivable means all accounts receivable of the Borrower
except those which are:
<TABLE>
<S> <C> <C>
$ 1) Greater than 30 days past the invoice due date.
--------------
2) Due from an account debtor, 10% or more of whose
-------------- accounts owed to the Borrower are more than 30
days past the invoice due date.
3) Delinquent, which shall mean due from an account
-------------- debtor, one or more of whose scheduled credit card
payments has been rejected or not authorized by
the card issuer on the due date.
4) Subject to offset or dispute.
--------------
5) Due from an account debtor who is subject to any
-------------- bankruptcy proceeding.
6) Owed by a shareholder, subsidiary, affiliate,
-------------- officer or employee of the Borrower.
7) Not subject to a perfected first lien security
-------------- interest in favor of the Agent on behalf of the
Banks.
8) Due from an account debtor located outside the
-------------- United States and not supported by a standby
letter of credit acceptable to the Agent on behalf
of the Banks.
9) Due from a unit of government, whether foreign or
-------------- domestic.
10) Otherwise deemed ineligible by the Banks in their
-------------- reasonable discretion.
</TABLE>
<TABLE>
<S> <C> <C>
Total E-Z Pay Plan Receivables $
--------------
Less: 1) Delinquent $
(item 3 from above) --------------
2) Other ineligibles $
(1, 2 and 4-10 above) --------------
<PAGE>
Total Deferred Payment Plan Receivables $
--------------
Less: 1) Delinquent $
(item 3 from above) --------------
2) Other ineligibles $
(1, 2 and 4-10 above) --------------
Total Other Receivables $
--------------
Less: 1) Delinquent $
(item 3 from above) --------------
2) Other ineligibles $
(1, 2 and 4-10 above) --------------
Eligible A/R $
--------------
80% of Eligible Accts. Receivable $
--------------
--------------
</TABLE>
Eligible Inventory means all inventory owned by the Borrower, plus inventory
being purchased under a Documentary L/C, as determined by generally accepted
accounting principles, except inventory which is:
<TABLE>
<S> <C> <C>
$ 1) In transit; unless covered by a L/C issued by
-------------- Norwest
2) Located at any warehouse not approved by the
-------------- Agent.
3) Covered by a warehouse receipt or other document
-------------- of title.
4) On consignment to or from any other person or
-------------- subject to any bailment.
5) Not subject to a perfected first lien security
-------------- interest in favor of the Agent on behalf of the
Banks.
6) Samples, supplies, shipping supplies, parts
-------------- inventory, returns inventory (including inventory
in the process of being returned) and damaged
inventory.
7) Work-in-process inventory.
--------------
8) Otherwise deemed ineligible by the Banks in their
-------------- reasonable discretion.
And the greater of:
10.a) Obsolete inventory as defined by slow moving
-------------- inventory (less than 10 sales in 9 months and
over 270 days), or
10.b) The Borrower's Reserve for Obsolescence.
--------------
</TABLE>
<TABLE>
<S> <C> <C>
Total Inventory $
--------------
Plus Inventory being purchased under L/C $
--------------
Less: Ineligible Inventory $
--------------
Eligible Inventory $
--------------
60% of Eligible Inventory (not to exceed $17,000,000) $
--------------
--------------
<PAGE>
Total Borrowing Base $
--------------
--------------
Total Advances Outstanding $
--------------
Total L/Cs and time drafts $
--------------
Total Line Outstandings ($ )
--------------
--------------
Excess (Deficit) $
--------------
--------------
</TABLE>
THE SPORTSMAN'S GUIDE, INC.
By: Date:
------------------------------ ---------------------------
Its:
-----------------------------
<PAGE>
EXHIBIT E
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between
______________________________________________________ (the "Assignor") and
______________________________________________________ (the "Assignee") is
dated as of _______________, ____. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit
Agreement, dated as of June 26, 1998 (which, as it may be amended, modified,
renewed or extended from time to time, is herein called the "Credit
Agreement"), among The Sportsman's Guide, Inc. (the "Borrower"), certain
banks party thereto and Norwest Bank Minnesota, National Association, as
agent for such banks. Capitalized terms used herein and not otherwise defined
herein shall have the meanings attributed to them in the Credit Agreement.
The Assignor desires to assign to the Assignee, and the Assignee desires to
assume from the Assignor, an undivided interest (the "Purchased Percentage")
in the commitment of the Assignor such that after giving effect to the
assignment and assumption hereinafter provided, the commitment of the
Assignee shall equal $___________ and its percentage of the Aggregate
Commitment shall equal ____%.
2. ASSIGNMENT. For and in consideration of the assumption of
obligations by the Assignee set forth in Section 3 hereof and the other
consideration set forth herein, and effective as of the Effective Date (as
hereinafter defined), the Assignor does hereby sell, assign, transfer and
convey all of its right, title and interest in and to the Purchased
Percentage of (i) the commitment of the Assignor (as in effect on the
Effective Date), (ii) any Advance outstanding on the Effective Date and (iii)
the Credit Agreement and the other Documents. Pursuant to Section 9.7 of the
Credit Agreement, on and after the Effective Date the Assignee shall have the
same rights, benefits and obligations as the Assignor had under the Documents
with respect to the Purchased Percentage of the Documents, all determined as
if the Assignee were a "Bank" under the Credit Agreement with ____% of the
aggregate commitment. The Effective Date shall be the later of __________ or
two Business Days (or such shorter period agreed to by the Agent) after this
Assignment has been delivered to the Agent. In no event will the Effective
Date occur if the payments required to be made by the Assignee to the
Assignor on the Effective Date under Section 4 and 5 hereof are not made on
the proposed Effective Date. The Assignor will notify the Assignee of the
proposed Effective Date on the Business Day prior to the proposed Effective
Date.
3. ASSUMPTION. For and in consideration of the assignment of rights by
the Assignor set forth in Section 2 hereof and the other consideration set
forth herein, and effective as of the Effective Date, the Assignor does
hereby accept that assignment, and assume and covenant and agree fully,
completely and timely to perform, comply with and discharge, each and all of
the obligations, duties and liabilities of the Assignor under the Credit
Agreement which are assigned to the Assignee hereunder, which assumption
includes, without limitation, the obligation to fund the unfunded portion of
the aggregate commitment in accordance with the provisions set forth in the
Credit Agreement as if the Assignee were a "Bank" under the Credit Agreement
with ____% of the aggregate commitment. The Assignee agrees to be bound by
all provisions relating to "Banks" under and as defined in the Credit
Agreement, including, without limitation, provisions relating to the
dissemination of information and the payment of indemnification.
4. PAYMENTS OBLIGATIONS. On and after the Effective Date, the Assignee
shall be entitled to receive from the Agent all payments of principal,
interest and fees with respect to the Purchased Percentage of the Assignor's
commitment and Advances. The Assignee shall advance funds
<PAGE>
directly to the Agent with respect to all Advances and reimbursement payments
made on or after the Effective Date. In consideration for the sale and
assignment of outstanding advances hereunder, (i) with respect to all Base
Rate Borrowings made by the Assignor outstanding on the Effective Date, the
Assignee shall pay the Assignor, on the Effective Date, an amount equal to
the Purchased Percentage of all such Base Rate Borrowings; and (ii) with
respect to each LIBOR Borrowing made by the Assignor outstanding on the
Effective Date, (a) on the last day of the Interest Period therefor or (b) on
such earlier date agreed to by the Assignor and the Assignee or (c) on the
date on which any such LIBOR Borrowing either becomes due (by acceleration or
otherwise) or is prepaid (the date as described in the foregoing clauses (a),
(b) or (c) being hereinafter referred to as the "Payment Date"), the Assignee
shall pay the Assignor an amount equal to the Purchased Percentage of such
LIBOR Borrowing. On and after the Effective Date, the Assignee will also
remit to the Assignor any amounts of interest on Advances and fees received
from the Agent which relate to the Purchased Percentage of Advances made by
the Assignor accrued for periods prior to the Effective Date, in the case of
Base Rate Borrowings, or the Payment Date, in the case of LIBOR Borrowing,
and not heretofore paid by the Assignee to the Assignor. In the event
interest for the period from the Effective Date to but not including the
Payment Date is not paid by the Borrower with respect to any LIBOR Borrowings
sold by the Assignor to the Assignee hereunder, the Assignee shall pay to the
Assignor interest for such period on such LIBOR Borrowing at the applicable
rate provided by the Credit Agreement. In the event that either party hereto
receives any payment to which the other party hereto is entitled under this
Assignment Agreement, then the party receiving such amount shall promptly
remit it to the other party hereto.
5. CREDIT DETERMINATION; LIMITATIONS ON ASSIGNOR'S LIABILITY. The
Assignee represents and warrants to the Assignor that it is capable of making
and has made and shall continue to make its own credit determinations and
analysis based upon such information as the Assignee deemed sufficient to
enter into the transaction contemplated hereby and not based on any
statements or representations by the Assignor. It is understood and agreed
that the assignment and assumption hereunder are made without recourse to the
Assignor and that the Assignor makes no representation or warranty of any
kind to the Assignee and shall not be responsible for (i) the due execution,
legality, validity, enforceability, genuineness, sufficiency or
collectability of the Credit Agreement or any other Document, including
without limitation, documents granting the Assignor and the other Banks a
security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of
the Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of
the terms or provisions of any of the Documents, (v) inspecting any of the
property, books or records of the Borrower or (vi) the validity,
enforceability, perfection, priority, condition, value or sufficiency of any
collateral securing or purporting to secure the Advances. Neither the
Assignor nor any of its officers, directors, employees, agents or attorneys
shall be liable for any mistake, error of judgment, or action taken or
omitted to be taken in connection with the Advances or the Documents, except
for its or their own bad faith or willful misconduct.
6. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor
harmless against any and all losses, costs and expenses (including, without
limitation, reasonable attorneys' fees) and liabilities incurred by the
Assignor in connection with or arising in any manner from the Assignee's
performance or non-performance of obligations assumed under this Assignment
Agreement.
7. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee
shall have the right pursuant to Section 9.7 of the Credit Agreement to
assign the rights which are assigned to the Assignee hereunder to any entity
or person, provided that (i) any such subsequent assignment does not violate
any of the terms and conditions of the Documents or any law, rule,
regulation, order, writ, judgment, injunction or decree and that any consent
required under the terms of the Documents has been obtained, (ii) the
assignee under such assignment from the Assignee shall agree to assume all of
the Assignee's obligations hereunder in a manner satisfactory to the Assignor
and (iii) the Assignee is not thereby released from any of its obligations to
the Assignor hereunder.
<PAGE>
8. ENTIRE AGREEMENT. This Assignment Agreement and the attached
consent embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings between the
parties hereto relating to the subject matter hereof.
9. GOVERNING LAW. This Assignment Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of Minnesota.
10. NOTICES. Notices shall be given under this Assignment Agreement in
the manner set forth in the Credit Agreement. For the purpose hereof, the
addresses of the parties hereto (until notice of a change is delivered) shall
be the address set forth under each party's name on the signature pages
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement by their duly authorized officers as of the date first above
written.
[NAME OF ASSIGNOR]
By:
----------------------------------
Title:
-------------------------------
-------------------------------
-------------------------------
[NAME OF ASSIGNEE]
By:
----------------------------------
Title:
-------------------------------
-------------------------------
-------------------------------
<PAGE>
SCHEDULE 1
EXISTING LIENS
THE SPORTSMAN'S GUIDE, INC.
JUNE 26, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FILE NUMBER: DATE FILED: LIENHOLDER: PURPOSE: NOTES:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
159723 6/24/93 Len Paletz Subordinated notes Debt extinguished. UCC
termination to be filed with
Secretary of State by July 15,
1998.
1660941 3/28/94 Ruth J. Conway et. al. Subordinated notes Debt extinguished. UCC
termination to be filed with
Secretary of State by July 15,
1998.
1845531 5/3/96 Norwest Business Revolving Credit To be paid off by this credit
Credit agreement.
1853428 5/31/96 Norwest Bank Secondary exposure for operating
Minnesota, N.A. services.
</TABLE>
CERTIFIED CORRECT:
THE SPORTSMAN'S GUIDE, INC.
BY: /s/ Charles Lingen DATE: 6/26/98
------------------------------- -----------------------------
ITS: CFO
------------------------------
<PAGE>
SCHEDULE 2
EXISTING INDEBTEDNESS
THE SPORTSMAN'S GUIDE, INC.
JUNE 26, 1998
<TABLE>
<CAPTION>
INDEBTEDNESS AMOUNT
<S> <C>
Housing and Redevelopment Authority - South Saint Paul, MN $120,000.00
</TABLE>
CERTIFIED CORRECT:
THE SPORTSMAN'S GUIDE, INC.
BY: /s/ Charles Lingen DATE: 6/26/98
------------------------------- -----------------------------
ITS: CFO
------------------------------
<PAGE>
SCHEDULE 3
GUARANTIES
THE SPORTSMAN'S GUIDE, INC.
JUNE 26, 1998
<TABLE>
<CAPTION>
DEBTOR CREDITOR AMOUNT
<S> <C> <C>
None None None
</TABLE>
CERTIFIED CORRECT:
THE SPORTSMAN'S GUIDE, INC.
BY: /s/ Charles Lingen DATE: 6/26/98
------------------------------- -----------------------------
ITS: CFO
------------------------------
<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
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,931
<ALLOWANCES> 144
<INVENTORY> 32,762
<CURRENT-ASSETS> 40,196
<PP&E> 9,052
<DEPRECIATION> 4,611
<TOTAL-ASSETS> 44,828
<CURRENT-LIABILITIES> 27,946
<BONDS> 78
0
0
<COMMON> 47
<OTHER-SE> 16,263
<TOTAL-LIABILITY-AND-EQUITY> 44,828
<SALES> 59,970
<TOTAL-REVENUES> 59,970
<CGS> 34,241
<TOTAL-COSTS> 34,241
<OTHER-EXPENSES> (12)
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 381
<INCOME-PRETAX> 1,122
<INCOME-TAX> 387
<INCOME-CONTINUING> 735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 735
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
